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Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always I'm Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App. And what we see now with so much of inflation as it comes in decidedly in a disinflationary mode, You're going to see a huge move I would predict in the market
equities lift. Here, I'm looking at the ten year real yield Claudia. Some would want me to do it. It plunges out of the recent range and moves from one point nine to nine down to a stunning one point nine zero, a full time basis point move. Paul, go through the list of the inflation You do it better.
Than me, CPI Tom just right off the headline is there's a negative symbol. There's a negative symb let's call that out zero point one percent. Tom. The consensus was a positive zero point one percent, So it's lower than the consensus. It's lower than the last month. That gets your attention. X Food and Energy zero point one percent
versus the consensus of zero point two percent. So you put that all in for the annualized number, Tom, CPI X Food and Energy year on year came into three point three percent to consensus was three point four percent, and that was what it was last month. So a slower inflationary environment is what we're seeing here, Tom.
Average wages pretty much level as well, maybe a little bit of an improvement in weekly earnings.
And I would finally state the claims.
Reversed from the recent trend to a this is this is Claudia is going to be really impressive, worser claims.
How about that.
It's a better claims statistic, But it's just one data point on this market moving CPI report futures up eight NASTAC up two tenths of a percent, a ten year real yield craters from a one ninety nine to one point nine one percent.
We went with claudia, some claudia.
There's a negative sign on CPI month over month, what does that signal?
It's good?
I mean, this is the what's so important about getting these kind of numbers at this point is it goes back. It tells us what we saw the second half of last year, what wasn't supposed to happen, the disinflation without the pain that was real. And it also tells us a lot of that where we got stuck up at the beginning of this year, that was that was not
the right signal. Right, So this is you know, we get one more month of data, but it actually helped to sort out the different conflicting stories that we've had before that you know, we we are on this disinflation path and we have been, and this is this is very good news. It is one data point and you don't you know, it's nice to see a negative ahead of that number. We shouldn't get to, you.
Know, wound up about it.
But this is the disinflation story. It's here and it has been here. We've just it's been under the hood and been hidden.
So how do you think the FED is going to interpret interpret this data? Claudy, Are they going to look at it on a month basis or kind of a maybe three months six month trailing basis. How do they look at some of this CPI data.
We we now have three months that are good months, right and frankly, this is is another very good month as with last month. So again they're not going to want to, you know, overreact to one month, but we're getting in their three month moving average range. Of these are good numbers. We need to keep them going. We had a full string of disinflation the second half of
last year. The composition we're all talking about top line numbers going on under the food is important and you know, good news is good news here and it is a story. It re enforces the dissemplation story, which is what we need to get back to normal.
The market moves, Futures explode up sixteen down, futures up seventy eight, nasdack up three tens an percent, small caps almost up two percent, the vics a much more attractive number twelve point three three. Bloomberg surveillance across the nation with a stunning inflation report, and we are strong with claudiasm of course of Michigan for years and affiliated with the University of Chicago Boos School. The former governor of the Federal Reserve System, Randall Krasner, joins us now the
market economist Randy Krausner. Neil Dudda of Renaissance Macro puts out a blistering single sentence, The doves have what they need, It is time to cut. What will the PhDs that the ECCOS building advise Chairman Powell?
I will say that we have the foundation for a cut, but they're not going to be ready to go yet. So I think they're As Jay has said over and over again, he needs more data to feel confident that inflation is coming down in a sustained and sustainable way.
This is certainly consistent with that, and you could see from the testimony that he gave over the last couple of days he was talking more about the risks to the downside, that is that the FED those rates too long and the economy, in particularly the labor markets lows too much. This is not enough to get them to move at the end of this month. I don't really think that's going to happen, but I do think it sets the foundation for a move in September.
Tough question Randy, I'm going to ask it with your brilliance, and particularly in financial economics, people will say the elites are benefited by our FED policy because they are asset heavy. Price up, yield down assets do better when you're around the table the Echos building July thirty one or into September, is there any discussion of the partition of America where so many Americans need that rate cut now?
Well, certainly, the FED has been very much focused on the labor market. I mean think back to a few years ago when Jay Powell and the rest of the FED launched the average inflation targeting where they said, well, we could run the economy too hot for a little while and that would be okay. So they are very sensitive to that. That is I think why Jay is starting to speak so much more about that. The unemployment rate has been four percent or below for a very
long time. Now, that's a very strong labor market, and there has been a lot of generation of jobs, not just at the high end, but really throughout the entirety of the income income distribution. But they're sensitive to that, and I think that will lead them to cut by September, but not this month.
So Randy whinn the FED does begin to cut rates. Do they do it? Did they do it, you know, four or five six meetings in a row? Did they alternate? How does that work?
And Paul, your question is the absolute heart of the matter.
Sure, for sure, And so I don't think they know yet how they want to do it.
I don't think they remember.
There's that old phrase that the Island green Span had that you moved a pace that was likely to be measured, so twenty five basis points every meeting for like two years. I don't think they want to do something like that.
See, Randy, you're busting my chop. So as Paul asked the money questionnaire. But Randy, we are wedded to a green.
Spanny in mathematics on this.
Are we wrong to do that? I mean, should we be more creative about it? Back to McChesney, Martin or Arthur Burns. Should we have a new formula forward beside a measured green span.
Yeah. I don't think they're going to do the measured pace.
I think there was pretty clear consensus even when I was there, which is now a while ago, that measured pace was not the best way to do things.
And so I think that they will move.
And you can see when they moved inflation interest rates up that was not at a measured pace, that was pretty rapid.
So I think they're gonna they'll bring interest rates down. I think they'll bring.
Them down somewhat gradually at first, but if they see the libor market really weakening, they'll start to move quickly. That'll be too late to prevent the labor market from softening substantially. But they have to weigh the risks of calling all clear too early, getting back into what happened in the late seventies early eighties, where they did that and then inflation reignited and they had to raise rates
really high at a really bad recession. They'd rather wait a little bit, you know, perhaps a little bit too long, to buy some insurance against that upside inflation scenario. But then they can cut and just have a slow down, maybe a mild recession, but something that'll be much less worse than what they had in the early eighties.
All right, Rannie, So today's inflation, David, you know, certainly showing some slowing inflation. We heard from FED Chairman J Powell over the last two days speaking in front of Congress focusing. I think a lot of investors said, boy, he's really kind of focused on the labor market, the employment market, and citing some slow downs, there are just some softness there. How do you think about the labor market. How do you think that Federal Reserve thinks about the labor market.
So I think they see that, I think is really the key on both the demand side as well as on the supply side. So on the supply side, they look a lot of wage growth, and wage growth has been coming down a bit. It's still now three point nine percent rather than four point one percent, substantially above
their inflation target. And given how important wages are in the cost structure of both both certainly services firms, but even manufacturing firms, unless productivity really spikes up, that's going to have to come down a little bit, a little bit more. On the demand side, obviously, when there's good real wage growth as there has been, that is that wages have been growing fast and nominal wages have been
growing faster than inflation. That's a that's a big plug or households continuing demand, and they want to keep that balance just right.
Professor Krausser, stay with us, don't go away at the Blue School Chicago, with his great work at opening BOS School in London. Here a number of years ago, Randall Krasser, the former governor of.
The FED, Randy, we're learning so much.
And what I learned was from David Rosenberg at Marylynch a million years ago that the financial media focuses on one statistic, or maybe we get sophisticated and we look at three statistics. Pros like you and Kate Moore for that matter, look at forty seven or fifty five inflation statistics, which is the one you're looking at right now. What is the subset of data that matters to Randall Krasner.
And it's not really the CPI, it's the Personal Assumption Expensure Index the PCE that comes out with the with the GDP report.
That's what the FED has said that they really focused on.
I think that's reasonable because if you look at the waitings in the CPI, a very large fraction of it is around rents, and so you know some of the oddities that we get with rents, whether it's you know, last month, there's a big spike up in New York City rents, there's a big lag in the way that rents are come into, right, its owner occupied housing, but it's really rental numbers that come in that sort of lag things because as you know, people sent you usually
signed one year contracts for rents, and so we're finding out a lot about what happened last year rather than what's happening happening currently. Less of a weight on that in the in the PCE index, and so the FED really focuses more on that, and I think that's reasonable to do.
Okay, Randy, this is really important, And I mean, you know, Brown University economics pop. It's a little different than Harvard Undergraduate economics. The gentleman at Harvard Jason firm, and I think you know who he is, Randall Cross. Oh, yes, Jason Ferman of X ten Fame launches a tweet out moments ago amazing inflation data for June. What's exclamation points? They do that at Harvard Brown University? Poole said, no exclamation points ever. Come on, Randy, the Fed's got to
adjust to this report. Explain how they adjusts. They staggered to July thirty first.
So certainly they will take this on board.
And I think, as you can see from the minutes, that I think are reflected in some of Jay's recent testimony. There's a lot more concerned about the potential downsides and the risks of keeping interest rates high for too long.
They will take that on board, and I think what they will do is I don't think they're going to move, but I think what they're going to do lay the foundation for move in September, because in some sense Jay laid the foundation for changing the wording and changing the changing the press conference UH feeling in July, and because the move the FED in its communication moves at a pace that is likely to be gradual, and so they lay the foundation for changing the wording in July to
be able to lay the foundation for actually making a change in September.
So I think that's what your most likely to hear.
Randy, thank you so much.
And just for the record, Professor Krausner, I would kill to get Professor Krasner and Professor fermanon.
At the same time.
That's a giant in financial economics, in a giant in policy economics.
Randy Krasner, the Moose.
School, Kate Moore, She's had a thematic strategy and global allocation at a little firm called black rock. So, Kate, I'd love to get your thoughts here on this inflation print we Saul this morning. What is mean for you?
Look, I think this is the latest and a string of good news for the equity market. You know, one of the things I was really considering as we finished off the second quarter was that, you know, most people were skeptical about the sustainability of the equity market going into the second half of the year. There are a little anxious that we can't repeat returns. I think this message.
That we're getting now that the FED is going to be in.
A place where they can continue to or they can start to ease policy and continue to guide us, and that is the path into the beginning of twenty twenty five is going to be quite supportive for equity markets. But it's not the whole story, right, I Mean, lower rates are certainly a support, but that's not what's really driving the equity markets in twenty twenty four. It's really been in earnings and a fundamental story.
So now us equity.
Investors, we have to turn our attention to earnings, which are kicking off any moment.
So what do you expect to see here? We had some of the numbers today. Delta a little bit weaker than expected on some costs, PEPSI, a little bit weaker on some top line there. What are your expectations here for earnings cycle?
Yeah, so okay, let's get out this.
To begin with, the baseline consensus is looking for a seven and a half to eight percent EPs growth for the second quarter.
That's obviously a little bit of an acceleration from the first quarter.
So this is what I'm talking about, between the price moves and where consensus is from bottom up basis. You know, we're kind of at a hot place. But I will say as much as people are anxious about a pullback and you know, get worried that multiples have expanded, there are a couple of reasons I think this earning season could meet these high expectations. So first, I'm going to make this point around pre announcements, because I watched this
really closely. When you're going into earning season, people may put out all the bad news if they need to early, and there have been very few negative pre announcements this quarter, especially relative to what we got in the first quarter of twenty four, which was.
Still a good earnings quarter.
So no one is coming out trying to front run the market here and get the bad news out before earnings, which I think is actually a very positive signal.
Kay.
And then the second thing, Oh, please go on, don't continue, Kate, Kate Moore, you deserve a second thing, Give us a second thing.
The second thing I was going to say is that earnings revision ratios. This is like the ratio of upgrades to downgrades from the bottom up analysts. And over the last one month, the earnings revision ratios for the US and particularly for the biggest parts that matter, like tech, have been very positive or have in Tech, we've had more than two upgrades for every one down grade. And you know that's not a sign going into earning season that people aren't seeing any signs of weakness.
Ira Jersey is going to be with us in a bit. We're still with Kate Moore, Blackrock and mister Jersey and his team. I mean, Kate, it's not like you or you're you know, you're alone and you're understaffed. Jersey's got like seven people right now writing and working on the moment, and Iris of course talking about key rain just here in the fixed income market, I want you to bring that over to the equity market. Irad Jersey says, four point one eight percent on a ten year yield is
a big deal. Right now, the tenure yield is four point two zero percent. How do equities react if yields go price up, yield down outside the recent range.
Price up, yield down, I think would be really supportive for big parts of the market. You may actually see a little bit of action in the small and mid caps, which have been, as we know, huge laggards.
Up one point eight percent right now.
Yeah, and here's what I'll say.
Fundamentally, that segment of the market is not as strong as what we see in the large cap indices and the megacap company that said this is the news that we need for smaller segments of the of the business community that rates are on the path down.
Because they know that has been a headwind for operations.
I got one more question, Kate Moore, when then we got to go over to Jersey to tell us what to do? You you don't remember the analogs that we remember. The nifty sixty I was, you know, nifty fifty rather in the sixties and all that, even ninety nine, two thousand does Kate More have an equity market analog you're working off of or is this a whole new world after all?
Yeah, Tom, I do remember ninety nineteen thousand. Don't worry. I'm not that young.
But what I will say is I don't see a perfect analog right here. And I know everyone wants to pick a period in history and say it looks just like this, and it's a comfort, you know, people like that comfort. But we are in the midst of, I think a massive technological change here with the advent of AI, and as companies try and figure out how to adopt AI and figure out the use cases and what the best way to work with this technology is, and I think that's going to lead to the incredible, you know,
bifurcation in the market. Companies that have access to the technology have access to amazing data sets and are using it appropriately and those that don't. You're starting to see that separation in earnings already. And I just don't know that we, or at least in the lifetime I've been in almost five decades, that we've seen this significant of a technological change.
Kate Moore, thank you so much, Blackrock. She's got to talk to her steam. Colleagues at Blackrock right now greatly greatly appreciate that.
Ira Jersey joins us.
Now with Bloomberg Intelligence, and he is a surveillance soccer expert.
Paul, why don't you get us on the straight.
And narrow exactly? All right, Ira, we had this inflation print, came in a little bit softer than expected. What's your market? What's the treasury market telling you about what we saw in the inflation print?
Yeah, so the treasury market liked it, and the treasury market has rallied.
We've seen some we call bull steepening.
So you have the front end yield, so yields on the two year note are are lower more than yields on the long end of the yield curve. So that's what we call bull steepening of the curve. And that's not a huge surprise because you know what this data does. It gives more confidence to the market that not only might the Fed cut in September, but once they do start to cut, assuming that we continue to have reasonably decent inflation prints and slowing economy, that the Fed will
probably go more regularly. And that's one of the reasons why you see the shorter end of the yield curve at two year note and five year note do a little bit better than the long end because that tends to be far more sensitive to interest rate cuts by the Fed. So it's not a huge surprise. And at tom, as you noted, you know, four point one eight percent on the ten yuere is actually a pretty important technical level because below that we're going to test four percent again.
And I think you know four percent is more of a psychological level than anything you know, economically important. But nonetheless you can wind up seeing a pretty big move.
We printed under four point one eight, but to pros like you, Ira, you need to close under four point one eight, am.
I right, Yeah, that's correct.
Yeah, so we do need to see it convince I call it a convincing break. So what often happens is you can make all these lines on charts and ultimately what usually you use those for things like putting stop losses or or stop reverses in so you you if you're if you're short the market, for example, you you hope that interest rates will go up, right, so yields will go up. And if you know so, if you say, okay, four point one eight percents a.
Is a key technical level.
You'll put you a stop in at four seventeen or four sixteen, So you need a more convincing break than just like half a basis point.
AI, Raight, I'm looking at the WORP function world indust rate probability if I'm reading this correctly, Marcus, looking maybe like an eighty five percent chance of a rate cut in September.
Oh, listen to you, you're doing it wrap?
I am?
I am? Can I pencil that in?
IRA?
Can I put it in with ink? What do we do here?
Well, the market certainly is coming around to that thought. You know, I'd been very skeptical that the FED would have enough good data to go in September, but you know, today's data was certainly good. We remember, we still have a bunch of prints before then, so we still have two more inflation data. Plus we have all the PC numbers as well as the spending and payrolls, right, so we have all of the important data that we're going
to get over the next couple of months. And you know, if that turns around and this happens to be the weakest inflation print over the over that three month period, then maybe September is off the table, but the market certainly is pricing for a September cut. I think what's what's what's important, though, is that we were also priced in now for another cut after that in September November.
Excuse me, so, so basically the market is starting to price for a string of cuts as opposed to just one and then a pause for a little while.
I got one minute, that's I'm so sorry. How does our world change if we get a close of three point ninety nine percent on the ten year yield?
I don't think anybody's ready for that.
Yeah, well, it doesn't change a ton of ton, but it what the tenuere going down that low? You would see lower mortgage rates, right, So you would see, certainly, I think some corporates start to come in and maybe pre refinance some higher coupon debt that they issued, say two or three years ago. So you can end up having a situation where ironically lower rates leads to easier financial conditions, and that actually might work against what the FED wants to do, or do the Fed's work for them.
So certainly, certainly, though, you're only going to get there if the market is more convinced that the Fed's going to cut pretty aggressively our Jersey.
Thank you so much, greatly appreciate it. This is the Bloomberg Saveillance Podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am
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