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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordernt. 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.
The economy very.
Much in focus investors awaiting the delayed September jobs report due out on Thursday. Towson's slock of Apollo making the case for a rebound in the economy, writing Liberation Day was almost eight months ago. Fiscal and monetary policy are easy, and easy financial conditions point to a re acceleration. Tawson joins us now for more toast and welcome back, sir. Are you expecting to see some of that in the September job data or is that too early?
That is too early, because the risk, of course is that in October we had to go home and shut down and of course, the chances that that werefore might be some weaker data for the month of potentially in November also once we do get that. But I do expect that once we look into next year, we have still relatively easy financial conditions, with of course the stock markets some wabbles more recently, but still very supportive. ITG spreads,
higher spreads, loan spreads very supportive. You also, at the same time have that you have tailwinds because deperation days now eight months ago. And finally we also have general tail wins because we are going into an election gem and therefore if we do get the two thousand dollars stimulus checks that you just talked about, that will certainly
also be helpful. So in total, I do think that the market is too negative on the economic outlook and the risks actually rising that we may have some reacceleration.
Once we get into twenty twenty six.
Toston. Is that reacceleration that comes with jobs growth or not.
I do think that it will come to job growth. It is actually very impressive when we think about it that over the last eight months, think about what we've been through, the shocks that the US economy has been facing, not only when it comes to of course trademark, also the shocks coming from immigration. And as you just mentioned, Jonathan, the non fund payroll equilibrium is now down at fifty thousand, accing to the Dallas fit is as low as thirty thousand.
So therefore the bar has been lowered, and therefore I do think that if we get numbers that are in that range, then we should look at that and say this is exactly where we should be. So in that sense, I do think that the economy has been remarkably resilient for the last eight months, and I do think that as the trademark gets more and more behind us, I do.
Think that a lot of the fog will be lifting.
Towardst And to Emory's point earlier, how important are the retail earnings this week, the walmarts, the targets, the lows.
They are very important and they do fit into the broader conversation about the k shape recovery. So it is still the case that high income households continue to benefit from ASER prices having been higher, and of course alsore very importantly because the level of yeals is higher. That means that not only are high income households benefiting from as is going up, but they also benefiting from the cash flow they get in fixed income is at the highest level in decades, both when it comes to public
credit but also private credit. So therefore the tailwind through high income household continues to be strong. Low income households have been suffering from interest rates going up. They've also been suffering from weight growth being weaker than what you see for high income households. But probably speaking again, with job growth still steady and stable, and again the trade one certainty more and more behind us, and especially now
think about the one big bult of a bill. The CBO is estimating that that will lift GDP growth next year by zero point nine percent. That's a very significant tale in for fiscal policy. So all those things combined argue for the economy beginning to look better as we get into twenty twenty six.
Interesting.
Conceivably, this could argue for the Fed not to cut race and explains why there has been a more hawkish tilt to some of the communication that we've gotten from Fed officials recently. What do you think the consequences would be if the Fed cuts by another fifty to seventy five basis points by mid year next year.
Oh, that would be very serious, because think about it, we already have an outlook. If I time ECFC, go on my Bloomberg screen and look at the quarterly profile, it is already the case that the consensus expects inflation to be three percent for the next eighteen months, while
at the same time growth is slowing down. So to your point here, Lisa, if we now see that growth is actually not slowing down and we already have inflation at three in a slowdown scenario, the risk is of course that inflation could be even higher than three percent, So cutting into that would of course be a major mistake. So I do think that the risks are rising that we are again under estimating that inflation has a lot more tailwind over the next slevel quarters.
With that as a potential backdrop, what would it mean that if the government gave everyone two thousand dollars?
Oh, that of course would provide even more fuel here to the economy. So if we already have the one big bill for bill, lifting GDP by almost of four Percenter's point, we have trade more uncertainty beginning to be more behind us.
If we still have stock prices.
We are discussing the AI bubble all of us very intensely at the moment, but given that there's still tailwind in the stock mart that's supporting of course high in consumer households in particular, all those things combined, they definitely argue that if you send out two thousand dollars checks, then you just run the risk that you will overheat the economy even more.
Austin Tilst And then we're introducing a new FED chair on top of all of this as well in May of next year, and I just want to toast on how difficult it is right now to offer any kind of outlook on FED policy for next year, including that second half of next year, which includes the new FED chair.
That's right, Jonathan, and that's exactly why I think that the firm CEA members are really coming up with quite strong,
strong voices at the moment. Laurie Logan and first of all saying that she did vote for the cut, and then subsequently saying well I didn't really want a cut, and now also on Friday, it really begins to emphasize more that will we still need to get inflation under control, and whereas you have of course, other inform C members deem be run in particular, of course, saying that we
should be cutting shol around the later. The dots are really moving in very opposite directions here, and it's becoming much more outspoken from the firm SEA members what exactly that the abuse are because this debate, to your point, Jonathan, is really still very very early, in particular when you have these very strong opinions about what are the tailwinds and what are the headwinds at the.
Moment, sosten g think this is a new era for the Federal Reserve where we're going to see greater dispersion at least publicly from policymaker to policy maker. And ultimately, what do you think the consequences are for financial markets.
I think it is a new error because we do make it, by definition, of course, a new fetchure in May of next year, because that's when Japal has to step down, and then we will of course figure out if that Fitchuair of course, is going to take the same view as the Iran or if that pitcher is going to have the view of Laurie Logan, and if the risk is of course that that Fitchair comes in and then begins to say, well, interest rates could begin
to go down because maybe the economy can handle lower rates. Then, of course the fear could be that inflation is going to be high. So they debate exactly to your point, Jonathan, year around what should we put weight on, especially in the dual mandate. Should we put weight on inflation still being a three percent? Should we put an eight on challenge a great Christmas showing that there are maybe a
bit more announced job cuts. I mean, this is still a very very important debate and we will not know the answers to this before we get into January. Remember also, the non found payroll numbers for November are normally collected in the month I'm sorry, in the month the week of the twelfth, and in the month of November, the week of the twelfth was last week, so that means.
The week closer to Thanksgiving.
That means that even there may be some distortions on the data for November. So that means that we may get all the way into next year before we really have a better handle at how strong is the US labor market. So that's why we still have a fairly foggy situation for the next several months.
Stay with us Mulblindberg surveillance coming up after this stock sent chin KaiA ahead of keley earnings from Nvidia. Sarah Hunt of vampind saxon Words, writing earnings estimates still seem to be faring well and absent any bad news from Nvidia, markets could stay on track for a positive end to the year. Sarah joined Just Now for more Sarah good Mornick. If morning, what are the lessons from the recent volatility, If there are any lessons at all.
I think that there was a whole lot of things that were going on that created some of that downdraft. And I think I mean, there was an earlier question about what's the most important thing that's coming up this week. I think it's a question of timing. If the payrolls was coming before in video, i'd say payrolls. But because in video's coming first, that's going to set a tone and either payrolls are going to help that or hurt that.
And I think that, you know, if you get any more downdraft in technology, it's going to be hard to rally through the end of the year because there is some concern there and there's some concerns about valuation.
We've been speaking for years about the K shaped economy. This week's the K shape market. Consumer's been struggling. You've seen that in some of the restaurant earnings. We're going to see in the retailer's potentially later this week, and then it's in video. Can we close that K anytime soon? In the equity market, never mind the economy.
It's a bit tough because people are if the technology story stays on track, people stay away from some of the retail areas where you've seen weakness. If there's a wobble, then people start looking at staples. Like you saw that downdraft day, there was some of the stocks that were doing okay, we're the more value oriented, more divinend oriented,
more cat like those kind of stocks did better. I think there's an argument to be made that going into next year, with valuations where they are, there should definitely be a balance in the portfolio, and you should have some of that because if you get volatility, that's going to act better than some of the technology. And I think the volatility is just going to stay and get moved around from data point to data point.
Is it Vidia the last tech company to actually feel the pain if AI isn't delivering on some of the promise that people expect.
Well, it's interesting to see the number of people who are going publicly talking about getting out of their Nvidia stakes, and I'm not sure if that's one of those we want to move on to the next thing, or we think that's the top for Nvidia. I think in Nvidia is in a good spot in terms of being able to keep bringing money in.
Because people still need these chips.
There is, to your point earlier, also a big depreciation cycle on those chips, so there is a round robin. It's not like you buy it once and you don't have to buy them again. So I don't know that Nvidia is going to be the problem there. I think the issue is going to be who's making money with those chips and how is that return coming, because that is the big question into the next iteration of AI.
This is the reason why Oracle has been so interesting, why OpenAI has been so interesting, why the CDs spreads and how much they've been blowing out has been so interesting, because there is a question about whether the rank and file company in the average economy is seeing the monetization from some of the new AI tools that they've been getting, and whether that's enough to justify the massive spending and investment.
Is anything that you're seeing seeming to suggest that, yes, we are getting to a place where we will see massive c change kinds of earnings from the rank and file companies that could lead to that broadening out and a justification for AI valuations.
I think the hard thing is that to believe that that is going to be the case in the near term, it has to be about to some degree productivity, which has to be about not having as many people on the payrolls. And that's not a great thing right now because we don't want to see that happen. I don't know that we are yet understanding exactly how those tools are going to play into a variety of things, including productivity and better earnings, except to get rid of people.
And so I think that you need to see some work cases where it's very clear that this is less about getting rid of people and more about making them more productive.
And I think that's still not quite clear.
Enough from the investment side to say, oh, I can see this going into this industry in that industry and that industry.
That's what people are hoping for. I don't know that we're there yet.
At least I mentioned this earlier about how some FED members are talking about the structural changes in the economy, like immigration, like these technology changes, which is why potentially there are shifts in a labor market. How does the FED address that.
That's another question that having a whole bunch of six weeks of not having data does not help you at all, because that is trying to figure out what the right number is to tourist and slacks point with given all the things that are going on, is very difficult. When you don't have enough data, you don't see weekly claims either, which also sort of informs you.
Even if it's not.
That week, that average of that starts to inform you. I think that's going to be one of the things that into twenty twenty six. You need to see some earnings growth because that's what's being built in, but you also need to see a data market that people I
mean a labor market that people feel comfortable with. And I think that we just don't have enough information right now, and that's where the timing of that data coming in versus other things starts to be an issue, and the faster we get some of it, the better off we are.
But it's going to be about what's happening now.
I don't know that September is that informative because people were looking at the ADP numbers for October.
Two pillars coming out this week in terms of Wall Street for Nvidia earnings and then Main Street for when it comes to Walmart. Could Wall Street continue to do well if the consumer's really struggling.
It's managed to do it so far this year, and the consumer has been struggling for a while, especially in the lower end. I mean you've seen some of that delinquencies on the lower end in auto loans, delinquencies on the lower end in credit cards, but not on the upper end. That upper end spend has really been able to carry things. Not so much for the retail sector because as a whole, they need more more than just the upper end, except the very high luxury stuff.
So it depends on where that goes.
And that's also where the labor market comes into play, because if you feel comfortable that you're keeping your job, it's easier.
To spend the money as it comes in. But if you don't. That's where people start to get a little bit more in the saving site stay with us.
Multiple IMBERG surveillance coming up after this. We've heard this.
It's been building for a while, the push against Russia, the push against countries economies doing business with them, notably China India who asked this to supply too well.
I think really it's about China and India because this is going to really force China to either have to go around some of the sanctions or deal the blow from the United States. At the same time, at the Treasury Secretary over the weekend talked about the fact that they don't have the final agreement in ink fully in place and they expect that to happen by Thanksgiving. Is this now another point of leverage Washington is trying to use it.
Joining us as Terry Hynes of Pangaea Policy Terry, welcome to the program. What is the president's big effort around Russia all about and will he actually follow through?
Good morning all I'm on Team Ann Marie this morning. The pick up on that point about leverage. This is about a lot of things, but one thing it is is exactly about that. What you can read between the lines from Secretary Bessett yesterday in a long interview, is that the supposed current deal that's happening between the United States and China is now taking a lot longer to paper than was widely thought even the best had said.
So it's about that.
It's about pushing India, I think, on getting a trade deal done. Secondly, Thirdly, I think it's about pushing the
Europeans on getting serious on Russia as well. The President has long said that the United States policy only works well if the Europeans are willing to to pull equal weight here, and Europeans have been tapped dancing on core questions around Russia and frozen Russian assets for years literally, and either they're going to get serious or the Ukraine thing is going to drag on for even longer.
Terry, the administration is going to use this leverage as part of the destination. But when we get to the final destination, do you think Congress will end up passing this bill?
I think the I think they can sure the willingness exists, the votes exist. This is a lot more up to what the President wants to do in terms of how he wants to use that particular pressure point one thing I saw in Trump's impromptu remarks there, frankly, was an ability to take the thing off and put it back, take the thing off the back burner and put it.
On the front burner.
Russia may may dismiss that, but I think they probably dismissed at their peril, considering that the president has the ability, thanks to Congress, to actually get this thing done if he chooses.
The Treasure Secretary seems to be throwing cold water on a Wall Street General report that says China is trying to ratchet back rare earth minerals that go to companies that help the US military. Do you think China will amend that or is this something that they're going to stick with.
I think the track record here is that China has been I think best referred to April sixth in that interview as being the date in which the high drinks started on rare earths. I think they've been doing this for six or seven months. I think the base case
has to be that they'll continue to do it. So what you know from a markets perspective, you have to take that into account, and you also have to take into account that the United States is going to continue to redouble and redouble every effort it can to get rare earths and start rare earths that are not of Chinese origin.
Darry, how much of a conflict is there between trying to get leverage some of these trade talks and trying to get cost of living gains for the United States and for average consumers, given the fact that that seems to be a renewed push by the president, is there a conflict here?
I think there's an order of precedence here, and the order of precedence from the administration's point of view is that they need to get the trade deals done as many and as much as possible and move forward from there. And they will, you know, they tend to put their stake out kind of you know, far and in a in a pure sense, and when work back and cut
back as they need to. And I think that's a lot of what you saw with the food stuff's tariffs last weekend or last week Besson talked about this as being mostly a matter of existing trade deals coming in or new trade deals coming into force.
I don't think that's quite the case. It's part of the case. But what they'll.
Continue to do is continue to work on the trade deals with the idea that they can calibrate them pretty much in real time as they need to.
Terry, just to circle back full circle to the beginning of the conversation, how much can this administration go really hard on China with sanctions on oil if it raises gasoline prices in the United States at a time where there's a real cost of living focus.
I think the priority for the administration. There's a balance here, but the priority for the administration is going to be making sure that China understands that it will use the leverage of it that the United States has, and that's
certainly a big part of it. I think the President cares a lot about gasoline prices, but one reason why he talks up so much the price of gasoline coming down, frankly, I think is he wants to buy himself some wiggle room with the public to make sure that if he ends up having to drop a dime on China on oil, that people understand the Watson whis.
Stay with us. More Bloomberg surveillance coming up after this.
Profitability of the AI narrative whipsawing tech stocks as valuation concerns rise JP Morgan's twenty twenty six global Investments outlook remaining bullish, writing artificial intelligence remains the defining force in financial markets. Stephen Parker, the co head of Global Investment Strategy at JP Morgan Private Bank, joined us now for more.
Stephen, good morning, Good to see you.
Good to see you.
Should we talk about a three pogey man?
Want to do?
Have a capacity, leverage, valuations? Your words? How concerned should we be into next year?
Yeah, Look, we think that there's still a long way to run in this AI trade. If you look back since the launch of chat GPT, seventy five percent of the returns, eighty percent of the earnings and ninety percent of the capital spending growth of the S and P has been driven by AI related companies. And so the question now is are we facing a bubb one? As you said, it's really those three factors. It's over capacity city, its leverage in the system, and its valuations that we
need to focus on. And we think that we're still in the early stages of this story.
How much do you think that the extra editions of this story, the extra chapters, really will come from a FED rate policy or fiscal policy or some sort of more accommodative backdrop that can allow valuations to get even more heady.
Yeah.
Look, I think we're in a world where there is still a lot of capital that is looking for a home. Investors are willing to make investments. But importantly, what we're seeing now is that these investments in AI don't look speculative like bubbles of the past. If you go back to the dot com era in the late nineties, there was forty million miles of fiber that were laid to help support the Internet, and by mid two thousand and one,
only about one percent of that was being used. It was supply in search of demand AI, the story is reversed. The vacancy rates and data centers today is at an all time low one and a half percent, and three quarters of the demand for the new construction and data center is already preleased. So we're not seeing those signs of speculation, particularly from a capacity perspective, that gets us nervous.
So your base case for next year is seventy two hundred to seventy four hundred, and the S and P five hundred, Your bull case is eight thousand to eighty two hundred. What makes you either constructive or uber bullish.
Yeah, I think it all comes down to earnings, and we've seen a tremendous run of successful earnings results.
Five of the last six quarters.
We've seen double digit SMP earnings growth, despite the fact that we've had policy uncertainty, economic uncertainty, trade uncertainty. There's perhaps never been a bigger disconnect between the stock market, particularly large cap stocks, and the broader economy. We think that continues and we see another year of double digit earnings growth, which is going to support that upside that you talked about.
How do you think about all of this in an age when globalization is out of fashion?
Yeah, I mean we're launching today our new twenty twenty six market outlook, Promise and Pressure, and one of the key themes this is idea of global fragmentation.
Post the Cold War, we were in.
A multi decade period where it was all about globalization, cost control, efficient supply chains that kept inflation down, it kept margins up increasingly over the last couple of years as a result of the pandemic, conflict in Europe trade policy. We're now in a world where countries are looking in they're more focused on security and reliability both in terms of defense but also of supply chains and infrastructure, and that has ramifications.
US versus China. That's what this feels like. What does Europe fit in in the US versus China?
So Europe is an interesting sort of pivot point in the global landscape. When we looked this year, the announcements that we saw out of Germany in terms of the shift in fiscal spend, the willingness to embrace positive fiscal impetus is a huge change.
You know.
One of the key themes when we talk about this idea of increasing fragmentation and a focus on security is what's going on in Europe as it relates to the spending on their infrastructure and their defense. We think that's both an important macro trend but also an investable opportunity.
I think people have the sense they know how to play the US story if they want to play it. I think they feel comfortable playing the China story if they want to play it. After the first half of this year, I think they're sitting here looking at Europe into twenty six and thinking, well, maybe that was the trait that was just sort of like last year, and now we're done with it, and we should move on to other things.
What is the trait twenty six?
We still think there's opportunities in Europe. A lot of the fiscal policy that was announced this year isn't actually going to be put into place until next year, so there is a growth dynamic there, and in fact, we think from an economic perspective, we're probably going to see a convergence, meaning that a smaller discount of growth in
places like Germany versus the US. But when you think about how you want to play the story, we continue to think that the European defense names are probably the most interesting opportunity that we're seeing.
Based on the framework that you just laid out, how are you looking at diversification? Is it from a regional basis or is it from an asset class basis?
Yeah, So we talked about the outlook, We talked about AI, we talked about increasing global fragmentation. The third theme that we think is really going to drive markets in the years to come is inflation. And these factors that we talked about increasing fragmentation, increasing fiscal policy means that inflation is likely to be more volatile and the floor is likely to be higher, and so when you think about building portfolios, the playbook of the past has to evolve.
Stocks and bonds on their own are not going to be enough. Stocks can help you when you get recession fears and growth scares, but increasingly in a world where inflation is going to be part of the narrative, you need to look at things like infrastructure, real assets, and gold, not just on a tactical basis, but on a more strategic basis.
So sticking with the gold trde even after a big boom over the last year, we are.
We continue to see upside.
We think we can get over five thousand dollars an ounce on gold, and that has to do a lot both with some of these concerns around geopolitical issues, the concerns around the dollar, but most iportantly and from a sticky perspective, central banks around the world are continuing to realize that they need to diversify, and a lot of these central banks are still under exposed to the long term targets that they're trying to achieve, which means more demand in a supply constrained world.
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