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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 Terminal and the Bloomberg Business app. Towson' slock of Apollo
got two benefits there. One he got an extra twelve minutes to go over all of this, and two might be Key set him up perfectly because Torston New just out there nodding.
You agree, don't you, Hunter Resent. I mean, let's look at the numbers. Non fine pay roles in August was better than in July. The unemployment RATI in August was better than in July. Average arlie earnings higher than in July. And you look at average medio hours also better than in July. I mean, this is better than in July. This economy is not slowing down. In the way that markets anticipating we will not get eight cuts over the
next twelve months. Here you should instead look at this report as this is really telling you that there is a soft lending.
So help me with this. In October, when we look back at this report and we get another revision, a downward revision, don't we have to reframe some of this conversation and just say everything gets keeps getting revised lower. This is Least's point over the last few days. This economy, this labor market is weaker than we initially thought.
It was GDP in the second quarter verse three percent. It was just revised up. Jobless claims continues to be a good. Continuing claims was also good. If you look at the daily data for how many people go to restaurants, how many people's fly on airplanes, the weekly data from Redbook on retail sales, if we're across the board on bankruptcies, if we're across the board on credit card spending. In the aggregate, the growth data is just not showing signs
of a slowdown. It is true that the labor market is weakening, and yes, the duels data has bidding a little bit, maybe more in balance as the fit would be saying, but this whole notion that the economy is slowing down rapidly, it is completely misguided.
What I thought was fascinating. I was speaking to a number of retail executives at this conference this week, and their biggest question was what's going to happen with the consumer? They didn't know, They had zero visibility. Even though you are seeing some trends and signs of robustness, some signs of weakness, they said, ultimately, it just depends on whether
they have the money to spend. These labor market reports are raising a red flag for a lot of people, saying if they lose their jobs, they won't How fragile is that sort of happiness that you're describing to a scenario like that.
Certainly, if we do have a rise in the unemployer rate, so that's not what happened there, impliner ray and down, it would become a problem. But if you also exactly as you know too well, look at what they did say the retailers during this earning season. Target Set, no sign of a lowdown, Walnut, no sign of a s lowdown,
and also Costco, no sign of a lowdown. You saw dollar general, some parts of consumers are on the mont distress, but broadly speaking, looking at retail sales, both the monthly, the weekly, and cross the boat on credit card data, there's just no sign of a shop slowdown.
So the bottom line in this.
Discussion is that you only get a recession when you have a really big shock to the economy, and that makes sense of course with COVID human Brothers going under, of course, the bust of the IT bubble in two thousand. But this is not an exogynous shock with something coming from the outside. This is all engineered by the FED trying to slow things down. And now the FED is telling us that they're about to lower rates, so that's about to counter some of those negative things.
Well, let's weigh. We get another headline from the Federal Reserve Mi McKay from the neo FED President John Williams.
Yeah, John Williams is saying it is time now to join the party. He is not commenting in his prepared remarks about today's numbers.
Of course he.
Wouldn't have had them ahead of time, but he does say it's time to cut rates.
Excuse me.
With the economy now in equa poise, which he titled his speech that means in balance and inflation on a path to two percent, it is now appropriate to dial down the degree of strictiveness in the stance of policy by reducing the target range for the federal funds rate. So the guy who's vice chairman of the Open Market Committee is saying we're gonna cut rates. He's not yet talking about by how much, But there.
Is a Q and A, so we'll keep an eye on and apparently unser thesaurus too for the New York fact torsan sluck. What do you make of that? And what are you looking for from Governor Waller?
So I do think Waller will also give some more guidance in terms of what's going on, at least with a bigger economic picture. But I don't think that he will tell us much about whether this is twenty five or fifty. It requires probably a very important debate given the spectrum of where if I'MC members have been recently in the speetures, some are clearly saying some are even suggesting we should have much fewer cuts over the next seven quarters, and others, of course are suggesting that we
should go much faster. So I do think that they need to gather in the room and think hard about do we want to go towards twenty five or fifty? I would say, and I would agree with Mike that twenty five is the right now. But given that literally everything in this report was better than in July.
Would it be a policy error though to go by fifty?
See that opens up the debate about our sty and how far do we need to go down if our star and where we need to go to And ultimately so real rates plus inflation, if we only need to go to four and a half, we're not far away from that, so there's no rush to lower rates. If we do need to go all the way down to two and a half or three, then there is certainly more of a rush. But give me the incoming data across the boat is still good. Why is there this
rush to cut rate so traumatic? Other than the our Star framework which says that we got to get going.
Jackson Hall speech was all about understanding the effect that FED policy has in the overall economy. The conclusion was, we still don't know. We don't have a sense of exactly how quickly it gets sort of transmitted in how much of the lag effects that we're starting to see. There is an argument if you cut rates more aggressively now you can get ahead of some of the lag effects that we haven't yet even seen. Why don't you give credence.
To that, because there are three very important reasons why we did not get that slow down that we all anticipated for so long throughout twenty twenty three. Remember they started hiking rates in mants of twenty twenty to. First of all, consumers and firms had locked in low interest rates, AI investment has been very strong, and fiscal policy has been a huge tailwind. All these things combined have been the key reason why the economy has not slowed down,
and those things actually still in place. A lot of people still, of course have low interest rates in mortgages, IT investment, greade, credit fixed rate also very locked.
In for a long time.
So that means that if you do start cutting rates, it's actually the transmission is also going to be weaker. On the downside, it was weak when you were raising rates, it's also weak when you're cutting rates. So because of that, AI investments still strong, fiscal policy from Chips Act, Inflation Reduction Act, and infrastructure acts still strong. All this argues that the data will just continue to be steady over the next several quarters. There is no reason to expect
this to be a hard landing. There is no exactantess shock similar to what we have seen during previous recessions.
Christen klugabuks the revision for a second. If you take off the twenty five thousand we took off last month and you do here for August, you'd get one seventeen. Would you still feel this way if it printed one seventeen?
Sure? Of course, revisions are very important because we have seen some MDEST slow down, But broadly speaking, the data was still better than what it was in July. So taken as the overall picture of him, particularly with the unemployment rate, which is especially important when you put that into your tailor rules and try to figure out what should the reaction function be from the fit. And that's
how all the regional fits prepare the forecast. And if the unempliner rate goes down, it's hard to argue why they should be going fifty. To go fifty, you need some very excuse me, academic argument about our star, and you've got to get going with lowering rates very very quickly. And the question is, with the incoming data being so strong, it's monaps saraposia really so restrictive, it doesn't look like it's restrictive. If it was really restrictive, the important report would be a lot weaker.
Pause, because this is exactly where I wanted to finish with you. You're saying five point fifty is still not that restrictive for this economy.
So if ASDA, if where we're going in the terminal rate is four and a half, it's five and a half far away from four and a half. I know, we, excuse me, have been somewhat not quite brainwashed, but very distorted by a lot of fmcment was seriously saying we've
got a normalized raise, normalized raise, normalized rates. But let me ask you this, John, if we really had restrictive manetary policy, why have we for two and a half years and counting, still been getting very good economic data, including GDP in the second quarter at three percent.
The lassage is so longer, they might say, the lags are just long.
What should be the reason for that. The tailwinds from AI continue to be strong, the tails from fiscal policy is still strong. We have locked in low interest rates for the consumer and for corporates. Where is this very significant transmission of margetary policy.
When we sit here and do this again a year from now, we'll do it before then, don't worry. In twelve months time, where do you think rights are. They've got a four handle, they still got a five.
I think that they will be much higher than what the market is pricing at the moment, because this is not a shock that is generating ever recession. Why haven't we had a recession for now thirty six months in counting. I mean, it is really the case that the economy and the economic data has just been much better than we literally any modelould have predicted for the reasons that
I just mentioned. Mayme be locked in low interest rates, tales from fiscal policy and AI spending being completely independent of whatever the FIT is doing.
This is box office and we should do it again next week and looking forward to it. Toason' sluck of Apollo, thank you very much. In the commercial blank We've were debating with Jeff Rosenberg of Blank Rock what would be the most confusing labor market report today for the Federal Reserve and for market participants? And Jeff said something like if you've got a slightly softer jobs report, but unemployment actually dropped back from four point three to say four
point two. And Jeff, we've got a mix. That's the mix we've got. So Jeff Rosenberg of Blank Rock, Jeff, please make sense of this for us? Yeah, tough to make sense of it.
It's a bit of that mixture. But I think the headline reaction is to the slightly weaker payroll headline and the revisions as Lisa was pointing out, So it's a little bit weaker on margin. You know, the bond market is very much behaving as if you know, if we price it, they will cut, and so increasing the probability or trying to push the probability to fifty. I don't think this report is definitive on the twenty five versus fifty. I think it's going to be Waller, What.
Do you want from Governor Waller? Jeff at eleven a m Astern time? What are you looking for? You think that's the final voice that sets up whether we go twenty five or fifty. I think it is.
I mean, I think it's set up on the calendar to give markets clarity on what the Fed's going to do. He will have had the information, he would have had a chance to talk to Powell, and so that you don't get a big market reaction, you know, next not next Wednesday, but the eighteenth, when they when the FMC meets. So I think it is intended to, you know, provide a little bit of a steer to the market. So I think that's going to be you know, as important
as the number that just dropped. What we get in terms of the reaction, you know, and it's hard to say, you know, which way they go. I think you know, the market is pushing from fifty. You know, this number isn't you know, particularly weak. You have the potential of the first print bias lower on the headline. Maybe that gets revised, you know, up we're talking about revisions. This is a weirdness in the data where August tends to be weaker. You know, there's a slowing and there's an
argument you know, on both sides. You know, if they do fifty, does that you know, kind of signal too much concern. They can talk around that, They can talk about fifty and talk about their confidence in the economy and kind of ease some of that concern, you know, so the market has been kind of right in the
middle between the two this morning. I think it's really just about that revisions and a little bit weaker relative to the expectations and consensus around one to sixty five coming in a little bit below that.
As an investor, what's your response mechanism to a FED that signals fifty basis points of a rate cut. Is it basically just extrapolating out about one hundred and fifty basis points of cuts this year and then essentially that's going to be questionable for risk assets?
Or do you say this is.
Supportive because this means that they are going to adjust quickly back to something that the market thinks is more neutral.
Yeah, you know, we had that debate yesterday and I think it's it's a tough one. You know, typically when the FED cuts fifty, they're cutting fifty because there's a growing deceleration in the economic data. This is a tricky period because you obviously have a lot of focus on the labor markets and the labor market deceleration as being the leading indicator. It's not really a leading indicator. It's
kind of coincidence. Some measures are lagging, you know. The rest of the economy looks strong, but there's this fear that the FED is behind the curve and that the rest of the slowdown is coming. And the rise in terms of kind of hard landing fears and so fifty might you know, kind of push people along that direction. So it's more negative rather than the Feds kind of on the job. It's uh, oh, the Feds behind the curve.
The fifty basis points validates our fear. And then you have all the other issues in terms of risks, high valuations, concentration in terms of evaluation in the tech sector, all kind of leading to a lot of angst. And then even what we saw last month, you know, in terms of the outsized market reaction positioning October not October, I'm talking about August second and August fifth. So I think the risk here is that fifty could be more of a negative signal than a reassuring signal that the Fed's
on the case. But it's a tough call either way.
Well, you were having the debate yesterday, Jeff, not just the market, more broadly, what was your reaction being given the fact that the FED doesn't have proprietary data that we don't see that points to a more conclusive signal about where this economy is headed.
Yeah, it's really about the fed's shift. We saw it from Jackson, Hole and Powell, and it's shifted this whole narrative focus and really market reaction focus onto the growth
data away from the inflation data. And that shift means the FED is worried now more about securing the benefits of their past policy intervention to secure the benefits of reducing inflation, and now focusing on you know, securing the securing the soft landing, so all of any signals around their sensitivity, any validation of that in terms of the data, you know, makes people very much on edge that you're you know, back not to the what but Powell called
the era of flouted rules that you know, you can't rely on these rules like the PSALM rule, like labor market differentials and other things that that that people point to when you have recession signals that those may actually in this time, UH, you know, be the right signal. And that kind of concern that you see in many commentary, many UH forecasts, you know, gets more validated under a fifty basis point cut scenario. And I think that's the
concern that would be, you know, the pushback. They can signal around that, they can use the language, they can use the press conference to manage that. But you know, it's a tricky it's a tricky needle.
The threat. He Jeff, this was great, Jeff Rosenberg of Black Rock. So here's the latest. Donald Trump promising to use tariff's as an economic weapon in a potential second term. HiT's remarks coming ahead of Tuesday's debate with Vice President Kamala Harris. Michael Jesus of Morgan Stanley right in the following tariffs could pressure economic growth, but possibly more so outside the US, potentially driving more dubbish central bank policies
overseas than that the Federal Reserve. Michael joins us for more Michael Goodmornich. That's a thoughtful take on a situation for global central banks. Do you think some of those policies could be more damaging to countries abroad than maybe domestically.
Yeah, We'll say I think about the US's pasture in terms of trede relationships with the rest of the world. If it's terrifying more of its imports, then more the
pressure is going to be overseas. So this thing comes up in the context of Wiznamy for the dollar, right, and the Trump campaigns talked about the desire to have a weaker dollar, but some of these policies we think at least initially would manifest, and the stronger dollar because it's putting more pressure on the rest of the world than the central bank dubblishness you'd see overseas without weigh what.
It would do to the US.
Most people talk about also in the contacts, of what it means for US consumers. If you look at the rest of the world, who would win in that scenario.
Well, I think it's complicated to say that there are specific kind of winners and losers. I'd say is if over the long term, if the US is pursuing more protectionist policies and the aggregate, which it probably is regardless of who's present, it's just a matter of tactics. Republicans clearly want to lean more on tariffs. But what it does create this long term incentive towards nearshore and reshoring, et cetera. And the places that are best set up for that, I think are the ones that we know
from the most part, right Mexico. If you go into Asia we're talking about Vietnam or maybe Turkey a Nina, because these are areas where you have to kind of re create the labor supply and the labor cost elements that you have in China. But you can't do it in one place. You have to if you're multinationally, you have to kind of do in the aggregate in the multiple different places.
You have a hard job, especially at a time where people are saying it's basically a toss up and nobody really knows what's going to happen, and people are coming to you to explain what's going to happen, and you say, I have no clue, but I am curious about whether it's getting easier in this one sense that the two parties are kind of coming to the same place that increasingly it looks like the policies are very similar to
one another. You just talked about how they are going to be protection as policies no matter what, is there a baseline of how much this gets accelerated, regardless of whether it's Harris or Trump.
Yeah, I mean so, if we're talking about trade, the real difference is in the short term on whether or not you're using tariffs right, And if that's true, then what you're the real difference in twenty twenty five is are we pursuing trade protectionist policies that have terriffs or don't. The end state might be very much the same, but in the short term, the tactic of using tariffs just creates a lot more volatility, a lot more uncertainty of
your own growth. And then to the that you've got a Republican pursuing those policies, maybe they're going to deliver something on the back end in twenty twenty six that's helpful to the economy in terms of greater fiscal expansion. But the sequencing here is important because you might very well go through the tougher and more risky stuff.
Upfront, and then you want to talk about corporate taxes. Now we can have the tariff conversation. It's a bit easier because we don't have to talk about the makeup of Congress when it comes to taxes.
We do.
Let's talk about how workable things are. Harris is saying, take things from twenty one to twenty eight. Trump is saying take things from twenty one down to fifteen, but with a lot of conditions. I imagine you filtered a lot of calls yesterday from clients. What did you tell them about how workable the Trump plan is for corporate tax cut.
I mean, it's the workability of any of this is really a function more of politics than anything else. Right at the end of the day, all of these tax plans are going to have to pass through a budget reconciliation process that in some ways starts with party leadership deciding what number on the deficit expansion are they comfortable with,
and then everything kind of fits inside of that. That's effectively what happened and with the Tax Cuts and Jobs Act in the negotiation in twenty seventeen where Senator Corker said, we can do one and a half trillion dollars on the deficit, and then everything kind of fit in from there. So I think these proposals are important to talk about
and we have to pencil in assumptions for them. But you know, how workable is twenty eight percent on cap gains as opposed to something higher, Well, that's really a function of was the party decide the aggregate they're willing to do on the deficit, and then therefore, what is it they feel like they need to pay for and what levers they have to pull from.
There, there's a ton of proposals that are coming out of both sides, contempting on Social Security taxes, expanding child tax credit, which seems that both individuals want to do. What do you think is your base case actually gets done if we have a divided government.
Well, in dividing government, I think you can expect at least some of the kind of commonly supported provisions that are set to expire, and so of the Tax Cuts and Jobs Act get extended, and then mostly kind of everything else goes to the wayside. So when we add up what we think are kind of commonly accepted provisions, adds up to about a trillion dollars of incremental deficit expansion for ten years starting in twenty twenty six. That's
where we think the bipartisan angle is. If Republicans sweep, we think that number can get as high as one point six trillion. If Democrats sweep, because they'd be more willing to bring you revenue to the table on the tax side, that number could be like five hundred to seven hundred billion instead. So really, I think we have to think more in terms of the values and the principles each party is bringing to the table.
The precision on the.
Numbers is going to follow later after we get more details.
Okay, I want to build at this though, And this is what we're talking about with Tobias Marcus too. I mean, we talk about the lack of clarity around some of these numbers that we get and the details that are yet to be worked out, and yet house after houses come out and said that Trump is going to increase
the deficit more than Kamala Harris. We have a number of Republican strategis as well as people who could be as advisors, who come on the show and get very angry and they tell us that we're not accounting for growth that will come on the heels of some of these tax cuts, et cetera. What's the argument against that? Why is that not being included in any of this?
Well, I think there's a technical argument and then there's
more speculative argument. The technical argument is that the way the government's going to score any of these things typically is not going to account for incremental growth or dynamic scoring as they like to call it, and so investors kind of not having certainty on that, particularly bond market investors are really going to project for or sort to discount to the present what is the expected depths of projection that the government is telling them that's going the
factor into supply, and so the idea of sort of future economic growth kind of mitigating that deficit impact to T plus two, three, four or five years later feels quite speculative and it's not something that you can work with from an investment perspective.
Bank of America this morning. So the most important NFP and most important debate of the year, that's what we're waiting for. The debate is important because we still don't know all of Kamala Harris's policy proposals. What are you most interested in trying to understand from her economic plans?
Yeah, means I would love to hear more precision on both the tax and the spending side. I don't think you're going to get more of that from either candidate though, And campaigns a lot of times are about putting your values out and expressing them in statements as opposed to specifical policies, because that's going to be more persuasive to voters. So I'm obviously going to watch carefully what happens on
the debate station next week. I personally have low expectations for us learning more precisely what each candidate wants to.
Have You developed much of a sective focus just yet or is it still too early.
Well, I think there are some sectors that clearly sort of you know, benefit or benefit less in either outcome. To the extent Democrats have more control. A lot of the sectors that benefit from the IRA, particularly clean tech, are going to be more secure because that spending is going to be more secure if you have Republicans sweep and therefore more of a skew towards extending more of
those tax cuts. You know, that skews more towards domestic industries, a little more towards small cap I think it's one of the reasons that when it looked like Trump win probabilities were going a lot higher following the June debate, you started to see signs of life in small caps, and that's kind of come back as things have gone to more of a toss up.
This is what Dan Greenhouse said, yes that I on this program.
Yeah, essentially that when you start to look underneath the hood, and this is what we heard also from Trump's potential advisor that they're going to free some of that funding for the IRA and that could end up really hurting particular areas, which is the reason why you're seeing some sort of shifting around the candidate.
To speak almost exclusively for the investor class. I think the way they view things at the moment is that Harris needs Congress to do some of the bad stuff high corporate taxes. Trump doesn't need Congress to do some of the bad stuff. He needs Congress to do some of the good stuff to offset the tariffs. So ultimately, I think the things as they stand are Harris needs a sweep and that means that's bad for markets, and if Trump doesn't get sweep, that's also bad for markets.
Fair Enough, sure, I mean I think that right now. What I find most interesting is that regardless of whether that's good for markets or bad for markets, it's when it will be good for markets are bad for markets. And the fact that Michael Jesus is saying that essentially the sweeteners will come later because it will take longer to me is indicative of well, the Trump trade looked different this time around.
Mike, this was great. It's going to see it's a complex stuff. Mike Seest of Morgan Stanley. This is the Bloomberg Surveillance 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.