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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, stop sending out a fourth day of gains, Tracey McMillan of Wells Fargo writing this, we remain more cautious at current levels in both fixed income and equities until valuations improve and better opportunities present themselves. We expect to see broader opportunities inequities over the next six to twelve months. I'm please to say that joining us now is Tracy. Tracy. Let's talk about this more course, on
both stocks and on fixed income as well. How does a view a one asset class inform the other? Currently?
Good morning, John, So we are cautious on both equities and on fixed income, and we're really waiting for better opportunities to.
Add to both of those asset classes. Right now, what.
We see is that at the short end of the fixed income curve, the yield is over five percent, and so you have to compare that to the opportunity and equities, and our large cap forecast for the end of twenty twenty four is fifty two hundred at the midpoint. So there's not a lot of upside potential that we see in equities going out to the end.
Of twenty twenty four.
Now twenty twenty five we think could be a better year, so we continue to favor large cap equities. But right now the balance between the risk reward between fixed income and equities does have a more cautious inequities going up in quality going up and quality and fixed income and staying towards the short end of that fixed income curve.
Could you clarify something for me, how do you think bonds would behave in a drawdown in equitcies? Would they still perform?
Well?
Yeah, so that's a really interesting question because over the past couple of years, what we've seen is higher correlations between both equities and fixed income, and that's because of the driver of the downturn in both of those markets, or conversely, the upturn in both of those markets, and that's been the expectations for interest rates based on inflation. And so as inflation expectations have changed, we've typically seen bond yields rise, We've seen equities come down, so both
of those negative at the same time. And then conversely, what we are telling investors is that going forward that should start to normalize as an inflation that comes under better control, and diversify, diversify into assets that do not have that strong positive correlation right now, like commodities and alternatives.
I'm wondering you talk a lot about the consumer and a weakening and the consumer. How much can we get a rid of that from the recent earnings which have been pretty strong on an earnings per share basis, But you've seen revenue come in light at a number of places, including an uber. They're talking about bookings coming in lighter than expected, expecting.
That to continue.
They talk about Latin America bookings having to do with this. They talk about early holidays. Do you think this is evidence of just tighter competition of price pressure by the consumer or all of the above.
It's probably all of the above, Lisa. What we're seeing in terms of the consumer is that you mentioned this a little bit earlier. Consumer confidence does appear to be waning, and there is a bifurcation, as you also mentioned, in the upper income quintile the bottom four income quintiles, which which have exhausted all of their pandemic savings, so really relying on just that upper end consumer now to carry
the market. We'll see retail sales next week and that will give us a further indication of whether or not consumers are continuing to spend. But some of the underlying information that we're getting out of recent data and recent reports is that consumers are pushing back on some of the price increases and that companies are feeling less confident about their ability to raise prices.
So all in all, that.
Could be good for inflation, but we do see the consumers starting to pull back in aggregate.
I think a lot of people would agree with you, Tracy, the issues just the speed and exactly where this is going to go. In terms of the weakening. You have some people come on and say we're going to see a protracted weakening and we're going to get that true downturn. Francis Donald than you live talking about that yesterday, and then you have other people saying, actually, it's just the appropriate softening to us small caps to rally.
Which camp do you fit into? So we do think that we're going to see more of a soft patch.
We think that the data last week is supporting that view that we'll probably see that soft patch growth slowdown, labor market slow down starting to occur in the second half of this year, so, you know, more of a soft patch.
We think there's less risk of a recession.
Than there was in twenty twenty three, but that doesn't necessarily give us the refresh, the reset that we would need, the clearing of markets that we would need for small caps to reassert themselves. Small caps for really for decades now, have seen the ranks of non earners increasing, and that gives us some longer term concern about small caps. But there's certainly a place in the cycle to invest in them. We just don't think that the time is quite right yet.
Tracy. All morning, we've been talking about the developments in the Middle East, and in your note you talk about how this could still be a risk to oil prices, which we've seen pulled back quite significantly. What kind of upside do you think we can see in the oil market now?
We have a price target on oil between eighty and ninety dollars a barrow through the end of this year. But we could see towards the upper end of that target range if we were to see oil trade restricted more in the Middle East. We did get good inventory numbers here in the US, and certainly US mint producers could ramp up production, but that will that will probably take a little bit of time, and in the interim we could see some supply constraints that would push prices higher.
And don't forget about you know, Opak being able to bring on more supply as well. So we don't see oil price is necessarily skyrocketing, but we could see certainly the upper end of that range, and we think that would again put pressure on markets because it could imply inflation if.
That were to be the case, a ninety dollars a barrel. Where would you potentially want to shift in your portfolio?
Yeah, so we have already shifted towards commodities with an overweight there again, you know that the non correlation. We like that about commodities. We've certainly seen precious metals performing well, gold in particular, and we think that oil does have some upside from here. So you know, a commodities position, we think is probably a smart thing to do at this point.
Crude a little bit lower on a session this morning, Tricy. He always wonderful to hear from you, a triceman than in that of whilst FAGA. Minneapolis FED President Neil Kashigawari, urging core, adding the FED will like to keep rates on hold for a quote extended period. More Fed speak on TAT with Jefferson, Collins, and Cook all speaking today Janet Henry and the team at HSBC expecting the Fed's first cut in September and expecting the ECB and BOW
to move in June. Janet joins us Now for more, Janet, some people might say September has become the new June. What is the risk that December becomes the new September and pretty soon?
Yeah, there's always risks where markets that are concerned. As you well know, it's not so long ago that markets were pretty convinced that the first rate cup was going to be in March, and then it briefly went right to the end of the year, and you're September for us is the new June. But you'll also know that back in December we were saying June. So it really will depend on the data. But as Powell keeps telling us,
it's the totality of the data. Yes, they need to see further improvement on inflation, but they don't need to wait until they get back to two percent. The urgency with which they will feel the need for act will depend on all of the data, including the labor market.
So it may be that, you know.
The progress on inflation is relatively modest, but if they see more that scares them in the labor market data, that could cause them to act. But if in December we're still an unemployment less than four percent, still getting payroll prints of two hundred thousand, and inflation core PCU is still above two and a half percent, then what's the urgency.
It's pretty impressive. It's not where we thought we would be even three four months ago. Jenna, let's talk about September and not the economic data. Can we just talk about the politics briefly. You're not alone on September. Other people have that monked on the calendar as well, including a then Center over Morgan Stanley. I think the natural question for us to ask is is the politics relevant
here going into the election in November. Is September still adore an option that's open to this feder reserve.
I think every meeting is open to the feeder or reserve because I think in anyone scenarios, including the most likely scenari for any FOMC member, is that the next move in rates, and any scenario is still on the table, the next move in rates.
Will be a small one.
We're talking about a twenty five basis point move in rates. Is what's going to happen now. While that is consequential because hopefully it will be the beginning of a sequence of rates. Even if it's not every quarter or every meeting, maybe it is a bit more intermittent, they will take the decision when it is appropriate based on the data. I don't think it will be oh, we've got to
wait until after the election and we can't be too political. Yes, a lot of them will be having that thought at the back of their mind, but it will be about what is most likely to settle inflation at least a bit more confidently back on track towards the two percent level, even if we never really get there without inflicting more damage than is necessary in terms of what's happening in the labor market.
But Janet, whether or not they come out and they say we don't plan to be political, that's going to be the optic. So what's the bar and the data they need to see to almost feel comfortable about taking that move, knowing that many are going to view it through this political lens.
Well, you know, we get back to the data.
You've going to remember in the last set of projections that we had back in March, what was in the FED forecasts for core PCEE for the end of twenty twenty four was two point six. You know, we're at two point eight. We know this is a bunply ride
for inflation. But just as everyone got overly excited at the end of last year on a few downside surprises to the inflation releases, they've got really really hawkish early part of the year, when inflation surprised for three months via about point one, you know, on a monthly basis for that.
Kind of period, So I think what they do need to see now it seems.
To really pull the trigger is get a core PCEE print that probably is more like two point five as the headline figure. But they will also need further evidence in the data slower growth, employment growth in particular, and the wage numbers.
That's by no means the most important factor.
But the more point twos we get our monthly inflation and the lower the payrolls release, that's probably what we do need to see to get that September rate.
Say September comes and goes and they don't make that cut, do you think they push it to December or there is a chance that November could be a live meeting.
I think it would be usual to cut in an election month. In fact, when we looked back at this, and certainly when I spoke to other previous FOMC members, they could only remember one meeting whereby the timing of an election, and I think it was a midterm election actually influenced the Fed's outcome.
And actually it was under green Span ahead of our midterm elections.
But the next move straight after the election was a seventy five basis point move, so it was really consequential when you're delivering a rate a rate rise of that kind of magnitude, So I think November will be unlikely for me. It really is a case of we either go in September or we will wait until December.
But I wouldn't rule anything out.
One of the most interesting aspects of your forecast is that you now call for twenty five basis points of rate clides this year. It was seventy five basis points previously, but you keep your forecast for seventy five basis points next year. Do you think that we're heading toward a higher neutral rate.
Than you previously expected.
Well, I've long been contacting over the last few years that we are moving towards a higher neutral rate. Obviously, the movement on the dot plot and the longer term dot from the FOMC has edged up from.
Two point five to two point six.
But I really get the impression from various FOMC members that they actually think it's more like about about three percent.
But I guess what we've got in our projections.
Is the idea that policy will need to stay relatively restrictive. I think this is what you might hear from from more central banks. You could potentially hear something like that from the Bank of England tomorrow. The idea that rates can be cut a little bit and still be restrictive.
If we're still at four percent FED.
Funds, which we are on our forecast by the end of twenty twenty five, arguably that is still restrictive to ensure an ongoing disinflationary process.
We don't have core PCE at two percent by the end of twenty.
Twenty five, Janet Wells said, appreciate the clarity as always, Janet Henry the of HSBC breaking down the Federal Reserve. Mandy, you call this the persistent kink in the vix futures curve. Can you walk us through it.
Yeah, So we've been observing this since the beginning of the year, where the October future of vix Future is training at a premium to the September by about two to three points. And that's unusual because a we're still many minut a month away from the election. If you look at this point in the twenty twenty cycle, there was only about a one point difference between the September and October contract back then, so a lot more volatility
being embedded this early on in the cycle. And the second thing I mentioned before was, you know, the November If you look at the November future, it actually doesn't show expectations of persistent volatility. People are expecting it to be quickly resolved, which I think is you know, interesting given the candidates involved.
You know, just to broad down a little bit this concept of volatility, a lot of people have been saying, oh, the market is getting more volatile. We look at a lot of the overall marred metrics, they're.
Not really getting all of that more volatile, right, But you.
Look at specific stocks and their whip sign. We're seeing that just this morning.
How do you put that together?
Actually, we have a great metric to exactly illustrate that. So this has been a key feature of the markets of the past I would say eighteen month is that while index volatility or macrovolatility has been muted, single stock volatility has not. So if you look at the stock of exactly your point, there's been some wild swing at
the stock and the sector level. So, in other words, dispersion of stocks has been high in terms of performance, while because of the low correlation, index returns have been muted. So if you look at vics that's low. If you look at our dispersion index DSPX, that's actually near historically high levels. And that kind of exactly illustrates that dilemma.
Many given we know what happened after the twenty twenty election, where is this conviction coming from from traders to say, actually, there's little fear of a contested election.
So I think you're going to separate up because even in twenty twenty, right, and we saw headlines about you know, is there election fraud and obviously one Candida not conceding, But even in twenty twenty, volatility came in very rapidly in November. So I think in terms of realistic path to a contested election, I think the hurdle is actually quite high, and I think that's what investors are really
kind of focusing on. So like you makee noise, you make it headlines, but at the end of the day, there is a process in place, and investors at this point still trust that process and that's why you're not seeing that resistant king in the curve.
You've explored this a little bit as well, How does this compare to previous elections, not just twenty twenty, but going back even further, is this normal?
Is this so what it's been priced in? I would say at this point in the cycle is higher than what we see at this point in the cycle. But if you look at how the vic actually performs in October, it's actually underpricing relative to some of the more recent cycles. So both twenty sixteen and twenty twenty we saw more significant jumps in volatility in the month of October than one is actually currently priced in. So I think twenty sixteen twenty twenty average about ten point increase in the
VICX right now two to three. You know, I think as we get closer to the election, we'll probably start to see that actually increase.
How does this stack out with what you would advocate for? So it's Steve Eisman right, basically tariff Sun China big deal. He said this about the Inflation Reduction Act. You might get changes that might be talk of repeating get we might move on that for a single day, but at the end of the day, nothing will happen. Would you advocate for the same thing? Is that how you view things?
So in terms of fiscal policy, I think what is important to focus on in the state of government, the state of politics nowadays, Really to get fiscal policy through, you really need to have a clean sweep, right, and
that's the kind of what people are focused on. And I think part of the reason why this may be a little bit less volatility and price and relative to how actually performed last cycle, is that there's just more of a less chance of potential clean sweep by either the Democrats or the Republicans, and that's what you really need in order to enact, you know, a significant fiscal policy in the market.
So divide a government means there's going to be gridlocked, but at some point they need to contend with the Trump error tax cuts they will expire in twenty twenty five. Do you expect some of them to be extended at the very minimum?
So I don't have expectation in terms of the fiscal policy side, but I will say, you know, that would obviously have an impact in terms of you know, the rates market, and that's where a lot of people.
Are focusing on.
But the big driver you know in the rates market obviously is the Fed and monetary policy, and that is still front and center for a lot of investors. So we'll see as we get closer to the election, obviously the outcome of the election, what happens to those you know, Trump tax cuts. But so far it's still very much focused on inflation and said in potential great cuts.
So let's put about one things just briefly, the spike in volatility and April. You've explored this, was it a one off? How do you guide sort of that conversation at the moment.
Yeah, sure so. Insomuch as the April sell off was driven by rates, I think it's important to recognize that the balance of risus shifted and when we talk about rates, right, we've been talking about rates higher for longer, for a very long time, but now the focus is really on the longer part of that, right, how much longer, which, when you think about it, is actually volt dampening because it's talking about rates remaining unchanged for longer versus before
when we were talking about rates for higher for longer, the focus was very much on higher, how much higher, how much higher inflation can go? The right tail when it comes to the rates distribution was much more significant. So to me, what stood down in April is that even though we did get a sell off in the market,
volatility was actually really muted. In the rates market. If you look at TLT imply volatility for example, it double last October during the rates sell off, but this time around it actually went up very very modestly and now actually currently back down to a one year low. So the more conteined reaction that we're seeing in the bond market I think has spilled over to the equities. And that's why you know vixus again back to thirteen handle.
Interesting Mandy, you what are the best of this and we always enjoy catching up with your Thanks for being with us. Thank you, Mandy zoo there of CVO. 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.