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Bloomberg Terminal and the Bloomberg Business app. Andrew Seeds of Morgan Stanley in the Soft Landing camp Self landings don't have to play out in a straight line. This is a tricky window where risk around growth are skewed to the downside. A few false negatives in the data can lead to belts of volatility. Andrew joins us now for more. Andrew, welcome to the program. Let's start with that phrase, soft landing. What does it mean to you?
Good morning? It's great to be here.
So for us it means inflation coming down, the FED easing, and no recession. And that's you know, very much what Morgan Stanley has been forecasting what we continue to forecast, and I think that's what I think, fortunately, we've.
Been seeing from the data.
I think we were in a critical window over September and still in October where you know, the market's going to be more vulnerable to weaker data because the FED and the ECB haven't really gotten underway yet with rate cuts. But I think so far that data has come in pretty solid, and I think that supports the soft landing view.
Andrew, do you refer to some of the data as a few false negatives potentially in our future? Can we talk about the data we had through the summer and at the other side, which one was the head fake, the deceleration in jombs through the summer, or the reacceleration we saw on Friday.
Yeah, so I think it was potentially this kind of rise in the unemployment rate. And this has been something that's in a lot of focus because you know, over a long period of time, it's consistently been one of the more worry cyclical indicators for markets. You know, once the unemployment rate has rise, it's almost kind of too late at that point.
That's one of the last.
Indicators historically to crack, and at that point it's very bad for equities and credit, and I think that's what the market was concerned about. You had concerns about triggering the SAM rule, You had concerns at the unemployment rate was already going up, and yet the FED as of the July meeting had still kept rates on hold.
Now you know, there was another view there, and that was the.
View closer to the view of Morgan Stanley's economist, which is at the unemployment rate was giving somewhat potentially kind of misleading signals because of the shape of the labor market the fact that participation was actually quite strong, that was kind of confounding the.
Picture a bit. But we really didn't know.
And even you know, heading into the other week with the the latest non farm payroll number, you had a really wide set of expectations going into that number, and the usually wide set. So I think the number we got was was good. We were at one hundred and sixty thousand at Morgan Stanley. We got a better number than that. And also I think given some of these very kind of unfortunate track natural disasters that we're seeing in the US, that could make the next several data
prints more uncertain. So I think the fact that we got one solid reading for the economy or another solid reading on jobs is quite helpful for I think assuring the market that for now the economy is still in an okay place.
Even with those prints. It's interesting to look, Andrew at how FED language hasn't changed. They are still talking about a balanced approach. Balanced is the new buzzword. Collin said it yesterday. Jefferson said it too. And we have an Atlanta GDP now tracker at three point two percent. If it is a FED that is still biased to cut with a strong economy, how positive is that for risk asses?
Yeah, so we do think we're still in a good is good environment, you know you mentioned correctly.
We also followed that Atlanta FED tracker.
We think it's been a great indicator recently and it is suggesting a very strong US economy.
But I think the other.
Important thing is inflation is really looking like it's getting back under control.
That kind of the battle against.
Inflation has been one and if you look at forward looking inflation expectations from the interest rate market, say over the next two years, those are kind of below. Those are implying a number below what the FED is targeting. So if we think about kind of historical performance patterns, certainly historical patterns for credit, you know, a scenario where the economy is holding up better, where the FED is cutting more gradually towards neutral, which is what we're forecasting
at Morgan Stanley. We think from this point on they're doing twenty five basis point cuts. That's been a much better kind of trade off for risky assets than one where growth is weakening more and you're getting a lot more FED cuts. So I think the scenario that we're getting in the data is very much tracking closer to that better soft landing base case that.
Scenario lay out. It's happening in the treasury market, that repricing has happened since Friday, but Andrew, in the corporate credit market, the repricing hasn't happened. Investment grade spreads are still at eighty three basis points, exactly where they were on Friday. Are you surprised by the resilience the unmovedness of this market.
Well, you know, look, spreads, spreads are tight, but our view at Morgan Stanley has been that spreads should be tighted that we're in an environment of better than expected fundamentals. We think soft landing is an unusually good backdrop for credit.
Credit likes moderation.
A soft landing is all about moderation and growth and inflation and monetary policy.
And you still have very good technicals, You still.
Have very strong demand relative to supply in the market, and better than average fundamentals. Better than average technicals probably should mean, you know, tighter than average, richer than average valuation. So I think another important factor, and I'm glad you linked it to yields, is we do think we're in an environment where higher yields are good for spreads, That higher yields are bringing in more demand from insurers, from pension front funds, from a lot of the buyers who've
been really driving the market over the last year. And so you know, with the yields going up to four percent, all of a sudden, that same spread hits a lot more yield bug for those buyers.
Andrew, right now, we're dealing an environment where there's a number of potential risks in the United States. There's the politics potentially we're not going to know for days weeks, and we could see a contested election. Then there's the geopolitics. We see in the short term increase in the oil price. What is the biggest catalyst to potentially your soft landing scenario.
Well, I do think, you know, understandably, I think the US election is going to and will get a lot
of that focus. You know, I think you are facing a close election, that's one important factor, and between two candidates with very very different policy agendas and policy proposals, and so, you know, I think in terms of thinking about factors that are not just going to affect the market over the next next month, and we are less than a month away from the US election, but also really going to potentially affect how investors think about pricing
into next year, I do think the US election probably stands out as a really important factor, and and that's why certainly, you know, at Morgan Stanley we've been devoting a lot of our effort to trying to understand the issues around it and research related to election implications.
Do you think the market right now is properly hedged for a scenario where the election might be contested.
Well, I think that's it's difficult to say.
I mean, I think we have seen some increase in volatility around the month of November but it's also a factor where this is an issue.
I mean, I'll talk about the election more.
Generally, that is a kind of an unknown heading into heading into next month. The markets had this on their calendar for a long period of time. I think a lot of investors in our meetings cite the election as a major source of uncertainty.
So, you know, I do think.
We as much as it's fair to say that the election is bringing up the potential for volatility, is bringing the potential for uncertainty, I think it's also possible. You know, it's also fair to say that investors are very aware of this and that they are they're going in with their eyes open.
Now. You know.
Again, I think it's a factor that we also when we look out into twenty twenty five, and you know, again we're pretty optimistic, say on more m and a activity in the market. You know, we actually think that moving past the election, just kind of having this once this question is resolved, that that can be a positive
catalyst in certain ways. So that can help, we think trigger more corporate activity, and that there are some you know, some risks associated with it, but also some positives As you move past the event.
You're not the only one who's said that. Andrew appreciate it. Andrew sheets the more constanting Camra Dawson of New Edge Wealth, saying we would not be surprised to see continued volatility in the near term as risk assets are going into this historically high volatility month price for perfection. The volatility is unlikely to be ctist clinics caatis clissmic given the backdrop of strong economic growth and a shift to more
supportive monetary policy. With a very long word, Cameron Dawson joins us now for more easy to write than say out loud. Cameron, thanks for that, put it in just for you, Thank you very much. Let's talk about this run we've seen in some of these individual names and video has had a massive run five days of gains, and for some people they're reflecting on the first half of this year where we had this big boost in inflation turned out to be a bit of a head fake.
We started to think about high rates for longer, and tech stocks really started to perform and we reached in for that playbook all over again.
It is interesting to see the equal weight S and P five hundred, which has been doing better over the last couple of months start to roll over on a relative basis, which just suggests that maybe there's this narrowness creeping back into the market. And you see it within the tech sector itself. Look at video being strong driving semiconductors, but flip the page to software. Microsoft is breaking down.
It's now below it's two hundred day moving average. So even within the all great tech sector, there are pockets of weakness being held up by just a couple of names.
Is this all about red cup expectations? Is that in the drive and see or is it something else?
We think it's the confluence of everything if you take a step back and appreciate the fact that you have strong economic growth. Look at Atlanta fed GDP now at three point two percent, supported by fiscal deficits. As if we're in a crisis now with the bond market pricing in the largest non recessionary cutting cycle in forty years, What is rate or what are risk assets not to like? And we think that's why you see credit spread so tight.
The b DOUBLEA credit spread is now one hundred basis points, nearly at the lows that we saw in twenty twenty one. Equity valuations twenty one and a half times. That's at nearly the highs we saw in twenty twenty one. So these markets are priced for perfection, but that's because the backdrop is quite nearly perfect. The question is can it last and where does it go from here?
Does earning season help? With expectations of under five percent growth your rear, that's relative to what we've seen before, kind of a low bar.
It is a low bar because you've also seen those estimates get trimmed going into this earning season, so maybe we can jump over this lower bar. The thing that's interesting is over the last two months you've actually seen twenty twenty five estimates get trimmed as well. We think that's why markets have stalled out over the last couple of months.
They've been relatively flat.
So you do need to see earning sestments continue to rise, we think, in order to support the market. The one thing that has been the key underlying support for this market since the beginning of twenty twenty two is rising twelve month forward earning sestments.
That is absolutely critical to maintain, and.
You've seen that in seventy two percent of the companies. That's according to Bank of America are expected to grow their EPs. That's some good breath, but as John was just describing, the market doesn't have breath at this very moment.
Do you expect that to change? It's certainly the hope of a lot of people.
And if you look into next year's earnings estments for twenty twenty five, the market has priced in the mag seven decelerating materially and the rest of the market accelerating in their earnings growth. But in a way that actually creates a high bar for the rest of the market to deliver because you have these big accelerations in earnings growth which are already priced in and forecasted.
So the banks would put on Friday, and we're all reflecting on what we heard maybe two weeks ago when we heard from Alli Financial warn about credit risk, and we heard from Dan Pinto JP Morgan. We talked about lower interest rates maybe weighing go on that interest income. What do you think is going to be the standout theme for this reporting season for some of the banks, both big and small.
I think it all comes back to the credit risk question, which is the underlying question that we've all been asking. Is the economic data overstating the strength of this economy, and the message from the banks will be important because they'll give us a notion about small businesses, they'll give us a notion about consumers.
And if we continue to see.
Credit risks bubble up, look at default rates within consumers. That's where ALI was flagging back a couple of weeks ago. If you continue to see that, it would question some of this headline data necessarily not being as strong as maybe it looks on the surface.
In the Wait a little bit, Jack Caffrey, JP Morgan mentioned this yesterday. It's very unusual to see defaults on auto loans. If you go back to GFC, I remember all the stories we tell the car was the last thing. It was the one thing you held on, so you always made that payment.
What could that be about.
It's partially a function of the price increases that we saw coming out of the pandemic. It's partially a function of people reaching for cars coming out of the pandemic, but it also likely reflects the true K shaped economy. It's usually the lower income consumer that's more likely to finance their cars and have floating rate debt overall, with credit cards, we do know that the low income consumer is under pressure and the one thing that is keeping
them above water is this jobs market. It's pretty incredible that you're seeing this huge uptick in default with a relatively robust jobs market.
Look at where the unemployment rate is.
If that goes up any higher, this could actually have default in that cohort of consumers that would be in line with the GFC, even though consensus seems to be that we're not going to have a consumer led kind of recession in this cycle. So I think it is incredibly unique, but it is certainly something that catches our e that makes us question the data.
That is one of those things again just out of line with an economy that's been driven by consumer spending. You also see it in some of these companies in just the past month. Pepsi, Constellation, Nike, Fedaches, rh Hormal, Dollar Tree, Lululemon have all cut their sales or earnings again just in the past month.
Is there a sector.
Because this has continued to be a problem for this equity market of staples of packaged food companies that you just can't buy until we figure out what's happening with the consumer.
I think it's all a reflection of this fading pricing power, and that comes squarely to head with what we're seeing within forecasts for earnings, because earnings are forecasted to actually accelerate next.
Year on the revenue line.
If you see fading pricing power companies effectively saying we want to raise prices, but consumers are pushing back because they can't take it anymore. That suggests that you'll actually see a deceleration in revenue next year, which is certainly not what's being priced in.
Does that cap just how bullish you can be on an overall equity market which with otherwise has good fundamental growth in the economy behind it.
We don't think it would be be the end of the world or a two reaching of a base case to expect relatively flat returns in twenty twenty five. It's not enough to say get out of your equities and run for the hills. It's just to appreciate that if that twelve month forward earnings number starts to flatline, it's likely that returns flat line. It looks a lot more like a year like twenty fifteen or twenty eighteen, or
the market chopped sideways. And the good news in that is it effectively allowed you to grow into very fulsome valuation multiples, which is where we are today.
Cameron, I hate to be the debbie downer, but what if tariff Man comes back?
What if forward earnings actually look like for these companies.
We didn't necessarily see it impact company earnings in a material way in twenty eighteen because it was far more pocketed. If we have broad tariffs, though, this is certainly something that could challenge the earnings picture because we do know it's effectively a regressive tax.
We do know it does lower consumption.
It's less of an inflation risk and more of the fact that it would dampen consumption, which then, of course would cause you to question earning sestements and that would be a source of volatility for equities.
I meant, too, the debbie downer on the earnings estimates. Do you think companies are going to have to focus on this in this quarter because it is just around the block in terms of what this election is going to look like.
We've already been hearing from companies over the last let's call it three four months that they've been delaying some capital spending, they've been delaying some hiring decisions, because of election uncertainty, So certainly that is something that's weighing on their mind whether or not they're going to absolutely make changes because of the election going into this earning season, they'll probably say, we have to wait and see.
Think about how wide the rank is for twenty twenty five a sweep fre either side. We can have a corporate taxt right of what twenty eight percent on the one side and fifteen percent on the other with conditions, What does that look like for you? Just how wide is the range for twenty twenty five?
Completely massive?
And I think that what we have to appreciate is that both sides what they have in common is that they're talking about higher deficit spending and growth dampening policies. So on one side you get growth dampening from tariffs and potential immigration. The other side you get potential growth dampening on higher corporate taxes, which just means that we then have to turn our minds to the bond market and how does the bond market digest all of this.
We do know that the bond market did not like the higher treasury issuance in the third quarter twenty twenty three. Treasury yields went up by one hundred and fifty basis points and valuations within the equity market hated it. So we do think that instead of this idea by the rumor sell the news with the election, that the election itself could be a source of volatility if it results in a sweep.
That could be charactistmic camera, thank you, Did I do that right?
Yeah?
Thank you? All right?
Second guard Cameron Dason and new h Wow Cameron, thank you very much. So here's the latest fame of bracing for Milton's landfall. Already stretched thin following how Urricane Helene. The agency is preparing for a three billion dollars deficit by temporary but the government says it has the resources to meet immediate needs. The former FEMA administrator, Craig Fugu, joins us now he let the agency under the Obama administration. Craig,
thank you for giving us your time this morning. We recall also some of the work that you did with Governor Jeff Bush back in the early two thousands, and maybe we can start the conversation there of the hurricane seasons that you oversaw in two thousand and four, five six. When you think back to that period. What's different about the hurricane seasons now that we have to confront in Florida.
Well, I think we're just seeing rapid tentification that we haven't seen before in history. So when you look at going back just ten years, how many storms went from a tropical system to a Category by hurricane in less than a couple of days. And so, you know, I think we're having to just get ready for these more intense hurricanes as they're approaching and maybe.
Not have the leak time. The good thing.
About Milton is there's been a lot of time to get ready. Many people started evacuating as early as Sunday, So this is a little bit different than a storm that just popped up. They had time to get ready, but it will not reduce the impacts.
Craig, let's talk about the FEMA response. Are they prepared?
Yeah? I get this question a lot.
And as bad as Selene was, FEMA has a lot more resources, a lot more capability, and they're not going to have to stop.
The response in Hurricane Helene.
That's I think a big concern for people in that area that while the national media has focused now on what Milton's about to do, FEMA is still working and supporting the governors in the states that have already been hit. And again, the party in any of these disasters will be always life saving, life sustaining, and getting communities stabilized to set the stage for long term recovery.
FEMA recently said that they have only nine percent left of their personnel reserves, that's about twelve hundred people. Where do they look then, in terms of getting the bodies they need to go to these areas that are going to be hit.
Well, those numbers really referred to staffing required for long term recovery. The initial response teams reset between disasters. FEMA has a lot of capability to reprioritize their resources as well as employ people from the headquarters. We did this in Superstorm Sandy. If EMA needs to, and given the size and impact of what Milton looks to do, I would imagine there's going to be a lot of people redeployed across the nation the support the state of Florida.
Is the current funding enough or do you think Congress is going to be forced back into session and get off the campaign trails?
Well, right now, FEMA does have money to do the initial response and provide support to the survivors.
I think the bigger.
Question is going to be the level of funding required for long term recovery, the permanent work. And that's not just going to be FEMA. There'll be a lot of federal agencies that will need additional funding to support the recoveries from these previous storms and disasters as well as what we're about to see with her Kane Melton.
And it's not even just those storms, Craig before it, it was wildfires out west that also required FEMA money. So you get to this point, as John mentioned, a three billion dollar deficit. Does there need to be a structural change with FEMA and its funding to ensure that it can continue to deal with successive climate issues.
Well, this was a situation we actually faced it in the Bomb administration and then Speaker Ryan and at that time OMB Director Jack lou had come up with a way to increase FEMA's funding, but it was always based upon the past storms, the past disasters. So the problem is is we get bigger and more intense disasters with little break between them. We really need to look at a funding mechanism going forward. But I think it's critical
we understand this is your federal tax dollars. This is increasing cost to the budget that does not seem to be slowing down. It's growing rapidly, and it's far beyond
just what FEMA programs are being taxed with. So for the federal taxpayer, we're seeing a tremendous trans for a risk to the taxpayer where previously insurance covered this, and as the insurance markets are no longer able to provide affordable or available insurance due to these increasing impacts, we're seeing this transfer risk to the taxpayer and that's going to grow. And I don't know if we have answers for that yet.
What does that mean?
Craig from when these areas get rebuilt that are still under risk, a place like Tampa also had impact from Helen Now again Milton, when government agencies, when FEMA, when others go in to rebuild these areas, does it need to look different this time because they are under constant threat.
The answer is yes, And.
FEMA has for a long time been focused on rebuilding better, not just putting things back. But the challenge is we're going to have to not only just put it back better, We're going to have to build it for the future risk,
and that isn't going to be inexpensive. The other problem I see is that we're going to increasingly see it transfer risk to government run programs like the Citizens Insurance program in Florida, because commercial assurance is finding extremely difficult to be able to stay in these markets where it's affordable product given their extreme exposures.
It's a conversation we had earlier this morning, just devastating. Craig, appreciate your time this morning. Thank you, sir, Craig Fuget there, the former FEMA administrator. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings
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