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This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from 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 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. We are in the front row right now in the shock of these markets. The perfect guest, Stephen Whiting, is with City Group and just to say the least, he is steeped in the linkage of our economics to our market. Steve, I can't to start with, is our economics linked to our stock market right now? Well?
It is, but it is out of sync in some ways from the way it has been in the past. We have been just looking back at the last year and a half in a period of poor corporate profits, with a few magnificent exceptions. If you take a look at global EPs X mag seven. It was about negative seven percent last year, and we now see it recovering, while the labor market, which was torrential in terms of its rebound from the pandemic, is slowing down. So slowing
employment and rising corporate profits. That's this moment.
Annawan, publishing moments Ago on LinkedIn follows up where their zeitgeist changing birth death analysis. This is inside baseball, folks, only Widing reads this stuff. I don't, but Anna says it's here in the job reveal visions will show a more tepid American labor market.
Do you agree, Well, let's just be careful to see the actual data, and she says, she says that, yeah, the levels versus the growth rates. And you know, when you're dealing with you one hundred and fifty million people, you know, is what does that necessarily mean? But I think if you take a look at the labor market, and this is all discussed in our City Global Wealth Midyear Outlook report we're releasing today, what you're seeing is
a real slow down in gross hiring. And despite all the you know, the reports on layoffs, they're not up that much in the aggregate, but a real slow down and hiring. And you can take a look at the Jolts report. We've had four million fewer unfilled job openings from you know, twelve million, eight million rounded, right, so you know this path is coming down. There's something else now, this is really zooming in on the on the near term,
and people get very crazed about this. But we had over two hundred and sixty thousand jobs created in the first quarter of the year. Guess what happens at midyear, right, we have a less sea an economy. Right, we're just thinking about agricultural cycles. See, maybe that's the one that people can can think about. We don't need to hire and fire everyone because of the time of the year
the way we used to. If you take a look at economic surprises, the city economic surprise indecks, you will see that it's stronger in the winter and weaker in the spring and summer. And suddenly everyone is saying this, you know, economy was trenchally strong is now in a bust again. And that is not really happening either. But it wouldn't surprise me if job gains are about half the first quarter pace.
Interesting, So Steve, I'm just I'm looking at the Wealth al of twenty twenty four, the mid year edition for you guys, renewed growth, New challenges, Building resistant portfolios is a resilient portfolio. Can I back away from the mag seven? Can I try to do some homework here and try to find some value outside of the magnizine seven?
I think we just have to take a look. When you're when you deal with three trillion dollar companies, maybe you can take you know, an individual view. I would just say that, you know, for every chip maker, there's a customer, and if all of those customers are all spending like mad all at once, you know, we might think about their motes in the future and whether or not they're going to be competing in the same space. And you know, the good news and again the renewed
growth part is on profits. I think ten out of eleven sectors will have EPs gains this year. I think much larger swath of the world will have EPs gains. And it's not that they're all going to be value the same, that'll never happen, but the rise in profits is the positive catalyst for more of the world equity market.
All right, Well, how about a fixed income here? I mean, Lisa Mitteo is sitting in here at a two year treasury darn near five percent, no gray hairs, she sleeps fine. What's wrong with buying a two year treasury? Just sitting there?
Well, you know, the world doesn't end in two years though, that's part part of the issue, you know. So the treasury market very efficiently is embedding a lot of easing, and the inverted yield curve makes it difficult. But you know, when the Fed says that it's long term normal rate is two point six percent, say that they're exaggerating. It isn't going to be that low. You know, what can you do with a four year duration? Where will you want to be in four years in terms of the
interest rate that you're earning? And we think, again, there are big pieces of the bond market that without a lot of duration risk, you know, can can earn you six percent.
What are we going to see? An issuance? What are we going to see? I mean, this is a nuts time. Even people that have nailed this, they don't Nvidia into the moon agree, there's a there's a there's a resonance, an anxiety to it, a frenzy almost is that Jodenny says, it's the roaring twenties. What are cfo's going to do? What I mean, I look at the bond issuance and this is not z body up at be you there's something going on here. Why are we seeing normal financing?
Steve Whiting, Well, look, I think they're I guess that. You know, the thing that's most surprising if we look back now that in ten of the last fifteen years we're close to a zero policy rate, and you know, we had this wonderful period in twenty twenty one where Americans could get two and a half percent mortgages again, and you know and say, you know, put that on
the wall. In the US, I think we've had just tremendous amount of refinancing and locking in, you know, of really good levels here that make the equity market better, and you know, have limited our need for for refinancing. I think again it'll pick up. There's some increase in interest costs, and even the US Treasury is better off because of the FEDS tightening. And I know that we've had a couple billion a couple hundred billion dollar increase on the level of our interest costs that will still
go up in a bit of time. But they've knocked it out. They've stopped this from being early eighties kind of increased.
Steve White, you think it's so much Mike Wilson, He joins us, Now some what cautious on this great bull market. Mike, how does a cautious bull play the madness of this technology rally?
Yeah, I think that's a good way to phrase it, Tom. I mean, you know, it is a bull market in a lot of different areas of the market, and many parts of the market are in a bear market, and so that creates a really good opportunity at the stock level and at the index level. Now, of course, everybody knows about the you know, concentration in the index. Everyone knows about the you know, incredible outperformance of the of the high quality gross stocks relative to say low quality
small caps. And and that's what we've been doing, is we've been really trying to create the relative value trades within the market. The one that is the most consistent. There's been several over the last eighteen months. And it's and by the way I should have set the stage, it's it's a late cycle economy and a late cycle economy. Full employment you know that that is fairly tight. They're maybe about to start cutting Typically large app quality is the place to be, and that is essentially the S
and P. Five hundred. So that all makes sense, and I think there's this there's sort of this appetite to want to veer away from that, to go down to quality curve. Everybody say, well, we can't keep buying the same stocks, and the reality is is that's the way it usually is at the end of a cycle, and they can go on for longer than you think.
Mike Wilson, if we get a breakdown in yields and I've got a ten year real yield one point nine nine percent, check, yes, one point nine nine percent. If yields actually breakdown for whatever, Ellen Zenner reason, how does that change equity dynamics?
Well, I mean, look, it depends on why yields are falling. Okay, So if yields are falling, because the FED is going to give us some sort of insurance cuts here, which is Ellen's view, and quite frankly that's the Fed's view too, right, They're not, I mean, they're they're they're signaling they're going to cut rates because they can not, because they have to and in that environment, well, that kind of speaks to more of the same, which is that we continue
to see you know, high quality stocks outperforming. Now, by the way, it doesn't have to be seven stocks. It can be areas and industrials, it can be some healthcare stocks, it can be consumer stocks. But what usually does well is, you know, his rates come down slowly because growth is slowing but not crashing, is higher multiples. And that's the
environment we're in and that probably persists now. Things are stretched on evaluation basis, and we've written about that's why we're not as bullish as others in terms of where the index can go over the next six or twelve months. And so therefore, you know, we're trying to define opportunities away from the stocks that have already run. And I would say the other theme that's worked really well is
operational efficiency. So companies that maybe aren't growing as fast in the top line, but are doing a phenomenal job of managing their businesses to you know, generate cash flow from whatever revenue they are getting.
Hey, Mike, talk to us about I guess the industrial economy here is it's a sector we should be looking out away from the Magnificent seven. I mean, I've we got a government is talking about a lot of fiscal stimulus here, a lot of investments spending and going forward over the next decade or so, and maybe even some rates coming down. Is the industrial sector someplace where people should be looking for some opportunities.
Well, we think so. We've been talking about this for about a year now, and for the reasons you've mentioned. In many ways, I would say the industrial sector has more legs to the stool than the technology sector. Right the technology sector has AI spending, but quite frankly, core IT spending is somewhat in a recession right now because
of all the payback from the COVID pull forward. Meanwhile, industrials have you know, the CHIPSAC program, they have the IRA policy, they have the reshoring, they have the infrastructure upgrades that are going on all over the world, the green infrastructure sort of retrofitting. So there's a lot of sort of irons in the fire that can drive strong revenue growth for capital goods companies. Now, once again, not all industrial companies are created equal. Right now, not all
going to benefit equally from this sort of trend. But you know, the capital goods companies that have exposure to those types of spending should continue to do well.
So one of the other areas of you know, Mike, a lot of folks think about, is just how about this energy space here? We've got wtech crude oil now down below seventy five It was as high as ninety just several weeks ago. What do we do with global energy here? If this world is trying to move towards a greener energy space.
It is I mean, look, I think energy longer term, intermediate term is probably still an attractive asset because we're going to continue to use fossil fuels even with the green transition. However, in the short term energy prices have been under pressure for two reasons. I think. Number one, we've seen a little bit of a supply boost from OPEC talking about it. In the intermediate term, they may
continue to produce more. It looks like Saudiy Raby's trying to take share back and prices have come down for
that reason. But I don't I still think there's a little bit of a sluggish demand picture that doesn't get a lot of attention, and this is one of our concerns about the broader market, which is that we still think there's a decent chance of you know, not just a soft landing, but also a hard landing and a no landing, and we just don't know the outcome there, and so we are watching the energy space closely as a signal that maybe driving demand as we go into
the summer or other forms of demand for energy is not as robust as you might think given the strength in the overall economy.
Mike Wilson, I got one minute left. How do you use cash now as a hedge? Are you? Are you fully in the markets with your caution or is cash a constructive tool?
Well, we always have some cash on the sidelines. You should as any you know, asset owner investor should I mean obvious if you're an asset manager. Is a little different. And I do think the barbell of cash and high quality stocks has been the place to be and it probably will continue to be the place to be as long as we remain in this sort of late cycle
softly outcome. Right, So in other words, cash is probably better than long duration because long duration has risk and you're getting another percent returned on front end cash, So there's nothing wrong with that, But being fully invested in high quality stocks. Is is also part of that strategy.
Mike Wilson, thank you so much for that. We speak with Monica Defense, head of a Monday Institute of Course of Europe on this ECB decision. Monica, just to frame this full of guard and the challenge of the press conference, is there disinflation in Europe?
Yes, we think that the trend is there, but the direction one't billinear. So we do expect a little bit of stolling and then our volatility and on the back of this probably we will have actually the cuts today, but we are not expecting a catcher to come into life just because on this inflation that is taking longer and is lower than expected. They don't really they are not really in a rush to cut father Paul.
I see on the nominal GDP question core inflation, they're twosh. I'm gonna say, as a conversational point, get out to growth, which is not what you'd expect from the Fed. Next year's growth one point four percent, down a tenth. So you got a nominal GDP that is different than the nominal GDP of the party you're going to in New Jersey this weekend.
Exactly so Monica, Is this the ECB telling the markets global Wall Street that inflation in Europe is in check? Is that what we're hearing today?
Yes, this is probably what is happening. But if I can go back to your point before, having in mind that the central banks one target the GDP growth, it's really on the output gap, and this might help us explaining what to expect from the central banks, notably the FED moving forward where the outpook gap is narrowing and is expected to progressively.
Our father, so Mana, give us a sense of just kind of broadly defined how the EU economy is today. Does the EU economy need these rate cuts or is it kind of rebounding on its own?
Well, the U economy is approved has proved to be less reason relented than the US. We came out of the post pandemic in a slower manner. But we think that now, at least for the second ATA, we are just approaching to two potentials. So we are coming from south approaching the potential growth. Obviously, within the Uter Zone there are countries that are really running at different at different speed. And this is if you weren't complicating the job that the easy be has.
To do so given that backgroup, Monica, when you talk to your institution investor clients at a MUNDI, where are they looking for opportunities if they're willing to take some risk in this market.
Well, we really need to have magnify a lenses. So when because just because top down is really difficult to find convincing structural investment opportunities. When it goes to Europe, probably having the easy B set for further cuts and the cycle that is expected to renew some momentum, small cap might be an interesting opportunity as well as the UK equities for example, just because of the sector, the equity composition, the sector composition of the of the equity market.
When it goes to the US, probably our clients are a little bit more coacious where there are plenty of opportunities in emerging markets.
Monica, is there a divide at the ECB? Regard has done such a good job of straddling the political tension, But on this historic day of a rate cut in the ECB, even around an inflation forecast that lives that in itself is absurd. But Monica, how big is the division, say between Germany and Finland? I mean just as one.
Example, when it goes to inflation, for sure, dries just because all prices have been impacted in a different way the two regions and going in that granularity is what I meant with having such a hard job when it goes to the ECB decision. But EVI said that probably there is this core of countries that because of the weight that they have also on the markets that I'm not saying are in the driving seats, but possibly are definitely relevant as a marketing impact at least.
Do you agree that there's a little bit of vibrancy here in the Eurozone they look at a growth lift for twenty twenty four. Do you agree?
Yes, yes, I agree, and we really think that because of the Olympics, because of tourism, there are some there is going to be some seasonal momentum. Obviously, what the European euro Area needs is an industrial policy that can set the region into a longer structural, higher trend.
Monica, thank you so much. Monica defend with us with a Munday Institute. John Storphus joins us because he knows you just got to be in the market to win. John stofas, how have you amended your bod market call in the last number of days.
Good morning, Tom, and thanks for having me on the show.
Must they really haven't amended it a hell of a lot, while we have recognized the fact that the utilities are really performing remarkably well, which essentially suggests to us that the market is becoming more confident on a FED cut and I think much more realistically now focusing on Kutzfort probably in November and December of about twenty five BIPs a piece, maybe only one to twenty five BIPs and maybe just to continue with other guests have said today
on your show, indeed you know it's coming, and the FED has been remarkably successful at a hike cycle eleven hikes, seven pauses or skips as they call them, without putting us into a recession thus far.
Hey, what do you make John of these earnings here we've had we just kind of pretty I guess decent earnings period is enough to support this market here if we have a FED that's going to be kind of standing on the sidelines a little bit, you know, Paul, I got to.
Say that the earnings we think are really pretty phenomenal. The overall number, you know, shows growth at around seven point seven percent on the EA page on the Bloomberg terminal, and on back of earnings of around four percent, and that is much better than expected at the beginning of the earning season for Q one I recall, I think it was about that people were looking for about three point nine percent in the surveys in terms of earnings growth.
And when you look at it, it's eight sectors positive earnings growth, and within those eight six of them double digit earnings growth. Only one of them a defensive sector, which is the utes. But you've got communications services, you've got consumer discretionary, you've got information technology and financials with double digit earnings growth. This is a big deal and very seldomension have to lift up the hood, right, bring out the Bloomberg and lift up the hood.
You mentioned utilities. Is this just a play on AI or is there something I'm missing here on utilities, Paul, I think it's two things.
One is that most of the utilities, as I recall, in the and P five hundred youth sector, are regulated, so they've been experiencing higher costs in terms of fuel and operational costs.
Now, so likely the regulators granted them increased billing I mean, for those of us who have con ed, do we know it? But the reality is the earning more because likely the regulators have naturally given them the ability to
raise their prices. But the other story there is the longer term story, or the duration story as we say nowadays, anything tech related likely is that utes are likely to be huge participants in the build out of the new grid in terms of transporting electricity and the whole process of producing it. And that's the longer term story that I think investors who are intermediate to long term looking for on top of a dividend, on top of better earnings, et cetera.
Paul years ago, did we have market timing? Was it as big as it is?
I'll note it's tough to do, that's for sure, market timing.
It's just you know what Stolfis is done, with Gina Martin Adams done. It is a miracle. I mean, we're under plane, as folks, second leg of a bull market. You're in timor is are you in seventh inning or fifth inning? But these people are the courage to stay in the market.
Stay in the market. And if I want to stay in the market, John, in the fixed income space, do I just hang out with that to your treasury, or I try to get a little bit smarter, maybe take some credit risk.
It really pins paul on what type of investor you are. If you're really a more adept to diversification, you can look for opportunities in credits in municipals. But certainly for now, the front end of the curve is a really comfortable place for putting stuff, for putting cash into, because you've you've still got an inverted yield curve related to the
short end of the curve. So but what we would say is we think bonds at this point are not competitive with stocks because for intermediate long term investing, we believe that it stocks where you want to be. Just consider from the end of October last year, when the rally began October twenty seventh, through yesterday's close, the S
and P is up thirty point zero four percent. If at a time one had decided to just with the five percent treasury, which was around where the ten year was, as I re all at that time four point eight four point nine, you'd still be waiting to get that four point eight four point nine, and the S and P's up thirty now at infobak forty four point nine to three, communications services forty two point three, five financials
who would guess it up? Thirty one point one right, and in dust reels twenty seven In the last, well, I'll mention it is a consumer discretionary have twenty one percent now, no guarantee of future results, but certainly to pause and ponder.
Right, John Sophis, thank you so much. This is a Bloomberg Surveillance 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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