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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. We begin with our top story and kicking off the week with all eyes on Nvidio the City. Stuart Kais are writing this markets will be captivated by Nvidia earnings, but after that event there are about two weeks without clear catalysts. Last quarter, Russell two thousand and s and P five hundred equal weight both outperformed the SMP by about two hundred basis points between Nvidia earnings and the March CPI report. We
like positioning for a similar patent. Steve judges for more good on it.
Ste Good Morning to.
Find good is two weeks of no dates or a good thing.
I Honestly, it's going to be a really big test. Because last week when you had kind of no data, the market was able to or two weeks ago when you had no date to the market just sort of trended hire you had a nice clean week. I think this time you have a two week window. It's right around month end.
You know.
The question I think is with the market at all time high, did people kind of trim some risk and do you get a little chop or is it everything's fine and dandy. I see, if you had dandy, it makes it much more enjoyable. If it's fine and dandy, I.
Think you can kind kind of drift higher.
So our view is strong earning season the same way you had a strong earning season last time. That tends to favor large cap because they're generating the bulk of the earnings. Once you get out of that kind of earnings event, we do think you can get a little little episode of broadening into that big June twelfth day.
With the emphasis on a little episode and not maybe a durable boarder think why is that?
Ye think I think there's still, as as you all have highlighted, there's still some anxiety, you know, kind of in the system.
I think a lot of it to be revolved around the labor market.
I think that's the area that is by by far the biggest risk to equity markets. And if you look at the case fed labor tracker or other metrics, there are some some sort of cracks or a little weeds kind of in the garden that you need to deal with them. It's going to kind of keep people a little bit conservative.
And you point into the idea that momentum has not recovered alongside the broader market. I was talking about that, we were talking about that earlier. I thought that was a really interesting point that this isn't necessarily the game stop frenzy, that it's going to fuel the everything up kind of moment, and yet you're still constructive. What do you take from that the idea that momentum is not really driving this.
It might be a little bit of kind of by the rumor sell of effect type issue. You know, you have very strong earnings from TMT companies. I think that's really what stabilized the market that week of kind of April twenty six or so, right, And I think now that you've gotten through that period, you know, people are probably taking a little bit of profits and maybe taking a little bit of risk off the table. And we were back at all time hues. Again we were below
five thousand pre TMPT earnings. Who are fifty three hundred dows. So I do think you're just seeing some people kind of adjusting positioning and maybe it's seven million the lake type situation here.
Is that what you're recommending? Do you feel fine?
I feel pretty good.
Actually, okay, that's different than fine.
I just want to say that one thing that you pointed to was initial job was claims, and I thought that was interesting because I remember when people used to care about those and then they started to flat line and then everybody ignored them. Is that going to be first here data this week?
Yeah? I mean claims are important.
If you think back to last summer, last June, we printed one oh five in non FORIGM payrolls and you got claims, you know, kind of above two fifty. If we got a repeat it that obviously the mark is not going to light that combination to data.
So claims matter.
It's just tough when you're at such a you know, such a low level, you would need a significant step up in claims. I think to get people's you know, people's attention kind of ticking up ten k here or there is not going to do it. You know, you're going to need a I think a significant step higher claims to be disruptive.
Stuart, how do you read the inflation data? Because we saw the bumps earlier in the year, it was just that this is bumps, not a trend. Then we get one print that's basically in line, and everyone's all excited, saying, Okay, we're back to the disinflationary trend off of one report.
Is that fair?
I mean, it's a good question. The reason people are taking it so well because I think they interpret the FED is taking it very well. Right This is a FED that has sort of a cutting bias to it, and I think the market is saying, if you're printing thirty basis points of of course CPI, that gives the FED kind of leeway to cut later this year. If you keep printing thirty basis points a core, you're almost back to four percent by the end of the year.
So you know, thirty basis points is probably not going to do it medium term, but right now I think it gives people confidence that the FED is kind of willing to cut in that environment. You know, we've said at the beginning of the year, you're sort of uber bowl case for markets, is you soft land or you don't go under the recession, and the FED does a couple insurance cuts behind that because that gives you a strong EPs outlook and potentially you get a little bit of juice on.
The valuation side.
So that was kind of what can get you up to those fifty five hundred type levels. That's what the market wants, ultimately, it's what we all want. So you know, when you get data that allows you to confirm that a little bit, I think the market tries to run with it.
You've said for a while that when the labor market starts to waken, you're going to get nervous. Your team is predicting that on the economic side of the research division. What does that mean for your call? Does it just to come increased in these short term and much more tactical. Is it much more difficult to have a longer term view of where the secretary market is going.
To be one hundred percent?
I mean we'd recommended hedging a little bit, you know, the last month, just to kind of manage that risk. The risk reward of the market is not what it was two months ago.
In our view.
You've had your US economic surprises has gotten quite negative.
You've got some hiccups going on in the labor market.
Earnings are strong, but it's starting to get priced in. So yeah, we're we're keeping it much much more tactical. When you get volatility down to these levels, I think it makes a whole lot of sense either to hedge or to use options for your upside. When you're paying sub ten implied volatility for upside on the S and P. That feels like a very responsible way to have your
kind of long exposure around. So yeah, we're much more tactical, much more careful, And I think the market is showing you that it's going to be a responsive to bad news. Unfortunately or fortunately we just haven't had.
That bad news.
How high is the bar for Wednesday? Frinvidia got another call right now in front of me, this time from Stefhul on Nvidia price target race to ten eighty five from nine to ten. The quote beaten rays widely anticipated. Same thing came from Berkley's early this morning. Oh sign still points to another revision higher. How high is that bar Wednesday afternoon.
It's a pretty high bar, man.
The market's got used to them basically beating by two billion, you know, every quarter for a number of quarters in a row.
Two billion used to be a big number.
So I think I think it's the bar is pretty high, you know for a video here, perhaps a little less high than it was a couple of weeks ago, when you know, the market was sub five thousand and there was a little bit of stress in the system. But the issue with a video is it's been a huge
part of revenue on Ernie's growth. It's also a huge part of market cap, which is why if you take the Nvidia implied move and you know, kind of multiply it by its market cap, it could move the S and P forty to fifty basis points that day by itself.
So you know, the bar is definitely high.
The way we track sort of sentiment, it's not quite as aggressively high as it was last quarter. Last quarter you had inverted skew, which means your calls cost more than your puts. That's highly unusual at the single stock level. Some of that has started to come out of the system so bullish.
Definitely, bar is high.
But it does feel maybe I think people are starting to just accept the fact that you can't continually beat by two million every quarter, right, So I think people have kind of prepared themselves for a little bit.
It'll be fine.
I think you think it's going to be fine. You feel fine.
I think it will be fine.
Yeah, fine and dandy, which is actually better than that. I will just say one thing that I find interesting is that we used to have companies that were bell Weather companies. Whether it was the banks, which no longer serves that, whether it was Walmart, which maybe no longer serves is that either it's sort of a Walmart story, not necessarily a macro story. Is in Vidia serving more
as a macro story in terms of AI adoption. Will we get a sort of broader read through to the market and sort of the sentiment behind it from Nvidia than just an Nvidia story.
I think definitely. So.
I think if video has become a macro store, you see how aggressively it's even probably sitto the S and P five hundred viece events or like our market based events.
You know.
I think we've talked in the past there's a view that AI increases productivity and can potentially lift GDP growth on a go forward basis. It has massive impacts on the labor market. So you know, AI at large is a macro story, and VIDIA is right now the cleanest, most direct way to trade that. So it's made that, you know, a macro story, Ei William. Those with the GLP ones I think would fall into that category as well.
Those are probably the two sort of single stocks or themes that would become macro over the years.
Take your point of the week, right date, a point of the week.
Goldman Sachs last week said eleven hundred dollars per share that they uplifted for Navidia. This is the data point I think whether or not the markets will be fine or maybe less than.
Fine Wednesday after the close, You've got a word on Man City, a couple of words sad. Are they the Mets not fine?
No, they're not the best.
Unfortunately they're not the Mets high root for the Mets of the EPL, which is the unfortunate that the unfortunate situation.
Stuve, it's going to see you. It's fine, It's going to be all right. Stuart Kaiser city. Thank you, sir. Let's turn to travel shares of Rhyan Air love this morning with the adlines saying some affairs may be flat despite low capacity. Ryanair planning to offer discounts to stimulate demand, and the the friend of our side, but he yes, Michael Leary joins us some more. Michael, good morning to you and welcome to New York.
More and John, great pleasure to be here again.
Grace to cant shat with you said, So, let's talk about pricingw You're right, cfive said it was cantering Shiwit's if helped me understand deck capacities down, prices are flat, what's going on?
Difficult to understand it ourselves.
Like, we've come off two summers and twenty percent plus pricing increases. So we thought pricing this year would be softer. We thought up five to ten. At the moment, it looks like it's flat to five percent through the summer peak. I think there's just a bit of consumer resistance out there. Capacity is constrained in Europe. We thought that would lead to stronger pricing each of us early. That means that April May June is a little bit softer. We still
see pricing up through the peak July August September. We're constrained because of boy delivery delays, but I think pricing is going to be softer than we had originally expected this summer. Good for consumers, not necessarily quite so good for shareholders. But then we've launched a seven hundred million share by back today, so that will keep shareholders quiet while we look after consumers all summer long.
It's just to be clear there strength of summer then soft right now, but you do expect five to increase, fest to increase as the summer progresses.
Yeah, there's no doubt. Indeed, the April May June quarter pricing is down on the prior year. Now we had a full easter in April. This year we only half at easter. Their pricing still looks but it's up, but it's up small. It's very weak and zero to five percent through July August September. We've only sold about forty percent of the seats in that quarter, so it could still be up slightly higher, it could be lower. We're reasonably relaxed. We have costs well under control. We've hedged
our fuel form for the next year. We've saved four hundred and fifty million dollars on fuel for the next twelve months, so we can use that to stimulate pricing. And when we've done some price stimulation in reason weeks, we've seen very strong responses from consumers. So I think consumers are they're a little bit nervous spending this week, but when you give them a price incentive, volumes the volumes are very strong.
Does this take some of the pressure off the twenty three deliveries of Boeing jets that you're waiting for that could be delayed because ultimately capacity is less of an issue.
Yeah, I mean I don't think so least.
I mean I would prefer to take the aircraft. We could fill those aircraft through the peak through July, August September. We think travel will be strong, pricing will be strong. We regret the fact that we'll be twenty aircraft short. We've crewed up so we have all the pilots and the cabin crew. Our label will be a little bit higher in that second quarter, but volumes lower. We've had to pair back our full year traffic forecast this year from two hundred and five million to about two hundred
million passengers. So it doesn't really help because everything we're geared up for the growth and we're just going to be let Boeing go leave us twenty aircraft short.
You've always been known for being incredibly cost conscious, trying to bring a lower cost to the consumer. Are you trying to get a deal on some of these Boeing jets? You're looking to maybe buy some from others, or you know, say, if you want to shift to Airbus, that's fine, I'll take your Max seven thirty seven jets.
Well, we've already said when United came out with those stupid comments there in the year, you know, we're not going to take those Max tens. Max Aircraft will take them if you don't want them, will take them? Of course, Yeah no, they kind of they mumbled and then decide they were going to take him anywhere. Aircraft and deliveries are incredibly tight. Airbus and Boeing are running way behind in their deliveries. There's a real capacity constrained story in Europe.
For the next couple of summers, manufacturers are delayed. Airbus fleet is twenty percent of the airbus fleet is grounded because the pattern with me engine issue and Europe is an airbus market, so capacity is constrained. Why it's a little bit surprising pricing is soft this summer. We thought pricing would be a little bit stronger because of those
capacity constraints. But hey, if the consumers are a little bit more price conscious, if they're a little bit more price sensitive, we'll stimulate.
It's good for our business because we're the lowest price provider.
Michael, what are you hearing from Boeing at the moments in the past you said you thought the deliveries could slip further.
How much further are we talking well?
And we re good question? I think two things. One, we're twenty aircraft behind.
We're supposed to get fifty nine aircraft for this summer running and get thirty nine at best. But we do see signs of improvement in recent weeks. I think Stephanie Pope and the new team in see After doing a good job. They're taking fuselages that are not being taken from which to unless.
They're completely defect free. But we're not yet seeing a speed up in the turnaround time.
In Seattle, they're still taking twelve to fourteen weeks to produce an aircraft whereas it should really be eight to ten.
Now. Two weeks ago they sent us an update. We were expecting two deliveries in June, three in July. We're getting two in June. It looks like seven in July.
So we're beginning to see the situation improve, but it's very small baby steps. We're still going to take aircraft through August, September and October, even though we can't fly them during those months. We think we get all fifty nine aircraft in this calendar year, and then the big issue with US at going is will we get the twenty nine aircraft deliveries we are contracted to deliver us
between January and April twenty twenty five. So I think they're making small, small steps, little progress, but we don't want to see any further bad news.
If that's your big question going into next year, then how do you weigh the impact on What does that mean for your business for twenty twenty five?
I figur at the moment it means that for twenty twenty four, for FY twenty March twenty five, we're going to be doing two hundred million passes instead of two hundred and five million for March twenty six or summer twenty five, we think we can step that up.
I think we'll get most.
Of those aircraft are Boeing, and then we'd like to see ourselves grow to probably about two hundred and fifteen million passengers through summer twenty five into March twenty six.
We think there'll be a strong rebound.
We still think pricing would be reasonably robust across Europe because capacity is going to be constrained. Airbus and Boeing can't deliver any additional aircraft. The engine manuf issue is a huge problem for the airbus fleet. You know, they've been talking about three hundred and fifty days to repair these engines. We think it's going to be for five hundred days, so a lot of Airbus aircraft are going to be grounded for the next two or three years.
How much do you see just going back to this idea of pricing power and that we're surprised that there's not greater degree of pricing power given some of the constraints with deliveries. How much is it sort of the end of the boom that we saw in the travel and that people are constrained by the fact that you know, hotel prices have tripled. You can see that any restaurant you go to is that which works, but it's ready
to be travel. I mean it's incredibly expensive. So how much have we sort of reached the tipping point or we're going back to something that's pre pandemic and not this you can work anywhere and travel all the time time kind of mentality.
I mean, I don't think we've reached.
I think Europe is a fundamentally different market to the US North America. You've seen a lot of travel price inflation in the last couple of years. You know, the average Fair Southwest charge last two week last year was one hundred and seventy dollars. The average Fair and Ryan air across Europe is forty eight euros. So there's still a bit to go in Europe. But there's no doubt in my mind that the European consumer is cutting spend is careful.
They're cautious. They want price stimulation.
We go out with seat sales, we sell out straight away, but you know, we have higher interest rates in government's cutting back on inflation. I think consumers are just a little bit nervous there at the moment. I don't think that's a longer term trend. I think, you know, interest rates will fall, if not this year through into next year. I think we will see some rebound and consumer spending, but I think you know they will protect travel. The
experiential spend will continue. It'll just trend down to the lowest cost provider, which in Europe is Ryanair.
Is this a time to get more aggressive and go off the market share and ser giogra face.
I would love to.
If I could get more aircraft out of Bowing, I'd be on it like a rash. You know, we are taking more market share though at the moment in Central Eastern Europe, Whiz have grounded forty five aircraft, nobody else six banding in Europe, so we are winning huge amounts of market share despite the fact that our own capacity growth is constrained by Boeing delivery delays.
So we're taking market share. I think that will continue.
But if I could get more aircraft, I would I would try and grow faster at the moment, albeit at the cost.
Of lower airfas you've got a good rate on the consumer. Do they care what plane they fly on?
No, I mean most of them don't know what plane they're flying on. I don't know what plane I'm flying on. Most of the time you're not check no.
I mean if you look at you whether it's the Boeing ENNGS, the Boi Max. I mean I prefer to find a Boi Max aircraft only because A it's materially quieter, and I know that plane is burning about sixteen percent less fuel than those the older fuel Guzzi seven three seven energis BOYL are making great aircraft. They are getting a lot of unfair publicity in the last twelve months. You think, so even nose field falls off and it's
been unfair about it. A nose field falls off an air cound of aircraft for an engine Cottle comes off as Southwest and it's a Boeing aircraft.
Slightly slightly concerning, Yeah, but it's a it's a maintenance issue for those airlines.
It's not fundamentally a seven three seven issue. The seven three seven is a great airplane. They're making phenomenal new engines. I mean the engine technology is being transformed. We can't wait to get the Max ten's for du to get the firstman twenty seventeen. They are carried twenty percent more patches but burn twenty percent less fuel. So not longly to transform our economics, but will make us a much better, more greener, cleaner airline to fly on.
Michael, it's going to say it. John, good to see you and thank you very much, Michael O. Larry there the ran A CEO. Another busy way of FED spake on deck, Boss Stick, bab Waller, Jefferson Mester kicking things off lights on today investors also looking ahead to the minutes from the last FED mating jobless claims and you mitched consumer sentiment. Joining us now to discuss RANA tables definitely brought them three search together with mar McCormick of
TD Securities, definitely first to you. We heard from the Atlanta FED president about an hour ago. He said things were softer in the labor market. They weren't soft.
Would you agree, absolutely, we've seen a softening. The latest payrolls print was arguably a Goldilocks type of print where you had a one seventy five payrolls number, which is good by historical measures, and an avagelarly running to print that was on the softer side. We're starting to see
some signs of softening. I have to say, there are some concerns in the market out there that all of a sudden, the labor market's going to start to crack, and there are no signs of that, and people are just taking the narrative and running and taking the opposite of what we saw on Q one and flipping it upside down. So that's not a fair characterization either. Realistically, we're just seeing or rebalancing in the labor market that's actually working out fairly well.
On part driven immigration, Marx, I bring you into the conversation, should we flip Q one upside down? Is that what Q two, Q three, Q four has in store for us?
No, I would agree. I think a big part of it is the market's kind of taking what's a positioning and a technical narrative and they're overlaying into fundamentals and you're seeing maybe some reversal. But if you look at one of the more important princes as well, like employment cost index, if you look at some of the other indicators that we track on inflation, there's no sign here
that inflation's cracking. To me, if you look into details, it's still pretty robust and it's relatively strong so I think also if you put in line where the fed's supposed to be, FED is basically looking for fifteen basis points a month over month to basically get their two point six percent year over year, and it looks like even PCE core PCE is tracking about twenty five basis points right now. So it still feels like there's a very big disconnect.
Stephanie, do you agree with that that there's this idea that reflation are sort of a resurgence of an inflationary wave is the biggest risk right now and looks more and more feasible given the backdrop.
It's definitely the biggest risk. Is it one that I'm particularly concerned about? No, because the inflation data are starting to look a lot better. Q one was certainly driven by seasonals, in my opinion. Powell seems to believe that as well, although in the latest press conference it probably couldn't.
Lean on that.
But what we're starting to see is a real normalization in inflation, and the latest print told us that. And I think this was the most important clean read of inflation that we've gotten this year, because seasonals were really driven up, driving up QQ one inflation and April was a lot better. So now we're tracking core pc of
the twenty five basis points. If we just get oere coming back down a little bit and financial services and it'll be back down towards point two percent point two percent month one month, And that's exactly what the FED is looking for. So it's very easy come the summer months to actually be tracking along those lines, and then the FED should be able to be comfortable cutting in say September.
Even though you do still see this surgeence underneath the hood of just some sort of stickier inflation. Commodity price is getting a little hotter marked. From your perspective, you're talking about how that's your fear. At what point is this driving flows internationally into the US at a time when some people are saying, well a week or dollar can actually make sense, and the other people say, well, just hold on a second, because on a relative basis
rates are so much higher in the US. Strength is there, and the FED won't be able to cut as much as say the ECB.
Yeah, it's very interesting because there's a clear focus on growth and inflation, and towards the end of last year and we were embarrassed the dollar there was a convergence with the rest of the world coming into the US,
and US exceptionalism basically peaked last year. Everyone now seems to be overlaying this like fading US exceptionalism now, which I think is quite interesting because this is more about positioning, and this is more about valuations that were extremely stretched in favor of the dollar and then a couple good data prints. But what we're seeing if you start back testing and trading FX strategies, the FX market basically just
change its focus entirely in March on inflation. So I think the one thing that's very interesting about the FED is it's very asymmetric from a risk perspective. Right now, there is an election, it's the big elephant in the room, and there is no room for error for one inflation print to come in through the summer above expectations and still be able to reliably expect September to actually be live. And if you take out September, then you have November and December. So how is the FED going to cut
in November around the election? And given the result of the election, how could the FED cut in December. So the way that we're thinking about it from like a trading perspective is that you could have inflation kind of go back to the levels that people are comfortable with. But do you price in three hikes? Do you get more confident that you just get two? But you get one bad number? And that basically makes September a very tricky,
tricky indicator, especially to trade it into the election. So I think a big part of this is we know that other G ten central banks are about to cut, but we're not very clear on whether the FED can and whether they will. And I think the big driver here for the currency markets and for markets in general is inflation divergence, and that's what our models and our signals are telling us that we should be focused on.
Among there's tons to impact, there is the politics. The stands out for me what convinces you the politics and the election is so important. When we go back to twenty twelve September, then that'ns QE three. What does it matter so much more this time?
I think a big part of it rights of inflation. So it's we can see that you get policy actions and it's usually not a problem, but inflation is way above target and so it's like this would be the first cut with very elevated inflation and a very tricky election where the polls are neck and neck and there's just a lot on the line. It's a very contentious
election just to even start. And I think the policy implications from one side or the other are so massive that the market is placing so much emphasis, especially for the FX market, because it is the most actionable way to look at the presidential implications in terms of terrorists, in terms of tax cuts, those are two big things that are sitting on the table for next year. The corporate tax cuts will expire and the discussions around terras
will remake the entire currency market. And this also fits into the story around the geopolitics around capital flows, where again, if you look at what's happening with the remed to be, if you look at what's happening with currency, markets like China and Russia and emerging markets are aligned where they are basically settling currency and remedy be they're finding ways to kind of nudge themselves away from the dollar, and this is why gold is trading at the levels that
it's at. There are so many implications for this, and so I think, with this in mind, the easiest thing to think about is how much can the FED cut into the election if inflation is still well above target.
It's Deephanie to see election matter.
I mean, I think the Fed's in a tough spot and they've been in a tough spot all year, and Powell has indicated they're planning on cutting if the conditions are right. So it's purely on the last part of that same If the conditions are right, which means the CORPUC needs to be trending at about point two percent month on month, and it's, as Mark mentioned, it has to go exactly right in order for the FED to cut.
If they have a couple of misprints in the next couple of months, then yeah, of course the Fed can't be cutting. But our base case is that you have a lot of conditions that should be continuously disinflationary between now and September and then they'll be able to move. But at this point they're kind of caught in a box and they have to just just go on what they've indicated is key benchmark indicators, and if those things are consistent.
With the FED cutting, then they're going to be cutting.
Regardless of what they do, they're going to be painted as politicize, so tough. It's a really tough one. So our base cases they can still cut in September and November is probably out, and then December is the next one.
But Cephanie, that's if inflation is on the trajectory lower. But if there's a move and a bigger softness in the labor market, that would give them this impetus and maybe some cover to cut into an election.
Do you think absolutely, if you started to see softness in the labor market, they would.
Have every indication to cut.
And this is different from where we were a year ago. At the beginning of twenty twenty three, they were in a position where inflation was so high that if we saw weakness in the labor market, they couldn't cut immediately. But now we're talking about two and a half to three percent inflation. That's a much different backdrop than when inflation was trending significantly higher.
So they're now able to be a.
Lot more nimble and even be able to cut interest rates even if inflation is still a little bit sticky and lean on the employment side of our.
Mandate mark, you see that there's very little room for the Fed to be cutting rates or it could you could see them not end up cutting at all this year, just simply because it's inconvenient timing. At the same time, you see a resurgent inflation as one of the biggest risks. So put that together in terms of what's going to be the main driver of either dollar strength or weakness.
So yeah, I'd say the last couple of months we flipped. We're quite bullish to dollar, especially against G ten currencies. I think that is the backdrop that it's asymmetric, right. It's like from a risk trading perspective, like our view is that the FED is going can cut. That's our economist spaceline call. But I think when you think about the markets on how people have to deal with the
risks around it. To me, the risks is if there's no room for air and data is extremely volatile and we constantly have to look at revisions and these kind of things to understand the trend. The trend in US inflation is quite different from all the other countries that
you track in the currency market. So I think the other implication is that the asymmetric kind of outcome is one where if you think about again, the market was very excited to fed the Powell said that there's no hikes, that's fine, But we were like, you know, starting this year, the market was talking about five or six cuts, and now we're saying it's okay that we don't get any hikes at all, or we don't have to have that
narrative discussion around it. But I think if you think about it this way, if we do have a more volatile fall and inflation is generally sticky, and the polls are kind of leaning towards kind of a change in leadership for the dollar, it has to price in the risk of terriffs. It has to price in the risk that corporate tax cuts will be extended. So in a very strong economy that's dealing with elevated inflation, you now
have macro policy that's moving more inflationary. So the market will have to reprice the expectations whether or not it evolves in that way, but it will have to basically reprice a narrative next year that is, you know, the rest of the world is cutting, the US economy looks like it gets stronger, and the fact that you're adding terriffts makes it much more inflationary, So you kind of have to rethink the way that you look at the
entire markets, particularly from the FX side. So for US, we are looking for a strong dollar against G ten currencies, but we also like the commodity story. So it's still a buffer for some emerging markets that are generally seen as exporters, but it is again kind of moving back into that terms of trade. It's also a world where it kind of creates conditions where we were expecting financial conditions to ease this year to see the economy evolve
in a better state. And if what we see is US inflation and the FED and the dollar creating a little bit of a tension around that, then we can't realize those financial conditions and we can't realize the growth expectations that we're priced in this year for next year. So that's what starts to see the volatility increase, that's
what starts to see carry trades online. This is kind of what a just market sentiment, and I think these are the risks that we have to be really focused on, and that's why we're more bullish the dollar in the back af of the year.
Sephanie just to tease out one part that he was talking about this idea that tariffs would mean that the dollar would essentially be stronger that some of the protectionist policies that some people are talking about being implemented, especially if there is a change in leadership, would cause more inflationary pressures and would cause a stronger dollar because the FED would have to remain higher for longer. Is that kind of an outcome that you agree with? I?
I mean, it's certainly a difficult one, and that might be how the market prices the election initially. But face case, First of all, the teriffs wouldn't go into place into twenty twenty six because that's when the TCJA expires. Second of all, it's possible that the labor market is actually in better balance by the time the election comes, so the Trump administration turning off some of the immigration flows
might not actually be as inflationary as many fear. And by the way, the Biden administration has done a lot of spending themselves, so it it's not actually I in in t in in entirely clear that if we do get a change in the administration, you'll start to get a u a real pick up and spending. Either way, we're gonna be getting tax cuts extended the Trump or Biden administration in the next in the next cycle would
be extending the tax cuts. It just depends if you carve out the the upper income people, which is what the Biden administration would do. It's not gonna be a boost to the economy certainly when you're thinking about tax cuts, because it's it's actually just extending what we have today. And the tariff one is is a difficult one, and I would view that as more certainly could be dollar positive, but it would also be an environment where growth would
likely weaken as well. The policies that Trumps has alluded to with a sixty percent China tariff or ten percent across the board tariff would be incredibly difficult for growth. So realistically it's possible it wouldn't actually be that inflationary. The Fed should probably just pause, see what happens, and then they would likely react. So it's not as clear cut as Trump is inflationary, and the Fed would no longer be able to cut in that environment.
Necessarily, the case mark when it comes.
To tariffs and it comes to these tax cuts, both of these issues coming into play twenty twenty five. Whether or not it's Biden or Trump, we're likely going to see more of the same. It just depends how aggressive they are going to be. So in that case, what do you have in terms of the direction of the dollar under a Trump twenty twenty five or Biden twenty twenty five.
I think the part of it is that with Trump, it just creates more uncertainty, more volatility. And again, the way the markets are trading the currency market right now is they're actually trading, and I hear it a lot from client discussions, and it's really the fact that the rest of the world is improving right now is why people want to sell the dollar. And we're a bit confused about it because a lot of our leading indicators are kind of suggesting that the global economy is not accelerating,
it's kind of losing steam. But there was some obviously some anecdotes. Is China's trying to clean up the housing market there, you know, the things are improving in the right direction there. Commodities are doing quite well across the board, so maybe that's again part of the reflation pmis and manufacturing,
those things are bouncing back. So people are excited about the global economy and the slow down in the US, and that is so you have to unpack it too as well, because laying out like slower growth and those type of things that would come from maybe a Trump administration is bullish dollar because it's risk off, and then you know, the world that the people are trading right now is kind of risk on. US is slowing but not by enough, and you can get FED cuts and
this is dollar bear. So I think what people are trying to figure out is which matters more, US growth outperforming others, US inflation being stronger. Therefore the FED has to react to that or whether or not, you know, in a Trump administration, does the rest of the world underperform? Like do we get the rug kind of pulled out from US right now as the rest of the world seems like it's doing okay, Europe's leting indicators are improving.
Does that all go away under a Trump you know, kind of a Trump present city which is what we saw the first time around, which is the US kind of outperformed the rest of the world. US growth look good because basically tariffs and the macro policies were administered basically slowed down the rest of the world. So I think that is kind of what people are trying to figure out is a high inflation, kind of weak growth environment good for the dollar because we kind of move
out of this Goldilocks environment. Everyone's moved back to goldilocks, and I feel like any state we go through over the next six months is not Goldilocks. It's either it's something that's more volatile, and the volatility and again there's first order and second order effects. The first order effect is you basically pricing the risk premium. Second order effect is we actually agree like if Trump wins, it's actually you could see the dollar week in dramatically after the
first year. You could see the implementation of a new Plaza cord. But those are a result of the fact that the dollar strengthens so much to pricen the risk around these economic pulses.
Stephanie, you've been nodding the final word.
Yeah, I mean, I think it's a complicated backup. For now, it's going to be all about Fed policy and whether inflation can be consistent with the Fed being able to cut The market's not going to be able to fully price an election certainly leads through much of the summer and probably not until the beginning of next year when
we start to really understand what those policies mean. So for now it's going to be all about whether the FED can be a little bit more dubbish, which arguably in the first quarter we think we just passed peak hawkishness. It was all about the US exceptionalism and inflation overheating. But if you just remember back to December, we were
talking about the opposite, it was immaculate disinflation. We've just been swung around by the data and it's really all about just looking through a lot of that noise, and what we're looking at is inflation running two and a half to three percent, a little bit too sticky, but nothing that's that dramatic, and an economy that's starting to slow down a little bit. So for us, it does actually look fairly goldiocked at least for the next couple of months.
Stephanie, this was great. It's got to see you. Stephanie Roth there of World for Research, alongside mart McCormick of TD Securities. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, antient 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 Amp.