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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie Hortern. 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. Bruce Casman joins
us now for more. Bruce, We're going to talk about management policy, the Fed, the boj Can we just start on this with America's debt pile? I know you and the team at JP Morgan have talked about the boiling of the frog, Bruce. When does it start to get a little bit too hot?
Well, I think it will get too hot if we're right that the FED just doesn't have very much room to ease, and over time that begins to affect balance sheet. It keeps credit tight, it weighs on pricing power. It's a slow moving story, and I think we have to recognize that so far the effects of high interest rates just haven't done nearly as much damage as we would
have thought to the private sector. So this story is playing out against another narrative, which is to say the private sector is healthy, we're getting supply side improvement, and maybe we can live with high interest rates and actually generate a soft landing. We've kind of moved from being very much in the boiler frog stands to being agnostic about where this story is going to lead us.
Can you talk to me, Bruce then, about the supply side narrative that the chairman seemed to endorse in the news conference last week. What's the question? Do you have the sort of linger before fully embracing it.
Well, I think we should embrace it. There's an immigration story which is playing out right now and is boosting labor force growth. It's limiting the pressure on labor markets and inflation from rising jobs. I think we've also generated some pretty strong productivity growth, and that seemed to me to be linked with what we've been doing on spending an R and D and intellectual property. The question is, though we still have a tight label market, we have
elevated inflation, which I think is sticky. I think, as you mentioned a minute ago, the goods price story globally is shifting gear. I'm just not convinced that's going to be enough to get inflation all the way down to what will make the FED comfortable over the next year or so.
Bruce, we've been talking a lot about the bridge collapse in Baltimore and understanding that it's just one particular port and that potentially other ports can take in.
Some of that traffic.
But does this highlight to you that supply shocks have not gone away and that there are these vulnerabilities that will kind of put some sort of floor under this goods disinflation that we've seen for the past couple of years.
Yeah, I think what you're seeing in some senses is a little bit of that, with the idea that there's some new pressures and shipping costs and this port closure might be part of that. But also you're just losing the benefits of having unwound this locations. You know, you've had over the last six seven months, US goods pricing X food and energy falling at two two and a
half percent base. I think most of the indicators, both domestically and globally are saying that's going back at a minimum to zero here, you know, So when Chair Pal talks about shelter inflation coming down, I think there's an offset here, quite substantial, maybe even complete, of what's happening
in the goods price story. And then that leaves the focus, of course on inflation very much on how you think about labor markets and other service price inflation, which I think we're going to see is pretty firm when we get the PCE report on prices on Friday.
So taking a step back, this raises the question, and we were talking about it with Muhammad al Arian about whether this is sort of a tipping point for this Federal Reserve intacitly accepting a two point something or a two to three percent inflation rate for the foreseeable future. Do you think that we have shifted that This past press conference from the Federal Reserve was really the key moment in that transition.
I think what the Fed is telling us it wants to are at the easing process in the middle of the year, and it's willing to do so even if in the first half of this year it's getting uncomfortably high inflation performance. What I don't think this means is that the FED is willing to accept on a sustained
basis inflation close to or higher than three percent. And what we think is going to happen here is that you are going to see a pivot sometime around the middle of the year where the FED maybe delivers one or two easing, but it really then starts to shift its guidance. The market today has over one hundred and fifty basis points a FED easing price through the end of twenty five. Unless the economy gets into trouble. I don't think we're going to see that delivered.
You say they.
Want to cut, which echoes a lot of individuals that come on the program, But they also continuously how data dependent they are. What would they need to see in the data to actually say, you know what, we're waiting, we're not going to cut this year.
I think that's an interesting point because as they're talking data dependent, you could see Chairpal in his press conference really talk as if the bar is pretty high event in easing. So I'm not sure I have the numbers. I'd want to be confident about where that is. But I think what they've told us at least to start the easing process around mid year that they're fairly comfortable
they've made enough progress. Yeah, there are data prints here that could take them off of that, and I would argue the committee, as you look at the projections, are probably more evenly divided on this issue. But I think the bar is pretty high here. I'm not even sure that if we get a couple of point threes on core inflation, which i'd say a high numbers, that that's
going to be enough to prevent a June easing. I think it'll stop them from doing much, but I'm not sure it'll stop them from easing in June.
Brace this one inconsistency that jumps out to me, perhaps we should finish it. How can the FEDS simultaneously say we're restrictive and then at the same time embrace the supply side narrative of the labor market, but also points the labor market as evidence of being restrictive. How does that ant up.
Well, I think there's a level issue of how tight the labor market is, and then there's an issue how much supply side performance is helping it. But I think you are raising an important point, which is that the supply side is improving and helping the FED, but it is also a signal that the neutral rate is higher.
And I think when you look at financial market performance here, it is embedding this idea that some combination of supply side performance, a friendly FED, and some other things going on here is allowing us to do a lot better with higher interest rates than we might have expected. So I do think you're one hundred percent right here. Policy is not as restrictive as the FED seems to be suggesting. I think growth will do better if we're right. Then
inflation is sticky. I think they are going to have to change their tunes somewhat here, but it still looks to us like they're getting ready to at least start an easing process around mid year.
It's hard to disagree at the moment. Bruce. Thank you, Sir, Bruce Kunsman of JP Morgan Economic Tanks on Friday morning AM under line of a black Rock, expecting cuts to start in the second half and writing this while a high for longer cost of capital environment poses fundamental pressure for some floating rate borrowers with limited financial flexibility. Competition between syndicated and private markets, coupled with ample private debt.
Dry powder has encouraged tighter pricing, especially for large borrowers who have access to both markets. A Mandarin places say joined us now for more a man, good morning to you morning. Thank you for the MP parabobble with us yesterday and they were talking about a soft landing in credit. Is that your kind of world you're view on things at a moment?
And good morning, thank you for having me I did see that interview with Megan yesterday.
I think I would agree with that.
I think the bar for significant disruption is really high in the corporate credit market. We do, though, expect dispersion, and we are actually seeing that to a pretty significant extent more recently in the US, European and Asian credit markets.
Two things I would note on the point of kind of competition between public and private, I think the way we're viewing it as maybe several years ago, if you were a corporate and left finn you would have made the decision between issuing a bond and issuing a leverage loan. Now there's a third option, and so you've actually seen private credit become a viable option for the opportunity set
for a lot of corporates, not every corporate. Not every corporate needs the size to become index eligible in that market, but it is a viable third option.
The other point is, I think on just the terms.
Of having more access outside of the banking channel and the public markets, we believe has been a good thing for corporates. And you actually see that in what I would argue as a pretty muted default rate given the interest hikes that we've had since March of twenty twenty two.
And I think that that shows that it's working.
And Bob Michael of Jpmorgo was talking about that the ballast kind of to some of the credit sphere. I do, though, want to just sit on this idea of frost, and that's something that Megan was talking about, that there is this frost developing and tighter credit speds because of.
The increased competition.
Sounds a lot like the equity market exuberance, but it makes sense so it can go on.
For a long period of time.
Is that kind of what you see.
We see it, and I would say it's not exclusively limited to the lift fin market where there's overlap with private credit. You also see super tight credit spreads and investment grade. To me actually it reflects a few things. One is fundamentals are pretty good. Economic backdrop is pretty strong, but if you look at spreads, they look really tight optically,
if you look at all in yields. However, if you going back to the post financial crisis period, we're talking really cheap levels on a percentile basis.
If you were to look at.
Just daily spreads, daily yields back to twenty ten, yield screen really cheap and spread screen really rich. So I think that's part of it is that the marginal buyer in credit is actually yield based, so when they're coming to deploy capital, they're not looking at it on a spread versus index. They're looking at where can I lock in all in yields? And I think it's fueling some of that optically tight spread measures and credit as opposed to it's not indiscriminate because again we.
Are actually seeing triple c's lag.
We're seeing actually a pretty significant share of credits that are trading above thousand basis points in spread. You are seeing dispersion in the single name capital structure over leverage capital structures that are.
Doing liability management.
So I would say if it were kind of a rising tide lifts, all boats and everything was rallying. I would say we are entering into kind of maybe possible over exuberants, but we're not seeing that. We are actually seeing some discrimination under the surface.
That's what I really wanted to get into. If I just go over a part of that quote again and just read it out loud for the audience, competition between syndicated and private markets, coupled with ample private debt dry powder has encouraged types of pricing, especially for larger borrowers. Is it just the larger borrowers who's getting left for debt here?
I think it's it's largely in the high end of the size spectrum, where companies have the ability to run dual track processes so they can actually see Okay, again, going back to that point of I've now got this other third viable option, where am I getting best execution? I think the pricing is most competitive at that end. But again it's it's not I do think it's it's there's not a sense thatolks are being left behind in
the sense that that competition is pricing them out. I think what it is doing is it's just changing that mix shift in link twenty twenty three, we saw a lot of public debt being refinanced with private debt. That shifted in the first quarter. Now that the syndicated markets are open and we're seeing a lot of private debt actually getting refinance in the public markets, but those companies need to be ready to be public market.
Just falling up on Megan's point, how concerned are you about weakening covenants weakening deal terms? Is this something that you see sowing the seeds for something that might not come home to rust this year, Maybe not in twenty five, but maybe twenty six.
Well, most of the syndicated market is covlight, as you know, on the leverage loan side, and as the high old bond market has become more institutionalized, covenants have become less of a binding constraint in that market too. It's really the private market that has a.
Lot of the covenant protections.
I think the big risks that I'm concerned about for risk asset valuations is a sustained reacceleration and inflation that the Fed cannot deliver at some point in twenty twenty four on rate not that that rate cut in the form of rate relief is so game changing for those credits. But I do think that it's really important for sentiment, and I think that's where you might start to see things really unravel from a risk asset side, is that we don't get any rate cuts in twenty twenty four.
We're in this extended high for longer into twenty twenty five, and I think the key there is if that's happening because inflation is sticky, that is problematic. If rate cuts are very shallow and twenty twenty four because of high growth, I would view that it's less of a problem. But if that gets postponed, I think that's an issue.
Just quickly maturity will red hair and go no big issue of something to ignore.
I was very concerned about it in the fall of twenty twenty three. I think the fact that the capital markets have remained open to lower rated issuers to allow them to get that refinancing done, it's relieved a lot of pressure pressure in European hig yield.
It's a steeper maturity wall than the US. So I'm watching there.
Interesting thanks for that. With some making a pivot to hybrid vehicles in China, chares with BYD falling in Hong Kong trading after the ev makers earnings missed estimates amid aggressive price cuts, competitive Volkswagen saying it expects to fall behind in China. Quote along with our value over volume growth strategy, we are deliberately prepared to give up market share in order to find a sound compromise between margins
and volume. For more. Pablo de c, Volkswagen Group of America President and CEO, joined us Now, Pablo, good to see you, Good morning. Thank you for coming into the studio. I know it's an important couple of days for you and the team here in New York City. I just want to reflect on the events of yesterday in Baltimore, important hub for auto makers. Can you walk us through the potential disruptions for you, the team, and the company.
Yeah. First of all, regarding yesterday, our hard goes to the families. Yeah, it's quite unfortunately, and everybody's putting. But looking at this from a business point of view, we are on the side of the sea level, so you know, when the ships come into Baltimore are not going to be affected by this event. Obviously we're going to have some disruption because of the trucks, but it's not going to be a disruptive as other automakers.
Supply certainly has been the problem in this industry. Unfortunately, it's been demand. Can you walk us through way youre seeing things wasteeing, things strengthened, and whether you're able to lean into what's handling with hybrids in the demand for it in America?
Absolutely, so let me start talking about the industry February today. The demand is very strong as an industry. The North American market, which is Canada, US and Mexico grew eight percent feverruyear to date versus last year and we grew twenty one percent, so we're tripling the growth of the market. But still eight percent is quite strong, and what we're seeing the data from March is still strong. Having said that, the EVE has flattened, the curb remains around seven and
a half eight percent of the total industry. But we as BW, we still have twelve percent of ourselves are in the eighty four in the electric vehicle space, so we're still having higher growth than the average market.
Do you expect to ramp it up though more slowly and maybe put a greater emphasis on hybrids. Are you starting to sort of sow the seeds for that right now, because you have a couple of years or potentially months to really get that up and running.
Yeah. So our factory is highly localized in the US, and we have both combustion engines and electric vehicles in Chattanooga in Tennessee, and we're the only foind automaker that qualifies for the seven thousand, five hundred dollars credit for the consumer, which means that we're localized within the vision. So that gives us our flexibility going forward. I think the pace of growth will be slower, but we still grow in the av space.
Other power trends.
Will be a good alternative for the consumers, so the consumers will be able to choose electric vehicles, planking hybrids, hybrids and combustion engines.
How important was that subsidy to you to not only build a factory but also just in terms of your decision of the product mix to sell well.
First, I think the ir Ed Inflation Reacting Act is a great piece of legislation for the US because it is transforming the industrial base of the US. So you see all these new factories and battery factories being built in the US over the next three or four years. So the benefit is not only for us, but also for the consumer by the fact that we're localizing and we're bringing all the jobs of Bozzagen and also the suppliers.
You know, we create an ecosystem that provides more jobs here and then the consumer gets a seven thousand, five hundred dollar credit.
If Trump were to come back in power, though, he can rewrite those Treasury laws which makes a subsidy, which could make the subsidy basically impossible to get. How are you thinking about that kind of impact when all this money has been put towards the evening market.
Yeah, so we have a long term vision on these topics. I mean, we know that, and we believe where we amain committed to the EV strategy in the long term, and the pace will depend on the consumer. Now, is it possible that the rules will change. It's possible, but he would need a vast majority in the Congress and the Senate to change his laws. And also when you look at the map where all the factories have been built, they're not built only in states that are democratic or Republican,
and they're being built all over the US. I think, you know, in the interest of jobs and growth, in technology. I think it would be wise to maintain this long term vision.
Do you think it would be wise to wait until after the election before you make decisions about your manufacturing footprint in this country?
I don't think so, and I give you an example at this are not only words. We decided to localize the ID four way before the Inflection Reaction Act, which goes back to your question. Right, So we believe so much in the transition to elective vehicles and in localizing our footprint in the US that we made decisions before and after that we're going to continue to localize.
One push over the last year or so by this President, by this White House is to push and support union workers. You mentioned Chattanooga. There at that plant, there's going to be a vote on whether the workers joined UAW that specific union. Can you walk us through what that could do to your cosspace?
Now, First of all, we respect the freedom of our workers to choose how they're represented. Having said that, we're constantly talking to our workers on how to improve, you know, the working conditions, the salaries, and the benefits. It would be up to them how they want to be represented in the future. So we will respect now and.
The cost space, you just assume that it would increase of the bank of.
That, I'm not so sure. I mean, we have a very competitive cost space, competitive in terms of the employees. We have wages around twenty three dollars an hour which are compatible to Michigan with the lower cost of living.
So we will see Pablo. Thank you sir. Hopefully we can catch up against soon. I appreciate your time, thanks for the invitation. See you next time, Pablo, the s VW North America CEO. This is the Bloomberg Sevenans podcast, bringing you the best in markets, economics, and Giepolo. You can watch the show live on Bloomberg TV weekday mornings
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