Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business app. We begin this hour with the promise of fiscal stimulus out of China, equities running worldwide ahead of jobless claims in the US, and comments from Chairman pell Evan Brown of UBS saying recession risk needs to be further priced out. Investors poured money into defensive trades over the last couple of months, but resilient US economic data and a proactive FED have meaningfully
reduced the left tail. We look for treasury yields to continue bouncing from here and cyclical sectors to help perform defensives. Evans with us and more. Evan, good morning, Good morning. Before we get to the market. Coch let's start with the Cole on the economy. How'm encouraged on you by what you saw from the Fed last week and what you're saying from China this week.
Very encouraged. I mean, look, when you have a meaningful change in messaging from to the most important economic actors in the world, which would be J Powell and I guess President she and the broader Paul Bureau, it pays to listen. And what we saw from Powell was a message of labor markets fine, we're going to keep it there. We are going to keep it there, and so I think the bar is very low for them to keep
doing fifties. You know, ultimately inflation has come down quite a bit and that enables them to act more aggressively.
This is something Deutsche Bank said as well. You suggested the next hundred basis points one hundred and fifty basis points of acing is actually an easy decision.
I don't know if it's an easy decision. I just think that the the next well, yeah, look, I think the next one hundred and one hundred and twenty five we're going to get. The more aggressive that they are right now, the less I think they have to do later. Ultimately, you're as you're saying, we're bringing down recession risks because they're acting sooner or more aggressively at this point.
At a certain point, you have to wonder how much does this leave inflation as a bigger concern, even if recession is less of a concern. We were talking about that. With longer term yields picking up just a touch, you have to imagine, are we truly seeing just a return to the past normal or is this going to be a new inflationary environment where officials aren't willing to allow the economy to collapse enough to create that disinflation.
Yeah, I think we're a long way from inflation becoming a meaningful concern again. I think, you know, we were just talking about oil and what's happening there, and oil is that's a major disinflationary force, not just on a headline level, but ripples through into core inflation. The labor market is still cooling. You would need to see like a re tightening of the labor market, I think to
get like domestically generated inflation getting going again. So I kind of think this is the best of all worlds where they're supporting growth maybe inflation becomes more of an issue if we get Trump tariffs and the like down the road. But I think that's kind of tomorrow's story as opposed to today.
The story that you're painting makes me think the US is less exceptional, and frankly everything else that's a little more exceptional, especially on the valuations that they're currently trading at. Is that how you're looking at it.
I think the US is still exceptional in one clear way, which is that we have a great productivity story here. We have seen productivity pick up in the US. Yes, employment has been coming down, but GDP growth has been really really strong, and that's allowed US also to get unit labor costs inflation lower. You're not seeing that in Europe. You're still seeing ongoing supply chain issues, corporate margin issues and the like. You're not seeing that in the UK.
And so the US is still quite exceptional on that front. When we talked about the equity markets, though, of course a lot of that good news, more of it is priced in the US and the rest of the world, as is almost always the case.
You also like China, especially versus Europe. But how much is the European story dependent on what happens next in China, and if what's happening with fiscal and monetary stimulus actually works.
Yeah, I think, look what happens in China, there's going to be some positively through into Europe, especially with some of the big luxury names. If you can shore up consumer confidence in China, then that helps on that front. I still think Europe faces a number of domestic challenges. You know, you still have stubborn wages, you still have a German manufacturing sector that is in pretty bad shape.
And we had from Mario Draghi last week, maybe the week before him, talking about how do we get Europe more competitive? And it's almost a sad read because you see such great work, such interesting work of things that can and should be done, but so little confidence that the institutional framework is going to allow politically these reforms to happen.
Let me jump in as an investor looking at Europe. How do he react when the German finance ministry sounds almost unsets with my stock coming gown? Yeah, I mean that's what it's not telling you about the situation in Europe, because that's ultimately what's happened in the last two weeks.
Look I think that's that's, you know, the underlying Yeah, there's an underlying institutional issues that are going to hold Europe back. Now, I don't think I'm saying anything that's not already reflected in European equities. They're very cheap, and then they can receive some bounce from this China improvement and maybe the ECB gets a little more aggressive and so that that helps. But structurally, it's hard to make this long term investment case for Europe relative to the.
US VMH Right now, you mentioned luxury, a VMHIF in Europe one of the six percent of the my mom. So we're seeing that running and luxuries you might expect on the menu a number of asset classes. Let's pick three, so equities, commodities, for in exchange. Out of those three, to price out recession, what does that mean to price in what now and where? Yeah?
So I think what we'll see more most in most clear is what's happening in the excuse me, in equities regionally and intra sector. And you know, like I said, a lot of people pour money into defensive sectors here in the US. I think we've got to price a lot of that out. I think recession risk that left tail has been sectial utilities.
What does it leave you, given that that run up is actually just off the back of AI as well as the defensive nature of the particular three pistolsis well, what do you do with utilities?
Utilities is the is.
The trickiest one because of that AI. I mean, in itself, utilities look extremely overbought. We've seen tons of ETF flows into utilities. Is all telling us, especially given the macro dynamics in our view that yields can bounce from here, that utilities should be vulnerable. But then you get these these big AI power demand announcements and and that's uh, that's so. I think among the defensives, utilities look a little bit better. I think in you know, staples, real estate,
and healthcare probably underperform utilities. At least you have that AI story there on utilities.
Just listening to you, it seems like overweight small caps, equal weight, overweight Chinese equities maybe preferly European securities, underweight bonds and have a high holiday. Is that basically your view? Yeah?
I think so. I mean it's kind of like refle It's it's like a reflation with without the refle without the inflation. It's kind of how I'm thinking about it, and that like this pricing out of recession, right, but now you have oil coming down for supply reasons, and hopefully that you know, the Middle East doesn't doesn't escalate much further from here. But if oil's coming down for supply reasons, you know, that's another very stimulative thing for
the private sector and consumers. So I think we have this this kind of uh, you know, stimulus from China, stimulus from the Fed, simulus just more globally, and we're setting up for just this better economic picture than people thought going into your end and next year.
Always enjoy your work. Just fantastic catchup. It's been too long as well. Come back soon, Evan Brown, if you best. That's not with equities Equiti jump across the board still that most sticks. I could examp on the S and p up by eight ten. So on the nassnak up by one point five. Let's flip up the board. Switch on the board, turn the page. You get to the bond market story. The two year yield was lower, the ten yere yield was lower. Now the two years just
a little bit higher. So that's the change off the bank of this in the last ninety seconds. Push that through foreign exchange dollar a little bit stronger. You're a dollar banking off session highs one eleven forty eight. Just remember payrolls a week tomorrow. The estimates one forty I think the survey week was last week. So this is what we're looking at for next month payrolls. Is it
really going to slow down anytime soon? Given what we've seen coming out of the jobless claims numbers over the last month or so.
If jobless claims are the best high frequency indicator, the answer would be no. At the same time, people have pointed to the fact that you're not seeing jobs getting created. It's not just maybe people getting fired, but that people aren't actually getting the opportunities, and you are seeing that
some of the sentiment surveys. However, there is a discrepancy between the bearishness and the fears versus what we're seeing in the claims numbers, and I think that that's what you're feeling in terms of the lift in yields on the margins in the bond market today.
Jay Bryson and wels Fago with this now to discuss Jay. I just love your thoughts on jobless claims at two eighteen. It just screams, there's nothing to see here. Everything it's okay, it's everything okay. Well, you know, so.
You talk about payrolls coming out right, and so payrolls is a net number, it's you know, it's two gross numbers or what we're getting today. An initial job was claims is people who are losing jobs. What Lisa was just talking about is creating jobs. And so when you look at the economy, we're not creating a lot of jobs. We're not losing a lot of jobs either, and so when you get that net number out next week, you know,
we're one thirty five. So there has been a slow down in job creation, and what that means is you're just not going to have as much income growth going forward as well.
Is it inevitable that lay offs the next I.
Don't think it's necessarily inevitable because if you look at the financial health of most businesses today, that's actually pretty good. You know, their balance sheets are pretty strong, the debt service ratios for most companies are very very strong as well, and so they don't necessarily need to lay people off
at this point. But you know, if monetary policy remains restrictive here, that's going to continue to put headwinds on growth, and that eventually puts actually could lead to those jobless claims going up.
Do you get the sense that this market is too complacent about the sort of soft landing nirvana as we've named it, or is this mora an economy that's at risk of a reacceleration that people maybe are a little bit overly complacent about the inflation side of the equation.
So you know, if you say, what's more likely going forward slow down, more of a slowdown from here, or more of a reacceleration, I'm going to take the more of a slowdown sort of story right now. Just again, because monetary policyy remains restrictive right here. I just don't see a really huge reacceleration right here. And so you know, when I think about the risk of recession in the next twelve months or so, you know, the underlying run
rate is like fifteen percent. You know, if you said to me, what do you think the rescue recession the next twelve months is one in three thirty five percent. It's not our base case, but we're not out of
the woods, right. I mean, you are seeing signs of stress in the household sector, seeing delinquencies on credit cards going up, you seeing delinquencies on auto loans going up, and people's you know, the excess money they had after you know, the stimulus programs are all gone at this point, and so you could get you could get a move to the downside here, although I'm not really expecting that.
If that's the case, why shouldn't FED go by fifty basis points in November.
I think there's a very good, very good case for that, But I think it's going to be I think you were saying earlier, it's all you know, we're just very very data dependent at this point, and you know it's they're trying to balance the risk out there, and you know, could you get a reacceleration. Sure, I don't think it's the most likely case, but you know there's that's still that possibility there. And I don't think they want to go fifty to have to have to reaverse that a few months from now.
Well reaverse that because of policy out of Washington in twenty twenty five.
So I don't think you're going to get a huge policy shift out of Washington in twenty twenty five. You know, I think the biggest thing that Congress has to deal with next year is the extension of the t j A at the end of the year. We are we expecting that right off the bat. Probably not right, that doesn't expire until the end of the year, knowing Congress is going to take them a long time to do that.
But I guess what about reacceleration of inflation if it came to things like tariffs.
If it comes to things like tariff that you could potentially see that. Now, does that mean the Fed starts to raise rates? I think the Fed and that you know, if you were to get a reacceleration inflation, I think the Fed goes on hold everyone's pricing in two hundred basis points of ray cuts. That probably goes away. But I think the Fed initially would would say wait on hold and see how much it feeds through.
Let's get to counsel matter of jp MOLK and asset management of County Common. It's you, good morning. How vulnerable are we to a self print on piros two fridays of why.
Well, there's there's two things to consider.
One is how vulnerable are we and then you know what is most likely to occur. So the initial job as claims today suggests that the expansion should continue. The labor market is healthy. Now, if you were to ask me where the balance of risks is, I would say the balance of risks is to the downside. It is to the risk that payrolls growth slows more and the unemployment rate rises. You know, I know there's this debate. If the FED sees payrolls growth below one hundred thousand,
then that's the green light to do another fifty. I think we forget that we already had a payroll's print below one hundred thousand two months ago, so payroll's growth
already is slowing. Now, this is the most new information that I feel like I've learned in the past few days in terms of FED communication, is that actually, while the market is focused on the debate about twenty five versus fifty being primarily about the labor market, some participants are actually opening up the door to additional fifty basis
point rate cuts just on inflation alone. And that's why I think, you know, you're not going to necessarily see materially higher yields just because you know the labor market stays around here, there are other reasons yield should remain low and should be by a slower because of the inflation backdrop alone.
Just to back up, was that Kevina Walla that might just not think in that way.
It was, although to be fair, you know, we've been thinking about it this way for a while, which is that the Fed has justification to cut probably one hundred to one hundred and fifty basis points just on the improvement in inflation alone. And then you couple that with what we're seeing in terms of inflation expectations, inflation break evens, the commodity complex, the global growth backdrop, and I think they can feel fairly confident that there is space for
them to ease. And that's kind of agnostic to does the labor market stabilize around here or does it continue to move lower.
One of the most controversial aspects of your whole case is that you see this as a reason to buy bonds across the entire yield spectrum. When people come on the show, they have increasingly said, I'm comfortable with it up until about five years, and then after that forget it, because I have no idea what's going to happen, and potentially we could get even inflation coming back or being stickier because of a proactive FED. How do you push back against that, because I'm sure you hear that.
A lot well.
I mean, when you think about what we are recommending that clients do here, what we've found when we look at the client base is that despite the fact that the FED has finally come in after fourteen months of being on hold and cut rates fifty basis points, there are still many clients that are under allocated to fixed income and over allocated to cash, and so there is still a lot of room to move out in terms
of duration. Now, in terms of how I think the term structure of the yield curve is going to evolve, I do think that the curve is biased steeper, so you are going to see front end yields move lower than long end yields as the FED continues to deliver
those rate cuts. But I do think that when you're thinking about building a portfolio that has diversification, you can think about a core or core plus fund with a five or six year duration, which is what you're going to get when you buy one of those full bond funds. That invests across the whole maturity spectrum, and that's going to give you both the income and also the benefit
of capital appreciation. If the claims data is not the real signal, and in fact the terminal rate for the FED is not three but lower, in this.
Picture, there's a real question about if you're more bought biased to the potential for downside risk, why should you go into risk your assets.
So I think there's a couple reasons. First of all, all of this in terms of the timing and transmission of monetary policy is very uncertain. The lags are very unclear. So we do feel like we're getting closer to reaching an inflection point, but it's not clear which way the economy is going to break. So on one hand, the FED cuts fifty basis points, and in twelve months, if they succeed in extending the cycle, we could be looking at reacceleration. In that case, you know, spread should remain
very tight. Here.
On the other hand, if.
This is like every other time in history, then the fifty basis point cut is actually not a proactive move that extend the cycle, but a signal that they're already too late.
And to balance those things.
I think you need both a.
Combination of duration and high quality, but also some carry in your portfolio because the outcomes both tail risks are possible at this.
Moment, Cassie, we've got to leave it that so it's going to catch up. Thank you, Cassie Power there of j P Bulk and Asset Management. This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, a giopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Easton. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.
Mm hmm