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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bramwitz 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 to
discuss is Mohammad al Arian of Queen's College, Cambridge. Mohammed, welcome to the program, Sir. I'm going to start yesterday. I'm going to go back to yesterday morning, a thirty easton time CPI drops. We were looking for you and you weren't here. You're with us. Now, what's your response to that day? To Muhammad? Because at the moment, the market is slowly gravitating to paying more attention to levels.
The federal Reserve at the moment seems to be more i would say, gripped by the current trend down in curry by it. What are you focused on.
So, John, sorry, I wasn't with you yesterday. I was on the road.
What I'm focused on is actually summarized really well by John Authors of Bloomberg Opinion. I'm a big fan of his daily Note, and today is a very thoughtful note, and he basically leaves you with three messages.
One is the fall in inflation is stalling.
Two, if you look at the components, they suggest that it will continue to stall.
And three is that if you.
Look at the work that's being done in the different groups of economists within the FED, they also confirm that we've got a three percent inflation weight. Now, as you know, I think the equilibrium inflation weight for these countries between two and a half and three. If you continue to target two percent, then you're going to have some really difficult choices, and I think that is what's facing the FED right now.
Do you think they're also slightly realizing Muhammad without in mind that they're not actually as restrictive as they think, And are you seeing evidence of that start to creep into some of the speeches you're hearing from FED officials.
Yeah, I think that backing away from the view that they expressed in their last meeting, and I think that what we're getting is, you know what, maybe I can live with two percent plus for a while, because otherwise they are.
In a really difficult situation.
Look, the market was relieved because the market didn't look at the fact that core inflation is stuck at point three monthly for the third straight months. The market was worried that the numbers would be higher than the consensus forecasts, and that didn't happen.
In the components though the BLS reported that over half of the inflation we saw, Mohammad came from shelter prices raising Claudia Sam said, we don't have an inflation problem. Now, we have a housing problem. And that's been true for over a year. We've seen the FED cut rates and mortgages move higher. Muhammad, How do you solve an inflation problem if it's underpinned by a fickle housing market.
So I don't think that's the only issue, Danny, but it's an important issue.
And again I'll point you to john Author's note.
You can tell I really like it because you've got such a good detailed work. We love Johnson where he looks at trim the measures, where he looks at all that. The problem is services, and within services is wages.
It's a good thing for the average American that real wages are growing by more than one percent. Now, that's a good thing. But it's feeding into services and that's the big issue. And it's happening at the time when grocery inflation has come down a lot, where there are negative price increases for certain food items. And the concern is that services aren't going to come down fast enough inflation wise, before good services goods inflation starts.
Going up, Mohammed, If we're going to be an environment where aid potentially is the priority of this White House, tariffs are put on and American companies are broad or forced to come back and they're forced to pay American workers, is this problem not going to get a whole lot worse.
So I'm in the UK here, Danny, where everybody the companies have found it totally normal to say the minute might cost go up, I'm going to pass it on. And you hear that over and over again from companies in reaction to the budget. So there is this mentality right now in the corporate world that forget about your profits, forget about all the dividends and all the share buybacks you do. If your costs go up, then you should pass it on to the consumers.
So there is that risk.
But I want to stress that it's really hard to model what the president elects economic promises. First you have to decide how many are going to be implemented, and then you have to decide the two counter forces. Yes, arosty inflationary, Yes, higher budget deficit will tend to put pressure. But on the other side you have a major deregulation and on the other side you have a major promise
to act on the expenditure side of the budget. So when you look at these two things, the first even when you try to net it out, it is not clear. And then the second round effects get really complicated. And I tell people, regardless of what happens, we now have an inflation that's not going to go to two percent. Now, before you jump immediately to what's going to happen next, understand that you got to wait because it's really complicated economics sorting all this out.
Muhammad, you have a new piece out today and you say, once again it was the economy stupid, im project syndicate, And I think, and you can tell us here. Are you trying to answer a question that our own colleague, Craig Tours asked J. Powell in the press conference, which was, did you learn anything about Americans think about the economy from the election results?
Yeah?
And Marie, it's fascinating because there were two economic messages sent and they're both correct.
There was the.
One that the Republicans pounced on, repeating the nineteen eighty Reagan question are you better off? And they were talking about the price level and people really still have sticker shock when they go to the grocery store, so that is what the average person focused on.
Well, you asked a question as well in your piece, will the Democrats and establishment in quotes you put experts get the message?
Will they?
Well, they haven't so far because they're focused on the economic exceptionalism, which is also true, but in a ca shaped economy that doesn't trickle down as much as you'd like it to. So the Democrats stuck with the economic exceptionalism. They didn't understand that that message wasn't getting through for good reason, because people were concerned about the price level. And you know, and Marie that the more you tell
some a message that doesn't speak to their reality. The more they questioned you, the more they lose trust in you. And the economists did a terrible job. The mainstream economists did a terrible job of trying to reconcile the two views, which are moreconcilable. But unfortunately the reality is that people will continue to focus on the prist level because it
has been such a large shock. We're not used to seeing inflation at nine percent, which is where it was in June twenty twenty two, and that impact hasn't gone away.
Mohammed, What did your thoughts on the price action? Let's talk about that. A little bit ahead of the election, you were looking at what was happening in the bond market, in the high yields, and this line came up in your Bloomberg opinion column. Well, most analysts agree on the list of potential contributors to this unusual development. FET's cutting interest rates, yields a rising there is little consensus on
their relative importance. You went on to say that over the next week we should get some clarity on that. Do you have clarity now on what is driving long rates?
I have more clarity on what's driving long rates, and it's exactly what you have been talking about the market is front running economic announcements, including who's.
Going to be in Treasury and that's going to be really important. And I agree with and earlier today saying that that really matters.
You see that the economy has continued to surprise on the upside and that has an impact. Meanwhile in Europe, and I'm glad you've been focusing on the effects situation. Things have gone in the opposite direction, John. The yield differential between tenure treasuries and tenure German government bonds, the boons are back over two hundred basis points. That's been a massive move, and it just the market has understood that divergence is a major story going forward.
Now, Hammd, how much more divergent things possibly get? We've already seen aggressive widening over the past week. I was mentioning in a conversation earlier this morning at the front end, if you compare the German two year to the US two year only back in September that was treading around one thirty now is something like two twenty, so almost the one hundred basis point move on that spread. Mhammed, how much wider can things get?
I think they can get wider, John, I think you know, if you look at the good, the bad, and the ugly of the global economy, Unfortunately Europe is in the ugly. Cyclically that challenged, secularly that challenged.
There is no.
Definitive political leadership in the two countries where you need it most, Germany and France. There's a roadmap the DRUGA report, but they're nowhere near even talking about implementation, let alone implementation. And these dynamics today mean that if you're lagging, you are likely to lag even more so, John, it wouldn't surprise me if you see that differential go higher.
It wouldn't surprise me if you see the year orgo weaker.
So that makes it easier, relatively speaking, to call the ECP for twenty twenty five, they're going to cut interest rates, Muhammad. There is overwhelming consensus the FED reduces rates again in December. I would love your base case for twenty twenty five.
Before we get to the end of the year. You're thinking about how much work this FED can actually do and whether you think ultimately just in terms of how the communication has evolved over the past few days, we're setting ourselves out for a pause into twenty five.
So first I agree with you that we are likely to see another twenty five basis points cut in December, and we should see another basis point twenty five basis.
Point cut longer term.
You know the range if you look at the dots of what where is the terminal weight where from about three and a half to just over sorry, from two and a quarter to just over three and three quarters, And I've argued it's towards the upper end.
I suspect that that now is about four percent. That is the terminal weight for where we're going. So we will have a couple more cuts, and then it gets really.
Hard to cut more unless you're willing to have the difficult discussions. And this is this is not a FED that's willing to have a difficult discussion. This is a FED that will continue to stand behind this notion of data dependency. And this is a fact that may be built out on inflation by what's happening away from it, and build out in the wrong way, meaning that inflation doesn't go to two percent, and they'll just say it's not our fault.
Muhamma, and I had taught you all day, we all could what do you mean by the difficult discussion. What is the discussion that you'd like the Federal Reserved to have as soon as today? What would you like to hear from Chairman Pow at three pm Eastern time that you're not expecting to hear.
So I'm definitely not expecting to hear the question. Is two percent still the right inflation target? He's not going to touch this? Hopefully behind closed door they are, because even if you don't want to change your inflation target and they won't change the inflation target.
The path to that really matters.
So I'm hoping that they're having a discussion what is the white neutral weight in this economy right now?
What is the white inflation target?
That discussion, if you had it without the historical context and without the legacy of having missed so badly on your inflation target since twenty twenty one, would be it's more between two and a half and three and that's probably the range it should be. But that's not a discussion that he will ever have publicly, not.
This fat Mohammed. It's good to hear from you, sir. I appreciate your time. Mohammed al Erindav of Queen's College Cambridge. Thank you, sir, President ELK. Donald Trump's priorities coming into sharper focus. Rob Casey of Signum Global Advisors saying, we believe President elect Trump and trade advisor Robert Leiheiser are committed to implementing an aggressive terariff agenda, likely beginning with Europe and ending with China. Rob joins us Now for more Rob, Good morning John.
The sequence.
It's a big focus for financial market participants worldwide. You think that it's going to start with trade and it will start with Europe.
Why, yeah, Well, first and foremost, it's not to say that we don't think that they're not going to wait on China for very long, but we do think that Europe is the day one priority mostly, you know, speaking very bluntly because we don't think Trump likes you up a whole lot. And you know, essentially we're dealing with a what is not a net neutral landscape but a
net negative landscape. Seabam, deforestation, steel, airbus. They are all of these trip wires that you know, the pro EU presidency of Joe Biden was not able to deal with, was not able to handle. We think Trump comes into office essentially with all those tripwires laid out, not really looking to avoid them.
Ron Desandis the governor of Florida is in Italy right now on a trade mission. Who do you think Trump views as someone he could work with in Europe?
Well, I think it's it's Orbon first, and then when Trump realized that Auburn actually doesn't have a whole lot of power in the EU, it will be Maloney second.
So when it comes to the tariffs, and if you think they're going to be enacted, first, personnel's policy, as you know in Washington, d C. Where does he put Lightheiser?
We think Lightheyser could be at USTR.
He could go back to us.
You are, but you know, if I'm Robert Leitheiser, honestly, I'm looking for a slightly larger portfolio, a little bit of a you know, a bigger role, and that could be.
A commerce that's terriffs, let's tell it taxes. Let's talk about what can actually get through Congress, and you'll view and what took place in the Senate in the last twenty four hours. How constrained will this presidency be by a Senate that for some people stand down the President elect and made its own decision a backg a different way.
Yeah, well, I think we can all be sort of relieved and happy that it's going to be John Thune, who is to his core an institutionalist, so to the extent that it's not Rick Scott. John Thune presents a little bit more of a constraint, but I mean he's got fifty three votes in the Senate, so I don't think it's going to be a huge constraint moving forward.
But tendor Thoon has said he will not get rid of the filibuster. So basically the only thing that can the Senate can do with that kind of majority at fifty three is tax and budget correct, Yeah, totally.
We think it'll be a very big budget reconciliation package. You know, they're talking about getting it done in the first one hundred days of the term. I think that will be exceedingly difficult. We also have to realize, frankly, that we're running up to a budget cliff in December as well, so they're going to have to pass a cr in the short.
Term with the current Congress.
If they pass it out to January February, they're going to have to deal with that first. A larger reconciliation package after that. But there's now talk about extending the CR to September October November to give them kind of that first one hundred days latitude to get the budget or conciliation deal done.
So with soon at the helm, What do you make of how the confirmation hearings are going to go.
I think we can safely say, or at least I will predict that mat Gates does not get confirmed as Attorney General, so he may wind up being sort of the sacrificial lamb of the cabinet picks. I think everybody else probably gets through. Again, Trump can lose one or two Republicans in any confirmation vote and still still passes nominees. So you know, Hagseth probably going to be a longer, more difficult process. Just give them that he's not really
on the books of regarding policy at all. I think mac Gates is probably the one who's struck down, and everybody else probably.
Gets through Seth.
Gates, though, showed us that Trump is willing to nominate people who hadn't been on anyone's list. I don't think anyone expected either of them to be put up for these jobs.
Does that show us.
That maybe we're too sanguine that when it comes to Treasury secretary will get kind of a classic pick, a market friendly.
Pick on Treasury.
I mean, I think it's going to be Best in Our or Lutnik. Frankly so to the extent that that sort of hams us in. I think that's good news. But we have to be honest and saying that Trump received a whether or not it was landslide I think is up for debate, but a national mandate, right, and he's going to put people into these jobs that a he likes and B we're very loyal to him, and he's not really going to apologize for it. He doesn't have to apologize for it. He won the national popular vote.
He's got to send up majority. And so do I think we could get more surprises from here, or at least really more trump accolytes from here. Whether or not that's a surprise, yeah, I think we could.
But does soons.
Lifting up as leader or not show us that there is some resistance to some of Trump's ideas and who he wants.
There's some I would say there is some resistance, or at least it's clear that the Senate isn't going to just roll over for Trump every single time, right, And I think John Thune will be He'll be a very good majority leader. He'll be a strong majority leader. And to the extent that he wants or has to stand up to Trump, I think he will be able to.
That.
Being said, though, on policy right on tax policy, on tariffs, et cetera, I think most of the Republican majorities in Congress are in line with Trump. So Tune is not going to stand up on policy. He may stand up on some of these personnel decisions.
When Trump went to the House the other day, when he also had the meeting with Biden, he brought Musk alongside him. I just wonder what the presence of Musk, who has become this huge donor for the Republican class, does to affect sentiment in Capitol Hill. Is there almost an element where they need to follow the money and that Musk represents a greater threat to them and maybe even funding challengers to those who don't support Trump.
Yeah.
Well, I think one of the biggest stories over the next two years may wind up being Trump and Musk falling out, just because two very talented political individuals, two very big egos in the same room together. That that only works for so long, right, So, I mean it's jams as though Musk is attached to Donald Trump's hip at this point, you know he's running this government if he has this government efficiency mandate.
Now, we'll see how that goes.
Do Republicans want to keep him on side at least until the midterms? Definitely? Will Trump be able to We'll keep him on side and keep it friendly. I honestly think it's easier said than them.
Do you think Democrats could have avoided this if they'd shown as much love to Elon Musk as they had shown to Mary Barrat of GM, Could this school have been avoided?
I mean yes, But I also think that in terms of Trump's not cabinet but kind of broader universe, it was there for the taking from Musk, it was there for the purchasing, and to the extent that Democrats were nice or not to Trump to Musk, I think less important because Trump was able to give Musk really what he wanted it and that.
Is power Trump.
John brought up the Democrats yesterday. There was a report that the reason why Kama Harris didn't said down with Joe Rogan and tap his fifteen million subscribers is because they were worried about the progressive pushback. How does the Democratic Party pick up the pieces.
Well, there's going to have to be a reckoning for sure. Obviously, in this global landscape, it's hard for any incumbent administration to get re elected.
Right.
We haven't seen that happen across the board this year, So I certainly think Kamala Harris was running from behind almost from the get go. That being said, Democrats have sort of installed this message that is incredibly left on social issues and actually pretty moderate on economic issues. And frankly,
I think most voters want the opposite right. They want a populist economic policy, they want an economic policy that's going to lift up manufacturing, lift up the working class, and they want to hear less and less about some of these social issues.
And so I think.
Democrats essentially have to have to inverse the messages.
The midterms are in two years.
How do they prepare for that?
In these two years? I think it's going to be very hard to turn the party around one hundred and eighty degrees right. It's hard to steer a really, really, really big vote with a really, really really big bureaucracy. That being said, I think for the next two years, essentially they are going to to tit for tat against Trump. They're going to be able to run against Trump in the midterms. Most of the time, an incumbent party does not do very well in the mid terms, as you
all know. I think for Democrats, the bigger issue, the bigger challenge is just what is the proactive, sort of positive message for their Democratic nominee.
And it's going to be a major fight.
We're going to see ten to twenty folks in that nominee race, and so the question is what is the message from the primary that emerges.
It's four years from now. We just started.
We just stopped talking about this this week. I's going to watch you.
If you've got a name to watch, Have you got a name in mind?
I think Pritzker from Illinois is sort of my dark horse candidate. Not not a DC figure, but he can be, you know, democrats billionaire in relation to Trump. He's tough talking, he's come out post twenty twenty four, you know, strongly in favor of many Democratic messages and strongly posted to Trump. And I think it's a strong figure that's going to have to be at the top of the ticket for Democrats to compete in twenty twenty eight.
I appreciate it.
It's good to say six thank you. Roke their signal Brian weistin' wealk and standing with us around a table. Brian, welcome to the program. If we get a cut in December, is that the last one?
It's the last one for a while. It could be the last one.
I think they take the first quarter off at least, you know, the first two meetings. There's a lot of things that they have to sort through. I think this one hundred we had god here was automatic.
Right.
We can all talk about the data and every data point reacting to it, but we didn't react to it. The data was stronger and we used one hundred basis plot was the reaction was five point fifty was probably too high.
Four point fifty sounds more normal? Is it?
We'll find out. So I think that's where we are. But I think it's time to watch and let the policy take effect and see what happened.
What concerns you is it the current level of things that you look in less of the trend and more about the levels and getting concern that maybe we get stuck around these kind of levels.
I think we get stuck for a little bit.
And listen, our investors speaking with their wallets are buying fixing right. We see it everywhere. The money's coming in, you're getting a decent coupon. It should be a head for equities. It hasn't been a great although now at the back of the hives and yield the correlations breaking down a bit right, Equities are doing okay. So my instinct tells me the trade for next year is that we're going to seek out the higher end of this range. So you know, call it, you know, four percent to
five and a half maybe for next year. I don't think we get there quickly. If we do, it's a problem, it'll hurt risk. But if we get there kind of hang out of four and a half start to move higher, I think the market will be okay as long as it's a growth story. We have all the dead stories of inflation. But I think at the end of the day, the growth story is actually the important one.
In the meantime, Blan, can you touch duration at all? There are just so many unknowns for twenty twenty five and it's playing out on the long.
End of the curve.
Yeah, listen, when I look at the yeld curve, I say history is a great guide, right, two's tens In a normal cycle, she get to one hundred and fifty two hundred basis points tens bonds. Let's forget the deficit for a second, just normal times, she get eighty to one hundred basis points. I look at the ield curve and go, wow, if twos are going to be stuck in more and a half and you make a big gulp, right, if you had two hundred, you get some big numbers there, right,
If that's where we're going. So yeah, I think duration has a place no portfolio. It always does. And I could be wrong and fields could follw hundred basis points. So I don't hate it as yields go up, but again, I don't see a reason to rush into it if you believe we're going to go back to normal looking yield curves, and you don't think fed fund is going to go back to three, right, So there's a lot of variables around it.
That's how I look at it.
But that's still not kind of the most comforting for as you say, something that's usually behn usually something that's uncorrelated with equities.
What becomes down.
The portable I think on the on the front end of the eield curve, you still get you can get good income without the duration. We've seen big flows into floating rate alone, short duration municipals, income funds and fixed income that have less.
Duration and more coupon.
So I think you can get coupon without taking max duration risk is how I would look at it. And again that's what investors have been buying.
I was saying, you were coming on the program about an hour ago, and I teed up the credit conversation. So let's do it. The spread right now for investment great credit. It's like this big seventy six basis points. It's as tight as it ever has been for the whole of this century. I want to understand from you why you think it can get a whole lot tighter from here.
I think it gets tighter from here. I think there are two major reasons. One is the buying dynamic, right, so listen, if I'm right and you'lds drift higher.
There's a lot of government debt.
We've covered that, there's less corporate debt relative, so people will continue to buy corporate debt if the growth story is good, equities do fine, and so credit gets tighter. The second piece I think people don't truly focus on, which is the market structure has changed that in one hundred years.
How hard was it to trade corporate.
Bonds when I started in this business in the early two thousands. Now you have ETFs, right, you have baskets of bonds trading.
Credit is much much more liquid.
So if there's less to fault risk currently too much government debt and it's easy to buy, I would say again, I would think there's a mathematical limit somewhere around fifty basis points a little bit less. You know, maybe that's a pretty aggressive call. So I don't want to be I don't think we have to get there, but I do think in an orderly sell off, credit will continue to frustrate people and continue to tea.
Yeah, but you're cold. Is much more aggressive than that, and you're burying the lead. There's the spread. You think this can happen. The treasury yields could go above what we could see in corporate America, maybe not across the whole index, but perhaps possibly on a few credits.
Well, there's so few.
High rated credits right the other century changes that the triple B part of the index is so much larger. So I don't think you have triple b's trading through government bonds. But for those few companies that can trade with A A, I do think there'll be a select few. Some of them are really close right now to go through government bonds. Do I think it's logical? No, the government can print currency, right, it's a better credit. But
I think it's a supplied demand dynamic. And listen, you can make an argument that if you have fiscal irresponsibility that maybe I'm wrong, maybe they should trade through So I think they will in certain credits. And I do think credit tights or not, we have not seen them yet.
Well, corporate credit is one of those markets that people look to you to get a signal for overall health that Okay, if spread starts to blow out, then I need to get worried. You mentioned the ETFs, but I also just wonder how much of this is just a really distorted risk premium. Not even with ETFs, but all the risks stuff is starting to go to private credit. Now, can we really use corporate credit as a signal anymore as in the way it once was.
A fair question. Listen, you're right a lot of the risk has moved to private balance sheets, doesn't get marked to market. Does that leave higher quality or lower quality stuff for the public markets? We can debate. I think the investment grade credit market is a little less affected by it, So I do think it's a kind of chicken and egg question.
Right.
If the equity market goes down to twenty percent, are there's credit going to be wider? Of course, will be caused by the credit market. I don't know this time around. Again, I think investors are happy to buy the extra spread and the yield you get from treasuries plus corporates, and I think there's some logic to be said. I don't need to own treasuries. There's not a lot of upside to doing so.
Your duration question earlier, So again, we're tight. Credit fits are tight. I think they'll get tighter.
Listen, if it gets disorderly, if ten year lues or five and a half percent in six weeks, it will be a different story. But if it moves in an orderly fashion, I think that's where we're going.
Brian we're going to be from J Powell today, and you started the conversating conversation saying that December might be the last cut and maybe no cuts next year.
Could we see hikes next year? Listening, it's so fun to talk about.
I don't have a great I don't think I could sit here on layer for you exactly how we get there. In other words, if you know, if inflations runs, you know, point two to point three instead of you know, going back to two, is if they're going to go right back to hiking. I don't think so. So I think
it's possible. I think it's more likely that they just want to sit here and let government do the work that they can say this maybe we'll say four and a half percent looks more like neutral than we thought, right, Could it be four?
Sure? I still don't think it's five.
So hikes would require all these things to happen, you know, tiff speed superinflationary but still pro growth, and aquity's making new highs again.
It would be it would be.
I can tell you this story, but I don't sit here thinking about, you know, rate. I don't want to bet on a rate hike in September.
And as my base case.
You don't want that to be the headline, Bron, Don't worry.
It won't be.
It'll be something else. On credit from Wiston there of focus standing Brown appreciate the updates set. This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, angie of 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.