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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. Amanda liner with black Rocks saying uncertainty around the path of monetary policy in twenty twenty five is alevated. While not our current base case, a reacceleration of inflationary pressures materializing from potential fiscal and or trade related policies following the US selection could cause the Fed's terminal rate to land higher. Amanda joins us now for more. Amanda, good morning, it's good to see
you morning. Thank you for having This was only a few months ago we were talking about a FED getting ahead of the curve to winsl the labor market, and maybe they needed to get accommodative. And now we're back to a word that you use in your work, which is normalizing, except normal might be a whole lot closer to where we are than we thought a month ago.
Right, And I think that distinction between normalizing and easing is really important. We would not be surprised for the Fed Fund's terminal rate to land somewhere around four, but again, the drivers of that are really important. If that is because growth is holding up really well, that is something
that the credit market can really digest. If that is because inflation is reaccelerating and there's a lot yet to be seen on the policies that are coming down the pike, we have some clarity, but the path is very wide in terms of potential outcomes. That would be a much less supportive outcome for credit, especially if it's coupled with slower growth. I think the bigger risk for corporate credit is what we're characterizing as a disorderly sell off and
treasury yields. If we have a gradual backup in treasury yields again because of good growth, that is actually a tailwind for credit because it brings in yield based buying. If it's disorderly, feel spooky.
Then it's coming.
Back to the fall of twenty twenty three when I think that one gives investors some pause.
Can you define this so ly and how olderly things are at the moment.
When we chat with market participants, that four point sixty level is really the area which they become concerned. I think if you start to see the velocity of that backup really be swift. So I'm talking about gaps of fifteen twenty basis points in a day for a consecutive period of time, and again not driven by positive growth surprises, but more driven by some downside risks on the policy side or on or upside risks on the inflation side.
That's I think where we would start to be a bit concerned, because then if you're a yield based investor, you may think you may come to the conclusion that it just waits to deploy capital into corporate credit, and that yield based demand has been incredibly strong in the context of all of this kind of path dependency. As you know, credit spreads have made new cycle tights, and so that spread of that tug of war between spreads and yields is very much still in place.
John asked the key question, right, what caustitutes disorderly move in yields at a time where fifteen to twenty basis point moves are something we have seen. This isn't abnormal, and there's a question of whether they have to see for a longer period of time. I mean, let's say Howard Lutnik gets chosen as Treasury Secretary and people view this as really an endorsement of stronger tariffs at the outset before some of the other tax cuts or other
pro growth types of implementations. Do you foresee that type of disorderly move in treasure yields.
That sequencing really does matter, I think, leaving some of the candidates to the side, if you have a situation where you have upward pressure on inflation, and I think what really concerns us is not so much the targeted tariffs but the across the board tariffs that could spike retaliation, because then you're moving from a discussion of the one time price level of argument that's been floated, which I'm not necessarily sure I agree with is not that disruptive
to the market, But if you have kind of retaliatory tariffs back and forth, then you actually have pressures feeding on themselves on the inflationary front, and I think it becomes much less certain. We kind of take a step back and say, Okay, well, where do we go from here. We like building and floating rate exposure to portfolios. We like financials. They would not be exposed to the same degree on tariffs because they're more of a services based sector.
We like domestic facing companies actually, so ironically and somewhat counterintuitively, that may bode better for high yield and leverage loans because they tend to be more US focused as opposed to multinationals. So, and financials are really important. Financials are thirty three percent of the IG index, and they're still trading wide to non financials, and so if we think that they can tighten, that can actually pull index level spreads even tighter than where they are now.
There's a larger question, and John and Amory we're focusing on this last week about at a certain point, if you see the companies out there as being a pretty good shape from the US and continuing to be so, could you see spreads and narrow to such degrees and even investment grade companies trade within treasury yields.
Yeah, so I think you had a conversation last week on this with Brian Weinstein.
Which I thought was great.
Look, I think there is scope for spreads to move tighter. I do not see a world we're on masks. Triple B corporates are trading tight to the sovereign, but you do have some double A and a few triple A companies still left outstanding in the corporate credits sphere that are trading really close. I mean the spreads to treasuries are in the single digits for some of those bonds at the moment, depending on where they're priced to. I think the net net here of everything is that corporate
credit is in a pretty good place. It all boils down to growth. If we have a supportive growth backdrop, I would say manageable terror for risk, and then I would say the continuation of yield based support plus some favorable technicals. That's a recipe where credit can stay in
its current tight range or even move slightly tighter. I think waiting for a significant catalyst for spread widening in credit would really involve a combination of persistent upward pressure on inflation, a slowdown in growth, and again that disorderly sell off, which it does feel like the volatility of the bond market has been elevated relative to what we've been used to in past cycles.
But I think it.
Would really be that kind of four to sixty range where folks get concerned up to the five percent range that would catch our attention.
Man, I'm just talking about this disorderly bond sell off. I'm thinking about how disorderly treasury pick has come to be. And if you talk about the real impact of terrorists. What I'm hearing from source that Peter Navarro is really in the mix this trade skeptic at ANYC And Howard Latink, who's come on and talked about the fact that you should use tariffs, is more of a yes man to Donald Trump. The real tariff man would be someone like
Robert Leittheiser, who already worked for him. What would a Lightheiser, a Treasury, Peter Navarro, a NEC mean for this bond market.
Well, again, leaving the specific individuals aside, I think the issue that we have to come to grips with is what does this mean for kind of upward ongoing upward
pressure on inflation? And really the worst case scenario for credit is kind of an across the board tariff that is also coupled with retaliatory tariffs that provides kind of upward pressure on inflation that corporates can't manage, right And I think that's the key, is that if corporates are feeling that they have significant cost input pressures that they are not able to manage through, then you get to this situation where right now corporates have just been hoarding late,
hoarding labor and they haven't been laying off. If you get to a point where corporates need to use the layoff tool to protect their margins, that's where I think we really start to get concerned, because that's when you could have the weakness and the consumer extend beyond the lower income segment.
Is the fact that the transition when it comes to the top post for financial markets already seems chaotic and it is messy. Based off every phone call I had over the weekend, is that already a market negative?
I don't think so. I think what we're really bracing for is for this to play out over the next couple of months. I mean, even heading into the election, we were not expecting ultimate clarity. Once we knew the outcome of the White House, the Senate, and the House. We know that this is I mean, you've been saying it personnelis policy, right, So we've been watching for these appointments. I think we're expecting this to be a longer term trend. The FED has even said as much that they're not
even reacting to policies once they're implemented. They're actually more poised to react to policies once you see the economic impact, which will take some time. So I think this is going to be a drawn out event, actually into twenty twenty five.
That's I'm glad that you brought the FED into this because that's been the other big shift over the past week is rhetoric out of FED officials has been talking about how they can afford to wait, they don't have to cut rates as quickly. How much is that a game changer on certain levels that there isn't the same kind of Duvish bias that there might have been, say a couple weeks ago.
So I was a little surprised at the market action last week because a lot of what Chapal said he also said during the November seventh press conference in terms of we may slow at the pace, We're not in a rush. I think our base case is really that there will be a cut in December, a twenty five basis point cut in December, as you noted, though at the start the path becomes much more tricky into twenty
twenty five. It all boils down, though, Lisa, to kind of what you're alluding to, which if they're not cutting because growth is above trend, which we still are tracking above trend, that is a backdrop that corporate credit and I think risk assets broadly can manage if they are not cutting because they are concerned to Emory's point about upward pressure on inflation or disruptions and supply chains, that sort of thing that would cause inflationary pressures. That's another issue.
But they are also focused on growth. I think it's not a foregune conclusion that tariffs could cause them to not cut or even hike, because there could be a growth impact that they're.
Focused on us. We could see some major changes. Amander, is good to see you appreciate your time, Amanda landam there a plank rop? So here's the lake says this morning the eyes of Wall Street on a battle Royale playing gout in Palm Beach, Florida. The race to become the next Treasury Secretary between Scott Besson and Howard Lutnik reaching burning point over the weekend. President elect Donald Trump said to be losing patients with infighting, leaving staff to
widen their search. Alternatives now including apolloist Mark Robin and former Thaed Governor Kevin Walsh. Henry of Trace of Vada Partners joined us now for more so, Henrietta, the big question where is this one going?
Well, I think the most important decision really is about what happens with Robert Leiheiser. As you guys have been mentioning, I think there's very limited amounts that the Treasury sear Jerry is going to do in terms of writing tax built with Congress. This isn't the first time around when
we're crafting it out of thin air. That tax bill is going to be written by the Said of Finance Committee staff, that Chairman of Mike Crapo and the House Place and Means Committee and their staff, and the Treasury Secretary is going to be influential to the street. But in terms of these massive pieces of legislation, it's terriffs and taxes, And I'm really more concentrated on where Bob Lightheiser is going to go than whether it's Scott Bessant or somebody else at Treasury right now.
Well, Henrietta, according to my sources, Robert Leithheiser is still in the mix as well as Senator Haggerty. When it comes to Treasury. What would a Robert Litthheiser at the helm of Treasury mean?
You know what I'm wondering is whether he's going to do something in the trades are Universe. That seems to be the main theme of the Trump cabinet picked so far, whether it's the Government Efficiency Initiative, which has sort of an Efficiencies Are Crypto zar, or Bob Litthheiser in a role that's more like a tradezar. He doesn't even need to be at Treasury. I think it's pretty unlikely that he would land at Treasury. I think the President elect is enjoying this process of having a big fight for
the transition. We definitely saw this last time around as well, so I don't think it should come as a surprise. But sort of a ROVINGSAR that has authority over USTR, the Department of Commerce and Treasury is going to be much more important, in my opinion than Treasure Secretary itself.
When you read the tea leaves though, and you see that potentially, and sources are telling me that the team is trying to maybe give this off ramp to Howard Lutnik, offer him a fancy, first world class ambassadorship potentially, then that would lead the way for either Scott Besson to come up and get the NOD or they're going to expand the search because this is just becoming a little bit too messy between these two men. How do you
read the tea leaves right now? And do you think there's going to be a timeline when we can get this NOD?
Yeah, I think the Trump transition folks and people that I've spoken to who are working with them, they're trying to get as many names as possible. Specifically, we know that they're trying to get CEOs, somebody with it comes with quite a bit of stature to come and fill that role. Already, they have not been able to find that particular human and yet and so we're still in
the realm of the Scott Bessett Howard Lutnick component. I think best probably for the most part has been out on the street the most meeting with you know, being bulch racket hedge banks and hedge funds talking about a very sort of slow, phased in five percent a month increase entire freights. Those are the kind of things that I think, when the details come out, will spook folks. When it comes to the transition, you know, the president
elect has actually moved very quickly. I would expect the Treasury secretary to be somebody that's confirmed within the first two weeks, let's say, in January. So they want to get somebody that's actually able to get through, not a Matt Gates like candidate who's going to run into some serious ethical problems.
Right when it comes to the Senate, obviously we think maybe the Treasury post could sail through. But you said the President elect was moving quickly, Why is it taking him so long when it comes to Treasury. This is one area we's not moving quickly, even though he ran on economic agenda.
Right and there's not just a clear loyalist that he's planning to place. Some of the others, whether it's a Tulsa Gabbard or an r K Junior roadvertally on the campaign trail in this situation, the folks that would have been in that role have already said that they do
not want to take on the position. When you hear things like, you know, going through the ethics component and the background check is preclusive, which I believe Scott Besson said a couple of weeks ago, it gives you an understanding of just how difficult it is to make the decision for these folks to go through the ringer with the FBI, with background checks, with the you know, disarming of their funds, and really understanding where that needs to
go is. I think there's a lot of personal decisions that go into Treasury and this role that are maybe a little bit higher bar than the attorney general pick, for example, dry.
Eda, How much do you see this as a test almost of how important the market response will be to Trump policies is sort of the ultimate check.
Well, I think the street is very hearkened by the fact that they feel like they're playing a role in this. I mean, every single meeting I go to, investors think that the stock market, whether it's going for down, has the real leache on the president. I don't think that that's true. Just to put it bluntly, but it's definitely a view on the street that they have a say in what the Trump administration does and specifically how Donald
Trump responds. So they're very optimistic, for example, in the bond markets that should his tax bill and tariffs go into effect in the same year. My expectation tariffs will go on in the first four or five months, and the tax bill be passed in December July at the earliest, you're going to get these massive both inflationary and deficit finance pictures. And what I hear often is the bond market's going to send a message and stop that. That's
just not the way that DC typically works. They are much more concentrated on quarter over quter GDP growth on employment rates. The President elect has tweeted quite a bit about the stock market, but that's never led him to not impose tariffs. As we all remember from twenty eighteen to twenty nineteen.
That said Henrieta, We did hear from Mike Johnson House speaker that there was going to be some sort of offset to any tax cuts. We heard from french Hill when he was on with US a couple of weeks ago that he's really going to be careful about not necessarily expanding the budget too much. Why do you think that ultimately that the market does not play the role that it thinks it does.
Well.
First of all, it's not what Congress is watching you. A tax bill is in existence for four or five, six years seven in the case of the last package, that's not, you know, designed to boost the market on a day over day basis. President elect Trump is going to be at the very beginning of his term, which is four years, not every single day matters. It's just sort of a fundamental misunderstanding of how DC watches the
US economy. I'm the stock market in general, and while I think President elects Trump tweets about it, as I mentioned, it's very different than writing and crafting legislative policy that will increase the deficit by at least two trillion dollars next year, whether the bond market responds or not, that's what it's going to take. That's what it costs. So when you talk about the Government Efficiency Initiative, what I hear as a former budget staffer is really exactly the
wish list that we get from an administration. On the first Monday in February. You get the budget every year. It's very optimistic and wishful thinking.
It includes a lot of.
Offsets to offset the cost of the spending that you want to roll out, but ultimately very little of that actually gets effectuated. So when I hear the President and Elon Musk and Beckmrmaswam we talk about government efficiency, what I hear is this is the thing that we'd like
to do in a perfect world. It will not actually happen, but it's part of the conversation that's necessary to mitigate the appearance of deficit increases on the magnitude of two trillion dollars, if not more, just to pass the existing tax rate.
We'll see Henrietta. It's good to see you, Henritta Trace their a Vada partners. So here's the latest. Big retailers, including Target and Walmart, recording garnings this week ahead of a shortened holiday shopping season. K Max Shane of Goldman Sanks writing, Target customer is our residient, you're on a budget, while Walmart is opposition to continue driving solid earnings. Kate, join just now for more. Kate, welcome to the program.
I want to talk about trade. Just to begin with how battle hardened are these companies from the trade war of a few years ago, and how well prepared are they for more the same?
Yes, I think frankly, the more discretionary goods you have and more that you're importing from Asia, the harder it is to manage. And so specifically to Target and Walmart, about a third of what Target cells is domestically sourced, so not subject to tariffs, and for Walmart it's about two thirds of what they source is domestically produced and not exposed to tariffs, So there is still quite a
bit there in terms of exposure. The last time we did see tariffs happen, both Walmart and Target did take prices up. Frankly, most retailers did, and that's probably what will happen this go around as well.
Kate, I have to ask, especially ahead of Walm coming out tomorrow with earnings, is Walmart still a retail company.
It's a good question. Yes, it absolutely is. But I think a lot of success that they have seen more recently has been with what they call their second P and L, or their alternative revenue streams, which is them building out a media business, a fulfillment business, their marketplace data ventures and they describe it as an ecosystem all
in which to better serve the customer with. But there certainly is a lot more tech and a lot more to understand from an e commerce tech standpoint than there's ever been before.
The reason why I ask Kate is because we also get TJ Max and Target, and I wonder if those are really the cleaner reads on just consumer appetite, the consumer pushback with price increases, those kinds of consumer discretionary trends that people often look to in the likes of previously Anyway, Walmart.
Yes, well, you still get the true read of what sales are doing and comp store sales trends, which they report every quarter. And we do get color from Target and Walmart about what sales are doing on the consumable side and what sales are doing on the discretionary side. And for all the success Walmart has had this year in terms of growing and taking share, their discretionary still remains somewhat flat and has not been growing similarly to targets.
Kate, do you still see and I know we talked about this when you joined us in September, when this was really one of the storylines in the consumer sector. Do you still see individuals on the higher income cohort trading down this idea of being more choiceful.
We definitely see consumers still being choiceful. Absolutely, the trade down hasn't necessarily happened to a degree. I think the story the consumer is they're pretty, they're employed, and they do have cash. And the Goldman view is that the consumer will stay healthy into twenty twenty five based on how strong the labor market is. I think where we're seeing a little bit of weakness might be at the lower income consumer, just as they continue to deal with
higher prices. Prices are still higher than they were a few years ago. But at the mid and higher upper income levels, you are still seeing good demand. It's just again using that word.
Choicefall before we get to twenty twenty five to the holiday season, and I just have to ask, why does Black Friday now feel like an entire week? It was supposed to be just one day.
Yes, it absolutely does feel longer. I would even argue it feels like the whole month of November has turned into Black Friday, and we are contending this year with five less shopping days. We have a Thanksgiving that is the latest point in the month that it can be, and there's five less shopping days as a result of that, so you're even seeing differences year over year in terms of when you're seeing Black Friday ads and Black Friday deals.
But it's all in the name of course, to engage engage customers.
Has there been any signs yet because I already see the Christmas trees up, I already see the wreaths, I already see you know, get your holiday deals. So it's basically two months Black Friday Black two months. I'm just wondering whether we have any early signs of what the appetite has been like for the holiday season.
We don't quite yet, and that's why I think earnings are so important this week for Target and Walmart, because they will have a read into the first couple of weeks of November, and hopefully they will comment there about how sales are going or how they are relative to what we saw in October. So we'll definitely get a better read on that when we speak with them this week.
I think data has showed traffic data at the retailers has showed some acceleration into the end of October early November, so it does look like you're seeing growth in traffic, which is a good sign. But again, we'll get it straight from the company's mouth.
This week tree went up this weekend. I knew it would, I knew that was aimed.
May it was completely it was personal. Really yeah, fully dressed.
Or Pandora first one of the season. Nice, all ready to go?
I did.
I walked by a Whole Foods and I saw all the trees outside, and I saw that the prices were the same this year as they were last year. I thought that was interesting, and I thought Jonathan Farrowe is right now is putting up his tree.
I'll spare you this conversation. Kay, thanks for joining us this morning. We appreciate it. Kaye Ma Chain there of Goldman Sachs. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, angiot 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 out