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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. Equity Market's coming off the last week of the year, the best week of the year investors looking ahead to Friday when fed Share Jaypowe speaks and we get the core PCU deflator Ediardenny of Yourdenny Research writing this and the Financial Times at this nirvana level, all is right with the US economy because it is growing while inflation remains moderate. If the economy is doing well with the current level of interest rates,
why lower them? At your Danny on places say, joined this now for more at fantastic piece in the FT. Enjoyed reading over for him when it came out a little bit earlier. This morning, you say, why mess with success? Can I get you a base case? Do you think they will mess with success?
Well, based on what I heard coming in the press at the press conference that Ja Powell had, it seems as though he at least is continuing to.
Tell us all that they.
Probably are going to lower interest rates, and that kind of again raises the question exactly why is that. I mean, we had a hot CPI and PPI a few days before his press conference, and yet notwithstanding that, he expressed confidence all as well, and he's right about the economy.
The economy is doing absolutely fine. I think there's some Fed officials who believe in the concept of real interest rates that if inflation continue used to come down, then real rate real rates will be restrictive and that might cause a recession. So I'm concluding that the Fed put might actually be back.
So if they do go forward a mess with success, Given that you believed the Fed put is back, does it really matter? Is it equities up and up and up and why.
No, it's fine for the economy. I think inflation is still going to moderate though. I think they're taking a chance. Here's with all prices going up the way they have. That's not an area that can always spill over to the rest of the economy.
So I don't think they want to get.
Everybody thinking about the possibility of inflation coming back. But yeah, I think this is starting to possibly be reminiscent of the nineteen nineties. And if you ask me where we are in the nineteen nineties, I think we're at December fifth, nineteen ninety six, where Alan Greenspan asked, how do we know if it's the irrational exuberance? And I'm concerned that the market go up too fast. I mean, it's great
on the way up. Melt up so wonderful, but by definition they can lead to meltdowns, and so that's where my concern is. Look, I've been forecasting fifty four hundred by year end. We can get there by the end of the week the way things are going well.
But just to sort of sit a little bit on what you were talking about with respect to commodities or oil prices, we've seen a number of strategistical misass coming out and seeing the potential for a fifteen percent gain in raw materials over the duration of this year, in part because the FED is going to allow growth to continue. Mike Wilson over at Morgan Stanley also talking up the liking likelihood that a commodity oriented cyclical boom really gets ignited.
At what point does this become a problem for the broader market with the idea of inflation coming back.
Well, I'm not that worried about the inflation story because I think, certainly on the good side, China is going to continue to export deflation. We cantinue to see that their producer price index is negative. We continue to see that import prices for the US coming in from China, those are negative on a year over year basis. China's
in a pretty serious recession. They're really in a property depression, kind of similar to what happened in Japan a while ago and in the United States, and it takes years to off set or to come out of that kind of deflationary experience. So I'm not particularly worried about price inflation. I'm more concerned about asset inflation. You know, it's not just the stock market that sanitary, it's also gold that's bitcoin.
Spread between high yield corporate.
Bonds and the treasuries is extremely narrow, So that's where the Fed's running a risk here.
I think there should be three mandates.
If they're going to have a mandate to keep inflation down, price inflation down, keep unemployment rate down, they also have to be concerned about financial stability.
And when you look at the take from Mohammad A. Lar told us on Friday, it might not be this pinpoint when it comes to inflation. Maybe the FED is now targeting a range, and he said last week was a really good moment where potentially you saw that shift.
Do you agree.
Do you think the Fed is now looking at a range instead of two percent?
Well, it seems more like based on what pal said, that their target is still two percent.
They're not putting that in a range.
It's just Palell kept saying over and over again that they're shooting for two percent over time. Two percent over time. He said it several times. And that implies that they're willing to lower rates before they actually get to two percent, whereas the message before seemed to be that they're not going to lower rates until they're actually at two percent or so close to it and so comfortable that it's going to stay there that they can go ahead and ease.
So I think the message right now is pretty ambiguous. Quite honestly, it does kind of make me wonder, what do they know that I don't know what's the worst to lower rates.
The answer to that is maybe nothing, as you know, because they're often surprised by many things. And I just want to know, given everything you've said in the last five minutes or so, what are you advocating for in equity markets? What are you ratificating for now from here to year? Rent?
Well, I'm still going to use fifty four hundred.
I mean, obviously we were only you know what, two three percent away from that, But I'm I think it's still a bullmarket. I think next year we'll be looking at six thousand, maybe sixty five hundred by the year after that.
So I think we're still in a bull market. I think you're stay invested, and.
If we get them melt up, well we'll have to discuss whether it's time to take some profits before I melt down.
But that's that's a risk scenario right now. It's not the most likely scenario.
So where does the financial stability point come into play? How concerned are you about that?
Well, I think it's kind of like the nineteen nineties in that regard, but it's not nineteen ninety nine.
It's more like nineteen ninety six. So we maybe early on in the.
Financial instability issue here, But things move pretty quickly these days, and everybody knows the history of the stock market.
They knows what happened in the nineteen nineties.
And if the FED really, you know, gives us a rate cut before we're expecting it, I think you'll see the market.
Moving a lot higher.
How much are you concerned about bonds waking up to the idea of something of a range of the idea of stick your inflation right.
Well, I think the bottom market is happy to see the inflation coming down, and I think the bottom market is struggling the way all of us are with the Fed's message. What do they really want to do here? You know, the foc statement, It made it sound like we're going to wait until we have the data that gives us confidence that inflation's coming down. And how modified that statement by saying that you know, things probably are going to work out in that direction.
And this just sounds like extended cycle, which raises the question about the cycle that I'd like to rimput on.
Here.
Are a lot of people come on this program and say we're late, Psycho. I think Lisa's asked the question a few times, just how late are we actually, I've given the conversation.
We have it.
Well.
I think we've discovered over the past couple of years that history doesn't always repeat itself, but it does rhyme, and you know, we are I think just somewhere in the middle of the cycle.
I don't think we're late.
I think the economy is still showing plenty of signs of infation, is coming down. But you know, you have to put everything in a global context. It's not just the same old US business cycle. It's you have to put it in the context of what's going on in China, what's going on in Europe, what's going on in the geopolitics, if.
You had any research. And thank you sir, giving us lots to think about.
Stocks.
Pausing on the back of another record week, we love doing shows for you. Fueled by the Fed's latest confirmation we really do it will cut sometime this year with the market on track for its fifth consecutive month of games. I'm speaking to management, not the audience. Neil Dutta, we love doing it for you too. Here's the quote, Neil, the market's rightly viewed the FED decision as duvish, hence
the rallying stocks and bonds. The risk is that January and February's inflation data represent a series of higher than expecting inflation prints. Ultimately power ses. The stance of monetary policy is very restrictive. As a result, he's more an alert for downside surprises to growth than he is upside surprises to inflation. Neil, I'm pleased to say, joined us now for more So, Neil, let's get into your framework. I remember a line of yours at the end of
last year. I remember you sent me a message and you said, the labor market is no longer a reason to be hawkish. And I thought it was really important at the time, because it wasn't just that the labor market was somehow weakening or deteriorating. It was that even with labor market strength, even with economic growth, that was no longer a reason per se to be hawkish. Now, can you just walk us through how you thinking about the economy with that in mind?
Yeah?
Sure, thanks John for having me on. Well, you know, compensation growth equals inflation plus productivity. Okay, and we know that compensation growth is moderating. You know, there's a lot of focus, of course on wages because that's the monthly data. But you know, remember that benefits are slowing a lot more rapidly than wages and salaries, and in theory, workers
bargain over their entire compensation package. And when you look at quits, quits are basically below where they were just before the pandemic, and it suggests that broad measures of compensation growth like the employment cost Index will be you know, somewhere in the vicinity of three percent by the end of the first quarter. Now, if you have three percent compensation growth, and we know that productivity is normalizing to around one and a half percent, where's the inflation coming from.
So compensation is three maybe three and a half, and productivities around one and a half, then you're at the fed's underlying inflation.
Objective of two.
So there's a lot of focus right now on things like goods prices, producer prices. You know, as I mentioned the last time I was on the program, Lisa is very focused on chocolate prices. But but there's limited paths through from those things into core consumer prices. And I do think that the normalization of labor market conditions will take a lot of the pressure off of services which are running, you know, well above what they normally run above with respect to goods prices.
Now, one take that we heard last week repeatedly, I think across the street, including from yourself, was that the FED was embracing this supply site narrative. Could you briefly describe that a little bit more broadly and help me understand how do you set monetary policy when it's the supply site doing all the work?
Well, I mean, I think first it's important to understand why the supply side looks better. I think that's primarily a function of normalization dynamics following the pandemic. So you know, this time last year, labor productivity growth was deeply negative, and now it's normalizing that. That's that essentially raises the
speed limit for the economy. So if you have stronger economic growth, as Powell mentioned, I mean, you could have stronger employment and economic growth without necessarily pushing inflation higher. And I think that's why it's important. Gives the FED room to kind of recalibrate policy. But you know, I mean, and that's why it's important, you know. So productivity is up, that gives the Fed a little bit more more space to ease, you know, modestly, if inflation's slowing more quickly.
Neil, I'm having a hard time, and I'm having a hard time for a number of reasons, partly because it's very hard to find people who can really pose and sort of negative case. But there is one to be made with the data that is coming in hotter than expected in certain areas. You talk about the fact that wage inflation seems to be nowhere. The New York Fed has a new measure of trend wage inflation that Torst's slock put out this morning, saying that it's currently running
at five percent, looking pretty sticky. Other measures showing that inflation is reaccelerating, with Jim Bianco is saying this no landing is going to pose a real problem for bond markets. How do you dismiss those things out of turn and retain faith in the disinflation story.
Well, you have to go to first principles. I mean, I'm not a big believer in indicator macro. I don't like going and saying look at this indicator. See you know it's up well, I mean that's again, as I mentioned before, I mean, looking at the wage number, that's one thing, But people bargain over their entire compensation, right, I mean, that's just to me, that's a red herring to distract people from the best measure of compensation growth,
which is the employment cost index. Okay, and you know there's minimal pass through from goods into into core consumer prices. But as I mentioned first principles, where is the acceleration in household and corporate measures of inflation expectations? Where is this showing up in earnings calls? Where I mean Costco is talking about basically holding the line on prices, Walmart's
talking about bringing their roleback back. So I mean, if households expect inflation to basically be you know, I mean those expectations have been coming down in the last few months, it would suggest that, you know, the inflation upside surprises that we've seen in the realized data will be fleeting.
I'd also point out I'd also point out Lisa, that inflation data has been generally on the weaker side of the consensus overseas interesting it would support the idea that I think the FED is putting a lot of currency into I think rightly that residual seasonality is a big driver of why the inflation numbers looked a little bit worse anywhere in February.
Then, Neil, if that's the case, do you reject this idea of a reacceleration of the economy in some sort of material way of broadening out around the world and see that that's premature because there is more weakness under the hood and frankly challenges to certain businesses that don't have the pricing power that would suggest that the FED was justified and cutting now, I.
Think to me, the strength of the economy, that's a reason to expect a ceiling on how many cuts the FED can deliver. It's not a reason for the FED not to cut at all. I think part of this is we're all very used to the FED cutting a lot or not at all, because primarily it's you know, they're cutting aggressively to stop a recession from gaining hold, or they're already too late, and that's why you're in a recesion. You have to cut a lot. What I'm
talking about is just a recalibration of policy. It's difficult to see the FED cutting six seven times, because, as you mentioned, the economy strong, but if inflation is falling, they can at least adjust policy a little bit to kind of reset the economy. This isn't an outright easing. It's just simply taking policy from significantly restrictive to maybe a little bit less restrictive. That's all I mean. This isn't like a broad wholesale change. I think that's kind
of the sort of thing that people are getting. I think, in my view confused by this isn't a wholesale change of policy. It's simply a recalibration of monetary conditions.
Now, I'd like to finish there, because I think those words are really important, just how bullish the reaction function of the Federal Reserve actually is, because many people run away with the idea that it was super, super bullish. No, I just wonder how close we actually were to having a very different conversation if that median dot had shifted from three cuts to two, and it was very close to doing so. Do you think the conversation would have been very different after the FED meeting?
Onestake, not really, because what would have happened My sense is that the bond market I mean, the markets probably would have sold off a little bit. I mean, certainly the expectation going into that meeting John was that, you know, we were kind of gravitating. The risk was for for two cuts instead of three, and maybe if they penciled into the markets would have taken that and and sold off a little bit. You would have seen a modest
tightening of financial conditions. But then guess what, Cheri Powel would have come out, struck the same dubbish tone, and then markets would have rout.
So I you know, I don't know.
I mean, I think I think the big story is they're cutting, they're just not cutting as aggressively. And the strong growth in the economy puts a floor or sorry a ceiling under how many cuts they can do. And that's also in the dots. That's the that's in the outlook for twenty five and twenty six.
Got it, Neil, cry to catch up, Got to do it again soon, no doubt to the redmac on the latest in the economy on the Federals of have Aswell PRAMO following a series of dubbish Central Bank matings, Jim Bianco of Bianco Research saying this the Fed cannot randomly pick some day and cut rights if they do, and the market thinks it is not serious about inflation, soal bombs FED dubbishness only works if the market is convinced
inflation is not a problem. Right now, it's unsure. Jim joins us now for more, Jim, are you unsure?
Yeah? I am.
I mean if you look at the markets, we've got the so called everything rally, except one thing has not been rallying with the everything rally, and that's been the bond market. It has been kind of meandering unchanged, especially if you go back to before the FED meeting.
It here's the Fed wants to cut rates. It looks at the data.
It sees stronger data, higher inflation expectations. It also sees the FED upgrading its inflation and economic growth forecasts. And I think it's wondering is this a good idea for the Fed to be cutting rates? Because if they're not careful, they could cut rates, and if the bond market's thinking that they're unsious about inflation, we could wind up with
higher yields, not lower yields. I think that's what we saw last summer when the FED stopped raising rates on July twenty sixth, the market was worried, it was unseerious about inflation. We were at three ninety on the ten year note. Ninety days later we were over five percent before it started to really believe that the inflation numbers were coming down.
You said last year that disinflation was transit three. Jim.
You said that.
You came out very early on and said it. I wondered, Jim, what you saw at the time that led you to believe.
So just looking at the data, you're right.
I mean I was looking at headline CPI and it has bottomed June of twenty twenty three to three percent. And if you look at the data going forward from here, especially the March data should be very strong, and you're probably not going to be below three percent.
Until the fall, if not the earliest.
Unless price ACCRUDEIL collapses down to fifty dollars, then you'll get there, But short.
Of that, you're not going to be below three percent.
And what I saw was just that the housing data was staying stickier than everybody thought, the wage data was staying stickier than everybody thought, and in oil and energy prices, which matters for headline CP was also not really declining to the extreme that everybody wants, and I think that's still the case as we move forward.
When is it going to be something that the bond market wakes up to, because right now it hasn't been material sell off, and frankly, bonds have handled this pretty well.
Yeah, they've handed it well, you know over the last couple of weeks, which I've said, it's been on sure, But of course the ten ure yield started the year three eighty eight, so it's up about forty basis points for the year as we end the first quarter. The other problems, or the other issue in the bond market is everybody's bullish. Everybody thinks that bond. Bloomberg had a story basically about, you know, we're back in the curve
steepening trade again. Everybody's losing money in that trade, but don't worry, it's going to be a good trade to wind up making.
And that's really what the bond market is.
Dealing with is a lot of bullishness right now, but data that is not supporting it.
So it's going to take some time.
And I think if the data continues to come in stronger than expected and the inflation data stays hotter than its affected, the bond market will eventually turn towards higher yields.
Well, this is really something that we were talking about with Sinaldasaia and she said that she still likes duration actually, and the reason why is just because of the wall of money. And it's clear that there is so much liquidity in the system that's got to go somewhere, and the ball of money is just going into every risk asset as well as bonds. How do you argue against that that that's not going to persist.
Well, it is going to persist until the wall of money ends.
And really the biggest driver of that wall of money has been central bank policy. Now I know they're doing QT, but they're also having their reverse repo facility roll off.
I know this is a bit wonky.
That's money that's outside the financial system that's getting pushed into the financial system, that is creating more liquidity. That's within a couple of weeks to a month of ending, and then all of a sudden, I think the liquidity situation in the bond market or in financial markets generally is going to start to turn lower, and that wall of money is really going towards where it's treated the best,
and that's cash. It's you know, we've seen a trillion and a half dollars go into money market funds and they just keep booming to new highs, and why shouldn't they the highest point in the yield curve and their forward looking thinker, Tom Keene has now got a quadruple levered cash fund and so I think he's got the right idea when it comes to where you should be.
That's right.
He had this European tour last week, celebrates in Jim Bianco at Vianco Research. Jim is going to catch up, buddy. This is the Bloomberg Surveillants podcast, bringing you the best in markets, economics, and geopolitics. 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.