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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.
Katrina Dudley of Franklin Templeton writing this, we continue to believe in a soft landing. Today's economy is better than it was at the beginning.
Of the year.
The one risk on the horizon is the impact of the presidential election. Katrina, I'm so pleased to say, joins us now, Katrina, Before we get to the presidential election, we have to go to the fact that we began the show saying that the runway to a soft landing skeet of narrower and narrow and you're basically coming out and saying, actually it's completely opposite, and people are getting more confident and we have complete conviction. Could you just sort of bring that together.
Okay, So if we think about a soft landing and you're talking about that runway being narrower, that's just the impact of data coming into the market and informing our investment opinions. So, first of all, if we look at the beginning of the year and look at where we are. At the beginning of the year, the market was predicting six rate cuts. We were actually much lower in terms of the number of FED rate cuts, so we were actually slightly more optimistic. The market has come towards US.
It's interesting though, because now soft landing is considered a bullish scenario, and I think that that really it just doesn't understand the resilience of the US economy. It doesn't also look at the fact that there are opportunities outside of the US market as well, so you look at valuations and everything. So when we look at this soft landing scenario, we're very positive. We go into the second
half of the year. I think that we've got good earning support, we have a labor market that is not inflationary, and we do think that if I look at you the impact of AI and all of those things. We think it's positive for a lot of sectors.
Do you think Mary Day is wrong of the San Francisco FED that this could be an inflection point and that often it's sort of nonlinear when you see some kind of weakening and a labor market.
I think in terms of calling an inflection point is very very difficult because you're calling a kind of point estimate in time. And we look at the fact that you've got a FED, which we really do congratulate for the fact that they have been telegraphing so clearly what they're paying attention to. They're paying attention to inflation, and we've spent a lot of time talking about that because
it's come from such high levels. They're also watching that unemployment number, but we're coming from historically low levels of unemployment, and so we can normalize unemployment and we can still have a supportive market.
I want to ask about what supports that market. The environment is positive, but we're talking about a soft landing. We're not talking about some huge growth engine, or maybe correct me, maybe we are. But how do the cyclical stocks catch up if, again, it isn't this huge bout of growth, If it's just kind of this anemix off landing and anemic.
Amount of growth is actually good for companies. You know, kind of a really aggressive amount of growth where you've got so many things happening, it's very difficult to plan for when you're sitting in that CEOC when you've kind
of got teppered, but you've got predictable growth. I think it's much easier to plan and to forward forecast if I was to tell you that, you know, we know that things are only grow two to three percent, you can kind of get some productivity gains in order to be able to manage that, and so you can manage
your cost in order to meet that revenue. When things are going your gangbusters and your market's growing ten or your revenues are growing ten fifteen percent, you're just adding bodies and you're adding cost and then you take care of the efficiency. So I do think that productivity is where we're actually going to see some upward surprises in terms of driving earnings going forward.
Does this market make sense to you right now? I mean, maybe we want to strip out the n video to ask does it make sense? But okay, let's say we strip out you look at the rest of this market and market where over the past quarter it's been utilities and staples that have done well and the others have lad do you look at that and say, Okay, given we're trying to approach this landing, that all makes sense or it is something strange happening to you.
So the concerns about the consumer are not new news in the last couple of weeks. I mean you talk about McDonald's for example, they were used three six months ago talking about the fact that we're seeing a shift in the consumer to being more cost conscious and what does that mean. When McDonald's sees the shift, they use data, They use a lot of technology in order to be able to forward project and they say, we are going to bring out more cost conscious offerings to meet the
consumer where they're at. And that's a really key aspect of what a company needs to do. You need to understand what's going on. So we already have known that consumer has gotten more cost conscious. You're going over to the oil prices and looking at what's happening at the pump. We know that that's also starting to pressure the consumer.
Interestingly enough, you know a lot of people are using the strong US dollar to travel internationally, so oil prices are actually not such a big component of the cost of travel in this you know, summer vacation series as they've been in the past. So I think that there's just a lot of dynamics going on in the market. But we look at it the fact that you've got a high end consumer supported by a strong stock market,
and they're very much a driver. The middle income consumer has got a lot of good things going for them, and the lower end consumer we're paying attention to, but that strength in the job market is really positive for them.
I'm glad you've got to travel because in the consumer confidence survey yesterday, one thing they did notice, even though we have seen some subdued sentiment, is that most respondents say they plan to take at least half We're saying they plan to take some sort of vacation the second half.
Of the year.
So does that still maintain this idea that Okay, we've seen disinflation, but services is going to be the.
Most difficult services in terms of what the number involves. The biggest driver there is actually the housing market and what's happening on the rent side of things, and that's a very significant lagging indicator, and so I think that the indication there is that that number is going to come down. So we really need to pay attention to that second derivative impact. So we do think that there's less inflation there In terms of traveling abroad, it is
the strength of the dollar that's really driving that. I mean, I'm heading over to London and to Portugal, and you look at the prices that we're going to be paying for accommodation, for trips and for travel, and it's significantly lower and that's a really big driver for a lot of these travel Before we let.
You go, you said that the biggest risk is the election later this year. Is there are scenario in your mind about which presidential candidate could potentially be more disruptive to the market.
I think the reason we talk about the fact that the presidential election is disruptive is the fact that there is no clear contender for the White House we can bank on, and you've had some data earlier to yesterday. So if I take a look at what we think is going to happen, each of them has a unique platform, and each of them has sectors of the market that will work if they're elected. And not work if they're not.
And that's the uncertainty that we're talking about in terms of it's a difference in policy and the fact that you don't have a clear person that is going into the White House. As a result, what will happen is that all of the stocks will price in the fact that you're going to lose. Everyone likes to price in their downside. So we do think that once we get through the election, we'll have that kind of those games come back into the market that we see the risk.
Katrina Dudley, thank you so much. Neil Dadda a macro renaissance research, a renaissance macro writing this, the Fed needs to get on with it. The rationale for cutting policy rates is quite strong. In short, unemployment is up, cor inflation is down. This is why a federal funds rate based on simple monetary policy rules that relate changes to unemployment and inflation to a policy rate, suggest cuts now, Neil joins is now, Neil, I love this idea that
you're on the same page with Mike Wilson. After having quite a bit of divergence for a number of years. Why are you saying just get on with it, and why are you beating the drum right now saying as loud as you possibly can, you are making a mistake.
Well, so I would say a couple of things. I mean, to me, it's just look at the realized data. You know, the unemployment rate is up. It's up about sixty basis points from it's low. It's so far it's been rising about thirty basis points every five months, which all LSEQL would imply that it would be around four point four percent per year end. That's higher than where the Fed
currently thinks it's going to be. And if you look at core inflation, after some wobbling earlier this year, which I think the Fed is a little bit too concerned about, generally speaking, the trend in inflation is lower. Core PC inflation is likely to be around two and a half percent in May. And to me, it's thinking about which direction are both of these indicators going over the next six months. What's the risk for unemployment? Is it higher
or lower from here? I mean, with initial job this claims rising and the hiring rate low, I think the risk is that the unemployment may rise a little bit, not a lot, but a little bit from here. And with respect to core inflation. There's still a significant amount of disinflation in the pipeline, and Powell's going around worrying about import prices. The dollars basically running it year today highs. That's going to put downward pressure on imported consumer good prices.
We know that things like used car prices have more room to deflate over the summer. New car prices are already declining year over year, and auto adjacent service is like maintenance, repair, motor vehicle insurance, those will continue to come down.
Well, I just want to break in. No, I just want to break in here because I understand all of these points, and I think that they're valid points, and I would love to talk extensively about each individual one, especially in light of the fact that inflation came in hotter than expected in Canada, came in hotter than expected in Australia, and some people are arguing that some of these indicators are going to reverse into next year, especially
if rates come down. I'm thinking of housing in particular. How do you assuage those concerns, especially given the readings we got in Australia as well as Canada.
Well, come on, Lisa, you're cherry picking some of the data. I mean this is after I mean Canada's cutting because the inflation numbers were coming in better than expected a few months ago, so we're going to I mean, look, I mean these numbers have in play. You have to you have to have a fundamental framework for why the data will move the way they do. You can't just be a slave to the high frequency numbers as they come in, because that's a recipe for making a mistake.
You have to actually have a fundamental framework for how these things will operate. Where's the upward inflation surprise coming from. I mean, if the Fed's cutting, you know, it's interesting financial conditions people are making that argument, Well, if the fedies's financial conditions will ease, growth will pop and so forth. Look at mortgage purchase applications, Lisa, I mean, yeah, the fact that rates have been already coming down. If you
look at ten year yeelds, they've generally been falling. What's that done for purchase applications? Well, not much of anything, not much of anything.
The other thing is is that when you talk about cherry picking data, you could cherry pick data any which way and you could tell a different story. It's not as if there's one overarching narrative that dominates. So it seems like you've coalesced around one set of data that is more important to you than say, all of the perspectives that we're getting from say carnival with travel picking up, the idea of you know, certain, you know, retail sales picking up.
Why only data that matters, Lisa is unemployment. You three unemployment, which is you know, in a wide body of FED research as these single best labor market statistics that we have. That was a comment from Janet Yellen back in twenty thirteen. Unemployment and core inflation, those are the indicators that are in the FEDS SCP. You want to talk about carnival, Okay, for every carnival there's a pool, Okay, a fewer home renovations.
For every carnival there's a home depot. Okay. You know, So you know, it's sort of let's focus on what's in the Summary of Economic Projections. That's ultimately how you back out the Fed's reaction function in that In those projections are unemployment, core inflation. You know, you want to talk about economic growth, they look at real GDP as well. Tell me what is the I mean, the right tail for economic growth has basically been clipped. I don't really
see much upside right now. I think growth is running at about two Maybe you can talk me into two and a half percent. I wouldn't be letting my hair on fire around recession, but there's not much upside risk.
Well, they let me up into this because I think this discussion in itself just really hones in on the point that people can come away with different ideas. Whether or not you think it's the right one is a different discussion. But the FED is doing just that. Neil, I'm sure you would agree with Mary Daily about the inflection point of unemployment and of the labor market. But for every Daily there is a Bowman who says that
inflation could go higher and that they could be hiking. So, in your view, if the FED is, for some of them setting rhetoric to yesterday's problem, when we do get cuts, how violent does it look?
Well, I mean right now, if all we're doing is just waiting on a few more months of inflation data, then it won't look that violent at all. I mean, I think they could probably be talked into a cut in September. Someone like Bowman if the inflation data continue to sort of do what they did in May through the summer, then I think it'll be very difficult for even the hawks on the committee not to at least
make a nod to cutting over the summer. And you know, folks like Governor Waller, I mean, all they're really doing, I think is just following last few months of data. That's kind of setting their tone. So if you know so, in other words, their rhetoric is somewhat conditional. So if the data changes and their rhetoric quickly changes, then I think things will be okay. Now, if that doesn't happen,
it could be a problem. I will say that I do think that, you know, we'll get another soft June you know inflation report that'll be coming out I think in a couple of weeks time. And as that happens, you know, I think the doves on the committee are going to be fighting tooth and nail to make a more sort of meaningful signal at the July form CEA meeting. So that's kind of what I'm looking for.
Neil Dota Vertisov's background Jason Drahe of UBS alongside Florini Rici of t RO Price Ballerina, I want to start with you. You had a call basically saying people are overly sanguine about how quickly the FED could cut rates. Why do you say that?
Well, I think when I look at the US economy, I don't see a lot of reason for concern and for a sharp deceleration. And then on the inflation side, we have had some progress, but the FED chair has made it very clear that they have a different reaction function to say the ECB. For Powell, the first cut is consequential. They want to have confidence by the time they cut they will deliver a series of them rather than one and done and see how the economy plays out.
So in this context, I don't see the rush. I see them as playing with this patient approach, getting more confidence on inflation and getting a clear signal that the economy is really decelerating, which I don't see right now in the data.
Jason, do you agree?
I would agree. I think the market's are pretty sanguine about it because the Fed's been able to wait because the economy is strong. You think about where we were in mid January. The market was pricing nearly seven cuts, including the first one in March. Now we are a little under two cuts for this year, first one maybe September, and the S andp's at fifteen percent, largely because growth
expectations have improved. Earnings expectations have gone up. So if the Fed's waiting because growth is strong, that's not a bad thing for the markets. I think the path thereafter is kind of uncertain, But the timing I think is less relevant for the markets. If the economy is doing fine, the.
Timing is less relevant for the markets. But what about the magnitude. We've been having this discussion really for the past week about a broadening out. What magnitude of cuts do you need for things like small caps for the more cyclical parts of the market to actually become attractive again.
So it's interesting. I think the consensus views clearly among investors that we're going to have a soft landing. I think there's lower conviction that the soult flane's going to exist of solid growth, disinflation and if they can do insurance cuts. To think about what happened last November when
inflation came lower. You had some FED officials out there talking about maybe we can proactively cut that's when small caps, that's when cyclicals really rally for about two months now, it's a little bit concerned, Well, maybe the Fed's going to come to the party a little too late and
cut their rates. So I think the market needs to be comfortable that this whole sort of really benign macro conditions can play out to really want to rotate away from the quality growth tech talks that have done well and broad note and to look to these more cyclical parts of the market that probably will happened for a few months at this point.
In time, Wene, I want to bring that idea to you that Jason mentioned, this idea that is the FED going to be late to the party, Because while for every dove like a daily that talks about the fact that the label market is termed, there is a bowman who talks about the fact that inflation could rear its head and that would mean potentially another hike. Is there a risk of a policy error at that point when you can still hear that type of language as there are other metrics that start to soften.
I think this kind of language and talking about possibilities and risk scenarios is actually quite helpful. It does prepare investors to better understand the FED reaction function. I do think that the bar to say hiking interest rates again is pretty high. It doesn't it comes with accelerating inflation. But that would only happen is if the economy itself is resilient and growth is reactrating. We're having here persistent in inflation in the US economy because demand is resilient.
I don't think we're seeing the kind of cost push wage inflation spiral. So I think this is important to understand. And then I hear a lot of talk about the unemployment rate and the recent increase. I would say that the unemployment rate is a very good summary statistic, it's very important, it's the FEDS target, and so on. But this debate, I think ignores the fact that there is some uncertainty about how reliable our household labor market data
versus establishment data. Are we undercounting population growth and immigration growth in the US? And I think this will all feature into the Fed's reaction function and their decision making.
You know, I think from both of you, you're hearing a lot of strength. You're looking at a lot of strength in the economy, And Jason, to that point, why aren't we seeing that conviction markets yes, we're seeing all time highs, but we've been talking about all week. It's really on the heels of a couple of names or one name. It's not any kind of convicted sort of under the hood rally.
So I think if you look at market performance over the past say roughly six weeks, it's interesting because the tech sector is up for a lot, NASDAK is up as a result, S and P is up, but things like the small cap index, the Rustle one thousand value,
they're actually flat lining a team. That's the signal that the market is kind of skeptical about the growth story, and as valuations go high, as the market kind of goes higher, there's an issue where like do you actually want to chase that performance because again, maybe the growth is low and we don't know. We've seen the data, especially for the past eight weeks economic data surprise to
the downside. We don't know. Is this asimp toating sort of like kind of a self learning or is it going the other way, kind of falling off a cliff. We just don't know yet. I think investors a little bit cautious and believing like if we're doing this when in fact we could be doing that.
Chris Harvey made a point that the reason why people are still though so bullish, is that no one has been penalized. Earlier this year, people were talking about six cuts that didn't happen. Yet you do see the stock market continue to make new all time highs. Is there something to be staid for that no one got hurt and continues to do well just basically continuing on these consensus traits.
So I think I would kind of break it down to the macro fundamentals that we have an environment where growth should still be fine. You know, it's around two percent, inflation still looks like it's going to come down, and you have a feather that spuys towards cutting rates. If you give me that sort of recipe, is this is the macro environment that's generally supportive for risk assets, and that leaves out the whole AI story of like a
kind of driving things higher. So if you have those conditions that you think still are generally directly supportive, it's hard to get sort of you know, kind of cheoe bears in the markets at this time. Now, the fact that markets are up, I think people are probably been underweight risk to some extent relative how well things have done. I think we talked about this earlier. It's hard to
you know, it's just as hard to be underperformed. You know, when the markets are going higher is and when the markets are going lower and you have too much risk on. So I think that's forcing people to kind of state you just have to be invested. If you aren't, you're going to you know, I think you're going to be laging your performance.
And if you try to gather some sort of narrative to drive the market on a macro level, you'll probably drive yourself crazy. As I think we all have blurring it to that point mentioned the craziness of the labor market data that you can look at a household survey that shows weakness, you can look at NFPs that still shows some strength. It is confusing. I wonder what you
make of what you hear from corporates. Are you hearing any more clarity When you hear someone like a carnival say that people are still growing on cruises, or you hear pools saying that people don't want to build pools on their backyard in their backyard, or Target yesterday saying that they're going to cut even more prices on their goods. Are you getting any clear picture at this moment from corporates in their exposure to the consumer.
So what I'm watching very closely is announcements of layoffs and how companies are discussing the tightness in the labor market. So what I see from the data is certainly a loosening in the labor market. Labor is not as hard to come by, and companies are not hiring at the fast space that they did in twenty two and part of twenty three. But at the same time, I'm not seeing widesprayd layoffs in all the survey data from the
companies by also the Challenger Report and so on. So this suggests to me that we're not at the point where the labor market is about to sour, because if that happens, then we should start thinking how sustainable is this recovery. So I'm getting a good signal from that. And then on the consumer spending story, it's going to be complicated and complex. During this recovery, we are due for a correction in goods consumption and that's finally materializing.
Mind you, it's happening maybe in a year or year and a half later than consensus first expected it, but there is still some pentap demand and resilience in services, and that's where carnival and cruise ships and overall consumer discretionary services spending comes in. So again it's not going to be a very clear picture, but understanding that this recovery is playing out in phases, and I think the service is strength that phase of service is comeback is.
Not over yet.
So this really is an interesting point given the fact that so much of good spending has actually derived typically from home home building and home moving and everything that comes around the housing industry, which has essentially been frozen in place for quite a while. We've been talking about this consistently for the past couple of weeks. It's very unclear, Jason, exactly what will happen when the Fed starts cutting rates.
Does that lead to more volumes and more potential supply that leads the prices to go down, or do you have all of this pent up demand unleashed when mortgage rates go down just a little bit. Where do you stand on this?
It's a great question because ultimately comes down to look someway how restrictive as mounet air policy, why have it not really kind of slowed the economy. And one will think if it hasn't really slowed the economy, then maybe cutting rates the same time wouldn't be that stimuli. But there's an argument to be made that the housing market we've seen when mortgage rates came down last fall, suddenly housing starts, home sales kind of picked up, that there's
kind of this pent up demand. I'd also think even for a lot of small businesses that were lost on bank lending, you know, they're boring at higher rates, and if you can go to the public markets and issue do at really low rates, that if those rates come down, a lot of sort of holding off on making new
investment that could ramp up. So I think the Fed's back of their mind, or probably front of their mind, is if we cut rates, is it something where the economic activity can re accelerate, you know, pretty quickly and then sort of finding financial conditions ease. We just don't know. I think it's kind of an open question, and the
argument that it may be not be that similar. I think there's a risk that it actually could actually really kind of ramp up activity enough that it just creates inflation. Concerns again, just to.
Apply that to what you buy. Does that mean that even if the Fed is cutting the impetus for bond yields, then to move down isn't a straightforward Well.
If they're cutting ins and being similar, I think the risk is that the tenure instead of kind of going lower, which is a typical pattern, the FED cuts rates and you see the tenure goes lower. That's kind of part
of our thesis. The risk is that actually that's not the case, that they go lower almost reactively, and then turns that economic acuity is and slow and then we're six months, at twelve months on the line eu Reson, we're still growing at two two and a half percent, and maybe the tenure should be at four and a half percent, not you know, below four percent. There's definitely risk of that happening.
Welrina, you have a lot of notes regarding the housing market right now, the inventory for the housing market. If we could just go back to that, what do you think will be the endgame if the Fed only I mean, if they cut, it's only going to be what maybe twenty five base points fifty base points the entire year? Is that really enough for people to want to get in that have been waiting on the sidelines because they're so concerned about mortgage rates.
So here's how I think about it. First of all, I agree with the point that there is pentap demand for housing. We started this cutting this hiking cycle with very tight inventory, and that has only gotten words because builders are not starting new homes. We have the mortgage locks, so people are not bringing their existing homes into the market,
so inventory has become even lower. I think the question here is even what we know from the FAD is they want to cut and start a series of cuts, and I think what happens when they deliver the first cut is that the ten year will respond This is the risk and will price even more cuts that maybe the FED will eventually be able to deliver. And then this loosening in financial condition and particularly in interest rates could give the housing market that leg up and release
that pent up demand. It's not going to be about the just one cut or two. It's going to be about what the ten year prices and what the market price is for the FED. That's the real risk here, and if that happens, we're expecting a deceleration in shelter CPI and PC, and that's really fundamental to bringing inflation down to two percent. And then the next leg of that risk playing out is that the progress that we expect on shelter inflation is undermined.
Well. Max Neil data earlier this morning basically said stop it with all of this that basically, if you look at the data and you stop cherry picking, as he told me in so Many Wars, then you'll actually see that it's important to do an adjustment because inflation is coming down and growth is slowing, and so if the FED doesn't cut now, they're going to risk having some sort of FED error. Do you agree with that, Lorena?
I think it's very nuance right now. It's more nuance than that. I do feel like it's terry picking season at Bloomberg Surveilliance this morning. But it's important to understand that in this complex environment, the patient approach that the FED is delivering is the right one. We do have a lot of firepower should the economy decelerate. But I also am of the opinion that that first cut and the decision to start easing, it's very consequential because of
how the market will price it. Just remember in January we were pricing six to seven cuts, and so I not pessimistic on the economy. If you think that the FED will deliver two maybe three cuts, that means that other people's baseline view is not for a sharp recession. And then in this scenario, just having more confidence on the progress on inflation, it is right waiting before you deliver on that easing and monetary policy.
Jason, is it cherry picking here on surveillance or just globally generally right now, because that's all the people are left with.
I think it's more like roar shock tests, like you have sort of preconceived notions and you look at the data and you sort of interpret in the way you want. If you are optimistic, you can you tell an optimistic story. If you more pessimistic, you can, you know, tell that story. I think that's that's really because I've had, you know, smart people on both sides say what Neil would say,
that the faces can be too late. Now that people say it's crazy for the FED you even thinking about cutting the colomies, not slowing down, and this is kind of the reality we're dealing with. Still data that's noisy, distorted, kind of you know from the pandemic. I must focus on Friday when week at the PC data, not the inflation piece, but the consumption expenditures, because we see goods
going lower. But at the end of May we set record travel for like kind of going to the airport, so our people still stay on services, not strong versus goods. So the picture is really kind of fuzzy. And then again you can sort of draw your own conclusions and that that's a challenge I think for the FED but also for us. But as long as it's not related to reading, it's sort of still I think kind of generally.
Riscond, we like Cherry's Jason Drejo of ubs Blory nor your Urici of t rope Price. Both of you thank you so much for being with us.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. 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 Amp.