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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am Marie 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 at Beginning this hour, with stocksin chin KaiA looking to snap a two day losing streak, market's whipsword by tariff headlines are leading to several downgrades for US sancreities. From Goldman, from City and from HSBC. Join Gus now from HSBC, Max Ketner, Max, Welcome back to the program, Sir, The facts have changed.
Talked to me about how the outlook might have changed as well.
Yeah, Look, I think we're still tactically quite cautious on equities. We're all, particularly of course in the US. We've just put out a note this morning. I think this is the kind of time where you need to update your framework your indicators pretty much on an hourly basis, because like you guys were just discussing, of course, even yesterday, things were changing pretty much three times during the day.
So when we look at our indicators at the moment, particularly from a systematic perspective, of course, yes, there has been quite a bit of systematic selling. But what we're not yet seeing is this sort of final puke. So when we look, for example, our momentum and slash CTA indicators, they are bearish. They flipped from maximum bullish to bearish, but they're only at sort of medium bearish levels until now.
So we need, I think, for us to be comfortable to go back in and to buy the DIP, I think we need a bit more sort of a puke moment inequities to really say, right, this is the all clear. Now, positioning is clear enough, systematics have sold enough, and of course from a fundamental perspective, what's changed in the outlook. So the stuff that you were alluding to is, you know, we were all thinking there is some sort of put from the new US administration. With that absent it is
down to the FED put. But of course with data let's say like yesterday, like the jolt data, all services of isms or payrolls still pretty pretty okay. You know, in a normal environment, that would be really bootish for equities and for risk assets overall. For the current environment, however, it just puts the FED put even further away. Remember what Powell was saying on Friday, We're in no hurry
at all to do anything in rates. So what we would need is the FIT to give some kind of not to tightening financial conditions, that they're monitoring market developments something like that. But as they said on Friday, I think we're still quite a bit of way off.
There max a lot to unpack there. Let's start with the technical term puke. What does the cathartic puke look like? We had a ten percent decline at one point in yesterday's session, so entered correction territory.
Briefly, If it's not that, what is it?
I think what we need to see is broader based. Even on Monday, right breadth actually wasn't that bad. It wasn't like it was all five hundred stocks going down. It was still pretty sort of focused and pretty concentrated on some certain sectors, and the high multiple sectors. I think what you would want to see is sort of the final broad based puke where it's not just you know, tech and the high multiple stuff that gets hammered, but really the broader market where perhaps even the equal weighted
SMP underperforms the cap weighted SMP. What you would want to see is that spilling over into credit spreads as well, right where we haven't really seen a disorderly widening as well, and maybe even spilling over into other equity markets where then people say, you know what, so far we've been hinding out in European equities. We've been you know, thinking
that this is a completely different story. But now we're really playing US for recession fears, and that should spill over in to global equity markets once we've got that. I think that is then sort of the final puke. And another queue to watch perhaps is the momentum factor. When we look, of course in US momentum, that momentum factor has been absolutely slaughter the last three four weeks.
Any kind of bottoming there, any kind of a sign of a reversal there, I think is another sign where we can start buying.
The dep I think this conversation needs a bit of antacid and Max. I am curious about whether we're talking about sort of the market equivalent of the economic debate here of whether we're pricing in stagflation or pricing in something more like a recession, and that is something Julia Emmanuel was talking about, what are we pricing in currently?
What would you take more seriously right now at a time where there are a lot of anxieties, but there still are people who are hopeful that we could emerge from this.
I think stagflation fears were about a month ago, right That was basically when we had January CPI particularly underlying inflation much much higher than a lot of people, including myself expected, where you know, super core inflation was really coming in quite a bit hotter, and that really was a month ago.
When we look at the last three weeks, the amount.
Of selling that we've seen in cyclicals versus defensives, particularly in the US, the amount of decoupling between US cyclical def against European cyclical defensives, or really rest of worlds cyclical against defensive performance clearly tells us what the market is playing now in particularly the last week and a half is increasingly recession fears, so we are I think we are getting closer to the point where you want
to start buying that correction. We're not just quite there yet because I think, again, it would be different if it was just the high multiple stuff, but we're starting to see that spill over into other parts of the market.
It's just not.
Quite there yet where we can really sound the all clear on the systematic positioning unwind being completely over.
This is a complicated story. It's not just about recession and recession fears in the US. It's also about relative valuation and the fact that suddenly there is an alternative and the idea that Europe looks brighter, especially with the
likelihood of some sort of fiscal package being passed. How much do you lean into that and how much do you say what a lot of people have sat on this show over the past couple of days, which is that's looking pretty expensive, looking pretty bad, that's already over.
I mean, for one, what is amazing is think if two months ago, if at the beginning of January, just before inaugration, if we had said I think German small in mid camps or European small and midcaps are the quote relative save Haven in global equity land. I think you guys would have thrown me out of this room now and would have sent maybe don't come back again. So it is quite funny how things have changed only
within a couple of weeks. I do agree with you it is perhaps the Dacks is not the right place maybe anymore. I think it's perhaps in Europe really the small in midcamps that should benefit the most from perhaps you know that the fiscal package in Germany getting over the line. Also perhaps any potential kind of positive news around Russia, Ukraine. All of that is really particularly beneficial for the smaller in midcaps, but also for other parts
of the market. We look at China, I think the China Internet that ags tech trade, that still has some room to left. So it's not like we have to throw in the towel on equities entirely, right. It is
so far mainly a US story. And I think in Europe, yeah, find the higher euro, the stronger euro, I think is starting to get felt in the larger caps, particularly in the German equities, given that they you know, basically get generate only or less than twenty percent of their revenues outside of or inside of Germany and about eighty percent
outside of Germany. So the stronger euro will start awagh on the performers there, But the smaller and midcaps, I think really the ones that you want to look at. Also the banks, right, we can look at European banks. Still really good European insurance, So there's a lot of stuff even within Europe also from a sector perspective under the hood that is worth looking at.
Max an incredible twenty four hours for Europe, potentially one step closer to peace on the continent. At the same time, you wake up and you see these retaliatory countermeasures to US tariffs, what narrative do you think will prevail?
Look, I think the narrative clearly for the US is is that that put from or that we thought was there from the US administration, either the strike price is much further away, or maybe that put doesn't even exist because they want to force in the fit. So I think that narrative, particularly for you as risk assets, and frankly at some point also for globally for risk assets more broadly, will really prevail on the next couple of weeks, because ultimately, for a sustained you know, for a sustained
reversal higher. We will need to see some kind of not from the FED to say, Okay, you know what, we are monitoring financial conditions, we are monitoring market developments. And let's remember that was actually already enough in the
December twenty eighteen January twenty nineteen episode. You know, they were starting to cut rates only in July twenty nineteen, but in January already had that bullish reversal because all the FED had to do is to say, well, financial conditions are quote notably tighter than they were in September.
That's all they had to do.
They only had to say notably tighter, and already markets were saying that's the FED put that's it.
So we're not.
Talking QE, we're not talking emergency rate cuts.
What I'm talking about.
Is literally just like a verbal not from the FED that we need and that already I think from a fundamental perspective, would then change that narrative that we've just been talking about.
A Max appreciate it. Thanks for the update. Max Canada there of HSBC. On the equity market, Let's talk about some of the stock moves we've seen in the past twenty four hours we can in consumer demand, leading to a sell off in airline stocks downta, spooking investors after kind of its profit forecast in half. Chila Colu of Jeffreyes joins US now for more chili. Good morning in rain, big changes. What did you see what you were tracking in the last month or so, what's happened with these airlines.
We have a data series that tracks airline traffic on apps and folks pre booking, so that data fell off about ten percent over the last three months, so trailing three months, but the three weeks really fell off. It hit the lowest cost carriers the most. So back to Ann Marie's point, it's in the heartland and where we're seeing the demand fall off. But Delta signaled a fifty percent revenue cut. They guided Q one seven to nine percent, then they cut it to up three to four. So
still positive. As Ed Bastian said, we're not in recession territory. But January and February, which is the last time we heard from them about three weeks ago, was positive growth, and so that means the last three weeks really decelerated. So Q two is going to be very important because it's about forty percent of airline earnings.
As we strip out some of the motivating reasons for why we saw such a deceleration in demand, can you track the fall off in airline ticket purchases to some of the safety issues that were raised?
That was cited by both American and Delta yesterday, But it was across the board, and that's what I think startled so many folks. It was Delta close in bookings, so people book airfares closer to when they're actually going to travel. It was also corporate demands off, and we've seen that in bizjet utilization data as well for February. And then third it was a demand across government, which United has about four percent of asms and American has one point five, So it was.
Across the board.
It was Trump's policy's doge really impacting government employees, corporates slowing down, and then you know just leisure demand slowing as well.
We heard from Delta that they plan to cut capacity to meet slower demand heading into the summer. What does that indicate to you about just how temporary this is, or if potentially some of the airlines are preparing for this fall off to continue for a longer period of time and hoping to increase prices to compensate for it.
I think domestically in the US market, capacity is already very tight. That was the story of the first half of last year. Capacity grew six to seven percent, and then we exited the year about flat and the data TSA volumes are flat year over year, but so is capacity. So capacity is already fairly tight. So that's a soft
comment from Delta to make. To cut capacity, we have to see demand come in, and I think the next four to six weeks is going to be very critical to see how the US consumer is going to react.
Where does the demand come in. I think we were all struck around this table yesterday when a headline dump that dropped that United said fifty percent drop in government travel. Who fills that void?
It's hard, I mean, it's a small percentage of asms. But then Delta also cited corporate demand across the board. Airspace and defense was of course the sector cited as well as leisures, so it wasn't only one thing, and I think that's what is more concerning about the reads. But again it's early and so that could change if the SMP goes up for the next four weeks, I'm sure people will start booking travel again. So it's all based on market sentiment.
What's more challenging domestic travel right now or international?
Domestic is more challenging. Domestic has always been because you have low cost carriers and so they priced down. You see tickets from Spirit other low cost carriers for very cheap. International is still very positive, and the good news is eight three fifties and seven eight sevens are very slow on the deliveries, so we're not seeing a lot of capacity come into the market. In BacT, that market's very constrained.
You suggested it's sequity market dependent. I might suggest it's dose dependent. If I'm a federal worker this year, I'm not traveling. If I've booked a vacation, I'm canceling it. If you've got to raise a family at the moment and you're dependent on the federal government fearr annual salary, I'd be very very nervous abound the rest of the year. How is that showing up in the numbers already?
It's a small percentage of the market, but I think DOJE in general, the headlines covering defense stocks is it's what's scariest, some of the headlines they put out are not actually the reality of what they're cutting. So again it's going back to the uncertainty of a big headline, and the reality suppose is that what are.
They actually countsinc When it comes to defense, it's.
Interesting to me because I thought they would go after larger, more bureaucratic issues, but instead they're going after it services contractors, which the six public ones we cover comprise about three of the largest defense programs, So I thought they would eliminate more waste, but they seem to be cutting very quickly and very abruptly, so without any precision, which I think creates problems as well.
How much of the story is this? And I ask this because yesterday I saw some comments out there like if government spending was the main pillar of support for the US consumer, then we had a pretty weak consumer aside from some of the stimulus that was really in to donch the government. Can you talk about what we've seen in terms of consumer spending habits leading up to this and then in the aftermath, and just how connected to the federal spending it is versus the overall tote.
I know it's hard to parse out, but it kind of gives a sense of where we're coming from.
I think is the government employees. If you're a government and employee, you're probably not traveling. But again, that's such a small percentage of the market, and some of the agencies were cutting from they've already had trouble recruiting and we've just gone back to pre pandemic levels six years later. So I think it's very problematic just cutting abruptly. And I do think the airline cuts go back to consumer sentiment on the overall market. As we've all seen our stock prices have.
What's your favorite name?
This morning, I'm going to go I'm going to actually pitch Boeing. I really like Boeing. I think outside the Arrapad lines, the Macro, we haven't delivered a single plane in six years. The skyline is over sold, and I think investors have capitulated on just demand. They think we're going to see demand destruction because the market's often for the the last three weeks. But I think everybody's still waiting for their plan and it's not going to get out of line.
So should I appreciate it? It's good to get off to Spade with you. Thank you, Sulda Cary. There of Jeffreeson joining us now is David Kelly of JP Morkan Asset Management. David, that's some good news going into next week. How much comfort will this bring the Federal Reserve?
Only a little.
I mean, if you look at the number of stage just scanning them, we saw a four percent decline airline affairs, which is probably you know, that affects some of the things that the airlines are saying to us about some weakening and demand. But I really think that the Federal
Reserve is in a very difficult position here. Until we have some clarity on tariffs, they don't know how much of an inflation kick we're going to get from tariffs this year, and until we've got some clarity on the budget, they don't know how much physical stimulus is going to be kicked in next year. So I still think they'll probably wait and see next week. This economy is beginning to look like it needs or will you justifies a rate cut, and I do think we'll probably end up
with more than one rate cut this year. I think we may end up with a sequence of rate cuts. But I think it's just too early for the Federal Reserve to make a decision given the uncertainty about policy.
What's fascinating to me is a reaction of markets, David, the idea that you're seeing a bigger reaction right now and equities in your bonds. This idea that maybe the Fed put could come back into play and support valuations even amid policy uncertainty.
Do you buy that?
Is that something that you think is a correct thesis?
Well, I think that there's some other things on the bond market's mind here. I mean one of them is that if you look at the numbers that the CBO put out yesterday on the budget depthsit so far this year, it looks like we're going to crack two trillion dollars this year, and we've got a massive budget deficit. And the weaker the economy gets, the more likely it is that we're going to see even more fiscal stimulus kick
in next year. So we've got a deteriorating situation, a fiscal situation here, and sow economic growth and tariffs will only make it worse. So that may be supporting real yels here, even if inflation backs off a bit on weaken economic growth next year, So I think there's more than just inflation and the FED on the bond market's mind.
Which is also part of the reason why the FED might have a hard time just embracing this data and then signaling next week that they plan to cut rates sooner than maybe they expected. David, what do they need to see to have confidence in the forward trajectory given that this is backward moving and we have policy that is pushing companies to act in real time.
Yeah, I think the most important thing would be a sort of a final story on tariffs for this year and for the next few years. We know obviously, as an economist, I believe that zero tariffs are the correct policy. I think that's a fairly traditional conservative perspective. But some clarity on that is vital for them to figure out, you know, how is how's the economy going to evolve?
I mean, what the FED has said very clearly two days after the election, j Palell said, we're not going to assume, We're not going to guess, and we're not going to speculate. But they'd have to assume guests and speculate if they move policy right now, and that's what they're trying to avoid so that the administration and Congress really need to figure out what the policy playing field is going to be over the next few years, then the Pederal Reserve can try to make some decisions.
David Kelly if JP Morgan Accent Management, David, thank you. The Federal Reserve meeting a week away, David really painted a picture of what a tricky position this Federal Reserve is going to be in a week from today. It could have been trickier without a data point like the one we just got.
At least they don't have runaway inflation of the idea, they're coming into a potential inflationary shock. I'll be at a one time price adjustment. There is some sense of disinflation. That said, the fact that if you do have a weakening economy that that could lead to more fiscal stimulus makes it very complicated for bond investors, let alone just the FED.
If you are just joining us, welcome to the program. Moments ago, a small downside surprise on CPI headline month over month zero point two percent the estimate zero point three. Stripping out food and energy zero point two percent, the estimate zero point three. To discuss this and a whole lot more joining us. Nas Mohammad, Aaron of Queen's College, Cambridge. Mhammed, Welcome back to the program sir, good to catch up with you. Important data point. How does this change things if at all?
So if you talk to economists, I'll tell you looking back it's good news. Looking forward, there's very little information content because of what David just said. What you've been discussing all day is we don't know what to pass through of expected and actual tariffs will be. So that's where the economists are. For those in the market having been disappointed on the Trump put, this is better news on the Fed put, and I think that's why you're getting such a strong reaction on the equity side.
There's been so much confusion Mhammad about tariffs in the past twenty four hours or so. US several hats, one of which is you've been a business leader for many, many years, and I think you made the important distinction when we had the boom of inflation. You made the point that this was not going to be transitory because of what you saw at the corporate level, how companies were acting and how they were responding given the threat
of higher tower is still to come. What do you see now from companies and what does it indicate to you about what data might look like in months and quarters to come.
So two things are obvious to me, John. One is that companies have gone into a wake and see attitude and understandly so, especially if you're multinational, you need clarity. So you're postponing decisions because you don't want to make a decision that ends up being a big mistake because the world has changed on you. So we are seeing
business activities slow down. The second thing we're seeing is people are much more ready to pull the trigger on price increases than they were in twenty twenty one twenty twenty two. So if these tariffs stick, and if if we get more did for tat trade issues and things like that, then they pass through to prices will be quick and it will come at a time when demand is softening. So then you bring the third issue, which
is a consumer. The consumer is hesitant already. I take seriously what you've been saying, all of you saying about what's happening to airline, what you're hearing from different retailers. There's been risk aversion clarity on the sense of the household. So put all that together, John, it is a weight and see economy that cannot absorb much of a price hit.
Is it an economy that can potentially enter recessions?
Here, Muhammad, my probability is twenty five to thirty percent. It was ten percent at the beginning of the year, so there's been quite quite a big change. Why isn't it higher Because it's a lot good happening in the US economy as well. But if we get a prolongation of policy uncertainty, then that probability will go up.
There's a question about the response from central banks globally, Mohammed. If you do have this environment where inflationary pressures are going to be stickier at the same time that you have slow in growth. Christine Laguard called it an era of shock and saying that maintaining stability in a new
era will be a formidable task. If the central banks around the world had to choose what's worse allowing inflation to be a little bit hotter but trying to help growth or suppressing inflation at the risk of not rescuing growth and allowing it to continue to plummet.
So for both Europe and the US, it is the former, these economies can get to stall speed pretty quickly. We don't want that because the damage that that creates is significant. So tolerating slightly higher inflation would be the better choice the way you framed it. But Lisa, remember these are central banks that made a huge mistake, and they may be much more sensitive to inflation than than we would be given the mistakes they made.
The idea of transitory and not maybe responding to it in a way that maybe they should have. I'm just wondering if let's say they did take what you just said seriously and they did say, look, we're going to have to just tolerate higher inflation for longer and we really need to address slower growth, how many times would you expect them to have to cut this year in order to offset some of the uncertainty and frankly, the consumer demand destruction that we're seeing in real time.
So to be clear, if two percent was really the operative inflation target, we wouldn't be speculating on how many cuts would be speculating on the timing of the hike because the data has sold for quite a long time, but because most people believe that two percent is a medium term to long term target, there is speculation and how many cuts. I'm in the one camp. I think, given what we know today, we get one now if the tarrier tensions persist and did for TAT get worse.
I mean, at some point yesterday with Canada, we were near tipping points and that would have forced a FED to revisit what is thinking right now about weight cuts. So it really depends where this trade war goes.
Lisa Muhammed, I want to revisit one of your best calls. You are probably one of the best risk managers that I know, that's for sure. I want to talk about February nineteenth, February nineteenth all time highs, and not the February nineteenth all time high of twenty twenty five. The February nineteenth all time high of twenty twenty and I remember you came out around that time and you said,
don't buy this now. The equity market is corrected in twenty twenty five ten percent from the all time highs of February nineteen, but it's quite a parallel to think about those two dates. Muhammed, what would your approach be to markets now and equity specifically, So.
I'm asked this all the time. John, I was asked this morning by someone here in the college, is it time to buy? It's very tempting to buy because with ten percent off on the SMP, with thirteen to fourteen percent off on the Nasdaq. I respond very simply, what mistake can you not afford to make? You know, most mistakes in the investment world are forgivable over time, and that's a great thing about the investment world. If you bet on something that the faults, that's a different issue.
So investors need to understand how much tolerance DoD they have for short term mistakes and how much tolerance should they have for volatility, because the probability of both these things has gotten a lot higher than it was at the beginnion of the year.
Muhammed, I appreciate your time. You one of the best.
Thanks for catching up with it's a good friend of this program, a good friend of ours. Mohammed al Aaron of Queens College, Cambridge. This is the Bloomberg Survenmans podcast, bringing you the best in markets, economics, and gie 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 app.