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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Ameri Hordert. 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. And Victoria Fernandez of
Crossmark warning against chasing this market. She writes, we have seen this story before. Breath deterioration coupled with bullish sentiment can lead to five to ten percent pullbacks, and we wouldn't be surprised if the story repeated itself here. Victoria joined us. Now for more, Victoria, welcome. I'm going to kick things off with the same question that I asked
George can Carve us about an hour ago. Have you ever seen a free cat like this one over to two to three percent pullback on the S and P five hundred.
Yeah, I mean yes, we have seen these pullbacks before, and it was what you were just talking about. When we have that breadth deterioration in this market, when you have this internal weakness kind of bubbling under the surface, but at the same time you have this, for lack of a better word, you have this exuberance, you have this sentiment that is extremely bullish. At some point those two worlds start to collide and you see this pullback.
But look, Jonathan, we are still.
Not that far below all time highs really when we look at the markets as a whole. So I still think there's probably some room to see more pullback, especially when you're seeing small caps down as much as they are. We know the tech stocks kind of led this rally. We see them leading the pullback we're having here, But I do think some of the internal weakness is driving this, and the fact that.
The government shut down is now over.
I think investors are starting to look and go, wait a minute, we've been ignoring some of these facts that have been out Here are some of these warning signs. Now they're starting to pay attention to it, and we're getting a little bit of a consolidation of a correction here.
This is going to sound slightly cliche, but I'm going to run with it. Just how strong are the hands in this market right now? Victoria I was listening to Amy bu Silverman of RBC earlier on this morning. She tuned into Bloomberg Radio and she phoned in and she said something, Mike, I would describe people at the moment as fully invested. Bess how fragile has the buying actually been.
I think that's a great description of where a lot of investors are.
It's where a lot of our clients, I think, feel like they are because we tell them you want to be invested in this market. The pulldown that we've seen so far has not changed the trends. The trends are still higher. Until we see the trends change, we see negative relative performance coming out of some of these leadership sectors, and staples start to perform a lot better.
Than I think.
You continue to see the market, although it will churn, you will continue to see it move higher. And that's why you want to be invested in the market. But there are these warning signals. We haven't been getting the data we're about to get it. What is it going to tell us? Is it going to say we're weaker than what we thought some of the private data was actually telling us.
If so, then yes, you will continue to have.
Some spaces where you want to put some defensive components in your portfolio. So it does make sense it is fully invested, but a little bit of a bearish outlook Victoria.
Just to build on what John was asking about, it does seem like institutional investors are fully invested, especially if they missed out in the rally or earlier this year. It does seem low though, Like there is retail selling and when you take a look at some of the high momentum sides of the market, that's what's.
Led the draw down. It raises this question.
Earlier this year retail and buying actually led to the upside, and investors chase that is this going to be the reverse of that retail selling and then eventually institutions chasing that as well, or are they stepping in to actually pick this up.
Yeah, Unfortunately, I think you do see a lot of the retails chasing that market, and like you said, the reverse right now, institutional investors tend to take a little bit of a longer term approach, and so they are slower to move on some of these changes, they look and say, what are we looking at three, six, nine, twelve months out. Retail investors tend to be a little bit more emotional investors, and so you see things change more quickly and more turnover, and some of those portfolios.
We have said all along, don't chase this market. Let it come to you. There's going to be an opportunity here because of the weakness that we saw in Breadth and internally that the market's going to come to you, and that's what it's doing right now. So I would actually take this as an opportunity to add to some of the names that you've liked. Some of the sectors that you're starting to see troughs and see up trends.
We've talked about them before. You look at healthcare, you look at the big banks, you look at some of the materials components and the metals that are.
There, and even energy.
We saw about forty percent of the S and P energy sector actually make three month highs earlier this week. I think there's some places you can play. Institutional investors will start stepping into that, but retail investors tend to be a little bit more emotional and move with what they're seeing in the headlines.
You didn't mention tech Victoria, and I do think that we have to focus on that, given the fact that not only has the tone shifted, but there's been a shift in the fundamentals of some of these companies. Not that they're not earning tons of money, but it does seem like the debt issue ins of the past few months has really caused some concern. You are seeing bond markets start to push back, You're seeing concessions in some of the new issue market. You are seeing some bonds
lose a ton of value, particularly from Oracle. I'm just wondering if this is a warning shot to you that there has been a material shift in the tech sector and greater risk going forward.
It's definitely a warning signal, Lisa. You know, we watch spreads very closely in the bond market. They are a warning signal, that canary and the coal mine to tell you what's happening. And we've seen the widening over the last month and even over the last quarter year to date, we're about equal.
At this point in time. We been extremely tight.
We've seen spreads wide now and yes, when it comes to tech, you're seeing large issuance come out, and it's been a question for a while, how are a lot of these companies going to pay for what they're saying they're going to do, and how is that going to aff affect free cash flow? How is that going to affect their debt ratios? And we're seeing some of that
come to fruition. Now we're seeing some concerns about what that means longer term, especially if we're not getting the revenue generation that a lot of these companies say they're going to. So definitely something to watch and to be careful on when you're looking at the debt market.
These companies Victoria seem absolutely determined to spend They've said that repeatedly. They are determined not to underinvest, and they don't mind taking the risk of over investing. Do you really see this market in a position at the moment at least to inflict discipline on those hyperscalis who are absolutely determined to spend hundreds of billions of dollars on this effort.
Discipline is an interesting word, Donathan. I'm not sure that they are.
These investors right now look at these companies and they believe what they're telling them, they're saying Okay, even though we saw free cash flow taking Vida out of the equation down almost twenty percent year over year for a lot of these companies, and now we're seeing debt issuants move higher, investors still say they're going to be able to do what they're doing. You heard Lisa Sue this week talk about eighty percent revenues from data centers for
the next three to five years year over year. That's a lot of positivity coming from these companies.
But yet at the same time, we're hearing.
Builders can't deliver on data centers where there's not enough energy and power for some of these data centers. So I would be a little more skeptical than maybe the average investor is. But you know, I'm a bond girl at heart, so that makes sense that I would be a little more cautious. But I do think for now they are taking these companies out their word because their earnings are supporting it. The minute we don't see earning supportive, that's when I think you'll see it all.
Flip Victoria, so how are you handling this?
Are you selling tech stocks and selling the bonds as well? Are you buying this docs selling the credit? How are you playing it.
Yeah, So we're trimming on some of our big tech names, but also we want to stay within you know, we parameters within the benchmark of where we need to be on these and because there's such strong holdings in the benchmark, we can't just eliminate these holdings completely.
You have to have exposure to them.
But we are taking the opportunity to put it to work into other areas, both on the equity side and on debt. And looking at that debt like seven to ten years out, we're starting to see the yield curve steep in. That two to thirty spread was a like sub one hundred and an hour about one fifteen, so we're starting to steep in a little bit.
It's good for financials.
That's our main area of where we're looking, but we're also looking at healthcare, buying some bonds and some equity there, and then like I said, looking at materials a little bit as well. I think those areas on both sides of the equation you can have in your portfolio.
Stay with us. Mulblomberg Savannah's coming up off to this Official Economics data sets a return after they record long government shutdown delayed releases for more than a month. Joining us now the former BLS Commissioner, Bill Beach, But welcome back to the program. Can you give us some insight into how the BLS will be operating at the moment after a month plus long government shutdown. What the first order of business actually is.
Well, I think they turned the data systems on yesterday.
It's sort of in that data desert that you just referred to, and so hopefully everything rebooted. Well, that's always a question. And then they have to ask about the field staff. How many people are coming back to work. You know, some of those people probably took early retirement or retirement. It's kind of an older staff. Anyway, we might want to talk about the CPI. Back to the jobs report that doctor has it mentioned, It is true the jobs number which is acquired from firms through an
electronic survey. Now BLS will prompt those firms to send their survey in electronically to Chicago or Fort Walton Beach where those forms are collected, and we will probably have a jobs number for October. But the household survey, which is collected largely by calling people on the telephone and asking them a series of questions, quite a lot, a
lot of questions. We may never have those data, and that includes not only the unemployment rate, but all of the breakout by race, by region, labor force participation, all those things that are really important for policymakers to follow. I'm also concerned about the CPI, but I think on the labor side where that'll be the biggest hole. I do expect the jobs report to come out for September, which was fully collected but not.
Quite written up yet. I expect that next week. I think they're right about that.
Oh you mentioned inflation a few times. Just describe the CPI process, the data collection, how the survey's put together, and why so difficult to produce that number.
So the CPI is collected from the first of the month to the end of the month.
They put as many working days in there as possible, and it's largely collected. I'd say about seventy percent of all of the observations or goods services are collected by people going into stores.
These are BLS employees.
And literally going down the aisles and marking down the price and seeing how many potato chips are in the bag. So it's a labor intensive thing. Now we're starting that process probably next Monday. That only gives us two weeks to collect four weeks of data. Now, it is true that a lot of that data comes in electronically. The housing stuff, the gasoline, automobile prices, those are electronically produced data from private sources.
So thirty percent find no problem. But you can't.
You can't have a CPI with only thirty percent of the data. So I'm worried about the CPI. I'm worried about the quality of the October CPI, So that's an issue and we'll see how that works. The November numbers are also at risk because we're going to be collecting those November numbers as well as collecting as many of the data on the October side as we possibly can. That's going to be really dicey, but I think the
staff is probably up to it. So let me just say bottom line, no unemployment rate, no labor force data that shows the demographics, and I think people should be concerned about the CPI. The PPI is collected largely electronically, and of course thet export indexes are entirely collected from administrative data from the Commerce Department.
Bill just quickly here, how much are you seeing the reduction in staff for the Bureau of Labor Statistics, just generally presenting a problem in both ramping up but also going forward presenting the same kind of accurate data.
Well, at the beginning of the shutdown, we had a really firm number. It was about one out of every five employees at BLS had quit. But there are two areas of really great concern. First off, the field, and I've mentioned that several times. You know, so many of our data from the Employment Cost Index, which is field collected to CPI, the household survey that does the unemployment rate.
These are labor intensive, so you have to be really concerned for the thousand people, one thousand people basically who work in the field. We don't know how many of those people are coming back to work. Honestly, they're largely an older staff, and that means they may have choices in whether they work or not work. And then the other area that I'm very concerned about is the senior
leadership of BLS. About thirty one positions that are absolutely crucial, and about twelve thirteen of those we think are now vacant. That's the largest vacancy rate, ever, and so this is expert that just can't be replaced quickly by going out to you know, indeed dot com and finding some good resume you.
That's those two areas I'm very concerned about.
Stay with us.
More Bloomberg surveillance coming up after this. Wall Street watching for fresh trade deals from the White House. The Trump administration announcing new framework agreements with Latin American countries as tours continue with China. The former White House Senior Trade advisor Kellyan Shore, writing, one thing is clear, despite the shutdown, USTR has been extremely busy negotiating.
Kelly Ann joined us now for more. Kelly, I'm welcome back.
We've been tracking this together since it started back in early April, in fact, since the election took place more than twelve months ago. Are you seeing this administration and White House start to change course a little bit?
Yeah, good morning, Thanks ver much for having me back on. I see directionally, the White House continuing strategy that it started with, which is we are going to impose these very high tariff rates and then negotiate with trading partners to try to land them at a place that's a bit more reasonable. And so they're continuing to do so, notwithstanding the White House's concern, which is clearly focused on the issue of affordability, consumer confidence, how much you're paying
at the grocery store. Now, on top of this, on top of those four deals that were announced, plus we had South Korea that framework which was released last night, a potential upcoming deal with Switzerland, an interim deal potentially with Brazil, you're seeing the White House tees a more significant tariff relief package which would really hit Americans at
the grocery store. Now, this would be a departure from where they've been going, but I do think directionally all along they've anticipated that they would need to course correct, that there would be recalibrations where there had been over corrections.
So I think we're starting to see the first part of this.
There's some contradictory messaging kit You're well aware of that. On the one hand, you're saying that tarifs don't lead to higher prices, on the other hand, just saying we need to do more on affordability, We're going to drop tariffs.
How do you massage the messaging?
Yeah, there was always a little bit of dissonance between these two messages, and this was always the White House's case to make to the American people that if we impose an average fifteen to twenty percent tariff on all goods coming from all countries, that's not going to lead to higher prices at the grocery store. It's not going
to make your vacations more expensive. I think the American people have always been a little bit skeptical of this argument, and this is something the White House is going to have to continue to message moving forward. Now that said, what they'll point to is the fact that we impose hundreds of billions of dollars of tariffs and Trump one point zero, and that did not lead to inflation.
And if you look at countries like.
India or South Korea, which naturally have very high teriff rates, they're not concerned about that leading to inflation on a day to day basis. So why would that pattern hold in the United States? But I do think voters are not quite there yet, and this is something the White House is going to have to navigate.
Kelly, how much is this argument a liability for the White House when it comes to the Supreme Court case? The idea that they're arguing that this is a national security issue while also talking about reducing tariffs for cost of living concerns.
Well, I think we've got a bunch of different types of tariffs, some of which are being challenged right now at the Supreme Court, others which aren't. And we've always had carve out since the beginning of certain product categories like your iPhone, your laptops, some of the pharmaceutical products, and aircraft and airplane parts have always had different tariff treatment.
So shifting some of that around or targeting certain food products I don't really think is going to make that much of a difference in terms of how the Supreme Court is looking at this.
Do you think though, that, Kelly, when you talk to some of your clients, there is a feeling that maybe we've seen the peak in terms of the tit for trade war type of behavior, just simply because the cost of living concerns are starting to trump the concern about national security and the concern about getting leverage internationally.
Well, I think, regardless of how voters are viewing cost of living, that we effectively had reached sort of the peak of this trade war. To begin with, the President was always going to come out swinging at the beginning to make this huge move to try to negotiate with every country on Earth and then land the plane at a lower rate, and that's what we saw him do in August. I think we're beginning to see more and more tariff reductions as part of these deals being negotiated,
but I wasn't expecting these huge swings moving forward. I think this is effectively where the President wants to land things and have the teriff rate be on average at the end of his four years now. I do think that consumer confidence and affordability is a significant issue for the White House, which is why you're seeing them take this head on, as opposed to the prior messaging which was more about don't worry, the economy's doing great, kind
of ignore how you feel. They're not there. Now they're head on addressing this, and I think that these recalibrations on our reflection.
Of that.
Stay with us.
Mul Bloomberg surveillance coming up after this equity's pulling back is try to digest hawkish signals from the Federal Reserve. Daryl Krunk of wilst FAGO highlighting the three eyes that matter inflation, interest rates, and illiquidity rights in the recent self is more about positioning. It's sentiment extremes and weak hands that have changed to underlying fundamentals.
Darrow.
John is now for more. Darrek, good morning, Good morning, John. Just build on that a little bit. Okay, the fundamentals are strong, are they? The fundamentals are still strong. I don't think that there's a lot of debate about that. What I would say the two things maybe in yesterdays sell off, the people missed right. Number one, you had all the FED speakers out being hawkish.
Right.
So for a moment in time, FED funds futures for a December cut dip below fifty percent right, the prior day just within the reference they were at sixty nine percent. Month part of that they were ninety five percent, right. So that's a pretty big move. That's the spark that lit this thing yesterday afternoon that we started the sell off.
Right.
What I found was interesting yesterday was you know, obviously decent breadth on the equity sell off, But if you looked at yesterday, treasuries were negative, Bitcoin was negative, gold was negative, the dollar was negative, right, which is everything. So going back to the point about weekends and stuff, when when positioning and sent thement gets out over their skis are off sides and people have to cover margin
calls and other things. You sell what you can now what you want right, and so you're forced to sell strong assets treasuries, right, gold, things that you would normally hang on to to meet some of those extremes in markets.
So I think that's what you saw yesterday.
Everything that's done well in the last ye Ros said yesterday did pully Yesterday got that the equity market. Is that a strongest story to get hold of When you look at the equity market right now and people are talking about five to ten percent pullbacks, is that a pullback people out somebody want to buy, or a pullback people run away from.
We have a lot of conviction around this.
We've been like a lot of people waiting for that kind of in trouble equity correction, five ten percent you usually get two a year, ten percent, one a year in account year. We think this is absolutely viable, right. We like the fundamentals going out into twenty twenty six. So if you get a five seven ten percent pullback, I would be using it as an opportunistic way to add capital in Now, what we did do is we downgraded technology on October thirtieth from favorable back to neutral. Neutral,
still a sizable waiting obviously in a portfolio. Ironically, the Nasdaq hit it's high on October twenty ninth, So sometimes better to be lucky than good right on those type of things. But where we would put capital is in places like financials, industrials, utilities, places where you're getting some of the benefit of the horizontal expansion of AI without having to buy the valuations of the tech Okay, I.
Love this the second person this morning who said, yes, by the dip not in tech but in everything else, by the dip in financials, by the dip in healthcare. Point, are we hearing an increasing aversion to buying tech at these valuations, even in a five to ten percent draw down, just simply because the structure of some of these companies has changed.
Yeah, I think it's a good point.
I mean the point I made about being neutral right with the market cap weightings of the index, you still have to have a meaningful position obviously in technology. But let's just admit like things got out a little bit over their skis here, they got a little white hot. We saw the same thing happen in mid October. Remember the catalyst at that point was when President Trump came out and said he was going to put one hundred percent tariffs on China and that he and Jingji weren't
going to meet. And all of a sudden, the Vick spikes to twenty eight right this morning, we're twenty two.
Right.
So that kind of what i'd call sticky volatility that's been with us for the last thirty to forty five days, I think is emblematic of what's happening as we transition in this tech world. To us, just valuations just got to extremes to the summer months in the early fall, and we just said.
Time to take some profit, right, pull that back.
I don't think you abandoned tech by any means, but we find better risk reward trade off in places like financials, industrials, and utilities.
Does some move that we're seeing this morning in bonds in particular make you like treasuries once again as a hedge and I'm talking about long.
Term treasuries, Yes, I mean I think you can still buy treasuries here. You know what people forget is if you look at the Bloomberg, you know, US bond aggregate. It's up seven and a half percent here today, right. I mean we haven't had positive bond returns for probably four years post pandemic.
Right.
It's finally a creative again to portfolios, right, and so I think you can still use those bonds as a traditional way to play that sector.
Right.
What people also forget is US households own sixty one trillion dollars worth of US equities. Right, So if you do get that ten percent correction, it's meaningful. In fact, if you do the math, it means probably about three quarters to one percent of GDP that it can shave off if you get a ten percent correction, or vice versa can be additive. So part of the economic growth story has just been the wealth effect of what's happening.
If you just simply do the.
Math, how supportive is tariff revenue for this bumb market? And if it started to go away or was spent, how swear, what would it make for the treasury market?
It would put up with pressure, no doubt on treasure yields particularly.
Long developed thing is that happening right now?
Maybe not quite yet.
I mean obviously concerns about IEPA, but you know. To me, John, the tariff story is not about whether tariffs will be applied, it's how they'll be applied, right, Because if they're not done by IEPA, they'll be done by Section one twenty two, Section three oh one, Section two thirty two.
It'll take longer to do.
That's keep raising the money, right, Keep raising the money, and are they going to keep spending it too?
Because we've had about six thousand toil of repeat checks this week, and it doesn't feel like that story is losing stain.
Yeah, if you take if you take what they've raised already and just projected tariffs and free them. At this moment, it's about four hundred and ten billion dollars, right, that's almost twenty to twenty five percent of the one point eight trillion dollar budget deficit. Right, So it's meaningful to apply back, you know, against that if you can do it. If for some reason you're going to refund all that money back to whence it came, guess what happens to
corporate margins and earnings? Right, because all that money was pulled in. If it goes back to the companies where it came from, all of a sudden, it's a monumental lift in margins and earnings.
These are potential negatives for the bumb market essentially for the treasury market, the credit market supporting massive AI spend now as well.
So the biggest question I think.
Across treasuries and credit, well, treasuries and credit continue to put the big dreams of the equity market, given how its price the vinment going to get to a new year.
So let me put it this way. Our year end twenty twenty six target for interest rates on the tenure and the thirty year are in the four and a quarter to four fifty kind of range, right, so higher from today's levels.
Right.
Probably the highest conviction that we have in the treasury markets right.
Now is the curve steepener.
We still think no matter how you play it, the curve has to steepen, whether that's short term rates coming down and long term rates staying somewhat stable, or long term rates going up. Which is your story right about concerns about fiscal concerns about tear off.
Someone as the story, I'm just artick. Can I end it for Harriet?
Please?
No?
That's right?
I mean, but I think you, I think the right normal level for long term treasure yields right or in that four and a quarter to four fifty. Remember the longside of the treasury curve is a term premium, a growth premium, and an inflation premium. Right, And growth premiums and inflation breemas have been coming down. Term premiums have actually also been coming down lately, but we think we'll expand it the next year.
This is the Bloomberg Seventans 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 app