Bob Michele Talks Second Quarter Markets, Third Quarter Outlook

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Bob Michael at JP Morgan, We're going to try to get him in here.

You have an outlook out there, and I see an outlook of price up, yield down.

Is that the outlook at JP Morgan.

Yes, it is. We're off to a fantastic start for the third quarter, probably not a repeat of the second quarter with all the volatility, but some expectation of the Fed bringing rates down by the end of the year.

Is in the bond world is there fear of missing out? Is there fomo among bon buyers?

We're starting to feel that now there are more and more conversations with clients who are in cash looking for an opportunity to get into the bond market and trying to figure out where in the bond market to go. There's still a ton of ton of money in market, money market funds and in cash accounts, depositives, checking accounts, savings accounts. The last time we looked at was over twenty one trillion dollars, which was a new high.

Bob.

We saw earlier in the Europe a move of capital out of the US into other markets, notably the European equity markets. And they're outperforming the US equity markets. Have we seen that in a fixed income world.

As well, We actually haven't. There's been a lot of discussion about it, a lot of conversation. There was a bit of a pause in the end of April start of May where foreign investors who would typically put money to work in the US bond market just stopped. And then it started up again, and we've seen no selling of US fixed income assets and reallocation overseas. What we have seen is rethinking whether they want the dollar exposure

Bloomberg Dollar Index you bring it up, the Bloomberg dollar inexus down almost ten percent this year. We don't see that very often, do we.

What do you make of it?

For us? It's a reflection of an overcrowded Overbaugh trade, Okay, where coming into this year everyone wondered, how is the dollar up there so high? What's keeping it up there? And it kept going and then there was a catalyst and reason to diversify out of dollars. We think actually there's another five percent move in the Dollar index lower.

I modeled it today.

I did not use Fibonacci's which I really don't believe in, and I came with a further decline of bbdxy of six point three percent total fourteen to fifteen percent down, and that takes it back to that range that we're at. You're in meetings with lots of foreigners using JP Morgan for wisdom on American full faith and credit? Do you see any tendency that they want to walk away at the margin of a belief to own and at the margin by acquire our bills, notes and bonds?

None whatsoever. There is no concern about the full faith and credit of the US Treasury. There was a bit of a pause on the amount of supply. Would it be too much? But there was a lot of conversation about looking for an alternate. Do we have to have everything in dollar assets? Isn't there something else that could act as a calm in the storm to treasuries and dollars. I think that's why you've seen gold, and we should

Not there exactly, I mean do.

You know what I wish I was there. I wouldn't be surprised if Breese is there, But it's an opportunity unity for them to try to establish more of a leadership role here.

When you were studying Greek and Latin at Penn, I'm sure you looked at the X axis, probably in all three languages. But the answer is, Okay, they want to buy us, but they adjusted their maturity perspective because of all the fun and games we're going through.

By and large, the investors we deal with where we've seen a lot of clothes from wealth management channels and total return investors has always been the intermediate part of the curve. The long end of the curve is really owned by pension funds and insurance companies, and they're far more strategic and where and how they invest, and they have certain trigger levels depending on their estimate of liabilities.

Paul, can I help this morning? Please? Price up, yield down, pretium octum, preventu's diminutum. Oh my goodness, Latin. Okay, that's what Michael. He goes out on the floor when the world's blown up.

JP Morgan, I'm a big fan of Vatican two, which get away with Len's that Google translator.

I'm sure exactly, Bob.

How much credit risk do we take here? I think I'm not hearing anybody talk about recession, so shouldn't I be taking some credit risk here?

Absolutely, you get concerned about credit risk when you think you're headed into recession. It makes sense. Recession by definition is lower corporate at profitability. The most levered companies have to go some sort of restructuring. Defaults go up, you get widespread de risking because everyone's concerned where the defaults could occur. We've been trained every other time there's a backup in credit spreads, you buy it if there's no recession.

All right, you're CIO and head of Global Fixed Income, Currency and Commodities Group, to t ask you about commodities, gold hiring.

What are we doing with gold here?

Why are we all not owning gold?

Well, actually, we think you should. We think of all the options for an alternate safe haven, a counterbalance to risk. Treasuries are out there, our high quality bonds are out there, Investors are adding those. Gold is another one of those generally accepted vehicles we expect to see more buying.

I mean, it's just amazing. What's going on? Is that just Chinese banks and Chinese consumers buying it? Is there something else going on with gold?

No, it's developed market. Central banks have been adding to their gold reserves, Its wealth management platforms have been talking to clients about holding some gold. It's not only a safe haven, it's also a reasonably good hedge against inflation. And just in case we get into next year and suddenly all the liquidity in the system gets ignited and inflation rears it's ugly head again and stays, then gold will be a pretty good hedge.

Bob, I'm doing it. I mean, this is the way we roll with the Michael and JP marketing. Good morning in your commute across the nation. Good morning ninety two nine FM in Boston.

We did a lot of.

Linear regression of the Bloomberg Corporate Total Return Index get a little more yield, and I went back thirty years and it's stunning, the recovery off the gloom of a couple of years ago in price. It's appening. You guys, Neil, do you envision in your head that with price and you know, making the coupon, we will get back on trend of a wonderful linear trend from about two thousand and three straight up. That will get price up, back on trend that we knew before the tobacco.

It feels like it. It feels like we're first of all, in an interest rate environment that will have yield to it. We're not going back to zero percent interest rates. I don't know if the Fed brings rates down to three percent, maybe three and a half, but somewhere in the threes puts treasur right close to four and puts credit close to five percent, which is kind of where we are. That's a pretty good level to be a holder of high quality corporate.

There's job in Manhattan internship with bout Michael and JP work.

It's like, you know you're working six days a week. Doesn't you just throw a fobosi at him? Because none of these kids remember like a normal yield market.

So we now call them analysts. We don't call them interns. Their summer analysts and prove that. And then they come. They come prepared far more than I ever remember. They they come with a level of knowledge of markets and how the financial system works that probably took me five years to get there.

The great L Hunt used to lecture at your Pennsylvania and Al told me once, he said, Tom, you're in the classroom in every single person there, it's smarter.

Than all was thirty or thirty five.

Yeah, and you know what, there's a lot of truth to that. They know it.

Exactly. Not in terns. They're called analysts now here, summer analysts. Noted.

Thanks, Okay, what is our fetter reserve thinking these days?

Bob?

I mean they could probably just give themselves a nice pat on the back and say we've engineered a nice soft landing. We've weathered some of the uncertainty from tariff's. Inflation seems okay, the economy okay, it's slowing, but it's still there. They do anything.

They're thinking, how fast can I get out of here and go to the beach? I'll I promise I'll come back after Labor Day. That gives me a couple of weeks to look at the data, see how the US economy survived.

This summer.

We'll have more clarity on the one big beautiful bill, We'll have clarity on tariffs. Hopefully we'll start to gauge the impact to the labor market and two prices. Then we can make a decision whether we can and should bring rates down in September or whether we stay in track for December.

Let's go back to your outlook. What is the anside?

I think of Jamie's great annual letter, which I really advocate folks as a long read, and there's four or five sixteens.

What's a theme secondary within your mid year outlook? It deserves note well.

I think within that is a view that we're heading into an environment that's more normal that existed pre great financial crisis when there is a demand for capital because there's a productive use for capital, and there will be a cost for that capital and it won't be zero. Does that mean the FED funds rate belongs about where that first dot was that the FED put out in twenty twelve, four and a quarter percent Maybe could be

Do we ever have to worry about deficits and national debt? I'm looking at the negotiations going on down to Washington right now. We're all seeing, you know, talking about two three four trillion dollars of depthitts coming out of this budget plan. We ver have to worry about that? I mean, you're the front lines of the fixed andcome markets. Set, how do you think about that?

We should?

And I think we all have a sense of righteous indignation because every month we go home and rebalance our checkbook and pay bills, and it seems like our government doesn't have to. But the reality is we're watching deficits go up globally. We're now seeing Europe starting to borrow and spend and it seems to be the generally accepted principle that government should be allowed to borrow and spend, and you appoint central bankers which will help underwrite that. Bob Minake is spending.

Generous time with you. Thank you so much. Mister Michael is with JP Morgan. Get their outlook from the analyst at JP Morgan.