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David Steef joins his chief economist, Developed Market sitting. The Murray has just been outstanding over the recent a number of months. I want to get out to the FET and chat. Paul's been doing a little bit. I've been remiss on this. Are we at a Bank of England point where Worsh is alone?
Good morning?
I think I might characterize it a little bit differently, but a Bank of England analogy I think is actually very apt here in that you know, when the Bank of England votes, it's one person, one vote, and you know the governor, who's the equivalent of the FED Chair, has no enormous amount of power to dictate things. And that's very much in contrast to how the FED has worked for at least the past fifty years, where it's been I would say, a de facto dictatorship of the chair.
And now we have Worsh presumably not only the most dubbish person of the nineteen member FOMC, but also with only a couple of others on the FED who are even I would say remotely dubbish at this point, and so he probably finds himself in a minority.
Is there a dubvish framework going into this meeting, I'm not sure I can find it.
Well, I think, you know, I think the dot plot is likely to show a number of dots that still have a cut or maybe even two appropriate for this year. And that's even with you know, under the assumption that Worsh chooses not to submit a dot, as has been reported. Now, it's going to be a scatterplot.
Clear.
I mean, we're gonna have plenty of dots for a hike this year.
But I think there.
Are still members of the FED who are looking for a cut later this year.
If Governor Christophers was down there, yeah, she'd just go like this, I'm sorry, I'm not submitting a dot.
No exactly.
We're going to get some inflation data tomorrow, David. I mean, I'm just you know, looking at the Bloomberg terminal, the CPI headline four point two percent. That's not bueno. If you're the Fed here at all? Yeah, what's going on?
I mean, you know, inflation appears to be actually rising now now we do actually see it in a more a fairly soft print tomorrow of point two and more risk of a point one than a point three.
That's for core.
But that that really is is not what the overall trend is the trend, especially when you look at the Fed's preferred measure of core PCE it's three point three percent on a year of a year basis, And in a couple of weeks when we get the print for May, we expect that year over year basis it to rise to three point four percent on a year over year basis.
So too high and going in the wrong direction.
So but the reality is there's nothing the FED can do, right, I mean.
Well the Fed, I mean, the Fed could raise rates, and that would be the classics sort of move that a central bank is supposed to do when inflation is above target GDP is growing out or above trend, and unemployment is low and if anything set to fall a little bit, yep, So we don't think they will.
But then inflation, I mean, I'll use the term, I don't care transitory, I mean, is it because of the war here, and if the war backs off, we got energy coming back down, maybe not the pre war levels, but certainly coming down. And there you go.
I really think this is hard to say that this is transitory, especially when you look at core inflation, so headline inflation, which the FED doesn't concentrate as much on there. You can make a very good argument. But you know, when you look at how much the Straight of hor Mooz and the energy price bump is hitting core inflation, probably no more than a tenth of a percent or so, so that's pretty small.
I think what we're seeing.
Is a much more classic sort of econ one oh one overheating of the economy, where there's a huge amount of one could say, price insensitive demand from hyperscalers for everything chip related, and that is outstripping supply and therefore, with demand outstripping supply, prices arising. And I think it's it's really hard to make a case that this is Straight.
Of hor Moves related.
Again, and key thing here, inflation on a core basis would be at or very close to the level it is right now, even had the Straight of Horror Moves not ended up being closed.
Do we think, Okay, that's really interesting.
That's a bit. If I'm mister Warsh, I'm like, now what do I do?
That?
Just did an out of rear and for j Jimmy Taylor out of Stanford, one of my first first supporters, And we have this architecture of certitude of a two percent inflation? Where did that go? I mean we are miles from a trend line two point x percent statistic.
Yeah, we're I mean, this is going to be the sixth consecutive year with a what.
Would Martin Feldstein say? You with the privilege you know I got, I knew Martin. Professor feltsay, well, we grieve his loss every day you worked the grind with Feldstein? What would he say?
He certainly is missed, and I think he would almost certainly be calling for rate hikes at this point. And so, you know, I think the argument, the dubbish argument that Warsh and others who are doves will make is that they see disinflation coming because of the fading of the tariff effect, because of AI being disinflationary. But you know, we've heard these arguments a year after year now for
six years. And where are we We're again well above target and if anything moving in the wrong direction on inflation.
Paul, this is serious stuff. We're but numbed by it, Paul, and I Aron numb. Alexis is not numb because we have Tito's and Tang on this side of the studio. But I mean, this is serious stuff.
Serious inflation, and I don't see it going anywhere. Labor market, what's your sense of the labor market.
Labor market is in somewhat of a goldilock zone.
So obviously we got a fantastic print just last week.
Now, if we took that print just at face.
Value, the NFP, I mean, it would actually look like the labor market might be overheating. A lot of that stuff was temporary, so we had a big bump in state and local that's that's probably just a statistical noise sort of thing. And then leisure and hospitality that may well have been related to the upcoming World Cup, so that's unlikely to be keep going.
But still, you know, even taking those.
Out, we're sort of right where we want to be at low hundred thousand sort of jobs.
And yeah, are you.
Going to be in the numurrors seats down low? Oh? Yes, Sun or are you going to be in the nu Mura box.
To be determined?
Yeah, David, thank you so on David Seed This with Namura can't say enough about his work, just exquisite research notes from Namua. Stay with us. More from Bloomberg Surveillance coming up after this.
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Emrita send joins us from London. Imrit I'm just going to cut to the chase. A lot of people predicted a spike, a surge, a jump in Brent crude. There's a rationalization now of why that has not happened. Does our audience still need to get used to much higher oil prices.
Down the line? Yes, Tom agreed. I'm in New York right now, been seeing clients here and that's exactly the question everyone's asking, you know, why are we not higher? What have we missed? People are misconstruing this as a demand must be super weak, because if we've lost twelve million barrels for plus of production, then that's the only way to rationalize it. The reason is we have we had a really big buffer of oil, four hundred million barrels of stocks that we're still running down. And add
to that four hundred million of SBR. So we did have and we still have that buffer. You know, we forget this time. I mean people were talking about us being at forty dollars right now. Remember for this year we were going to be three million barrels per oversupplied. So it's that overhang that we are running down. And that's what the market's almost forgotten about. Once that's true, yes, of course prices will be going higher. But then the question is how long does this gone for?
Well with the energy aspects rigor do you have an xxis Paul wants to the week when the vest when the vestment becomes expensive.
I'd say we still have a couple more weeks, right, It's more like weeks or months. It's in July that on our numbers we start to get like you know, critical levels between en July and end August, depending where you are, what buying and so on.
Amrito, if we were to get an end to the hostilities today, do we have a sense of when the golf would be back up and running, and the oil would be free flowing, and we'd have it back to somewhat of a normalized market.
That's actually the million dollar question. And I think the market there is getting very complacent. I've seen some reports that are it's going to be much quicker to recover. I was just in the Middle East and everyone there said that the damage to infrastructure has actually been a lot more than people have let on because for obvious reasons, right, and I think it's not an overnight thing. The tankers are in the wrong place. How the tankers are here
in the US, they need to reapers tankers. The owners are still very cautious because of casualty. You know, despite the cease file, you still get these occasional ships being hit. Mines the other issue, and production is not a light switch. It takes a few months. Now some countries like Ua, even Iraq and Kuwait now are starting to kind of let some vessels. They're managing rather to get some vessels out. That means they are going back in there seeing what
damage is so it won't be like too long. But you know, officially they've still come out and said months, not weeks, like it's going to be three four five months before production fully recovers, if not longer.
Is there a sense in that part of the world in Marina that they need to de risk the straight up for moves. I don't know if it's through pipelines or other ways to get the crewed out of that region of the world. Is there any plan there to change how that works?
Absolutely? That was probably one of the biggest points of conversation. And I think how the Arabia really stands out there right like they already had invested inspect kind of alternative capacity, and they've always said, look, we don't get paid for it until we do right. And I think the Kingdom is probably the least affected because of the East West pipeline. They are coming up with four pumping stations that makes the flow of that pipeline actually sustained at seven million
barrels per day right now it's more like six. They're tweeting two gas lines gas pipelines to also flow crude. They're going to dredge the port so they can do more. Kuwait and Iraq a talking to them about new pipelines through Saudi Arabia. I think in two to three years time, that entire region will look different. You as also already got that second pipeline going.
Yeah, absolutely, Amrida. One final question, and we know you've got to get off to Energy Aspect meetings this morning. Karg Island, Okay, I get it, it's a thousand miles some Israel and all that. But are we doing a sort of kind of like war because we don't want to easily take out this incredibly important important oil hub for Iran.
Now you're asking why they haven't taken it out, I'll go with.
That, or when or what's Amrita sent take on the importance of carg Island. It's super important.
You know, we've actually we've actually just acquired a company called Chios and their satellite base and they're literally going through tank by tank. How much is there and carve is Iran's lifeline in terms of how much oil sits there. They have been managing to get oil down there because they're still getting shipped through the US blockade right. That's
been amazing to watch. I think, Look, kinetic action is not something the US wants to do or anybody wants to do right now, because the Iranian IRGC in particular has shown their asymmetric powers damaging infrastructure in the region. And you know they are the kind of people. They really believe in Scott Shreth. If they can't have it, nobody else can have it. And I think there is some real risks to again kind of restarting kinetic action, and that's why the US is backed off.
Amrita. So and thank you, thank you, k appreciate it. Look forward to speaking to you way more often into two thousand and twenty seven. Brilliant research with energy aspects. The minutia of what she does is just really really uncommonly good. Stay with us. More from Bloomberg Surveillance coming up after this.
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YouTube Pleazanne Saunders joins, so should we try it around Bloomberg Money Friday twelve, It's is okay, it's okay, so we said, let's get her back. So Lizene Saunders here and I hate it. It's now midyear review. We're in God's name to twenty twenty six. Go there we are. How do you write a midyear review given the noise out there?
Well, we always start with a right, what did we say for the full year? And what did we get right? What did we get wrong? And as you guys know, Kevin and I work on it together. He kind of tackles the economic side and I tackle the market side.
You know, sometimes it's frustrating because in this instance, you know, we like to put them out before the end of June, and I think one of the missing links that would otherwise be in a report like this would be about FED policy, especially under a new FED share, but we had to get them out beforehand, so you just sort
of take stock of the year so far. And we're not market timers, so we're we're not out there trying to time inflection points in the market, but just share some perspective, and we think the macro environment looks decent. Neither side of the Fed's mandate is suggesting they should be even considering easing policy here, and I think that's
the right stance. But I think that's going to be the most fascinating thing is this first meeting and what worsh has to say about how he's going to think about running the FED.
The good news is that earnings are driving this market. Maybe the less good part of it is it's kind of concentrated here. We get that concentration risk that's come back into the marketplace. How do you guys think about that?
Yeah, well, we've written and spoken about concentration within the market in terms of performance. But you're right, Paul, there's a lot of concentration within the earning story. Now, the AI story and the infrastructure component of that has broadened out into areas like materials and industrials, but.
You still have a relatively.
Small handful of names that sit behind the huge surge in what were first quarter earnings, which contributed to a big jump in full year earnings. We were before reporting season started, we were in the teens in terms of estimates for calendar year twenty twenty six, and that's up to twenty five percent right now. So the bar has set high.
We got a massive Dow Jones Industrial average draw down of one point sixty six percent from the record. Hi, you've got a piercing single sentence that three percent of SMP five hundred are hitting fifty two week highs. Have you ever seen this before? No, so discuss this is really this is the key question for me.
And by the way, it's it's only about twenty percent of SMP constituents that are outperforming the index itself over the past couple of months. Now in the past week there's been a little bit of breath improvement, but we
do have an incredible concentration in terms of performance. The one thing I wanted to point out though, when we discuss the megacaps and their contribution to a cap weighted index like the S and P five hundred, an example would be in Nvidia, which I think is still the fifth largest contributor to S and P five hundred returns, but it's not even ranked in the top one hundredth within the S and P in terms of price performance.
And that's an important message for individual investors because I think sometimes they feel that they have to be in say a cohort like the Magnificent seven, But there's a big difference between contribution to return and actual price performance. So there's one hundred plus stocks performing better than the alphabets and the NVIDIAs of the world. They're just large contributors by virtue of the multiplier of their cap size.
So I mean, what are your schwab I mean you and Kevin, you're on the road all the time talking to your schwap clients. What's the big issue today?
What's there? Is it?
Fomo?
Is it? You know?
I don't understand AI, what's the big issue that you get?
Some of it is age dependent.
I think the FOMO is more prevalent among the younger investors. I would say that then, lately, a lot of questions on the IPOs okay, and you know much to your chagarn there, and it's not something I can talk about with any kind of specificity. I would say for our more seasoned investors, still the number one question that we get is on debt and depicite.
Really without a doubt.
But you and I have been in the market soon amount of time. It's never been an issue as long as people keep showing up to the Fed and our trade free and behind our debt.
For whatever reason, I think the investor class cares deeply about this subject. I think the average constituent maybe cares about it in the abstract, but they don't tend to vote.
Based on it.
So as a result, something that those in Washington on both sides of the aisle just continue to play nice with the kick the can down the road?
Can I sink you sure? There's all these fossil eggs out there. And I saw Springsteen the other day and he's just absolutely phenomenal. He did not mail it in never September of nineteen eighty. Ready, forty six years ago we lost John Bonham and they have the courage to say it's just never going to be the same. I mean, they really led Zeppelin, Lizanne's you should see her living them.
The merchis the collector. I'm some unbelievable player. They have the courage then to just say, we're not going to fake it.
That's right, and you know, but what's also interesting is the unwillingness, at least on Robert Plant's part, to do some sort of get back together because John bottom Son Jason is an extraordinary drummer. And they did it the one time at O two and two thousand and seven tribute Costs.
They sold their catalog like a lot of other I don't believe.
Trust be the underwriter. Yeah yeah, okay, but then Rush comes out with Anika. Now, so they're just starting a brand new tour with Neil Perth dying. They they're trying to do it. It's very cool what's going on out there.
And they got the Stones still doing it.
Ye are we seeing the Stones this summer? I don't even know.
Are they I don't know if they're I've seen them so many times, but I.
Mean, it's that's the only way, well, one of the few ways left for these folks to make money.
My biggest my biggest agony of this, sitting on a bed at Rochester is to do detechnology looking at Steroay to Heaven and that album and saying, what is this is? Jimmy Page just didn't go forward like Robert Plant did with Alison Kraus, right and all that, and that's so? Is that a good segurity? What do you doing?
I like that to do that sec that won't show up right exactly.
Well, thank you so much for coming in. But the do you have a vision into twenty seven? I don't.
I don't, No, I think not, other than I think that there's a greater connection now between the bond market and the stock market, pretty significant inverse correlation between bond yields and stocks I think the bond market is keying more off the inflation side of things and on the employment side of things, And as long as that stays the case, I think that inverse correlation is maintained.
Thirty year round five point zero two percent. Liz Ane Saunders, Thank you, Thank you, Thank you. 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 Auto with the Bloomberg Business app, or watch us live on YouTube.
Nature putell rights really smart notes for parametric It's about like the dynamics of municipal bonds, our muni bonds like everything else, if it's priced down, yield up our muni's like government's full faith and creditor, you know, corporate bonds. Recently of muni price gone down because everybody else's bill note in bond prices have gone down.
So I would say we had a little bit of a hiccup. Obviously, as a war started, right we saw treasury yields increase, prices down. That did affect markets generally across the board in the fixing.
Cop cyberunies as well.
Of course, now always it's never going to be a linear move Directionly you could expect it to go into the similar direction. The one nuance with munis different than treasuries in corporate markets is that your primary buyer base are high net worth individuals typically or retail investors. And that is what we saw last year as being a really big catalyst for a lot of the underperformance. A lot of supply and not a lot of demand. We talk about technicals in the meuni market. Now, Tommy has
a good question. I think what's changed this year is that we've seen the demand pick up, right, So we've had a tremendous inflow cycle in munis, the second highest since nineteen ninety two. Now why is that? It's because you'lls start getting attractive enough. Right, you have clients who are looking to move out of cash high tax brackets, Paul, We always talk about New Jersey tax equivalent to eels there. Tom,
I think you have a MUNI account. But you know, when you start to see on a risk reward basis, yields getting this attractive, you start to see the inflows kind of begin. So that has been incredibly supportive so far this year to where as of late we've actually seen muni eels come down and prices.
That's where because Paul's walking around different, he's very happy, a bigger smile, very happy.
So there's demand there, but there's also a ton of supply. It seems like record years of visions in twenty four, twenty five, house twenty six shipping up.
So twenty six we had a record year last year. So far year to date we're actually versus the same time last year, slightly higher now now. So expectations you know from underwriters on the street is that we will likely be at twenty twenty five levels when we close
out the full year, could even be slightly higher. The reality is that there's a lot of pent up to make and right for infrastructure needs, and so when the economy is on a stable footing look as we are seeing currently, there's more confidence for issuers to issue debt right, balance sheets are healthier, and again again across all sectors, you're seeing that to generally be the trend. Again, the
biggest caveat is if demand is sustainable. If demand stays strong, then that will help absorb the supply, which is exactly what we've seen us is this is this refinancing or is this new borrowing in the meunium market. So some of this is refinancing, but a lot of this is also going to be new borrowing as well, So it is a combination, but a good portion of this is going to be new money issues that we're seeing across
the board. Again, if you look at kind of you know, the trends over the past few years, we have seen just an increased demand for infrastructure infrastructure needs. You know, I will kind of integrate AI and AI kind of capex spending that is happening. So you know, as these actual physical warehouses and storage units are being built out, you also need supportive right utility infrastructure needs to help with this. So that's just one of the elements that
you're seeing. And look in the MENI market, issuers are never timing rates. It is very difficult to do. So if they have a need, they can finance it. If they got voter approval, they're going to come to the market tissue. But again, you know, with even the recent rally, we still see an opportunity here in Munis and I think for the foreseeable future. In these summer months, we should see demand side hold up pretty well.
I haven't seen much credit quality issues out there. I haven't seen a Puerto Rico kind of blow up or or I don't know, how's credit quality out there?
Yes, good, good question, And I think that's another reason for really the supportive demand. I think generally the credit story has been very strong. You still are seeing, you know, net more upgrades than downgrades across most sectors. Again, the economy has been very strong, so think about that across the board. Tax collections are high across the board. These kind of geo cities, town states have built up very strong reserve levels and strong balance sheets. But again I
would say professional credit management is still key here. Sector bisector story, healthcare, higher education, airports, It's all going to depend upon the sector.
I saw you in the third row last night at the next game. There's such a bond nerd that you know, you don't look at this like we do. Yankee Stadium and the city field were MUNI bond transactions, right, But MSG's wacko and wasn't is that there's not like MSG.
There's not MSG UNI bonds correct, Correct.
They don't texting, I don't understand.
Right, so Yankee Stadium, they will issue through a muni conduit Madison Square Garden. I have not seen that ever be.
Exception, but it's a nineteen eighty tru state law. They have a permanent one hundred property tax exemption.
Yeah, I guess so, I mean people want to move Madison Square Garden. Good luck with that better.
People have tried.
So talk to us about just kind of the FED. There's a municipal bond market. How much does a muni bond market care about the FED and what it does.
That's a great question.
So when we started this off, Look, munis are going to be dependent on just overall rate picture, right, and treasury rates for that matter, directionally, typically in the same direction, and we've seen this over the past few years. You see a major uptake in treasury yields, you see volatility. Munis have typically underperformed in those markets. So my answer is on the FED side, it is very important in the sense that it's important for the treasury market and
just on the directional move of where rates go. Now, obviously we've seen an uptake and short end rates because of the market now increasingly pricing in rate hikes, right, So the market is saying, look, the fetis is off. They're wrong. Rates are not restrictive enough. Next week is a big meeting that is going to be a big one. So any market reaction from that, particularly in the treasury market, could be a catalyst for a move on the Meani side.
Nischa Hotel, thank you so much. Sma fixed income portfolio manager at Parament, greatly appreciate that.
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