Bloomberg Audio Studios, Podcasts, radio News.
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. Alongside Samir, we're joined
by Chrishna Mamani of Lafaette College. Gents, great to catch up with you both. Submit it first to you? Is bad news just bad news? And could you define for us this Friday when we get payrolls what bad news looks like.
Yeah, John, you know, as you know, we've been cautious for some time, and a lot of that caution has been driven by the fact that the FED raised reads so precipitously over the last couple of years. And although those kind of low invariable lags might be a little bit more long and a little bit more variable this time we've thought for some time that the economy will
slow as far as Friday goes. I mean, the tricky part is, you know, there's gonna be some who are hoping for rate cuts to come back to the forefront. For those folks, they'll clearly want a worse number. I think the tricky part for us, though, is we tend to be more fundamentally driven, and if you do get a worse number, you know at some point you do have to deal with the slowdown on the way to those rate cuts.
Chris, Now, let's talk about what bad actually is one twenty five over a Bank of America. That's bad news, apparently, Stuart Kaiser City, who'll be catching up with Lakes this week, headline paid ros below one fifty would be worsome? What is bad this Friday?
Well, so, I don't think one fifty would be such a bad number. I think if you kind of put one fifty in conjunction with GDP now coming down from three percent to one point eight, you can make that case. But I think in the sequence of things that we have seen and the variability in employment, I don't think
one fifty is a really bad number. The point I would make to kind of counter what Savere was saying was, you know, there will be a slowdown, and we have been hoping for a slowdown, but there's absolutely nothing in the data that indicates that things are actually slowing down in any perceptible way. I think the FED would like to see that, but there is really no evidence of that just yet.
Hold on a second question. Now, a lot of people would disagree with you. Even Neil Dudda is actually getting as constructive as he has been in the past, partly because what you are seeing under the hood is ism, manufacturing coming in lower than expected, the US Economic Surprise Index falling to its most negative going back to twenty nineteen. Why is that not enough to say that things are slowing.
I mean, things are certainly slowing from a very rapid pace. But I think if you have your growth rate at two percent at this point in the cycle, after five hundred and fifty basis points of rate increases, I don't think that is really would be considered a meaningful slowdown. That's the point I'm trying to make. That is, if we stay at two percent, which is what Neil says.
He at two am.
Last night to kind of confirm that. The fact is, if it is at two percent, then that's really not a slowdown at this point in the cycle.
All right, Samir, So what would you say to that, given the fact that we've been grappling with this for a number of months now, what is slowing but not slow?
Right?
What is sort of the normal cooling that is positive versus something that is nefarious.
I mean, first of all, I know I'm not in this DM group at two am at night, but you know, away from that, I mean, look, I think the tricky part is, like I said, those lags have been longer and maybe a little bit more variable, but every time somebody goes to refinance, they pay a much higher interest rate than they did the last year, the last two years, last three years. Right, So again that is creeping into the economy. You have seeing it on the lower rungs.
I think you know, typically it tends to go up from the lower rungs to the upper rungs, and I think you're seeing that. I think you're also seeing, you know, whether it's all in yields on long corporates and high yield also creep up. I know spreads are low, but the amount of the companies are paying has gone up.
So I think from that standpoint, what we see is a little bit of a saucer in terms of things come down, they settle into kind of a new normal, and then eventually, you know, you reaccelerate once kind of savings have been rebuilt and people have kind of worked off some of the.
Excesses, and you're looking for that recovery in twenty twenty five, a recovery to a slow down that Christmas says hasn't happened yet. So may can you have to understand the next twelve months and how you think this place out.
So I think for markets anyways, you know, I think probably the next few months are gonna be very choppy. I don't anticipate new highs in twenty twenty four until maybe after the elections. And again I think that's depending on when we finally get kind of clarity around the elections, which you know, possibly could push into late twenty four
early twenty five. I think once we get that clarity, then I think the markets can kind of figure out, all right, you know, which set of socks will do well kind of in this administration, whoever that might be. And then I think, you know, we do make new highs probably in twenty twenty five alongside that economic recovery.
To share that view, well, I think the overall trend in for acid prices is probably higher. I don't think it happen in early twenty twenty five, and a lot of the policies that will be implemented after the election, I think if there's a driver on the upside, it's probably going to be driven by that far more than the election results themselves, because there'll be some amount of uncertainty.
But having said that, though I think from an economic perspective, things started at a good place, the real question is how do you kind of incorporate that okay economic news in the context of valuations and likelihood that inflation remains somewhat elevated relative to what the FED would.
Like it to be.
I love this right.
You guys have different kind of economic outlooks, perhaps, but you might have the same actual investment thesis. You're still just saying t bill's.
And chill, Well, bills and chill, because I think the summer is basically lost, like the second quarter was lost. In the things started not slowing down in February. It became quite clear that we are going to be in this range bound market for quite some time, and that has how exactly it has panned out. It doesn't mean that things cannot go up. It's just that we have to catch up to evaluations. Let the economy, the economic growth run and let's see if inflation slows.
Down, Samir, are you tbils and chill as well?
You know, we don't mind the short end of the curve, but I think as we kind of approach the upper fours on the tenure, I think we would like to lead the duration. I mean, you know, I don't know if it takes six months or twelve months for the FED probably cuts and at that point probably you will see people start extend duration. We want to be a
little bit ahead of that. I think, you know, from a from a market standpoint, from investing standpoint, I think the nice part for investors, and we've been on the right side of this is if you're in large caps, you get better profitability, better quality, better performance. That doesn't happen very often. So right now you can fade em, you can fade small caps and kind of concentrate more on the larger cap side. Be okay, and I think that's kind of the way to approach the next few months.
Krishna.
I think the point Samir is making is a really good one, which is, if you look at the markets and you kind of see which market has a higher potential of running away from you in a hurt, I don't think that's equity market, and I don't think that's bond markets on the negative side. I think if it is, it's bond markets on.
The positive side, so yields, tropic.
Yields, dropping bonds doing much better. I think if you wanted to take a punt on the risky side, that's the punt I would take rather than the other way.
You mentioned the politics, samre Let's talk about that. This is what paid chairs basically said. Both candidates are troublesome for bombs and we'll get more and more clarity on that as the a C grows older. So may what would you sind back to that? For somebody's looking for that recovery in twenty five, there are others who are pointing to the bond market. It's troublesome, maybe the recipe for a problem in equities because of what may or may not happen come November.
Yeah, look, I think with bonds you have to be very disciplined because again you do have kind of this fiscal proficacy in Washington. So I think again, if you push north of you know, again four to seventy five, I think there's some val you and fix comes, especially if there is some disappointment on the economic side. Right, you've got to kind of traverse this path of bad news to those fed cuts. So I think at four seventy five that probably makes some sense, But then you
fall back down into the low fours, high threes. I think you have to reconsider and possibly close out some of those tactical long so I think at least for Treasury, especially on the longer end, I think you have to be very nimble. But I think there will be opportunities.
Still ready ety dies, it's early June. Is it too early to talk about November?
Oh, yes, very much so. I think there's a great deal of un just start to consider it.
Well.
I think when the picture gets slightly clearer, which is never the point is right now in terms of political developments, it's still very early and very uncertain. I think within a few months things will start crystallizing a bit more as to who's getting more.
Traction that' said, what's the bigger risk right now? Because we've had numbers of guests come on and say, the bigger risk is that the Fed customer rates now, and then whoever wins in November is going to announce something fiscal package including prolonged tax cuts, including potentially tariffs, and that could send inflation higher and push shields higher.
Do you buy that?
I think that is certainly a risk. I don't buy that because I don't think the Fed is cutting rates anytime soon. Because I think for the Fed to cut rates anytime soon, especially ahead of the election, things have to slow down in a more pronounced way than they have done so far.
Samir, this is actually an interesting debate that's percolating, and honestly, I don't get a good sense of where the majority of people stand. What is the balance of risks right now for the Federal Reserve that they're too tight or too loose. I mean, honestly, we still don't know.
We don't And again, look, it's a bifurcated economy, and so you've got people who can make really good, solid, well reasoned arguments probably on both sides, which is why. I think there's you know, these opportunities that are kind of being underappreciated by markets. So I guess what we've done is maybe taken a step back and looked for you know, secular trends, right, things that will probably do regardless of whether the Fed cuts or doesn't cut, regardless
of who wins them White House. So I would go back to energy industrials, materials all are involved with AI and you know, decarbonization in some ancillary ways, and then healthcare. Right, all those areas can grow earnings, they trade at reasonable valuations. Maybe you don't fully outperform, but you at least participate without having to lean into probably the most crowded trades.
What about the bond offset on a long end?
So again I think if we if we get you know, those markets come to us, I think that's a great offset.
Right.
You pair kind of some of those cyclical areas that are cheaper maybe you know, play well in an okay economy with kind of that hedge on the on the longer term fixed income side, because again, you know, if you if you do see a rough patch, those short term yields will melt very quickly.
Final word, Christia yeah.
I think the interesting thing about the bond market is we can worry as much as we want about fiscal profligacy and all of that stuff. But the moment you see a sign of a recession arrive, that's it. You know, we are rallying mass laws.
What does that look like? The moment you see a sign of a recession arrive. And some people think we might have seen that already.
Well again, it's not in the data. You might have seen. It doesn't exist. But the fact of.
The matter is, I think for that a way for a group of economists to look back twelve months and say there it was well.
For that to happen, I think consumption has to slow down significantly more, and employment has to The growth has to taper off, and you have to start losing jobs. There's no sign of that just yet.
Krishna, Thank you big week of data. Appreciate your time. Christian Marley alongside submits amounta of wels Vaga and Laffette College respectively. Johnny us Now to look ahead to the week ahead is JP Morgan's CALSI Barrow and Bank for Americas Aditya Barve. Let's start with you CALCI first, of all on that calendar, and we can bring that calendar back up hopefully payrolls on Friday, jobless claims on Thursday, the ECB, We've got the m services read tomorrow as well.
Take your pick on this calendar right now, what stands out for you? What's the big one for you and the team?
So I think.
The hard labor market data is really what is important to us, because when we look at the Fed's reaction function, we think it's becoming more asymmetric, meaning that the FED is going to be more sensitive to weaker economic data than they are to continued strength. Continued strength is what we all expect, right, So it's interesting when you talk about something like this is a manufacturing report which apparently drove the rally in yields yesterday.
You say, apparently, well, isn't.
Manufacturing has been below fifty for sixteen months in a row. It popped up above fifty in March and then fill back below fifty for the last two months. So essentially, the soft data has been telling us that the economy stinks for quite a while now, and it's the hard
data that is actually going to move the needle. So you need to be looking at things like claims like jolts at ten am, and like the and the unemployment rate and job growth on Friday, because that's what's going to shift the fed's mindset from fighting inflation to protecting the labor market. We're not there yet, that's what we're watching.
Let's pick up on that distinction. So it's soft Danka versus heard data, Adita. Do you think we're being misled by the survey data?
I think we focus on the hard data, as Kelsey said, for the jobs report, we're pretty optimistic. We're looking for two hundred thousand in job growth, which should be just fine. That's trend like that keeps the FED very firmly on hold. Our view has been on the Fed that nothing changes until something changes. In other words, the data aren't strong enough for the FED to worry about hiking, but the data aren't weak enough to warrant rate cuts just yet.
And we're very much sitting in that space very comfortably right now. As Kelsey said, focus on the hard data, focus on the jobs report. That's really where that's the start of this week's show.
You see, as Kelsey said, But Kelsey also said the economy stinks has been sticking for quite a while.
Do you agree, Well, she said, the soft data are telling you that the economy stinks. GDP growth was more than three.
Percent last established laces plass not castles.
GDP growth was more than three percent last year. In that entire period, the manufacturingism was under fifty. So if it pops about fifty very narrowly for a month and then goes back down below fifty, you know you take that with a grain of salt. The US is not a fundamentally a manufacturing economy, right, It's a service's economy. It's a consumer driven economy, and the consumer for now looks just fine. I mean, you talked about air travel
over Memorial Day. For that week, we had more people flying than in any week last year.
Right.
We set a record above the summer peaks, above the Thanksgiving peak, the Christmas peak, So you're probably going to see even stronger summer travel this year. And personally, I'm not flying the summer for that reason.
Really, well, I know that some people on this said did actually travel on a more labor moral day weekend and had fun experiences from what I can gather. I'm wondering, though, Kelsey, not to mischaracter or characterize what you're saying, but you do see enough weakness to validate the idea of FED rate cuts later this year.
So I guess what gives you that.
Confidence if the soft data has been thinking for quite a while, not necessarily the hard data, but you know, it's kind of left people in this level of uncertainty debating whether the FED is hot, too hot, too cold? You know basically what their biggest mistake could be.
So if I think about how we've been positioned so far this year, the first five months this year, our game plan was to embrace the soft landing, to lean into credit, to lean into high yield, and to put less of our risk budget on duration. Now, there was a reason we still like duration, and that was because of valuations and the skew the skill, meaning the Fed's
done hiking. We think the bar to restarting hiking is very high, and there is a ton of policy space for the FED to respond if things start to weaken. And I think there's a limit to the painless labor market rebalancing that we've experienced. So for example, job openings have come down, the unemployment rate hasn't gone up, the quicks rate has come down, the unemployment rate hasn't gone up. Now, that can persist for a period of time, but I
don't think it can persist forever. So again, we're watching that labor market rebalancing. But I think the next move that the FED is going to make is ultimately going to be one that protects the strength of the labor market rather than one that in which they need to be fighting inflation. We do think that inflation generally is
under control. The majority of the inflation overshoot we think is lagged, compositional, it's generally related to housing, and secondarily for CPI, it's auto insurance.
Is that preemptive? Is that policy protection preemptive? Do they do that before they see weakness in the labor market or do they have to wait to actually see it.
So when we look back at history, pretty much every rate cut is initially considered preemptive until it's not. So, I mean, if you look at what the market prices when the FED is doing their first cut, they always underestimate the amount of cuts that are actually delivered, And so yeah, I think it probably will be viewed as preentup initially, but then we'll have to see if it will be enough.
I did cha, Do you agree?
I'd say on the FED, you know, not so fast. We do have the first cut in December. But you have to recognize that over the last four months the core PC has been running at four percent annualized right March or sorry, the April data that was viewed as a big improvement, Well, guess what, we still annualize to more than three percent in April. So there's still some
ways to go for inflation to come down. I agree that some of it is housing, but they can't look through that right because you just can't cherry pick in the situation that the FED is in right now.
One of the backdrops to this is uncertainty around immigration. We were talking earlier to Seve Englander about that and how much that has been a supply shock in a way for the labor market. The other aspect is just fiscal stimulus in general. That aditya I know you've been pointing to as still being a tailwind to economic growth. How do you factor that in as something that is the new normal or continuable or something that isn't going to run out right, So.
It actually does look like the fiscal impulse is fading If you look at the first quarter GDP data on both public and private investment, you got this very large surge in public investment as well as manufacturing structures, which was related. The public side was related to the IIJA, the private side was related to the Chips act in the IRA. Big deceleration across all of those components. Still growing,
but much slower in the first quarter. So it looks like that stimulus has that that impulse to growth has run its course, which makes sense, right because at a certain level of investment, you can continue growing the capital stock, but investment doesn't need to keep growing, and I think that's where we are right now. So the fiscal impulse
seems to be fading. That means that broadly, supply shocks are becoming less of a story and it's more of, you know, going to accelerate or is it going to cool off.
You've got tons of data on bank balances, what people are spending month to month. What's that data telling you at the moment, So it still.
Looks like spendings holding up pretty well. It's a little bit difficult to translate the daily data into monthly growth rate, so we still don't have a forecast for March retail sales, but sorry, may retail sales but may look pretty solid from what we've seen in the daily data. We'll see what it means.
Don't want to get JP Morganjellius Chips has got tons of data, lots of balances. What do you see happening with the consumer?
Well, we do see the consumer continuing to spend, and I think when I when I think about what drives that, ultimately it's income growth. So again it all ties back to this labor market report. You know, we do see consumer sentiment is soft. We do see from consumers that they're trading down, that they're a little bit more conservative. We see delinquency rates are rising for lower income consumers.
So there are cracks forming. But ultimately, as long as you're employed, you know, you can continue to keep spending, and that is ultimately what we're seeing.
How much do you see immigration and sort of the supply shock from that level kind of changing the numbers or making it look better than it is on the labor front. That's what Steven Glitter was saying earlier.
I think that is part of the story. The FED is acknowledged that's part of the story. It's part of the painless rebalancing in the labor market that we just discussed, and it's something that we're going to have to continue
to monitor. But I think probably you know, the bulk of that impulse, the surprise associated with immigration and the resiliency of the labor market associated with immigration, we've now factor that in, so you know, I'm not sure exactly how much more we're going to get from that going forward, particularly when you know the whole regime could change in November.
This raises this question of what is normal I mean on a lot of levels, and I mean that sort of next essential way too, but also this idea of what are we going back to? I did you do have a sense of that?
So if you the challenge doing that is that any of these macro models that you run to kind of get trend growth our star, they all tend to be a bit backward looking, so you're not going to capture structural changes until it's too late. Instead, I think you have to think about, you know, what factors might have driven structural changes and then just make sort of qualitative
judgments on how long they can last. So on the fiscal impulse, on the labor supply shok, we think that's probably not going to last because with labor force participation, ultimately demographics will win. With immigration. Even if you maintain current levels, it's difficult to keep growing at these rates. So the labor supply shock has probably run its course. It could last for another six months as these new entrants,
you know, take time to get jobs. And then on the investment side as well, the impulse has probably run its cosed. So at least in growth terms, we probably go back to roughly two percent growth.
The DASA this week send the stage for the federateserve next Wednesday. Let's talk about that briefly, three part act statement, forecast, news, calm, diference. Walk us through where we are on the dot plot at the moment, how you and the same Cassie expect that to sort of evolve in the next way co site.
So the market always moves ahead of the Fed. And just to go back to this conversation on the neutral rate, you know, we can all hypothesize what the neutral rate will be, but what are the markets saying. The markets are saying the neutral rate is higher. I don't know if it's as high as the trough that is currently being priced. The terminal rate right now is around three
seventy five four percent is what the market's pricing. I think it may not be that high because that would imply a two or two and a half percent real rate, But that being said, the market is sending you a
signal and I think we do need to listen to that. Similarly, when we think about the FED next week and the dot plot, you know, the market has adjusted to anticipate a dot plot that is going to show less cuts this year, and so you know, my expectation would be that you show instead of three cuts, it's going to show two. I don't think it could go to one, but it could. And then I think we are on a journey for the long run dot to continue to
move higher. So we saw that first move from two point five to two point six, and to be honest, it's actually been going on for a while now. So if you look at the minimum and the maximum submissions, those had been drifting for really a year before the long term dot actually started to move. So we're in a transition there. But you know that happens way after the market sniffs it out.
You're looking for complic counts this year, you're looking for one. Do you see the federals that have coming down to your view of the world Next Wednesday.
It's going to be a close call between two and one cut and the dot plot this year. The question is, on the one hand, do you want to take that optionality out for September or do you want to leave it in or And on the other hand, are you concerned about sounding too dubbish and kind of moving incrementally knowing that you'll have to move again. Right, So it'll
be a close call between two and one. But I think more importantly, there's going to be a lot of focus on the dots, but they're not going to matter that much because the FED is so data so it's all about the data. The dots will potentially cause some knee jerk reaction in the markets, but ultimately we just don't think they matter.
Vulnerable from one data point to the next, and you can tell us if that date's point actually matters when we catch up next time. Cassie Barrow, JP Morgan, Cassie, thank you. Bank for America is at Echo bave a teacher, Thank you. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, an gio politics. You can watch the show live on Bloomberg TV weekday mornings from
six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and, as always, on the Bloomberg Terminal and the Bloomberg Business Amp