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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine
am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app in Lincoln of bemo Right in the following, we're encouraged by the modest bid for treasuries. This does trigger our concern that investors are looking for a more dubvish CUD than Powell is going to deliver. On Wednesday, he joins us now for more in good morning morning, Happy to be here, Great to
catch up with you. Let's talk about the bond market running so far this year, our performing the bond market bid has returned to treasuries. Let's start with why. What's driving that move for you? So?
I think there are two main factors. The first is we got through the period of being concerned about a buyer strike in treasuries. Now we know that there's the man at the auction. Now we know there's plenty of demand in the secondary market. The second major issue is that the period for caref passed through to really move
the inflation complex has largely passed. Now. That doesn't mean that there won't be upward pressure on goods inflation as a result of the trade war, but because it wasn't condensed into a three month period and is going to be spread out over twelve months maybe longer, that means that the market can move on to trading. What's next, and what's next is the resumption of normalization.
Do you think that it's a paradox to see both a rally and the bond market and a rally in risk assets that seem to be really hedged on this idea of a reacceleration and growth.
So I have been very surprised by the resilience of the equity market and the fact that we continue to move higher and higher and set new records every day. However, if we put it in the context of a monetary policy adjustment lower that is still holding out hopes for a soft landing I think that higher equity evaluations make sense in that context. It's not until we get a bigger spike in the unemployment rate or a slowdown on the consumption side that we would really start a conversation
about a recession. And barring that, as long as the FED is in motion towards lower rates, I don't think there's a reason to sell.
Is there a trigger point in terms of ten year yields that signals to you that we really are seeing weakness? Bad news is bad news versus just simply people getting stomped out of their short not long term treasury positions and being forced to buy.
I think that at this stage, given how positive term premium is, particularly further out the curve, that we would need to see ten year yields below three seventy five or even three sixty five before I would characterize that as anything more than just going back to the prior range. So we could drift lower in rates just through the process of normalization.
When we quite to you, we toallked about the risk into Wednesday, just a lamporight on that what is the risk coming into tomorrow's decision?
So the market is poised for a very douvish takeaway from Powell. But the reality is if he goes twenty five, that means that we're still restrictive, we're slightly less restrictive than we have been, and he will justify continuing to remain somewhat restrictive in all the uncertainties. And so if the takeaway is that we're not starting twenty five bases points per meeting and instead it will be meeting by meeting, I think the market sells off.
How much?
Why will you put on the debt plot? The market loves to trade it and it gets revised all the time. So I'm cautious about assuming that that gets realized.
Do you think that markets have really grappled with the idea of FED independence or have they just shrugged it off and say.
What does that mean?
How can we really even know? And ultimately, whoever's on the FED board, we'll do the right thing for the economy at a given time, Right, So what's the sort of pendulum there for when that starts to matter again?
So if the FED didn't have the justify cation of slower payrolls growth and the bingchmark revisions lower, I think we would still be having a conversation about FED independence. But the fact of the matter is the data has caught up with the pressure that was coming from the administration, and so FED independence can be preserved while still cutting rates.
So we're about thirty six minutes away from the retail sales figure that we get out from the United States and a real question of how to read this right? What are you looking for to indicate whether this builds unsoft payrolls data or whether this kind of flies in the face of that and points to a lot of confidence by consumers.
Well, from a GDP perspective, we look at what's called the control group, with which I mean which backs out all the components that don't flow through to the GDP consumption figures, and so that'll be the key.
And if it is zero.
Point five point six, I think that that's going to be a strong showing for a month in which we saw weaker payrolls growth.
There's another thanks to point and that makes us wow this morning that one't get as much attention impul prices. Important is that as an input to gauge who's paying the tariffs right now and who isn't.
Well interestingly, import prices at this stage are not going to be as relevant to the tariff discussion. There will be more relevant to put in the final estimates on core PCE for this month or for the month of August. And I think that that's going to be important because we're tracking at zero point one eight, which means a very benign print on the Fed's preferred measure of inflation.
Stay with us more Bloomberg surveillance coming up after this. Let's stand to trade. President Trump and She holding a call on Friday after trade talks concluded in Matrid, Spain, joining us now to discuss as the former senior White House Trade advisor Cally Ane. Sure, Cally Anne, welcome back to the program. So we get the phone call on Friday between Trump and She. What are you expecting to be the outcome of that?
Good morning, Thanks much for having me back on Well. I think what this is is a pretty significant political and commercial deal. Now we don't exactly know the terms. All we know is that this involves US controlled ownership. President Trump teased with reporters yesterday that there may be some government ownership, either US or Chinese potentially involved in
this as well. So we could see some unique deals kind of like what we've seen over the last few weeks with the Trump administration and exploring US ownership and types of investment credits. But we'll have to see what this ultimately results in. The readout was pretty good. I'm expecting this to move.
Forward, Kelly.
And what is a larger significance of this, given the fact that expectations were pretty high heading into this meeting that it wasn't just about TikTok but the broader dispute between the US and China.
Yeah, I think that's a great question. And we certainly had a deadline coming up this week in terms of by dances need to divest in order to prevent the app from being banned in the United States. That's why the focus of this meeting was really on TikTok. But they met for two days. Clearly they talked about a host of other issues. So the question is, well, what about the other six hundred and fifty billion dollars worth of bilateral investment and trade and economic relations between the
United States and China. Where do we go from here? And we don't know much so far. The talks have been relatively narrow in scope. They focused on export controls on the Chinese side for rare earth magnets. They focused on some US export controls. Potentially we could see some purchases announced as part of a leader level summit that could come as soon as the APEX summit in October.
But beyond that, I think there's a lot of work left to do in this relationship, and I don't expect some grand Phase two style deal to emerge anytime soon.
So then, is it surprising to you that it's going to be capped off on Friday with a phone call between Jijinping and Donald Trump given the narrow scope of what people are expecting.
Yeah, well, again, this is a very significant issue for the president. He ran on keeping tik Talk alive notwithstanding a congressional ban. This is a shit that China has been able to hold. It's a piece of leverage that they're now giving away.
So I think this is a.
Sign that they are saying, Okay, we are gearing up for some leader level summit that might have some big purchasing commitments. Maybe they'll talk about a fentanyl and some sort of off ramp there with steps taken from China for confidence building. But again, I don't know that China's also interested in a broad based Phase two agreement either.
I think China's looking to stabilize the relationship, and this goes towards that, but it doesn't fix all the things that are wrong in the US China relationship.
And Kenny on something I was wrong about. I thought we'd move pretty quickly back to the purchase agreement secured in the president's first term.
What's the hold up on that?
Well, I think a lot of water has run under the bridge between Trump one and Trump two. You had the Biden administration who really didn't enforce any of these commitments. And now from China's perspective, this is something that they can give away. This is a piece of leverage. It's that commitments they've already made. They already committed to egg purchase, energy purchases, aircraft purchases, but they haven't really followed through
with that. So again, I'm expecting to see them to commit to at least that, if not more, in the coming weeks and months. But we'll really have to see what else happens here. Again, the world has changed significantly in the last five or six years. I just think that the chessboard looks different well.
Let's talk about the rest of the chessboard. USMCIA has got to be renegotiated. The Mexicans seem willing to put the walls up to the Chinese, something we know is going to annoy Beijing. I just wonder how the US and China are going to figure that out in the next year. And I just wonder if that's a recipe already for tention further down the road.
Yeah, and this was really interesting, and I would actually rewind back just a few days to Friday, where the Department of Commerce put twenty three Chinese entities on its entity list. China of course retaliated with launching its own investigations of anti discrimination, anti dumping, and then it's finding
in the Navidia case. But what we have here is a relationship where China and the US can still make progress on politically significant issues like TikTok, while at the same time defending their own interests on other areas of the economic and national security chessboard. So when it comes to Mexico and those tariffs that are now going to go into effect on Chinese imports, I think we're going to see the US asking more and more of that of US trading partners. Now Mexico is much more reliant
on the United States than it is on China. I don't think every country is similarly situated in the same way, but there is this concept of changes to rules of origin that we've talked about and the administration has teased, and I think what that means is the US is going to be seeking from trading partners that if you want access to our market, you've got to limit the Chinese content that is in the goods that are coming
into the United States. And I think to your point, that's going to cause more friction between the US and China.
A lot of companies and economists have talked about how peak tariff uncertainty is behind us, and that's unleashing a lot of optimism at companies who feel like they at least know some of the rules of the road. Do you think that's right and that actually there's room to de escalate further, to see even a further softening and tone, especially ahead of next year's midterm elections.
Yeah.
My sense has been that where things are right now between the United States and China, with which is something like a thirty percent to fifty five percent average terif rate depending on the good where we have talks that are ongoing, but we're still separately taking national security and economic measures that may discriminate against the other. I think this is more or less the status quo, and while the numbers may shift around one way or the other,
I think this is as stable as things get. And frankly, I think things could go the opposite way. If a year from now we still have China buying loads of Russian oil, if we still have China looking to be slow walking some of these discussions, if they're cutting off exports of rare earth magnets, this relationship could actually fall off a cliff and get much more unstable. But I think sort of the best case scenario from an investor perspective is probably the status quo right now.
Stay with us. More Bloomberg surveillance coming up after this. Elliots Galou, the senior investment strategist that Bank of America Securities Joint just now for more and it's what an interesting moment, and welcome to the program. Picked out two bullet points from your survey this morning when it was released. We've got this equity allocation that's the highest in several months, and at the same time you've got these valuation fees
dominating to alis. How do you think we're going to reconcile those two things.
John, I think you know it's one of the great point from the global fund manager survey. On the one hand, investors see global stocks as the most overvalued on record, but that was already the case last month when you and I when you and I met, and at the same time they increase the exposure to your global equities through the highest since since February. In fact, you know, valuations matter is the one factor that matters most over
the long term. But in the short term investors focus on the cycle, and this is a cycle that's dominated by strong macro forces, which are huge monetary easing. There have been ninety five rate cuts here to date, and from tomorrow the most important central bank in the world will join the rate cutting party. And on the other hand, there is a micro force like no other. I'm talking of course about AI, and investors and FMS investors are
very bullish about AI. They think this is a deflationary force. They think this is a force that is already lifting productivity growth, and that is why they continue to buy the stock market and to buy the very expensive tech sector despite sky high evaluations.
Alias they are bullish on AI, bullish on the equity market, how bullish are they on growth? I understand that everyone's long rate cuts at the moment, but is that leading to an improvement in the outlook?
Look? Amongst the huge convictions from FMS investors, the one that the Fed will be cutting in global central banks will deliver further rate cuts is maybe the most conspicuous, right, and we have a share that is greater than eighty percent of FMS investors who expect short term rates to be lower. You mentioned the dichotomy between sky high valuation on one hand and an increase in equity exposure. The other dichotomy in the FMS is the fact that everyone expects
rate cuts. A net majority see at least four rate cuts from the FED in the next twelve months. And on the other hand, investors are actually very highly concerned about inflation, you know, and consequently, the expectations that bond deals will rise in the next twelve months is the high since August twenty twenty two, when inflation was a
few points higher. So I do believe that this view that the global economy is heading into a global soft lending is at the heart of global investors stock optimism. But ultimately they think the globally economy will weaken, but inflation as well is going to stay elevated. Altogether, the soft lending conviction is the one that explains why investors optimism in terms of stock exposure is.
Wisic ellies, I want to stay on that for a minute. You said that the number one tail risk right now is inflation exactly because of what you just put out there. We're seeing inflation above two percent, We're seeing inflation above two and a half percent. What will it take for this to manifest itself in the psychees of investors?
Okay, I do believe that the conviction that yes, inflation is here to stay above target, but AI, which is again dominant micro force that is driving investors bullishness, will be able to lift productivity growth over the long term,
help put profits growth and health margin. Is what is also holding investors optimism in an environment where inflation is above target is the fact that the hyper scalers able to increase capex right an environment where inflation is high, usually investors would be a little bit worried about corporates
increasing capex at the extent Hyperscaler are doing. And yet in this survey we find out that the CIOs, the typical fund managers participant, is asking CFOs to focus on capex more than anything else.
AI.
The conviction that AI is the dominant macro force is why at the end of the day, investors are bullish and they think inflation is Yes, it is a concern, but is not detrimental to stocks.
And it fits this puzzle, this idea of how you can have ongoing growth without commensurate inflation and maybe a pretty chepid rate of hiring. I am curious about your view on the dollars. We've been talking a lot about the weakening trend that we've seen over the past number of months. You said that the fourth quarter pain trade seems to be a stronger dollar. Just how overweight our investors this idea of a weekening dollar right now.
Look, if you look at the fund manager survey in itself, investors say that they are underway the dollar. We hit peak dollar bearishness in June. Since then it stabilized around that level. But when you look also at the hard positioning data, the flows data. To US, it feels that investors are emotionally burished on the dollar rather than physically verish.
If you look at the flows data, the picture that we solver the summer is quite mesmerizing because with in fact, we didn't see any net new inflows to US equity funds, but at the same time in August we actually saw the biggest monthly inflow to US bond funds, driven by near record pace of inflows into US IG funds.
So if investors were truly perish.
Physically berish on the dollar, they would they would not be buying US bonds at a record pace. So we think it's really a matter of hedging. Investors want to hedge against a weeker dollar, but they are not ready to sell the beloved US assets. And we think that US dollar bear market or the debasement of the US dollar is to us the cleanest investment theme into twenty twenty six. The price of gold, the price of crypto's signal that the dollar will weaken further.
Allies, before you go and just want to sweaze this in. You're sitting in London. The present is going to join you in the next twenty four hours or so he'll arrive in the UK as well. You've got these contrarian long trades in here, bonds being one the other UK equities elis, why does that jump on the page to you?
Look, this is why I'm in London today, you know, just to be an advocate of UK equalities. You know, a very unloved asset. You know what struck me in the fund manager service that investors will already underweight UK stocks, but what happened in September is that they decrease their allocation to UK equities by the most since two thousand and four, matching the biggest drop on record.
So if investors truly.
Believe that the economy will be heading into a soft lending, that bond yields will remain anchor and we won't see a big breakout of global government bond yields. I think there is one asset that is very cheap, very much and their own, and in which you can get to a big bank for your buck.
It's UK Greece.
Stay with us. More Bloomberg surveillance coming up after this. The latest in this market an upside surprise on US retail sales. The control group positive zero point seven percent. The estimate and our survey we were looking for zero point four with us around the table. Steve Rashutto of zero Steve Goomonik, good morning. It's going to see you, sir, at the epicenter of your research. I think you're cool at the moment. You ask the right question, just how
restrictive is monetary policy? Clearly the Federal Reserve's got one opinion on that. What's yours.
Well, the Federal Reserve opinion is three percent is neutral. My view is four percent is neutral. So we're a heck of a lot closer to neutral than the Federal Reserve would be. Assuming the difference between us is what you assume for the real underlying rate of interest that's required in the economy to achieve the Fed's balanced trajectory of a long term maximum sustainable employment and low inflation.
The FED thinks it's one percent. We think it's two percent.
So if the Fed's credible at a two percent inflation rate, which is largely be questionable as well, then you're at three percent or you're at four percent.
I'm trying to understand this market move. I can't.
Can you explain this to me, why is the bond market just not doing anything on the idea that we got retail sales that were hotter than expected across the board, and it seems like the US economy is doing just fine at a time when, yeah, the headline payrolls number has come in, but a lot of people are saying that's appropriate given some of the demographics.
You know, you're asking the question is where have all the bond vigilanties gone. The answer really is they're all either indexers or closet indexers.
So all they carry about is the performance. It's number one.
Number two, there is a global deflationary force out there. Number three, it's hard to short a market in front of the Federal Reserve cutting.
Interest rates, which they're going to do.
And then there's a fourth consideration, which is for a lot of people in the marketplace, these levels of yields are attractive because they really have never witnessed substantially higher levels of yield and every time there's been a backup, they've done well by buying it. So you're in an environment where you're expecting the Fed to cut not only once, but potentially three times before the end of the year.
They're not going to do a jumbo rate cut, although there will be voices around the table for a jumbo rate cut. So in that environment, it kind of makes sense for people just won't short this market, and if you won't short it, it's hard to make it go down.
In christ you said something in there that there's a global deflationary force.
Correct. If that's the case, why.
Don't we all buy bonds because ultimately then we're not worried about inflation anymore and we're getting something real for our money.
Well, that's exactly part of the problem is you have this global deflationary force. And the question is you saw the import price numbers going up, they're still relatively tame.
What is this deflationary force?
What are you talking It's China.
China is the global deflationary force. It's replaced Japan as the global deflationary force.
It has to dump product around the world. And that's one of.
The reasons why I don't think you're seeing the amount of impact from the Trump tariffs, because I think you know, even though import prices are going up, when you look against the tariffs, they're not going up as much. So I do agree that I think the importers are dealing with some of the terriffs. But I also think that people are exporting or dealing with some of the tariffs
and it's getting absorbed that way. And I think there's an additional factor that people are fearful of in here, and that is whether or not this administration is going to attempt to do something like yield curve control by adjusting the long term supply of treasury debt. So when you roll all those factors we talk to together, you can see why it's hard to get the market to short in this environment.
Is that what you're spank thinking, I'm kind of yield ca control.
Well, that's the fear.
I don't think Scott Bessint has moved towards it, but everyone is convinced he's going to if push comes to show, because Donald Trump wants lower interest rates and he has more room to go in terms of raising money in bills.
Now.
It's also interesting, despite all the money they're raising in the tariffs, you know, you are seeing the budget deficit still deteriorate fairly rapidly, So there is going to be more supply coming down the pipeline, but they may wind up just doing it all in bills.
It's funny that when you talk about yieldca control, I think about monetary policy, and you think about it coming down to the treasury. How important it's that distinction.
Well, there is a big distinction between the two of them, because one is a function of a central banker making a decision based on a hard and fast policy rule, and the other is based on a political decision. And it's that politicizing of this. It's the interest rate environment that I think is a big, big, big part of the fact of why yields can't go down.
How long can bonds and stocks keep rallying together? At the point, given everything you said.
Well, I mean, the equity market looks pretty good. Look, my forward earnings numbers are very good. My earnings revision factors are very very good. We having pushed multiples to any significant level. I think to get back to the question you asked earlier, which was why is the dollar not doing well?
Why did the dollars sell off? A little bit?
On this, I should say improve a little bit on this, and that is because people had been expecting three rate cuts. That was the potential. And I myself, when I moved from nothing I said, might as well just throw in three. You know, now you're in a back drop. Now you're in a backdrop where you know, are you really just looking at two?
So that's the reason why maybe the dollar is going to strengthen a little bit. Just going back to this, do you think that bond market investors, bond market traders are whistling past the graveyard just a little bit? Or do you think that they are right to focus on the overcapacity of China, the right to focus on the ability of companies to adapt and adjust and say, ultimately this will be a soft lending.
If yields were higher, I'd be more convinced in answering that question. Yes, if we were in that four point fifty area, I think then you could sit there and say, maybe the bond market is correct, and we'll hold in because at least I'm being rewarded somewhat for the risk I'm taking. Because I've already got an inflation rate running at three right now, I'm getting no protection from that inflation rate. I'm missing one hundred basis points. That bothers
me and it should be bothering the investors. But again, how can you short it against all those factors.
So they've gone into the fence tomorrow. Just a final thought what I've already sent from you. From speaking to you, it sounds like you believe it's quite a mistake to anchor the view of the labor market just a round, a step down and payrolls growth. It's that a fat description of where you're at.
I'm disappointed by the labor force growth numbers. I think I understand what's happening. Companies that have seen their margins being impacted, or afraid their margins would be impactive, opted for.
A more cautious route.
But they're having to pay their employees more, and they're having to work your existing employees more, and.
They're still generating the income.
I mean, is it a mistake to cut RGE twenty five basis points?
Is it a mistake to get back to four percent on the Fed funds rate, which is where I think is neutral. No, you can live through that.
Getting and saying we're going to get to three is where I have trouble with this market.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. 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.