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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a 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. In stately of JP Morgan assen management rights, we believe the Fed will be able to respond with more aggressive rate cuts if the labor market falters, even with inflation still above target. In joins us now for more in Welcome to New York. It's going to see you.
Thanks having much.
I think you've now the most important point for financial markets right now. Are they constrained? Can they respond if the labor market data weekends over the next several months? What gives you the confidence that they can?
I think if you take a take a step back and think what happened back in twenty eighteen. The response was that they waited a little bit, and they probably waited a bit a little bit too long, but ultimately they then reacted and during Power was absolutely right. That was a period where inflation was transitory, where it didn't have a huge impact, and actually it was a growth and the laid market that was more critical to them. And I think that will be the case this time.
And I look at it from the way if you think about what they did yesterday, growth forecast revised down both years, inflation forecasts revised up one year next year, they don't actually see much of an impact. So I do think they're going to look through it, and if they start to see really weak payrolls, that's when they're going to react.
I'm with Stuart Kaiser.
I found yesterday deeply confusing and deeply contradictory, because on one hand they were talking about how they're downgrading growth and they're going to look through inflation.
On the other hand, he seemed to Vetcher J.
Powell seemed to dismiss some of the soft data that indicates weakening, which suggests that they'll be late. How much do you have confidence that they could adjust that stance?
Should some of the SAFT data.
Start maybe being a little bit more consistent or bleeding into on the margin certain hard data points.
I think the weather way I looked at it was that they I saw this as a FED chair who actually is concerned about the economy the way like reading between the lines. I thought, they've concerned about a bit of weakness going on, but they haven't got the evidence yet on the hard data to react to it. And I think what actually is quite clear is they just don't know, and none of us actually know exactly what's going to happen. They're in a really tough spot at
the moment. And you think back to twenty twenty three, we had the headfake of the soft data there showing signs of weaknesses. It never never fed through, So they're probably a bit mindful of that. But ultimately, if you do start to see how data roll over, and it does typically take a few months, I do think they're going to react. So it's probably going to be more later later this year that will be happening.
I understand why the front end of the yield curve rallied. I understand where people started to believe that maybe this FED would respond to weakness in the economy. Why did that triggle into the long end of the yield curve? Why did people buy the idea that not only is this transitory, but the entire international story that we've been talking about of a relevering in Germany and in China wouldn't suddenly be relevant anymore because the Fed's cutting rates.
Why is that sort of the logical conclusion, right?
But I think humane it pretty clear he was they were going to focus on the growth aspect of thing. He sort of dismissed all the questions around inflation. And if they were concerned around inflation, maybe that's the back end gets you know, it has to move a little bit higher. But if he's going to look through all of that and then you've got the asymmetry where he talked about we're either on hold or we're cutting, that probably gives confidence to the bond market.
So this is basically the market believe in him. This is the market getting back on team transitory. The market is getting back in the trans team transitory band.
Is that what you're saying?
And I think that's right because that's what happened in twenty eighteen. The last time we did transittory was the pandemic, and yes, that was wrong, But if you think about what the pandemic, the difference there is we had positive growth,
and that and positive inflation. If you're having an environment of negative growth or a slowing in growth, then the inflation we should be looking through that, particularly it's a one hit from taris and particularly we start seeing weakness in the late market, because that ultimately will bring inflation down.
Howell referred to the teriff yesterday as being tariff inflation different from regular inflation. How do you decipher from between the two.
I think it's difficult, and I think he actually said it's going to be difficult for us to exactly calculate what is tariff and what is what is just regular. And the problem and the slight nuance that we've got relative to twenty eighteen. We obviously went into twenty eighteen and inflation was below target. It's not at the moment.
So again that's something they just have to be mindful of over over the coming months as they think about what they're going to be doing, because inflation was just at a worse place to start with.
Just to pick up on Lisa's line of questioning, let's sit on the markets a little bit more perfectly intuitive, FED cuts rates, see a rally at the front end, got that you're stru up. That's what happened yesterday. How me understand what happens to risk if the FED is cut in because growth is deteriorating but inflation is still above target. How does high your credit trade in that world?
Soros? Obviously it's widening a little bit because of the grossience. I think it depends how deeply we think these growth impacts are going to be. And again that goes back to the problem that we've got that your impower's got is we just don't know. We don't know what's going to happen exactly on April the second, We don't know how long this is all going on for. It's a very difficult argument. I think what we can say though, is going into this, corporates were in really good position,
very healthy. Fundamentally looks very sad, and I think that's what you have to step back and think about. And yes, if you see a real deterioration in growth, of course we're going to see some widening credit spreads. But I still think there's this all in yield argument that we've talked about a lot people like seven and a half percent. There's no question about that.
So that throughout the end of last year as well coming into twenty twenty five. Let's just finish on this economic data later this morning, Hey thirty easton time we get us jobless claims. This feeling yesterday that the Federal Reserve and Shairman power reduce the importance of the soft data. I wouldn't say dismissed it, but we've said repeatedly through this hour, perhaps downplayed it. How important is the hard data going to be? Do we put additional weight on
things like jobless claims? How do we trade on that information?
I think the hard data is really important, and I think actually the jobs market is probably the thing we really need to need to focus on, because if you do start to see weakness there, it's going to filter through to the rest of the economy. So hard data, jobs market, that's what we really need to.
Mord hard data. A little bit later this morning, in steady of JP Morgane and thank you, sir, My Pile of black Rock writing well, negative stock bond correlation has re emerged. We do not believe it will persist with sticky inflation, tariffs and significant US fiscal deficits. The FED faces challenges, and term premium will come under pressure. Mike joins us now. He's also the former economic advisor to President Joe Biden. It's going to see him Mike as always.
Should we start there? How does it feel? So it feel good? If he's shaking the Washington d C off, Do you feel better about it?
Got using my step. Happy to be back in New York and happy to do you with you.
We can get into the markets in just a moment. I'd love your assessment of where the economy is and how these policy changes might influence where the economy goes in the coming quarters.
Yeah, I mean, certainly. I think we're in the midst of a pretty significant set of shocks. So obviously trade policy uncertainly, both the magnitude of it and the uncertainty around it. Certainly, I think some some slowdowns more broadly in the data.
You know.
The flip side is, you know, the United States is a very dynamic, very resilient economy, and I think what you heard from the Fed yesterday is while these shocks are significant, while growth is likely to come down, wall of inflation in the short term is elite is likely to move higher. You know, still there's a kind of underlying strength there that's going to see growth through.
When it comes to tariff you know all the players.
Obviously you weren't not in the Trump administration, but you know who they're dealing with on the other side. Do you think we get to a place where it's methodical reciprocity.
So I think what we've seen from other countries is you know a likelihood that you know, this negotiation is going to play out in the backdrop of not just not just tarif announcements from the United States, but threats of retaliation from others, And I think that, you know, I think one of the big questions as we roll the clock forward over the next three, four, five, six months is you know, not just where do US tariff levels end up, but where do other countries end up
with their tariff levels? You know, to the extent that you know, deals are possible, negotiations can reach some kind of resolution that ends up with tariffs perhaps lower than what gets announced in April. Second on both sides, I think that's going to be ultimately a world that's healthier
for growth and inflation. Globally. I also think at a minimum, you know, as we roll the clock forward, we're going to get more certainty and that's going to take some of that uncertainty discount off of economic forecast as well as markets.
But if there's this reciprocal tariffs and then there's the hit back, the tit for tet, do you think there's a chance you can tip the United States into a recession? Powell said, it's moved up, but it's off the table for now.
Yeah.
Like I said, I would just echo, you know, share Palel. The shocks that we've seen are significant. We're going to see significant shocks. That's going to lower growth, that's going to mean, at least in the short term, higher inflation. But you know that the underlying momentum, the underlying dynamos, and the lying strength of the US economy is you know, quite significant, and that's hard to you know, turn around.
You might agree with the Fed on that front.
I get the sense you're not exactly joining the band yet of transitory.
You're kind of on the sideline saying.
I'm not sure that that's actually the case. And you made a point about you're not totally buying the long end rally that we're seeing in treasuries.
Can you talk a little bit about.
What you're seeing that makes you disagree with the fees assessment that we can resurrect this word transitory.
Yeah, so I think that you know that when you look at the long end of the US curve. I mean, yes, we've seen a rally over the past couple of weeks as these growth scares have worked their way into the market. But looking out over the medium term, you know, inflation does look somewhat stickier, and obviously we're going to have
a shock on that. In the short term, I think fiscal deficits are likely to be persistently high, and you know, when you face a backdrop like that, I think you do see pressure on term premium built up, particularly from the starting point we're at today, and that means that bonds are going to be less strong as diversifiers kind of rolling ahead as they have in the last two or three weeks, and as they were, you know during
the twenty tens. You know, that means that investors are going to have to seek diversification in other places, whether that's managing fixed income in different ways or seeking uncorrelated sources of return that can provide that diversification.
Where do they find those uncorrelated sources of return? And I'm so pleased you've brought up this topic because I've lost count of how many times you've asked this question over the last few weeks or so, haven't we We've gone back and forth on this. Are we seeing reduction and risk mitigation characteristics or treasuries over the last few weeks. I think slowly you've started to see some evidence of that gold.
I keep thinking gold, Are you just going to gold?
And is that the reason why you see it keeping on rallying?
Yeah? I mean I think that exactly to your point, John, I mean, obviously, at the beginning stages of the pullback, you saw really strong reactions from the treasury market. That's diminished as we've gotten kind of deeper into this period of volatility. I think that's a harbinger of what's to common.
I mean, black rock, you know, one of the things that we would say is you should, you know, seek diversification from things like stable long term cash flows that are less growth sensitive, that are more inflation sensitive, places like infrastructure. You know, the thing that we really look at are things like you know, our quantitative multi strategy hedge fund, you know, built on the back of forty years of innovation and leadership. You know, they've come through
this period generating solid alpha. And what it proves is or show proves out is you know, having a range of different strategies arranged different ways of generating alpha. And in this environment in particular, what's worked is, you know, strategies that are primed in market reversal period, strategies to provide liquidity to segments of the market across asset classes, that can generate alpha even in the face of market dislocation. And that's what investors are looking for.
John, I I'm nearly as sexy as gold.
Multi asset diversification, city cash flow, you know, things to.
Sell here much just go bust. So exactly, private markets instructure all of those companies. I'm not frond shite to how to respect for the position. The answer used to be booms, used to be German bombs, and obviously that's not the answer anymore. How have things changed in Europe from you perspective?
Yeah, so, I think it's it's actually a really interesting moment in Europe. You know, I think the debate within the firm. Is is this a trade or is this a more durable investment? You know. On one hand, obviously Europe Germany has stepped forward with the set of fiscal policy changes that you know, as far back as when I was in the Obama administration we were calling for.
That is really tremendous to see, you know. But I think that among the bell weathers that we're looking for is is this going to be coupled by changes in the regulatory environment. You know. The Drogy Report talked a lot about the degree to which Europe remains uncompetitive in the technology sector, the types of spaces that really drive
innovation and growth. You know, if we see a turning of the page there, that might be, you know, a precursor for a much more durable European trade of the long term and take it from just a three months six month trade to something much more long lasting.
I'm sitting here smiling. I've done you a while. It's nice to hear you talk about markets again. It's been too long. It's nice to have you back in the seat. I want to finish where we started. How are we going to make sure that talented individuals keep going down to Washington, d C. To do the kind of work that you did, the Deleep Singh did, the Wallyadimo did. How are we going to make sure that continues?
So, you know, I think when I look across you know, a number of friends that I've had who've served not just in you know, Democratic administrations, but Republican ones. I think the folks like, you know, just amusement. She was the number two with the Treasury Department and the first Trump administration. I look into this one and see, you know, really thoughtful, qualified people as well in important pockets of
that administration. You know, I think that the call to service is a strong one, and the call to deliver for the country is a strong one, and I expect that we're going to continue to see that across administrations and both parties.
I hope that remains the case. Mike is good to see my power there of black clop Let's stick with retail investors looking ahead to Nike earnings for another read on the state of the US consumer, Brookroach of Goma Sex, writing, we believe it is still early in Nike's turnaround journey, and we have yet to see material signs of brand heat environment improvement. She has a buy rating on the stock with a ninety dollars price target. Broke Johnsys Now
for more, Brook, welcome to the program. Let's get into it. What are you looking for later on today?
Good morning, and thank you for having me today.
We believe that all eyes are on Nike's earnings result this afternoon, and as we look.
To the report, we do believe.
That focus is centered on signs that the brand turnaround is working. New CEO mister Elliott Hill outlines several strategic actions taken to improve the brand over the course of the past couple of quarters, and we believe that you're starting to see signs that those actions are taking root. We have seen some refreshers in marketing, We've seen some changes in promotional activity, and we've seen some that they're
looking to reduce discounting on Nike dot Com. As a result, all eyes are on any signs that fiscal twenty six may be able to return to growth and what the impacts of recent changes might have on sales growth and earnings.
What's the growth market, Brook, Is it going to be the United States?
Is it going to be overseas? At a time where there's a.
Real question about that will be trying to rehitch its wagon to the NFL.
I think one of the big questions is whether or not they will be able to return the North America market to growth. We believe that the reset in North America is very important. We are seeing signs of improved marketing, we are seeing signs of improved innovation, and we are seeing some signs that the North America consumer is engaging
with that improved marketing and innovation. Generally in our sector, when markets begin to improve in North America for retail brands, we start to see signs that that brand heat can translate internationally. So we believe investor focus will be very centered on North America.
The big counter argument is on holdings is the potential increase in Hokah's is the fact that in all the running groups that we all see in the morning in Central Park, there isn't necessarily a huge domination of Nike shoes. Instead, they're a whole host of other brands. At what point does that become a real problem because there are these competitors and they're scrappy and they're getting in.
We are seeing a lot of signs that Nike is refocusing on innovation across each of their core sport categories. The new CEO is focused on returning the brand to focus on sport and to engage with those core running communities and those core sport communities. As a result, we've seen better innovation with more new product. We've seen the launch of the Pegasus Premium and the Boomuro eighteen, and the company is refocusing on engaging with those local communities
and with specialty retail running. So we believe that they are starting to make the steps that are necessary to return to competitive market share positioning in each those core categories.
Even if they have a better product.
What's to say people are buying Dick's sporting goods, they expect a sales slow down at the same time that surveys continue to say that consumers are worried about the uncertainty that's coming from policy in Washington and the tariffs.
Overall, we have seen signs of some consumer slow down and macro choppiness over the course at the last few weeks. At first, there was some focus on the potential that this was a function of weather, but overall we have seen some more comments about slowing overall. I think as
we look at Nike's turnaround story. Investors are much more focused on what will happen in fiscal twenty six, which will be beginning in June of this year, and what Nike can do on a relative competitive positioning to improve the brand heat so that they can gain back that market share regardless of the macro backdrop.
So basically what you're saying is twenty twenty five is going to be really a period of transition for Nike to them potentially nail it in twenty twenty six.
We believe that the company will be returning to growth in the back half of their fiscal twenty six and that many of the actions that have already been outlined by management are going to drive lower sales and lower margins in the first half of twenty of fiscal twenty six and.
Thus calendar twenty five.
There's a challenge still to come. Brooke, appreciate your time to break this down for us. As always, Brookroach there of gone at Sachs on Nike, Louke Tilly of Wilmington Trust Wang in on that decision right in the following We continue to think the labor market and inflation data would justify a rate cut of the main meeting, but given Fedschair Jaypow's response, we are moving our first expected cut to the June meeting. Luke joins us now for more,
Lok welcome to the program. I want to build on what we heard just yesterday from Chairman Power with you in just a moment. I want to start with the forecast. What was your initial reaction to the adjustment in the SEP that we saw relative to December.
Yeah, well, the big change obviously is to the GDP forecast and that coming down, and I think that incorporates what we had been expecting, is that the strength of the consumer at the end of last year was not really strength in the sense that the consumer keep powering the economy ahead. What we saw was really strong spending on durable goods in November and December that was coming a lot from replacement purchases from the storms, and then
also people getting ahead of tariffs. So there's a lot of people at the end of last year that thought the economy was just up, up, and a way, you know, in this sort of almost like a no landing scenario that was going to generate inflation. And of course we've seen consumer spending come back down in January, retail sales down in January and February, and really the more accurate picture is a consumer that is, you know, it's doing okay, it's pretty solid, but it's going to accelerate. And that's
why I would expect GDP to come down. We've had a one point eight percent forecast for twenty twenty five for a while, so the Fed now is very close to that with their one point seven.
So growth comes down, inflation goes up, and it's that piece of it that's interesting. So from a market perspective for investors right now, they want to know if this Feder reserve is in a position to respond to deteriorating data. If we do get that weaker economic data, are the constraints somehow by higher inflation prints? What would you say to invest us.
This morning, Well, we've had the same story for a while now, and it's that the consumer was not strong enough to keep pushing inflation higher. Nor was the consumer strong enough to take on increased prices of imports and drive inflation higher. We thought that basically, if you raise the prices on imports, that they would start spending less on domestic services like going to the movies or haircuts or restaurants or anything like that. So we really didn't
perceive that there was an inflation problem. We've been messaging that for quite some time now. I think the FED, in a good way, was talking very differently about tariff's yesterday than seven weeks before, acknowledging that the increase, you know, a tariff increases the price of a good, but that's not necessarily inflation. It's only inflation if consumers can handle it and they're ready willing and able to keep paying
those higher prices and keep spending elsewhere. And that's sort of what it sounded like at the end of January, the previous FOMC meeting. But of course the messaging yesterday's you've pointed out earlier in the program very different. Basically a step level, one time increase in prices of those imported goods, but we wouldn't expect it to generate inflation that would go on.
Okay, So Luke, it seems like you're actually on board with that, And yet you think that the FED took may off the table in terms of cutting rates in part because they are looking at the hard data. Do you think that actually this increases a chance they're going to be behind the curve if you do think that the soft data is indicating a much faster pace of deceleration economically.
It feels a little bit like last year. I think we were probably the last people to take July or off the table last year and say, well, they're not even really leaving the door open, and then when they got to September, of course they cut by fifty basis points and they had to play some catch up. I think yesterday it was in response to a direct question about May, and Chair Pal said, we're not in a rush, you know, And so that's about as clear as a FED chair is ever going to get about. We're not
going to cut rates at the next meeting. So that's why we have to push our first cut out one more meeting. I also don't think it's hugely important. The economy is not going to hinge on twenty five basis points over the course of seven weeks. But as I said, and as you read in the quote at the beginning, I do think that the economic data will justify a cut by May. We're going to keep seeing slower job growth,
We're going to see slower consumer spending. I think the inflation data will keep slowing down, so it'll justify that. But that'll be fine as long as they're talking about it at the main meeting. That should the ease financial conditions.
We have this near term data, and John was talking about the delta earnings and the call about how much demand has been dropping off. We've heard that same thing from other companies that to consumers and raises this question how far behind is the hard data. We don't see it in the jobless claims, we don't see it in a lot of other data points that have been coming
out from the government. At what point do you expect to start seeing this in the data or can you dismiss this as watch what they do, not what they say, and those two things can be very different.
Yeah, I'm definitely a fan of watch what they do and not what they say. And I don't really think we're looking for a deterioration in the hard data signaling
recession or anything like that. If you just look at year over year retail sales, year over year consumer spending, it's at pretty mundane normal levels that we had in twenty eighteen twenty nineteen, when inflation was not a problem, and I think that that hard data speaks directly to that the labor market's going to be a lot more interesting. You know, we think that the job openings are going to continue to decline and jobs are going to slow down.
One of the interesting things here is that because of the uncertainty of the tariffs, we do expect firms to maybe hold off on hiring, and that dynamic, it wouldn't actually show them cutting their open positions, just sort of you know, hey, you know, hr, let's wait a little bit and see how these things turn off and not pull the trigger on actually hiring somebody. And that's where you would see it come through. So it's not going
to show up in the jolt stata right away. But one thing that we have seen, even though the job growth is okay, you're not seeing unemployment claims, we're seeing shorter work weeks. It's two months in a row now that the average work week is really low. And when you combine that with slowing job growth and slowing wage growth and you look at just total wages paid, that's at the slowest growth rate that it's been since the pandemic.
So it's really starting to slow down. But it's like seeping in kind of, kind of sneakily, because it's just basically lower wages being pointed out. You've got reduced overtime hours in that reduced work week, So in some ways it is coming through in the hard data. It's not pointing to recession, but it is a slow down and I don't think generates any inflation pressure.
Look, you have a recession probability of thirty five percent and GDP of one point eight percent. What I find so interesting about your call is it it's the call you had around the time of the election next year. Meanwhile, everyone has really revised what they're thinking about growth and also potential recession because of the tariff story. What did you see in November that people are starting to catch up now.
Slowing labor There is slowing labor demand all of last year. It's going to slow down the hiring. We're looking at job growth that is coming in around one point fifty and you've also had a significant contribution from government jobs last year. So when you look at private payroll growth, it was slowing down already through the second half of last year. There were some strong consumer spending numbers, but like I said, a few minutes ago. I think that
those are a little bit of a head fake. And if you just if you think about what's going to end up driving consumer spending, it's not savings. There's not many savings left. It's going to be job growth and wage growth. And when those things are slowing down, you're going to have a slower economy. It's going to call fall down below two percent this year. That's how you don't end up with any inflation pressure. So I will
say next year at the end of the year. It was incredibly hard to read through some of the impacts. There are multiple hurricane events, storm events, the election, people getting ahead of tariffs, so you really have to be looking at longer term trends and not hinging on anywhere one particular data point. But this is that slowing is what we've been seeing for quite some time, and Mary.
A lot of people are catching up with you. Look appreciate it, Luke Telly there of Wilmington Trusts. This is the Bloomberg Savants podcast, bringing you the best in markets, economics, an gio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.