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Bloomberg Terminal and the Bloomberg Business App. Brian Levitt of Invesco writing, tariffs are likely to lead to a more volatile investment environment rather than result in a bear market for equities. I would not expect a broad decline in risk assets or a recession in the economy. Brian joined us now for more bran, good morning, good to see you, Nice to see it too. Where does that more optimistic view come from? What underpins that?
So?
What underpins it is ultimately a belief that we will start to see or move towards greater clarity. But that gets called into question the longer that this persists. So my view in writing it was Ultimately the administration will provide greater clarity around this look. Tariff's result in less optimal outcomes.
But as long as we know the rules of the game, businesses will get through it.
And of the belief that you know, the Federal Reserve, given the recent inversion in the Y'll curve, will start to sound the more dubbish signal. But the longer it takes for us to get there were a greater risk of these things happening.
When things like this do happen, they happen often. We have these growth scartes. You're waiting for that cathartic moment, Peter Sheev Academy said, this is the first day that feels like a real washout has been occurring. Mister Krinsky over at BTIG, Jonathan saying, if you were hoping for an entry point, this is your chance. Have we had that cathartic moment yet?
I'm not sure we've had the full cathartic moment. I mean, I went back yesterday though, and I looked at yesterday. It was the ninety third worst day of the Nasdaq in thirty years. So let's put it into some perspective. I went back, I'm not the best at Excel. I'm almost fifty years old, but I brought up my Excel spreadsheet and I looked at the other ninety two worst days and said, well, what if I added money on each of those days? What if I withdrew money on
each of those days? And obviously you were better off adding money on each of those bad days.
Right, So I think.
Most investors don't think that way, So you don't necessarily need the cathartic moment. I don't think we're there yet. I think there's more to go in terms of a bottoming process. But even if you're investing in you're halfway through a correction.
Historically that's been quite good for investors. More to go.
What needs to happen for that cathartic moment and then, frankly, for a steady climb upward. What kind of information do people need to say.
We need clarity?
I think Jonathan said the exact right word, which is we need policy clarity. And I go back to twenty eighteen thinking about what was going on then when we were dealing with the US China trade war. So what ultimately led to a bottoming in the market The United States and China got together and said, okay, truth that doesn't fully eliminate uncertainty. But ninety day truths, Federal Reserve came forward and said, all right, we're done raising rates.
We may even be lowering rates in twenty nineteen. And that type of policy clarity is how you start to move forward. So long as we're in this environment where consumers don't know the rules, businesses don't know the rules, you're going to be challenged for a while.
Right now, the bulls on the street are basically coming out and telling us, doesn't really matter if we have ongoing policy uncertainty on the fiscal side. As long as the Fed comes out and rescues markets, as long as they cut rates by enough, then you end up with a rally and a supported market.
Do you agree, Well, it can't hurt, But I think you're going to need it beyond just the Federal Reserve this time. You can't be making the cuts that you're making on the fiscal side and creating the uncertainty you have on the trade side and think that the Fed oor Reserve alone just bringing rates to neutral can solve this. I mean, the reality is most Americans have fixed rate mortgages anywhay. Most Americans didn't recognize the move up and rights.
They're not necessarily going to feel it on the move down either. So you're going to need more than that. You're going to need trade and fiscal policy. Get to a place where we understand where it's going when.
It comes to trade, though.
That uncertainty is why Donald Trump thinks he can have this negotiating power. How long do you think the market could sustain this uncertain period, because it could.
Be months, Well, it could be months. I mean, I don't know.
So the word sustain, I mean we can fall further from here, right, I mean we were used to five to ten percent corrections. They happen every year. Greater than ten are less frequent, but they're almost always the result of policy uncertainty, and so the market could continue to feel pressure from it until you finally understand what the rules were going to be.
Do you sense there's a pain threshold within this Trump two point zero?
We certainly hope so, right, you know, I mean the idea of that Trump put is being called into question right now. But ultimately I don't think this an administration that wants to see the markets moving the way.
They are now.
They may have an ideology around trade that they want to pursue and they're not going to move away from it.
But let's let's.
Get with it.
Let's let's figure out what the rates are, what the tariffrates are going to be, and let's move on.
Twenty eighteen. They tolerate sed much more than this, didn't they.
Ye twenty eighteen we were down twenty percent.
Is that what you're looking for now?
It seems like you're moving towards that. I mean right now.
The SMP's down eight and a half percent. I mean we were down eight percent when the Bank of Japan raised interest rates once last year. So this seems a little bit more challenged of an environment than that. Again, I come back to the fact, though, if you're an investor and you invest halfway through a downturn, you should be okay. So let's not try and get too cute with this. But it doesn't feel like the bottom is in you.
Consumer discretionary is down twenty percent from the recent highs led by Tesla, of course, but the airlines have stud its participate down to this morning, down by something like eleven percent. What do you do with consumer exposed names. When you hear Advasti in the town to CEO say things like mid February consumer business purchases activity just tried to stall. He says, it's going to be transitory. Do you think it's going to be transitory.
I do think it'll be transitory because this was an economy that came in with fundamental strength the consumer, where household net worth is at all time highs, where the unemployment rate was near all time low. So it's a consumer that's coming into this in good shape. It's a consumer that's not over levered. It's an economy that's not over levered. We were in a good backdrop. The consumer right now is tightening their belt a little bit because
they don't know. You know, if they work for the federal government, you're not sure what your employment picture is going to look like. If you're in the market, you're not entirely sure your household net worth is going so you tighten your belt a little bit. But it doesn't feel like a recessionary environment.
Now.
Could you get there with a prolonged period of uncertainty, sure, But when you look at the usual indicators on a path to a recession, big leverage, big excess, corporate bond spreads blowing out.
None of that.
Exists today, and until corporate spreads really start blowing out, I'm not ready to think of this as a much more meaningful downturn, severe recession. It's just not what the picture is telling us right now.
Initially a lot of Wall Street firms agreed with you, but the downgrades have started to pour in. We've seen it from HSBC, We've seen it from Golden Sax and JP Morgan, City Group coming out downgrading the US equities to neutral and upgrading Chinese equities.
At what point would you agree.
With them and say that, actually, at the very least, to quote City Group, US exceptionalism atas is at least on pause.
Well, we're upgrading European equities as well. I mean, we've increased our exposure to European equities earlier this year. And why it's not complicated leading indicators in Europe we're climbing. The economic indices were surprising to the upside. The European Central Bank was easing. It was a better mix versus sentiment in the United States declining in a period where valuations were more heightened. So you're getting these cyclical bounces.
I always say these markets, everyone's waiting for things to be good in Europe.
No markets move on better or worse. By the time you wait for.
Good, it's already happened. The bigger question on Europe now is not just the cyclical bounce.
Is this something more structural?
And with the investment that you're seeing, the borrowing that you're likely to see out of Germany, is this more structural?
They have a chance.
Now, can we get twenty seven countries to agree on it. We'll find out, but there is certainly a chance. And yeah, I mean sometimes it's real simple. If you're easing policy, it's a better backdrop. If you're pursuing tighter policies, it's.
A worse backdrop.
And it behooves investors to think about those parts of the world that are being more stimulative right now.
ASSISI making the point that the better news will come from elsewhere over the next several months. It won't come from here.
What's interesting is that City Group thinks that that better news is going to come from China, whereas HSBC thinks that better news is going to come from Europe. Is sort of like pick your poison where in the world you think that it could potentially have better information on that.
Cool that Dan grated US Equities HSBC joining us a little bit later this hour, so look out for that. Small business confidence came in about twelve minutes ago, and small business confidence came in lower, four month low. There is a nugget in here though that got my attention and I think it got les us too. The share of owners you said it would be a good time to expand declined by the most since April twenty twenty and engage capital spending plans matched and almost five year low.
That is not what we want to see coming into twenty twenty five. Bran, thank you, it's going to see you as always, Sir Brian Leavitte of Investment the Bank of America Institute releasing its latest Consumer Checkpoints survey. The team right in the following the consumer is still restraining underlying forward momentum that we at a more measured pace and place to say. They're giving us some time. This morning is Holly O'Neil, the president of Retail Banking at
Bank of America. Holly, welcome back to the program. A warm welcome to Bloomberg surveillance. We've heard from a few companies in the last twenty four hours, from Delta air Lines, from American Airlines that maybe the consumer was a bit softer in February. We're just wondering, Holly, whether you see anything of the same at all in your business.
So I think you had it right when you said continued forward momentum, but at a more measured pace. And in February, we saw little softness mid month in certain regions in Texas on the East Coast, we really thank driven by weather, and in most of those locations it recovered by the end of the month. So when you look at the February spending data that we have, it was up month over month when you seasonally adjust it.
So even though there was some mid month disruptions with weather, we saw most locations recover from that.
Ollie on what though, recover in terms of spending on consumer discretionary on groceries. I mean, we've been talking all morning about the airlines coming out and saying that they really haven't yet seen that recovery in some of the domestic travel spend. Is that really being focused in say buying food for families? Sure?
So overall, spend recovered, So our total debit and credit card spend was up month over month seasonally adjusted, so that includes everything. When you dig in underneath. On the grocery front, grocery spending was up, and we actually within those numbers, you saw value grocery spending up, premium grocery spending down a little bit, so overall groceries up, but you saw the consumer adjusting where they were spending their money.
So this voter goes to this question of is this a headfake? Are people getting a little too carried away with the narrative that sentiment is toora so rapidly that spending is falling off a cliff, and that's going to stein me any kind of American exceptionalism.
Would you push back against.
That and say, actually, what we see is just the same of what we saw before, which is a moderating trend. People looking for value, but otherwise a consumer that's still pretty healthy.
That's right, a moderating trend, and you really do have to separate what sentiment says versus what consumers are actually doing. And so that spend data, the grossery trends that we talked about, the overall spent that is what consumers are actually doing, and we do at times see a difference in sentiment and their actual behavior, and I think that's very important. So again, continued forward momentum, but at a more measured pace for the consumer. We did not see
spend fall off a cliff. As you said.
We've also talked about the fact that delinquencies on credit cards have been creeping higher. We have seen some signs of distress in auto loans. I'm just wondering where fact mats fiction right, where stories have gotten carried away from your each other, from themselves, versus any kind of true warning signs that you're seeing in any of the trends that you monitor.
So from a credit perspective, we're seeing a very normalized environment at Bank of America, and in fact, we're seeing delinquencies, you know, somewhat stabilized and are expecting them to come down as the year goes forward. So we're not seeing any unusual patterns there and I would call it a very normalized credit environment from what we're seeing with our clients.
You mentioned the potential tariff impact in your report. What sectors is that is that are you seeing that bleed into this potential increase in prices when it and then potentially what it might be harder for consumers.
So we'll look at the consumer as a whole, right, and we'll look at high income consumers. We'll look at low income income consumers and watch what their patterns are. But as we talked about with the groceries, consumers do self regulate with shifting price and I would expect nothing different no matter what tariff environment comes through. So we'll watch the consumers really closely as to how they adjust their spending patterns if prices were to increase.
Do you see any policies out of Washington hitting consumers right now? Besides trade?
We are not, I mean again, across the board, we're seeing very normalized, good momentum with the consumer overall, so we're not seeing anything underneath from Washington come through.
Now, Hollie. Just to finish on what's been happening with interest rates. Interest rates have stayed much higher for longer the Federal reserve, but rates of the long end something that this administration has celebrates that have started to move lower, which is important for mortgages. What are you seeing in terms of credit access and our consumers trying to step up or they hold him back.
I would say consumers continue to borrow. Consumers continue to borrow at a normalized rate, and we see that in our credit card data. Bridge borrowing from our credit card borrowers is slightly above where it was pre pandemic, so they still have access to credit. I think from a mortgage perspective, we haven't quite seen the demand really fled back into the market. We're still seeing purchase volume, but again because of the rate environment, that refive volume is
certainly at the lower end. But that's something that we would expect to come back as the rates change.
Holly appreciate it. This was an important update on a day where a lot of people are concerned about the consumer Holly O'Neil there of Bank of America. So there's the lasst this morning. US Treasury is rallying yesterday as the S and P five hundred nearest correction territory. Kelsey Barrow of JP Morgan, writing, amid the uncertainty, one detail is clear, an allocation to high quality fixed income is once again serving as a diversifying ballast in investor por
fo oleos Cansey joined us Now for more. Calsey, good morning, Good to see you.
Good morning.
Let's pick up on what Steve Scheferin said there at the end, maybe some austerity in America, and I stress maybe, and you put that up against perhaps a real expansion of the fiscal deficit over in places like Germany. What does that mean for treasuries in an international bond market.
Yeah, so I think that you've hit on a really key point. We've been very focused on the US what's happening in the White House, but there are seismic shifts happening outside of the US right now, and the shift in Europe towards defense spending and towards infrastructure spending is really an important shift that we're seeing. And while we're talking about in the US that bonds are serving as
a diversifying safe haven. So while stocks are going down, bond prices you have US treasuries, agency, mortgages, investment, good credit all up in price yesterday.
In Germany you have.
Essentially the opposite, which is bonds have been hit massively, body yields are up, but stocks are up in Europe too. One of the biggest trades that's been in place for at least a year has been the investment of foreign investors in US equities on an unhedged basis.
Right.
They wanted the US equities and they wanted it unheedged because nothing's ever going to happen to the dollar, right. That I think is the biggest trade that is in the process of being re evaluated right now.
You think we're unwinding that big dollar long we've built up over the last several years. That is what it appears.
It's not going to be a straight line, right. But I do think that what has been underestimated is not what the US is doing, because that's been out there. Trump's been talking about tariffs, Trump's been talking about layoffs. What's been underestimated is the response from the rest of the world. We knew they would respond, the magnitude of the response has been the surprise.
There's a real question embedded in this observation about the shift in the balance of dollars and the dollar long, which is, if money is moving away from the United States, do long term treasuries offer the same kind of ballast or will there not be the same degree of demand for them because some of that money is diverted elsewhere, say to Germany.
So I think that we can differentiate a bit between the equity markets and the dollar trade and the bond trade. Typically you think about them together, but what we've seen over the past few weeks is you can have periods where the treasury market is getting a bid, long term years are falling, and the dollar is softening modestly. It sounds like a bit of a paradox, but I do think it's something that can continue to occur. One thing that will be on investors' minds as we move forward
is the deficit trajectory. Right in the two places in Europe, we're seeing for the first time. Germany is considering a deficit, considering more deficits as an advantage to them. At the same time, the US is considering the fact that deficits are not our friend anymore and we need to be
managing them much more closely. As long as those two that sentiment continues, I think that you can continue to see the support in long end treasuries, and on the other hand, I would expect Europe Germany to continue to underperform.
I would love you to have a debate with Asha Ka Batya of Newburger Berman, who is on the show yesterday. At some point I would love to witness you guys have a discussion about this. He was saying, he actually is getting a little bit more bearish on long term treasuries.
What he sees is this concern that even as people price in federalers or rate cuts, that stickiness and inflation and that real kind of floor under how far the Fed can go, and ongoing deficit concerns that they're not going to get fixed by simply cutting on the edges. It will take something more sustainable is going to really create a problem longer term for the United States and
for the Federal Reserve. Why do you disagree with that that the term premium is just going to be structurally higher in the United States.
Well, I think the term premium already is structurally higher. Right, So if you're a longer term investor, if you are looking at the market over a five to ten year horizon, you're already observing that term premium in the US is substantially higher. Yields are substantially higher than they were before.
So I think that that story is already essentially in the price and what we're looking at now is that there's quite a bit of demand at these yield levels, particularly when you have a FED that is maintaining an easing bias. Yes, inflation has been a bit stickier than before. But it's our view that ultimately what is going to get the FED moving more aggressively in terms of rate cuts is if we start to see the weakness translate into weaker labor market data.
Hiyold spreads wady yesterday by almost twenty basis points back through three hundred. Is that a buy yet? What are you looking for?
So it is interesting this goes back to this kind of question of is it the spread move that people care about or the price move. So spread buyers are saying, great, Okay, we've had a bit of a backup. Maybe this is an opportunity to get in on a price basis. Most of the high high quality part of the high old index has those bonds have not really moved down in price very much because the yield movement has offset the spread widening.
So I think you could view that in two ways.
One, maybe there's a little bit more pain to come, but also I would say it's really credit towards the strong fundamental starting point for investment grade and high old bonds in this market. And I don't think we we shouldn't lose sight of that. Coming into this year, growth was very strong. Defaults continue to remain very low.
Margins for companies.
Were at the higher end of their ranges.
So companies are.
Probably as best place as they possibly can be for the difficult times ahead.
Counsel appreciate it. Councy power that of JP Morgan Asset Management, Linday ros Sans Joint is now not getting into that. Lindsay, welcome to the program. We don't want to get into that.
Not aggressive on the airlines, not big thank you.
Something you said to us last time. I think that the dis is your friend. What's the dates of telling you now?
The data is telling you right now that you are paid to pause. And what we mean by that is it may make sense to take a page from the Fed's book. There's nothing we have to do in markets right now to reposition necessarily, so for us, we're just waiting to see how the data unfolds. We need to learn more. Jolts is not going to give us much information unfortunately today because it's really January. But we need to see that. Back to your prior guests, has the
consumer changed their path? We think not but all of this data is really going to help us.
This sounds so calm.
I mean, I love this.
You know, if people are talking about slaying of the sacred cow and a parade of horrible and you're saying, we can just say, come and take a look at what's going on and we don't have to change anything, what are you waiting for? I mean there's a lot of pretty heated rhetoric out there.
Yeah.
I think what we're waiting for is prices that make sense. And so we've been saying that fixed income makes sense in a portfolio. If you look, you're to date. I think if there's a lot of concern right now about what's happened with stocks off a percent from the peak, down maybe four percent overall, this isn't a massive move. But contrast that, which we think is really important, with what fixed income's done for you. It's earned you in the front end of the curve two percent, in the
middle of the curve, four percent back end. Even more so, I think we're calm because we're bond people, but we're calm because we have a good setup in our portfolio construction. Overall, with bonds as a ballast.
There's a question about how long term bonds can really remain a ballast if people start to get concerned about higher overall inflation from a deglobalized world, the idea that supply chains will have more built in and efficiency. How do you cope with those kinds of discussions. Do you just assume that there isn't going to be price appreciation, that yields are going to sort of stay around here, and that that's fine because it's relatively good to be paid to wait.
Well, what will be a problem, certainly would be if tariffs are on the maximalist size of the side of things, and what we've seen recently is tariffs on, tariffs off tariffs being placed out there at a higher level than brought on at lower levels. I think until we see a full blown, really aggressive tariff regime, I think you can feel confident in bonds. They have good coupons, We're starting at a good spot there. They will be support,
we think as we wait to find out more. But again, we don't have to daytrade our portfolios, and I think that's the important thing. There's been a lot of just prenetic behavior in the markets right now. We were talking before we got on that it's hard to think about even taking a day off from the markets. You can't take a vacation I think right now under this administration. But as we learn more, I think we're going to be emboldened that rates are going.
To help you.
When you're looking at potentially that maximus approach to trade, it sounds like you're basically waiting for April second.
Is that accurate.
Yeah, we're waiting for April second, just like we waited for March and we waited for February. I mean, I think there's a lot of markers that we keep waiting for. At some point, I think there will be an end to kicking the can a month a month, a month, and we'll have what is the final here, And that's what really people are waiting for. And I think that
uncertainty doesn't do the market well. And so hopefully April second is maybe the beginning of the end of we know what the permanent state will be.
We're seeing some economic advisors outside the administration but close to the president, like Steve Moore saying you gotta push out the tax cuts. You can't wait for the end of the year.
Do you think that's an.
Accurate assumption that they need to be able to balance some of this uncertainty and bad rhetoric around tariffs with some of the good policy changes they're trying to get through.
Yeah, I think you're bringing up a great point. If you think about what happened post election. We had this big euphoria bubble, and I think a lot of people have said that the errors out of this bubble or the balloon has burst, so to speak, because all the good stuff was thought about, deregulation, tax cuts, well, we
haven't had those yet because the sequencing takes time. Instead, we've seen the more negative things, potentially like tariffs, and so it's really hard when everybody was banking on really positive things to happen, the negative ones happen first, and we're still waiting for the positive things later on. They are coming, I think they're coming much more slowly. Certainly, if we sed them up, I think people would feel a lot better.
Policy clarity abroad. And I wonder how you and the team are thinking about the search. We've seen in European bond yields over the past week or so, specifically in Germany the forty basis point move last week. These are regime shifts in policy, particularly in Germany that we haven't seen in decades. How are things changing? View and the team? How do you think about the global bankdrop for fixed income now?
Yeah, So what we've said really since twenty twenty four is that there are great opportunities of divergence and that we should be able to take advantage of them in our macro strategies. What's happened in Germany is, to your point, something totally new, large significant. We actually don't think that the backup in yields is over yet, so we wouldn't hop in yet. Still prefer the US, but I think it's really important to think what that means for a
backdrop for credit. So from a credit perspective, Europe has actually outperformed the US. So when we're thinking about how to position our portfolios, we're still leaning into US because we feel like there's more opportunity there. But should that be dislodged, it'll be a good opportunity to shift the portfolio and add back in European credit.
Once we get more clarity.
On in fact, if the defense spending will be passed, what will really happen.
What's more compelling to you the pushing away from the US effect of a potential deterioration in the data or a potential positive shift not only with respect to the spending getting passed, but a sense that maybe it could ignite some kind of growth and infrastructure spending on the heels of it.
In Europe. Yeah, so this is the big change, and I think you're seeing that with the yields in Europe. This is big spending and I think now you're starting to see that all the views that there could in fact be a recession in Europe or things are looking really really weak. That's changed a lot because spending is a huge part of GDP government spending, so that does
change the tone out there. But what's important is it is a global environment, and I think what we've seen with stocks with bonds so far and the big volatility and performance is that you want to do active management to take advantage of all of these differences and all these movements because they're happening quickly.
It's going to say, as always, appreciate the update. Thank you Linday Roseen and Goldman Sachs. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and 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 opp