Surveillance: US Payrolls Post Big Beat

the floor is yours set your thoughts on this one. No, thank you very much. This certainly is a great jobs report. When you look at the different sectors. Uh, most of the economy is recovered. The jobs that were that companies had pre pandemic or all returned. So it shows good gains. We've showed some good wage growth, We've shown good good areas. Manufacturing is one of those areas that certainly we've seen come back, not just come back to pre pandemic levels.

About going beyond that. I think with the Chips bill that was passed and signed is gonna be signed until next week, we can do more manufacturing United States of America, which in the long term will help us with some of the inflationary pressures such as semiconductors and and more microchips. Secondly, well,

what a turnaround this has been since the pandemic. Can we just take a moment to think about that, how much we've recovered over the last couple of years, and can you talk to me about how sustainable you think these jobs gains might be. I'll tell you, Uh, pandemic March of I was the mirror Boston and we were shutting businesses down. We're shutting h restaurants down. Uh, we didn't really know what the economy held, and thinking about

where we are today was really incredible. And I think that this will, in my opinion, will be sustainable moving forward. I think companies are understanding. I think we're gonna have a new type of economy. I think we're still obviously dealing with the inflationary pressures. You talked about it right before we got on the air here. I heard you talking, and I think that you know, we're going to adapt

and adjust and we're gonna move forward. I think that the infrastructure law that was was signed into law, we're going to see more investments all across American roads, and bridges. I think with the chips all that was passed and

move forward, we're going to see more investment in manufacturing. Hopefully, the bill that's being worked on now in front of the Senate is going to be working on prescription drug costs and environmental climate change in some other areas is going to help when you really think about a lot of what's happened here under the Biden administration is something that we've talked about for the last decade or so.

And these are all going to be good bills and good investments to move our economy and quite honestly, move America forward. And you've got a lot of people to talk to this morning. I did want to talk to you about the negotiations on the West Coast with the ports. This was gonna bring out. I know you are because this was your quote last time we spoke. You said, next month, I'll come on the If I come on this show. If we don't have a contract, and we're not close to a contract, then you and I might

be having a very different conversation. So I guess that we have one to be close to one, or we have a very different conversations. No, we're not well, I don't know how close we had to get into contract. But one thing that that has happened and since we've spoken and both sides have agreed is the healthcare And that was a big sticking point. That's usually a big sticking point, the costs around healthcare and who's gonna pay for healthcare, and and that was an aociated and solved

about ten days ago. So I'm very pleased with that. Now they're onto the next phase of negotiation. UH. And usually when you think about contracts negotiations, the biggest sticking point is around healthcare, pensions, things like that, and those are in the rearview Marna. Now now they're moving forward on some of the other issues they want to tackle.

So I feel good where we are. If I said that, I probably should have used my words a little better if you don't have a contract by next month, but I certainly I am very confident where we are in the negotiation right now. I am not concerned. Uh. And I say in very close contact with both the longshoreman union in the companies on the ports to offer any type of support we need. But every time I talk

to them, they said, we're moving forward. A secondly, well, for some people who might not be that confident as you are, they might not be familiar with how this works with this particular set of negotiations. Have you said before, this particularly one is a little bit different because it only starts six weeks before expliration. Can you help us understand things a little bit better by comparing it to where we were then at this stage and where we

are now. Well, I think we're further along than we were if I remember that took an awful long time to get done. But just for people that don't quit quite understand collective boggating or negotiations, usually you can start months ahead of time to lay down the foundation for a contract. In this particular case, it's six weeks before the termination of the contract, which means it always runs over the expiration day. I don't think they've ever had

a contract done on the expiration date itself. Normally you want to shoot to get a contract by expiration day. But what both sides have agreed to do in this case have continued to agree to keep the current collective bargaining agreement in place while they negotiate moving forward. There's been no no conversation of strikes lockout, slowdowns, none of that stuff that hasn't even broached up, brought up and talked about. And that's the thing that I don't think

will happen in this negotiation. And I'm going to continue to talk to the sides and where I need to pro pressure on them. Certainly, this is a big, big issue for the ports and for products coming into the United States America and quite honestly for exports out the United States of America too, So we want to make stay very closely now myself in general, Lions whose liaison

at the White House has been in constant communication. We talked more than we talked a couple of times a week, but we have a scheduled call just to go over where we are just so we can stay on top of these negotiations. Secondly, Welsh and Monster jobs report, it's the final question for me for Boston. Do you need to see some labor turn over at the Red Sox? Uh? God,

I get myself in trouble. They I'm not really sure what's going on there, although that they seem like they didn't make any many changes, so uh, they're going for something, So they must be going for that wild card spot. That was from Mike McKay and Tom Kane. They were pushing me to our secondary wolves. They had to go there. It's gonna catch up with you, sir. Thank you, Labor Secretary Marty Wolves. There on just the Killer Jobs report again, tape negative two, down on negative one, a little bit

of improvement. We'll see where that goes through This Friday, we continue with Tiffany Welding of PIMCO, their chief US economists. Tim Tiffany, I want to talk about something that's harder than it sounds, which is the physics of inertial force and momentum and the idea that a trend gets inertia, the trend is going to be higher interest rates. Explain how the next rate increase is different than the third

or fourth rate increase out UM. Well, so I think that, uh, you know, it depends on the level of interest rates that you start at. So UM. You know, before July, the most recent fo MC meeting, for example, you know, we would have argued that interest rates, the level of interest rates was still providing accommodation to the US economy UM, and that was increasingly inconsistent with economic fundamentals, you know, which we would even argue before July and before this

payroll report, we're calling for more restrictive monetary policy. So the July increase of seventy basis points from the Federal Reserve basically just got them out of accommodative territory into something closer to neutral, although I think you could even argue that maybe they're not neutral yet. Um. But now what the focus is on is really recaliber rating to where we need to be, which is in restrictive territory,

you know. So that's why we think federers are officials are probably also going to do another seventy five basis point rate hike at the at the September meeting, you know. But ultimately eventually they will slow the pace of those adjustments down. Um, but as they get closer to kind of where they think they need to be on on the restrictive side. Tiffany, I'm looking at the two year and the ten year treasury yields. I see a forty basis point inversion. Do I need to pay attention to that?

I'm just an equity analyst wanted to pay attention to that. Yeah, I mean so historically, you know, what we call the yield curve you just mentioned has been one of the best leading indicators of inflation UM and then obviously today in reaction to the data that was released the employment report you saw, I think even more inversion in the yield curve. So maybe the markets pricing in more of a recessionary outcome or higher probability of that event. I

think that's right in terms of market reaction. So although this for a court confirmed that the economy was not in recession in July UM, it also suggests that the FED needs to do more to tame inflation, and that means tighter financial conditions, putting more pressure on the economy, which just raises the risk of you know, of a recession call it twelve to eighteen months out. So um.

You know, I think that there's a growing concern, certainly from US and probably from others, that the Fed will have to do more than just um produce below trend growth to get the economy to cool down. You know, if you look at you know, historical precedents, you know, in the seventies and eighties for this, the FED actually had to engineer a recession, or at least recessions did

follow these kinds of high inflationary episodes. You know, so it's certainly possible that you know, the FED was to bring down inflation and quite quickly they might have to do more. Uh. But back then, and I spent a lot of time looking at log proportional change of the curving versions, Tiffany, and we're not going to go there on August Friday, but Tiffany welding when we we're doing that.

In the seventies, the ten year yield was what Paul whatever, I I don't see the equivalency to the Voker period. Do you see that? Well? I think what you have to do is, you know, you have to adjust for the fact that you know, what we call the real neutral interest rate in the economy, so kind of the interest rate, uh, that the economy can handle right where where is uh monetary policy accommodative or restrictionary, and that that level has declined over the years. Um. So it

was much higher in the seventies and eighties. Uh. You know, the model suggests we kit observed this in the market, so we have to try to estimate it. It was much higher than that it is now. So you do have to adjust for that, you know. So we don't think interest rates are going back to where they were back then. Um, but nevertheless, we think the FED will have to be restrictive at this lower level of interest rates now. So tiffany five wage increase that sounds pretty

good to me? Is that's something that you think is sustainable, sticky healthy. How do you think about the wage environment out there? Well, you know, the you know, I think the bottom line from that is that although wages wage inflation has started to accelerate, you know, of course, it's still below uh price level inflation. So people are are

still getting squeezed. If you look at you know, the kind of data and aggregate what we see or interpret is that, um, you know, more people are getting jobs, so overall, aggregate incomes are still growing, um, you know, and they're growing much more in line with with h inflation prices, price inflation, um, you know, so maybe people are getting two jobs to deal with uh, you know, to get some extra income to deal with these types

of price increases that they're seeing in the grocery store, etcetera. You know, but I think overall you're asking if if the wage the wage numbers, is that is that normal? I mean, I think the concerns still that we have is that as you get more price increases, people negotiate higher wages. The wage inflation broadens out, you know, and then you get even more you get higher prices as companies pass on those additional costs, so you get in

this kind of trial situation. We don't think we're there yet, but certainly that's something that we want to avoid. Tiffany, thank you so much. PIMCO. Let us get a briefing from someone who's sat at the desk in the Echoes building. Randall Krosner continues, where there's a former FED governor at Both School Chicago. Randy, how does this change the calculus for the Federal Open Market Committee? I think it's really clear that they are in a path to continue to

raise those rates UM. Certainly seventy five basis points will be on the table for the UH for the next meeting. UH. The thing, it's not only the strength of the labor market, but it is also the UH the significant increase in wages, higher than expected upward revisions. UM. The FED really worries about inflation expectation becoming entrenched. They're really hoping that inflation is gonna be coming down low five percent fairly soon.

But if people are still demanding five percent wage increases, that gets them into a lot of difficulty, and so that's why they're going to continue to move. I think this means that they'll will certainly be in the fours by early next year. And I said I said before, I think it's going to be there for a while. And exactly as Jonathan had said, when the Fed moves the rates up, it's not that they just pivot and

pull them back down. They typically keep them up for a while because they really want to stamp inflation, inflation expectations out of the system. Randy, someone's going to ask this question, does this pass the smell test for you? A number this big? I mean, there can be always revisions. You never want to put too much emphasis on any one month. But you've got an upward revision last month,

you have a strong number this month. UM. The Fed is not going to overreact to any one number, but you know the upward revisions to UM that that came last month with this will certainly embolden them to to move expeditiously as they have said. And I think they're gonna get least I think it's going to be very close to four by the end of the year. By the end of the year, Randy, can you talk a little bit about the path you did mention earlier that you expect them to go to four percent for the

Fed funds rate and stay there for a while. How long is that while and what will determine that length? So it's gonna depend a lot on these these statistics that we're that we're getting. What's gonna be happening labor market, what's gonna be happening to two wages? And Um, you know, right now we're not seeing the economy going over cliff and this is exactly the time that the Fed needs to be moving quickly. Um, the the economy hasn't sputtered yet,

so they need to move. But also they haven't gotten the political pressure on them yet because the unemployed rate is at near record lows. So this is the time to be raising races to try to stamp the inflation expectations and inflation out of the system. Brandy, you're gonna throw me out of the classroom, but I'm gonna ask the question. I'm gonna raise my snarky arm and say,

Professor Krasner, where's the neutral rate? And I say that with great respect because is within all the back and forth of all our guests, and that it's when does this become painful, which means through the neutral rate? Where's the neutral rate? Professor? I always knew you were the troublemaker in the back of the class. Um, and uh, and you continue to be. That's exactly. That's a very important question, and one where Um, the consensus of the Fed, what they say is around two and a half, so

roughly where they are. But that's two and a half when they think of inflation being down at two percent in the long run. In the short run, when inflation is still very very high, Um, you're still the very dramatically negative inflation adjusted rate. So two and a half is not neutral right now. In the long run it might be neutral, but it's still quite expansionary when inflation is depending on are you are? Are you giving up the Chicago school and joining adam posing with a three

percent inflation level? Is that really what we're talking about here, is we need to adjust a neutral rate higher? No, no, no, I'm not saying that that the goal should change from from two percent and I'm not saying that that in the long run they're not. I think they're right about the or it seems reasonable that they are in a

reasonable range for the for the long run. But in the short run you can't say that two and a half percent is neutral when inflation is eight percent and so you have a you know, very significantly negative real rate. So it's there's a bit of a long run versus short run kind of thing. To catch up Randy Crossing at that to make sense of this stunning report, Jeffrey Rosenberg joins US portfolio manager of the Systematic Multi Strategy Fund at black Rock. Jeff Rosenberg, let me cut to

the chase, how do you do? Multi strategy? Was such a shock? It is a bit of a surprise. Clearly, you guys have hit it on the head with you know, good news being being bad is and and it's surprising. We strong, and it's a reminder of just you know, how strong the economy is. We're expecting an eventual slow down, but it's not here yet. And Lisa and I we're talking about this ahead of time. You know, what does the market do on a on a big upside surprise?

And the narrative going in here from the fm C was the Powell pivot, and this is the payroll pushback, and the pushback is they're not going to be able to pivot as aggressively as the market was expecting post that FOMC. And that's what you're seeing with that yield curve flattening and the big increase in the front end of the race and then on risky assets and equities.

You know, they don't like that because they like, you know, the end of the FED tightening, and as Randy Krassner was was talking about, if inflation doesn't come down, we are nowhere near neutral and so you've got a lot more FED hikes if you don't have that inflation coming down. Jeff, I've got a bunch of Doeby Bond questions for you,

but I think it's important. And a lot large pop relation of our radio and TV audience worldwide don't have fancy financial degrees, and they're asking what's wrong with generating five fifties six thousand jobs with the revision? Why is so much good jobs reformation a bad thing? I just don't get that. Yeah, Well, it's it's about it's about overheating and it's about inflation. And one of the challenges that you have is in this report you see a lot of signs of that wage inflation and the wage

price spiral. Uh. That is is really the bigger risk here that you you transition from COVID supply side disruptions transitory to something that's much more persistent. And the risk is that inflation hurts everyone and if you don't snub it out early, the pain that has to happen later is much much greater. And so that's why good news is bad news because for financial markets it means the FED is going to have to do a lot more, and it's going to have to do that sooner, tightening

financial conditions to rain in the demand side. It's the only tool they have to address this inflation concern. So, Jeff, we were talking before we got these numbers that the Powell pivot would turn into the payroll push back, which is exactly what we're seeing. And that was your expectation just based on how lopside of the markets have gotten in their belief of the pivot. How much have we unwound of that? How much more do we have to go?

And I say this as we look, yes at NAZDAC futures out about a percent and going lower but still well off the lows after surging over the past few weeks. Well, there's a there's a narrow reaction to today, and then there's a longer run issue. The narrow reaction is, as I looked at it last about seventeen basis points. You know, you're you're taking back you know, a little bit less than twenty five that you priced out follow going the

FO and C in the Powell pivot. But the bigger issue is really what Randy is talking about and what Somers is talking about that you know, to say that that we're at neutral, we're at two and a half percent is the conflation. It's the difference between the long run neutral, which was really what he was talking about, and the issue of the short run And and this is the issue we're gonna be talking about for the next six to nine months, which is we're past peak inflation.

We're going to see inflation decline. But to what level? Because the forecast in the FED. To say that they're at neutral is Randy was just saying, is that's a two percent inflation rate. If you don't get to that

two percent inflation rates. Say you get to a higher inflation rate of say three percent, well, what it means is that you're nowhere near your long term neutral, and the whole bond market expectations in terms of where rates settle in have to reprice, because what we're pricing right now is a two percent inflation two and a half percent long term neutral, and that's all conditional on the

realization that two percent inflation. Right, Jeff, this is a sea of uncertainty, and we're getting a little nodes that might point to a direction of travel. Where is your conviction right now as you tweak your portfolio, as you try to understand where the risks are miss priced in markets? Yeah, you know, we're a little bit uh skeptical of the

of the rally that we've seen in risky assets. We're still concerned that you have uh, both a shock in terms of inflation what we're talking about here today in terms of what the Fed has to do in front of that tightening financial conditions not being conducive for risky assets. So we've been pulling back from our risky asset position. We didn't add uh in the rally that we saw in July. It's important to recognize that when you're in bear markets, they don't go straight down. They have ratchets,

they have bear market rallies. That's what people are characterizing the last up move here. That's barely consensus. We're a little concerned that that we're in the consensus camp there, but we think all the data is pointing to still considerable challenges to the risky asset profile going forward here, So it's a little bit more cautious. Vie, what about your portfolio of cash? I know that black Rock has been adjusting as cash and holding a higher than usual

level of it. How have you maneuvered in that space? Yeah, you know, I mean every portfolio and portfolio management team runs, you know, their own portfolios and are fun. As Tom introduced at the beginning, you know, we have run higher cash levels. Um, it's it's a way to reduce some

of the risky acid exposure. The other issue that all investors are facing in this summer environment is it's been an exceptionally a liquid environment, very expensive to trade, uh, and so using cash as as opposed to other means to bring your risk down is just a more efficient way of reducing transactions, costs and and and retaining value for our investors. What do you do on duration? Here is a general statement of black Rock. What do you

do on duration? You guys are gonna have twenty of you in a meeting yelling and scream is going to assume you know, we just we just understand that probably cost her. It shall be rude. I mean, that's just use you the way it is. But then, Jeff Rosenberg, what's a duration call? Well, I think the duration call, you know, I'll speak for our our team. Obviously, as you highlighted, there's a lot of different voices, and you're gonna hear some more voices in Jonathan's program uh in

the next hour. But it's still a cautious view on duration here. Again, that's the view of the uncertainty of inflation. Markets are pricing certainty we're gonna have a clean path to two percent. We are more skeptical about that being realized. And if it is not realized and you end up with higher inflation, the whole bond curve, inflation risk premium, they need to reset higher. And so you've got to be a bit more defensive on duration with that uncertainty

Jeff Rozenberg, Thank you so much, greatly greatly appreciated. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on

the terminal. I'm Tom Keene and this is Bloomberg