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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hortern. 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. Buzy joins us now
for more. Lizzy, Welcome to the program. Do you think this economy is reaccelerating and do you think we're very close to this FED skip and a meeting.
Well, I do think that yesterday's number showing this ongoing resilience and strength of the consumer reinforces the notion that we are on very solid footing. And when we look at what the retail sales numbers are likely to do to three third quarter growth would be an acceleration above three percent from what we saw even in the second quarter.
So this does, I think, do two things. First, it calls into question the fed's decision to make that outsized rate cut in September, that fifty basis point production, but it also now calls into question the need for additional rate cuts, at least in the near term as we
look out to that November policy decision. I do think any further indications, as I said, with a few data points between now and then, any further indications of ongoing strength, further strength in the labor market on the consumer, a reacceleration and inflation does give the FED and out to potentially bypass that November meeting.
So lindsay, as you know, that's talking about removing restriction, not providing accommodation. And you can tell me if that's a distinction without a difference or not in just a moment. But ultimately, when they say recalibration, it feels like they mean autopilot on the way down to neutral. Is that the wrong way of thinking about this?
Well, I do think there's a very important distinction, and unfortunately, I think the FED sent the wrong message with a
fifty basis point cut. It was an inappropriate message to the market to suggest that they were in a rush to not only get back to neutral, but potentially below to provide support to an ailing economy, as opposed to a softer twenty five basis point cut, which would have indicated that the Fed is simply removing policy, firming at a slow and tempered pace back towards neutral as the
data neutralize. So even if the Fed intended the latter, the message was muddled with that outsized rate reduction of fifty basis points, And now the Fed is caught in a position where they're trying to backpeddal and not only recalibrate market expectations, but now determine what the appropriate next step will be after that outsized and that outsized cuts.
That's said Lindsay, a lot of people are looking at the growth and potential reacceleration of the US economy and not seeing it get accompanied with inflation really picking up in a material way. We're not seeing that in break even rates, We're not seeing that in a whole host of other metrics. At what point do you actually see inflation reaccelerating in tandem with growth, given the fact that there are some reasons for inflation to keep declining, Well.
We are seeing some underlying metrics reaccelerate push further away from the fed's two percent target. The core PCEE, for example, tick tire. The super co also tick Tire. But you're right, one tenth of a percentage point is not necessarily an indication of a massive reacceleration of inflation. That being said, we're not at two percent yet, so I think the onus is still on the FED, not necessarily to avoid
a reacceleration, but to foster further improvement in inflation. The Fed's job is not yet done, and a resurgence back to a reversion seis way back to two percent is not a foregone conclusion. So the FED, motivated by this fear of impending weakness in the labor market, shifted their focus away from inflation. Now we see that the labor market's strength appears to be well founded, and the focus
of the FED should go back to getting inflation under control. Remember, a soft landing is not just about maintaining positive growth, but reinstating price stability at two percent, and we still have quite a ways to go before we can achieve that goal.
This is so interesting, Lindsay because essentially making the argument that maybe the fedge take more of a page from the ECB and having more of a single mandate in terms of inflation, rather than focus so much on avoiding some sort of weakening in the labor market. I just wonder how often we've seen this. Whereas basically experiments.
On either side of the Atlantic.
We're one the ECB pledges to just focus purely on bringing inflation down even in the face of economic weakness, and the Federal Reserve to avoid any further weakness says, inflation's coming down, that's good enough for us, We're cutting rates.
Well, I do think that the FED decided to move its focus away from inflation prematurely. Remember, when we look at it historical cycles, the Fed has been forced to raise the Fed Funds rate above historically significantly above that peak and inflation. So at five point six percent, five and a half on the Fed funds rate was really the bare minimum that we should have expected in terms
of this rate hike cycle. But given the massive amount of liquidity and stimulus and cash pumped into the market, it was really unreasonable to expect that the bare minim would be the appropriate amount of policy restriction to reinstate price stability. So I do think that the Fed stops short of where we need it to be and now
to add fuel to the fire. They've reverted to this policy pivot prematurely before really seeing that underlying disinflationary trend take hold, and that leaves us in a very uncomfortable
position as growth it remained solid for now. If we do start to lose momentum looking out to twenty five twenty six, and the FED continues to tolerate above target inflation, the biggest risk for the US AICO ONNY longer term then is not a downturn like we're seeing necessarily in our developed counterparts abroad, but a period of stagflation.
So lindsay, though, is there a chance if we continue to grow and we do see inflation come down, continue to come down, even though you do have concerns about maybe a reacceleration, is there a chance we could just grow bigger and not hotter.
Absolutely, And I think that's the utopic scenario that the FET is looking for, that we continue to see this acceleration and underlying growth resilience in the consumer, positive spending, and positive acceleration in the labor market at the same time that price pressures begin to wane back to two percent. But again, that's a big gamble a big bet when we haven't seen that established downward trend in price pressures.
We're still seeing very sticky components, sideways movement in the core for one month that as I mentioned, a reacceleration more recently, and we're also seeing some of these upside risks to inflation that are still.
Hanging out there.
International factors that could disrupt commodity markets and lead to higher prices, energy prices, fertilizer prices, factors that are outside of the Fed's purview. Not to mention, a very contentious election coming up in November, and regardless of which side of the aisle we find ourselves on, either candidate is proposing expansionary fiscal policy, which will continue to complicate the Fed's ability to get back to that two percent level of inflation.
And possibly contribute to high yields. Lindsay, We've got to leave it there, Thank you, Lindsay, PX the of State.
Four.
Let's talk about foreign exchange.
The US dollar heading towards a third week of gains after getting a boost from stronger than expected US retail sales and an ECP rate cut. Kit Juice of solt Gen writing, the market has been fed a steady diet of stronger than expected US data are of late more of the same will keep it bid, but perhaps mostly against the China sensitive currencies. We're concerned about US tariffs and dissip appointment at fiscal easing.
Aren't going away.
Kit joined US.
Now for more.
Kit, welcome to the program. We caught it with Jeff you someone you know well a little bit earlier this morning. He's looking for parity next year. Can you get on board with that?
I had this sense that we would get somewhere closer to one twenty, not that far on this bounce on a US slowdown followed by possibly.
A move to parity.
Then, because the long run story is difficult. That the challenge right now is that the market has bought so many dollars. And when I mean the market and has been the fire exchange market, I mean the capital inflows from everybody sucked in by US yield by US tech talks, by US exceptionalism, US outperformance overall over the last couple of years. So you know, the world savings have gone
to the United States. And I mean I certainly thought two months ago that once you started seeing people forced to hedge those or reduce their risk that that would give the euroor bounce or it wouldn't be anybody's favorite currency, but it is the world's biggest net investor abroad, so it makes a difference there, and that then the problem would come back in two. Three is down the road. I'm now utterly confused. Jeff much cleverer than me, But I don't think we're going to get to parity on
the way down now. I think we have to clean out some of the positioning at some point and get a more meaningful dollar sell off before the US economic outperformance can drive us lower. So in my mind it's still a couple of years away. What we are now is I think the market completely wrong footed by the US economy. I mean, along with the Fed and everybody else.
Sure, so, Kit, let's talk about the difference between the Federal Reserve and the ECP. The ECB has also been surprised the other way. The ECB has been talking about data dependence meeting by meeting. Do you get the sense of markets just in the driving seat making the decisions now for them?
The market certainly bullies them to some degree in the sense that you know, you can kind of say you know, did the Fed go fifty because the market was talking fifty, or did the go fifty because because they were really shocked by the data at the beginning of August. You know, it's a bit of both. In one hopes it's more the data that are doing it, but they might now say, yeah, if we'd seen the data since then, we wouldn't have acted. The Europe is a bit the same thing, but they've got,
you know, the ECB's big differences. It's only focusing on inflation at least in principle, and to that extent, what it was getting what it's now had is a surprising slowdown inflation, but by its standards, and so it doesn't really have an excuse not to get on with with easy.
We've had one month of that.
But you'd have to say we're going to get more rate cuts down the road because I suspect inflation will continue to fall because there is many growth and the global back crops change. But they are all you know, yes, the market is pushing because that's what the market does, and the central banks are finding that when they get data that support what the market does, that they can't really resist the temptation of going with it.
As you said, very diplomatically, Kit, we haven't really learn that much from ACB news conferences, and whether it's being bullied by the market or the data, either way, they've been sort of flipping and flopping in terms of their overall message. That said, there seems like there was a shift. And yesterday what I thought was interesting was it not only was Christine Leguard talking about potential weakness, but she
made it political. She said that the potential of tariffs in the United States actually increase the risk of downside surprises to the area's struggling economy. How much do you see the ECB cutting rates aggressively to get ahead of whatever might be coming down the pike.
It's hard to imagine the ECB cutting rates aggressively. It's not in that DNA to do anything other than react to inflation. It's still, you know, the job is, the job is to hit the inflation target. But I do think they can pick up the pace from possibly, let's put it this way, from what a lot of economists that expected, while not quite keeping up with the pace, that's priced end of the front end of the curve. Because they are they are, It wouldn't take much more soli.
Doesn't they expect inflation data to push them into feeling that, yeah, look, we have no reason not to get a move on.
At the same time, Kit on the flip side, there seems to be this assumption that if the US puts up its walls and does increase terraff substantially, that will end up with a stronger dollar and a weaker everyone else. And especially giving your opinion about how much of an overweight there is in dollar assets, it.
Seems like you disagree.
Do you think that people are underprising the worst the US economy in that type of scenario.
I think people are looking at the US economy in all scenarios in a state of saying, we know the US economy's done phenomenally well. We understand part of it was the size of the fiscal easing that we saw during the pandemic and immediately as the pandemic was ending. We don't understand why the tightening that came after that didn't slow the economy more. We don't understand how the economy is reaccelerated in the last six weeks. Hell's bells, let's stay with US assets because all the good stuff
comes out of this place. And I think that's there's there's that kind of there's that kind of reluctance to turn out and say, well where else can I where else can I.
Put my money?
And you know, I mean the Japanese were selling were selling US debt, you know, like crazy in in you know, back in July, as they were trying to get out of some of their trades. They're right back in there. They're buying with Gusto again and probably US equities and so on. So you know, there's no I think, I think the market, you know, investors are as much caught out by this unique economic cycle as economists or or central bankers or all the rest of US. And and
the default is US is a Morazonian economy. It's growing faster, There more investment opportunities, It's.
Got high yield.
You know, if I'm there, why should I Why should I cut back pair hedge my currency too much? I know I'm going to end up going back in later anyway, Kip.
Ahead of the US election, more people are talking about parody, even though I know you think it's a few years away, but you do say there is one trade that is definitely perceived to be safe pre election, meaning regardless of either candidate.
What is it.
Safe trades briers? You might have to tell me now, I'm feeling nervous this morning that Nunny said. No, I think people see the people see the safe trades as being still to be short the Euro against various things, and a lot of people see the political trade to be short the UN against everything short.
To you on because either Harris or Trump is going to be tough on China.
Yeah, I mean, I think the piece in markets thinking about about election trades at the moment is that you get bigger moves on a Trump event. So Trump is he's more outspoken, and he's got clear he's got clear intentions on things like Tarris. So if you think the odds of them are fifty to fifty, for the sake of argument, you get bigger moves on Trump. You don't get moves the other way on Harris because she's less likely to get a clean sweep apart from anything else.
So the market ends up concluding I'll have my I'll have my Trump tar off trade now because I'm not going to get hurt for heaven, and rightly or wrongly, that that is a very popular track Kit.
I appreciate the update from you, sir. We're all confused Kit jokes is such. Appreciate it, Thank you, sir. At a Stagia Amarosai Capital writing. Some risks and unease, like the rebounded yields and US dollar are still percolating in the background, but given the positive economic momentum, we stay invested. At A Stagia joins us now for more Anastagia, Good monk, good morning.
What do you think is in the.
Driving seat Reecord expectations Ronics, Which one is it?
I think it's a little bit of both.
I mean, first of all, I think what's really truly in the driving seat is the fact that the economy is resilient, and that has been on full display this week actually for the last couple of weeks. You know, if you look at the Atlanta Fed GDP, now it's actually tracking three point four percent. If you look at the City Economic Surprise Index, which has been negative for the ball of Q two and maybe even you know start of Q three, that's actually turned positive in the
last couple of weeks. And then we've got retail sales that you pointed out point seven percent core core print that's really strong too, So I think that's what's truly in the driving sea. But I also do think there's this extension to the rate cut story, which is the rate relief is being felled by the economy. It is being felled by companies across corporates and consumers, and that's starting to support the economy as well.
And then John Tie last point financials earnings.
I think that's been a really really key development in the last week, and that's why we've seen financials breakout to the upside.
The coast is clear for the financials. Let's talk about tech SML says there's a problem. TYSEMC says there's no problem. It's the coast cliff for tech gun into NIX.
Well, first of all, tech arnies have actually been revised higher, you know, unlike the rest of the sectors that actually have been revised lower. I do think that the setup is constructive for technology. Look, if you look at ASML company, that's a particular technology that goes into semiconductive manufacturing, and you could see why there may be some delays and
capex for those. But if you look at TSMC, that is the pulse of what is happening with semiconductive production right here, right now.
And the couple of things that I heard from that report.
First of all is that AI demand is rock solid and is accelerating. But John, the really really key thing for semiconductors what's happening with non AI demand. And that's where TSMC was also more constructive, saying that they do expect to pick up and things like smartphone chips and other things. So I think that sets it up nicely for semiconductors.
So that secular changes, which is the AI trend, and then there are the cyclical changes which we see. You said something that I want to pick up on that you're already seeing the rate cuts filter into increased economic activity. How is it that so many people say the corporate America did not feel the rate hikes, but that so quickly the rate cuts are getting filtered into the economy.
Well, part of corporate America did feel the rate increases. And that part is, for example, if you had a leverage loan, if you issued a leverage loan, you were paying much more to service at loan. If you took on a private credit loan as well, you were paying much more to service at debt as well, and that's where.
We see some of the resets.
And of course commercial real estate, you know, a big portion of commercial real estate loans have been floating rate, and there's a small fracture of the consumers have felt it.
But that's where I see the first recess.
So for example, in some of the big five banks results that we saw, we see debt underieting really spike, and that means companies are issuing more debt, they're refinancing prior debt, and those dead costs are starting to reset
lower for part of corporate America. And then on the consumer side, Lisa, you know, if you look at mortgage rates, for example, they have pulled back obviously quite a bit from the peaks, and we are starting to see an uptick in refinancings and the banks are talking about that. So those are the early indicators that I see.
For a while, in the high rate period which lasted, it seems like a heartbeat relative to the zero rate period that we had. For a very long time, people felt like the bond market had precedence over stocks, that essentially you could earn more and have less risk by
going into bonds. Is that equation increasingly shifting as we're seeing currently in performance, but also just in terms of if you can borrow more easily, doesn't that lift equity valuations and increase the potential growth and sustainability?
It does?
It does?
There's so many pieces to pick up on there. You know, first of all, now the yields have reset a little bit higher to four percent or a little bit above that. I do think going back into the bond trade might be more compelling, But we're exactly into the bon trede.
Do you go?
Because if you look at high yield spreads, if you look at investment grades spreads, they're really really tight.
So I don't know how compelling that is, especially.
If you are individual and you have to adjust for taxes.
So but on the flip.
Side, I do agree with you, and I'll kind of extend this to private markets a little bit. The reason why I think some of the private equity managers are going to have strong results this quarter in the next.
Couple of quarters is because their debt that they.
May have taken out to finance some of their by our companies that is starting to move lower. The cost is starting to move lower, so therefore the profitability is starting to improve, So I think that's really important.
Just how easy are financial conditions given everything you've just said, Now in my private markets, how you spreads investment great spreads. They are ridiculously tight, ridiculously tight.
Yeah, financial conditions are easy.
But to kind of go back to the point that you made about restrictive policy versus easier monitory policy, I mean we are still in restrictive monetary policy time frame. I mean if you look at five percent nominal FED funds rate and inflation, that's let's say somewhere around two and a half percent, that's two hundred and fifty basis points of restriction give or takes versus that. So as easy as the financial market conditions are, I think the Fed can still get easier.
So let's say they go another hundred at financial conditions of this easy, is there a real risk of a reacceleration in this economy? And do you think we can achieve that without having a spike another one of inflation?
Look? I do, I do.
I do think the US economy can accelerate. And that's what it's doing, by the way, in the third quarter. And as you think about it, the more cores go on the more benefits will accrue from lower rates across corporates, real estate, and consumer. So I do think that for twenty twenty five, we're setting ourselves south for the reacceleration.
The reason why I don't think.
This is going to cause this massive wave of inflation that some people worry about is we don't have the imbalances as we did coming out of the pandemic.
We don't have supply chain challenges. We don't have as massive of a shortage of labor.
We don't have vacancies that were you know, two times you know to vacancies per unemployed person, So we don't have those major imbalances.
Can inflation stay stickier? Can it stay above two percent? Yeah? I think so. But we're not talking about a search to four.
So you're not a goldbug.
I'm not. Look, obviously gold has done quite well.
Gold has done quite well, which makes sense is real interest rates fall.
But at the same time, look at equities.
Look at equities, Look at financials, and this has been one of our favorite sectors, you know, to play this pickup in cyclical activity. Look at technology, Look at by the way, at some of the AI names. I know I've talked to you about picking up the AI semiconductor companies, But actually one of the interestring trades for next year may be the rest of the MAC seven, which I recently not liked because they're the ones that are spending
on AI capax. But if you look at the iqebex numbers for some of the hyperscalers, they grew about forty or fifty percent this year. They're likely to grow about eleven percent next year. So I think the cappex spending may be tapering off, but the monetization can actually be picking up.
So that's why I look for opportunities.
Given what we know about the former president, do you think he's a threat to the semiconductor AI trade?
Yes, yes, I think that is a risk to monitor for sure.
Why is that not being priced in while everyone is, you know, really going in on the Trump trade right now Republican baskets out performing.
Yeah. I mean, look, you focus on this secular momentum, which I don't think any president is ultimately going to derail. But I do think that if we do move closer to the possibility of a red sweep, you do have to think long and hard about what.
That means for semiconductors.
You know, look in companies like Nvidia, for example, have obviously already paired back some of their sales to foreign stakeholders. But I do think that the headline risk for for you.
Know, think about the huge exposure that we.
Have in the semiconductor space from the fact that most of the production is done in Taiwan, you know, think about some of the other linkages to foreign countries. So I do think it's a headline risk that should be monitored. So I would be aware of that, I would be quick to react to that. But in the meantime, I think you have to focus on the trade that's there, which is ai.
Things could change a lot in a few weeks time. Anastas going to see it. Thank you, Anna Stagia amoso Ev Capital. This is the Bloomberg Sevenans 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.