Bloomberg Surveillance TV: September 30, 2024

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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

I think we'll get there. It's going to take a little while.

If the playbook says when the feed is easing, you buy bonds, right, people want to lock in rates.

It's very rare.

In fact, it's never happened before that we've come from such an inverted deal curve right right into an easing cycle. And so I think people are missing that the trades more or less already happened. But in the meantime, any weaker data, you know, any FED easing, people will buy bonds. So I believe bond yields will be meaningfully higher than here. I think it's going to take a little while to get there.

Let's just take into that word meaningful. Can we talk about that? And you think we're at the bottom of a much bigger range. How big is that range? What is meaningfully higher?

You know?

So I came into this year saying three ninety to five, and obviously I'm a little bit off on the low side. So let's say it could be even a little lower twenty five three fifty. I think when you look at a FED with a terminal fund rate near three, the eald curve should be at least one hundred and fifty basis points steep. So that puts us at four to fifty. If the Turmo rates three and a half or four, well,

This is counter consensus in terms of how high the yield could potentially be in this cycle. It is not counter consensus when it comes to just volatility expected, especially heading into the election.

How do you trade around this? How do you position for that type of whipsaw?

Yeah, what's amazing is nothing's happening, right, We're kind of stuck in this three seventy to three ninety range, and this is the tightest range. The rally happened over five months and now now we're stuck. So I think the answer may be, don't expect what I just said to happen anytime soon again. People like fixed income, they want

So I think we're stuck in a bit of a range maybe for stocks. Two.

And then when we get through this, when we get into January February of next year and you see the effects of the FED easing, I think you start to see higher rates.

But it seems a little bit boring for right now.

Well, see, this is what I was really struck with, And over the weekend I spend a lot of time thinking about the idea of how you navigate bifurcated tails. This idea that you have potential hotter than expected economy or you have a potential weaker than expected economy, and right now people aren't willing to make any kind of best so they're just betting on perfection in the middle

I think it's by the way. I think you're right.

I think were priced for perfection, and I think the tails are in play. The problem with say Friday's payroll is if the FED hadn't gone fifty, right, if the FED had been stubborn, the payroll would matter a lot. The fact that they're ahead of the curve. Now we know if it's weaker, they can go fifty again, so you can get a response. If it's not weak and they did a little too much, the curve might bear

I don't think so. Right.

We know inflation went from a to close to two. We know that employment is weaker than it has been, maybe not super weak. So it leaves me thinking, as much as I don't like it, as someone who wants to help their clients make money, you're stuck in a range for a little bit longer, despite the fact that you do have these tail risks, and if we overreact to one, you probably want to fade it right, which puts you right back into that range concept.

Does this remind you of the inverse of pre twenty twenty The line that really got that going in my mind was we're a long way for neutral. I remember that line, and they ended up being a lot closer to it than they realized. Are we going to see a repeat of that? But on the other side, I.

Think it's possible, right, I mean, it feels like we're a long way from neutral, but we don't know where neutral is and we didn't expect five and a half to be necessary and it was, which suggests that neutral is higher.

Right.

The economy did not fall off the cliff when we got to five and a half, and we're easing, not because we are in danger, but because we don't want to be, and that's why I'm so embolden with a higher rate call for later. I don't think neutral is going to be two point eight or three. I think it could be three point five or four. And so yes, Johnny ditch where we are right. I think it looks like we're far from neutral, and we won't know until

Of next year.

So a lot to learn, a lot to get through, and I would be thinking not about what this easing cycle looks like in the next couple of months.

I think it might be boring. It's what's on the other side of that.

A great Brian is going to catch up. Thanks for catching up with us, Brian. Wise that of more fen standing Venu Krishner Barclays is staying Courtius, saying we would note that despite upbeach sentiment in financial markets, our macro research colleagues believe that impacts the Chinese real economy are likely to be limited. Vena Joints napomorph Any it's good to see you, good to see you, and you're not buying the happy talk out of China in the last week.

I think in the short term all these measures could work, given how negative the positioning has been in the sentiment.

But I think the issue with China is much bigger.

It's structural demographics, the property market, consumer sentiment, a host of things, domestic consumption, which is you can't export your way out forever, which is what they're trying even now.

I think that is the question.

So I think in the short term it's tough because the questions of what is it a gun or is it a bazooka or whatever? Right, so you fine, you bring your bozuga and that what structurally over the longer term.

What changes?

How would you just write to move over the last week, is that your shorts coming off new long scoing garn a positioning squeeze that turns into a bit of a mount up and a short term what would you call this?

It's a combination.

It's a big relief as well, because so far the concern has been that in the past, you know, they've thrown in a huge amount of stimulus, they weren't doing it this time, and so the concern was that they don't care as much. But now the opinion is that they do care, and now they're saying that this is very important and they're won't to do something about it. Right, So I think it's a combination of all those and perhaps it has some staying power. But I take a

So, you said that there are some structural things in the US that are good, So you're bullish on the US.

Yes, I'm still bullish on the US, though I'm a little concerned in the pace at which we are going ahead.

I think it looks too fast, too soon.

But structurally, for example, you know, I mean, the US remains at the forefront of the technology front unparalleled. We you know, are still you know the world's biggest economy, right, we are the world's biggest oil producer now, uh, and we still are the center, are probably the leader of the global financial architecture. And the dollar still remains a

We were in the middle of a cloud.

Transition and then they've got AI on top of that. And at the center of it is the action is coming from the US and the ecosystem we have in the US, mainly around the Valley is unparalleled and cannot be replicated just by infusing capital.

That's a great story. You expect losses by the year end. How much short term do you expect this story to have been overplayed? And basically, uh, everything is to really face a whole lot of volatility based on potential growth, headwinds, potential regulation, potential geopolitics.

The election absolutely raise a lot of right points.

And that's why if a C my base case price target is fifty six hundred already about that, but we do have an upside case of sixty one hundred and in all fairness a downside case of close to five thousand.

So I think the way to.

Think about it is Bittech has corrected reasonably healthily multiples which had gone to about thirty four times and now back to what twenty nine times, so just about the

I am skeptical.

I think it's going to be less than that, but still they're Actually what's happened is the composition of growth has changed, so Bittech still leading but moderating, reasonably priced, and the rest of their SMP quite fully valued or argue but growing at you know, expected to grow in my view maybe around ten ish percent. Which is not a bad combination. It leaves me to your question that what about the levels right now? I think we probably

But we haven't cared.

About geopolitics forever, so I'm not too sure why we'll start caring now.

You have such a big gap when it comes to the upside and the downside. Yeah, and you say, yeah, you don't know the catalyst for what could be. Is there a potential of what the catalyst though would be to the upside if you're unclear about what it would be.

In terms of taking a breather.

Sure, I think the catalysts are very clear. You talked about the jobs numbers just now. So the big shifting sentiment over the last call it month or two months has been this growth scare, right, and so based on historical experiences, the market is very concerned and we are that is the label market as robust as it seems, you know, is it a fact that labor market can discilerate very quickly?

We don't know. We don't think so.

But The point is, it is very clear that the odds of even a shallow recession have increased over the last two months.

They haven't decreased, right, So that is your case downside case.

If you start certainly seeing a detivation in the labor market, which nobody is expecting, including us, but it is a real possibility because the odds have increased, you could start testing the downside. On the other hand, we are still printing with robust numbers. You saw the Atlanta GDP number. It came even stronger. Consumer sentiment marginally increasing.

So I think if growth.

Does accelerate and there's a reasonable likelihood even though that's come down a little bit, there you have my upsideks is sixty one hundred. So I think you know, it all depends, and the derivative market is telling you that the one thing they care about is a NF piece, right, So.

You know that's where the action is.

So good news is good news still? That doesn't change.

Yes, right now, the good news is good news. We've shifted from that paradox of flipping it back. But I think the question is good news is good news still? Something breaks? Right, and so the disconnect right now is between the raids market and the equity market.

Right, And what I would suggest is that the raid's market has been all over the map for the last two years.

We're expecting seven cuts, then zero, now you know, nine cuts in a middle year, middle of next year. So the equity market has been more right than wrong. Right, And so that's an interesting situation we are in.

Right, you've thrown some shindy at your colleagues on the other side of the room. So the pond mark has been all over the place. Did you hear that? I heard that.

I heard that.

So you know, basically is that your your accusation.

Well, my point is that everybody looks at the rates market a big barometer.

Of what to extend.

Yeah, so, which is true.

But the point is if you tried to follow that, you're gone crazy because you will know what to do a week from week.

Right, slipping all.

Right, hold on a second in fairness, not a defendant pod market, but it's a defendant bond market.

Equities have had s and P five.

Hundred has had five straight months of gains. If we close out the month of September with a gain, it has come in tandem with to your yields having five straight months of yields going down. You're saying that that isn't directly correlated.

Well, what you really care about for equities is the ten year rates, right, and if you look at ten year rates wherever, they're moving around. But that is a discount factor because we're a long duration asset, right, And we were hovering around five percent a few months ago, right, and then we went to three and a half percent. Now you're again going back towards the four percent range. So I'm not trying to sort of reduce the importance

Market colleagues carry on, Can I keep going at the end of.

The day, you know it's been all over the map. And let me tell you something.

So everybody, everybody in the macro market is concerned about deficits, right, So you would expect that shows up in the term premium.

Where is it?

Some big egos on that side of the room, as you know. Y, thank you Kiney Krishna. Print of Park Please market's looking ahead to the week's biggest catalysts, including today's remarks from Fed Schad Jay Powell ahead of September payrolls on Friday at ECHA Bave of Bank of America Securities expecting a print of one hundred and fifty thousand, with unemployment holding steady at four point two percent. A details with us in a studio here in New York.

It's certainly a possibility.

So if you look at the Joel's report, this will of course be for August rather than September. But if you look at the recent Joel's stata, the job opening's number has been dropping like a.

Stone, and that's not sustainable.

At some point, that's not going to be benign, right, It's going to start affecting the lave market. So that's something we're watching quite carefully. The openings rate now looks quite consistent with where it was before the pandemic, so further sharp decreases and openings.

Will be a point of concern.

There's a missing feature in the parish narrative. It's layoffs. What's happening with layoffs? Where aren't we?

Layoffs are still very low, and that's the reason that we're holding on to our soft landing Outlook. If you look at the layoff rate, that's been low. If you look at jobless claims that's been low as well. And even within the unemployment data, you can look at kind of voluntary versus involuntary unemployment, where involuntary would be layoffs, right, So that only accounts for a little more than.

Half of the increase in the uneployment rates.

So no matter how you slice it, layoffs have been low, and that gives us more confidence about a soft landing.

Also, revisions, and this is sort of counterintuitive because some people are saying the revisions to jobless claims and to the job's figures have been downward and significantly so. But the revisions to GDP and GDI were the opposite direction. It suggested a bit more growth in the couple of years in the direct aftermath of the pandemic. How much are you looking at that and saying we did to rethink the strength of the economy.

Oh, absolutely, those revisions were remarkable. So there was a big gap between GDP and GDI going into the revisions, with GDPI being significantly softer. So the bearish view on that was that eventually GDP would get revised to GDI because income is more easily measured or something like that. But actually what happened was that GDP got revised up, GDI got revised up even more, and it's now basically

We'll activity backstop the.

Label market, which is now looking like a bigger risk given the revisions, or will activity collapse under the weight of a softening label market, and now that's looking less likely.

Okay, So this to me brings me to sort of the paradox that we're dealing with right now in Marcus, which is you've got two tail risks that are diametrically opposed. Brian Weinstein earlier this morning really highlighted that, and he said people are underestimating the growth in this economy, are overestimating how low the neutral rate is.

It actually is going to be much.

Higher than the Fed says, and that really they don't have as long of a way to get to neutral. Do you agree based on some of these revisions in the amount of momentum that there seemed to be in the economy heading out of the pandemic.

So to the extent that productivity growth has really picked up very mechanically, that does mean a high neutral rate. I think eventually we'll know the neutral rate when we get there.

So that's probably enough.

Come on, give us advanced notice.

It's probably higher than it was before the pandemic. Chepowell said that as well. The question is is it high twos? Before the pandemic it was low toos, right, so is it high twos? Is it mid threes or is it even closer to four percent? And I think all we can honestly say about the neutral rate is that it's somewhere between two and a half and four, and we'll know when we get there.

Aditya qui ask what's potentially going to happen in the next few hours, We know what's going to happen.

Where's going to be strikes at port? What could be the impact on the economy.

So there's two things that we focus on when we think about the impact of strikes on economic activity. The first one is that the longer they last, the more of a drag they are, but not in a linear sense, but rather in a nonlinear sense at some point, because then they start to affect supply chains, right, So one

It'll show up.

It won't show up in because when you're striking you can't apply for jobless claims, but it will show up in employment.

So what's the.

Cutoff when it actually can become more damaging down the line.

It really depends on how many people are striking, how broad the strikes are, So there's.

No fixed sort of cutoff, right.

But when we were thinking about the auto strikes last year, for example, we were thinking, you know, once you go beyond four to six weeks, it gets a lot more painful.

So how much do I need to strip out from Friday's number? Do you need to strike adjust this number?

Not really no, because the survey period was the week of September twelfth.

Do I need to cut off sixty because of revisions?

You need to account for the fact that Chair Powell is cutting off something, right, He didn't say what, maybe it's forty to sixty.

But this I thought was really interesting.

In his press conference, what he said was we are

So just I'm going to take a line from market's philosopher Jonathan Farrell, who is talking about.

The whiff of Goulesby.

If we hear the whiff of Goulesby at one fifty five pm today from Jerome Powell, how much does that risk a reacceleration in the market with a series of fifty basis point rate cuts that reignite the growth.

Side of the equation, It's a risk.

The question is how many fifties can can Powell pull off? Right, So if you look at the dot plot and you take it at face value, which I would recommend you don't do, but if you did, then you know it would say that they're not going to do any more fifty.

Right. We think they'll do one more. But each one that Powell pushes through, we now have a strong.

Sense that he's more dubbish than the rest of the committee. It's going to be harder, They're going to face more resistance because each one you do, you're telling the markets that we're not going.

To stop, and you're getting closer to neutral, so maybe you don't want to do too many.

So our base case is one more fifty and then back to twenty fives. But honestly, everything's on the table for this FED. You could get to twenty fives if the job's data are good. You could get very very fast cuts if the job's data deteriorate further.

What are you focused on this soufternoon? Just to final question, what are you looking for from the FED Reserve chair?

I think he's going to be pretty noncommittal. There's two more jobs reports before the next meeting. He really really wants to keep his options open, so it's going to be data dependence. You know, he'd probably used the word recalibration again, which again for us, if you're recalibrating, why.

Only do that one extra twenty five basis point increment?

Right?

You want to do at least one more.

But he's probably going to talk about recalibration, and he's going to mix this very optimistic message about the economy with a more dubbish message around you know, we'll do what it takes to to accommodate the liberal market.

Two pay Rose report, I think, one CPR report, and a presidential election in between the next decision.

Yeah, it's going to be a really tricky You gotta imagine that if he's laid a groundwork now for we're gonna Dove, that will just, you know, take away a lot of the uncertainty and the potential.

Actimmy actually spoke like that, we're going to dove a teacher. It's going to see you a teacher rather thank from America. This is the Bloomberg Sevenance podcast, bringing you the best in markets, economics, angio politics. 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.