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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.
Joining us now around the table, Oksana Aronoff of JP Morgan Asset Management, Oxana, thank you so much for joining us. You just heard from Katy. They're talking about the markets pricing in this Trump trade. When you look at the rise in yields, is that economics or do you think it's politics?
So I want to start answering that question actually by zooming out a little bit, because we spend a lot of time in markets trying to predict rates. Obviously that's a backbone on the market, whether you're talking about bonds or stocks. But the reality is that when we look at the history of how good is the market consensus provided by will work at predicting where the ten year will be, It's actually pretty terrible. How good is the
FED at predicting where the FED funds will be? It's actually pretty terrible because if you look at their dot plot in an extreme example, in twenty twenty, they expected the FED funds to stay at zero through most of twenty twenty three. So with these things in mind, and by the way, even when you know what the Fed is going to do, and they do it like cut fifty base points earlier this year, which seemed kind of unnecessary given the strength of the economy, but they did it.
What has happened to the long end of the curve? Against the calls of extending duration, the end of the the longer end of the curve moved up with seventy basis points. So all of this to say that I think everyone needs to have a little bit of humility and really focus on the economy and the data. And Powell himself said last week that look, we're not going to prejudge anything. We're going to be really looking at
the data. And I think that a lot of what's in the mix right now with the new administration coming in is potentially short term at least looks quite inflationary, and that means, you know, possibly higher longer term rates, which of course are also looking at the state of our balance sheet. And that process started way before the election. We'd been saying that. Look, look, regardless of who occupies the White House in January, there is really no focus
on fiscal spending. I mean, everyone wants the accountability in theory, but everyone wants.
To spend on the one percent on the ten yure.
So if you look at what the market is currently pricing in for the Fed Funds rate, we have about a three percent rate by the end of next year. Historically, the spread between Fed funds and the ten year Treasury is around one hundred and seventy five basis points. So
you do the math. So even if markets expectations come true and we have a two point nine three percent Fed Funds this time next year, is a five ten year more likely or a four percent ten year more likely or a three percent tenure right, So if you believe in a positively sloping curve, that tenure is going to be likely higher as opposed to lower. Not to mention all of the longer term issues, that are inflationary that we can talk about, but that's just the math. Now,
what will actually happen. Your guess is as good as mine again, and that's why we do not pin the fortune of our process on the directionality rates. And maybe that's why we've actually outperformed strategies that track indicase in fixed income by fourteen to sixteen percent over these last very volatile three years in fixed income, which is a lifetime of return I'm fixed income frankly.
Well to that point before we've gotten the fifty basis points of cuts and yields move higher. So many people have talked about the reinvestment risk in this market that you need to be going into bonds because yields will come lower. What psychological impact has it had for investors for that not to play out? And how real still at that moment is this reinvestment risk if there is some potential for yields to go higher from here.
So right now, as we look out and it seems that a higher for longer environment is more likely, and the FED is going to be looked looking at the data and to the extent that that data continues to be strong, and we possibly see even an uptick in inflation, they may stop cutting or even take some of those cuts back. So we definitely believe there's nothing wrong with cutting or not cutting, clipping that coupon at the front end of the curve, and that's been the right tread.
And so we like things like high quality corporate floaters. They still give you a yield above traditional kind of front end money market type yields and incredibly high quality to levels at kind of what's happening in the lower credit market, because that same thinking has pushed people out into lower rated, you know, junk created parts of the market. You have high healed spreads today sitting at two hundred and eighty five base points over treasuries. It is extremely
rare to see a spread inside of two seventy. This is incredibly tight. And the last time we saw spreads in these levels at these levels were just before the JFC and just before kind of the bubble burst in the late nineties early two thousands. Not to say that we're heading there, but to say that, look, these valuations are definitely pushing against historic yeah, ig.
Even more so. Seventy four ish, I think is to spread at the moment tightest level since nineteen ninety eight. John likes to ask this question. He's not here, so I'll do it for him. Are we heading into an environment where you could see yields on credit on IG below that of treasuries?
So again, we've we've seen a lot of unprecedented things unfold here. I would point out that the yield on double b's, which is the higher tier of high yield, versus the yield on three month treasuries right now within hair's kind of distance of each other. So why would you buy that junk rated right with a six handle on it on it or a high five handle on it where you can get basically that risk free in three months to emails?
Right?
So, and if there should be a revaluation tomorrow, which we think is very likely because to your point, IG is quite tight and about half of it is triple be rated. So you have this enormous cloud hanging over the high yield market, and you've got names like following like paramount Right. I don't really have an opinion of them, but you are reading headlines around their credit quality. Are they going to drop into the highield index that has very serious ramifications for valuations?
There?
So at the end of the day, investors always have to ask themselves a question of what is priced in? And do I want to just let an index drag me through the experience of this repricing, whether it's caused by just higher for longer, whether it's caused by a slowing of the account, whatever it is, or do you want to have an active management approach that can actually
take advantage of these different valuations. To your point about investment grade, one of the cheapest trades out there right now is buying protection on credit via selling it on investment grade cheap forty to fifty base points all time, kind of low cost, and we're taking advantage of that. But that's not the sort of thing you'll see in a market risk driven strategy.
You say that credit is expensive and there are a number of risks out there. I look at the Bloomberg Corporate bond oas it's the lowest seventy four basis points.
It is the lowest in a century. What is the biggest risk If we're sitting around this desk every day talking about US exceptional and the fund flows that will come in here, the FDI that will come in here, the migration, not just migration to the dollar, but the sheer flowed the dollar has been immense, So what is it the challenges credit?
Then, So it's interesting you mentioned flow to the dollars. So if you look at assets coming into the US ten, twelve, fifteen years ago, we're overwhelmingly going into treasuries and credit. Yes, today they're overwhelmingly going into equities. So there is incrementally less dollars going into the dollar or less money going into the dollar on the credit side. And when I talk about and when you talk about you know, pricing being very tight, spreads being very tight, it doesn't mean
we are expecting a recesion. The economy appears to be strong. But the problem is when something is priced for perfection, it takes anything other than perfection to move that price. And lower rate of credit is notoriously volatile, right, So just this higher for longer environment. If it doesn't materialize that the FED gets us to you know, high twos and we have to live here longer, that's a problem for cash strap junk rated companies.
Give us your opinion. Steve Shoodo was with Danny and I last week and we were talking about, oh, it'll be the bond vigilantes that will restrain the fiscal largeess of Washington. They will retire it will be nineteen ninety five and stay sort of linked onto the desting one. There aren't very many bond vigilantes left, So contextualize us for us. Do you believe that you know he talks about a migration to other markets with Danny and myself. Do you think bob vigilantes can be reborn? Are?
There?
Are? There so few of them?
So again, I like to stick to the facts and the data, and we know that where does the demand for treasuries come from? Overwhelmingly it comes from the FED, comes from US commercial banks, and it comes from foreign investors. The feedest kittyeing. US commercial banks can I get rid of their treasury holding fast enough. And foreign investors are dominated by China, China and Japan, and China, of course
we know the issues around their relationship there. There are not enough stores of value in the world, so China has continued to buy our treasuries, but at a smaller, lesser pace. So the major sources of demand for treasuries are not what they used to be, and therefore we're seeing some weaker auctions and so I can't speak to the bond vigilantes, but we are certainly seeing some underpinnings
that are in the process of change. And these things always happen slowly and then suddenly, and so that's been part of the reason why we've seen the long end of the curve migrate higher, along with better growth prospects, perhaps a return of inflation. You know, on balance, probably not back to nine percent, but somewhat of a return
to of inflation. All these things that are going to be are not going to allow the tenure to move significantly lower in the absence of some exist adrena's shock that comes out of nowhere that we cannot see obviously, but that's why we have high quality allocations and portfolios.
Ox on Off Jonathan was here. He'd called a clinic and a He's disappointed he missed this. Thank you so much for your time this Weeking Oksana aaronof Air of JP Morgan Asset Management. Neil Rigison of ADP joins us. Now she's looking forward to all of us and maybe also playing a little bit scenario analysis when it comes to twenty twenty five. Let's just start the week off.
What are you looking most forward to you know, I'm looking at CPI because it's going to be so important for how the Fed conducts itself over the remainder of twenty twenty four. But I think the sleeper of the week is initial jobless claims. Here's why we saw a really negative private sector print from the BOS for October. So we should see some indication in this high frequency
data that companies are laying off. We haven't yet. It's still super low, and that's an indication that the BLS number may be revised higher, or that the labor market looks a bit stronger than that last report would suggest.
It's a really good point. It was the government sector that added to jobs last time around, so in this scenario where you don't see that coming through. Can we also go back to this thing of okay, the last month's data, it was all weird. It was hurricanes, it was strikes. We basically have to discount it all.
I think there are some threads that we can hang our hats on. This very low initial job will claims number that's high frequency is one of them. We're seeing strengthen the labor market at ADP. There was hiring in the Jolts Report also coming out of BLS, so there are some hangars we can use, but definitely we want to look towards the future to see if there's evidence
of weakness. And then coming back to that CPI print super important looking at services and the role that labor market will play in pushing up or restraining service sector inflation going forward, that's going to be very important.
Well, in the spirit of looking for it's a twenty twenty five where the outlook is just so uncertain. We don't have any great economic models for what adding seven and three quarters of into the US deficit will mean. Does the FED need to start talking about scenarios? Do they need to start laying out different futures that they might face, or should they continue with the line we need to wait and see.
I think the FED is always looking at scenario so I don't think this is a net new policy. I mean, they have four hundred economists. They have to do something with their time.
So I think.
CINEO analysis is the Salthius Joe.
At Washington common inflicted coit if you.
Go, scenario analysis is bill it hardcore into their policy framework. What I think it's going to be very important for a data dependent FED is to have a consistent framework, and that's the task of the next few months is to reevaluate that time framework. It's time. The last time they revisited it was in twenty twenty. It was a different inflation picture than now. They have to kind of rejigger that framework to fit the scenario that they're in
right now. This idea that inflation may bounce back, it might be a little bumpy, and that trajectory is very different than too low inflation what we had going into the pandemic.
The narrative iron tires. We will know incrementally. You know whether it's twenty percent, thirty percent, and that could be on your it could be on your allies, not your enemies, on your enemies or perceived enemies. It's China sixty percent currently, it's two percent on the trade weighted assets that are
imported into the United States of America. That is going to go potentially to twenty percent of the imports into the United States of America extrapolated not for me in terms of potential inflation, but most of the drag on growth.
Right, So the US is benefited in this soft landing outlook that looks like we're still on that trajectory from a very steady global picture. The IMF has called global the global economy underwhelming but steady, so it's not been a headwind. It has hasn't been a tailwind. Tariffs could change that event, whether global growth becomes that a tailwind or a headwind in the short term versus the medium term, versus the long term. Those are all scenarios that have
to be penciled in. But it's really important that people remember that the administration during the first Trump term had a product out out out out of list, a product exclusion list. Yes, it wasn't a car across a board tariffs. The carve outs matter and they'll continue to matter as we go to these bigger, more macro tariff policy implementations. What's on that list? And until we know what the product exclusion list looks like, we can't really handicap what's going to happen with the economy.
I saw some pretty good articles over the weekend talking about Canada and obviously the amount of energy that's imported from Canada, you know, and again that would be one of your closestylists. It's certainly one of your closest trading partners. As you look at the fiscal kind of narrative, and this was one of the big stories and one of the big things that we wrote about going into the election.
On the Harrison is going to be just under four trillion dollars under Donald Trump if everybody gets a tax cut, literally you get a tax cut, you get a tax cut, you get a tax cut. I can't remember where that came from. I think it's right, Maya McGinnis on yourself, but on a signing more serious note, that is a definicit of seven point seventy five trillion dollars. We're not going to get everything that he promised, are we Again
you talk about the car btes. But it's also good about what he's going to have to walk back from a tax perspective.
Now, what's said on the campaign trail and was actually done in DC. As someone who spent almost twenty years in DC and several of those years as a government economist, like trying to translate that policy into legislation into law, they're very different things. The sausage making is real. Democracy is hard, and putting it all together means that what you say and what actually is done. Is very different that being said.
You know, when you.
Look at the big picture, whoever, you know, the path forward is with a very stable US economy. But the big dragon, the big it's not even an elephant anymore. The big dragon in the room is the fiscal deficit. No one talked about that on the king page Tree. It was not issue. Nobody wants to talk about it because it's such a big dragon to slay. And so that's a problem not just in the United States. It's
a problem throughout the world. And it is a problem that could reignite inflation by crowding out investment and crowding out the ease of capital allocation to other parts.
Of the world, which leads to a blow.
A capacity productivity, which lowers grows. So it is an issue.
Paying off your debts doesn't win elections. Could we potentially though it win's economy. There is attention there. Could we maybe be on the downward trajectory of this idea then of US exceptionalism.
I don't think we're there. I think there is plenty in the US that keeps the strong growth narrative alive, but we can't take it for granted. Productivity is lower now than it was going into the pandemic. That's worker productivity, and the way this country grows, the way it's always grown, is when there are more workers and those workers become more productive. And we know that there's plenty of technology out there that could make the US worker more productive.
The question is will it get translated through the capital markets into the companies, especially the small and medium enterprises that need to see that productivity enhancement with their workforce. That's a big open question. And also the interest rates we have to pay to move that capital is a big open question, and fiscal debt could affect those rates.
The real sausage making Washington and the financial markets. Neila Ridgison of ADP and also Bloomberg contributor, thank you so much for joining us this morning. Plenty of data and fedspee gundeck this week, including remarks from FED Chair j Powell on Thursday, just one week after the FMC cut rates by another twenty five basis points, former Obama economic advisor Jason Furman writing, this monetary policy is going from
very contractortory to reasonably contractionary. This makes sense given that inflation risks are much lower than before, but we are still higher than recession risks. I expect another cut in December, but core PCE inflation is likely to rise, making a continued process of cuts at every meeting difficult. Jason Furman of the Harvard Kennedy School joins us. Now, Jason, thank
you so much for your time. I know you're looking at potentially this cut in December, but give us some clues on what the heck twenty twenty five is going to look like when policy can be vastly different that this Fed needs to recalibrate for.
Yeah, first, separate from anything related to policy changes coming from Donald Trump. We're probably going to end the year with a core PCEE inflation, right, is something like two point eight percent. That's usually your best bet for what inflation is going to be going forward. Then you add to that some fiscal expansion, some tariffs. We don't know the magnitudes of those, but they both push in the
same direction. You're adding even more to inflationary pressures. I think that's going to make it hard for the FED to continue its process of rate cuts at anything like in every meeting pace next year, maybe every other meeting at best, with an exception, if the economy starts to weaken, they'll be there. But absent that we have strong growth, we have high inflation. Hard to keep.
Cutting, hang on, Jason, So save for their cutting bias, should they even be cutting in December? Does that even make sense with the environment that you just laid out.
Yeah, you know, interest rates will still be contractionary after one more cut. In some sense, the way the Fed operates is they always wait longer so until they're really sure, and then they start a continuous process of change. And that's where they are now. I think it would be too shocking to the system to pull that one back. Would almost also look a little bit political. But yeah, after December, they need to take a hard look at
the data. And I don't think it's going to say, you know, keep cutting.
If we can go to that environment where you have higher yields and a stronger dollar because of whatever the Trump policies are. But because they're not cutting every single meeting, that means you globally have tighter financial conditions and maybe force rate cuts elsewhere, which again feeds this feedback loop of stronger dollar, higher yields in the US. Jason, what is the likelihood of that type of global environment where you do get this sort of doom loop with rate differentials.
Look, in some ways, a weaker currency is useful to a lot of countries around the world which are struggling with demand. The higher dollar and a CeNSE is shifting demand, you know, from the United States to those countries. So in some ways that's going to help with the global equalization. But Europe is in just a very different places than US right now. They have really weak growth. We have really strong growth. That means monetary policy should be different in those two economies.
Jason, good morning. You wrote in the Journal in September time that Trump often listened to sensible advisors and walked away from some terrible economic policies as a president. What do you think he will walk away from memories and making this point that he's watching the batting markets, He's on Twitter and social he's watching everything. What's the worst policy that he will walk away from from the campaign trail?
My guess is that, well, first of all, interfering heavily with the federal Reserve, I think he'll walk away from that. The market would punish that very severely. Second, I hope he walks away from across the board tariffs on every country in the world. The you know, on the one hand, he does have a deep seated belief in that. On the other that would just be really destructive to the US economy. And where I don't think market will put
much pressure though, is on fiscal expansion. Do I think he could do you know, the eight trillion dollars he proposed on the campaign. Probably not. Do I think he could add five trillion dollars to the deficit without tanking the market? Absolutely? Yes, And so it's that fiscal expansion that I think is the most likely to make it through the screen.
I'm curious what you define as tanking the market. My inbox is littered with five percent. It's like a number that keeps ringing up on a cash register at the moment on the bond yields. So so just told me through that.
Yeah, look, we get to five percent on the ten year I think that will get attention probably from the President and if not from you know, four Republicans and the at least four Republicans in the Senate. That's what our fiscal conversation to date. You know, we had too much deficit increase over the last four years. Harris was proposing too little deficit increase. Both are a part of this, but part of why they have is that interest rates have allowed it and the bond markets have allowed it.
You know, let's see if the bond market vigilantes come back when they start hearing about these multi trillion dollar deficit increases.
Well, Larry Summers was saying that maybe it's going to be up to the bond market to educate lawmakers in Washington, d C. Do you think that's what forces Washington to coalesce around actually being a little bit more disciplined when it comes to the US trajectory the fiscal health.
Yeah, I think that's pretty much the main thing that could get people's attention. I would have thought that the Social Security and Medicare trust funds being exhausted within a decade would get people's attention. I would have thought, you know, nearly two trillion dollar deficit at a time when the economy is really quite good would get people's attention. But those haven't. So yeah, I think we need the market at this point.
So that's basically a Liz Trust moment. Is there were a timeline Jason that you think this could happen. I mean with a publican trifecta nearly once we get the results of the House, do you think it can happen in twenty twenty five.
It can always happen, but it could always not happen. And I realized that's super unhelpful. But it's not like there's some mathematical link between here's the quantity of deficit and debt and here's some discontinuous change in interest rates. Markets are trying to assess not just where the deficit and debt are, but where they feel policymakers could go
or would go with it with future actions. I think with Liz Trust it was the sense that she was just completely recklessly ignoring any sense of discipline around this that then interacted with a set of quirks around insurance companies, regulation and the like. Things like that are hard to spot in advance, but yeah, that's what I would be worried about if someone picked the unlikely event that someone picked me to be Donald Trump's Treasury secretary.
I'd hate to say that too, but it's a very unlikely event. But former Obama economic advisor Jason Furman, thank you so, MU much for joining us in your time this Monday morning.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and, as always on the Bloomberg Terminal and the Bloomberg Business opp