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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordert. 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 out with stocks a little change following two weeks of games, heading into this week's inflation data. Lori Cavasina of RBC writing the sentiment story has been one of mixed emotions, with takeaways varying depending on which data set one is looking at. Lori joins us now for more. Louri, good morning, to see you, Good morning. Does the bullcase stand up to the rate high debate at the moment?
I think so, as long as you have a moderate amount of rate hikes. We talked about this in our Weekly few weeks ago, that whether you're looking at it from the perspective of the FED taking rate, taking their interest right up, or ten year bond yields moving up.
That when we go back and we look at the history both since twenty twenty two on the bond yield side, or if we look back to nineteen ninety and look at sort of FED moves over the context of twelve month moves in the market, everything in moderation seems like something the equity market can handle. If you go back to twenty twenty one, twenty twenty two, we priced an enormous amount of hikes, we had a massive move up in ten year bond yields.
It was a real regime change.
We've been sort of stuck in this bond yield environment on the ten year yield side between sort of three point three to five percent. If we stay contained in that range, I think that we could have some short term indigestion in markets, but still have a fairly good outlook over the next twelve months. Similarly, if you go back and you look at how stocks perform in different hiking and cutting cycles, your best environment is when the FED does absolutely nothing. So we can keep our fingers
crossed for that scenario. But you tend to get like thirteen to fourteen percent returns on both the hiking side and the cutting side when you're seeing moves and the zero to one hundred basis point range. As long as we stay within say two ish hikes over the next twelve months of twenty five basis points, I think stocks will ultimately be okay.
They may not like it in the short term.
Lisa mentioned Deutsche Bank looking for a call right hikes lantor this year Bank of America doing the same. That note just drop earlier on this morning, this call, this conversation accelerated by this move and energy, but energy drop back to the seventies. When you speak to the team at RBC, how dependent is the outlook for interest rates on what's happening in the commodity mail kit?
So Blake went on our US rates strategy team handles the FED call for us. He's not currently looking for any FED moves, though he has also written that his conviction and that has come down, and our econ team has talked about how the next move may be a hike rather than a cut. I think there's a lot of fluidity in the situation right now. One of the things that came out in my meetings with investors last week.
Is just a lot of uncertainty is in the air, whether you're looking at the path of the FED going forward, how the FED is going to operate going forward, and frankly, also this situation in the Middle East in terms of what that means for oil prices, what should your assumption be over the next twelve months. I don't think a lot of people know that, but that does have reverberations
and headline inflation. One thing that Blake has really emphasized to us internally is that he hasn't really viewed the FED policy rate as the appropriate path or the appropriate tool really to combat any get inflation emanating from oil prices. But we do know, of course that we have inflation emanating from other sources as well.
What's more important for the equity market Core PCE coming out on Thursday, or Micron.
Earning is coming out on Wednesday.
I think that this is a situation in the equity market where we have very very strong earnings tailwinds that are running up against very stiff headwinds on the PE side, and you tend to get compression in the PE right when you have higher inflation, higher interest rates but so far in our modeling, it looks like the earning story is strong enough to offset those headwinds from compression. So I would say, right now, earnings matter more at this point.
A lot of people keep talking about that, and yet you take a look at some of the earnings, they've been driven by names that have pricing power.
There is a bit of pushback on.
The pricing side in a significant way, from hyperscalers and from other companies that are realizing that there are some limits we might be bumping up against. At what point is that a tension that needs to get resolved that could potentially be a risk factor.
So look, I think it is something that investors are already thinking about and digesting, which takes some of the edge off. Frankly, I think we just have to go through reporting season right and hear what the latest commentary is from companies.
One of the things we've talked.
About is the capex cycle, and we're doing a lot of questions on this last week.
A lot of that is hyperscaler driven, is AI driven.
If you look at rates of change on S and P five hundred capex, you're kind of hovering around peaklike type levels. But if you x out the top ten names, we're in the very early stages of.
A capex recovery cycle.
So can you elongate the cycle as you get more companies participating in the capex boom. That's something we have to think about given the tax bill that we saw last year, so we're still sorting through a lot of these issues.
Our come more companies are going to be participating when it comes to doing better in the stock market, given they could put the Iron War behind them. Prices are moving much lower.
So I'll tell you Marie, last week on the Business Roundtable put out the CEO confidence survey that they run, and we actually saw that tick up, and it was on the strength of capex expectations, sales expectations, hiring expectations were pretty neutral. But there's just really been a clear contrast between say, investor sentiment, which has been kind of weak or meh, it's gotten a little bit better recently,
but hasn't been that fantastic. And then if you look at the corporate side, I wouldn't say they're off to the races, but are still generally optimistic. So I think we have to take some comfort from that, especially as we head into this next reporting season.
Can I answer the question, Can I just say Micron? Yeah, right, Micron, probably because I think most economists understand where PCEA will probably come in after seeing CPI and PPM the last week.
Yeah, and how high expectations are from Micron given the fact that it's rallied like some eight hundred percent scot last year.
I mean, it's insane.
You started wondering can they keep having this transfer of wealth coming from hyperscalers to them. There was a chart showed the divergency performance between the hyperscalers and the.
Chip makers, and it's bonkers.
I mean, it just shows what's going on right now, and it.
Feels like maybe not totally sustainable in perpetuity.
Sometimes you just can't please some people and they'll say things like this is as good as it gets, even it is so good, have we seen peak?
As good as it gets?
So if you look at the rate of upward revisions for either the semiconductor companies or the S and P five hundred in general, it does look like we've sort of hit those peak levels of earnings enthusiasm. If we looked at the SMP five hundred, the rate of upward revisions. I think it got to around eighty nine ninety percent recently at the high. The high tends to be kind of in that ninety to ninety four percent range, and in our latest update at tick down to eighty six percent.
So these are all very good numbers.
Right. You're still generally seeing upgrades, just slightly slightly slower pace. If you look at the semiconductors, we're still sort of sitting at peak levels of upward revisions. And so we've been talking a lot to clients about this because I've talked to a lot of people who have been in the semi's names, who have been in the AI theme. You know, a fair number of people doing well with that, but they're saying, maybe I should be looking around at
other opportunities. So we look at that chart and I say, you know, this is a risk factor, but I can't just tell you to sit here and hold your nose and sell because if you go back and look in the past, sometimes you sit at these peak levels of upward revision for multiple years.
So we have to watch how.
They move in time. And I know that's not a satisfactory answer. We're all supposed to have crystal balls in this business and predict what's going to happen six months down the road.
With certainty and conviction, righty, But I.
Do think in this plus yeah, but I do think in this particular situation, we kind of have to take it day by day.
Stay with us.
More Bloomberg surveillance coming up after this. The UK Prime Minister Kase Tharmas stepping down after two years in the role.
The question my party is asking now is whether I am best placed to lead us into the next general election. That is why I will resign as leader of the Labor Party.
Sama's exit opening the door for Britain's fifth prime minister since twenty twenty two, the former Manchester mayor Andy Burnham, putting himself forward with a backing of former Health Secretary Where Streeting Jordan Rochester of MISSOUI right. In the following, Burnham wins either way according to polling. His policy positions are clearly to the left of Starmer, but lack detail on how they would be achieved. Jord and Rochester joined
us now for more. Welcome to the program sir, As you know, the nervousness in UK markets was less about secure Starmer leaving. It was always about the worries about what would replace him, Jordan, what comes.
Next well, as you said John earlier in your previous section, was about their chancellor choice too. I think Burnham's positions the market knows they're quite expensive, some of them, especially the full nationalization. But in terms of the next step, John,
it's about how soon does this contest take place. We're kind of get in the details of that, and when will it finish, and how quickly could a new PM be in place, and if it is a coronation, essentially it's going to be around three to four weeks, similar timelines to when Theresa May took over from David Cameron. If there is a longer drawn out contest, then you're
talking the sort of August period into September. And there's some commentary commentary this morning suggesting that Andy Burnham hasn't yet got all of his plans in place, so it doesn't really want to be a prime minister within three weeks. He'd rather be a little bit longer and perhaps even in fruit to September. So those are the timelines, but
let's just imagine it's in three weeks. Then it's about who the cabinet choices are and we get that within a twenty four to forty our well wind of news And as add Marieves suggested earlier, if Streeting has put and he has he's put his name behind Andy Burnham, does that make him more Likelyp's chancellor.
It could be a Vet Cooper as well. She about my mood.
These are of the names that were being considered, as well as the sort of the dark horse, Ed Milliband, which is Edmndiband was once considered for prime minister. So he's not the end of the world for UK rates markets, but that's kind of how the commentary kind of frames it. But he is definitely to the left of most of those other candidates, so that is the one which leads to and that sort of outcome a guilt sell.
Off Jordan, what's priced in?
Because ultimately it seems like there's not a lot of action on the heels of some pretty signsificate headlines.
This morning well indeed, so essentially the price action took place towards the end of last week. We had a UK rate started to sell off as it started to seem quite likely after the Make a Field result, which was a very strong result for Andy Burnham, it was supposed to be a tight contest between him and Reform and it was actually pretty gangbusters over twenty percent lead.
That suggests that as a leader he could boost the Labor Party's fortunes, because that's what politics is all about, it about getting elected, and the party is going behind that sort of Burnham momentum that if you look back over the past few months, the writing has been on the wall for Keir Starmer. In the public opinion polls, he was deemed to be the most sort of unpopular prime minister in UK modern history. So the writing down
the war should been a matter of time. And the main reason why Guilt's move last week was because of that lead that Andy Burnham had in the makefield. But apart from that, the bigger picture is Okay, that's the politics, but what about the data?
What about the Bank of England?
Where's oil price is going and helping rates a little bit?
This morning? Is oil coming off the.
Sort of recent level slightly thanks to progress being made in US around.
Talks well Jordan To that point, how much is this story a very specific story for a political sort in the UK versus a broader macro story that suggests something bigger about bond and FX markets.
Well, the specific part is for all these policy details and how much guilts can sell off versus treasuries versus buns. So I think going forward, if you want to take a burriage fee on the UK, you need to do it as a spread versus US or Europe, because the broader picture is that yields have come down thanks to the US around war ending.
But the broader picture the.
UK slots into actually something that's quite similar, which is fiscal spending is now potentially being entertained again. Even though the UK has been boxed in by these fiscal rules, could they be redefined And the policy agenda that Andy Burnham has probably needs the fiscal rules to be tweaked in a way, at least on capital expenditure.
So that feeds in through to the bigger picture.
US is spending on the one big beautiful bill, Japan's doing a consumption tax on food. Potentially you've got Germany's defense spending from just the pre this year, an infrastructure feeing through to the UK thinking about a public utility nationalization, better spending on NHS, healthcare, etc. So more physical spending. It definitely starts into a broader theme.
The head of one of Britain's biggest trade unions had said that Ed Miliban would be a quote noose around the neck of job creation if he became the chancellor.
Could we see some sort of market.
Reaction to the downside in the United Kingdom if we were to see Miliban become chancellor.
It's definitely the scenario that most analysts would say that leads to a guilt sell off, and it's because of a position on for more fiscal spending. But he has also outlined that he would respect the fiscal rules. So I think the sort of dramatic Liz Trust moves that you've got in twenty twenty two you're not really going to get as long as all the candidates on potential candidates for a chancellor say we'll respect the fiscal rules, so that kind of boxes them in. If they don't
say that, then you do get the bigger moves. And I don't believe edmundband had so I think it's the scenarios leads to weaker performance of UK gilts. I'm not talking about twenty twenty two sell off, but the other points I'm guessing from the Union leader.
I have to look at the quote exactly.
It's because of the views of north sea drilling and this is why admit a band maybe is a little bit less likely because the reindustrialization plans that Andy Burnham has for the north of England kind of don't tie the net zero agenda, and of course the north sea drilling.
Stay with us.
More Bloomberg surveillance coming up after this. Negotiators for te Run and Washington continue building the roadmap for reaching a final deal. The president facing some pushback from his own party.
History demonstrates that giving billions of dollars to theocratic lunatics who want to murder us is an exceptionally bad idea, and I think unfortunately the President is receiving some really bad advice on this deal.
The Republican Senator Take comic joins us now for most and it's a good morning going to see us, say with sending the negoshiandam face. So it's difficult to judge a deal that we haven't gone yet. What are your thoughts, your assessment of the process and how does this coming Togainda Well, let.
Me let me start by just a word on al Greenspan who I knew I know was wife Andrey Mitchell. So I really today we celebrate a great a great life. And I introduced Kevin Warsh at his hearing, and Kevin is a big admirer of Allen's as well, and he does it'll be a different challenge, but we have the right man for the job. He's he's he's going to
help lead the FED. I think in a time of great change and uncertainty with regard to the release, I think you have to start with the beginning of this is that the President Trump took a series of actions which puts US in a position for a set of negotiations, so enormous progress, taking the nuclear program way back under, reducing their missile capability their launchers, so AARAN is in economic difficult straits and militarily has been and dramatically affected.
Now as we think about this, MoU there's three things that have to be achieved through this sixty day negotiation, which I think a critical on the President has more or less said this. Number one, the strait has to be open with an unhindered by Iran, there can be no control. Second, they have to give up their enrich uranium and there has to be a path to no nuclear program. We may have a step forward on this with the new core inspectors. And the third thing is
needs to be paid for performance. In other words, each step along the way in terms of sanctioned relief has to be only coming when there's actual movement on the part of the Iranians. I think it's too early to tell whether that's happening or not, and we'll see as these negotiations proceed. But the President's goals were clear from the beginning, and I think that's what we have to stay true to.
But there are two of President's goals that are not being addressed in this MoU and as the blistic missile program, and that's the money to running proxies. Do you expect the president to somewhere address these red lines that he has had for years since going back to his first term.
Well, the first one we've made a lot of progress on. So I mean the missile attacks that we've done on and the air attacks we've done on their missile program, on their drones, on their manufacturing capacity, on their launchers have been extraordinarily successful. So their capability is a fraction of what it was. How far along we are I think remains to be seen, but there's been big progress. This second issue is whether they're going to actually stop
the funding for Hesbela and others. We've also made huge progress in taking down Hesbela and Hamas. If we move forward on this path, we'll see whether there can be a future commitment on financing of the terrorist groups. Right now, I think the focus on the nuclear program.
What role do you.
See Congress playing in all of this, especially when it comes to the sanctions relief that the MoU addresses for the.
Regime, Well, it depends.
It depends what the agreement turns out to be, but I expect Congress will have a role, and for this to be lasting and meaningful, Congresses need to be involved and hopefully have something that we can approve leading into the next administration. I think part of the reason the Obama deal was ineffectual was that it was never assigned deal and was never passed by Congress.
I want to go back to Ellen Greenspan for a minute, because this is a really pivotal moment, given that we're ushering into Kevin Warsh era that potentially is going to be very different from what we've seen, Given where inflation is currently in Pennsylvania, given what you're seeing in markets, do you think it's appropriate to be hiking rates at this point? Do you think that this is something that even the president would welcome.
Well, I think Kevin what was wise in the companies. You have two big forces coming out the economy at the same time. You have what's happening in Middle East. You have the oil shock and how that's affecting pricing, particularly in energy pricing, but it's affecting everything. We've seen a lot of relief on that recently, which is a huge deal for Pennsylvania's working families. Gas under four bucks. It makes a big difference. I was just a Pennsylvania
for three days. They talked about it. The second thing is this enormous capital investment in AI and infrastructure, which can have a significant deflationary impact and a huge increase in productivity. So I think it's going to take a while to sort that through, and I think Kevin's being very wise in the federal I think we'll wait until it has a little more insight into which way things are headed. You made the point about a single voice.
I think Kevin will be an incredibly articulate voice. But he talked and his hearing about family fights and the idea that there's going to be a real open exchange at the table with conflicting views on the table. He's got some very strong views on the data and the data models and how they need to be updated. So I think it's gonna be a different feed than under Alan Greenspan. But one more stuited for the moment is the.
Narrative that AI is just inflationary. Does that work with voters? It might not be working with markets right now, but does it work with voters? Well, listen with the.
Challenge and I see this every day is there's an enormous amount of misinformation, and make no mistake, the Chinese are behind a lot of that. Look at the hearings that are being conducted in the House and the Senate. There's been a lot of reporting on this. AI and data centers in China have an eighty five percent popularity. In America they have about a twenty percent. A lot
of that's based on misinformation. So one of the responsibilities I think we have in the public realm is to make sure people understand AIS offers enormous benefits enormous opportunity. A lot of it still remains to be seen, and it has huge risk, and it's our job to guide this incredible moment of change in a way that lifts all boats, make sure that we mitigate the downsides to it. So it's too early to tell, I think, is the short answer. There was all these predictions about huge job loss.
Certainly it'll be disruptive, but in Pennsylvania there's enormous growth and these skilled labor electricians, welders, you can't get enough of them. And the white collar job loss has not materialized yet. So too early to tell in terms of what the impact is going to be. But I think because of the uncertainty, that'll hopefully lead to do you know, careful decision making before we make any moves.
But center the job of couple lips that everyone was worried about apocalyse.
How did you make that up?
Yeah?
No, no, that came from AI companies themselves, not China. They were the ones that are saying that this is going to more.
I think this go through every moment of profound change, technological change in history. There's a doomer narrative, which I think is very misplaced. I think it's scared a lot of people, but I also think we shouldn't be too pollyanish. This is a moment of a lot of change, and we have to guide it. It has huge national security implications. We have to we have to be in the lead
from a US perspective visa via China. It offers enormous opportunity and life sciences and health, and on the productivity and job front, I think we're learning a lot as we go. Literally, the job creation that I'm seeing on the ground from energy infrastructure, from data centers is just
absolutely remarkable. And and I lived through the I lived through the Internet boom, and what we saw there there were some of the same predictions that wasn't quite as consequential, but there was predictions about how this would destroy certain business models. That was true, but it also created all
sorts of new business models. I suspect we're going to see that as people become more comfortable with all the power that comes with AI, there's going to be new businesses, a new job creation that it comes along with it, in addition to people that build things, because people that build things are in high demand. It's the great irony of this moment of technological change, it's putting more and more emphasis on people who can actually create the infrastructure of the future.
So I'm a race pointing that this narrative has come from the likes of anthropic what's in it for them? What do you think is in it for them?
Well, I'm not going to speculate on motivations of any particular player, but I think.
I need to interrogate the potential motivations though, of these individuals that run very launch companies that can have launch consequences for this economy.
Well, you could you could imagine, you could imagine efforts to shape the regularatry landscape. Depending on what relative position someone's in, you could imagine that by positioning yourself as someone who's seeking to protect against the downside, there's benefit from a strategic perspective, from a marketing perspective. So I'm not going to pugne anybody's motives. I will say I think I think a one sided story about AI is really both misguided and really damaging to America's ability to
lead and compete. And that's not to say that we shouldn't have a fully rich and honest conversation about all the possibilities, but it offers enormous potential. And in the history of humankind, these moments have created unbelievable prosperity. And I think this is another But this may be, you know, in all of our lifetime, is certainly the most consequential thing that's happening, but it may be the most consequential
thing that's happened in humankind. I mean, this is amazing, the pace of change.
I know you're a free market supporter. What do you make of this administration weigh and taking equity stakes in some of these AI companies.
Well, I think the you know, I'm a markets person, a free market person, but I think we sort of lost the narrative to some degree. And I saw that particularly during COVID, when we were dependent on others for semiconductors, for pharmaceuticals. We had let our commitment to markets essentially
make us dependent. And so I think that there are certain industries, certain technologies, certain capabilities that we really do need to have control of, need to have at home, and so the government playing a role in ensuring that's the case is I think is good makes sense, good common sense. I think the problem is the slippery slope.
So you have to be very thoughtful about where those lines are, what really is a necessity from a national security perspective, and what is ultimately can be done in contributing quickly.
They're talking about taking an equity stake when maybe anthropic, but the d D has it supply chain risk.
How does this make any sense?
Well, you have a pace of change where new models are being created that pose new challenges and new risks. So I think the government is quite rightly wrestling in the Trump administrations, wrestling with how to play a constructive role in the safeguards at the same time not standing in the way of this remarkable innovation which is so critical to our future. So it's a balancing Actually it
takes a little bit while to get it right. The thing I always say is we shouldn't be setting precedents or putting any policies in place that we as Republicans or Conservatives wouldn't be comfortable with the next team if the next team isn't aligned ideologically. So we need to
think about this in nonpartisan a political terms. How should the government engage in such a way to maintain leadership, protect innovation, guard against the worst impulses with a healthy recognition that Ronald Reagan's line about the scariest words that you could ever hear is I'm here from the government.
I'm here to help you.
We need to recognize the government's probably not equipped to get to actively engage in some of these topics.
Sent it's a one fund of word if you can. We brought up Kevin Walsh new FED chat. What do you think people are getting wrong about this guy? Because the auditoring conclusions about what this FED will deliver in the coming months. What do you think people are getting wrong?
Well, he is a very very gifted person and he understands markets, but understands the FED. I think he has a reformer's heart, a reformers instinct. So if you look at the ideas that he's put for he's been talking about this for years. He's I got a big vision I think for the future FED. And he's also very astute politically, So for example, the task forces that were set up, I think is a mechanism for creating a blueprint for the future, but also bringing people on board.
So reformer a change agent, but someone who's going to do it with a lot of political agility and success.
Would I'd like to run one of those tasks, Foss.
I've got my hands for this.
He enough.
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