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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. A slower FED.
Speak on tap. This week we'll hear from Williams, Harker and Cook today. There are six more speakers tomorrow, plus retail sales data. On Thursday, more Fed Speak, plus housing starts and jobless claims. Neila Richardson of ADP writing this, jobs aren't everything. Labor market data has been decent news, but as a federal Reserve takes a wait and see approach on interest rates, we see big changes afoot on pay Neila joining us now and Neila, what I love is you can dig beneath the data at a time
when it has been so confusing. Can you give us a sense of just sort of the sea changes under the hood that might be warping some of the overall index levels.
That we're tracking.
Sure, well, good morning, it's great to be with you all today. I think what's interesting about this moment is that this is the most PopEd and proddugt economy that I've ever seen. Every data point seems live and important.
But it's not.
It's sometimes like a caffey and what we're looking at at ADP we're going through to what we think is most important in the sea economy, which is how companies hire and what they pay, and that has changed significantly over the last four years. We've seen shifts in geographic distributions of people are commuting long distances. That has an
effect on pay. In fact, we find in our latest reports out today that people who actually go the distance for employment make sixteen percent more than people on their own teams. So that's a huge change and it's under examined. In this market. We're seeing pay distribution change. The gaps between the wealthiest workers and the lowest paid workers has grown by our estimate five percentage points over the last
four years. We're seeing occupational changes, We're software developers, which should be an.
End demand job.
With all of this talk about AI, there are fewer selfware developers now than in twenty eighteen. And then of course for all of us who have teenagers, some are hiring is in focus. The summer looks strong in terms of jobs, but not so strong in terms of pay for these young people. So all of these shifts feed into the narrative, and the distribution of the worker not something we talk about a lot.
And I guess that's part of the reason why the data has been confusing, because there are these structural shifts that doesn't necessarily show itself on a headline level. So what do we do with the data? Then? Should we just ignore it? Should we discount it? Because things are different and what it's telling us isn't really what's happening under the surface.
We can't discount it because we know that a certain really important institution is pegging a certain really important decision on the cancophany of data points. But that one move won't shape the economy. Whether you lower interest rates by one down one dip this year twenty five basis points or two or three really won't change the distribution of the US workforce, which has shifted. And I think that's
what we're seeing in the data that pay change. This low level of wage growth that was really keeping the economy on track during the ten years of expansion is not here now that pay is changing, it's evolving, and that involvement in pay means that inflation may go up, may be higher for longer, and the Fed always has to be watchful on the stata point and on pay. In particular.
Consumer sentiment did not look good on Friday, and the director of the survey had this to say, the views of middle income consumers resemble those of their lower income counterparts, a departure from historical patterns in which their mentions are squarely between those of higher and lower income consumers. So what are you saying that the wage gage gains are not on par with the inflation that middle and lower income individuals are feeling.
You know, what they're seeing is price levels, and they're looking at, yes, their paychecks, but they're looking at what's in their basket at the grocery store. And as long as there's a disconnect between how much their take home pay has grown and how much their basket has shrunk, they're always going to be a little moody. Now we've seen that a moody bad vibes on the consumer side does not necessarily translate to lower retail spending. That's going
to be something to watch this week. Last April, retail spending was flat. Those vibes have prepped in how long, how permanent they are, whether they affect spending is going to be really important. We've seen some resilience in the consumer. I would argue from the high end consumer. They have
been carrying this economy. So it's a really interesting situation that we're seeing in the pay When you take the pay and the retail side together, what you're seeing is that firms are raising prices because they have to increase pay from all those double digit pay gains safety and from low paid workers. But the people who've actually benefited the most are high earners from asset prices, from higher wage games. And so you have this like combination, this cohabitation.
I'm trying to crush it between high spending high earners and low income workers who are seeing high pay growth but not able to spend at the same rates because of higher price levels.
I'm glad that you brought that up very that survey that came out and the commentary from what we got from the University of Michigan survey, it kind of raised alarm bells for me because it's atypical. Usually what you see is that middle income workers kind of are in the middle when it comes to how they feel relative to the high end and the low end. They're not this time. They're shifting to the low end, and it raises this question. It's been the big question for a
lot of people. Are we seeing the beginning of a shift downward that's going to be a more protractive, protracted weakening in the labor market. Are you seeing that? Is this a problem for you? That whatever it is, you can't reject people's feelings on mass and so there's something going on that's going to potentially have a significant impact on the economy.
Feelings do translate into behavior. That's why we measure them, That's why they're important. And if you're seeing a diffusion of bad vibes, I'm wayful that bad vibes through the income distribution. It doesn't spell good news for the economy. When I hear what I hear from main Street is I'm delaying, I'm being like the Fed to watch the watch before I take on that new lease of my new car. I'm going to watch before I buy that investment property, that rental property. So that waiting watching has
an effect on the economy. So even if you can afford to spend, you may not do it this quarter because you're waiting.
So this is sort of the diversions between the bulls and the bears. Some people I'm thinking of Andrew Hall and Horns out there is thinking this is the beginning of a real weakening that we're going to see in a labor market. Last week's climb and initial job, as claims, was a harbinger of a greater degree of weakening under the hood.
Do you see that now? I think again that goes back to my comments about this economy being prodded a little bit. This is a normal economy. You're not going to make straight a's every quarter. You're going to have some weakness here and there. There's going to be weakness in pockets, but that doesn't mean that it's a persistence diffusion.
What we're trying to figure out, and it's a hair trigger decision, is when the FED can feel comfortable cutting rates that doesn't mean the economy is bad because they start cutting it. I mean it's necessarily good because they start cutting it. I think what it means is that the FED as a whole collectively feels that they're a little more restrictive than they want to be in this particular normalizing economy.
So feeling better about the vibe session maybe, But okay, one of this idea, I get not to harp on this, but this idea of all of a sudden everybody's feeling a lot worse in the middle income consumer too. Jim Bianco and looking at that UMich data basically looked at and said, there's been something strange happening with it. It's actually democratic opinion that has really turned. I wonder if
you look at it and say the same thing. Maybe what's actually happening is that political bias, But it's this huge cohort saying maybe Trump is going to be elected, So it's still that political influence. But on the other side too. It's hard to tell.
At the stage. We know that that MISS survey has had a methodological change too. It's gone online. We don't know if that changes the sample we've seen though for the past two months pretty downbeat sentiment. I'd be hesitant though then the changes that we've seen on the methodological end to put too much on the political differences right now.
But we know that politics does affect opinion, does affect vibes on the economy, and we'll see and should track how that plays out over the course of the next six months.
For sure.
Neili Richardson of ADP and of Bloomberg Television contributor, thank you so much for being with us as always looking forward to next time. Sam stoveall of CFURI also looking closer at the tech trade, saying this, even those six sectors also advanced, The tech sector was the exclusive outperformer last week, causing one to wonder just how long this can keep? Can this jumbo jet keep flying on only
one engine? Sam joins us now and Sam, I have to say this, in some ways is the quote of the morning to me, given the fact that this is the ultimate existential question. Is this US stock market ultimately incredibly vulnerable because of the dominance of the big tech names or is it incredibly resilient because of them? Is it a feature or is it a bug? What do you think?
Well, Lisa, good morning, I think that it is resilient. However, I do believe that we are headed for a second decline of five percent or more in this year. Good news is, however, that based on my historical work, every one of those top fifteen first quarters ended up with a gain for the entire year, even though many of them went through two entry year declines of five percent or more, and those average annual increases exceeded twenty percent.
But when I look to the S and P five hundred, I see it trading at a thirty two percent premium to its average twenty year pe.
I look at TECH at a sixty.
Eight percent premium, and I look at TECH at a twenty one percent premium on a relative pe basis, I do sort of wonder if we've jumped gone too far, too fast and need to reset the dials in order to maintain this longer term upward trajectory.
So basically, you're saying that you think that TECH is going to pull back a bit as the rest of the index maybe just hovers around where it is now, and that's what's going to drive the index level five percent lower. Is that what I'm hearing from you?
Well, I'm saying it's going to decline by at least five percent.
Actually, history would say that we're probably going to experience a mild correction, So that forty eight hundred level on the S and P I don't think is out of the question at this point. I think that if we do start to see people take some profits in tech,
it's not going to be just tech alone. Tech and consumer communications services are the only two sectors that are outperforming the S and P. Since we had about sixty eight percent of the S and P fifteen hundred sub industries trading above both their fifty and two hundred day moving averages, today that number is down to thirty eight percent. So while the market has been advancing, it's really being led by tech and to a much lesser extent, communication services.
And it's been a long time since we've seen a five percent more or decline in this US stock market. It's been a long time since we've seen a two percent decline in this stock market. It is, as Bank of America wants called it, the Pavlovian urged to continue to buy because stocks keep going up? What needs to change? Because valuations alone haven't spooped investors, So what changes that allows for that sell off to happen.
Sure well, we did experience a five point five percent decline from March twenty eight through April nineteenth, and we recovered everything we lost by mid May, which is not surprising because of the sixty four declines of five to ten percent since World War Two. It took us only a month and a half to get back to break even. So that's why I typically say that you're better off not allowing your emotions to drive your portfolio decisions.
But as we saw last.
Time, with the tenure yield creeping higher, causing investors to worry about where it would end up peaking, also the worry about the Fed not likely to cut interest rates three times, as the March dot plots had indicated. Most recently, expectations were for two. Yet I found that investory bulliance was dashed by the dots this time around, with the expectation now only being at one.
So I think the question is how long will.
The Fed maintain higher for longer and does that increase the risk of recession.
You talk about your note this frustration by the Fed and people could have been humbling the meat loaf song two out of three am bad. What are you expecting this week?
Then?
From all the FEDS speak, do you expect them to be a bit more dubvish given the fact that the data potentially may mean they're going to cut before December.
Well, Neil Kashkarri's comments, I think we're basically what he's been saying for a while, which is much more of a hawkish tone. Other commentary could yes, take the other side as well, because the FED wants to remind us that.
They are data dependent.
At the same time, I think they want to let us know that they are independent of political pressures. Every election year since nineteen ninety two except twenty twelve had the FED either raise or lower interest rates in that election year, and many times it occurred in September. So I don't think the FED would be averse to cutting rates if they felt that the data supported it.
And you still think September remains in play, what's your biggest conviction for that.
Well, when I look to.
The CME forecast model, I see that we're looking at one third or a thirty eight percent in a sense, indicating that we're probably going to stay at that current level. But obviously sixty two percent are implying that we will probably see a cut in September of either twenty five or fifty basis points. That moves up to eighty percent for the July period and even higher for September.
I'm sorry for December.
So I would tend to say that the chances are increasing that we do end up seeing a cut of sometime this year. Would possibly two still on the table, Sam, A lot.
Of people would agree with you. Last week we saw a massive rally in US government dead I'm looking at a twenty one basis point decline in ten your yields down to four point two two percent to end the week. Why is Why is that not igniting a rally? And some aspects of the risk market that have not participated. I'm thinking of small caps in particular.
Well, I think, first off.
The reason that one reason why the yields have been coming down is because the prices have been going up because interest rates look more attractive here in the US than an overseas, so that's attracting foreign investors. We certainly are looking at small caps now trading at a thirty one percent discount on a relative pe basis, mid caps
at twenty five percent discount. I think it's because in investors want to wait until the FED does actually cut rates because of the potential of a rising risk of recession sends. These smaller and mid cap firms are the ones that will take it on the chin more so than large caps should we end up having something deeper than simply soft landing.
So I think investors.
Are playing it close to the vest at this point and focusing almost exclusively on the larger cap growth universe.
Sam Stoveball of CFURI, thank you so much. Right now, we want to dive into what to expect to the remainder of the year and whether the balance of risks has.
Shifted as we do.
See a disinflationary tilt to more of the data, at least in the United States showing US now Stephen Major of HSBC and Lydia Burssor of EY both with US. Lydia, I want to start with you in terms of what you make over the rally that we've seen in bonds the last couple of weeks in particular, and what this signals about where the balance of risk is at a time with the Fed kind of had a hockey is still last week.
Yeah, so we've seen softening in economic data, and I think that the narrative has been shifting towards the economy is slowing more than what was you know, anticipated earlier this year when inflation is surprised on the outside. So what we're seeing in terms of the economy is a gradual slow down in economic activity. The Fed, you know, last week was you know, somewhat you know, slightly more
hockey than expected coming out of this meeting. There is really the sense that they have lost some conviction that inflation is moving back sustainably towards the two percon targets.
So now when we look at you know, the next couple of months and the coming data that we were discussing, it's all going to be about rebuilding that confidence seeing less that softening and sequential inflation, but also seeing some stuffening in the label market for the Fed to be confident enough to start cutting interest rates.
Stephen, what did you make of last week considering that we saw a harkish tilt to the Fed and you just reconfirmed in your media outlook a belief in a rip boring rally in US government bonds. They could potentially take the ten ure YEARLDS three and a half percent.
Yeah, I'm quite glad we kept the bullish conviction. I mean, the news flow coming through on the back of these elections that you were talking about in the prelude to this interview, I think that really matters, and I think it kind of overwhelms the impact of these CPI and payrolls releases and the FED speak. So I think it was yourself or Danity that spoke about chaos.
And you both mentioned France and Mexico.
There's a lot of commonality here that these are spread markets that have a lot of overseas or non resident behind them, and they don't respond well to volatility shocks. In this case, you've had election results that have brought the fiscal challenges back into focus and bonds don't like that.
So if you're get a flight to quality, people moved from French bonds to German bonds, from Mexican bonds to US bonds, and globally it's all knocking on, and I think you've got an unwind going on of all these carry trades. So at a time of type credit spreads and a bit of a bowl shock, it's no surprise that treasuries are doing quite well.
Even though what happens when all of that meets us political instability? If we do see something in November that looks like uncertainty about the results, confusion about the results, confusion about the policy, where does that money go?
Yeah, I guess at the start of the year everyone was focused on how many elections they were going to be this year. It's taken to the halfway point Delhi for there to be a significant shot, because, I mean, the Indian result wasn't a big shock in a way, and it is a very domestic market.
The reason Mexico and France matter is because they're so international.
So the US election is still a long way away, and I think everyone who's watching this show knows that there's a lot of debt, and they know what the policies are of the two presumed candidates, so it's not like a big unknown out there. It seems to me that part of the reason that data is cooling is because the fiscal impulse is starting to fade. And I think all of us should just recognize whoever's the president in twenty twenty five is going to have double the death stock of eight years ago.
So whoever's there is going to be somehow.
Restricted in what can be done in terms of future fiscal loosening. I didn't think the US, by the way, is in that bad shape fiscally. I'm talking here about relative to other countries and considering the asset base.
The growth of GDP has been has really helped.
But of course if the economy is cooling and the debt keeps going up.
Then you have more challenges.
But I don't think the US treasury market should be so worried about the debt lydia.
What about from an economist's point of view, if we do have it doesn't matter who's in. We know what the fiscal situation is, what the debt looks like, a fiscal impulse, that fase doesn't matter. Do we need to start worrying about the deficit?
Yeah, I mean we all can agree that, you know, the fiscal policy is on an unsustainable trajectory. When we look at interest payments on the debt, they reason, you know, to three percent of GDP, which is double the pre pandemic rate. Now, I don't think you know, this is threatening the outlook in the short run, but it does
both economic challenges in the long run. It pushing interest rates higher can generate inflation, can weigh on growth, and then more importantly, it also means that there is more limited physical space in the events of a down pair.
Stephen, when you say that the US doesn't look so bad, is that because relative to what is going on in the rest of the world that the US doesn't look so bad? Or is it because you actually think the US is okay when it comes to its fiscal trajectory.
Yeah, a combination of both.
I don't know whether this is an English or American saying, but we call it the least dirty shirt, So I sort of imagine looking through my wardrobe and trying to find the cleanest, brightest white shirt to wear. It's a bit like that in that the US debt stock as a percentage of GDP, if you look at the total debt total debt that's public and private sector, since the two thousand and eight financial crisis, it's gone up, but it hasn't gone up.
As much as some other countries.
And it's also been helped in the US by the fact that household has deleveled, so.
On a relative basis.
It looks not so bad, and on a historical basis it's okay, And I think that part of the factor is the strength of the GDP and the tax take. Now looking forward, the US has incredible taxing ability, But as we know, it's all a question of willingness, and.
It's also a question of policy. You know, we have a new report out today talking about the fact that if Trump's proposal to exempt tips, for example, from taxation, it would bet one hundred and fifty billion to two hundred and fifty billion added to thefcial federal budget deficit. Is it very difficult to think about twenty twenty five until we know Stephn the outcome of November or are you just expecting there's going to be a lot more debt added to the US.
I think that that's a big number you just put out there. But there's also going to be money coming in on the other side, because don't forget there's money from tariffs for example.
I mean, we just don't.
Know what the outcome is going to be, and it all depends on whether we have a sweep or not, because I think the fiscal outlook will very much depend on whether either candidate wins with a sweep. So so's it's tricky and and I think in terms of probabilities at the moment, you wouldn't go down a baseline or base case of there being fiscal irresponsibility. I think that that is it is a risk, it's a scenario, but it's not the baseline.
And at the moment, I.
Look at US treasuries and I think that their priced appropriately given where the policy rate is. If the policy rate starts coming down, yields are going to fall, and they're going to fall quite fast. That's what really matters. Bond yields don't go up because there's a lot of supply, and it seems that some people want to inject additional term premium into treasuries because of the supply. I think it's already there, you can already see it.
But do I do agree?
Yeah.
I mean looking at you know, the elections and what the implications could be for the economy, there is a lot of uncertainty surrounding you know, the post election landscape. When we look at the economic impact, we really focus on two key themes that will be very important. The first one is fiscal policy. But you know, the Tax Cut and Jobs Act in particular, and the expiration of the Tax Cut and Jobs Act. That's going to be an important issue and you know, can represent a fiscal
mini physical cliff. We've estimated it could you know, shave one percentage point of GDP. There is also what's happening on the trade front, with the potential for you know, escalation in tariffs. We're already in an environment where inflation is still elevated, so seeing you know, more inflationary impulse and you know, potentially some heat to growth would not necessarily be a desirable environment we want to be and especially as the Fed embark on that is in cycle.
We're talking with Steven Major of HSBC and Lydia Bisor of e Y, both of you at a time when talking about yields going lower in the face of disinflation as well as US just being.
A haven for a lot of dollars.
Lydia, at what point to lower yields boost the economy, boost the economic activity in the United States and have a self reinforcing cycle versus indicate some weakness that actually would be negative for the growth prospects.
Yeah, I mean, when when we look at the economy today, we're looking at an economy slow down underway. We've seen some rebalancing in the label market market, some softening in label market indicators. We're looking at consumers being more cautious with your spending, investments also softening, and companies being more discerning with their spending and hiring because you know of this you know, tighter credit coundition environment and because consumer
them pass soften and consumers are more price positive. So in this economic environment, with signs of softening in the label market, we're expecting to see that recalibration and monetary policy happening, you know, towards you know, September. We're expecting the first rake cuts in September and rates starting to gradually move lower and move away from that restrictive fall system. And you know, by you know, seeing that those rates moving lower, we should you know, ensure that the economy
doesn't slow down materially. We're expecting to see growth palling below trend in the coming quarters, but we're not expecting to see a retrenchment in economic activity. And the fact that the FED is going to embark on that is in cycle should allow for that cycle to continue and run through twenty twenty five.
Steven, what's your view on this, because some people would say that this economy has been a lot less sensitive to rate hikes, why would they be so sensitive to rate cuts.
Yeah, that's a fair point. So get to be careful with this one, because I think that people are expecting just very modest rake cuts. In fact, that's all conditioned by what the Fed's just told us in their dot blot.
So I find a bit of an echo.
Chamber around the mainstream forecasts because they're all basically one standard, the aviation from the FED. It strikes me that it's probably true that the economy isn't that sensitive to the rate cuts, But when the rate cuts come, I think they're probably going to be more than the markets pricing in.
And that's exactly the point that cutting by twenty five basus points here or there isn't going to do anything. So when the.
Economy is really cooling, and if unemployment is going up at a faster rate than the Fed's forecast, I think that that could be a kind of scenario to think about the then rates will be cut quite hard and fast. Also, it's not just about the US cyclical economic data. It's about the it's about the structural facts. It's this huge stock of debt It's about what's happening in China and Europe and ultimately US rates just look out of line with everything else.
Stephen Major of HSBC, Lydia Bassor of EY, both of you, thank you so much. On a week where we'll be talking a lot about the Third and Reeds.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app