Bloomberg Surveillance TV: September 11, 2024

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am Marie 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. Mike, Good morning,

Well, that's a signal that we're getting from the Bomber. The by market has historically been a pretty good indicator where the FED is relative to kind of what they need to be doing. And we saw this, by the way, on the upside too. Right in the twenty twenty one time frame, the two year got a head on the f side. So it's the same picture just on the other side. And you know, people's complain, Oh the complain. They say, we're looking stock market is behaving fine, but that's not true internally.

Once again, you know, defensive stocks are really doing extremely well.

So I think I think the stock market is taking its cues from what the bomb market is saying. It's not saying hard landing yet. What it's saying is that growth has continued to disappoint it. So since April, and we've been on this program many times since then, I would say that the data has been und distinguishedly negative in terms of growth data. Also, the labor day has been much worse. So how is the equity market dealt

So I think everything kind of sinks. It's just we're waiting.

For the you know, like, can somebody give us the keys to the test, you know, the cliff notes whatever it is, and how's this going to end?

And we don't know, but the market I'm going to losk you face. You've said one of two things. Either the FED cuts aggressively or the labor market starts to improve and improve quickly. That's right, Equity markets to perform well. So if you've got a base cases that one of the others, we get one or the other.

Well, what I would say is that the FED could get ahead of the curves they decide. But the problem they're constrained. Okay, they're constrained by two things. Not inflation, by the way, inflation's over, as far as I'm concerned.

Inflation.

They beat that. They're What the issue is now is the currency market. If they come in and start cutting aggressively, the end dollar relationship is going to create some stress, so they gotta be careful with that. The other thing I went through out there is we've looked at this. When the FED starts a cutting cycle with fifty basis points as opposed to twenty five, the chance of soft landing goes down materially. And they noticed, they know this data, they don't want to signal that.

So they're in a tough spot. The Fed's in a difficult spot. They've They've done you a good job.

Of trying to navigate this challenging different environment that we've been in for the last several years. But now the markets are pressing them, and so next week, I don't really care what they do next week. What I care about is how the markets react, how do the markets behave after they don't They're going to do twenty five probably, and then where do they stay in the press.

Conference the vibes, whether they actually work for the market or not. I'm curious though, before we go into quality growth and quality defensive and what that actually means. You say something about the currency differential. Are there certain target levels that you see sort of unwinding some of the longs that still remain out there. Do you have a sense of just how disruptive the ongoing long trade for the dollar really will be potentially eight down the road.

Yeah, I mean I don't have a specific level, but I do feel like they're trying to defend this low one forties level between yen dollars, so call it one forty two. If we start to you know, one thirty ish, you know, one thirty eight, one thirty nine, I think that could cause some stress in other markets.

Meanwhile, you talk about shifting from quality growth to quality defensive. I've struggled with these monikers quite a bit simply because what does defensive? What does growth mean? Where does Nvidia fit into this, or does a tech trade go Given the fact that people have gotten an AI trade that is so inflated in terms of expectations and timing, what does that mean to you? Quality defensive?

You know, defensives are your classic defensive sectors, whether it's utilities, staples, healthcare, things that are positively correlated to bonds. Okay, they and they did not trade well by the way up until sort of April.

It was really the quality gross stacks.

Now the other thing that's happened is the AI dream has taken you know, a little bit of that luster has come off, and I really gazed up by what semi conductors are doing.

It's not just videots, it's semi.

Connectors writ large, and a lot of those stocks have really come off, and that makes sense to me.

We just we just got overcooked on the whole AI theme. Doesn't mean it's over.

We've written about this extensively, like we're not believers that this is going to change productivity materially in the short term. That's a long term story, and everything kind of got bit up on that. So with that theme now gone, the market is looking for a new theme.

On a gross side, there.

Isn't one, So it does it hunkers down into defensive, high quality assets until we get the next thing, whether that's a bad outcome or a positive out come.

They're going to hide out in these areas.

Mike, you say inflation's over. We do have CPI data though today, So I'm curious to know, how do you think the market would trade if we get say a hotter print says is it too volatile or softer print? Would the markets start pricing in fifty or look at a softer print and say, wow, we are cooling down faster than even the FED was expecting. And bad news really is bad news.

Yeah.

Well, when I send inflation's over, I mean the ry to change on inflation is over, and it's kind of over for equity markets, and quite frankly it's over for the FED. Where inflation is not over is the price level, right, The price level is absolutely squeezing the heck out of businesses and consumers, and so it's like a vice.

And so I don't think inflation's over. An ergar.

But what I would say is that, you know, hot number I think is probably pretty bad for the stock market today.

I'm not expecting that.

But if we've got hot number today, then all of a sudden, the FED is going to stay behind the curve.

They're kind of stuck.

If we get a really soft number, then we go back to our old thesis, which is pricing power is gone. Okay, so we kind of need to thread the needle here a little bit too. I mean, break evens are at two percent now breaking away, So what are we talking about. We're already at two percent and it's not like these things stop on a dime. You know, there's a risk

So I think I think the market's already understand all of this. Once again.

They're going to do something next week to try and manage the situation. Twenty five is what we think, and they'll signal for more twenty fives, not fifties, and then what do they do at the balance?

I think that's probably the bigger wildcard.

Do they talk more aggressively about ending Q team more quickly, do they find other other provisions to provide liquidity. That's the bold case in my view. That's where we could be surprised on the f side. Is there more liquidity coming into the system from other sources?

And after next week, then everyone's going to really be focused on the US election. Goldman Sachs RBC. They talk about how earnings will be much higher potentially under Trump administration if he gets his tax cut plan rather than Harris who's calling for twenty eight percent. How do you view next year earnings growth based on these two proposals.

Assuming that the economy is in a soft landing, okay, if it hasn't overstated, it's welcome. And by the way, I think that risk is still on the table. We're in the soft landing camp, but it's that to me is way more important than the outcomist election in the next six to twelve months. So let's assume we're in a soft landing.

Our views the same.

We think that basically Trump is kind of pro growth, kind of bad for bonds, good for stocks, okay, And that's how we would look at it. And by the way, last night, when the debate was going on, the betting markets kind of went in favor of Harris, and the stock market futures kind of trade a little bit okay, But I do think the stock market is pro Trump. I mean, the stock market has traded better when his odds go up and vice versa.

So Bonsaw good unto Harris and stock's a bad unto.

Harris in theory, I mean, at the margin, I would say that's the setup, and.

The reason being is really taxes.

Taxes is the one thing that requires some congressional support too. But to me, that's the big issue, not tear so much, both administrations of tariffed and then immigration. I think both parties are going to deal with that in some way. So taxes is the issue. Obviously Trump is talking about cutting parents, is talking about raising them.

That's bad for stocks, good for bonds.

I wanted to ask you this question. I want to squeeze it into the very end. Least was knocking on the door. Utility is actually defensive. They're up like twenty percent this year, and it feels like everyone's getting whatever they want from utilities. It's defensive. It's at touched to AI what are utilities?

So this is a very interesting question. So you know, we agree. I mean, we don't think we were one of the first ones to talk.

About utilities as an AI beneficiary back in February March.

I think that's probably gotten.

A little overdone, to be honest. But now utilities are definitely trading with the bomb market, so they are the defensive properties of utilities are I think, dominating their performance in the near term. Here's the interesting about utilities. Their balancees are typically are not great. Okay, so you gotta be really careful with utilities. If it's going to be hard landing, these things are going to start trading really poorly. Caution listeners. If you totally start treating really poorly and

That hasn't happened yet.

But if you look at things like low volatility parts of the of the stock market or defensive, they've gone almost parabolic, and if they start to sell off hard without a stock market rally, then I get concerned about hard landing risk.

That's not the case today.

Interest in This was great clinic, hanzill West, Thank you, sir, Mike Wilson that it's the late says coming on. How is challenging Donald Trump to a second debate? With the eight weeks remaining until election day, Trump sang on Fox News earlier he is less inclined to debate Harris once again. Rob Casey of Signum Global writing this, Harris had a very good night. She did not land any knockout punches. This is going to be a close race tomorrow as

Morning.

You said she had the edge going into this. She base cases that Harris wins this election. Did anything change overnight?

You know, I don't think a lot changed. I think Harris had a good night. But how voters feel about Kamala Harris and how voters feel about Donald Trump. I think yesterday into today not a whole lot different. You know, Harris did introduce herself to more voters, voters who maybe didn't know much about her as she was a senator and VP maybe didn't turn into the Democratic National Convention.

So I think in that sense, you know.

Harris proved that what proved once again she can be on that stage. She deserves to be on that stage, even though she didn't win any primary votes. But that being said, this was not a debate to change people's minds.

There's a phrase that you've used you and the team in your research, asymmetric incumbency. You get to fly on Air Force two, but without the baggage. Now, the former president seems to be doing a pretty poor job of prosecuting the case and getting people to realize that there is some bankat chair. Where is he folding shill? On that front, I.

Think it's a much easier argument to make against Joe Biden than it is against Kamala Harris. You know, I think most of us in the country understand that the vice president doesn't have a whole.

Lot of power.

Was she tasked with the border to a certain extent? Yes, Do I think that that's a very successful attack line against Kamala Harris. Yes, and it's one that Trump made last night. But that being said, you know, she's essentially an undefined quantity. She's done a better job of defining herself than Trump has it defining her.

Some individuals are going to start voting next week, especially in a swing state like Pennsylvania. Trump saying he's less inclined to debate Harris again. This morning on Fox Kamala, Harris's team came out right away and said, we want a second debate. What benefits her of having a second debate if you and many others would say, And the predict market has her up now saying she won this one.

You know, I think that was a stellar decision by the Harris campaign to come out and say immediately after that she's ready to go again. Right, she won, she wants to do it again. She doesn't think it was a fluke. She's happy to step on any state anytime. That being said, you know, I don't think Trump is

I know this wasn't actually in the debate, but Taylor Swift did come out after and endorse Kamala Harrison. The reason why I'm interested about this is because Evan wroth Smith yesterday said they're going after last night five hundred thousand people. Does Taylor Swift actually move the margins into Harris camp?

You know, I think she moves the margins marginally. I mean, I don't think it's a huge change to the race. I think it's the single most important celebrity endorsement in this campaign, certainly maybe in US presidential history. And that's because you know, the Taylor Swift base, if you want to call it, is largely white, suburban women, often young women. These are the voters who could decide the election. They're

Just to build on something both Emory and John we're talking about, how much at this point you can the only thing that really changes the tune of this election come to turnout. Essentially, this is just a turnout game more than anything else.

Yeah, it really is. And between now November, and we talked about this last week. You know, there aren't a whole lot of things that are likely to change the election a whole lot, right, We talked about October surprises all the time. The data doesn't really show that October surprises change voter's minds a whole lot. So between now and November, I think the question is can Kamala Harris sustain her momentum out of the convention. She didn't get the bump that I think she and Democrats would have

From Marcus perspective, it seems like a lot of people are discounting the election to a large degree, partly because there's no visibility, but also partly because there is an assumption that there will be divided government and that nobody will actually get their agenda fully through. What gives you confidence that that's going to be the case at a time where potentially, if it comes down to turnout, then more turnout for one candidate could mean more downpellate races that people win as well.

Yeah, absolutely, And I think that you know, a blue wave under a Harris campaign is more likely than it was under a Biden campaign because Biden proved to be such a drag on Senate and House races for Democrats. That being said, the Senate map essentially comes down to a few particular states that Trump is going to win by thirty thirty five points. I mean, I'm talking about Montana in particular, if John Tester can't win that seat.

I know this is scenario analysis with various probabilities attached to it, and we can sit here and say it's a low probability outcome. But if we got a blue sweet, wouldn't that be absolutely terrible for equities in America?

Yeah, I mean, point plank, Yes, I do think it would be a problem. There are not the moderating forces in Congress that there were under the first two years of the Biden presidency, which was, as we all remember, a blue wave, but a blue wave tempered by Joe Mansion and Kirsten Cinema. And there would not be those

Interesting, Rob, Thank you, sir, web case of signal David Kelly, jpm molk and I said management to stay for shoots of miss wall join us now for a little bit more, David, let's get into the data first, and your reaction to it. Is this noise or news for the Federal Reserve.

I think it's it's more noise than news in the fact that the core number was slightly higher than expected for the month. If you look at it, we've got a three point nine percent jump in airline pairs of very balls, so they were down last month.

They're not you know, given the number of people traveling.

Frankly, it's amazing that we don't have more airline inflation.

We've also got to bump in tobacco prices, which are pre vols a month to month.

But outside of that, it's it's very much on track, you know. And I've been talking for a long time about you know how the economy is or how inflation is cooling, it's just cooling too slowly. Well, I can say that it is now cool to room temperature. I mean, at two point five percent a year over year, there

And frankly, you know unemployment.

Four two, CPI inflation two five, add those together six seven. That's better than it's been eighty five percent at the time over the last fifty years.

So it's really not a bad economy. It's a good economy, and.

I don't think I don't think it calls for any drastic FED action.

I'd be very happy to see twenty five basis points next week.

The we're in the quiet period. We've got all the datesa Now, given what you just said David, does this reinforce the case that we get twenty five? I know you'd be happy to say it, but do you expect it?

Yes?

I do, because I think the Fed must be aware that if they go aggressive here, they're in danger of undermining consumer confidence. And honestly, the economy is doing exactly what they wanted to do. It is settling into a softer expansion of sower expansion. That's what they want, so they only have to gradually return to normal and interest rates.

This to me is a really interesting moment. David Kelly and Stever Shudo, I think are going to agree. Stever Shudo is here and is this something that you kind of agree on that twenty five basis points is the appropriate and logical.

Conclusion from this data we just got.

Yeah, twenty five has been our call for quite some time.

We haven't changed.

We didn't fall into the overall concept of seventy five basis points and fifty basis points. This rate cut arms race that my colleagues on the street have been engaging in,

Yeah, and no one really wanted to engage with that in any kind of verbal right in a Jackson hole. I am curious of your surprise the market's reaction right now that equities are lower, at least initially understanding it's not always the correct move or the one that's going to stick. But does it make sense to you that it would be lower by taking thirty basis points maybe a little off the table.

Yeah, because if I have a possibility of the FED over stimulating, I'm going to have a bit more inflation. And if I have a bit more inflation, guess what, I'm going to have better earnings. I'm going to have a stronger economy and better earnings. So I think, you know, as Jonathan was talking earlier, I think what the market is really doing is saying, Okay, we have a really good economy. We know we can get this level of earnings.

Steve Free fifteen percent.

When you talk, you sound that rosy. The economy is doing very well. Do you think there even should be a recut?

Look you've reached excuse me, you've reached a point in the cycle where inflation has come down to a level that you could begin the process of normalizing rates. The real question is where is that level of neutral rates? And this is the debate to me that really matters, because I think the neutral rate is four percent a two percent real return, a two percent inflation target. Assuming they can get there four percent FED funds rate. The

That's reckon on something that we had from Tilston's slow he was basically in the same thing who was asking the question to whether we are actually sufficiently restrictive. David Kelly, I know you've got thoughts on this matter, so let's discuss it with you as well. Where's neutral? How are you thinking about neutral?

Yeah?

I know Steve and I are supposed to disagree, but I think we're quite closely gone.

I would say three and a half to four percent.

I mean, if you look at the fifty years before the Great Financial Crisis, the federal funds rate to average two percentage points above core CPI inflation. If we end up at two percent on inflation, I have no problem with.

The federal funds rate about four percent.

But I do think that and I think the Fed's long term target will probably gradually go up.

It certainly should, but I also think they.

Should gradually move rates back down to that level because I think we are.

Suffering today from the aftermath.

Of infrast rates which are way too low between the Great Financial Crisis and the pandemic, and that caused an enormous inflation in home prices and other asset prices.

You know, the carrying cost.

Are crazy was zero, and so we've got a lot of crazy bets out there now. I think a lot of Americas are locked out of the housing market right now because home prices are too high given a normal level of more.

So I want them to, you know, if there's.

Nothing wrong with the economy fundamentally, if it's basically on the right track, you shouldn't have an active policy either way. You shouldn't be restrictive, you shouldn't be a stimmlative.

You should get back to neutral. And neutral is less than you.

Know, five and quarter five and a half percent of the federal fundraate, so that they should get going, but they should go slowly because there's no need to upset anybody here.

Just gradually get back to neutral.

One market is still falling, yields up now by almost ten basis points at the front end of the curve on a ten year by four basis points, and that two year ten year just turn a negative just briefly. We'll see if that sticks. For the fifth time on this program, stave a Shut, I want to come back to you. You touched on the differences between now and twenty nineteen. The difference between where you think neutral is and where the FED is anywhere between one hundred and

Again, I think the policy make is you're looking at are political economists, and getting back to that low level of interest rates allows them to do things that they would like to do. It allows them to try to create an environment where they're going to try to rebalance income distribution, and they're going to try to grow the employment rate and grow wage and salary and come to make up for the shortfall that was created by the COVID inflation. And I think this is their underlying motivation.

The tactic to get there.

I don't think the aggressive adjustments or the fact that we have to get to lower levels of rates are going to do it for them. I think they're better off doing again. David and I agree doing a very gradual approach to allow the economy to adjust to this, allow the economy to move on its own basis, not based on policy stimulus. This is a fat that I think wants to add policy stimulus in twenty twenty five

I'm not sure if I should be happy or nervous that you both finally agree, but this is what we've got. Scared David, Kenny, Steven Shashudo to the both of you. Thank you, guys, appreciate it. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, an gie politics. You can watch the show live on Bloomberg TV weekday