Bloomberg Surveillance TV: May 19, 2025

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am Marie 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

Well, I think the important thing here is the admission that obviously the exporter is not the one that's paying, right. I mean, that's an implicit subtext here. They're basically admitting that it's American companies and consumers that will end up eating the costs. So I think that's an important sort of admission biomission there.

You know.

Look, I mean I.

Think some of it's going to get passed on to consumers, maybe half. I just you know, obviously, retail profit margins aren't especially high to begin with, so I think it's going to be challenging for a company like Walmart to not pass on at least some of the tariff burden. But keep in mind that, you know, the bigger issue

Hold on a second, Yal, this is actually a really important point, and there's a question about how much some of these retailers can increase prices where it becomes not necessarily inflationary, but disinflationary because it surprises demand. Are you seeing any evidence that that's actually happening, given that reports have been pretty mixed and dependent on just execution as much as anything else.

Well, I think companies are going to find significant resistance in terms of, you know, trying to pass on the higher costs, because ultimately the inflationary story boils down to a.

Household's budget constraint.

And when you talk about tariffs, I mean whatever goes I mean, think about price and quantity, whatever goes into P is ultimately going to come out of Q. And so you know, look, I mean right now, nominal GDP growth is probably barely growing at four four and a half percent, if you can maybe talk me into that, So if you get a signify an increase in inflation, you're going to get a big drop in real growth.

I mean it's as simple as that.

So look, I mean, the household's budget constraint is getting worse, not better, and I think that you know that ultimately means that, you know, anything that's passed on to consumers will mean weaker real economic activity.

We've gotten a pretty big consumer stimulus over the past month that's come in the form of significantly lower oil prices, and this is something that we've heard the administration talk about quite a bit, and I wonder how much that offsets some of the constraints on household budgets and actually allows more more money for retail, for retailers for goods, for things that might be more expensive due to the terraffs.

Well, we I mean, we have seen a widening in spreads, right, So it's not like the drop in oil prices has translated sort of one for one to gasoline, so consumers haven't really felt the benefits. But no, look at some level, I mean, I agree with you that you know, the drop in crude oil prices is meaningful and the FETs should sort of take that into into their into account when they think about how they're you know, looking at interest rates policy setting, because you can't pick and choose

And you know, a.

Typical rule of thumb I believe is a twenty percent drop and imprude prices takes about thirty to forty basis points off of headline inflation, so that'll provide a meaningful sort of tail into the disinflation story. And remember, oil doesn't matter a lot for you know, underlying inflations, but it does matter for sort of the monthly swings in headline prices. So I think it's something to keep in mind here.

No, I want to get your take on what's going on in Congress. We have this big, beautiful bill slowly passing through the committee's potential is going to hit the House floor by the end of the week. You've always talked about the fact that this is just basically baked into the market because it's an extension of TCJA. But now potentially does this become a risk for financial markets?

Well, I mean, I don't. I don't, I don't know. I mean I always talk to you about what's going on in DC. I don't really have many views on that myself.

We have a view of what it means for financial markets.

Well, I don't. I think basically what they're doing is removing ahead wind, not putting in much tailwind. And so yeah, I mean I don't think the uh. I guess my sense is is that there's not much new coming from this so if the bond market's keying off of the fiscal negotiations, it doesn't really make that much sense to me, you know. So I do think a lot of that was already baked and you're seeing, you know, yields go

Treasury curve here, And then what do you think it is? Then?

I just think that, you know, it's a that's a good that's a good question. I mean, I think there's some residual sort of you know, fading of recession risk. There's I mean, it's not just the US, right, I mean, it's also global in nature. I mean, you have a lot of countries kind of stepping up in terms of fiscal It's not just the US.

You have it in Europe as well.

But I think it's sort of it's a combination of economic resilience, you know, people kind of getting tired of betting on a recession that hasn't happened, and you know, I think it's a.

Sort of global fiscal story.

So, you know, the US story, I think by comparison to some of these other countries, there's not as much new.

There, I think, as is the case for some of these other countries.

We've been trying to sell thirty year treasuries to some people as are coming on the show to see who wants to buy them, and so far nobody has wanted to buy them, even those who believe in some of the resilience of the US economics story. So are you one of those who sees this as an opportunity to invest in the dynamism of long term interest rates?

I mean, look, I mean, to me, there are too many things in the economy that don't work with interest rates up at these levels. Therefore interest rates will have to come down. So yeah, I mean I'd be buying duration here.

I think it's sounds limitsing now. I think it's an important point. You believe it's so limiting that the laws of gravity still exists for the bond market.

Absolutely.

I mean, how long can you sustain a situation where Morgan, where interest rates are running above the rate of nominal GDP?

That's I mean.

And as you know, my economic outlook is generally more on the.

Cautious side of the consensus.

So I think if economic momentum is slowing down. Interest rates will come down as a result.

No data, No appreciate your thoughts as always, buddy, no data there of Remaka, Let's extend the conversation with Janet Low of Stratetiga is a bad company. Jenet, welcome to the program. To events one event, one outcome. Let's talk about the event the US losing its final triple A credit rating, this one from Moody's and the outcome Treasury yields back through five percent on a thirty year bond. Did the fiscal hawks in Washington just get some extra fuel?

Oh?

Absolutely.

This was definitely something that bolsters their argument. They had gone into this fight a haul along saying there needed to be much more significant budget cuts. They were the ones who were pushing for even larger budget cuts in order to have larger tax cuts in place. And they're

Did this up end Speaker Johnson's plan to get this all on by Memorial Day?

I don't think so.

I think that there is obviously some significant push here to get this done. This is part of Trump's agenda. He doesn't want this bill to get accomplished. There has to be some compromises because obviously the fiscal conservatives do

To you and Jonathan's point, the fiscal hawks seem to have some fuel right now after what happened with the Moody's downgrade. Who else has leverage in this fight?

Yes, I mean, obviously I think the moderates, do you still have leverage because they are not going to vote for things that are going to cost them their seats. They are obviously the majority makers in this Congress, and so that's going to be really important for them to not have significantly drastic cuts. So that's why I think, you know, having work requirements moved up to twenty twenty seven rather than immediately makes a little bit more sense.

You also do have the Salt Caucus, so the blue.

State Republicans who are pushing for a higher salt deduction, they believe that that's really important. So they're still going to be pushing to get their leverage in here. And then obviously we do need to watch the Senate as well. The Senate is saying that they're signaling that they're not happy with some of the provisions that the House is put forward, but the House also does have and the Senate does have to realize that the House has this

I love a good deficit debate. It's a great thing to have. We discussed it all the time. Is there enough discussion about the growth side of this bill, how much it actually does boost growth and the other side of the balance sheet. It's crucial to keep the deficit in some sort of balance relative to GDP.

Yeah, And I think this is a really important piece with the tax bill is we have two things that are happening. First, they did include more pro growth tax provisions in this bill, so they have foot media expensing for CAPBEX, for R and D and for structures again to kind of get more domestic manufacturing in the United States in the midst of this tariff war that we're

How much does that offset the increases to the deficit on a sort of relative basis at a time where people are saying at the same time, growth is going to slow as a result of some of these tariffs.

Yeah, I mean, so I think we still think that the deficit is on a improving trajectory. You do have tariff income coming into the US treasury that won't obviously count for this tax bill, but we are going to see some improvement in the deficit. Obviously, it's not significant for especially priscal conservatives, and so that's something that comes into play.

But if we were looking at.

The fact that maybe we would have significant tariffs in place, and maybe this tax bill would have been delayed that wouldn't have helped.

To boost the US economy. It could have been worse situation.

If you actually have some of these pro growth tax policies in place and they happen before the stronger tariffs hit, that actually provides boost to do the US economy and then actually can help with the growth over the long term and then help with the deficit.

Jennet, just finally, just to wrap it up, do you thinem they get this done a wait today?

I do. I do think that they will get this stead line is very strong in the House. Now. Maybe it's not done by Thursday, maybe it's done by Friday, or it gets pushed into that holiday weekend. But I do think there's a strong effort to get this done. And the fact that you had the Budget Committee meeting at ten o'clock at night on a Sunday is really important to show that they really do want to get momentum voting present obviously with them backing down to some extent to allow.

The bill to move forward.

And now they have a couple of days before they do that one am Rules Committee meeting on Wednesday.

Jeannette, appreciate your time. Thank you. Janet Low there thost fatiguas, let's turn to markets. Bomb your tire across the curve the dollar weaker, equity is lower as Moody strips the US gouvernment of its top credit writing. Kathy John's are child swap writing. This is not a case of the US not having the capacity to pay the debt. It's the willingness to reduce the deficit that is the issue.

Yeah, it really wasn't a big surprise.

As you indicated earlier, they had them on negative watch.

They're following s and p and pitch.

As I watched the negotiations over the tax bill or the budget bill, I thought, oh, well, we're not getting anywhere we need to go to get our house in order.

So not a big surprise.

But it does bring forward all the issues that you've been talking about that we're not enough path to sustainability, something we need to address, but Congress doesn't seem willing to address.

I feel like every couple of years we talk about the bond vigilantes grabbing their pitchforks and getting ready to go out there and pick it, and it never actually has any staying power because other people say, actually, well you don't want we love. How close are we to the bond vigilantes getting the upperhand and really shaping the narrative here.

Yeah, I've never been a big fan of the bond vigilante story because I remember the eighties and it was more about inflation than it was about the budget.

But that being said, in nineteen eighty.

Five we've got sequestration, which which actually did help get the budget back in order.

How close are we?

You know, I don't think that we're looking at a stampede out of treasuries, but I do think that.

When you combine the whole policy mix.

We have tariffs, a lower dollar that goes with that, and this sort of deglobalization trend, then you get a steady march higher in long term yields because you're discouraging inflow.

Of capital capital that we need.

So I think that we just continue to see a steady climb in yields from here until something changes, either the economy gets a lot weaker and we look at more federy cuts, or we get some sort of you know, fiscal deal that actually makes.

Sense, Kathy, when it comes to a fiscal deal that actually makes sense, what are you talking about? Is there anything you see right now on the policy proposals?

Yeah?

I mean I'm not a plicy analysts, but if I sat down with a spreadsheet today and said how do I get back to three percent deficit relative to GDP, I wouldn't be cutting taxes on everybody, and I would, you know, have to look hard at some of the spending that we're doing.

But that's not what's going on. You know, now we're giving tax cuts, and on top of tax.

Cuts and spending is maybe trimmed a little around the edges on Medicaid, but really all that does is on Medicaid, you're just going to limit access. You're not, they're already Medicaid spending to hospitals and to.

Doctors is at a bare minimum level.

So you're just limiting access to healthcare for part of the population. And yeah, maybe that gets you a little ways, but it's not going to the turn the dial.

He Kathy.

In the grund scheme of things, we're having this conversation when things are good, the hot dates is still okay, The hot date is still okay, and we will un budget deficits north of six percent. Through the previous administration, when the economy was an expansion in GDP was running at three percent. Kathy, how much confidence do you have that if we do indeed go into an economic dancer, the dispawn market rallies and yields full.

Well, I think they'll fall, just not as much as they would otherwise if we didn't have such a heavy download and we weren't due pursuing these policies that are in conflict again, trying to get a weaker dollar, limiting trade, deglobalizing, all of that is going to be negative for getting the capital inflows. We need to attract buyers of our bonds, so we can cut rates, but we in line with slower growth and lower inflation.

But they're not going to go back to levels that you might otherwise.

Have thought given that, Kathy, does that limit the argument for bonds just as you talk to potential clients as a counter cyclical hedge the way that they have been traditionally.

Yeah, you know, I was looking at the correlations between SO equities and over the weekend, and we had that big dislocation in April, and now we've gone back to a more normal out correlation. I think we may see more of those dislocations. So what does that mean is bonds don't provide as good a hedge as.

They once did.

But I think that it's going to be periodic dislocations rather than long term dislocation because eventually the policies will probably send the stock market lower and you'll need to be somewhere, and frankly, a four and a half to five percent treasure yield is not a bad place to sit. We've been just advocating staying shorter, you know, benchmark a shorter duration and up in credit quality because we're not willing to take a lot of duration risk in this environment.

You're not alone, Kathy, that's for sure.

Kathy.

John's a child swabbing. We need to turn to the bond market. Christian Mammali of Lafat College with this to say, I still like bonds despite the recent pain, for the simple reason that I think inflation will not be as significant an issue as the markets expect. Kristna joins us now for more Christian, Welcome to the program, sir. Before we get to tarifs and inflation, downgrades. How relevant is that downgrade from Moody's ever at all?

Well, so, I think your vestent is right on this kind.

That is, the downgrade itself should have happened a while ago, and it really isn't much of a driver of anything in the market. I think if the downgrade had come when S and P. Five hundred was at let's say, fifty four hundred and fifty six hundred, I don't think we'll be talking about in terms of impacting equities and risk assets very much.

But Krishna, as you know, it's coming after a big conversation through much of April about the future of the safe haven status of the United States following a big policy shock on the trade front, and that's raising questions about the future of a tax bill advancing down in Washington, DC, and what it means for fixed income coming forward from here. What do you think it does mean?

Well, So, I think the real issue for the economy right now is as Yelena was talking about, is really the slowdown and the tax bill. But it isn't tariffs, and it isn't really the impact of the fiscal deficit that much on the state of the economy or even the dollar.

For that much.

So I think what we are talking about here is the tariff situation will get resolved, the tax will probably gets passed, but with lower level of fiscal expansion in twenty six twenty seven than what we are expecting right now, that's really not a bad environment for bonds, and especially in the light of the fact that inflation is really

So if that is the case, inflation is.

Not a big deal and real rates are high, and you end up with a tax package that is more reasonable rather than meaningfully expansionary, I think that's not too bad for the bond market.

So, Krishna, are you buying thirty year bonds?

Well, so, you know, in our allocation, for example, for an endowment, for example, what we are focused on is really the long term return of equities and private equities in particular, So bonds, you know, bonds are interesting, but we can generate bond type returns out of low wall hedge funds just as much. So no, we are not buying it in my private portfolio.

Yes, all right, So here's my question, Krishna, why does it not concern you at all that we have a toxic brew right now where you have bond selling off, stock selling off, and the dollar selling off in tandem at a time where people are making a lot of noise about the fiscal deficit.

Well, so I would say that you have to put it in a bit of a context. That is, all of this is happening after a significant rally on all of those things over the last month, month and a half. So you know, if we are giving, we are making profits rather than rethinking the basic strategy here.

Chris, Now, will you talk about in your notes that you don't foresee a recession but a slow down. What would make you reconsider that actually the US could tip into a recession.

Well, if the tax bill doesn't pass and tariffs get implemented, that's a fiscal consolidation for the history book. So I think that really would get us into a recession. If we have a reasonable tax package and the fiscal consolidation is or that there isn't as much fiscal expansion, I don't think we get a recession.

Well, that's already baked in that this we're going to get an extension of TCJA. The issue right now is potentially a lot of people talked about how this was a removal of a headwind, but does this actually offer some risk given the fact that we have this Moody's downgrade.

Well, so I.

Would say the fiscal consolidator or the tax impact effectively off tariffs, let's say a percent in GDP without any corresponding expansion on the tax package. If it is just a renewal of TJSEA, then that's a different equation than what we are talking about right now with the current bill.

So right now you see that there's a downside risk to growth. You see it because there is not necessarily more fiscal impulse coming from the from Washington DC going forward. Is this going to be something that can sustain some of the private credit, the private investment that's been ongoing in the US economy, or do you see something of a very difficult time the fact that you are going to private assets.

Well, so, you know, I think private credit and.

Things like that are really a reflection of credit growth and the fact the disintermediation at the bank level. If the FED is really effective in changing bank regulations in a meaningful way, again, it's an open question whether they will away from, you know, just giving them a little bit of room to buy treasuries. I think if that happens, the expansion private credit probably comes to, you know, the growth that probably stops to some extent because banks will have an opportunity to do a lot.

Of things, you know, without that.

You know, if the US economy and US corporate sector is as good in the shape as it has been over the last two three years, I think private markets probably continue to do from a growth standpoint, as opposed to return standpoint right now, probably continue to do just fine.

Krishna always wonderful to hear from his Christian Mamali there of La Fat College. This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, anchier politics. You can watch the show live on bloombag 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 bloom Black Terminal and the Bloomberg Business Amp