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Terminal and the Bloomberg Business App. David Kelly of JP Morgan Asset Management joins us now to build on some of this. David, Welcome to the program Sir. What's your initial reaction to these numbers this morning? How useful are they?
Well, you know, usually.
When we're on this call on CPI day, it's like the biggest news of the week. But and you know, today obviously it's the terriff news. But also I think the other big part of the infliction story going forward is the fiscal stimulus that's beginning to emerge on Capitol Hill. Because what it looks like is Okay, the tariffs aren't here and consumers are relatively quiescent right now, and we're not seeing a lot of enthusiasm there with the airline
fares and so forth down. But it looks like they're cooking into this bill stimulus for twenty five, twenty six, twenty seven, and twenty eight. They're implementing a lot of the President's promises on the campaign trailer in addition to extending the tax cuts. And if that comes through, you're going to have a surge in consumer spending in twenty twenty six help by fiscal stimulus.
And perhaps even later in twenty twenty five. That'll keep inflation little higher.
So this is good news and inflation, but I think the signs are that inflation is going to move up in the short run because of tariffs and then in twenty twenty six because of renewed physical stimulus.
And David, is that a reason to be bullish the equity market?
Probably not, you know, I mean, the equity market is hard an exactuary are right now, but it's hardly down here today, and it's I mean, we've done a sort of a round trip on tariffs here, but we still end up with the higher tarif rate than we had at the start, I think we got swer long term economic growth.
So in some ways the relief rally has been.
Stronger than the downturn, and I think it may be a little bit overdone. So i'd still call from people, you know, longer term that the huge premium that US equity prices have over the rest of the world probably isn't justified, and so I'd still be in the diversification camp here. I do think there's you know, a tenure treasure yield at four fifty to five is probably more
reasonable than a big fall from here. But I think it's too early to be really bullish about equities because of fiscal students, because you know, we're talked about a full employment economy where the Fed's going to have less reason to cut.
We've been struggling all morning with whether this really is the beginning of the return to the United States and the dialing back of some of the loss of US exceptionalism types of narratives, or whether this is just a pause in the go international trade. David, you talk about diversifying, what does that mean if you think that ten year yields are going to be in a four fifty to five range and you don't really find US equities particularly attractive right.
Now, Well, it does mean international equities.
I mean, yes, the US equity market is almost done around trip here to date, but European equities up very strongly.
International equities in general are up strongly for the year, and the dollar is down. I think that will.
Continue because you know, if we will still end up with significant tariffs at the end of all of this, even though we're seeing you know, calming down, we're going to end up with higher deficits. We're going to end up with lower immigration, probably lower economic growth. So I know, you know, this is a package and agenda that the public has voted for and that's why we have elections.
But it does suggest a slower trajectory in US economic growth, with higher deficits, somewhat higher inflation in the short.
To medium term. None of that is really very pro US.
And the thing is, you know, I think the US will do okay, but does it deserve to be, you know, a fifty percent premium over the rest of the world in terms of pe ratios. So I'd say international equities yes, and then also alternatives, you know, just if fixing income's not going to help you because of higher inflation alternatives. There are plenty of alternative things like infrastructure, transportation, real
estate which have a degree of inflation protection. So I think people just need to broaden their definition of diversification in this kind of environment.
You mentioned the feeds response, and this has been a subject of pretty heated debate and prank. Frankly, it feels like people are bifurcated on just whether this gives a FED more incentive to cut rates just for the good
reasons or less incentive. From your perspective, is this more of a reduction in potential inflation in terms of the lower terrifrate than it could have been that gives the FED more of an ability to cut rates without a recession at a time where the data that we just saw, albeit messy, does point to something of a much lower pace of price increases.
Well, yes, but the fence target is two and I think they're on the consumption deflation and I think Jpal put it pretty well at his latest press conference. You know, they're going to have to look at where they think inflation's going, where they think unemployment is going. And I think the both fiscal stimulus that is beginning to emerge from Capitol Hill, and then also a somewhat lower tariffs. They suggest that the risk of recession is receding here.
I think it's you've probably just gone below fifty percent, so risk of recession receding. Maybe the unemployment rate ends the year four and a half percent to five, but the CPI or oh sorry, the consumption phase could easily end the year above three percent. In fact, it probably will, so probably be further from consumption to flat target than from the unemployment target.
In that kind of environment, there's not much.
Excuse for the Fed to cut at all because we're at you're fairly close to a neutral level.
So I think the Fed will take it very easy here.
And it's and it's part of the story's tariffs, but the other part is putting more fiscal stimulus and higher depthicits into twenty twenty six.
Really doesn't give the Federal Reserve a reason to be easy.
It's your base case snake cuts, not David.
No, not quite. I think we will get at least one cut this year. By the end of the year.
I think the Fed realizes they can they can edge rates down a little bit, but I don't expect to cut in June. I don't expect to cut in July, to be honest, I think they'll want to see much more of a you know, a more much more certainty around what the terrif picture really is and how much stimulus is in this in this bill before they contemplate any for any cut. So I think we're gonna have to wait some time for the first rate cut.
Interesting. David Kelly, the of JP Morgan David Gosa ju not to discuss Tiffany Welding of Pimco. Tiffany, welcome to the program. We were told to ignore some of the data throughout this morning. Can we ignore this data?
Well?
Yeah, I mean I think there is a lot. It sounds like there's a lot going on under the hood, But the overall message is that, you know, the US economy prior to any sort of tariff pass through was just on a continued path towards normalization. After you know, after the pandemic related shocks, inflation was was elevated, it's remained elevated, and I think overall this report, you know,
suggests that some of that is coming down. And if it weren't for tariffs, the outlook would be towards more moderation. But I do think you have to discount this a little bit because we know eventually the tariff costs, which are major, you know, will be passed through to some extent, you know. Now, maybe one more point on that is I think the interesting thing is that we're hearing from some of these larger retailers, you know, as they are
trying to hold the line on prices. It seems like as long as they can to increase market share, they had the ability to front run this by importing a lot of inventory ahead of time, you know, so they might have a bit more of a window before they really need to raise prices.
That's said Tiffany. If you look at some of the details under the hood, there is this question about whether some of the components that contribute to the smallest increase since February of twenty twenty one are sticky, are durable, And I'm thinking of housing, which we were talking about with Emily Roland earlier, as well as the gasoline prices. How much is that going to be a disinflationary force that will be thematic through the rest of this year.
Yeah, well, certainly we've seen a fall in gasoline prices, you know. I think the interesting thing is is if you look at US gasoline and other US energy prices, they have not fallen as much as global oil. So think it'll be maybe a little bit less disinflationary, you know than if you're just looking at oil prices, but you will get some benefit from that, you know. I think on the housing side, I think there's real questions here.
The tariffs clearly will raise housing costs. The things that we import in terms of appliances, you know, and other inputs into building homes. Most of that comes from China, and so that will cost more, you know, and eventually that will filter through into higher rental prices, you know.
Now I think near term against that, you know, we we've found evidence that the increased flow of migrants into the United States, you know, did raise rentals in sort of the lower you know, lower you know, smaller rental apartments and things like that. And we think that's why you saw, oh we are you know, moderate come down inflation come down there much slower than many people were expecting,
is because you had this offsetting inflow. Now obviously that force is waning and potentially even reversing, so that could result in some faster deceleration near term and some rental costs, but I think ultimately the longer term outlook there is for stickier housing costs as a result of some of these tariffs.
John pointed out that we're all kind of tying ourselves in pretzels as we try to get all these counter forces together, whether it's the immigration story, whether it's the terrorift story, whether it's what the economy was heading into all of this. You also asked me, and I had no answer about when the data would be clean, when we would get actually something that we could rely on.
So I will ask you, at what point do you think that you can see sort of the new normal in the data or is that not really going to come back? Are we going to have to watch these trends sort of in parallel fashion and try to compile a picture.
Well, I think that the new normal is I think we're quite a ways away from that, you know. I mean, I think the bottom line here is just taking a step back from from the headlines and things like that. The average effective tariff rate that we calculate as a result of these trade policies has increased more than any
time in a century. That is a dramatic economic shock, and it will take time for that to flow through the system, you know, and we aren't going to see the quote unquote new normal on the back of that, we think for quite some time, you know. When I say quite some time, you know, maybe a year or more for the economy really to adjust, assuming these tariffs in place. So I guess to settle in and let's see what happens.
Do you think you have a best guess right now, any kind of guess, any kind of tall you whatsoever, on the nature of that shock, Tiffany. I get that it's a policy shock, but it's an inflationary shock, a disinflationary shock, a growth shock, a negative supply shock. What kind of shock is it?
Well?
I think it acts like all of those that you mentioned, you know. And I think the bottom line is is because we haven't seen the type of a policy like this in quite some time, you know, we don't exactly know how it's going to filter through into the economy.
You know.
Again, we have the best guess about that, which is that we think you will get some price level adjustment that occurs because firms have to pass on the additional costs of tariffs, and they will do so eventually that will result in a real income squeeze because you don't see wages adjust as quickly. We ultimately think over time
wages could adjust. But during that real income squeeze, that just means that real consumption you know, is hit by that, and there's some knock on second round effects from that. As volumes start to decline because prices are higher, you know, then that just means you potentially need to you know, to hire less people. You'll you'll probably get some margin squeeze. It could be detrimental to investment trends in the United States,
you know. I think the magnitude of these things and how they play out over what time frame, you know, I guess is really the question here, you know. And
then how inflation expectations adapt to all of this. I think the real concern from the Federal Reserve, for example, is that we've come off of a period of elevated inflation, you know, and having another shock that should be a one off, sort of temporary thing, can result in inflation expectations drifting higher, can start to creep into wage negotiations, and can result in more persistent inflation. I think that's what the Fed is concerned about.
Appreciate yours take has always Tiffany Wilding there of pimcoat with us now for more montca Cuera of Mulk and Stanley Monica, good morning, get to see you.
Good morning.
Let's get to the congressional math and numbers. How narrow? How tight are the margins in the House.
I'm very tight. They only have, you know, just just that fifty one percent majority that could get this budget reconciliation built through, Which is why it's so important that you know, the Salt Republicans and the fiscal hawks you know, all come together and get a deal. This I think slows them down in their effort to get a bill
to the President by that Memorial Day. You know, we're thinking maybe they get it through committee by then, but we're already seeing those hiccups and things that are going to slow the pace of this. So we're still looking much further out into the summer.
You now, did how many with the solution? How do you please Salt Republicans and the fiscal hooks simultaneously.
I think that's a really good question. I think it's gonna be very hard to do. What you're likely to see is more movement on the tax revenue side. You can get some wiggle room on salt if say, for example, you put in caps on corporate salt deductions, right for example, So for those corporate spaces. Now there's lots of other options that they could explore as far as raising taxes on the margins, like maybe addressing the carried interest loophole.
So again this is still early days. While we have a blueprint and we see where the priorities are, there's a lot of negotiation that still has to happen. And that's really exemplified by those two issues.
Which of some of the campaign promises from President Trump, do you expect to have a harder time getting through to the final draft.
Yeah.
So one of the things that we've talked a lot about is the note tax on social security benefits. This is a huge sort of campaign proposal that was bringing a lot of seniors to the table that actually can't even be addressed in budget reconciliation because of the rules of the parliamentarian rules around it. So we think that if something like that is going to come up, it's either going to be a twenty twenty six campaign proposal
or later in the year. Things like the no tax on tips, no tax on overtime, and now the senior's bonus are all on a temporary basis. So while we're getting a little bit of fulfillment on that campaign piece, it is still limited, and so that's important to just keep in mind.
There's also the promise that there's going to be revenues that aren't necessarily written into the budget that come from tariffs. And this has been a pretty big proposal from a lot of Republicans that have argued we're not even including the pay fors that come from these levees.
V Al budget lab.
Estimated that all tariffs to date in twenty twenty five would bring in roughly two point three trillion dollars of the next decade if they were to remain in place, even accounting for some of the negative economic effects. How much is this going to be the quiet arguing point behind the scenes.
I think that that loses steam as they've put in these pauses and capitulated.
Even if you look.
At the deal with China right now, where we've gone back down to that thirty percent TERI free if that expires, it would bump up to fifty four percent, So speaking of campaign promises, it would be right in line with Trump's campaign promises. What that means for this budget is that the potential revenues that could be used to offset aren't necessarily going to be there. In the same way, you're still going to be looking more at that seven
hundred billion level that was first you know, analyzed. I think Yale also put out an analysis about that prior to the April announcement.
This is a move in targative course, But what is your base case now for trade? What does policy look like by year end?
By year end, I do think we get that that ten percent universal tariff. I think you have a fifty four to sixty percent on China. What's been interesting is how much we've capitulated on almost every single negotiating piece with China even to get us to that thirty percent
right now. So there could be an additional wiggle room there, But I do think that we might actually end up right where Trump wanted us right and at the end of the year at that ten and sixty with some you know, very specific reciprocal tariffs that you know would impact other Asian countries.
Do you have any sense of what was gained in some of these negotiations, particularly on the US side from China.
Well, the only thing I think we know right now is that we're now going to be able to send over Boeing planes, right. That that's really the big you know give back. Plus they reduce their teriff weight on us to about ten percent on a on a temporary basis during that ninety day window, So we got a little bit back, not you know, anything significant over the long run. But I think that that just again highlights that while we're getting some certainty, we're starting.
To see the the.
You know plan get fleshed out, we are still very much in the sausage making process, and that this is not final. And so it does really get back to that you know, broader sort of call for us that you know, while markets are up, that is still market volatility, right, and so we're still in that Q one through Q three sort of market volatility window. And once we get this budget finalized, I agree with you know, besn't there's going to be a lot more cularity. Discussion isn't going
to be about taxes anymore. We can pivot to other things and then it's going to be about that growth, that pro growth policy.
Agenda, deregulation, tax counts, et cetera, something that Treasury Secretary would like us to spend a little bit more time on. I think away from trade, we would be.
Happy to you if everybody wasn't trading around every single headline like a whack a mole in every single hour or day. And that's really the ultimate question. How do you get to that when there still is that uncertainty of is it just blowing planes? What happened to the rare earth's minerals. There's some discussion that maybe permitting is going to be easier for US companies, but unclear.
I think it's a pretty safe assumption right now that ten percent baseline tariff is going to nowhere, based on the comments we've heard from the administration over the past few days. Monica, good to see you. I want to conquiror there of Morgan Stanley to extend the conversation with us now. Scana Montgomery, Knick of Barclay Scylli, Good mornings here, Good morning, you're a dollar this morning one a left and yesterday the biggest one day moved lower since the
day after the election, good news for the dollar. How bad is the bad news for the Europeans.
Yes, well, this is the issue right it's the euro has largely been trading as a liquid alternative to the dollar, and so yesterday it saw a lot of downside because it's a lot of upside when the dollar was under pressure as well. I think for the Euro itself, the domestic outlook isn't great from a growth perspective. You're bouncing
terroriff's versus fiscal policy right now. Terrors are more growth negatives and the fiscal we've had so far as positive, so you need another kind of boost there before you can get more positive on the Euro. And I think the other issue is, you know, as the price segment before alluded to, it's really hard to get a trade deal with Europe because you're negotiating with a number of country but you also have these non tariff trade barriers
that make it very hard. And you saw that even with the US UK agreement, there wasn't a lot of detail there, it was just an outline. So it seems like that will be a headwind certainly for the air going forward.
The trade wars in the past couple of weeks has been treated as more of a problem for the United States than the rest of the world, including Europe. Is this the tipping point where that discussion changes and you actually see more downside for the euro versus the dollar because that narrative is going to flip on its head.
Yeah, I think it's something we certainly need to consider. Part of the story for the dollar was that you had this turn in the soft data that meant that you had fed expectations reevaluated quite strongly, and that weighed on the dollar a lot. And so you could say to some extent, because you had that turning consumer and corporate confidence, that fed into dollar weakness. Whereas you've not had tariffs imposed on Europe for very long, so you haven't seen it feed into the data in the same way,
and you haven't seen that corresponding weakness. So potentially there's more growth worries priced in the US and elsewhere. And I'll give you Canada as an example of what could happen. Because Canada had tariffs imposed early, you saw that turn and confidence that's turned into the hard data, and they've had a couple of labor market reports that have been very weak.
As a result, how much do rate differentials also start to matter again at a time where people are pricing in maybe fewer rate cuts by the fetch reserve. At the same time, if the ECB might be prompted to cut more in the face of weakness.
Well yeah, this is another reason that you should really have euro dollar be a lower level, because rate differentials tell you, and you can look at different points on the curve, but they tell you that euro dollars should be closer to one away than where it is currently. And for us, we think those rate differentials should be more in fear of the dollar. Even in terms of
we think the FED will be restrained by inflation. You won't have unemployment rises you might have otherwise because you have the supply side of the labor market constrained by immigration. And so that means we see the FED cutting only twice this year. And in contrast those other economies, because they don't get the price level adjustment of tariffs, they haven't retaliated at the same time, they have lower oil prices, they've had a stronger currency, and there's likely going to
be the supply glut from China. That means disinflation is more likely in these other places, and so for Europe that means we see the ECB cutting towards one twenty five, and that's a big gap to the US.
The damage done to the US dollar is multi dimensional. It's not just about what's been happening with one thing, it's across several different dimensions. How reparable is that damage done with a simple truce between the US and China over the weekend? Yeah?
I think over the weekend that was a big positive surprise for the US because the expectation was terif rates would be significantly higher than the levels we've gotten, and we've actually gone from an average effective TERIF rate as the beginning of last week of twenty five percent to fifteen percent. So that's a big upside surprise for growth for the US economy. At the same time, you've had the soft data term with the hard data's holding out quite well, and because of that, you could have a
more supported dollar environment. I think for US fear value for euro dollars somewhere closer to one oh seven. You have that gap because there was somewhat of a risk premium priced in, but that risk premium, well, it might be a little bit sticky it can come off if you have more policies from the US administration that seem practical or more pool growth, and that means you could also have more into US assets, especially if other assets aren't as attractive.
The dollar diversification, as you know, it's been a conversation that predates the trade story. We've been seeing that diversification at the central bank level to gold now for a number of years is enough to unwind some of that. Would you push back that far?
I mean, I think we'll see how it evolves if it is truly an unwined story from dollar assets, and it can take a while to play out, and you might get kind of rounds of depreciation the dollar as a result of it. But it's very hard to undo a decade of policy that's been very flivable for the US, and you're only seeing like little changes here and there at the margins, and the flows don't really support a
broad on wine from the US to elsewhere. The only place you really see it is in the Cophort data, so in central bank reserves, those are diversified away from the US. But it's been very slow over the last five years. It's been about a percent a year that you've seen diversify away. That was accelerated somewhat by the Russian invasion of Ukraine because it was shown that the
USB US as a weapon. But since then you've also had big sycle upswings in the dollars, so it's not a detriment in terms of the story of the dollar.
More broadly, we could come back to the same question that we were asking several weeks ago, is this a negotiation or the new rules of the game that lead to a system level shark? And it just feels like a lot of people now going with a former and certainly not the latter.
Talking about maybe this isn't a system level shark, or we ultimately have the same trading system that we had before, just with slightly higher terrorists.
Skyler, it's good to see you, Thanks for dropping by. 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 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.