Rate Cut Calls and Election Latest

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Apollo so well, the job this morning is showing that twenty six percent of our consumption in Virginia goes to data centers. So the need ford investment in renewable energy need find investment in data centers. The need for long term caucil to invest in long term projects is including in boosting here the AI revolution.

Why can't Google by their own utility?

Well, some of the tech companies are actually building their own power plans and building their own power sources. But the bigger issue, of course continues to be that, as we all know, one search on CHATGBT takes ten times as much energy as one search on Google. So therefore, with everything that's going on everywhere in AI, last language models,

And Turst and Sluck Andjument on the same page. He's writing about this this morning for Bloomberg. Just let's complete your story. Questions for Twisted Sluck.

Well, you were talking about how the risk to cutting interest rate too much too quickly is, especially on the back of the latest jobs report, could become and especially looking at inflation might be too hot again. Expand more on that because we're gonna get an update on CPI later this week.

Yeah, this is very important.

So the key question really is why is the economy still so strong. Your textbook would have told you that when the FITS started raising interest rates in much of twenty twenty two, the economy should have begun to slow down because when interest rates go up, people should be buying fuel costs.

That's not what we have seen.

When insist rates go up, you should have seen the housing markets low down. That's not what we've seen. So there's a number of tailwinds to the economic outlook from AI, from defense spending, from fiscal policy, the Chips Act, the Face and Production Act. All those things combined have kept the economy afloat, including also that consumers were less sensitive to interest rates because they had locked in mortgage rates at very low levels. Ninety five percent of mortgages are

There is no need for the FED to lower interest rates.

And you made a bold call earlier this spring that the Fed wouldn't cut interest rates this year. What changed?

So we actually still think that that was and is the right call, because now we're debating was it a mistake for the Fed to cut rates fifty basis points? We just saw non fine payrolls on Friday. It again shows that there is no need to lower interest rates. So this raises the question why did the FIT lower interest rates?

And this Tom and I have been talking about this for.

Year because they have an our style model framework which says that, well, our long term interest rate needs to be lower, so therefore we need to lower it, not because of the incoming data, but really because we think in the long run we should have a lower level of rates. So yes, it is true that they did cut and our expectation is that they may even also cut here in November.

But given the incoming data.

The risks are rising now that we may have more upside risk than downside risk to the economic.

Tursting on about so if your continental view of years ago at Deutsche Bank, to me, the great differential here in becoming ever more evident each and every day, is the nominal GDP difference between Europe, say, and the United States. I got four percent even five percent nomenal working in the US. Europe's pretty much flat on their back. Is that because of our debt build up or we sent our grandchildren essentially funding our nominal GDP.

Well, the US has some tailwinds that are rather unique to the US. We have an AI revolution in the US we don't really have in Europe. We also have significant support from the Chips Act, the Inflaze Production Act, the Infrastructure Act. We don't have those tailwinds in Europe either. And on top of that, Europe has now some headwinds, of course from inner new sensation, from the challenges more broadly speaking that they have with the economy with low productivity.

So you're having a cup of coffee with Rowan and Zelter. I know you're not on speaking terms with them, but you know, Let's presume you know you're doing an eight o'clock meeting with the fancy people, Apollo, what are you advising them about the general market, the tone of our equity markets.

Well, we talk every day.

And the advice, of course is here still that the economy is doing just fine across the board wide range of indicators we are seeing. If you look at the daily data for how many people fly on airplanes is still very strong. The daily data from my Bloomberg screen how many people go to restaurants is also very strong. The daily data from my Bloomberg screen on depit card transactions is also very strong. The weekly data for how many people go to the movies, go to Broadway shows,

Continues to be strong.

So the advice really is that look at the data that comes in instead of looking at frameworks for thinking about where we might be theoretically with us STAR and if it funds raised in several years time.

What's the top question that you're getting from clients and how do you use that as a potential sentiment gauge.

Yeah, a very important question is, of course financing and

So this debate about how is.

The financial system changing, both in terms of how we say for retirement, also in terms of how consumers borrow, how firms borrow, and also in terms of the role of banks is playing a very important part of my conversations with LPs.

At the moment.

Torston slock with us with apollow global management. We continue a good conversation here Turiston. If we don't get the rate cuts, so many people are modeling what does that do to our economy? Is it something that we have to work out and work through or is it just another at the races and we normalize at these levels.

I like that description another day the races.

So I do think that this is a very fundamental question, namely, if monetary policy really is restrictive.

The FED keeps emphasizing and saying the Fed funds rate.

Which today is about five, and in the long run we're going to down around three. Well, given five in interest rates is higher than three, then the definition, according to the Fed must be that the monetary policy stands is restrictive or constraining on economic growth. But that's not what non found payrolls of two hundred and fifty four thousand suggesting, that's not what a declining on in plantar rate is suggesting. That's not a declining default rate for

After that blew out jobs report, Bank of America is making a call about how CPI is no longer a non event. And the implied move right now in the options market for CPI day is about one point one percent in either direction for the S and P five hundred versus about a seventy basis point move over the last three months on that day. So how vital is it when it comes to this latest report coming up in a few sessions here as far as what it means for the Fed's next rate decision.

Yeah, this is a really important question because think about it for years when inflation started going up in twenty twenty one twenty two, all the debate was inflation, inflation, inflation. Now when inflation there has come down much closer to two, we're two and a half today. We were at nine in twenty twenty two, so we are very close to two.

Now it's been unemployment.

Well, now we're back to watching inflation actually is on its way.

Back to the two percent target.

Or if there's a risk that in particular the forty percent of the CPI basket that is housing, if that begins to move higher again, then we will certainly have much more focus back on inflation again.

And of course when you're looking at the money market funds still being around records here, if rates do stay a bit elevated, what's the actual yield based on history as far as when need see money coming out of money market funds and more going into the equity market.

Yeah, and this is the real host mystery looking ahead, namely the more than six trillion dollars in money market funds. A lot of that money came into money market funds because the fifth funds rate went up. Now the fifth funds rate is going down. So the question is what I invest us in money market funds going to do? Historically they have gone into other types of fixed income itg. Credit,

Lower interest rates?

In other words, what is the risk willingness of that six trillion dollars in money market funds?

Where do they go?

Yeah, this is brilliant tours. Just great question because this is just the heart of the matter. But it's nonlinear tours. And we just had a model. What did you learn in the lower interest rate experiment of the last twelve Maybe sixteen weeks. What's a lesson you took away?

Well, I think a lesson is exactly something that we can get from what happened for the fourteen years from two thousand and eight to twenty twenty two, when interest rates were literally at zero. Well, in those situations, when we had investors a lot of money that gave much lower in.

Return in rates, they began to chase yield.

The hunter yield, of course resulted in a rally in a broad range of asset classes, and also in this case, will likely result when the Fed now embarks on lowering rates. What we're debating is to speak with which they're lowering rates, not if they're lowering rates. So even if they do lower a little bit slower as I would expect, I do think that this will.

Be positive also for credit. It will also be positive for equities.

It'll be positive for asset classes that generally benefit when interest rates move to lower levels. But what's most important this debate is that we are not going back to zero.

Michelle Bowman gets a massive victory lab you grew up with the descent of the ECB, the descent of the Bank of England, and should we see more Michelle Bowman like dissent at the FED.

I do think that this is a healthy development. Not that they shouldn't all agree all the time, but I do think that in particular in this instance where we are exactly debating will maybe the fifty basis points cut which was really justified by a recalibration. Remember j Pal mentioned ten times in the press conference that the reason why they did this was to recalibrate monetary policy, not

Quarters can't wait towisted few to be appointed a governor. Mister Slock is with the Powell. Thank you for the generous time here. Had an uncle. He is a professor at Union College in Schenectady. When my father got angry at me, say spell Schenectady, which I never could do. Jennifer Lawless Caspell, Schenectady. She survived Winter's there. What was it like at Union College a few years ago, Jennifer Lawless.

It was so many years ago now, but it was snowy and cold.

It was cold, That's what I remember. On the Mohawk River, it was mostly called. Jennifer Lawless out of Union and of course Stanford and now holding court at the University of Virginia. She's absolutely definitive on the female species in our political moment, Professor Lawless, How was the Vice President of the United States doing and garnering the votes of women?

She's doing as well as most Democratic candidates do. Most people think that when there's a woman at the top of the ticket, there's a bigger gender gap, But the reality is that female voters tend to prefer Democratic candidates, male voters to prefer Republicans, and the sex of the candidate doesn't matter that much in terms of vote choice. But what Kamala Harris is doing is really motivating women to turnout, and ultimately it's likely going to be a turnout election.

Which is the key female turnout? Is it the women of the suburbs of Philadelphia and Pittsburgh that we heard about two years ago and four years ago or is it a different distinction of women that she needs to win.

I think it's two groups of women.

It's the suburban women for sure, because in battleground states they're often decisive. But it's also motivating young women who need to turn out if Harris is going to not only build up her popular vote but also secure wins in tough states, and young people have traditionally been less reliable when it comes to turnout, so anything she can do to make sure that young women are enthusiastic will be very helpful on election day.

So which states are going to be most crucial for the female vote?

Well, basically the female vote is really important in all states because when the Democrats are able to ensure that they have greater margins among women, they tend to win. So if she can up the female vote, if she can increase her margins on blue wall states like Michigan, Wisconsin, in Pennsylvania as well as along the Sun Belt. Those are two good paths to victory without a big advantage among women, it's hard to see that happening.

And as far as when it comes to those swing states, which ones do you think are most crucial because you're named a couple there, But do you think it'll really come down to those?

I do.

I think without winning Pennsylvania it becomes very, very difficult to win the election, especially given the amount of time that she's been spending in Pennsylvania, that Walls has been spending in Pennsylvania, and Joe Biden's connections to Pennsylvania.

So I think that's the most important state.

And if she wins Pennsylvania or plans to win Pennsylvania, the easiest path to victory is then through the blue wall states of Michigan and Wisconsin.

I look, Jennifer Loss, I want to go back to your core research here, which is so many other countries we seem to be very comfortable with women in any number of slots, whether a representative, senator, even at the local level, is well, you know, the work you've done at UVA. Running for office is still for men. How did we get there? Why are we distinctive in this?

It's interesting. It's really a supply problem and not a demand problem. And by that I mean that when women run for office, they generally fare just as well as men. They're just as likely to win their elections, they raise just as much money, their media coverage generally looks the same.

And keep in mind, in twenty sixteen, Hillary Clinton.

Did win the popular vote, so voters, donors, and the media seem okay with women. The problem is that women are still significantly less likely than men to emerge as candidates and run for office, largely because they perceived that there's widespread systematic bias against them.

And so it's sort of a chicken and egg problem.

If we don't have enough women out there, we can't normalize it for more women to start emerging.

So what do you think ultimately needs to be done in order to fix that?

Two things. The first is political recruitment.

When women are encouraged to run for office, either by a party leader, elected official, or political activist, but also by a family member, colleague, or friend, they're far more likely to give it serious thought. And if you don't think about something, you're not going to do it. So that's an important first step. And the next thing that we have to do, I think, is convey the reality that when women run, they are just as likely to win.

Professor Lawless, I believe in the Wall Street Journal today, I don't have it in front of me. There was a patheartical about Democrats in Michigan basically saying to the vice president, let's go lose the media dash and get up here in campaign. Where do you stand on that? Does a vice president? I mean President Trump has a mode, He has a model and he grinds it out every day. Is there a mode? Is there a model to Harris or does she to shift now? Twenty x days before.

The election, I think she's got to walk on chew gum. We saw in twenty sixteen that Hillary Clinton wasn't campaigning as actively as a lot of people thoughts it's and turnout wasn't where it needed to be. But We've also seen people like Joe Biden take a hit for avoiding tough questions by journalists and doing the media tours and blitzes. So I think the Harris campaign is trying to do both, and she's got twenty eight days to demonstrate that she's able to do it.

Jennifer Lawless, thank you so much, greatly, greatly appreciate it. I really can't convey enough the theoretical foundations of Jeffrey Rosenberg. He comes on the Fed day, he comes on other days, and for Black Rock it's blah blah blah, and the fixed income market over to economics, even with a touch of equity analysis, but behind it is me Minnesota, Wisconsin, and then on to Carnegie Mellon. It is rigorous mathematics. Behind the Jeffrey Rosenberg comments, Jeff, what part of your

That's a great question, Tom, and the answer is rate of change. And that's really what markets focus on. They focus on much more than the level, the rate of change, and that's really what last week's economic data and really before that was all about. Right the rate of change in the actual data and as importantly the rate of change in.

The revised data.

And so that's really changing people's perspective about where this economy is and where the FED has to be. And that's what you see in the bond market the last two three days. And it's pretty violent this rate of change.

To me, what's important here with first second derivative Newtonian mechanics is a basic idea, Jeff Rosenberg, it's simple, chug and plug. I mean, what does Jerown Powell need to plug into the equation to lead us some stability for dare I say a vision out to late twenty twenty five, What does he need to do?

Yeah, you know, it's it's an interesting question because there is a lot of you know, kind of taking the SEP forecasts for growth and inflation, plugging those into a formula, various variants of the tailor rule, and determining whether or not the Fed's policy excuse me here for a second, is overly restrictive. And the problem is the inputs to those formulas they change, right, And that's a big part of the recent you know, kind of reassessment here in

The debate between GDP.

And gd I basically was settled in favor of GDP being the right measure, meaning this economy is as strong as it appears and not this kind of stinky weakening. And so the data going into those formulas is changing, and it's basically saying, you know, the Fed is not as restrictive as.

It thought it was.

And so in that case, on the back of this latest jobs report and ahead of the CPI data later this week, what is speculative trading in the futures market for bonds telling us about the direction of yields?

Well, I mean you don't have to look at the futures markets to see what the trading is saying. It's it's basically spoken pretty clearly here and I think you highlighted it in the break a minute ago. That we've priced out the expectation that we're going to have, you know, three fifty basis point cuts in a row, and now

You know.

Obviously, we came into the year huge expectations for a lot of cuts. We had to price that out given the inflation.

So level, and you know, as we head into the final months of the year, how are you suggesting to clients? What do they buy? What do they sell? In the treasury market.

We've been, you know, pretty adamant that the vulnerability in the bond positioning for most clients is what we've been seeing a lot in the flows.

And what you see in the flows is this kind of knee jerk.

Reaction to the expectation of the commencement of the Fed's cutting cycle. And the knee jerk reaction is if the Fed's cutting interest rates, then duration is my my friend, and I want to own the maximal amount of duration in my portfolio.

I want to own the longest maturities out there.

And that we've really been very much saying you gotta be careful now. Number one, it's a little bit of buy the rumor sell the news. The FED cut fifty basis points and bonds lost money, so a lot of it was already in the price, and you had a lot of heightened expectations.

And number two is that.

You just have a lot differential reaction along the maturity spectrum. When the FED cuts rates, it's mostly in the front end where you see that impact, and the back end can be affected by a lot of different things besides just the FED cutting rate.

Now, I'm gonna go a little mathy here math warning and Jeff, it goes off of what James Glassman said yesterday I retired from JP Morgan about the technology overlay. All the work you've done, Jeff, and how it folds into the bond market is off of a productivity analysis off of technology, and I would suggest off the foundation Cob Douglas function, which has some exponents, it's got some Greek letters in it, but there's a big, fat, ugly A at the beginning of the Cob Douglas function, and

Yeah, the Cob Douglas production function, we can measure what goes in and we can measure what comes out. It's the magic inside that we don't know about. That's total factory productivity.

You know.

You know, it's interesting time.

You talk a lot about you know, the math and the science that we use, and a lot of the math and the science that we use is the mathematics of uncertainty, right It's it's using probability and statistics and risk models to try to quantify uncertainty, because that's really what it's about.

You know.

The cop Douglass function is nice.

It gives you a very certain form with a very uncertain input. And that's a lot of what we see in kind of the mathematics of economics is that there's a there's a proposal of how the economy works, and

We don't know what that real neutral rate is, or something even.

More, you know, kind of basic, which is we measure economic data that we think we know with certainty, like growth and inflation, or our payrolls are employment, we measure it with error. So when there are revisions, there's a lot. So it's really about dealing with that uncertainty. And I think on this technology issue, you know, we really just don't know what we really see in terms of technology.

I can't emphasize enough, Jess, and everybody knows where I am on this is l Arian would say, thenown unknowns right now that Jeff brilliantly laid out there the finance media. I'm as guilty as this as anyone. We are certitude one oh one. We believe the ten year yield Blowney, I'm sorry. We have no clue when you look at these variables like technology.

And this time a year ago is actually when the ten year treasury yield spiked around five percent to that level.

There.

If you look now, it's trading at around the four level after being around three six. But of course, if you're looking at the Atlanta Fed GDP now model, it's around two and a half percent for the third quarter. So I'm curious why had Bonn yields continued to creep lower this year despite sturdy economic growth.

You know, they went lower on a number of factors.

The biggest thing, you know, was this this fear, this slowdown, right, I mean, we had a lot of conversation about the unemployment rate ticking up, the PM rule predicting in recession, a lot of recession fears, and that you know, pushed and we got I would say, you know, the kind of impact on that was. You know, the big fifty basis point start of the cutting cycle is very much built off of this kind of legacy of the late.

Summer slow down in the labor markets.

And now when we look back on it, with the revisions and the data, the residual seasonality story around initial jobless claims, you know, it's all kind of pointing to maybe this labor market is a lot tighter than we

And do you still see and you're keeping your call of two twenty five basis point rate cuts for the remainder of the year. For obviously, we have two more meetings left in November and then in December.

Yeah, I said that kind of at the end of Friday post payroll that you know, the easy call was taking the fifty out for November. I think they're going to want to stick with tw twenty five and twenty five. Obviously we've got some more data between now and then, and you know, critically.

Thursday this this inflation report. You know, we've moved inflation to the secondary category of importance because of the I would say erroneous belief that the attainment of two percent is just is just a given.

And so I think if you had some surprises on inflation, you can't really predict that.

That's the definition of surprise.

You know, you could change the narrative around the twenty five, but right now, not knowing you know, whether we're.

Going to get that. I think the Fed's going to try to continue to deliver on.

Twenty five and twenty five in November December, and that's where I would you be expecting.

But you know, the data changes, we're going to have to change your mind.

Jeff, this has been brilliant. Thank you so much, Jeff Rosenberg with us in Black Rocket. This is a joy. Greg Giau and the only one close is Dave Wasserman and Cook Political Report is the granularity of America away from all the endless news of two candidates. In that we are thrilled that Greg Dureau of Bloomberg Government would take time with us this morning. Greg, you're focused on Washington State Republicans, and you're focused in California and Democrats

Yeah, So in some states it's possible for two Democrats or two Republicans to advance to the general election because they have unusual primary systems. Everyone runs on one ballot in the primary instead of in separate Democratic or Republican primaries, and the top two vote getters in that single ballot race advanced to the general election regardless of party affiliation.

It even sounds like seventeen eighty or seventeen ninety almost, Greg duo, How is the left, the liberals, the progressive doing nationwide? Do they have traction in this election? Yeah?

I mean I think they probably cast their lot in with Vice President Harris. In the presidential race, you have, you know, two choices. The left is going to buy and large back Vice President Harris. I mean, they're always going to be some disgruntle of people on the left and the right who are going to, you know, maybe not vote. But I think there'd probably be a decent

One state I wanted to bring up is Texas because you've written about how it's offering Democrats the best shot for a Senate upset. Walk us through the dynamics here and what's happening.

Yeah, So in Texas As, Senator Ted Cruz is seeking a third term. Texas has not elected a Democrat and a state wide election since since the nineteen nineties, has not voted Democratic for the Senate since Lloyd Benson in nineteen eighty eight, but Democrats have come close, including in twenty eighteen when Bellew O'Rourke, who was Cruise's challenger, came within three percentage points of beating the Senator. That wasn't a good Democratic year Texas. Now we're in a presidential

Greg jo Nick conadd article two days ago I think in the New York Times, and I'm going to Senator around the New York congressional race the surprise of twenty twenty two. Do you frame the Greg juro work is a continuation of what we saw in twenty twenty two or is twenty twenty four really discreete and presidential?

Well, I think twenty twenty four in the race for the House, New York is a state to watch, New York and California, which makes it kind of different from the presidential and senate election maps, which have a lot of overlap in you know, the industrial Midwest and some competitive sun Belt states. But when we were looking at control of the House, yes, I'm looking at a lot

Greg. One final question, what's the single race Greg Dureau is most focused on.

Wow, Well, I think the Montana Senate race for the past as you mentioned earlier, but also I don't know. I think I'll pick New York's nineteenth district since we were just talking about New York Mark Malonaro. This district runs from Ithaca east through the Catskills, some of the Upper Hudson Valley all the way to the past Albany. It voted almost exactly for Biden and Trump as the

Greg, this has been wonderful. Hope we can catch up with you on a weekly basis here as we dashed in November fifth, Greg d Folks. For those of you within Bloomberg Government and available on the Bloomberg terminal, I can't say enough about Greg Dua. His newsletter Ballots and Power is absolutely must read. I just I can't say enough. Sign up for that as you're able to Greg Duau