¶ Intro / Opening
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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this sour
¶ Market Volatility & Inflation Forecast
with stocks extending losses following a very volatile session. Steve Chevrod federated call and get the storm before the calm, writing to be clear, we would see any volatility as a buying opportunity. Steve joins us now from what Steve, Good morning, See what do you think is behind the latest fragility, the latest wild swings the tank stocks?
Yeah, let me just say I'm not coming from either rio or court side of.
The next game.
Rush off to New Jersey Turnpipe, where our traffic has been insane coming into the city, which is I think a sign of actually strong consumer demand. But look, I think there are a lot of non fundamental factors that are going to interfere with markets and cause volatility over the summer. People need to make room in their portfolios for all the equity capital that's being raised, including SpaceX, pension funds, and kind of investors that are targeting allocations.
Equities have run so hard over the last quarter, fixed income has struggled so much that there's going to be a rebalancing trade very likely that I think we'll interfere with markets.
Inflation.
I think today's inflation report is going to mark the worst of the worst. This is going to be the biggest jump on a month of a month. I think we kind of stabilize from here.
Than this is the peak.
I think, well, not necessarily the peak, you could get a report that's hotter, but the jump. I think we're going to go from you know, three eight to four to two likely today.
I think that's the biggest jump.
So after this report, I think things will get bad at a less bad rate, which is usually what markets look to to have an inflection point. You've got uncertainty around the midterms, it'll start to come in the con and then you have a new fed share that's going to get challenged, so I think you could see volatility
over the course of the summer. Our anchoring point, though, is that we still sit in what is at worst the middle of the biggest infrastructure build out since the railroads, and margins that are growing at the fastest pace in my lifetime, and it's not as short as it was you can see from the gray hairs. So we want to own that. And if we see volatility on some of these non fundamental factors, we're likely to buy it.
¶ Inflation Debate & Wage Dynamics
Own it what price. And this is the key issue because everybody has their handout. Everybody wants to raise money, and the sums of money are getting bigger and bigger to pay for it higher and higher cost items because inflation is going up as quickly as people can raise money to pay it.
I think prices are up.
I don't think inflation is in place, and I think that that's a key element. I don't think what we have is a self reinforcing upward cycle and prices. And the reason I don't think we have that is we don't see it in wage gains, which are still pretty modest at three and a half percent, and what you're seeing is pockets of weakness in parts of the consumer basket that's offsetting the strength that you see in energy commodities.
What we have is a straight of horror moves.
It's closed, and if energy is not flowing, prices are going to be higher. But what we don't have that we had in kind of twenty two and twenty three was just more and more money getting pumped into the system, whether it was through government stimulus or rates that are zero.
And so I think what you're going to.
See is on a year of a year basis the biggest jump this kind of four percent number, and then I think we'll see a string of four percent numbers. But then all of a sudden, when you get to the back half of the year, you've lapped the tariffs.
Even if energy prices stay exactly where they are once you get to next March, energy inflation zero at that point, right, So, and I think what we're likely to see is energy prices that ease some, not necessarily go back to where they were a pre conflict, but ease some.
So I think we have higher prices.
I think it's hurting some people, but I don't think that this is that self reinforcing inflation cycle.
I would take issue with one thing, and this is something that I was hearing.
Would like to listen, that's kind of where we do.
By the way, you're off to a fantastic fatation next week. So don't exactly crib me a river about ur. You know, let's not go there. But I will say one thing that as I was talking to different CEOs, they're talking about how much money they have and that their margins have been increasing, not decreasing. And you said that fiscal isn't necessarily coming in the same way that it did during the pandemic. Maybe so, but you're getting tax breaks
that are giving them a lot of cash. At what point will companies have to raise wages in a commensurate way because they have so much money they need to build their business. They are all investing in capex. I mean, why isn't that a likely outcome?
So let's talk about the margins first.
And this is really important because in a high inflation environment, usually stocks don't do as well as they do in a low inflation er environment unless earnings are growing above trend, and they do particularly well when margins are growing. So what the history shows is that stocks can do as well in a high inflation environment as they do in a low inflation environment if margins are growing, and that's why you see the stock market as resilient as it is.
As it relates to wages, wages are growing.
They're growing at about three and a half percent, and that's about where you want it right. When it gets over four, that generally becomes a self sustaining kind of problem. That's twenty twenty two three and a half percent, with inflation kind of around three. Let's say that's been the average. That's real wage growth. And again that's very different than what we were seeing with the inflation of twenty two to twenty three, when we had a record period of
negative real wage growth for the consumers. So the consumer here, and I think this is the biggest contrarian call. We all know how difficult the consumer's been, how K shaped it's been, but look at the bottom part of the k. All of a sudden, instead of adding ten thousand jobs a month, we're adding one hundred and eighty thousand jobs a month.
And the biggest decline.
In the unemployment rate so far this year is folks, some college degree, high school diploma, less than a high school diploma. I think that bottom part of the k is set to do a little bit better than what we've seen over the last year.
¶ Federal Reserve's Policy Outlook
See what do you think the FED does next week? With all of this, I think you're going to see the Fed likely on hold.
What I expect to hear from Warsh is how he's going to look at things. He's not going to come out and say, hey, we're not hiking, or we're hiking. I think he's going to maybe reiterate that he's going to look at trim mean measures of inflation. I think he's going to lay out a framework or a series of breadcrumbs that will communicate to the market that this Fed is not going to hike.
And I really think that's.
Going to hike this year because here's why.
What is it going to do?
The parts of the economy that are rates sensitive have already been in a recession. That's been what we've talked about around this table. So are we going to punish the low end consumer more? Are we going to punish small businesses more? Because you can raise rates all you want, it's not lowering a chip price, it's not lowering a price of a gas turbine because the buyers don't need
debt and their price in sensitive. So what you don't want to do is hike rates and destroy those interest rates sensitive parts of the market, so that if AI Capac slows down, you find yourself in a negative cycle. So I think this FED will understand that. I hope that they'll understand that. I think it'd be a real policy or to get too aggressive.
On it's say you look if it's something duvish relative to Mohok shanks BacT tent.
I'm expecting him to drop some bread crumbs, and the bread crumbs would be things like I'm going to focus on trim mean inflation.
I on, Wait, what's up?
I'm going to all wag on si.
That's the question, right, because he does have the hardest management role I think of any FED share in a while, particularly with his predecessor sitting there apparently keeping a low profile, but then giving speeches that aren't so low profile. So we're gonna see We've always assumed that even though it's
a committee, the FED share sets the direction. I would expect that Warsh, being well prepared and very interested in this job for a long time, will be able to navigate that we will see if it really is a committee strap in.
He's had ten years to think about it, that's for sure.
He's very well prepared.
For this out of town stay with us multiple impex
¶ Tech Market & AI Investment Boom
Savana's coming up off to this, Dons went Bush writes in the following while there will be somewhere race that the mamm of SpaceX will take away some oxygen from the tech semi trade. This will be a short term bump in a road. Dan joints a snap for.
More Dankamonic greed to be here.
The eppetite for this IPO, I think makes it makes a fantastic point. A lot of people talking about the same thing, just trying to get ahead of the index inclusion, aren't they.
Look, I think that that's definitely a play, and I think to say it's not would be wrong because of just the unique situation here from the indexing coming out of the gates. But look, at the end of the day, it does come down to it's viewed as a derivative of the AI revolution in terms of like how you're going to play space data AI. And look, this is it's a test for the market in terms of not
just SpaceX. But the ripple effect a cross the rise offact, and I think that's what you're seeing you're starting last week in terms of the sell off that we've seen in semi is. I think it's playing in the just it's a little white knuckle moment that we're going through in tech just to see how this is the reception ultimately is going to be.
But it's not just this, it's pushback to equity capital raises elsewhere. The report of maybe Meta doing the same thing, We've had another player this morning suggests they're going to do the same thing, pushback in the equity market.
Do we have the space for these names?
Look, I believe you do. And I think even if you look like Google after they did the offering, the view that you were going to have a big sell off, but instead I think actually took it pretty well. In terms of this talk, Look, it's four trillion dollars that's going to be spent over the coming years. This is an arms race playing out. I don't care whether it's SpaceX anthrop it go up in the AI in terms of the CAPA rays that we're seeing, and I think
these companies understand the demands there. The difference is if we go back six months ago, it's like show demonization. Is Capax going to accelerate?
It's happening.
And I think now that there's more of a green light, I think that just give further confidence. I think investors now are able to see around the corner because we just saw this weekend like our Taiwan chack like further just tighter supply, which is just more bullish or chips more bullish for what we see, you know across semis in obviously cross memory.
That's it.
I mean a lot of people can buy into the story and say this truly is a revolution, but say that the pricing is already pretty full, especially because as the supply becomes constrained, people are paying more and more for it, and they're raising debt that they have to pay back later with future revenues that go to that. At what point do you see that as having a viable argument.
¶ Monetizing AI Across Industries
Yeah, Look, it all comes down to like monization on the use cases.
Not just on the enterprise.
We're on the consumer side, because look, you build it, will they come. So now it's all built, you see the demand there. But now it comes down to the next phase and you got to see an earnings. The big thing that the big reason we saw the rally that we have. It goes back to like obviously the negative sentiment in March, but then you go through earnings in April and may I mean those were you know, I think Jalen Brunson like in terms of what we
saw in terms of numbers now come down there. It's setting up for what I believe is going to be earnings over the coming quarters that will further support tech stocks. You know, we continue to think NAZAC thirty thousand the next six months.
You talk about the consumer facing side, you have to see it there. Does that mean that you like Chinese tech stocks better than the US that's catering more to.
Corporate look, but it's also why I like in Cupertino what Apple's doing now the start at least having an adequate AI strategy because on the consumer side it will come and go through App. I continue to view them as a toll collector on the on the AI highway book in China, robotics is where they're winning. And I think you cannot just view this market. It's not just
US China. There's gonna be a lot of winners, and we continue view Iebob with some others in terms of big tech in China and where that continues to really be. I think just start the next phase.
Dan, speaking of China, what do you make of the US looking at potentially nationalizing parts of these companies similar to what China does.
Look, it's this is balancing out, and I think it speaks to like, you're not going to see this sort of like when I'd be like nationalization, because the reality there is that it further I think stumps from a regulatory perspective.
But what you do think we're going to see that I started to do it.
So I don't think in the US you're going to see nationally, but I do think you will see steaks just like Intel.
Well, how is that not nationalization?
Look, I think that's you know the problem is is that a big part of where Intel is today it's because of the investment that you saw from Trump administration. Then it comes down to like, was that the right move? I'd argue in that situation, I think it was the right move because you can't have Intel basically being a
blockbuster video of the of tech. But I think selectively they're going to take steaks in different companies because look, it is true, like in what's happening in China, that is an all stalk.
About what we're buying, what happens to demand for the products that open a ionthropic at distributing right now, when they start changing, what it actually costs, what happens to the amount and what are we saying already happen in C suites around this country.
Okay, I think you're gonna you're gonna have to see the cost of tokenization continue to go down. You will see limits in terms of you know what we see on caps in some companies. But I think it also is going to come down to like as companies monetize that, and as they know that those dollars are being spent for revenue that's accelerating within these companies. That's where all of a sudden, the two charts start to cross.
Where do you see revenue acceleration because of AI adoption? Why do you see that right now?
Well, I think it's it's already started happening in the data layer. I mean, if you look at snowflake, you get data, dog, you get into a.
Data So we just start off. It was just chips now data layer. Then it's going to be software.
Oracle obviously is going to be key in terms of what we see from them. Hyper scours that continue to think are not being factor in terms of the true moanization like a Microsoft.
Being which one for example, Microsoft and who else?
Look I think, I mean, if I look at go back to like what's happened in Google and a year ago New York City cab drivers parish nowfbat now what they're monetizing on hyperscour on search, on Gemini narratives are very easy where there was change. And I just think I continue to think this is third inning one out relative.
To aim more confident on that NaSTA color the next gun.
It's game four, Well I can do that.
I think nixt game for by Ultimately, do you think Nixon five? Now's that thirty?
They went in San Antonio?
I think they win in Sanntorio.
Okay, maybe we should go you going never know?
Okay, considering it, considering, Okay.
¶ Fed's Inflation Credibility & Challenges
Stay with us, multil impag Savannah's coming up after this, joining us now to discuss Tefanie Wilding of Pimcot Tifaney. Welcome to the program. Four handle on inflation, what anticipated haven't seen that for three years, Tiffany, Can this FED look through this?
Yeah? I think the key question right now is, you know, is inflation elevated as a result of negative supply shocks or a positive demand in the economy that's lifting inflation. And clearly what you're seeing from the headline story and the higher energy prices is that is being driven by you know, the negative supply shocks that we're seeing coming out of the Middle East and high gasoline prices as
a result. You know, Now if we look at core, you know, I think that you know, there's a there's more of a question there, and I think that's why you're starting to see some FED officials that are charking talking about interest rate hikes.
You know.
But at the same.
Time, we know that we've had some pass through of tariff higher higher costs as a result of tariffs, and you had the AI story as well, which is has been bleeding over into inflation a bit. So there's some supply shocks on that side as well or kind of one off things, you know, and we think out side of that, you know, core inflation in the US still looks like you know, it's on a trajectory that you know that that eventually should be okay for the Fed.
Now again, well we'll get some of the energy that is bleeding into uh the core, airfares elevated and things like that, you know. But ultimately, we do think they have room here to look through and and wait and see how this plays out.
Definitely, we've heard that for five years, and inflation has been a puff target for five years, and the incoming FED chair in his own words that inflation is a choice. Do they need to do something care just to anchor credibility?
Yeah? I mean well so as of right now.
You know, if you look at a range of estimates for inflation expectations, you know, they they look pretty well anchored. You know, the markets certainly are giving the Fed a lot of credibility. And if you look across the surveys, you know, we would argue the surveys, you know, look
pretty well anchored as well. Of course, one year inflation expectations from very survey have gone up, but they always sort of tend to lag inflationary pressures, you know, so I think they again, the Fed has some room here to take a look and see and see what's going on. You know, the other thing about negative supply shocks is, you know, it's kind of a it's a more difficult
or tricky choice in terms of the dual mandate. So although it's putting upward pressure on inflation, it's it's putting downward pressure on activity, potentially some upward pressure on the unemployment rates. So they're going to absolutely weigh that piece of this as well. We do think at the next f o MC meeting that they will drop the forward guidance. Most likely there was you know, the so called easing
bias in the language and the statement. If you sort of squinted, maybe you could see that, and it's a nuance. We think they probably will drop just a signal you know that there are more two sided risks here. But at the end of the day, we think the FED is you know, is going to be careful, you know, not to overreact to what could be supply shocks that are pushing up inflation and could be temporary.
Tiffany, when did they move their target to three percent rather than two percent?
¶ Long-Term Inflation Strategy & Outlook
Well, certainly that's a you know, that will be a question for for the new FED chair orsh when he gets in there. As as we heard from from hell. He said that he was not going to change the inflation target during his tenure. You know, they just had a review of their long term strategy that you know that they that they discussed last fall, and in that in that longer term review, they you know, they sort of move the asymmetric language in terms of how they're
thinking about inflation out. So now you're you're kind of back to just an you know, inflation targeting, flexible inflation targeting central bank type of strategy. You know, so at all of that sort of signals to us that they're not going to move their inflation target of two percent officially.
You know. Now having said that, though, you know, in terms of FED strategy, you know, we can we can kind of think of it like the you know, the ninety strategy, the opportunistic disinflation strategy, where you know, we've had a series of supply shocks that keeps inflation slightly above target, and the FED sort of knows at some point,
you know, we could fall into recession. We all hope that we don't, but in that case, we'll have below target inflation, you know, and so you know, they don't really want to overreact to get inflation to target now, just given the cost of higher unemployment that that could result. So some tolerance for above target inflation for a little bit, you know, knowing that at some point you probably will, you know, get some of those recessionary forces that bring it below.
I don't envy the FED right now, Tiffany.
I mean, there are all these geopolitical choke points that are creating a series of sequential supply side shocks that on one hand, you could say they want to look through. On the other hand, there is a secular overlay of what we're seeing with artificial intelligence, this incredible demand for assets of all types, and it seems to be a price inelastic I'm just wondering, from your vantage point, how
you view that in the inflation story. Should that be concerning given the fact that electricity is rising at about six percent year when it comes to just the inflationary.
Pressures, Yeah, I mean so, I think that's the tricky thing as well, right, I mean, there is certainly a piece of this that is demand related, you know. And again the Federal Reserve monetary policy more generally, you know, has has more of an ability to impact demand, you know, and they also want to try to understand, you know, how you know, how persistent is is this demand impulse
going to be? You know, and certainly the AI demand impulses is absolutely there, and we've seen it accelerate at the beginning of this year, you know, coinciding with the you know, the Iran events. You know, so I think that's certainly something they're going to weigh. And we're seeing the prices of components related to the infrastructure build out really skyrocket and that is spilling over into into the price components of those into the consumer price components. In
those categories, it's impacting PCE more than CPI. Not to get too wonky, but the PCE is their preferred measure. Yeah, I mean, so there's definitely you know, some demand driven
inflationary pressures here. But but we've been talking about this two speed economy for quite some time, and you know, there's certainly another part of the economy outside of AI and maybe outside of the you know, top twenty percent of households that hold you know a lot of their wealth and stocks, you know, that isn't doing as well
as a result of these economic fundamentals. So you know, they're the labor market for example, does not look like a source of inflationary pressures at the moment, you know, So the FED has to weigh all of these factors, you know. And again, what monetary policy theory would suggest when there's a lot of uncertainty is you go slow and you wait and see and again. We think as of right now, that means, you know, they are on hold for the next little bit.
This is the Bloomberg Seventents podcast, bringing you the best in market It's economics, angio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.