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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie 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. Fello Orlando, the chief equity markets trying to just a federated global investment right in the following. We expect the FED to cut interest rates by a quarter point at both his September and December meetings this year. We should boost stocks towards our seven five hundred target next year for the S and P five hundred.
Phil joins us now for more, Philke and.
Monic John, thank you very much for having me back.
Thank you for being here, sir.
Let's talk about the month ahead payrolls this week, in flight next week and then the big feder Reserve meeting. How do a thing's shapen up for you in a team.
So we've had this massive thirty five percent rally off the Liberation Day bottom going into I guess the week before Jackson Hole, and then the market traded off about four percent or so because the market didn't really understand or appreciate what sort of a tone would Powell take at the meeting. Now, the rally we've seen over the course of the last week or so has been that Powell took the right tone that the Fed is thinking about easing. But as we get back to the day
after Labor Day, everyone's back from vacation. Now the cold dose of reality sets in. All Right, what's the next set of inflation data going to look like? What is the labor market data this week? And then you've got all the noise surrounding the Fed and tariffs and does meron does he get seated this week? So at this point that dose of reality, we think, given the fact that we've turned the calendar to September, there could be some chop here looking out going into the September seventeenth met.
Well, let's touch on a potential source of tension.
Let's say the move we saw in the last month to see cyclical was outperformed, to see the airlines up double ditgit's the home builders up, double ditchits to see the rustle to small caps of my seven percent at a time where the chairman is increasingly word about a cyclical downstad does that one stack out for you?
So we love small caps, just full disclosure here, and the key reason for that is we believe lower interest rates. Not only do we think we've got two quarter point cuts this year, we think we've got another four quarter point cuts over the course of next year. The funds rate by the end of calendar twenty six, we think the upper band is going to be a three percent. If we're right, that suggests that you've got an excellent backdrop for small cap stocks as well as those consumer
cyclical areas. So that's our longer term view. But there's a lot of noise and nonsense that we're going to have to parse through over the course of the next several weeks.
Given the fact that this would be the deepest rate cutting cycle outside of our session ever going back to the nineteen eighties, I mean, this is something that a lot of people have pointed to. So do you see these cuts coming irrespective of whatever economic data that we get. In other words, you can question the politics of the moment, but what this market seems to be pricing in is rate cuts for the sake of ray cuts that juice growth, impossibly inflation regardless of the economic data.
Great point, Lisa. We're looking at that dual mandate, We're looking at the data, and so while there is some concern about inflation, we're focused on the labor market.
Here.
What's happened in the labor market over the last three three months. The average non farm payrolls thirty five thousand. The first four months of this year, that number was up around one hundred and twenty five thousand. All of last year that number was one hundred and sixty eight thousand. So the labor market is materially slowing. This coming Friday, we're going to get the August non farm pay report. The August report historically is the wonkiest report of the year.
There's going to be a lot of noise. You know, you've got summer vacations in and out, company's menufacturing facilities, take downtime in terms of furloughing temporarily workers and whatever. And then next week I think it's next Tuesday, we're going to get the annual payroll revisions. Last year that revision was down eight hundred thousand jobs. We think the revision this year could be down another five or six
hundred thousand. So we'd be focused more on the labor market and the deterioration there as opposed to what's going on with inflation.
If inflation is higher though, and you do see that sort of crimping in the labor market, the sort of loosening or in the labor diver I should say, this issue of people not being able to get jobs, Then why would small caps rally, which are typically hinged to growth when that's a stagflationary backdrop.
So we think that growth ultimately over the course of next year is going to improve. Let me throw this data point out our Macro Policy Committee at Federated Our GDP forecast for next year is two point eight percent. The blue chip consensus is one point four percent. Within the blue chip consensus, the highest estimate on the street
is two percent. So why are we at two eight One of the things we're focused on is the fact that we are looking for a significant improvement in economic activity coming in corporate cap X. One of the key provisions in the One Big Beautiful build was one hundred percent expensing. So you look at productivity growth in the first quarter of this year and it was negative by
two percent. It's never negative. What we think was happening is a lot of companies were holding back their cap X plan, saying we're going to wait to see what's in this piece of legislation.
Okay, but that was also continent on some clarity around tariffs. Don't some of those plans get withdrawn now that there's a real question mark around how much the tariff's go into place.
Well, the tariff question is an open question at this point, and so I think legislatively we've got that, but I think this is ultimately going to be decided by the courts, particularly the Supreme Court, in terms of the legality of the terriffs.
Despite that, you're clearly looking for a reacceleration and growth through the next year, and parkably the market's picking up on that in the last month. Do you think what's happening at the long end of the Yeld curve is a reflection of a better growth profile in our future or do you think it could become a constraint for risk assets.
So the way we're looking at the yield curve is you're probably going to see a further steepening lower interest rates at the low end, higher interest rates at the high end. But as we look out over the course of the next eighteen months or so, we think the benchmark ten year treasury you'ld could be working down towards the four percent level, which is supportive when we think of consumer cyclicals and smaller cap stock.
Stay with us more Bloomberg surveillance coming up after this. Lets extend some of this with Leland Miller, the CEO of China Baseburg. Leland joins us now for more Leland, welcome to the program. Is China and President She from an economic standpoint, operating from a position of strength, can.
Call it a position of strength, but it's getting stronger considering that a lot of countries are backing away from their close relationships to the United States. If you look what's happening with India right now, India doesn't want to be looking around the room and see China on the left and Pakistan on the right and Belarus across the room. I mean, it would rather be in a group of countries in the United States and others and strengthening trade
relations there. But it will push back if it thinks it's being pushed into a quarter. And so we're seeing a situation where China is getting is becoming an attractive option because it's not the United States.
Right now, it seems like Russia and China have a very clear relationship. China is almost the owner or Russia is the vassal state of China because it is so dependent on its revenues. The relationship between India and China is much more complicated. How do you see that evolving? How close can that get given how incredibly contentious the relationship has been for decades.
Yeah. Look, you know, India considers itself a non aligned country, and a lot of countries do in Southeast Asia too that that have that have you know, said they're not going to be a US ally directly or a Chinese ally. They're gonna they're going to manage relations with both. I mean, you've got Indonesia, You've got Vietnam, You've got a lot of other countries. But within that non alignment uh label, there have been tightening relationships for years and years in
the United States. It's been geopolitical, it's been economic, it's been trade. These things have been very advantageous to US policy goals, trade and foreign policy and even military in the Pacific region. And if if all of our policy ends up backtracking to become one big question about so fair trade, but it doesn't have any uh, you know, look at the geopolitical side instead, it's on how are
these things balancing out? Then then we're going to be We're going to wake up five years from now, We're going to realize that we've just undid twenty years of diplomacy, uh that have sort of pushed back against the China led world.
It's a problem how.
Much you already seeing some of these new alliances in the trade data. I mean we've seen, for example, Chinese exports that have decres substantially to the United States, but that have increased substantially to the rest of the world. Do you see that along alliances or is it just transshipments the idea of finding the weakest know that they can get products in they can eventually get to the United States.
Yeah, it's not alliance, but it's not all transhipment either. It's essentially China shoving its exports down other countries throats, and you know, the United States says, you know, you can see it in our China Facebook data, you could see it in other trade data. You know, the direct shipments in China the United States has been going down, but China has been just unloading its exports, in particular into Southeast Asia because they can't they can't push back.
They can't push back geopolitically, you know, they can't compete with Chinese lower prices that are sort of dumping their overcapacity into into Southeast Asia. So it's not about tightening economic block if anything, it's the opposite. But it means that in a world in which China is trying to find places to dump its exports, you know, it's picking on its weaker neighbors, and it's being very successful.
Right now, then can we just DOOWND that point? China is the capacity.
We had a guest on the program forty minutes ago, making the income of that China was going to address that. Do you see any sign of that whatsoever?
You know, it's one of these things that people. People read the they you know, they read what the government's plans are and I say, oh, well, the government must be willing to address this there, you know, there, it's it's you know, they're going to spur you know, have more consumption, they're going to have more stimulus, they're going to have you know, they're going to combat over capacity. Finally, the model doesn't allow them for them for them to
do this very easily. So look, if it was a priority and the short term, yes, I think that they're doing little things is anti evolution campaign. They're they're trying to weed out some of this price competition that comes from you know, every provincial government in China subsidizing the same stuff, leading to oversupply, leading to exported you know, exported oversupply in this overcapacity problem. So yes, in the short term they're going to deal with it on a
micro level. But the economic model that China has, which is stimulus to the supply side and not to the demand side, you know, it does not allow for them to shift things away. They're going to have more over capacity and there's going to have to find places to bury it until someone forced or someone or some block forces them to do otherwise.
Leilan, just why are they married to that particular model. What would it take to make them change their mind.
Well, for I think it's what Sheijenping and Chinese communist leaders have have fought for a long time. What they want to do is they want to produce more. They want to build up their industrial base, and that's fine, and that's laudable from their perspective. But what it has happened is it's all the all the stimulus. The entire model is based on spurring more production and more exports, and they've been very explicit about that in the last
couple of years in particular. So as long as you're trying to produce more, produce more, produce more, but you have very weak domestic demand and you're doing absolutely nothing structurally in order to empower consumers or households or the private sector to become more consumers back home. What you're doing is you're having a model that's completely reliant on production.
And that's what the model is right now. It's why China is very vulnerable but also not a very good trade partner for for others who want them to do a.
Board ward stay with US mult Bloomberg Surveillance coming up after this. Ken Hexter, the Bank for America Security senior analyst of air frame and surface transportation joined just now for more kenk morning, good morning. Let's extend some of that conversation, and thanks for being here. Let's take the
deminimus exemption. Can you just walk us through it, give us a feel for how much of the overall volume between say, trade between the US and China that actually accounted for through ranks alone.
Yeah, and happy post labor day and welcome back to work everybody. So you know, it's a great question in terms of you know, Brendan was mentioning the one point four to one point five billion packages a year, about four million a day, so you've got a lot of frequency. UPS and FedEx export combined about two point eight million packages per day, so they're representing and that's not all dominimus but a huge portion of this diminusm movement on
a per day. But international is only about twenty five percent of each of UPS and FedEx's revenues, and then the export portion is only seventeen percent, so we're still talking a small portion, as Branda mentioned, a smaller portion of the number of volumes or the high volume but low value of the package is moved. But this is meaningful this is the highest profitable lane is the US China lane. So we've already seen those volumes down about seventy five percent year over year once this went into
effect in May. The new news here is on Friday it expanded to the rest of the world. So that's about twenty four percent of Dominimus is now encapsulated in this new expanded part. How enforceable is this, So it's enforced by the US right, so it's something that our Customs and Border Protection Division is going to be watching.
And so now everybody has to comply. The difference of what's going on before is ups and FedEx already required the information on what's in the package, but now you've got to get who made a packet, who made the goods, and so the difference is the postal operators. He was mentioning thirty different postal service operators suspended because they don't have the technology. Before you could just check a box that this was a small, low value package. Now you've
got to give so much more information. So that's guarded by the custom a CBP and on imports.
Now, I was just wondering, you know, if you get on a plane, let's say, and you get five hundred dollars worth of goods from some country, how do they come on the plane and get it? I just wonder is this you know, I'm just thinking theoretically, South laughing at me.
I mean, how do they enforce this?
Has it become difficult given all of the changes and the teriff regimes and some of the legal challenges.
Yeah, what you're carrying on you that's still not going to change as far as that eight hundred mint dollars limit.
Right now, this is looking at class This is the mailing reasons.
This is mailing cross border, right, So this is going what's going in packages, what's going on vessels, what's going on different methods of transport, even rail cross border? So they're managing what what packages are going cross border?
Of the companies that you follow at the moment, who's executing really well? Have you been impressed by.
Well, I mean they're ex secuting in terms of FedEx and ups already moved traffic, right, have the skill sets. But this is a question about what's going to happen with the increased rates to those packages. So for example Temu and Shean, right, these were low value shippers that had found a loophole and expanded that loophole. We went from one hundred million packages twenty years ago to a billion and a half, right, and that's already up to nine hundred million packages at run rate by the time
this went into effect in May. So you're seeing this. This is really taking those companies that learned how to take advantage. And what you've seen is Shean's volumes are down twenty three percent I'm sorry, down twelve percent, but revenues are up twenty three percent because they've taken rates up to adjust for the tariffs, or they've gone in and as you were mentioning gone to different countries.
Stay with US.
Multile IMPEG surveyance coming up after this. Aaron McLaughlin, the senior economist of the conference for It, joins us now for more Aeron, Welcome to the program. I talk about your data, the loss of confidence. Are you seeing that more pronounced or if we send it bounce back as we come into the post Labor Day period.
We have not seen a bounce back yet. It is still you know, after our sort of dip after Liberation Day, it elevated a little bit in May, and it's still very similar. Those numbers looking at sort of a trend or a possible emerging trend. It looks like younger consumers, consumers under thirty five are feeling more negative than some older consumers. And we think in part this might be
well in general because of cost a living. But one thing that we're also closely looking at is the end of deminimus in the additional cost for fast fashion and other items whole.
Love a second, Aaron, are you saying that because people can't get their she and packages and that that's typically the younger individual, they're feeling worse.
Is that what you're sensing.
I am sensing that that could be the case. Yes, So we've done some analysis these packages that are coming that have come directly from China other places from around the world that are have really boomed the last few years, and in fact, eighty three percent of e commerce packages come to Minimus and they came in virtually without any ariffs on them because they came direct from China and elsewhere.
And we think that the additional arariffs could add up to two tenths of a percentage point on inflation over the next year, and you know, it could be a downer for younger consumers.
Taking a step back. There are two prongs to the consumer confidence side of things. On one hand, there's this question about inflation, which has been a really dominant theme over the past number of years. On the other hand, it's employment, and that's kind of what we're looking for to understand and what the breaking point will be. Are
they still confident that they will have jobs? They still confident enough to keep spending even if they don't feel very good about it, because they haven't always done what they've said they've felt when it comes to inflation.
Right right now, it seems that consumers still feel that the labor market is fairly healthy, although they're starting to reveal in some of the answering of some of our data that they sense that there's less jobs available out there, which is kind of interesting. So personally they may feel confident still continue to spend, but we do think this spending will be on sort of not on discretionary goods
is where it will weaken. That non discretionary goods is where consumers will continue to focus, and that when it comes to big purchases like appliances and automobiles. As tariffs increasingly have an impact on these we just may see that confidence are road in the future months.
And let's talk about confidence, particularly about the labor marketing. There's a lot of confusion right now about whether the step down and payrolls for growth is leading towards an increase in labor market slack or not. What do the attitudes as consumers towards the labor markets sound like now relative to where they work only six months ago.
Well, I think consumers recognize that the labor market is loosening. But consumers often act based on their own situation, So if they feel confident in their own situation.
They will continue to spend. Generally, they may.
Be a little bit more wary. But if they see, even though the unemployment rate has remained steady, if they sense that there's less jobs out there, i e.
If they lose their job, it.
Will be harder to get a new one. That will certainly has a potential to impact their confidence.
This is the Bloomberg Survendments podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcas cast on Apple Spotify or anywhere else you listen, and as always, on the Bloomberg terminal and the Bloomberg Business app.