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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business app. We begin this out with Stock's looking to recover after sliding into correction territory. Chris Frown of stratigas a bad company writing equities are attempting to stabilize in the fifty five to fifty zone. The sentiment conditions are coming together for a rally, but it's usually a day of very strong breadth of screams.
Game on.
Chris joins us now for more. Chris cammonnin let's be here. What a week?
What a week?
Let's start with that. Are we screaming game on?
Yet?
I don't think quite yet. I think we're in the ballpark of kind of the conditions that we like to see to mark at least some tactical low. And this last week again as a reminder of what I believe is the undefeated rule of Wall Street. It's that attitudes are shaped by price action.
Not the other way around.
And I think, in particular, as we entered the year, and we talked about it on this show, the hurdle for twenty five would be the game of expectations.
The bar was high, and all.
Year we thought the challenge would be chipping away at that bar of expectations. I think we're much closer in that regard today.
We've seen just.
This week a lot of the surveys flip upside down where you have more bears than bulls, and a lot of the investors surveys, you've seen this big swelling and inverse ETF volume, so people buying the short cues or the short SMP funds. You've seen the VIX curve invert to a pretty meaningful degree. So spot vix, how you've evolved. The future should never be above where you'vee evolve down
the road, yet it is right now. So you have these conditions that I think are starting to come together, whether it's fifty five to fifty or fifty four to fifty, I don't know, but I suspect we're in the ballpark of some type of a good trading love.
Things are a lot worse than that ten percent, seems to imply because beneath the surface. I was gone through some of the tank nights this morning. METSA down twenty percent from a record last month, and Vidia down twenty two from the highs of this year. Apple down nineteen percent from the highs of ascent, but Amazon down twenty Since it's not a February, what gives for big tech?
Not fun? Right? Well, I think let's remember a couple things.
It's not like deep seak happened six weeks ago and suddenly tech began to express weakness.
Tech relative to the SMP peaked on July tenth of twenty twenty four. You know, it also peaked on July tenth of last year.
Dollar yet so we've talked about this at nauseum in our work. I think it would be silly to underestimate the impact of the degree to which yen carry for so many years, dictated how money moved around the world.
And I think in.
Particular the very large stocks in our index are beginning to see kind of the waight of that.
Now.
I don't want to forget kind of another undefeated rule of Wall Street. It's that corrections end on bad news. They don't end on good news. If they ended on good news, this game would be easy.
Right.
Market's top on great news and they bottom on bad news. So, you know, as we kind of work through this growth scare underlying the word scare, but I still think it's in the context of a bull market. And one main reason I still feel that way is despite these kind of very big declines in some of the equities, you really haven't seen an equal response from credit conditions.
We did a study this week.
We looked at how big is the move in double B spreads off the lows relative to the decline in stock.
So double B spreads right now are up about thirty.
Basis points off their lows, pretty modest for a ten percent decline in equities. You actually historically would expect double B spreads to be about one hundred basis points wider. So you've actually seen some relative resilience there in credit verse equity.
Oh does that signal broken? Is that signal broken because we have a now buffer of private credit has really shifted some of the credit incoming information from public markets.
So I think no, but let's assume yes for a moment. Let's assume I'm wrong and you're right, and the explosion of private credit over the last number of years is really where the threat of.
The warning may be.
So therefore, I think we ought to look at what these black holders in the public markets of private credit are telling us.
You know, it's Apollo, it's Blue Alo.
It's Blackstone, its areas, and you've had good correction in those stocks, but in uptrends. I think if we're sitting here in three or four months from now and these stocks which are over sold have tried to rally and rally tepidly and don't rally the leaders and roll back over, then I think we can kind of begin to move more towards your view, Lisa, But I thought my view.
I'm just presenting the hypothetical, just throwing it out there.
I just think it's interesting, though, are we really going to get the R word without credit in mass public credit really deating?
Well, okay, the R words right. I love that we can't even say recession who I mean, there's this question of just putting aside a recession. There's a question about whether there's been a structural shift in the overall market flows, the disadvantages the United States after advantaging the United States for so many years. You mentioned the peak in dollar yen, and that has sort of preceded some of these big
moves downward in equities. George Saravellos of Deutsche Bank put out or report this morning titled pain, talking about how European investors and US equities are down some thirty percent simply because the dollar has not rallied in tandem with the weakness and equities. Is there a structural shift underway?
We think so, And again I think that structural shift is dated back to when the most important price in the world began to change, which was dollar yen. It was just congruent with this wholeble market in tech for twelve or thirteen years weekend.
Now.
I think one of the reasons I'm at least longer term a little bit more seguine about a lot of this is simply because this weakness in US equities over the last month or two has really not been accompandated with weakness and global staffs. I mean, Europe has corrected here modestly, but it's held up much much better. The Chinese market has frankly held up fantastic.
Throughout all of this.
So you're not seeing like the global bear market come together or the global recession come together.
Copper is breaking out here.
So I think maybe one of the most important charges in the world for your viewers are Chinese two year olds are now going up for the first time in two or three years. You've arrested the kind of financial crisis message from China, which was just bond yields and free fall.
That has changed if it.
Was like developments sound swam. We were talking about this early this week, particularly in places like Europe, Pentagon in China, reducing the so called risk mitigation characteristics of treasuries. It's interesting that you mentioned what equities have done and what high yield hasn't done. I would look at equities this week, we're down again, and bonn Yold's on a ten year maturity, you're basically flat. There are days where it provides me comforted.
There are days where it really doesn't provide me any comfort at all. What is the ten year bonio telling you at the moment about what it trades on and what it doesn't trade on.
Yeah, it's probably been the hardest call for two years, and I think we've all wrestled with it one way or another.
And the reality is.
For two years we've basically been in a range. There's been no right call. We're sitting literally on the two year average of ten year yields. It's four twenty one is the two year average, and we're basically there this morning.
I generally have leaned more bullish bonds.
We wrote, I think in yesterday's work, you know, as rates went up on a soft CPI, which is always a surprise, right, we thought the best you would do.
Is maybe four forty four to forty five on tens.
I ultimately think you will still get a three handle on ten year yields.
But there's a pull on the other side here.
And the pull on the other side is German tenure yields look like they want to go to three fifty, and Chinese yield are going up, and we certainly know Japanese yields. So I think we're kind of in this very unsatisfying moment for global bonds again. I lean generally more constructive, particularly on the short end, for yields lower. But I just want to make sure I don't get too too cute with that call.
We'll just sit on that coade just for a little bit longer. Developments in Germany, how big aunt those developments? How could that change? The White tries to yes, Trent, because typically we think about striving the global bomb market. We don't think about the bomb markets doing that to trace race.
It's funny.
I was on your set in early January during Davos and Christine Leguard was speaking about how she was peak pessimistic on Europe, and I remember telling you guys, you know, I want to be a buyer of pessimistic central bankers.
I remember, right, And you think about that.
Why have European equities or Chinese equities, or particularly the cyclicals in those parts of the world held up better even as rates have gone up sharply in Germany and sharply in China. I think it's because you have much more accommodative monetary policy, both in Europe and in China. And that's the one difference today with this growth scare that we're going through. This is not the first growth
scare of the last two or three years. It's not the first time cyclicals I've corrected, but it's the first time it's happened where you don't really have a FED that's particularly eager to kind of get back on the easy train. So that I think explains a lot of the resiliency x US. And still a lot of stress here, like who gives first? Is it the administration or is the central bank? I lean towards the central bank, and I think the two yearield will ultimately get us there.
But that's the big debate of the day.
As soon as next week. Let's too early.
I think that's too early. And John, when you talk about corrections, right, we're down ten. There's a price and a time component to every correction. And when I say that, you know, I think we're probably eighty ninety percent of the way there on price. I do wonder if the time component is almost still in front of us where we need to just grind this out, you know, rally retest, rally retest.
That would not surprise me. Kind of given this framework here.
I could be features this morning. They are positive by three quarters of one percent. Special thanks to Christopher on
of shoutagus. So here's the lass this morning, President Trump standing firm behind his tariff agenda re it's writing plans to keep still and aluminum teriff in place and move forward with fresh tariffs on April second, at any research sciencing, Trump, as he count says year s and p target to sixty four hundred from seven k, writing quote, we can't ignore the potential stagflation re impact of the policies that Trump two point zero is currently implementing. Joined just now
for more and welcome to the program sir. An important distinction here. Your revision is off the back of a change to the multiple and not to learnings. Can we start there? Just explain the difference between the two.
Well, look, it's pe time z when we try to think about where the market's going, and I'm still hanging on to the idea that the economy is resilient. Over the past three years, we've had a tightening of monetary policy, and despite the tightening of monetary policy, the economy has continued to grow. So I'm hoping that that experience demonstrates that the economy will be able to withstand this mix
of stagflationary policies. On the one hand, we've got a policy that's increasing the tariffs, which could potentially slow the economy down. And then of course we've got the Doge boys cutting back perils pretty aggressively in the federal government. Yet despite all that, initial unemployment claims remain remarkably low. And there's lots of articles about how the consumer is going to retrench. But I think we're actually going to find that once we get marched in April data and
the spring, that will be growth. As Chauncey Gardner once said, Remember Chauncey, the idea is that the consumer will prove resilient. There was a lot of weakness in the consumer in January and February because both months were actually colder than average, and so I'm expecting that the economy will actually hang in there.
Sow much. Is this revision downward to your SMP call by year end a bond market call and not really a stock market hall, with the expectation that bond deals will remain higher in the face of inflationary pressures.
Yeah, Well, we've been expecting that the bond deal would stay. We think that bond yields are kind of normal. They're back to basically four and a half percent plus minus twenty five basis points is kind of where we think bond yield should be. And as we've all noted, notwithstanding some of the weak numbers that we've had of late,
the bond yield has actually gone up. No, it's basically a call on the fact that valuation multiples have been high historically, and they've been historically justifiably if the economy continues to grow and giving us plenty of opportunities for earnings to kind of fill in for valuation multiples. But clearly there's at least a recession scare. Lots of people are talking about a recession. As a matter of fact, last week, we raised the odds of a recession from
twenty five percent to thirty five percent. So we're not we're not saying that there's no way the economy is going to slow in the face of what's going on, but we're still betting on the resilience of the economy and earnings where we think valuation multiples have already come in and what will stay lower than we thought.
Just a couple of weeks ago at you were sticking with the seven thousand target on the s and p for the your end, and you did make this revision just now of moving it down to sixty four hundred, which is still a sixty percent upside from where we closed yesterday.
What triggered that?
What made you think, Okay, we need to take action because what's going on gives us a sense that maybe this isn't going to pass so quickly.
Well, that's a good point. I think we are going to get some teriffs, obviously, but I think there are going to be negotiations. Maybe in some areas, as you just showed the President's going to be stubborn on aluminum and steel, but I think there's a room for negotiations on tariffs in lots of other areas. So that's what
I'm expecting. The April second is going to be kind of important because that's when we're going to have the reciprocal tariffs across the board, and I think that obviously will could trigger more downside in the market in the short term, but I think it'll also triggered a lot of the negotiations to reciprocally bring those tariffs down.
I had as a tho full cold and we appreciate your time breaking it down. This morning, Attani atty research on the LESNS for US secreces.
Well, the man that was turning down the temperature yesterday in the Oval Office was the new Secretary General of NATO, Mark Rutta, and we're so excited he's.
Joining us today.
His first interview following that meeting with President Trump. So this is your first trip to Washington as a secretary general sitting down the Oval Office.
How was your.
Conversation with the President. We saw the forty minutes or so that was out to the public, but then you guys had lunch. What did you take away from that meeting?
It was a very positive meeting. We became friends when he was trimp forty five and I was still prem minentsaud in thatlands, so we worked fairbell together and it was a very friendly lunch and also absolute clear commitments to the Alliance, to NATO, to what the alliance stands for. So that was very optimistic and very positive.
So you took away that Trump is one hundred percent committed to the alliance, even though individuals in his orbit like Elon Musk are calling for the.
US to leave. He was absolutely clear there was no room for doubt there, and he did, by the way, stayed the same when he was meeting with Michael, the French President, and with Starmer, the Brilateist Prime minister two weeks before. So I tell some of my European colleagues when they say, well, it's the US still connected and committed to NATO, I tell them you might want to turn on your television and listen to the President when he says this, because he was on the records and
again yesterday stating this. So I have no doubt and there's no reason to doubt that. Did you see Elon Musk yesterday?
Was there any individuals at this table that you had convinced for the reasons why the US should be a part of the alliance?
Englan was not there, but in the conversation there was nobody there doubting the need for alliance. But of course everybody very much pushing for more spending, and particularly on the European side, because we are lacking behind. But luckily we are now ramping up and we're spending much more on the European side of netto look what is happening now in Germany. This is staggering, potentially in half jillion euro slash dollars extra on defense spending. That's historic.
So the Germans have reached this morning reporting out of Germany on this debt package. As you say, it's going to be a lot more money coming out of Germany for defense.
I think they had to deal with the Greens, but it seems that they're getting there.
Yeah, it seems like they're getting there, and then there will be an agreement in place.
There is a debate though.
When it comes to Europe or whether or not Trump is helpful because of things like this. The Germans are finally starting to spend on things like defense, not having to outsource it to the United States. Or is Trump unhelpful because he really is shaking up the global order, not just when it comes to militarily, but also things like tariffs yesterday two hundred percent on European wine, champagne and cheeses. How do you view his impact on the continent.
I think when it comes to defense spending, he is extremely helpful. And I told him yesterday trim forty five again his first term. We had pledged in twenty fourteen to go to the famous two percent. Nothing happened. He came in in sixteen seventeen, and then immediately you see the defense spending coming up. Now the aggricate amounts about seven hundred billion going into one tillion. Excellent. That was Trim forty five. Now the second Trim presidency. He is
only in his fiftieth days. Now I think of fifty first day. We have seen eight hundred billion from the Europeans. We have seen this half to impactus from the Germans, but also the Bridge, the Suits, the Czechs, the Belgians,
so many others picked up. And this is because they since that with Trimp in the White House, this is necessary, but also of course because we all realize in Europe and here in the US that Russia and China both has read and that we have to rearm ourselves because they are doing this at an incredible pace.
But on trade, he definitely is ratcheting up the tension when it comes to trade policy tarfs with the European Union. That's in the wrong message to NATO adversaries.
Well, I would leave that to the EU and the US. But when I look at home from a line sport of perspective, I would argue that Europeans are buying four times more when it comes to defense, industrial products here in the US than the US is spending in Europe, and I don't mind the difference. So it's a four
to one. So you guys are getting much more a better deal here than the Europeans, and that will only become more because if we keep the equation the same and spending more, you will have the overall a mouth being involved, really getting up. And already it's a couple of one hundred billions of the last couple of years, the F thirty five s to pay SIA systems and all the other great products from the defense industrial base here in the US being bolt by the Europeans. And that's good news.
I know you're preparing for the Hague summit this summer. Do you think you're going to increase defense spending to what the Trump administration is calling for five percent GDP for all NATO members.
Well, but what we're doing is we have a process in place where we exactly determine what are the gaps, and these gaps are big, so we have to do a lot more than we are doing now, so it will be considerably more than two percent. We first now the next couple of weeks will decide on exactly what the gaps are in terms of long range missiles, in terms of our armies which are depleted, in terms of our defense, our defense against ballistic missiles, our command and
control systems, all that data is a priority now. And then you will come to a new number, and that will be much more than two percent. I believe it will be more than three percent, but I cannot now totally and fits its readful end up. And then you look at it. One hundreds of billions pouring in now basically it is whatrea be happening, and that's the good hus.
Do you think that's an optimistic goal or will that be a red line for this administration?
Say five percent? I think what we need to do collectively is to make sure that we can defend ourselves. And at this moment, we cannot defend ourselves going forward. Yes now, but not in four or five years. Because the Rugussians, for example, ammunition are producing in three months, but all of the alliance, including the US and up
to an including Turkeia, is producing in a year. So we have to ramp up defense industrial production, and we have to ramp up on the European side, on the Canadian side to defense spending and we will decide on that over the next couple of months, and it has to be content based, but it will be much much more. And again when you look at the numbers coming in now, the Trump effect of this new triump presidency is clearly there.
When it comes to the defense of Europe. Did you and the President talk about potentially amending where troops are American troops on the continent, because there were reports that he was thinking maybe pulling out from Germany and putting more troops on the eastern flank, maybe to Hungary.
Well, we didn't go into that detail, but what we know when Pete ha said the secutive defense was visiting NATO, he was on the record saying, hey, guys, you have to understand that as a United States we also have to pivot towards the Inner Pacific. So that means that we have to take care of more than one theater, yes to European theater, also the Middle East, also the Inner Pacific. This of course history made you the leader as the United States. That means that you have to
attend these various issues. And that also will mean probably over time, the Europeans spending more that you guys will have to look at, Okay, where it can you best deploy our troops, but that will be a gradual process, taking time and not aprupt.
There was definitely with this administration coming in more troops being put on the US southern border. Under the Biden administration, though there was a surge of about twenty thousand troops to Europe. Is this administration going to pull back that Biden surge of twenty thousand troops because they have other priorities like the southern border, like the Red Sea, in the Middle East, like the Asia Pacific.
But we didn't discuss those numbers in that detail.
So would that concern you now?
But I think it's important is that the US is committed to NATO, committed to the whole of the alliance, and is also committed to if over time the Europeans are doing much and much more, and for the US also to attend to other issues like in the Pacific.
And by the way, as an alliance, as a collector of thirty two countries, we can also be helpful in a sense of projecting more American power at the world stage because the US not being on its own but embedded in an organization with thirty one other allies giving that.
Role that was missing in the past four years. American power on the world stage.
I think it was there, but I think we could have done much more. And when it comes to the European side of NATO, we were still lacking behind in terms of our defense spending. And I get the hot.
War in Europe right now, and that's what I want to talk to you about.
What's going to the.
Ukraine While you were in the Oval office. Steve Wikoff, the President's longtime friend, his special advisor, second meeting he had with President Putin in Moscow. Coming out of that meeting, Dmitry Peskov is saying he's cautiously optimistic. When do you think we could see a thirty day ceasefire?
Well, I cannot predict that. What I can say is that.
I am there are more rooms than I have.
Yeah, but let me say this, first of all, the Trump administration, the President themselves, broke the deadlock on this on this war because he started to engage with solutions. I think that's positive. With the Ukrainians, that's positive. And there was a deal last Tuesday in Saudi Arabia between the US and you on pushing for the ceasefire, so this is all good. Obviously, the US administration is now dialoguing with the Russians to see where there are on this,
and that will be a step by step approach. But this is literally developing over the next couple of hours and days, so very hard to predict when that will happen. But I think this idea of having a thirty day ceasefire is a very wise plan because it gives you the room to go into more detail on what next.
You've heard from the Ukrainians they want security guarantees. Did you get a sense from your meetings yesterday the US is willing to do that.
Well, the US is saying this first, we need a peace deal, slash the ceasefire, and the person that's very clear on this that obviously there will be many issues to be discussed and debated when a ceasefire slash a peace deal is there, But to discuss how to keep a peace deal if there is not yet a peace deal is also a bit strange. You of course, you have to think aparently.
Taken off, He's already taken off Ukraine joining NATO off the table. So Ukraine is left asking this question, how are we going to know, we're going to have proper security.
But he he was also very clear Pitasett and Brussels, but also the President self that when there is a deal on Ukraine, it has to be lasting, it has to be durable, putting should not have to try this again. So the question is then, how how do you do this post a piece deal? Then I would side with sup Pressident to first need to have a peace deal before you can get into these details. Obviously, behind the screens there will be discussions on the what if there
is a peace deal, how then to maintain that? But there are many ways to do that, and we know, of course the Diffrench.
Ship be involved Lensky's calling for a monetaring mechanism coming from the Alliance itself.
I mean, there are many ways to do this, but I think for NATO to be as NATO involved will be difficult. But NATO will maybe always advise and look into what is the best way to do this. But in the end, what we're seeing now is the French and the bridge and the bridge in the Americans discussing how could you organize that? But again I would caution a little bit and that before you get in too much detail in terms of how too many tain the piece.
You first need to have the deal, and it's a step by step approach and one after the other, and they're I think trumpet right, Do.
You think we get a deal this year? Do you think the fighting stops this year?
I'm optimistic, yes, And then.
Paskof is cautually optimistic. I believe the National Security Advisor Mike watterificast.
So are you.
I would also be cautiously optivists about this year, but I hope it is sooner because the amount of people dying there, the destriction of whole cities happening as we speak, it is really very very painful, and it is having an impact on so many families and so many people in Ukraine, but also on the Russian side. We know
that there were days detruitions. We're losing up to fifteen hundred people dying or seriously wounded a day, but also in the Ukrainian side, so many people that and so many people seriously wounded.
Before you were Secretary General of NATO, you ran a European country. Would you be willing to do business again with Russia after this? Because we are hearing reports of things like maybe gas deals come back into play.
Well, I mean, I'm not there because first of all, you have to maintain the pressure on Russians to make sure that they do whatever is necessary. That's why we have the sanctions. And let's not be naive about the Russians. But longer term, Russia is there. I mean, Russia will not goblebey. And I've had many dealings with President put
In till twenty fourteen. In my first four years as Prime minister, we had many negotiations, and I think it is normal if the war would have stopped, for Europe to somehow step by step and also for the US step by step to restore normal relations with Russians. But if you are absolutely not there yet, we have to maintain the pressure on them to make sure that they are revealing to engage seriously in talks with the American administration and of course also with the Ukrainian I.
Think the markets and business leaders might be a step ahead of the leaders in this one. We have to end on Greenland because you were in the middle of this Oval Office meeting and the President's talking about how he wants to go after Greenland. He wants the critical minerals.
There, are you concerned.
At any point you'll be mediating between two NATO members.
No, I know that they are in close dialogue, Denmark and the US, so I will leave it. That's the discussion between the two of them. But there is a bigger issue at stake here, and that is the High North, the Arctic, and this includes the US who Alaska, it includes Canada, that includes Iceland, norwaysed freedom in Finland and
Denmark because of Greenland. And I think the President is totally right in saying, and others are arguing also the Russians rearming there, the Chinese using these zeroes knowing that we have a lack of icebreakers. There is a reason for these seven countries and NATO would be somehow involved here also in terms of advising and bringing the group together that we have to take care of our defense in the High North. So this general issue he put on your GENA. I think that's positive and it's.
Something data we'll talk about this summer potentially.
Potentially, and I think the seven countries are coordinating and if there is a.
Role for NATO, we will always be present and we hope to see you there at the summit.
Thank you so much, you so much, thank you so much for joining in his first interview of the day after his over office meeting with President Trump, and made it very clear to me, Jonathan and our audience, President Trump is committed to the alliance.
Towson Stock of Apollo, writing, this is a weight and see economy consumers are more reluctant. The bottom line is that this eventually leads to a slow down in the hard data, and markets should prepare for that scenario. Towson joins us now for more tost than good.
Morning, good morning.
We've seen the shift and the soft data. The last time we spoke, you raise the issue our believe. Lisa asked to the question, with that soft data bleed into the hard data, do you sense a inevitability now towards that We.
Are beginning to see that if you look at the high frequency data, so over the last several weeks, we have seen and I know some of these indicators are a little bit special, but we've seen the number of people who are going to movie theaters, number of people going to Broadway shows.
If you look at the TSA.
Data for how many people flying airplanes, even if you look at how many people visiting the statue of living here in New York City, all that has actually started to weaken. And now we get another soft data print
here at ten with the Michigan centiment for consumers. So overall it is still a little bit too early, but given that we have this weight and see situation both for consumers and for corporates, it does make sense that the soft data should eventually begin to spill over to at least some weakening in the hot data.
One feture of this cycle that I think a lot of people underestimated, you not included is the resilience of this economy. What is our capacity to absorb sharks now has that been reduced?
Well, that's a very important question because that depends on the nature of the sharks, and we're facing two sharks at the moment, namely DOGE, which is laying off government workers. Estimate suggests that that will be around three hundred thousands workers that might be losing their jobs. Remember that for every federal worker, there are two contractors, according to Brookings.
So Brooking start to show that in total, true employment in the federal government is roughly around nine ten million people.
So if you now think about number of households is one hundred and thirty million, and someone in the federal work or contractor lives together with someone in the private sector, you get that as much as ten fifteen percent of all households in some way or another is being impacted from a sentiment perspective by DOJA loon and tariffs of course also in particular impacts anyone who is associated with trade with Canada and Mexico, and you have that that
is also a particular of course across the border to the north and to the south, playing a significant role in.
A number of states.
So the bottom line is is not only terriffs and trade war, it's also the combination of the risk that government workers and contractors potentially losing their jobs. That are the main reasons why the soft data is weakening the way it is. And it's not only consumer soft data is also corporate. If you look at the CAPEX planning from the regional feds Dallas Fed, Field Deelpha Fed, New York Fed, that's showing that businesses in those districts are
saying we're beginning to cut back CAPICS plans. Likewise, NFIB also roundtable surveys CAPEX planning is also moving lower, So both consumer confidence moving lower corporate confidence moving lower. It is a precursor for slowdown coming in the hot data.
There's an argument being made that if what was propping up the United States economy was government spending, it wasn't that strong to begin with, and this is actually somewhat of a withdrawal from a sugar high from an incredible amount of fiscal spend in the direct aftermath of the pandemic.
Do you buy that there is some truth to the detox argument in the sense that if you look at hiring in nonfound payrolls over the last two years, twenty five percent of jobs created in twenty twenty three and twenty four where government jobs. The previous years it was like five ten percent much month or less, So a very significant part of jobs in the last two years had.
Been coming from the government sector.
So it is true that job growth has been slowing in the private sector, even going into these shocks that we're looking at the moment.
Heading into twenty twenty five, you are pretty clear that you think that the inflationary shock was going to be maintained and that it was going to create a real problem for the FED to actually offer response to that kind of weakness in the economy. Do you continue to see that even though the shocks that we're seeing right now, to see might have a bigger ramification on growth than you'd previously expect it.
Well, the real challenge is that going into tariffs, we had that inflation unfortunately was still too high at around three percent, and most calculations suggest that you will add roughly half a percentis point to core PCE as a result of teriffs.
So it makes a huge difference where you start. If you start with inflation at three and you add half a percent.
Of course, the risk is that you will have too much upside and we're way above the feeds target. Whereas if inflation had started at one and a half, which is where we were in twenty sixteen, and you add half a percent, then inflation will move up towards the feed target. So the problem was really that the starting point for inflation when these policies came along was that
it was, unfortunately well and above the FETs target. So the risk is in this situation that you have inflation moving higher and growth flowing down, which of course is a definition of a steflationary shock.
We were talking to Mohammad Olarian earlier this week, and he made the point that given these dual shocks, the FED should probably allow inflation to run a little bit hotter for a longer period of time and address the growth issues and cut rates at least once this year. Do you agree that that's more prudent at a time where there are these stagflationary forces starting to loom?
Absolutely, because the FED has the dual mandate on on the one side, if growth is slowing is saying the fat should be cutting. If inflation is going up is saying the fetch you should be hiking. I think the FED will look at if growth starts to slow and if we're with the next several weeks, begin to see that unemployment begins to go up. Let's not forget that non farm payroll is always done in the week of the twelfth means this week, so this is the week
when they do the survey for the employment report. And if we do believe that this week was somewhat intense on the policy front, then there is of course a change that non farm payrolls for March could.
Be on the weaker side.
And if that's the case, then in the next seven weeks, and particularly going into April, and with the April second deadline also from Trump with a reciprocal tariffs, we come to the conclusion that the risk is that we might begin to see growth slow down, and the FED will say, well, as long as inflation expectations are anchored, yes, actually inflation may be higher. But if inflation explctiations are anchored, they will be focusing on growth slowing down.
And therefore the risks are that markets will be pricing in more cuts at the time.
And by the way, it looks like from stock markets that they are almost saying, well, thefet should be cutting many more times, whereas race markets are saying, no, no, we only need two more cuts. So there's almost an inconsistency between the messaging from stocks that are now in correction territory and race markets saying no, no, we only need two more cuts.
In the news conference on March nineteenth, next Wednesday, how does Chairman Pound address those issues? What are you looking for?
So I'm looking very much for how much he's focusing on the soft data slowing down. He did do that at the USMPF last Friday. Here in New York City, where he was in his prepared remarks saying, ah.
Everything is generally okay.
But when he was sitting down with Andrew Kashev and asked questions, he was more saying, Hey, something is going on that has some downside risks that we maybe should be putting more weight on.
So I do think that he will begin to.
Talk about, well, there's softness in the soft data, but maybe we're also worry about softness in the hot data.
We have seen this incremental shift from the November meeting into December. Assume, we don't guess, we don't speculate. Then in December there was some assumption, some guessing, some speculation, and then I agree with you the recent address we had from Chairman Power, there was another subtle shift. Just started to tackle policy issues head on in a way he hadn't done in the previous few months.
And on some level he kind of has to, because there is a sort of scenario analysis that has to come from the FED for them to even be relevant about how they're measuring some of these aspects. And that's probably why the statement of economic projections, which could be a dartboard, but it is sort of a messaging tool about how they're going to potentially respond to what is transpiring in policy and how it's transpiring and data, even if it doesn't necessarily come to full pass.
The difference now, I guess is we're actually getting the policy. They don't have to speculate about it anymore. But that policy comes with a lot of volatility and tolson. They've got to manage interest rates through the cycle. Maybe Chairman Power steps down in the next couple of years. I imagine he will. I don't know for sure, but I think we all think he will. I want to understand
from that perspective. You sit there and you acknowledge the risk right now, but also you've got to think about tax cuts, the potential for loocid regulation further down the road. How do you manage through the cycle with that in mind.
Well, that's why this debate about is it policy dependent is it data dependent becomes really really important, because, of course the policy that's in place suggests that well so far, the two things that we have seen from the beginning is those which is putting the unemployment rate up, and also terrorists, which is.
Putting inflation up.
So if that's the case, they need to deal with that shock as the first thing. Even as you say, if there are other policies coming on deregulation, on lower taxes and potentially also more energy.
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