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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. Let's stick with the economy.
Francis Donald of RBC right in the following. Whereas the Trump administration was initially celebrated for its emphasis on deregulation and tax cards, it is now facing tariff centric policy and fiscal pullbacks, which is not reflationary but stagflationary. Joining us now two of the very best, Francis Donald and Al Selinos. Francis here in New York, Alsa over in London.
I just think the perfect pairing for this morning, because we're talking at the end of US exceptionalism and that has a big effects impact that we can talk about with Alsa shortly Francis, I want to begin with you, what's changed in the past month.
Well, when we talked about US exceptionalism, let's remember that it was generally a call on the structure of the economy, which was really being supported by fiscal chips at AI, a good underlying fundamentals, and the cyclical acceleration. I don't think the structural story for the United States has changed too much here, but that cyclical optimism is what is fading at this point, and we are seeing we are seeing the damage from tariff uncertainty creep into the sentiment surveys,
creep into soft data. What we need to see now is does the soft data bleed into the hard data, especially with this K shaped economy where the ultra wealthy have been supporting the whole And what concerns me most as well. We heard from President Trump, we heard from Secretary be said that they're not watching the stock market anymore. Maybe if they're watching the economy, they need to be
aware of that wealth effect flowing through. The Other component of this, which is hugely important, is just how inflationary those tariffs turn out to be. Strongly depends on the path of the US dollar. That's why Elsa's views are so critical to the economy. Now, it's not just economy to effects, it's how effects will change the shape of tariffs and just how stagulationary they are.
Which also is the reason why a lot of people expected that a strong dollar would offset the inflationary aspects of those tariffs, exactly to Francis's point, and yet what we've gotten is that exactly the opposite. And it's part of what's going on with growth fears in the US, but it also has to do a lot with what's going on in Europe. How far can that dollar weakness really go?
Yeah, absolutely right. It's been an absolute momentous week for Europe. I mean, the scale of integration and large scale announcements we've heard this week just Pelsantine significance compared to anything we've heard over recent years. So I think there are a number of cross currents. As you said, there are a number of people saying, well, actually a stronger dollar could offset the impact of tariffs. I disagree with that.
The large majority of US imports are actually denominated in US dollars, so a lot of that effect would actually accrue to exporters in terms of profit margins, but thinking more generally about where the dollar goes from here. As I said, we have a number of cross currents because it wasn't just the fiscal announcement coming out of Europe this week. There's also the fact that we already had better European data. We saw that again this morning with
the upgrade to Q four GDP. Actually the economy did reasonably well from initial reading that was point zero five, fairly better than flat up to point two two now, with a lot of that coming from domestic demand. And so I think it's that challenge which has caught people off. God,
how much further can the dollar on? I mean, you know, we've been nying up one twelve as a decent verse resistance level, just because that's the level we got to in September of last year, when again there was that pessimism about us exceptionalism.
I miss the days when we're talking about gross differentials and inflation differentials and we could just focus on that. Now there's tariffs, now, there's questions about spending. Now, there are questions all of this, Just to for instance, the point if you tried to strip it down, which is kind of the goal right now, its just growth and inflation, which is the biggest lever to pay attention to when
it comes to the US rates outlook. When it comes to just how much these tariffs could really affect the US economy, well.
It's a great question, and I'm glad you qualified for the United States because it did really differs depending on which country you're looking at. In the United States, they have some growth margin. We were looking at two percent growth for twenty twenty five. If we have to downgrade till even one percent, I mean, it's not a great development. You have to have a rerating across many asset classes,
but it's not going to break the US economy. Where there is very little room is on the inflation side. And if we do see these twenty five percent tariffs come through one month from now, we could be seeing three percent cour inflation by year. And combine that with a structurally tight labor market, it's not a great position
to be in for the Federal Reserve. High inflation is going to be what it becomes more problematic for the American psyche right now, especially because let's not forget prices are up twenty nine percent since Trump's first day in office back in twenty eighteen. The appetite among households, businesses, and the market for the inflation side of the picture is very different now than I suspect the growth side.
You were at the Economic Club last night, Francis, and you heard what Scott Besson had to say. He says, this one price shock is transitory.
Do you think it's transitory? Do you think this will bleed through for months to come?
Well, economists and those who like to say that tariffs will not be problematic for the American people will say it's transitory, and what they mean by that is there's a one time price level adjustment and one year later it drops out of the year over year. But I like to say tariff price level increases are also permanent, so the price increases, but then it stays at that
level for an extended period of time. What came out of me from that speech was that, you know, Secretary Ofscent described a nice economy, one where we've deleveraged from the public sector over to the private sector, one where trade is recalibrated for the American people. It actually sounds like a great economy that many economists would check the box on. But you have to build the bridge to
the other side. And from my perspective, what this market is coming to recognize is that that bridge to the economy that's being described is not seamless, and it may not be guaranteed.
I might do a lot of damage in between. We started this year and I talked about it repeatedly. We all did that the policy makes would attract a lot of capital from the rest of the world. It's the policy mix stying to push it away. Is it too early to tell?
It's a sequencing issue, So we're not getting the juicy, high quality invest in American exceptionalism content. First. Some of that may be just having to fund some of the better things. But there's some story that you kind of have to eat your vegetables before you get your dessert. Maybe that's a little bit of the mix that we're getting right now.
And also, this is exactly the point behind a lot of the really bold calls behind euro strength. Given the fact that people are seeing suddenly the sucking sound away from the United States toward Europe, how much are you actually seeing evidence of that that Euros are flooding in with what we just saw the biggest weekly inflow into European stocks going twenty twenty two. I mean, you've just seen this groundswell.
So we're certainly seeing a huge shift in the short term positioning, and actually on our short term positioning monitors. Markets already actually turned long ear a dollar, having been quite consistently short. But it's interesting, you know, I've seen some calls out there for this kind of continued euro's strength, kind of pacing it gently throughout the course of the next twelve months. I actually think it could look pretty different. I mean, there's this initial move, which is very likely.
It feels like it's going to get into overshoot territory because it happens so quickly and people are somewhat chasing the move. On top of that, you've got that equity angle that I feel is really underappreciated the impact that has on the currency market, because we're seeing a structural reallocation out of US equities back into European equities, and there's a currency component to that as well. But once all that washes out, you know, the point France has
made is absolutely critical. Is this going to be an environment where the Fed can cut rates aggressively or is the inflationary backdrop going to prevent them from doing that. And if you don't have those aggressive FED cuts, then those kind of calls are one twenty one twenty five that you know we got to back in twenty twenty one, that one twenty three fifty high that looks much harder to achieve without that convergence in frontend rate differentials.
So there's one piece of this story over in Europe that I'm trying to make sense of, and perhaps you can help me. We've had a massive week for the Europe I know that off the back of the plans to boost infrastructure spending. But this all started when President Donald Trump made a more aggressive push to end the war in Ukraine. That's when the euro started to move
started to find a flaw. And also, I wonder if Germany is going about rearmic and the whole of the continent goes about rearming, does that make war more or less likely, because that's going to have quite an impact on the continent and financial markets.
It's a great question, John, and I think one which people have in the back of their minds. You know, our spot trader here in London was mentioning that this morning, you know, is it necessarily great for Europe if we're having to rearm ourselves with the risk right on our eastern borders. I don't think that's the story that people are focusing sing on today. I think they're far more focused on that kind of n WUS exceptionalism and the swing and capital away from the US back to Europe.
But that's certainly a risk premium that's going to be baked into the back of people's minds too.
With the very best stan Selnya SASABC Francis Donald here in New York. So that both of you thank you breaking down the jobs report. We can continue the conversation now around the table with definitely Wrath of Wolf research Kathy Jones of Charles Swap to the turf. You welcome to the program. Stephanie's just first to you to talk about the economy. First look, first take.
Yeah, not expected, and as you alluded, the headlines are very different from what we saw in the data. Big reason is just a timing miss match. Right the survey we fell just before all the significant layoffs hit the net. The next payrolls print is going to look a lot uglier than this one. So yes, we can't really have a sigh of relief as a result of today's data, because we're gonna start getting hit pretty significantly on the
perils print. We're gonna start the apparels prints that are around one hundred thousand, if not slightly below.
Kathy, is that how you see things?
Yeah, I think they slow down is taking place, and we will see more of it. It'll snowball as things go forward. You know, one of the things when you have fewer hours worked and you have less aggregate income, and that means less spending power for the consumer. So that's going to ripple through and then you have this level of uncertainty where every day is a new policy and if you're trying to plan business activity going forward, I'll forget the consumer. Do I have a job or not?
But think about businesses. What's my labor force look like? What are my materials cost? Can I get my hands on those materials? What's the demand going to look like? I mean, all those are big questions that make people freeze and say I'm just not doing anything to li havee some clarity, which.
Is the reason why and Stephanie, a number of people have raised this point. People are trying to understand the momentum heading into this period to understand the resilience, the potential resilience for the US economy to deal with that kind of uncertainty. One hundred and fifty one thousand isn't bad. It actually is a pretty solid labor market. So how much give do we really have in this labor market?
Yeah, and it's fair.
But now all of a sudden, we had a sudden surprise to activity, and I don't think folks were expecting the extent of the government layoffs that are going to play out the contractors that are tied to them. And then, by the way, the immigration stuff he cut off on January twentieth, that was adding for much of last year on seventy five thousand workers to the workforce that's cut off, and the reasons are going to start expiring throughout the course of the next two years.
But do you think the end destination is still possible because what they're talking about is moving from a public policy to more private sector jobs.
Yeah, and that's totally fair, but it's just going to take a while and it's a painful process along the way. So the endgame might ultimately result in a sort of a rebalanced economy, but that doesn't mean it's going to feel good.
For the next six months. OK, Kathy, this sounds very Billy for Bonts, is it.
Yeah.
You know, we're still in the camp that says the Fed's on hold for a while because they have to sort out all these cross currents and the inflation potential coming from terraffs, so they can't do anything. So we're in the long end. You have you have probably the slowdown, which will bring yields back down probably ten year, around three eighty or so, but not until we actually see that data, because your offsetting is you have potential inflation
from tariffs. So right now we're just bouncing around in this range waiting to see which plays out first. The inflation plays out first or the slowdown plays out first. Right now, it looks like the slowdown might play out before the inflation, but you know, we don't know day to day what.
Teriffs look like.
If you are just joining us, welcome to the program. The Job's report came out just moments ago, nine minutes ago, and it came in like this, one fifty one, just a small downside surprise. We've been looking for one sixty lots of numbers to talk about our swear to do that. Right now, we can bring Mohammad Aaron of Queen's College, Cambridge into the program. Mohammed, welcome to the program, sir. Let's get to that job's report. What's your interpretation of things?
I think you captured it well when you said, you know, no big news here. The only thing that I will be torturing is the labor force participation. But everything else came in as expected. And I think everybody's right in saying what's more important, what's ahead of us? Not this report?
That said Mohammad, We've been talking a lot about the momentum in the US economy and the fact that it takes a long time to turn things around. Is there any part of this report that makes you concerned about the level of exceptionalism that we're coming off of into this period of uncertainty?
Not in this report, Lisa, but in a lot of other data there is. You know, the edge of the US has been predictability, has been transparency, and you're starting to see more and more business step back, not just on a short term basis, but really think how much longer do I need before I figure out what's my
operating environment, and that builds on itself really quickly. So you know, the risk here is that below the economic exceptionalism, which is strong economic performance, strong acid price performance, has been this notion of the US edge, and I'm worry that this edge is being eroded right now.
So Mohammed, are you saying it's the death of US exceptionalism.
I'm not. I'm saying it's under enormous pressure. We still have attributes that other countries, you know, would dream of. So you don't kill the US economic exceptionalism, but you could put it on pause as people try to figure out what the operating environment is.
Mohammed Worth five six weeks into a new administration. Has that much changed that quickly in such a short amount of time, So I.
Think there's been lots of changes. Just go to Germany and see what's happening there. Look at the debate there. It's been a Sputnik moment for Germany in terms of defense spending, infrastructure spending. John, all I can tell you is that all the consensus trades at the beginning of the year have been upended, every single one of them. Currency waits relative US equity performance to the rest of
the world. I can go across the board every single consensus trade has been upended, and that tells you that there has been significant.
Change, which race is a question about how much this is a trade and how much this is a fundamental shift that can actually get implemented in economic data. That takes time, and Stephanie, I would ask you that how long is the transmission mechanism for some of these things at a time when there are some fundamental policy shifts that will take time to implement, but it takes even longer time to ripple through the underlying data and the underlying sense of strengths.
Yeah, it should take a couple of months for us to start to see it reflect on the data. Of course, for example, today the February data look just fine. The March data are going to start to reflect this, and I would expect in the next three months will start to see the real impact. For example, the impacts from tariffs. It takes about three to six months to work its way into the CPI data, so that's when we'd start to see that. The payrolls numbers we're going to start
to see in the next couple of months. Because the job a lot of the job cuts are fairly immediate, and then you'll see the government contractors as a result the fallout from that afterwards. So I would expect in six months time we'll see a lot more of this truly reflected in the data, but we'll start to see it in the next couple of prints.
Kathy from an investment perspective, and Muhammad was talking about how the policy shifts have been pretty traumatic and the market is trying to be a forward looking prognosticator.
How do you make bold moves?
Do you just hide out in cash? Do you keep your allocations? I'm serious, it's sort of such a volatile time with sort of the reality checks coming out where there isn't that much news in the economic data.
Yeah, you know, I don't think cash is the solution because you know that it gives you some optionality. So building some liquidity I think is a good idea, and I think people undervalue liquidity in their asset allocation when things good and we've had this long stretch of everything's great and who needs liquidity? Now, I think you do need liquidity, But we are also keeping our benchmark duration right at benchmark, we're not extending yet.
We hope.
We hope to see an opportunity, but there's too much noise right now to take that risk. And then we're saying up in credit quality because you just don't have enough excess return there to justify taking a lot of credit risk. And we don't know what industries are really going to get hit. Some industries are going to suffer, and we do expect some spreads to widen as a result of that.
Europe's had a long stretch of everything's bad, and that's changed pretty quickly. Mahamedz comes to you on that. I remember in early November, shortly after the election, you said to us on this program, that sucking sounds you hear is capital coming in from the rest of the world into the United States. That sucking sound we heard this week was capital, gun I swear, and we've heard that
a lot throughout the year so far. Mahammed, what do you think about that reversal inflows that a lot of people have identified recently, and how sustainable do you think it is?
So that reversal makes sense given what has happened over the last few weeks, is it sustainable? I don't know, John, you know, the jury is still out as to whether Europe is going to be able to go from words to actions. It's not easy politically, it's not easy socially. They have governance issues. So I'm not sure that sucking, the reversal sucking sound, if you luck, is going to
continue for a while. But I understand why, because there's been a shock to a lot of the conventional wisdom on the US and on Europe.
Muhammed, has there been an end to the sucking sound from the United States?
We'll see the data. I suspect you'll see that there's certainly less fewer influence coming into the US. But has it completely stopped. I doubt, I really doubted. The US has some attributes that are very difficult to mess up. So the US is still you know, whether you want to call it the cleaner, sturdy shirts or whatever, but it's simply not as clean for outsiders as it was a few weeks ago.
But Muhammad, where was everyone?
The president was talking about these policies for.
Months leading up to the election, and then talking about these policies for months between the election and inauguration.
Everyone knew what his plan was.
Why is everyone shocked?
Sequencing? And you talked about it earlier today. So we know the five areas in which he's going to move to our unambiguously beneficial to the economy. Three have good and bad to them. There's a journey issue in those three, and the hope and the market expected that the sequencing wouldn't be what it is now. What you're getting now is okay, we've got to get go through the detox, we've got to go through delivered disturbances, and then we
will get the good. The market expected the good to come much earlier, therefore offsetting the bag, and that's not what has happened.
It's definitely not in your head away. As Mahommed speaking, you agree absolutely.
We were expecting tariff to become a bigger thing for later in the year to tie to TCJA. They're coming much earlier. This has a legitimate impact on the economy. And by the way, the uncertainty is even greater than anyone had anticipated. So to the point earlier on CATBAX being sort of stalled out here, it's hard to make any investments when you don't even know what the tax rates are going to be from a tariff perspective, and then they change day to day.
We're reacting to the payrolls report next week. Is the CPI number that comes on the twelfth on the Wednesday, Muhammed, I want to come to you just on a final question. Secretary best In yesterday at the Economic Club in New York said he'd like Team Transit Tree to get the band back together at the Federal Reserve and look through any inflation pop coming off the back of the tariffs. I just wonder how you feel about Team Transitory getting the band back together.
John, I'd go back to what Stephanie said. There was price pass through from tariffs. Companies are much more agile in how they think about passing on prices than they were before. So I think, you know, if Team transit It gets back together, I wouldn't have them commit to too long a playlist.
It's a good way of putting it, Mohammad. We'll leave it there. Thank you, Sir Muhammad al Aerian of Queen's College, Cambridge on the Federal Reserve, on the jobs data and this market as well, And a special thanks to Stephanie ruther Wall for research and Kathy Juddes of Childs Swab. This is the Bloomberg Surveillance 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
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