Bloomberg Audio Studios, podcasts, radio news. I'm thrilled to say we have tourists and Slock, he is Apollo's chief economist, joining us on set.
It's great to see you, Torson. Thanks for having me.
So let's talk about your own pal, because he's made very clear that he would like to cut rates. The data so far hasn't been quite cooperating with that impulse, but maybe a little bit of weakness in the last couple prints. Where do you think he stands right now?
What I think for him today it is that we still have three inflation prints before the eighteenth of September FMC meeting, so that means that he doesn't need to come out with a strong.
View in either direction.
It's pretty clear that they will not cut in July, and it is quite fascinating how the market always is, Oh, it's not this meeting, but the next meeting is when they cut will come.
So I still think we have some time here for at.
Least two or three more inflation prints before we find out if the FED has enough confidence in inflation actually moving down towards two percent.
Why do you think no cut in July?
Peter Cheer of Academy Securities was on earlier and he said he thinks it'll be a July.
It's the last day of July, right.
Because the Fed doesn't want to cut too close to the election.
Well, I think there's a number of challenges with that.
You name it.
First of all, if you look at the weekly writbook, retail sales data is still very strong. If you look at auto sales, monthly data also very strong.
If you look at some of the.
Numbers that have been coming in across the board on KPEC spending, on AI, spending on AI earnings. When it comes to the value of starts going up, the tailwind to the economy from easy financial conditions is also very strong.
So I take that.
For the Fed, the issue is they need to get inflation to come down towards two percent, and we'll see on Thursday what we get on CPI. But the question is whether they will have that confidence at the end of July.
And I still think this questionable.
If this is the case, they definitely need to change their communication sooner rather than later.
If I type ECSU on the Bloomberg terminal, I see economic surprises and they're all to the downside, and I read your notes every day. You've mentioned commercial real estate recently and the fact that they can see rates continue to remain high. I was talking about this with Lori Calvacina, and there's a maturity wall coming to you know. Isn't the FED worried about tripping us into a recession?
I think they are, But from their chairs, they will probably say, well, we need to race interest rates to make it more difficult to get financing for consumers and for firms and in commercial really state, And if you look at the progress of this process of the FIT having race rates in March of twenty twenty two, we're
just still not quite there yet. If you look at the employment report last Friday, for the last three months, employment growth has been two hundred thousand, for the last six months, two hundred thousand, for the last.
Twelve months, two hundred thousand.
Yes, the unemployment rate is going up, but a very important reason why the unemployer rate is going up.
It's not because people are getting fired.
It's because more people are showing up at the labor force, most likely immigrants and others that are basically saying, well, we would like to have a job. That's a good sign of the economy actually doing recently well. So I still think that overall, yes, that process of destroying demand as a result of rates going up is playing out
in certain parts of the economy, including commercial estate. But when you look at the aggregate impact, with two hundred and six thousand jobs created in the month of June, that's still an economy that's doing quite well.
Torson.
Even though you have a FED chair who will meet Congress who maybe wants rate cuts sooner rather than later, you still have a situation where the monetary seems to be fighting the fiscal How much concern is there that if they were to cut rates and the government keeps spending as it is, then the problem compounds into twenty twenty five.
Well, when interest rates go up, of course, interest expenses for the government will go up. It will take a little bit of time, but it will eventually happen. But when insust rates go up, you also have that people who live on fixed income and people who own fixed income, including people who own public credit private credit, will get cash flows that are higher than they basically have been
in decades. Combining that with the stock market going up every day, with home prices going up, the wealth of a significant part of consumers.
The wealth effect is just really still quite strong.
So yes, interest rates going up is biting certainly harder on highly leveled companies, on highly leveled consumers, and also on some parts of commerciary state to Matt's point, but I still think that the net effect still tells you
that job growth is still strong. And yes, again the unemplying rate is going up, but the rise in jobless claims has also been more seasonal, so we don't see this as any sign that the economy really is slowing down to the same degree that the narrative at the moment is in markets.
I'd really be curious about your view on the demand for tea bills, as issuance has been really flooding the market. When does demand evaporate and why?
Yeah, this is really important because there has been a very deliberate decision, of course to issue more T pills over the last several quarters, and ultimately dead levels are growing so significantly that we will need to see more
issuance of coupons, being bonds and notes. So the more issuance of rises, of course, it begins to create the question who is going to buy all these tipiles that are coming to the market, and that begins to raise some issues and fears about what happened in September twenty nineteen where funding markets started to be impacted because there was a significant amount of supply coming to the market at the time.
There was also a lot of issues well with supply was.
So big that that created in particular in the front of the.
Curve issues with supply being high.
So yes, the change in the structure of that outstanding is a very important topic in rates markets at the moment.
Well, when it comes to T bills and T bills demand. You've made the case in your notes that once the FED starts cutting rates, that some of that demand is going to dry up. And I would just want to meditate a little bit longer on why, because you take a look at money market funds right now, over six trillion dollars in there is a twenty five basis point cut and then maybe another really going to really meaningfully shrink demand there.
That's a good point, and I think fair enough, it's probably not going to shrink demand dramatically. But given the FED is so keen on continuously telling us that the next.
Move in rates is lower.
That means that there's a lot of people that are then thinking about, Okay, maybe I should be buying some duration, but what about the front end. If the next move is lower and we'll get a number of more cuts, then that could begin to have some duplications for what will happen to the amount of money in money market funds.
And the other thing in that discussion is remo. Also, what really is intriguing at the moment is that the amount of money in money market funds is going up, and at the same time.
The stock market is going up.
So we have a very bullish environment where all assets both the safest asset they need T pills and also the stock market is going up simply because there's still a lot of money slushing around buying investments, both in risky assets and in safe assets.
I have a viewer writing into the question I happen to know that he's a bond trader.
He's asking when does the.
Market price out euphoria over a cut for the realization that cuts always signify something breaking in the market.
Well, a very important part of that discussion is, of course, what we've seen in the last few weeks is that with the election coming up, there's a lot of debate about what would implications be for tariffs, what would implications be for restrictions on immigration, what would the implications be for the amount of TE pills, And what might even be the restrictions.
Be on in terms of I'm going to get a.
Bigger fiscal deficit or smaller physcal deficit. So when it comes to the outlook for rates, it is partly the cyclical discussion, meaning inflation, on employment, jobless claims.
But there's also this whole.
New theme emerging of does the fiscal position matter, Does it matter that we have more T pills outstanding? And what are then the implications for the shape of the curve? And the most likely scenario to that question is that we'll probably have a steeper curve at the end of the day if the fifth does eventually start to cut and we still have some fiscal challenges that are very difficult to deal with no matter who wins in November.
All right, Torson, really appreciate you dropping by for our inaugural week.
Torson slock there of Apollo