Ukraine Developments and Previewing Jackson Hole

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One of the great moments for Bloomberg's Surveillance is when research notes are accompanied by the bow tie. Yes, I'm in the background, hidden in the blurry view, but far more important is Klaus the beast has a bow tie on celebrate you the ninth birthday of Michael dartis dog Klaus. I'm a vineyard, Michael Darta joints this morning. Is Klaus Wisconsin a bow tie today? Michael?

Well, actually, Tom, Klaus is under the covers. It's a little chilly this morning, so he has not arisen just yet a little.

It's a little chick Washington. How does the international relations moment fold into the markets or is it a distraction?

You know, that's a good one, Tom. You know, I hate to be kurt here, but I think unless you're really looking at a big disruption of commerce, these geopolitical events don't have to don't tend to have large lasting

Michaels about a year ago that the FED began cutting rates. Some folks are saying, all right, let's do a reducs here this year. How do you expect their federal reaction in September maybe guide for the remainder of the year.

Well, the markets are fully now for a twenty five basis point rate reduction in September, and over the course of the next year, markets are expecting the FED policy rate to drop a little more than one hundred basis points. But my view here is that a go slow approach is appropriate. When I look at tracking estimates for the third quarter, it looks like we're running pretty close to

And if you think about.

Where we were last fall when the FED kicked off the easing with a fifty basis point reduction. We were coming off peak policy rates one hundred basis points higher than they are today. In the unemployment rate had been moving up, triggering certain recession alarm bells. Inflation expectations were rolling over really hard. That's not happening today's. So I think against the current backdrop, the FED needs to be

You're thank Jonathan Ferrell for that interview that was talked about to say the least last week. We welcome all of you across the nation, and Serious XM channel will help me. Paul one twenty one, Sure the Brain goes on a Monday Channel one twenty one, Good Morning, Serious XM, Hot applecar Play and Android Auto, ninety nine to one FM, Karen Mosca Radio OH in Washington nineties and nine FM in Boston. Good Morning, Bloomberg eleven three OLO on YouTube

So, Michael, it looks like the consumer is kind of hanging in there here. I mean, how do you view the consumer with all these crosswinds out there?

The consumer is hanging in there, Paul, that's good news. So right now it looks like real consumer spending is probably running just above two percent for the third quarter. Again, that's not a picture of an economy that necessarily needs emergency policy rate reductions. And I think the reason for that is we're coming through this uncertainty fog. Now. We obviously got hit with with a big uncertainty and confidence shock earlier in the year, but the labor market has

You know.

Paul.

Somebody emails in they go is it too early to go Nerd?

I said, it's never too early to go Nerd. We go Nerd with Michael Darta.

Michael, you know we've got a wonderful tailor rule function on the Bloomberg folks. It's got one, two, three, four, five, six, seven plugins and John W. Taylor's out of Stanford is classic, classic rule right now, the tailor rule, as you suggest, Michael suggests rates where they are as fine and Secretary Besson is wrong, wrong, wrong. Which attribute in the Taylor rule is the most data unknown? Is it nayru, It's

Well, Tom, you know, we really don't know where any of those variables are going with any super precision. But one question we can ask, and I think Larry Summers mentioned this on x Twitter last night. If the FED is dramatically above neutral for any period of time, we would know it because the economy would crater, asset prices would implode. So if you have a ten quarter average nominal growth rate of five percent, pretty strong real growth

Michael Darter, thanks so much, greatly, appreciate it. Stay with us. More from Bloomberg Surveillance coming up after this.

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from seven to ten am Eastern Listen on Apple, Karplay and Android Otto with the Bloomberg Business app, or watch us live on YouTube.

With a question. Our interview of the Day. Angela Stent was with us a few days ago. Her book Putin's World is Definitive. This is a day of NATO and the President of the United States Angela. I don't want to turn it into a history lesson, but coming out of nineteen forty nine, we pieced together this thing NATO, and it's morphed over the years. And then we decided somewhere in the vicinity of seven eight that we wanted

I think we did. Good morning everyone.

Yeah, I mean, if you think about it, after the Soviet Union collapsed, you had the countries of the former Warsaw packed eastern Europe and.

They were kind of in limbo.

Many of these countries have been invaded either by the Russian Empire or the Soviet Union.

They didn't really.

Have any place, and so was the right thing to do was to include them in NATO to make sure that I mean they were territories between a number of these countries, Romania and Hungary and others, to make sure that they were democratics. So this was not a mistake. And you know, in hindsight, we can say if U grained been a member of NATO, Russia wouldn't have invaded it.

What do you want? I can't imagine the history today, Angelus stent back to when you and I were trying to figure out the high the Berlin Wall. What do we want to do here? So we don't have a domino theory in Europe. Mister Stubbs of Finland is really worried about that, isn't he?

He is?

And you noticed that all of these major European leaders are going to accompany President Zelenski today in the White House with President Trump to make sure that he doesn't just sell Ukraine short. And what they want to make sure is that Russia ends this war and doesn't have designs on other former Soviet states or even on rolling

So Angela, in reality, what is he verifiable win mister le Zelenski and the European leaders.

Well, a verifiable win would mean that President Trump is not going to try and persuade Ukraine that has to give up territory that Russia doesn't even control. I mean, just yesterday President Trump against it on truth social it's up to Zelensky to end the war. It isn't up to Zelensky. He didn't start the war. The Russian started

And it seems like the reality is mister Putin has no intention of stock the war. What's different management just dragging things on.

Yeah, it's the heart of the matter.

That's kind of it here.

And he's got an American president that may allow that.

Who knows, right, I mean, it's.

Going to be very difficult.

You know.

President Trump completely reversed himself. He went into the.

Discussions in Alaska saying there had to be a ceasefire first, and then they discussed the conditions and now so, I mean, the thing that the Europeans and ukrain have to do today is to persuade President Trump that that's just not file right and that they have to push for a ceasefire first.

Procrastination and around the world. Angela's stent with us this morning from Brookings Institution, Angela the ft I mean, they don't sugarcoat it. This is an editorial from the Financial Times of London. Donald Trump's Alaska summit with Vladimir Putin was an embarrassing failure. Worse, it was a terrible mistake. And what I find interesting, Angela, let me quote this exactly.

Well, I think the Secretary General of Natil Mark Rutzer, the former Netherland's Prime minister.

He seems to be a leader in this.

I mean, we have the other leaders there, the British Prime Minister, French President, German Chancellor, the Italian Prime minister. They'll all try and push, but I suspect that Mark Rutzer will be the leader here. But it's a huge tall order for them because they're very concerned that the US will just kind of abandon Ukraine, and that is not only Ukraine that's going to be threatened by Russia then, but the.

Whole of Europe.

Angela.

Is there any role here, any voice here for the US Congress?

Well there is, I mean, and we know that a number of the US Senators, including Republicans, were very concerned about what happened in Alaska and about President Trump really seeing Putin what Putin wanted. So there is the question is will the Congress stand up and you know, try and persuade the Trump administration, particularly the Republicans at Congress that they have to really.

Refresh on and this and thank you so much doctor Stanners at Brookings Institution. Her book is definitive. It is Putin or look for her essays at Brookings. Stay with us. More from Bloomberg Surveillance coming up after this.

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Let's get into a first Jackson Hole brief here we get to Wednesday, traveling out there. Lisa Bramwontz and myself will be with you Friday with Michael McKee leading all our coverage in Jackson Hole. A first brief with RBC Capital Markets US rate Strategies Blake Quinn as well. Will Powell move the bond market price up? Price down?

Well, it's hard to tell.

I mean the piece that I put out the preview, I called it not your twenty twenty four Jackson Hole. And I think looking back at last year, we had a very very clear message from Powell. I mean, he was could not have been more obvious that they were going to cut now the fifty. Obviously we didn't know they were going fifty yet, but made it very clear that they were going to act at that next meeting.

But thanks were so much easier back then.

You had unemployment rate on a long trend, remember triggering the Saw rule. Everybody was kind of freaked out about the labor market. The same time, inflation was coming down very steadily, very aggressively.

So he was in a much better position last year to deliver a clear message. I don't think he has that. The data is really pulling them in two directions this time.

So what should we look for, I mean, other than sitting at the million dollar cowboy bar, I mean we're going to be listening to Chairman Palin Friday.

What should we be listening for?

So I think one thing we might get is he might try to clip that tale of a fifty base point cut.

So we've heard daily kind of saying, you know that that's not the right move. Now, we need to take it a little bit more gradually.

So I think he may be willing to do that, But as far as very clearly signaling a zero or twenty five, it's just very hard for them to do, especially when you have this, you know, one more round of NFP, one more round of CPI kind of hanging out there because last thing they want to do is very clearly set up a cut, and then we get to the next data, labor bounces and inflation is hot.

You guys have a vector of disinflation led by Ian Lingdon. You guys are world class EMO capital Markets at RBC Capital Markets, the whole thing. All the Canadian strategists just seem to be on a vector of disinflation. Is your call there at risk where we don't get lower yields?

No, So I mean we actually have inflation continuing to go up.

I think we probably subscribe to the same theme that the Fed does that this is going to be somewhat you know, transitory if you will. But I think what's becoming clear is it's not going to be transitory in a clear way. You know, it's going to leak into services. It's going to be in categories that you don't expect. It's going to happen over said rate cut. We do, but not until December, and Marcus, right now, you know we're still pricing over two cuts.

And that's actually come off a lot. Last week.

There was a there was a period we were actually pricing in some probability of a fifty basis point cut in September.

That's actually come back a bit. We have them pausing.

But Jim Bianco last week, this is just absolutely fascinating.

If I put myselves in, if I put myself in FED Chairman J. Pale's shoes, I would feel pressure to cut. You think he feels pressure to cut. Whether it's political pressure, market pressure, I don't know.

I mean, that's honestly, the best case that I can draw for cutting in September mostly runs through these non fundamental factors, Like if I just sit down and look at the data. You know, a lot of the kind of freak out we've had over labor data since those NFP revisions I think is a little bit overdone. A lot of those don't really look cyclical, their education, their government. So I think the labor situation looks okay.

Meanwhile, you've got some hon.

Inflation prints that are a little bit worrying Muslem, you know, from the FED set at best. I think he said we're missing on inflation, now we're not missing on labor. So I think if I was just looking at the data, I wouldn't see a case to cut. All of the case to cut really comes to these tangential things. It's the political pressures, you know, the fact that the markets are already pricing in when we've seen the Fed not really want to surprise market, we.

Get an RBC capital markets inflation. Do we risk a negative real wage I don't think that's in the zeitgeist yet.

Yeah, I don't.

I don't.

I mean, i'd have to look at how that really interacts with the wages. I don't think it's really going to pass through as much to wage pressure. A lot of that's going to depend on what's happening on the labor side of it.

Now.

I will say on the labor.

Side, I think one thing that's interesting with these NFPs with the payrolls. And this is part of the reason Palace saying you got to focus on the unemployment rate, not the payrolls.

He said that at the last press conference.

Yeah, you really can't tell what payrolls mean right now because the shifts we have an immigration because of retirements going on.

You could actually, I mean this is an extreme.

Scenario, and I don't know that this is the case, but you could actually have a scenario where we have zero or negative payrolls, but labor markets are actually getting tighter because we're losing people out of those jobs.

And companies have to replace them.

So you could end up in a scenario like that where labor markets are getting tighter because of these lost jobs and wage pressure is actually going up.

Ten year government bond is sitting here at four point three zero percent.

Where do you think we're going to end a year? You know what's funny, we're very close to our Yearend targets right here. Yeah, I think we're probably going to remain range bound.

You know.

I think even if we're right and we do see that December start to the cut, you know, I think people kind of near term probably price out. There's a little bit to price out of the front end, but I think the back end, you know, tens thirties, those remain relatively well pegged. I think most of the volatility is going to come in the five year year, five year sector.

Paul Sweeney's world. Do you clip the coupon or do you have risked a total return in fixed income?

I mean, I think the trade right now, because I do not have a strong directional view on rates. At these levels, things look pretty fair. I think the right way to think about things. Is something like a twoes tens flattener where you are picking up positive carry. It's less for it's less because I think two tens is going to flatten massively. But you are earning positive carry to be in that trade, and you have a risk that we price out some of those cuts at the front.

That's too much jargon for Monday, Sorry about that.

The same as a two cent flatner.

Two tens so basically being long the ten year sector short to two year section. So you want the yields of the front end go higher, eels in the back end to go lower. But if that trade doesn't move, if if it doesn't actually suit, it's a bit opposite of the consensus. Most people want to be in the steepener, but that costs you money. You're bleeding away those cupons you mentioned about. You're bleeding away, Carrie to be in that trade. It costs you money to be in that trade.

LISTA. Bromwitz.

She's the only one to understand this stuff as far as I know. She tells me to look at the two tens, and it is, you know, we have a steep nerve about I don't know fifty five basis points. What does that tell me we're kind of at the top end of the range at that two stents.

If you look at where it's been kind of trading, we've steepen flat and we've been kind of, you know, moving about in this range.

We're at the top end of that range now.

Is just another reason I kind of like that flatner because I do think we probably pulled back down into that range.

So on Friday, he's going to speak, and as you say, we have other economic data coming. What is the dynamic if the world is disappointed and we get a Blake Gwin.

Call that that's that's more on the front and that's more on the two year part of that trade.

Because I think what happens if he does clip that tale of a fifty markets are going to take that as a as a bit hawkish. I think if he comes out very clearly. Since you talked, do you talk to Amy whose Silverman?

I talked to Laurie and Amy all the time.

My deepest sympathies. What does it do to their world if we get a Blake in delay in race cuts.

They would not like that.

I cannot imagine equities are going to be taking that well I'm sure I'm going to be answering mini phone calls from Laurie and Amy on that, but yeah, I mean they've you know, equities have been very sensitive to what's going on in the race base recently. That's been true the last year, and I think a lot of you can just tell by the nature of the questions you get from the equity side that a lot of people want these rate cuts to happen.

So that would definitely come as a disappointment.

I think. Let me pause you right now across the nation. Good morning and your commune. Good morning on YouTube as well. It's our new digital distribution. You can watch us on YouTube. Subscribe to Bloomberg Podcast. The President of the United States on Twitter this morning in this Germaine to this afternoon, A big day at the White House. We have never had so many European leaders here at one time. A great honor for America. Three exclamation points. Let's see what

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Joining us now. And I'm sorry to say, folks, this is the most important conversation of the damn Sorry, Angela's stan conne hack with us and what has happened to coffee. Conne Haig is at a commodities it edn f Man. She is absolutely encyclopedic on the SAFT. So coffee is drought, but is it really just about demand? And particularly Kona our demand a fancy coffee.

Okay, So it's supply and demand.

This is not just demand.

And right now we're in a situation where we've come from two or three years of consecutive deficits, very much led by the supply side. So we've had consecutive bad weather events in countries like Brazil and Vietnam, which are the major producers. And on top of that, as you mentioned, on the demand side, demand is pretty and elastic. You're not really seeing despite almost record prices, you're not really seeing that much of a destruction in demand, and it's

So talk to us about the supply of coffee. I've seen the map on the walls of some Starbucks around the world. I kind of get a senseetic certain parts of the globe is kind of where you grow up, but all those parts of the globe seem like they're subject of wild weather.

Talked to us about the supply, Yeah.

It is.

It's pretty much held in grown in all the tropical countries, which as we know now, it is increasingly susceptible to climate change and therefore extreme weather events, whether it's more floods or more droughts, or the severity of either of those happening at a more frequent level. So inevitably it means that perfect conditions for prolonged periods, it's just not

Currently an interview. I did log coffee back fifty years, five oh years. You can do this on the Bloomberg Professional Service. You do logarithmic coffee and I ran it. We're out five standard deviations, which is like a medical chart. We've come back. We're now three point two standard deviations. Do you see a permanence KNA to this? Because of our inelastic demand, I have to have my cupa sank or I can't get through the day.

No, As you said, we've already come down from five log to three. At some when we will come down even more, but not necessarily back to where we were in the two thousand and eight teens, when the green coffee was about one hundred hundred and fifty cents per pound. Today we're about three times at three hundred cents per pound with good reason. Now, yes to money's in elastic, but we are expecting not necessarily this year. This year

So we're about a.

Year away from that big crop now, and obviously anything can happen, but for now, assume we get a massive supply response, which we're expecting in about a you know, set nine months time, then hopefully that can bring the supply demount a little bit more into balance, and then that should allow prices to come off a little bit. But obviously we've got for the US consumer that you've got the tariffs. Brazil has got a fifty percent input

Get one more.

Question here, Paul, because you're a Starbucks eight times a week, all.

Right, So Tom, Tom's concerned about coffee as many people are. John Tucker and I are concerned about energy oil WTI crude oil sixty two dollars a barrel here? How low can this thing go.

Bye again?

So OPICK plus are ramping up, non OPIQ is ramping up. We have a potential reduction in geopolitical risk premium with this. You know, if we if these post Alaska, if the Washington talks with Ze Landscape come up to some kind of ceasefi ideal, that could potentially lead to you know, a massive exporter of the massive region where oil is exported coming into more normal situation.

And you know, we.

Could see a pre you know, post sanctioned era where things are getting slightly back to normal and traplaws resumed back to right clear toly. So I think that's that's a fundamentals and a little bit are reduced g Gibil the whispering which is full closing downward pressure on prices.

ConA, thank you so much for the brief. Usually we do like bigger, like sixty thousand FISA if I just want to know what a cup of coffee is going to be. ConA haeik is absolutely definitive at Ed and f Mann here in the soft commodities really appreciate it.

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