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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie 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. NACI is our The chief global economist, Piper Sandler, is bracing for a soft employment report on Friday. She joins us now for more. Nancy, Good morning, Good morning. What's a soft employment report on Friday?
Well, we're assuming about eighty thousand. That's maybe a little bit more than consensus, but as of now, eighty is our best aty good these days, Probably eighty is better than something closer to zero, to be sure. But it is a very very clear shift down, and you see it in a lot of data.
Companies aren't hiring.
You see that in continuing claims, they're not firing aggressively. Initial claims are still relatively are still relatively low. Your point earlier on the quit rate, the quick rate is coming down. People are reluctant to leave. And just ask consumers, I mean the Conference boards survey of is it hard to get a job or is it easy to get a job as a metric, I've used my entire career and consumers say it is hard to get a job. So there's clearly been a shift down in the labor market.
Why companies are trying to protect their profit margins is.
Eighty thousand and even worse number because of the downward revisions. To Mike's point that the longer you wait, the more unclear the data is in the short run, but longer term you do get just as clear of a look in terms of responses.
So the household employment data, which comes out with the unemployment rate, actually historically at turning points is better than payroll. I've studied this again my entire career was first written about in the nineteen seventies. Unlike payroll, the household employment data aren't revised. There's once a year population adjustment, but you can smooth that out. There's been no growth in the household employment survey for the past twelve months.
And then on.
Next Tuesday, you're going to see the QCEW, the quarterly Census of Employment in wages, and that's going to likely show a very sharp reduction in payroll from March of twenty five back over the past year of about at least eight hundred thousand. That is, payroll is going to start to look more like the household data. Consumers, No, it's a week job market. They're cutting back on highly cyclical stuff, both on the good side and on the
service side. So the idea that you're getting new news from the payroll report to me.
Is a little misleading.
Consumers have already reacted to this week employment backdrop.
When does this term become a problem because it's not a downturn, it's not a downturn yet and it doesn't seem to be heading toward any kind of recession. But this low higher low fire dynamic has continued and people don't feel very good. But companies are doing just fine, as we see in the earning So when does this become a problem.
That's so important that companies are doing well in this environment. Before you see you can see an upturn in the job market, companies have to make money. That's been a beauty of the US economy over the past decades that companies are allowed to stop hiring and or in some cases fire people so they can rebuild their profitability, and
that thing gives them the ability to hire people. So I think some of the most bullish news for employment in twenty six is the fact that two q s AP earnings came in double what they were supposed to have been and hit a record and hit a record high. Prior to every upturn in employment growth, you first need an upturn in earnings and profits, and we're seeing it. So kudos to American companies.
Is that what your full coasting now? A rebound and economic activity?
We are this year you're one one and a half percent, but you're already seeing capital spending turn up. Individual companies are seeing it. You saw it in the new order data yesterday. Why is that happening? Well, One, the Fed cut rates one hundred basis points a year ago, and it takes about a year for that to work through the system. Second, you do have this full capex appreciation, which is the most significant capital spending booster shot since Reagan in the early early eighties.
You're seeing it in company data.
So we have three percent GDP growth next year, and we don't think three is a new two. We think next year inflation does shift back down to two percent. You'll lap the tariff increases, and you'll also see further acceleration and productivity slowing unit.
That's a great setup.
You're looking for three percent GDP, two percent inflation, where's the FED and all of that.
We don't need an aggressive FED in this cycle. I get one that would make me worry about inflation. In the back half of twenty six, you have stronger potential GDP growth, which is about two and a half two two and a half percent. FED funds are pretty much in line with that. Nominal GDP growth of about five FED ones are a little bit lower than that. The problems of the seventies happened because the FED would shove rates down way below nominal growth, creating a boom and then eventual bust cycle.
And so we think maybe one cut.
Would be healthy, but more than that, I would then start to worry about inflation.
Okay, let's take a bait.
Nancy new fetchare comes along, huge selection process and they're going to deliver one cut in twenty twenty six.
Again, if the economy is help if you go back and look at the nineties, which is where we think there are echoes of the nineties, The tech tech obviously strength in the nineteen nineties, a green span ninety five, I believe, cut rates just once and you had three and a half percent GDP.
Growth with inflation slowing.
You didn't need a lower interest rate in environment because you had healthy potential GDP growth, stronger productivity growth, and strong very strong corporate profits. And those are the things that were driving growth, not lower interest rates. Again, that creates problems like another house rice bubble and or boom and nominal GDP growth, which then opens the door to inflation.
How has artificial intelligence changed the nature of that rebound given the fact that this isn't necessarily going to be a job full recovery that can be equally distributed to a lot of different people in different sectors.
So under the hood, there's always creative destruction in the employment and the employment data.
Just look at the retail data.
When Amazon came on in the nineteen nineties, you decimated retail employment in certain sectors. Online online touched sectors in particular, but at the end of the day, overall retail employment rose, and so creative destruction within the job market has gone on, not just back in the early nineteen hundreds, but even over the past ten twenty years. Tech employment has not
been a driver of the employment cycle. So I view AI as more of a productivity enhancing, profit boosting mechanism that actually is going to create more jobs because companies are going to have stronger earnings.
You're using it and you love the page book.
Le's what you're doing that you think actually how it affects your job?
Well for us, my colleagues are are very talented and using CHATBT five you can actually write code for the page book and get a sense of what what what the direction of the economy is from from AI. So I'm a product of technological innovation. I started with a typewriter. Obviously that I went to a computer, et cetera. I'll stop, but a technological innovation in this industry is not new. It just improves our ability to do but hopefully not always a better a better economic analyst.
Stay with us. Multiple IMPERG surveillance coming up after this. Marc Abana, the head of US Right Strategy Bank for America Global Research is with us around a table for more mark and morning, good morning. It's going to see you like a lot's change, what's changed for you?
So we think that investors should really be focused on where the cutting trough in this cycle is. That's still around three percent. The FED thinks three percent is neutral. The market seems to believe that that's credible and that the FED will head there increasingly. At least for our rate strategy team, we see three percent as almost a
cutting ceiling. They're going to at least cut to there, we think, and we think that the market is not fully appreciating the potential range of outcomes below three percent that the FED could take us to.
And that range of outcomes.
We think exists because you do have a moderating labor market, you do have inflation that is expected to peak around the end of this year or first half of next year. But we also think that you're going to have a composition of individuals at the FED that are going to be targeting potentially different objectives than the current FED is. And specifically, what I mean by that is, think about, let's say, how the FED judges the natural rate of unemployment.
The FED thinks that in the long run this level is four point two percent. They don't know that for sure, but that's their estimate. What's to stop a new composition of FED officials from targeting and potential three and a half percent or sub four percent type of natural rate of unemployment? And we think that you're going to increasingly hear these types of arguments from individuals that are being
considered to adopt leadership positions at the FED. I'll certainly be listening for that on Thursday with Myron's testimony, because we have heard from other, let's say FED share contenders that they're open to this idea. And if the FED does indeed adopt that type of approach, that opens up the range of outcomes for where the funds rate can go well below three percent. We think you want to
be received five year ois to benefit from that. It also means that you should be expecting that longer run inflation expectations move up because they are still very well anchored. We agree with the Fed's assessment on that. We think that they can be moving up. We think that the inflation curve can be steepening, and we think that the
nominal curve should also be steepening in that type of environment. Finally, we like being short thirty year asset swamp spreads because we do worry about some of this supply demand dynamic at the back end of the rates curve. If the Fed is let's say, cutting to rates lower than what many of us would think are justified by fundamentals today.
Who's going to buy the bond?
If you're worried about upside inflation risks and the deficit is still not improving materially. Who's going to take down all that long duration treasury supply? So we think you want to be positioned for them. We like being short thirty r asset swap spreads to do so.
So as you talk, I'm thinking, I'm going to hide in gold. I'm going to hide in the most pro growth stocks because essentially they're going to juice everything. I mean, essentially, isn't what you're saying really positive for stocks, really positive for gold, terrible for the dollar, and don't even touch that thirty year bond? Yes? Yes, yes, yes, okay, So that's basically what you're looking for right now, and.
We just think that again, you can focus on fundamentals and fundamentals and our economists, and kudos to them, are still very much rooted in that they're thinking, this is an economy that's not headed into a recession, where you've got stagflationary risks, where inflation is going to be a three percent or higher by the end of the year, and where the FED is running the risk of a policy mistake by cutting later this year, if that's indeed what they do. And so they're thinking, why would the
FED be doing this? And I understand that from a fundamental perspective, but we've all seen the headlines. We've all seen at least or we've heard some of the approaches that individuals were being nominated or considered for FED leadership positions are espousing, and all of those, at least me as a rate strategist, say, why are they going to stop at three?
Why would they do that?
Waller is just saying, no, we're going to cut to neutral, or I think we should be heading to neutral, and I think neutral is three percent, But he'll be the first to tell you that he doesn't know where neutral is. And then once you start to contemplate some of these other arguments, we suspect about lower natural rate of unemployment and really strong GDP and deficit financing levels, which is not in the FEDS mandate, but certainly you hear that
line of argument from administration officials. Once that creeps into the dialogue, then why would they be stopping at three? So we just think again that the distribution of rate outcomes is much greater to the downside than what the market is currently pricing, not necessarily due to fundamentals, but due to a shift in the approach for how the FED will likely be thinking about setting monetary policy.
You know, I give you a lot of credit for trying to force people to think out sign a conventional framework, because I think that what we could say next year could be very unconventional.
The idea of targeting something sub four point two percent on the jobs market and ignoring the inflation possibility. I'm just thinking, I mean, I understand why people are pro risk in that environment, because why wouldn't you be pro risk at a time where they're trying to juice growth at the expense potentially of inflation.
I done it round.
I do think against the clock fifteen twenty seconds.
Okay, so what stops this? We think two things stop this. Number one popular discontent with show inflation the voter.
But I don't know about you.
I would imagine that it takes above three percent inflation to really bring it, you know, individuals out to the ballot box on this issue five or two loss of control on the back end, and you're going to be looking at best in cutting auction sizes in that event or potentially defit using the balance sheet.
Stay with us multplemperg Savannan's coming up after this, whether sayre at New York, let me Cantrell, Pimcoke, letb me Gimonic, good morning, September seventeenth. Will she be there?
Will Lisa Cook be there? I mean we think so, we expect so. I mean think obviously this is how the court will adjudicate. This is sort of any one's question. But assuming that the Court has not sort of definitively decided whether this is fraud, we believe that she will most likely be there. I think a bigger question in some ways is will the Council of Economic Advisors Chairman Myron be there? He, of course is going to be sitting for sitting for his Senate confirmation hearing, tomorrow. We
think that is quite aggressive. So Lisa Cook Pop most likely will be there again sort of barring any sort of core developments, but Chairman Myron probably will not be there.
How much is it going to be a contentious fight with Stephen Myron in those hearings tomorrow versus just paving.
The way come on down? Yeah?
Well, I think we've talked about this before. Me The Senate confirmation process is not necessarily perfunctory. I think the market sort of just assumes that whomever the President any president nominates, they'll likely get confirmed. And I think for in most cases that is true, but for this particular position, in this particular context, we do think that any sort of phedenominee is going to be question by Democrats, of course, but also by Republicans. And remember that the first step
towards Senate confirmation is through the Setate Banking Committee. And you know that again might just sort of seem like a bunch of kind of mumboed process mumbo jumbo, but it's actually very important because assuming no Democrats vote for Chairman Myron for Fred Governor, that means that he cannot lose even one Republican vote, in order to advance to the full Senate floor.
So this so.
Tomorrow will be very very important. We do expect that he will get confirmed, but again probably not in this very accelerated time frame, meaning that he'll probably the earliest he'll be seated for that film is probably October.
The controversy over the FED has sucked up a lot of oxygen in a lot of time, and I wonder how much we ought to.
Be putting to the idea that we could be facing.
A government shutdown in a couple of days and I will say for a couple of weeks. And I say this at a time where globally we're talking about government dysfunction, how much it could be affecting some of the fiscal worries and markets. Are you expecting us to actually shut down again? I mean, is this actually a worry that we have to focus on.
Well, I think that the market is predesensitized because there have been so many headfakes around government shutdowns, around debt ceiling fights, and so I think it's sort of understandable that the markets sort of a inre to even this discussion. But we do think the risk for a shutdown is higher this time around than it has been in probably several years, and that's because just the friction between the
Republicans and the Democrats, the requirement. Remember that in order to fund the government, we need at least sixty votes in the Senate. That by definition will require some democratic cooperation in the Senate.
You may even need.
Democratic cooperation in the House as well, And just given that lack of comity, that friction maybe an understatement. I do think that the Democrats may very well be willing to take the political risk and shut down the government. Now what we've seen from an economic perspective, it doesn't really matter unless it is a prolonged shutdown. But again, I don't think the risk of that is necessarily zero just given some of these sort of political dynamics.
The issue we've been talking about in the last twenty four hours is very much close to home for you. It's in the bomb market for the team over at PIMCO. What's been amazing for Lisa, me and others on this program is to see tariffs go from something that was bombed negative in April to bomb positive as we kick off September. How are you going to take thinking about that now?
Yeah?
Well, I think actually in all of these these things that we just were talking about too, I mean, from our perspective, really lead to what we've seen in the bomb market, which is a curve steepening kind of bias, and that is something that we've had, we've been positioned for that really since the beginning of this year. Clearly there might be even more room to run on this in terms of the concerns around FED independence, the concerns
around inflation, the concerns about a government shutdown. We think that all reinforces lisa steepening bias. But yeah, I mean I think you know, you know, again, this is the kind of where we think, this is sort of our sweet spot in terms of being active managers being able to find some value in the bond market. But again, all of these things that we speak up in terms of Washington really do reinforce this idea of a bond steepening.
How much revenue are they rising through terrists at the moment.
Well, there, I mean a lot.
I mean, it's you know, to date, it's around for fiscal years around one hundred and fifty billion dollars. So there is of course a question of whether the government would have to return that money. I think that is an open question, you know. Our view here is that this sort of this this legal process that you all have been talking about, will play itself out, will likely go to the Supreme Court if that is adjudicated on
a sort of a normal timeframe. That means that we could we may not see a ruling until actually a June of twenty twenty six. So the up sort of the upshot for the market here is, even though there's a lot of noise back and forth around these tariffs, our expectation is that they stay on at least in some form or fashion for the first forestable future. And then, of course, as we've talked about John before, the President
has a lot of other tools. So if the Supreme Court decides in an expedated fashion that he cannot do this, we think that he will put tariffs on using some of these other lovers that.
He has stay with us.
More Bloomberg surveillance coming up after this. Let's turn to the consumer. Kay McShane, a US retail analyst that Golment Sachs writing this, we have seen growing concerns around the health of the US consumer. However, we expect a combination of job growth, easing interest rates, and more benign essential spending to translate into resilient spending power. Kate joined us now for more. Kate, welcome to the program. Let's just build on your routelook. We've seen a market start to
believe in a pickup in this economy. Are you hearing the same thing from the companies you follow?
I think we are.
I think there is some hesitation going into the back half of the year in terms of what with the higher prices we could see as a result of tyriffs could mean for the consumer.
But as we enter into twenty twenty.
Six, and we published on this yesterday, we do expect to see an accelerating cash flow for the consumer, especially with that middle income consumer.
How much Kate has the expansion or the rosier outlooks from the retailers come from the idea of more robust demand from consumers, and how much has come from the fact that they can raise prices and cut staff or cut costs around the corners and maybe deploy a little AI, deploy a little something else.
I do think there is a strong underlying demand that's underpinning the sales that we're hearing and seeing from retailers. What we've heard for the last couple of years is that while the consumer is being choiceful, they do respond to newness and to innovation. And we've heard so far that back to school has been very strong as well, and back to school is usually a very good future
indicator for how holiday will turn out. And so I do think that there is a fairly healthy consumer that is underpinning the demand for these discretionary sales.
How much Kate is this affected by some of the uncertainty that we've seen. There was this expectation that heading into the end of the year there would be more certainty around policy, more certainty about what was coming down the pike, and now we have the question about the legality of some of the tariffs. We have questions around what is going to happen with the budget deficit, a
government shutdown? I mean, is that basically not on the minds of a lot of the executives that you're talking to there.
Oh, I think the uncertainty is definitely something all of our companies that we cover have spoken to. I think there is a lot of uncertainty in terms of how things will play out again.
In the back half of the year.
I don't think we've seen as much fear from the consumer, though we haven't heard as much of pull forward in anticipation of potentially higher prices in the back half of the year. Everything seems somewhat normal when it comes to the consumer pattern of spending.
Kay, I want to just ask, we've been talking all morning about the proliferation of artificial intelligence and how a number of different companies are using it and how it is migrating from the Magnificent seven to the rest of the names the index and beyond. Are you hearing about tangible ways that retailers are using the latest technology to either facilitate sales, reduce costs, or even just improve.
Processes to do.
Yes. I would say within the last couple of quarters, we have definitely seen the narrative around AI accelerate in terms of how these companies are thinking about the future. We do hear it in the context of efficiency, I think a little bit more than anything else. Think supply chain,
think e commerce and product descriptions. There's a lot of things that they're talking about kind of early on here, but I think we're going to hear a lot more the next couple of quarters of again, how it's improving efficiency at all these companies.
This is the Bloomberg Surveillance 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 podcast on Apple, Spotify, or anywhere else you listen, and, as always, on the Bloomberg Terminal and the Bloomberg Business app.