Bloomberg Surveillance TV: March 17, 2025

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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

Great question, and I think it's too early to say. So you did have a lot of noise in one queue, certainly, as you guys said, the airlines really disliked this uncertainty. So when are we going to get clarity on tariffs, on dodge cuts and what does all of this mean for demand? I think that's too early to say during the quarter at least so far. As well, you did, unfortunately have several high profile aviation accidents, all but one of them were fatal. That is also something that you

So let's go check ourselves, because before we get carried away with too much negativity, not that I would ever be accused of that. I am wondering if it really was all that bad what some of these airline executives are projecting.

Yeah, so look, I think if you look to your point, nobody so far has changed their full air guide. I think they're also in a wait and see mode to some extent where things go. Are we going to wake up a month from now and we'll have a little bit more clarity after this April second bogie that mister Wessemmer mentioned. Are we going to wake up and have some wild headline about Greenland and nobody wants to travel? I think it's too early to say, and it's a

There was a real question about how much of this was driven by consumer discretionary spending, people who might be worried about losing their job, versus companies really pulling back saying hunker down, study, you've got nothing to tell any of the clients.

Yeah. Look, I think those are all potentially legitimate drivers I would add to that what's happened on the government level, which is not the largest piece of travel, but with doors kicking in less government employment, I would imagine they're also being stricter about who's allowed to go on business trips from these various agencies. So I think all of that stuff is relevant.

They certainly are, I hear that anecdotally. But also we saw it with United, who is most vulnerable to that those government contracts, those government flights.

Yeah, certainly United had not a massive number, but American United sort of talked about having a smallish percent of revenue associated with US government travels. So I don't remember exactly at the top of my head, but very low single digits I think in in the highest case.

So not enough to pull roots.

No, no, But you also have to also, uh consider some of these markets uh where the government serves, so Washington, Reagan of course, where we just had one of those awful accidents. Uh. You know, the FAA has had actually added a little bit of flights uh into that carrictor recently. So you have a difference in terms of how much flow you get from some of these uh government employees,

You also mentioned fuel prices in your note. A lot of banks are now cutting their forecast to BRND. How much is that going to be very helpful right now for the airlines?

Yeah, so I think, uh, lower fuel prices are helpful, and fuel sort of a funny thing. You know. Fuel prices that are too high are bad news. Fuel prices that are too low also bad news. You know. The latter signals a recession, for example. But where we are today with you know, WTI and kind of the high sixties or thereabouts, it's at a level where it's not really doing any damage or it's not dangerously cheap per se. And it did come down from levels where we're going

So I think a couple of things we're still talking about one. Did the weakness in February spill over to March? And within the weakness is the premium segment. The international long call is still holding up.

Yeah, so what we see so far international long hall is still strong. You have a dearth of new equipment per capita in that space. On the wide body side, you really only have three excuse me now with the alask have four US carolines and how many any wide bodies really? And loyalty and co branded card the same domestic spin the main place. So far that's been a little bit soft. And you know, the indications so far as are is that that should at least continue somewhat

And let's finish on domestic what happens when you start changing for bags? What happens?

Yeah? It depends who you are.

What if you're Southwest?

Yeah, well, so I think on one level, if you're a carrier that's for decades been dealing with a passenger flow that is elastic in terms of demand, it's a give and take, No, so I think what you're gonna pick up and check bags. You're also going to run some risk of sending some passion passenger flow away to somebody else, and that also makes you arguably less distinct

If yourself question why did they do it? What's the logic behind it?

So I think for the discount airlines there has to be some kind of change. Strategically speaking, I think these post pandemic structural challenges, the way consumers purchase tickets and decide to travel, all of that's changed. We no longer have enough air traffic control capacity per capita to allow these discount carriers to just lay a bunch of capacity and maintain really high blockout ugalization. They need to do something on the unit revenue side. So is this going

Just quickly topic right now for the sector?

What is it of the US airlines? United's my favorite one, and then American Airlines in DOTTA.

All three then all three of the big players.

We're fans of the network guys. They have everything they need to win. We just need the consumer to have a little bit more calmera water.

We'll get another read on the US consumer at a thirty Eastern Times. Stephen Trent, good to see you, as always, Stephen Trent there of City, Lofi Carui of GOLDM and Sachs looking for wider credit spreads. Writing since the first tariff headlines broke, our message has been simple, ad hedges, embrace for some rebuilding risk. Premia Lafia joins us now for more, Lofi, good morning, it's good to see you.

Warning.

I want to go back several months. I want to go back to the note you put out the end of twenty four going into twenty five, where you highlighted just how severe the valuation constraints were coming up into the new year. How much of a role do you think that's played in some of the shay count we've seen so far.

A little bit, obviously, when valuations are expensive, you don't have a lot of room to stomach these big, big shocks. But back then, actually our message was that yes, the market is expensive, ad hedges, add downside protection and then wait for any signs that things that are shifting, either

Things are changing fundamentally when it comes to sentiment, when it comes to maybe to demand that we're hearing from airlines as we were just talking about. Has it really shifted though, with the credit worthiness of these companies that have walked in borrowing costs for a long time and still seem to have healthier balances than they have historically.

It depends where you look.

If you're talking high quality, ig rated companies, probably not. I mean, you know, if you implement terrorists at the end of the day, it's probably worth a couple of points of declining of declines and earnings that will shift your credit metrics a little bit, but not too much. Where this will make a difference, in my view, is in the very low end of the high end market, where we ended the year with tight spreads in hopes that actually the economics of refinancing for some of these

Again, we just.

Saw a week of the biggest widening and credit spreads going back to last summer's volatility, and I just wonder, is this a repricing of risk to your point about valuation late last year, or is this the start of something more significant where people shift maybe to places like say Europe and European credit over the United States.

This feels a little different to me relative to late July early August, where we were actually pounding the table to buy the dip back.

Then.

This feels a little different because you need time to process what is effectively a meaningful dose of uncertainty that's been injected in the economy. The starting level for spreads is also very tight, and so it's not like you were being paid actually for this type of shocks. Europe has already a performed Actually, Europe has had a phenomenal

There's this question at a time when the US is potentially entering into a difficult patch of whether credit still has the canary in the coal mine aspect that it used to, Whether it's still kind of can forecast the sense of disruption in the fundamental economy that it had the reputation of doing ten twenty years ago. Has that signaling mechanism been broken?

Yeah, I think that rept comes entirely from the playbook of the global financial crisis. I don't think things will play out that way this time around. And so what we've seen now is literally credit moving locksteps with its sort of empirical or beta relationship to the equity market. And so people complain all the time, Well, actually credit has not moved. That's actually quite that's not true. You know, we've actually repriced in terms of the change in spreads.

When John was talking about your note, you talked about the first headline from Donald Trump when it came to tariffs. Why now? Trump has talked about this from the very beginning, and we knew this was one piece of his broader plan.

Why now?

Great question. I think what we've learned is that the administration has greater tolerance for a move lower in the market and even a full slow down in the economy. To me, that's been the most critical piece of information that we've learned. And then valuation has remained very tight. The two other things I would add is that you know, and this is a big difference between today and twenty eighteen.

I think we all remember December twenty eighteen when the credit market totally throws up. I think that month for high yield we got zero issuance in December twenty eighteen. Is there anything like that happening right now? Anything that we're concern the Federal Reserve coming against this two diimetic standing tomorrow.

I think they'll most likely be in wait and see or on the sidelines, will learn, you know, in terms of what they do with the their own projections how much they'll push inflation up and then how much they'll push growth down. But at the moment, like us, my guess is that they're processing this flow of information and trying to assess what they will do.

Now.

The market is pricing in I think two cuts for this year. That seems quite reasonable to me. You're pricing in two cuts not because you think we're going to make progress and inflation, but you're pricing in two cuts because you think the Fed will probably adopt some kind of an insurance cuts type of framework exactly like they did. Actually in twenty eighteen.

It's the primary market still open for DALs. We saw some headlines in the last week or so.

You know, risk aversion has gone up, and so the market is open one hundred percent, but new issue concessions have gone up, and so you know, issuers have to pay a little bit more relative to the secondary to access the primary market. That's actually, in and of itself, it's a healthy thing because if you reduce supply, you kind of rebalance the market a little bit and you bring stability to the secondary market.

What are you waiting to understand the depth of what kind of correction we could see or whether this is going to become something that you can opportunistically go into.

So at the single name level, I would say you're already seeing some opportunities. I mean, certainly the primary market is one way to deploy capital and harvest a little bit of alpha. But what could change my view?

Look two things.

One, you get a valuation reset, so actually you from load a lot of damage, you price it in and you make spreads interesting. Then you revisit the conversation. The second thing, I think we need to remember that there's in the administration's policy agenda. There's a lot of things that are pro growth, and so if you recalibrate, actually that policy makes away from some of the stuff that is actually negative to growth into some of the things

A sense that's still the strategic can care of a lot of the bolls out there that the overall policy makes is still pro ris pro growth. In six nine months time, things might look a little bit different. That's the hope. Anyway.

The first half of the year is Biden data, and then when Trump data comes into play, you would tell that, yeah, then there's going to be a policy mixer. It's more supportive too. Things going better.

Lofi's good to see you. Thanks for breaking this down. Sharp has always a clinic on credit from Loafi Karui there of Goldman Sachs, twenty seven percent of registered voters view the party positively in an NBC News poll. Unreal joining us now to build on some of these conversations. Henrota tres A Vada Partners, Henrietta welcome to the program. Overall, I would say on net the people that come on this program don't like tariffs. There is some pushbacks sometimes,

Well, if you listen to the White House, they're trying to build the one thing that is happening here tariffs as tax cuts. You know, when Peter Navarro and other economic advisors in the White House come out and say that tariffs are tax cuts, that's obviously you know, either you're lying to yourself or you're lying to me.

But it's not correct. And that's the problem.

That we run into because the same is true on the tax cut side. As your previous guest was discussing the bill that they're trying to pass, you know by Memorial Day whenever it passes, that don't care.

They're extending the status quo.

So there are no tax cuts even built into the four point six trillion dollar tax bill that they need to pass this year.

So there are tariffs and there are not tax cuts.

And when you sell tariffs as tax cuts, you create a pretty material disconnect between the consumer who is confused now about what there should should be expecting, which is swye. You pull back at the big box retailers and people delaying big purchases, which.

Is what's leading to that soft data that's so problematic.

Right now, Henrietta, what happened to the Caroenen stick approach when it came to tariffs in corporate tax rates? I thought, if you produced in the United States, potentially you could get a fifteen percent corporate tax rate. Where did that conversation go on Capitol Hill?

That conversation is nowhere right now on Capitol Hill. Each percentage point reduction in the corporate tax rate costs a hundred and fifty billion dollars. So, as I mentioned, we're already at four point six trillion just for the status quo. We got to fix the salt cap even just to raise it up to twenty k for couples filing jointly.

We have to extend the child tax credit.

The President wants to do things like eliminate taxes on tips, which is itself one hundred and seventy five billion dollars. We do not have the money for a fifteen percent corporate tax rate, And even if.

You did, I'd like to.

Relay that the Republican Conference and members up there do not support additional tax cuts.

For the business community.

They view the twenty seventeen tax build downfall. The one piece that was really unpopular is that the corporate rate tech cuts were permanent, and all the individuals in the United States are now subject to the tax increase at the end of this year because of the twenty seventeen bills. So there's not a lot of appetite for tax cuts at the corporate level.

So, Henrietta, what kind of extras can we get? Do we get no tax on tips, no tax on social security? What could Trump put on this to make it more than just an extension of TCJA.

That's a great question. The no taxes on SOLFI security is physically not possible.

They're not permitted to address social security in any capacity using reconciliation instructions.

So that's entirely off the table.

And just so we're clear, the cost of doing that would be one point eight trillion dollars. So if it was not physically impossible, it's definitely monetarily impossible. The no taxes on tips piece doesn't have a tremendous amount of support because there's not been enough education or discussion of how to rain that in so that you don't avoid a CEO saying the million dollars that I made last year is actually just a tip and evading taxes, So they don't have this the logistics.

Worked out for that.

And then in addition, that's not a universal tax cut for all individuals. It's only a tax cut if you get tips, which not everybody does, so it's disproportionately impactful to different states. That was a big sell in Nevada, but Nevada does not have Republican senator, so it's going to be really difficult to get that over the finish line. There's not a lot in there that can be described

Henrod destroys as Ida put as Henritta, thank you for the update. Appreciate it. To extend the conversation, it's a run back now, welcome to the program, sir. You've noted the soft data the anxiety over employment specifically, I just want your thoughts initially on retail sales. Do those two things stack up.

Well?

I mean, the retail sales data was basically an online story. I mean last month, a lot of the weakness that people didn't foresee was a function of online retail. And this month, a lot of the strength that people see was a function of online retail. So that kind of just slung around. If you take that out, you know,

Neil, You've been clear about how this weakening tread has been in place for quite a while, that really since late last year you could start to see it in the data, and this is part of the economic cycle as much as anything else, if not more. I am wondering if you're surprised by the pace of some of the deterioration, especially in light of the pressure that increasingly is being put on the FED not to cut rates because of inflation expectations.

Well, I don't think there's a smoking gun yet in the hard data. I mean, I want to be clear about that. You know, there's no sign of collapse. There's no real discontinuity in the hard data. I mean, that's a classic green span sort of tell for trying to figure out when you know, if we're in a recession or going into one.

But you clearly see weakness in.

You know, soft measures of economic activity, and you know, obviously there's been a fairly rapid speed in terms of the weakness in in consumer sentiment as.

An example, the March Empire data. Sort of the same thing.

Obviously, if you're doing tariffs, I mean, that's going to weigh on the good sector, you know, disproportionately, and you're seeing that, but you've yet to see that really translate into into hard measures of activity.

And I think at some level.

Lisa, I mean, the fact that the economy, i mean, residential investment has been quite sluggish, you know, you know, a lot of the cyclical areas. You know, manufacturing has been quite sluggish. So if these cyclical areas have been relatively soft to begin with, it mitigates some of the downside, because if you're sort of bouncing along the bottom, it's hard to go further down into the basement.

One thing that you've laid out, Neil, and I thought it was really profound, especially in your conversation with Paul Krugman over the weekend, was the degree to which some people are underestimating the amount of state and local funding that's being cut right now, and how some of the federal cuts might look really small on kind of a national spending level, but when you start to get those cuts at state and local levels, that's where it's going to bite more significantly.

I'm wondering how quickly are.

We starting to see some of those cuts filter into some of the economic data that we're getting out, like spending, like consumer confidence.

Well, I think the area to watch is really stay in local government employment. I mean, that had been a steady tail wind for jobs growth over the last you know, year or so, and that's you know, shifting into a much lower lower gear. And you know, I remember stay in local governments. We're adding, you know, thirty basis points to GDP growth, and that's probably poised to go to zero, maybe and slightly negative this year. You know, that's what

It comes to this administration and their pain tolerance. Over the weekend, Treasure Secretary Scott best In, someone I know you know well, said, over the long term, if we have good tax policy, deregulation, energy security, then the markets.

Will do great.

But in the short term, right now, the only policy we keep getting out of this administration is tariffs. What's their threshold for how painful they're willing to take what we're seeing in the financial markets and consumer sentiment, Well.

I don't know the level of the the put I mean, I just know that it's lower than where we are now. I mean, look, I do think it's more about what they're doing, not the uncertainty around what they're doing.

That's that's driving the markets.

But you know, did I keep you know, you and I have talked about this and people not know what they signed up for. I think what we're seeing is when Trump won, everyone knew that it was some combination of tax cuts, deregulation, and tariffs, but they bet on it in that order, which is why you saw expectations for growth at least in the first and second quarter go up after the election.

But obviously we see what the order is in.

Any day that they're not talking about tax cuts and deregulation is a day they're talking about tariffs, and the signaling of that means that they're pursuing a lot of growth unfriendly initiatives.

First, Neil, why do you think there was this consensus around the sequencing, because it's very clear, if you understand Washington, that the only lever Donald Trump could pull on his own when he got into office was unilaterally tariffs.

Well, yeah, I mean, I'm I don't know, Henry, maybe you should you should get into the private sector forecasting business, because I think that was a great call. But but look, I mean not only that, I mean any leg was going to be a very very tall left as well as you know, because the Congress was so thinly divided. I mean, I think at some level, because it's going to take them longer to get some of this tax

Neil, I haven't watched it yet, but people want to know. Is Kruman Dat's are going to become a regular thing? Do we get a second series?

You'd have to ask Paul, but it was it was quite the honor to be on with him.

Neil appreciate the input. As always, Sir Neil's of Run mag This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, angier 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.