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Terminal and the Bloomberg Business App. David Kelly of JP Morgan Asset Management, Tom Porcelli of p JIM Fixed Income Gents, Good morning to you, David. First to you. Your reaction, Well, I think.
What we've got is a moderates moderation in the US economy, both in terms of growth and inflation. Inflation is it's taking a sweet time coming down, but we still think it's a downward trend. And I think you know the reason for the market reaction is that we didn't get enough surprise. So we've now had three reports. Who've had the jobs report, then we have the consumer Sentimental Report, and now I've had the retail sales, repoard. They're all saying,
you know, overall things are moderating here. When you look at the Jill's number, things are moderating, and we've got fewer job opening. So it looks like the economy is just easy itself into sort of a two percent card or of two percent growth, inflation gradually coming down.
Towards two percent, And that's very good news.
And I think the good news is that we didn't get another upside surprise in CPI today.
Does that whisper of a July cut get up a little bit louder after this, or is July still too soon?
I don't know if the whisper, I mean, it's already been a whisper. I don't know if it can become less.
Of a whisper.
I think it sort of stays where it is.
Which is to say, you know what, around twenty five percent. I think that's probably reasonable. It doesn't go away, though. I think that's the important thing on the back of this, So I think he'd probably still linger. But I think as a practical matter, it's probably going to get pushed a little bit. And I have no challenge with that. In fact, one of the things that I've actually look, I've been sort of critical of Pal when it's been mostly deserved.
But I pushed back around this type.
But recently I think he's done a good job with the narrative, right.
I think after the last presser and actually the pressure before, where he said, hey, look, we're not going to overreact to a couple of you know, sort of strong string of inflation reports, just like we didn't overreact to a really soft string the last go around. So I think that this, to me, is a chair who wants to cut. I think that, and you can easily see one. And I think I think if he has the opening, I
think he'll do two. And I think data like this, if it persists, I think that that'll give him that opening. And sorry, I'll meet this one last point. And I think David rightly highlighted this. You know, if if you look at that control number on retail sales, I mean it was pretty weak. And again, no one's making the case that we're sort of falling off a cliff here, but I think things are slowing down and that'd be consistent with.
The FED having the ability to cut.
We were just speaking with Ed Yar Denny, and he doesn't necessarily have the same kind of sanguine outlick that you do with respect to j. Powell, because he says, honestly, the consumer is strong that yeah, there was weakness to the control group, but it's Mike was saying.
It has to do with auto sales.
It's not the sort of broad based people not going out and spending things. So at what point, David, do you look at that and say, you know what, things are fine? Now? Why the rush to cut? I know you are in the police cut now and you should have already cut camp. Well, why is it not that we see things are just fine and you should stay in here and only a cut with turbocharge a rally, which is exactly the reaction we're getting today.
Well, I think you should normalize interest rates.
I think the Federal Reserve for a long time has been trying to micro manage the economy with race that got too low and too high. I think it messes with financial markets. And you know, the more the Federal Reserve, you know, tease all financial markets, the more financial markets sort of act like sort of babies here. I mean,
you shouldn't have had this much of a reaction. But you get this reaction because of because you know, the Federal Reserve is so sensitive about saying anything that might offend the markets one way or the other than the when when you know, when economic numbers are a little bit off one way.
There, I just say that reaction function is set up for us to be hind.
I think market markets have an over reaction function. That's the problem. And so market does.
Overreact and so the Federal Reserve you kind of have to expose the markets to normal policy, normal policies. If the economy is doing okay, rates ought to get back to normal levels. And I do think, you know, I don't think July, but I do think September is possible.
It's it's there, and I think one of the I think j Powe himself will actually make a decision as he heads towards this about whether he wants it himself, because the one thing that we've seen about Jay Powell which is very clear, is he wants to build consensus and he works hard and actually lobbying. I wouldn't say lobbing necessary is the right word, but he does talk.
I think it's amazing that he talks to all nineteen participants in the fmc C meeting before the meeting and just you know, this is my view and so forth, and that's why he's been able to get so much consensus. So if he thinks that, look, let's get going on a slow rate cut cycle before the election, so you know, and let's let's get it going here so we can't be accused of playing politics, I think I think he might well do that in September.
To No, I agree.
I think David is completely spot on. Look, I think this is just a recalibration cycle. You know, this is not you know, people here cuts, and I think that immediate immediately conscious of the images of the FED like getting aggressive, like, we don't think that that's the case. We think that this is going to be a sort of a very modest reduction in funds.
But talking about markets as baby his babies, right, this question of how they react react has been basically a feature and not a book of financial policy. This was the transmission mechanism we've been talking about.
This also, how much do we get a.
Rally on the on the idea that we're going to get a cut, And that's going to be a problem.
It's going to set us back further and.
Actually cause this to be more of a problem and more sticky.
Well, I think the Federals, Federal you know, the Federal Reserve, makes a big deal about how they don't lack politics over overall what they're doing. They should also do the same thing about market reactions.
So they should not overreact.
To how the market reacts to either economic numbers of their own policy. But also what they need to do is and I completely agree with you on a recalib calibration here, because what they just talk about is not monetary easing, but monetary normalization. The truth is, I don't think that we're heading into a you know, a higher for longer environment. I think we're heading into a normal, for longer environment. There's nothing there's nothing wrong with four and a half percent on a.
Ten year treasury That's actually about right.
Given two percent normal for Fed funds, I think, I personally think normal for Fed funds is somewhere between three fifty and four. I mean, in the fifty years before the financial crisis it was two percent above core CPI inflation.
That would be four in the long run.
I think, you know, someone three fifty three, seventy five to for me?
Bet right, No, I mean I just found my new best friend.
I love carry on.
No, I think I.
Yes, I agree, I mean I think that's I think it's exactly quite right. I think that this, to me is I think this is the right way of thinking about about where we're going. I think, you know, three and a half to four percent is probably the right range.
To consider this in.
And you know the good thing about that is, you know that is that that is roughly what the market is expecting. So I don't think that there has to be some big recalibration as it leads to the market, because expectations seem to be roughly right, although the market has tended to take things way too far.
Let's be honest on that.
We'll get to the market right now. Equity features are positive off the back of this economic data. I know a few of you just tuning in, this is what you miss. Zero point three percent is the number for CPI. Zero point four was the estimate on a headline basis, stripping out food and energy zero point three against an estimate of zero point three. The rustle out perform and a small caps up by one point four percent. Thank you to the bond market, treasuries running and yields drop
in across the curve. The two yet down about seven basis points now to four seventy four. Mike McKee, still alongside us, Mike, you've had longer to read through this. What stands out now?
Well, A couple of the categories that people watch closely perform pretty much as expected, in that used cars were down one point four percent, insurance health insurance only up three tenths of eight percent, but unfortunately auto insurance still posting a big gain one point eight percent, down a little bit from last month, but still an our size gain. And John, you had a probably good discount on your trip to Paris this week because airfares were down eight tenths of eight percent, which is.
Kind of interesting because the CPI tends to.
Include what people are buying for vacation time ahead. So we'll see if airline fars can continue to behave.
Just for the record, it was Taylor Swift weekend in Paris, and I booked the flight I think a day before I got it, So Mike McKay, that was not cheap at all. Just for the record, did you.
Enjoy the concert?
I didn't get to watch the concept, but it was very busy. Can you imagine me a Tyler Swift conw Mohammed went, I know, Mohamma's going to be in a program on Friday.
Great pink, fantastic.
It was amazing.
Did he really think he wouldn't be seen on that T shirt?
Oh?
I know he's now a swifty.
Mohamma's going to join us Friday for a review of the economic data and apparently a review of the Taylor Swift performance in Paris, France over the weekend. David Kelly, I want to come back to the Federal Reserve, certainly not on Tyler Swift. You've said repeatedly that the Federal Reserve should just have faith in the calendar. This is going to work its self foul for the next twelve months, regardless of how restrictive they think they are. Is that's still your stunce.
Absolutely.
If you look at airline fares, I mean, you know, we've got we've actually got to air travel back above pre pandemic levels.
There's plenty of.
Demand out there, but the airline industry is competitive enough for airline fers to come down. But overall, you know, in some areas of services and throughout the goods industries. What we're seeing is enough competition to gradually push inflation down. So this is not an inflationary economy. The only time it's an inflationary economy is when you have a huge supply chain disruption and you have huge fiscal stimus where
you're giving money to low and middle income households. That is the one way you can generate long stant or significant inflation year. Once you take that away, inflation will gradually drift down, and that's exactly what it's doing.
It's just very gradual. Tom.
Do you think a lot of this market reaction though, is actually the CPI or the retail sales because CPI is pretty much in line. Retail sales was much softer.
Yeah, I mean, you know, it could also be a sort of a better than feared because as we were saying, I think before we were on camera, you know, could have easily been a four tenth. So I think it could be some of some of that for for sure.
You know the thing too about inflation, I just think, look, I don't know about the wisdom of stripping out an assortment of different things, like you know, super core, I mean, you're stripping out fifty percent or more of the weight of inflation, which I look, I have no problem stripping things out of inflation. But what I would say is, if you want to do that, then go the next step, right, because what we know is that auto insurance has been
a thorn in the side of inflation. That is, there's nothing the FED can do about that, and if you strip that out, inflation looks even a little bit better. So to me, that's the Just keep in mind there are some idiosyncratic sort of sectors that are really impacting inflation that the FED has no ability to control. So in that context, I think it's even better.
And also, I mean, the FED have a good reason sets a target of two percent, but no conomists will honestly tell you there's a big difference between one or two and three. You know, so long as you're there or thereabouts, you know you're okay. And then what you do is do no evil, do not do or financial markets by having rates at a significantly incorrect level.
So then should the that just be targeting two to three percent?
Well, in Canada they have a range of one to three percent, and I kind of like the idea of a range of one to three percent as a target.
We get in that range, we're fine.
I totally agree. In fact, I always used the RBA. I know it is terrible.
I'm sorry for you all the weight condemn.
It was using Canada. I've used the RBA as a great example.
The RBA has a range, and I think a range is a saying two point zero percent to me, like just strikes me as like the pinnacle of hubris. I mean, like you rarely see it at two point zero percent for any period of time. I think a range is really the right way of thinking.
And it actually caused tremendous problems last decade because they kept raids way too low for way too long as they were trying to get inflation up to that two percent target, and that fueled a lot of the asset bubbles and real estate bubbles that they were now suffering from.
So anyone who took the survey, the University of Michigan survey last Frido was listening to this, says, what are they talking about? They're in goldilocks land. Everything is amazing. It's going to be a great economy. Stocks are going to keep rallying. We can sustain this. J Powell is great. Where is the disconnect here between the important Okay.
Yeah, sorry, So it's an important idea. I think about like my parents, right who having the foggiest idea what I do for a living?
I mean, after me trying to explain it to them.
But you know when I when I tell them, when I tell them, look, you know inflation is because they was asking what's happening when inflation's like, oh, it's improving, you know, not to fear.
And my father loves to say, like, what the hell are you talking about.
He's like, I'm going to the store. I'm still paying a lot more for stuff. And that's the disconnect between Main Street and Wall Street. Like we look at the percent change and they look at price level terms, and price level terms, it's still incredibly elevated. And that's a problem, by the way, from a consumption perspective, because a lot of these things are fixed costs, like auto insurance or like food prices that will actually continue to chew into disposable income.
Okay, that's been basically the theory.
I have to say, you need to fade that University of Michigan Sentiment Index surprise because they had a change in methodology and they started they're starting interviewing people on the web as opposed on the phone.
And apparently people I've.
Been waiting for that cod for agous.
Lucky people.
Well, yeah, exactly exactly one that now you get. You get asked on the web and apparently you're more gloomy when you look on the screen.
How antiquated is callings on the phone?
No problem, no problem at all.
But the problem.
But the problem is that they moved, they changed methodology, and they didn't do a level adjustment for the bias that they know it's actually causing their data. They put something out, I mean, it's this is really technical.
But just it's not what's going to happen. They filed answers. I think inflations can be twenty percent if they.
Don't, If they don't do a fix to this, the University of Michigan survey will be about six point six percentage or index points below where it was a few months ago forever. So so it's it just this change in methodology actually messes up the number. So I know, if it gets excited for a number of misses consensus by a loss and that.
Happened, but it was just a technical technical web.
You're again just the Apple fire. I mean, just keep in mind, for whatever the confidence numbers are worth. Confidence has been pretty downbeat, yet spending has been pretty robust on relative basis.
Right, So we're feeders of the Michigan numbers. Two But I think now, yeah.
Exactly, but I think, but I think the the inflation expectations numbers within Michigan I think are really useful.
Sometimes it's nice to get along chance. This was great, Thank you. Alongside David Kelly, f JP Morgan, President Biden unfanning a sweeping new round of tariffs on Chinese imports ahead of the November election. The decision looks to escalate measures first put in place by former President Donald Trump. The former House Speaker Kevin McCarthy joins US now speak, McCarthy, go to see you, good to see you, great to catch up, sir. What did you think of that from
President Biden? Did Biden just out Trump? Trump?
No, he can't do that.
I mean, Biden opposed these terrorists will four and I actually believe when it was only Nixon can go to China. I think a Republican administration always has a better relationship with China and a stronger one. We've watched in this current administration. They've created like an access of evil with Russia, Iran and China, something we haven't seen since the nineteen thirties.
And you know, there's an interesting.
Piece by Henry Kissinger before he passed in Graham Allison seventy nine, seventy nine and nine seventy nine years since a Great War, seventy nine years since a nuclear weapon was used, and only nine countries with the potential of a nuclear which in the seventies you thought there would be twenty five or thirty.
That doesn't just happen.
So foreign policy really matters. The world is in a different place that they're looking for a strong kind of American Western leadership, and I think that's the challenges that we have. And Biden's decision in Afghanistan and what he's just doing with Israel, it's really harming the world known in America, and I think greater stability will go a.
Long way when it comes to China. Though Biden and Trump are largely on the same path. Trump is talking about sixty percent tariffs on imports coming from China on top of potentially a ten percent tariff wall for all imports.
Isn't that trajectory?
Isn't that the only place you know this well that there's bipartisanship in Washington.
When it comes to China, well, you want to look at it.
Trump's policies on China he believed long before he was ever elected. Biden has flipped his position on China in the last year, So it's kind of what you believe. And I think in China's position, China always looks long term, so if they have somebody in there with a strong position, you usually can negotiate something there.
I believe, and I.
Think looking at the New York Times latest polling Trump election is today, Trump would win it probably pretty big. Republicans would have a very big night that you would have an agreement with China. You might think there's another tension, you'll get a lot of good news for a while, but I think we would be in a much stronger place because there'd be greater respect on each side, and that's where you could come to an agreement.
But an agreement on what I think you could get a.
Lot of places on agreement on trade, agreement on the movement of China and Russia and Iran. I think China moving into the Middle East, bringing Iran and Saudi Arabia together, you wouldn't see that as much anymore. I think America would take back the place that they've stood before.
So you were at the former president last night according to photos I saw online. What are you hearing from him and his team about what two point zero would look like? Would that also maybe include someone like yourself.
Look, you never prejudge where it is, but I think the president is very upbeat.
You look at what he's going through. Interesting thing.
I think the White House has taken a position, and almost every position they're taking is all political, like this China position, Israel position.
What he's looking at.
And I mean, if you look at Biden in the last elections, and you're a station that plays with numbers, Biden won the election by forty eight nine and eighteen votes, but his favorability.
Rating at that time was plus ten. Now it's minus twenty.
You've got six states that are swing states and Trump has been leading in.
Five of them for like fourteen months.
And now Minnesota, which a Republican has not won since nineteen seventy two, when Ronald Reagan swept forty nine states. He didn't win Minnesota, but now it's a tie within Minnesota. So it's a much different play going forward. And I think their position they thought going after Trump in a judicial way would help them, I think it's hurt them.
You also see independence now.
I mean, by a margin of fifty three to forty two, Independents believe another four years of Biden will harm democracy, and they say democracy is on the ballot. So it's interesting what they had planned out. And my advice to the Biden administration, if you're in denial, you're not going to solve your problems, and they're kind of in denial of.
The problems they have.
Can I just ask you follow up though you didn't answer my question, would you consider going into a Trump administration?
Look, I would consider to serve anywhere if I'm the best person. I think in America we need the best and brightest. But I think that's the last thing you look at. You want to lay out, make sure it's good policies. You want an election to be about policies and ideas, then people can govern in a better way.
I want to try to strip away some of the politics from the policy and try to understand looking forward, you talk about under a Trump administration this idea of some agreement with China. I'm more focused on Europe, frankly, because under a Trump administration it was America go to loone, America first going out of NATO, really pressuring the.
European Union to do more.
How much is that going to be basically the state of play going forward, and then a Republican administration at a time where a lot of people are saying, you need an alliance to really counter some of these threats that you're talking about.
That's a great question we should look because now we have time to compare what transpired in the Trump administration and what happened now was Trump tough with NATO? Yeah, but now you're watching the European nations actually spend more what they had promised to do on their defense, which they hadn't time.
But let me answer your question. Okay, Now what you had, you didn't have war in Europe.
For the first time in any American administration in modern history. Putin had not invaded another country. Now we have warn there. But let me finish your answer to your question. You have five American embassies that have now had to be evacuated. We now have a base in Africa where the Russians are now coming into, where you.
Have a thousand US troops leaving out. It's the place we use our drones and others.
So I know what the topic is and maybe the brushness of Trump's message, but we actually had positive returns within there. So it's a difference of opinion whether you like the headlines or not, but you really have actual facts on the basis of what a Biden administration looks like in Europe and what a Trump administration looks although there are long and.
Variable lags with a lot of policies, so it's hard to identify exactly where some of the games come from depending.
On who you've had the Abraham Accords, which I believe people should have got a Nobel Peace Prize over, But had Biden embraced the Abraham Accords, I don't think you would have had October seventh, My.
Question was with Europe and particularly on the commercial side of things.
Because what we hear from a lot of executives is.
They don't know how to even shape policy given they don't understand what the policy in the US is going to be two European goods. Are they going to start to put up walls to those two to try to really enhance the industrial production of the United States?
Are they going to work together?
Is there going to be cohesiveness at a time where France seems to open to the idea of accepting electric vehicles from China? How does a Trump administration deal with issues given the fact that a lot of people say, we need these alliances in order to actually win on some of these issues.
Well, I think we have strong alliances. I remember the Trump administration. I was there with McCrone in the White House. I mean, look, every country is going to want to compete with one another. I think what America wants to see is a level playing field. It's a disadvantage if America starts further behind and France. They want to have a level playing field. But every country is going to
compete in different ways. And I just believe at the end of the day, you will find the policies we had under the Trump administration the policies we have today. America didn't have inflation, we were stronger around the world, incomes were rising, and what you're finding in the new York Times Polls America sees that too, And I think the number one issue people are going to drive is going to be inflation the border. Are they going to be the two largest drivers of this election?
You don't think the birth control and abortion are going to be a big factor as well.
I do think it'll be, but it'll be in certain spots. It was a big factor in the last election. But remember this, I mean you also look to what's going to happen in the Senate and what's going to happen in the House. I was leader for five years, and every single cycle when I was leader, Republicans picked up seats, even though Republicans lost everywhere else. When Biden was on the ticket, it was the first time since nineteen ninety four not one Republican in the House lost. And the
last election, abortion was a very big issue. But as leader, I picked up five seats in New York and five seats in California. You would say abortion would be the top issues there. So I believe in pockets, Arizona could be an issue, Florida could be an issue, but.
I think it'll be more in a pocket than it will be national.
You talk about your leadership.
Speaker Johnson had eleven Republicans vote to oust him, You only had eight Democrats came to save him. Are the Democrats in charge of the House at this point?
Akeem thinks so. I mean he says it on sixty minutes, they.
Saved Speaker Johnson.
Look, he actually had more Republicans vote against him than you did, but you lost your job.
That's not right.
Uh. Look, I don't believe in the motion to vacate. I think Democrats play politics on both sides. If they didn't think the motion vakate was right, then why did they think it? Under me?
But it is what it is is politics.
They think they're going to play it for a political purpose to win. Republicans have a better chance on winning seats this election in the House than they did in the last two elections we want, so I think it's going to be a big night. You watch what happened in the primaries last night in Maryland. Hogan is going to make Maryland competitive and what that does it expands the playing field. The Republicans are going to win the Senate.
It's a simple math question. The presidential election, it's still up in the air, but you look at every polling today, Trump is in the lead and Biden's doing nothing to change that. In the House, there's a better opportunity for Republicans. The only challenge and advantage the Democrats have is they're beating us now on money rather largely, and that will make a difference.
I've got about ten seconds left. Can you give us a ninth VP? What do you think? Who would you like to see in that seat?
Look, there's some great people and I sat with like Tim. Look, I think Jim Scott is great.
I think our governor in North Dakota is.
Excellent, Nick Hyley.
Look, if he picked Nicki Hayley, I would say the race is over. Yeah, I think the race is over if you look at the primaries, even India.
To the break, now, Kevin, we've got to go speak McCarthy. Thank you, sir. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg terminal and the Bloomberg Business app