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Terminal and the Bloomberg Business App. Andrew Honhorst of City pushing his Federate cut forecast to September from July, writing, we continue to expect the FED to cut policy rates more aggressively than what the market is pricing. Andrew joined us now for more, Andrew kamnik Ronick, and let's start with the timing. So you push back from June to July and now from July to September. What's not going your way?
The labor market data is what just hasn't given the FED that clear say that they need to be cutting. And I think that's what's difficult here, is that we see the signs in various data that they will be cutting eventually.
But when that time is.
They're actually going to make that first cut, they're going to have to see the unemployment rate and move higher. It rounded to four point two percent. That's going to be enough to keep them on hold.
So you've lost confidence on the timing, but maintained confidence on the degree to which we will get a response from them, which will be much more aggressive than the market is priced for.
Why are you maintaining that confidence.
I think it's not.
That hard to get there if you look at things like the FED Beage Book. Now I know that the FED is looking at the hard data. They're going to wait until they see that in the hard data. If you read the FED page book, it said the economy is contracting and employment was unchanged over the intermeeting time period, So.
We're not hiring people.
We have an economy that maybe contracting, according to the page book at least slowing down significantly, housing sector that's in contraction. So I think that there's a lot of signs out there that we will see weaker data.
You have to actually see that in the data, though, before the Fed's going to move.
It feels like test It is so difficult to get your head around yesterday the data came out, or on Friday the yes, it feels like yesterday, how the DAYA came out and it was better than expected. Yay, people are looking at this. Not a bad number in this, people take more time to look at it. Lots of bad numbers in this, in particular the two month revision downward of ninety five thousand and the idea that the
household survey lost over six hundred thousand jobs. There is this feeling that the economy, that the labor market is contracting. As you said, at what point do you think that it's going to be evident enough in the data. Do you feel like that's coming soon or do you feel like that's been what's been delayed.
I think that is what's been delayed. I think it is coming in the next few months. We know that this has been a very uncomfortable labor market where we've had a low hiring rate. We're starting to see in the weekly data, and that's what I would be watching here, continuing jobless claims. These continuing jobless claims are starting to rise, So we don't have a big increase.
In initial jobless claims.
People are being laid off from their jobs, but when people are out of work, they're finding it hard to get back into work. That's why the continuing claims are rising. That should mean the unemployment rate rises. We saw something very similar last summer, and if you remember September, we got that fifty basis point cut. So I think we're kind of in a similar dynamic to what we saw last year, probably a couple months before you get the Fed moved.
It also raises a question of which rate is more important to watch. We're talking about the FED funds rate, the one rate that the Fed has control over. At the same time that there were all question marks over ten year, over thirty year treasuries, the auctions that are coming up in the remainder of the week on Wednesday
and Thursday. How much do you think that weaker growth infers lower rates substantially on the longer end, which is sort of key to stimulating the economy in any kind of real way in a downturn.
Yeah, So that's a new challenge for the FED that sometimes when we're getting weaker data. Now we're seeing the equity market sell off, and usually you would think that would mean the treasury market would rally and yields would move lower. But we've had this phenomenon where sometimes the treasure market sells off and we actually get higher yields, and that's an issue for the Fed because we can have lower growth now and higher yields in the long end.
I mentioned the housing market mortgage rates that have stayed higher.
You really need to see.
Those mortgage rates come down, I think, to get the housing market expanding again. It is contracting now, and what can do that now is the FED cutting rates. So it's just another reason that the Fed, I think, is going to have to cut. They're not going to look at that tenure yield and say we're reacting directly to the tenure yield, but indirectly they're going.
To see it in the data, and that's going to leave them.
Just about on Lisa's questioning, though, they did cut one hundred basis points and the long guns sound off. So basically, they cut interest rates and mortgage rates went up. And as a belief that when they did cut, they weren't committed to anchoring inflation expectations, So no surprise this time around what they are saying the core of the Federal Reserve. Every single speech the chairman over and over again committed to anchoring inflation expectations, which rates the question about you,
Rolti McCall. Can they move fast and decisively to respond to a downturn in the economy and at the same time cover themselves about anchoring inflation expectations.
Yeah, it is a big challenge here, and it really depends on the measure of inflation expectations that you look at how worried you are about those da anchoring. If you look at University Michigan survey, for instance, we've had a big move higher in the inflation expectations, other surveys not so much. I think what they need to do is really focus on the fundamentals here, and this focus on inflation, I think is fighting.
The battle of two or three years ago.
That was a time when the Fed thought that inflation was going to be transitory. It turned out to be persistent. We have now house prices that are moving down. This is not an economy that is just too full of demand with supply constraints and you get really high inflation.
That's what happened a couple of years ago.
I think this is an economy where we actually have demand that's cooling. That means we're not going to get a lot of inflationary pressure. That means they can look through if we have a one time price level increasing.
Governor wall is making a similar argument. It's a convincing one. How lonely is kelvinor Walla on the FMC, I.
Think pretty lonely. Look right now, I'd like to give him some company. I agree with the point that he's making, But again, I think that's why you have to see this so clearly in the activity data, which kind of means that the Fed is going to wait longer than they usually would before they cut because they want this really clear signal from the labor market, because they're worried about inflation.
They've talked about September. John Williams and the New York Fed has talked about September. I wonder if September is still too soon.
Well, it depends on the data and whether you get some sort of reflection there. I mean, Peter Sheer of Academy Securities is making the argument that if they really wanted to cut, they could have even looked at the non farm payrolls report that we got on Friday and made an argument to cut right now. To Andrew's point, there is a fear that the runaway inflation that they failed to stave off immediately is going to be something that's repeated, and they don't want to do that. So
they're going to have to lean into inflation. And Wednesday CPI print's going to be really important on that front.
Things are super finely balanced. If NFP was bat on Friday, because the best of the week's thanks, it wasn't great at all, Right, NFP was bat on Friday, would be having a very different conversation this Monday morning.
Yeah, and probably President Trump would have more company with his one percentage point rate cut, not give fuel to otherwise pretty solid economy.
Andrew, it's going to see you. Thanks for the update, Andrew holmeholst there of City. Let's turned back to what top story for Wall Street? President Trump saying he expects talks between the US and China to go very well after his phone call with China sheet just last week. Elizabeth Economy of the Hoover Institution joined US Now for more. Elizabeth, welcome back to this program. It's always good to hear your thoughts on a very sensitive issue. There's a phrase
that you've used, strategic decoupling. Can we begin with that phrase? What does that phrase mean to you? And ultimately, with that in mind, what's the purpose of these talks in London.
So I think strategic decoupling basically refers to the fact that both countries have identified the other as their most significant long term strategic challenge, and each sees it as in its interest to begin to reduce its dependency on the other in terms of trade and investment. And this is a process that's been underway, certainly from the Chinese
perspective for a number of years. We've seen with their Made in China twenty twenty five program right the effort to reduce dependency across ten critical cutting edge areas of technology to ensure that Chinese companies dominate not only domestically, but also become global champions.
And I think, beginning with the Biden.
Administration, the post COVID period sense of the United States is too reliant on China for a number of products of goods that we need for our human security.
That was the personal protective equipment, but also.
As we see today, things like rare earth elements and so I think that's the broader sort of strategic context for what we see taking place in terms of what
that means today in terms of these discussions. I think the reason that we see the two sides coming together at this moment, in the sort of middle or early stages of the ninety day pause on the tariffs, is that we've seen from the Chinese perspective, the United States put export controls on the Quahwei assand chips on computer design software, and of course this big move on the visa revocations for Chinese students. So they view the United States as having not upheld the spirit of the initial
trade discussions that were held last month. From the US perspective, of course, what we're concerned about in the moment is the toughening export licenses on rare earth elements that Chinese. It was our understanding that the Chinese would lift these licensing restrictions after the first set of negotiations. That didn't happen, and so that's why both sides are now at the table.
This certainly feels a lot more complicated than it did in the president's first term. In the president's first term, a lot of these issues could just be addressed with purchase agreements. We've heard them talk about those purchase agreements, but I just wandered this time in your mind whether you believe these can be addressed, can be pushed to one side with just a simple purchase agreement and the narrowing of the trade balance, or at least the commitment to do that.
Well, we saw in terms of the President's first deal with the UK that you know, in large part, that's what it amounted to. I think for China, of course, there are other issues tied to economic and national security
that will continue to be irritance in the relationship. But I believe that for the president, for President Trump, that significant new purchases by the Chinese would at least go some way to addressing his concerns around the bilateral trade deficit, which is of course, you know, at least initially what impelled a lot of well impelled this global sort of set of terrorists.
So I think that.
They could make some progress if they were to announce, you know, big new purchases, but I think you're right that it wouldn't solve what's really at the heart of the challenge here.
And Elizabeth, there's been this discussion around how much incentive China really has to make some sort of agreement to come to some sort of resolution or have some sort of purchase arrangement with the United States, given the fact that our president's usin paying seems to be doubling down in a pretty significant way and willing for the economy to slow as long as there are certain strategic goals that are achieved over not necessarily the next.
Year or two, but ten years.
How much do you feel like the leverage has shifted, that the desires have shifted here.
Yeah, I think it's a really important point.
I think the United States miscalculated at the outset when it believed that we had so much more economic leverage over China, because, as Secretary Bessett said, you know, we import five times as much from China as China imports from the United States.
But that ignored I think two things.
Number one, that China has spent the past eight years reducing its economic its trade dependence on the United States. You know, since pre COVID levels, the US sorry, the share of exports global exports from China to United States has reduced from nineteen percent to fourteen percent. And so
I think That's one important element of it. The second is, as you suggest, you know in your discussion earlier, China has been routing exports to the United States through third countries, right, So it's still seeing, you know, an ability a path through to maintain.
Its exports to the United States.
And it ignored the fact that we have a greater soul source dependency on goods from China than China does from US. What that means is that for roughly thirty percent of the goods that we import from China, we have a seventy percent dependency or more on China. China doesn't face that same soul source dependency on a wide array of US goods. So I think we miscalculated the outset.
China has been thinking strategically about how to reduce its dependence on the US market, you know, for you know, five to eight years really since the first Trump administration, and so I think that the leverage has shifted over the past five to seven years.
So that's said Elizabeth.
Overnight we saw data that showed deflation for a fourth straight month in China. You have a price war with the d that has gotten the attention of authorities in China worried about cannibalization from their own market and this idea that there's going to be a race to the bottom when it comes to electric vehicles and really sort
of undermining the perceived quality internationally. How much structurally, though, do they have a challenge that forces them to the table to ultimately come to some sort of even stopgap measure that could last a couple of years with the US.
I mean, I think China has been facing these challenges the ones that you just suggested for a couple of years now. This deflation issue is not actually new. The sort of incredible competition in many industries just within China again is not new. It's part of the process that they undergo every time they have this over investment in certain industries. We saw it in solar panels and wind turbines, now we're seeing in evs.
We could see it in batteries moving forward.
I think that's why we see the exports right and what China's doing now with the EV is looking not just to the United States or to Europe, but they're looking to Africa, to Southeast Asia, to Latin America. They can export you know, very cheap cars there. They're looking to build manufacturing capacity in those countries.
So China's looking.
Globally, not simply at the wealthiest market for their goods. And I think this is part of a long term strategic plan, and I think they're trying to bet that, you know, they can endure this short term pain for a kind of longer period of you know, strategic and economic gain. That being said, they have tried to do and take a number of actions over the past year to boost consumer confidence. They've had these massive goods trade in programs. They've done things in the real estate market
to encourage people to start buying property again. But overall they're not willing to take the steps that are actually necessary, which is to move investment right away from you know, investment in technology, investment military, into education and health and into the pension system, so that people and consumers feel confident that they can spend because their other basic needs are being taken care of.
Elizabeth, you are one of the best, and it's going to get some time with there this morning. We appreciate it, Elizabeth. Economy there of the Hoover Institution, Francisco Blancher playing for American Right. In the following the oil market is poised to remain oversupplied, and we believe Brent crude may average sixty two a barrel for the balance of the year. Macro tensions also mean that oil prices could temporarily sink
to fifty dollars a barrel. Francisco joined us now for more. Francisco, good morning, good to see you, Good morning.
Thanks.
Start with OPA plus because I think that's been the main event for the crude market over the last several months. What's policy now and what's the strategy behind it?
So you could you could make a case that ol Perks is trying three things or once right, it's trying to increase market share.
I think it's more of a saliy thing.
You could argue there's a discipline element to what SUD is doing because it's really driven by solid avia.
And the third bit of it.
Is well why now, Clearly lower oil prices can help upset some of the upset pressure of inflation on USTARTUS. So let's say it's a Trump administration pressure to get those barrels in. So I think maybe the three of them are objectives. But what's important about the strategy is that we believe this is not a price warter is going to be short and steep. Rather, it's going to be a price worter is going to be long and shallow, And it's going to be long and shallow for a
couple different reasons. First, because in twenty twenty four, Saudi became a net borrower for a first time, whereas the shale patch is actually in pretty rule health from a debt perspective, they don't really issue that much that anymore, and they can flex their muscle up and down depending on where prices are.
The show pats themselves have.
Their own issues, right because the higher tariffs are also bringing up costs. Remember oil is steel on the ground, and steel is fifty more expensive than it was than the beginning of the year, So some margins are coming in lower oil prices, higher steel costs. We're seeing a big drop in the recount and that's exactly what saud He's trying to do. They have the lowest market share they've had in a very long time, not just against non Opic but also even within Opeic Soviet's lost market share.
They've done this price support already by themselves, were not for three plus years, right, having this huge shell response, they're done with that they need to get it hasn't really worked. Eighty five ninety or oil six million barrels a day of exports not working. I mean, you want to get maybe lower prices with just more barrels.
Can we sell on that price for just a little bit longer? And they tried this about ten years ago. I forget whether it's November fourteen or November fifteenth. You remember the text seen fourteen, Okay, Revember twenty fourteen, it's there in the memory somewhere. What's different what they did then compared to what they're doing now.
Well, back then, what they were doing, it was a much deeper price war, but it ended up lasting organ they hoped.
And part of it is.
That back then, again, the shale patch was very levered, so they had a lot of cash in the bank when they started the price war, and it was just at the beginning of shale, right. So we still have
grown rammatically in the last ten years. I mean, the US has pretty much added fifty percent plus of the incremental oiling as in the world for the last fifteen years, right, So I think we are getting towards the end of the shale cycle and Tier one acreage is becoming more exhausted, and companies are pushing to Tier two acreage, which is more expensive.
And I have this additional costs.
So I think it's a different moment in time, and you know, to be honest, I mean I think, like I said, so this supported prices for a long time, and they've realized that just keeping them so high only means loosing markets shared in the long run. So that's what's different. But also their own position is different. They want to build out the kingdom and that's very important.
You talk about the War of Attrition and this idea that it's a long drawn out period of time where potentially you could see the sixty dollars a barrel at sixty dollars a barrel, could you see the shale patch become a lot more productive where you see rigs that are permanently taken offline, and it really becomes that much less profitable because ultimately it is much more expensive to drill there than say over in Saudi Arabia.
I think that's exactly what's going on, right. I mean, I think we're going to see slow in production here for oil, and in some ways alreally happening.
If you look at if you look at the rig.
Count, if you look at marginal coastal production, many companies are facing oil in the fifties in maybe as high as sixty dollars a barrel, and therefore this price range doesn't make things particularly appealing. Now, having settled that these companies are cash can they're paying out huge dividends to shareholders in a world where interest rates are also high, which is a very big difference.
Back then we had zero rates.
Today we have five percent rates, and shales not a cheap operation when money is not free.
Yeah, and I'm looking right now. And in twenty twenty three, the US oil and gas industry contributed by eight percent to the US GDP, So this isn't exactly a small part of the overall economy.
In the United States. I am wondering on a broader scale.
We haven't even talked about supply on the demand side, and whether demand is going to materially drop off to sort of add some of these price declines based on what we've seen in the price of oil, how much is tied to the idea that demand is just declining, especially as trade really falls off.
So demand held up pretty well in the first quarter we had readily cold weather. And also remember at first quarter there was a lot of pentap consumption because people were trying to rush in the imports. Right, So we had actually a pickup in global trade in the first quarter. We've had a slow down, of course in the last couple months. We'll see what the negoiations between the US and China, another members and other countries end up looking like.
But I do think that you know, you raise a great point sixty or oil is also going to help demand in the medium term, right, I mean, it just makes evs less attractive. It makes a lot of energy sources less attractive. Remember, oil is the best energy source we got for a lot of reasons, right in terms of in terms of its energy density, it's flexibility, it's how it is a transported story, and oil is cheap sixty doors a barrel, I mean, stem bucks and an mbtu.
Just frankly, think about it, with all the inflation we've had for the last ten years, right, So I think I think I also will encourage consumption. And ultimately, what I think Sally's trying to say, well, we don't want to run around with so much spare capacity because it's expensive to maintain. And we're also changing the way will consume energy domestically, which means our demand locally will go down because now we're going to use a lot more
renewals domestically. So all of that you put it together and you say, well, we have to get going, and this spur capacity into the market, and that's I think that's really the plan. So you get more consumption, you get your release, your spare capacity, and maybe oil just doesn't do a lot in the.
Next year, let's finish on something that's gone more expensive. Got thirty three twenty my more than twenty six percent now for the what's the cove from even the tain.
So we think it's been a bit of a double top in the first half of the year. So we think maybe second half we need to see a real shock for prices to break away from where we are, and we have a four thousand dollars target, which we think maybe a twenty twenty six story. But if you look at the action in the precious metals, it's really coming from other areas. It's coming from platinum, which is really where things are starting to move in a bay way.
We've seen twelve hundred hit this morning, and potentially we're going to go higher in platinum. We think platinum will trade well ahead of palladium, which is also being dragged along, and even silver. Silver is now thirty six and change and you know, heading up to forty we believe, right, So gold's had a good run. Now we're getting the rest of the Prencips medals, and then based on wild geo politics and maybe the US budget deference in situation worseness,
then we'll have an order leg up. But I think second half of a year might not be as great.
As the first of losing for gold.
Francisco, I appreciate the update. Thank you, sir, Francisco Blanche There of Bank of American. Let's focus on this story. Claudia Sam of New Century Advisors right in the following is early signs emerged. The tariff will drive up prices. The FED faces a crucial question. Will tariff induced inflation be short lived or will it persist? Claudia Joints is now for more. Claudia, welcome back. As always, we can spend some time with you talking about the US economy.
Right now, let's get to that first line, that first piece of that sentence as early signs emerged the tariffs will drive up prices. What are you focused on right now? Where you see that at the moment?
Right Well, the first place we're going to be looking for and we ought to see is more of it this week is in the goods prices, and that is both on consumer facing prices, and we're also looking in the producer prices. I mean, we're we're terrifying intermediate goods as well, and that that will eventually have some impact on consumer prices. So it's you know, it's looking at the data and again, as we said before, the magnitudes will matter and how long we see this, you know, upseeck in prices.
So Claudia, that gets to the next question, show a lift or will it persist? How instructive is the labor market? With that in mind, let me start to think about that. How much of a guide can we take from where the labor market is count Like?
Right, well, you know, the labor market is important. It is holding up.
We saw modest signs of cooling, but not a dramatic, you know, weakening. When you talk to business as one of their first priorities when they think about pricing is consumer demands. I mean, it is the case the labor market holds up, it may be an opportunity for businesses to pass more of these hair costs onto consumers in terms of prices. I mean, right now we have a cost shock for businesses, and it is an empirical question as to where it's going to end up. Is it
going to end up with consumers saying higher prices? You're workers with paychecks, it can be less profits. And we're just we are a fond edge of seeing how businesses are dealing with that really difficult question.
And Claudia, there's this lack of clarity around exactly whether this is a transitory I hate to use that word, or short lived inflationary move, or whether it has longer legs. There's also a lack of clarity around the labor market.
On Friday, we got the jobs report that the headline number seem to suggest was still really robust and better than expected and upside surprise if you look onto the hood, though, there are a number of analysts for raising questions, especially with the downward revisions and some of the other modeling that points to maybe a weaker outlook.
Where do you.
Land on that on this dual side of the mandate, when you take a look at the labor side of the equation, we.
Have an economy that's still largely at full employment, so a four point two percent on employment rate. We have payroll gains, while not stellar, are still solid. It's, you know, the question is there are real signs of slowing, and we are seeing some modest slowing. It's you know, it's not happening rapidly, and that's important. But but the labor market, especially in terms of the FED thinking they're close to
their mandate. I mean, there is a reason why they are getting such focus to thinking through what's going to happen with inflation over the coming months because largely they're in a good place.
On the labor market side.
So yet it's and I think it is important to understand that while the labor market hasn't resilient and things they're looking like mod is flowing, we don't have the same strength that we did, say two years ago. We have much narrower job gains, Like we're down to a few large sectors that are really pulling above their weight in terms of job gains. We have an unusually low hiring rate, like, we're not set up to really be
hit hard in terms of the labor market. But for right now, things are looking really pretty good.
Claudia, it sounds like you disagree with Andrew Hollenhorst, who came on and said that the FED is fighting the wrong battle and that inflation is in a very different spot than it was last year or even three years ago, when there was a lot more heat in the economy. He thinks that there isn't as much of a risk on the inflation side and that there is a more
significant risk on the employment side. I'm just wondering, if let's say this Fed to reserve took Donald Trumpetus word cut by a percentage point, would that lead to significant unwoiring of inflation expectations and the potential for long term yields to rise really considerably.
Well, the FED listening to the President doing what he says probably won't do good things for yields in general, but just thinking about that, like, could the FED be cutting right now? So there is an argument to make, but remember the context is so important. Inflation has been above the FEDS two percent target for four years, right, and even a modest increase in inflation at this point is to move us.
Further from that.
So I think there are good reasons, and we really did get burned by the persistence of the shops. Even at this time we have smaller shots inflation, and I think that is likely to write call here. The persistence of it could does risk embedding that we just aren't a two percent inflation economist, and the FED does not want that to happen. So I think at this point they can bounce these risks and waiting and seeing the you know, the surgeon inflation comes back down, which I
think is you know, the textbook case. I think that's the most likely case, but the set is going to want to see it in the data, and I think that is appropriate at this point.
We get another rate on Wednesday, again on Thursday, Claudia. I appreciate you for you. As always, Claudia, sound there of New Century Advisors. This is the Bloomberg Sevenans podcast, bringing you the best in markets, economics, antient 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 this and as always, on the Bloomberg Terminal and the Bloomberg business own