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Instant Reaction: Jay Powell on the Fed Decision · Bloomberg Intelligence

0:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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Speaker 2: Chairman pell fascinating news conference, the most interesting news conference
0:16
Speaker 2: we've seen with a FED share in quite a while.
0:18
Speaker 2: Let's start with the price action, a big portion of
0:21
Speaker 2: uncertainty with a sprinkle of transit tree equity markets rocketing.
0:26
Speaker 2: We're up by one point five percent on the S
0:27
Speaker 2: and P five hundred on the NASDAG, up by one
0:30
Speaker 2: point nine on a Russell, up by close to two
0:32
Speaker 2: in the bond market, two year, ten year, thirty year
0:35
Speaker 2: yields down and down hard at the front end of
0:37
Speaker 2: the curve by five basis points to three ninety eight.
0:40
Speaker 2: Check out the commodity market, gold all time highs intra
0:44
Speaker 2: day up by about a third of one percent.
0:46
Speaker 3: There's a couple of interpretations here. Here's one.
0:48
Speaker 2: It's the bad news, so they've downgraded the outlook for
0:51
Speaker 2: growth but haven't responded by projecting additional cuts. Here's the
0:54
Speaker 2: good news, and this is what the market seems to
0:56
Speaker 2: be leaning on just a little bit more, and a
0:58
Speaker 2: FED chair spoke to it. Based on the forecast, the
1:01
Speaker 2: FED believes that any upward revision to inflation in twenty
1:05
Speaker 2: twenty five won't last beyond twenty twenty five into twenty
1:09
Speaker 2: six into twenty seven. On that and more, take a
1:12
Speaker 2: listen to what the FED share had to say.
1:15
Speaker 4: It can be the case that it's appropriate sometimes to
1:17
Speaker 4: look through inflation if it's going to go away quickly
1:20
Speaker 4: without action by us, if it's transitory, And that can
1:24
Speaker 4: be the case in the case of tariff inflation. I
1:28
Speaker 4: think that would depend on the tariff inflation moving through
1:33
Speaker 4: fairly quickly, and would depend critically as well on inflation
1:36
Speaker 4: expectations being well anchored longer term inflation expectations being well anchored.
1:41
Speaker 2: A willingness to look through this perhaps reinforced by this
1:44
Speaker 2: take on you, Mitch Michigan. Inflation expectations reading is an outlier.
1:49
Speaker 1: Okay, going back, there's a lot to unpack here. We
1:52
Speaker 1: can talk about you Michigan and how much that actually
1:54
Speaker 1: did or did not inform the back of twenty twenty two,
1:57
Speaker 1: and why it's less relevant now. The point of transitory
2:01
Speaker 1: is a key one. This market is looking through the
2:04
Speaker 1: downward revision to growth, the stagflationary like circumstances that frankly
2:07
Speaker 1: defy logic for why that should be good for risk
2:10
Speaker 1: assets and points squarely to this belief that the Fed
2:13
Speaker 1: has resurrected transitory it is going to cut rates in
2:17
Speaker 1: the face of weakness.
2:18
Speaker 5: What I find fascinating is John, you mentioned it correctly.
2:21
Speaker 5: Does see gold go out to a record high two
2:22
Speaker 5: thirds of the ways of the press conference, Folks, I've
2:26
Speaker 5: never said that in the technical destruction of the equity markets,
2:30
Speaker 5: to see the Dow and the S and P popped
2:32
Speaker 5: the way they are, by no means do they have
2:35
Speaker 5: some buoyancy of a bicygnal. I mean there's some damage
2:38
Speaker 5: out there from the politics folding into what he has
2:41
Speaker 5: to deal with.
2:42
Speaker 2: The market reaction carries a lot of way, and right now,
2:44
Speaker 2: this equity market, it's rallying, going into the closing ball
2:46
Speaker 2: about forty minutes from now. Joining us on the program
2:49
Speaker 2: to react, the former New York Fed President Bill Duntley
2:52
Speaker 2: Bell three poun acts. We've wrapped it up, We've had
2:54
Speaker 2: the full cost that decision, and now the news conference.
2:56
Speaker 2: What's your reaction to all of the above.
3:00
Speaker 6: The summary of economic projections is actually a bit hawkish
3:03
Speaker 6: in the sense that they that keep down graded growth
3:05
Speaker 6: and pushed up inflation, and the dot plots, you know
3:08
Speaker 6: that plot did shift up. They didn't shift up enough
3:12
Speaker 6: to change it from two to one rate cut this year,
3:15
Speaker 6: but they did did shift up.
3:16
Speaker 7: Powell then came in, and I think he gave.
3:18
Speaker 6: A pretty dubbish performance in the sense that you know,
3:21
Speaker 6: we got this, We're in a good place, we can
3:23
Speaker 6: afford to wait, we'll see how it goes, We're going
3:26
Speaker 6: to get the job done. So he I think was
3:29
Speaker 6: pretty reassuring to people that this was all, you know,
3:33
Speaker 6: quite manageable. I think the reality is, I mean, growth
3:36
Speaker 6: outlook is worse, the inflation outlook is worse, and certainty
3:39
Speaker 6: is a lot higher.
3:40
Speaker 7: I'm not really sure how you parse that out as positive.
3:44
Speaker 7: But Paul put a pretty dubbish spin on it.
3:46
Speaker 1: Bill that's where transitory comes in. It was resurrected, the
3:49
Speaker 1: word that was once left for dead. Thought to look
3:52
Speaker 1: through some of the tariff induced inflation, saying it probably
3:56
Speaker 1: would subside. What do you make of that, because it's
3:59
Speaker 1: giving a lot of confident to this market.
4:02
Speaker 6: Well, one thing that he did talk about was inflation expectations,
4:04
Speaker 6: and he basically said, look, there's only one indicator that's
4:07
Speaker 6: really shown a significant increase in long term inflation expectations.
4:11
Speaker 7: Everything else looks fine.
4:12
Speaker 6: So he's basically telling people if you can ignore the
4:14
Speaker 6: University of Michigan long Term inflation Expectations measure, which has
4:18
Speaker 6: shot up very sharply the last month or so.
4:21
Speaker 7: So that's reassuring.
4:22
Speaker 6: So I think people think that's got this, you know,
4:25
Speaker 6: I think the reality is they're flying blind. They don't
4:28
Speaker 6: really know what's going to happen to growth, they don't
4:30
Speaker 6: know what it's going to happen to inflation, and you know,
4:34
Speaker 6: that increases the risk of making a policy mistake or
4:37
Speaker 6: just being late.
4:38
Speaker 5: There's a book years ago, Bill Dudley, with a chapter
4:41
Speaker 5: by Bill Dudley and Ed McKelvey, and you set off
4:44
Speaker 5: of Patrick O'Brien. There's not a moment to lose, how
4:49
Speaker 5: x post is this fed? They're to me not, It
4:52
Speaker 5: is not a moment to lose.
4:54
Speaker 7: They are weight.
4:55
Speaker 5: Wait, wait, isn't their their best outcome?
4:59
Speaker 7: Well, I don't fault them for waiting.
5:01
Speaker 6: I mean, I think when uncertainty's really high and you're
5:04
Speaker 6: in the economy is in a pretty good place. I mean,
5:06
Speaker 6: on inflation's rates running two and a half three percent,
5:08
Speaker 6: the unemploying rates around four percent, you know, staying here,
5:11
Speaker 6: you know, and definitely would not be a really bad outcome.
5:14
Speaker 6: So I think that's what gives them the ability to wait,
5:16
Speaker 6: because you're the starting point is actually pretty good. Another
5:19
Speaker 6: thing I thought it was interesting about Pauwell's remarks is
5:21
Speaker 6: he started to minimize the soft data that's showing a
5:25
Speaker 6: lot of weakness and said, we're really sort of focusing
5:28
Speaker 6: on the hard data. We haven't seen weakness in the
5:30
Speaker 6: hard data yet, So that was also reassuring.
5:32
Speaker 2: This is what Marko Khlanovic formally, if JP Morgan has
5:35
Speaker 2: to say out on excess afternoon, not in a hurry
5:39
Speaker 2: means we will drag our feet when things get worse
5:41
Speaker 2: like in the fall of twenty eighteen. This is not
5:43
Speaker 2: bullish at all, but you've lived a lot of this
5:47
Speaker 2: in the past. Is there a risk of a repeat
5:49
Speaker 2: of twenty eighteen here?
5:51
Speaker 6: Well, I just think there's a risk that the FED
5:53
Speaker 6: will be late, because if you have to have the
5:55
Speaker 6: information in hand before you act, and they're long and
5:58
Speaker 6: vera lags of monetary policy, you're not gonna uh to
6:02
Speaker 6: the necessary action in a timely way. I think that
6:05
Speaker 6: the same. But at the same time, I mean, which
6:07
Speaker 6: way does the FED lean? Do they willing against the
6:08
Speaker 6: inflation or do you lean against the growth side. That
6:11
Speaker 6: was interesting in the summary of the economic projections also
6:13
Speaker 6: didn't get a lot of attention, but people's assessment of
6:16
Speaker 6: uncertainty about inflation and employment both went up. Their assessment
6:21
Speaker 6: of risk to inflation and employment both went up. But
6:23
Speaker 6: I think that's really what tells you what's what's bad
6:26
Speaker 6: about the economic outlook now is that this dispersion of
6:30
Speaker 6: possible outcomes is pretty wide, and we just don't know
6:33
Speaker 6: which which way we're heading.
6:35
Speaker 1: Bill, you said that this is a FED that's flying
6:37
Speaker 1: blind and essentially fed.
6:38
Speaker 5: Char J.
6:38
Speaker 1: Powell said it as much when he was asked why
6:41
Speaker 1: there was this ongoing to rate cuts priced into a
6:45
Speaker 1: market where you'd had some pretty sizable changes to growth
6:49
Speaker 1: and inflation, and he said, what would you write down?
6:52
Speaker 1: It's really hard to know how this is going to
6:54
Speaker 1: work out. Is there any time in history, Bill that
6:57
Speaker 1: you can think of where the FED was as flying
6:59
Speaker 1: blind as they are right now?
7:02
Speaker 7: Well, I'm sure there's been other times.
7:04
Speaker 6: For example, you know, when you had the two oil
7:06
Speaker 6: price shocks in the nineteen seventies, that wasn't very good.
7:09
Speaker 6: They had a great financial crisis in two thousand and seven,
7:11
Speaker 6: two thousand and eight, you know, the week Lennon Brothers
7:14
Speaker 6: failed over the weekend, and then the FED was meeting
7:17
Speaker 6: the next Tuesday and Wednesday. So that was probably a
7:19
Speaker 6: pretty flying blind moment. So I think there's been other
7:21
Speaker 6: times like this. The good news is that you're economy,
7:24
Speaker 6: as Chair Paul made it clear, is starting from a
7:26
Speaker 6: pretty good police That's the important part.
7:29
Speaker 5: John Pharaoh, David Rosenberg just out on Twitter right now. Really,
7:33
Speaker 5: this is the insight that I had with Boby Michael before.
7:37
Speaker 5: A four point four percent unemployment is a single stick
7:41
Speaker 5: one hundred basis points above the three point four percent low.
7:44
Speaker 5: You got to go back to nineteen forty eight to
7:48
Speaker 5: see that abruptness without a recession.
7:51
Speaker 2: So we had some deterioration last Summer's Home. I'm with you,
7:54
Speaker 2: but it turned out to be a head fake, and
7:56
Speaker 2: the Federal Reserve was somewhat unerved by going into Jackson
7:58
Speaker 2: Hull and Sick noted some reaction to it, Lisa, and
8:01
Speaker 2: they followed up with a hundred basis points of interest
8:03
Speaker 2: rate reductions. And here we are again, and we're trying
8:05
Speaker 2: to figure out if the soft data and the deterioration
8:08
Speaker 2: we've seen in the survey data is a head fake
8:11
Speaker 2: or not on whether it will translate into softer heart
8:13
Speaker 2: data down the road.
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Speaker 1: And it seemed like this was a FED more willing
8:17
Speaker 1: to say maybe it is a headfake with respect to
8:20
Speaker 1: soft data, and not necessarily emphasizing it as much as say,
8:24
Speaker 1: the hard data at the same time reducing their forecast.
8:26
Speaker 1: I wonder if we're making too much of the dots.
8:28
Speaker 1: I wonder if we're making too much of all of
8:30
Speaker 1: these utterances when essentially you have a FED chair himself
8:33
Speaker 1: saying we have no clue, we don't know, we don't
8:36
Speaker 1: know inertia, we kept it the same because what are
8:38
Speaker 1: we supposed to do? And so there is this element
8:41
Speaker 1: where you have to look at this and say, on
8:42
Speaker 1: a fundamental level, is monetary policy still in the driver's
8:46
Speaker 1: seat at this point or is this a fiscally fiscal
8:48
Speaker 1: policy driven market and frankly an economically driven market that
8:52
Speaker 1: the FED cannot really engage with in a constructive way.
8:55
Speaker 2: So, Lisa, for moments like this, I wouldn't put too
8:57
Speaker 2: much weight on the forecast because the chairman is telling you,
8:59
Speaker 2: we don't know. I'd put a lot of weight on
9:01
Speaker 2: the communicated reaction function, how they're communicating, how we'd respond
9:06
Speaker 2: to certain information points. And Bill, I wonder what we've
9:08
Speaker 2: learned today If we did get a deterioration in the
9:10
Speaker 2: economic data over the next several months in the hard data,
9:14
Speaker 2: have we learned that this FED would respond to that,
9:16
Speaker 2: or would this FED weight because I think that's critical
9:19
Speaker 2: for a lot of investors. Are they constrained it's the
9:22
Speaker 2: easy bus now constrained by the inflation uncertainty of the
9:26
Speaker 2: next twelve months.
9:28
Speaker 6: It's definitely constrained to a degree. I think the thing
9:30
Speaker 6: to focus on is the unemployment rate. If the unemployer
9:32
Speaker 6: rate stays where it is, then the fact can wait.
9:34
Speaker 6: The underplanner rate goes up to say four and a
9:36
Speaker 6: half percent, then the FED has to worry about the
9:39
Speaker 6: whole thing giving way. So I think the the tightness
9:42
Speaker 6: of the layer market, how the layer market's performing, is
9:43
Speaker 6: really important. That itself has a lot of uncertainty because remember,
9:47
Speaker 6: the growth rate of the labor force this year is
9:49
Speaker 6: to be much much slower.
9:50
Speaker 7: Than it was in twenty twenty three or twenty.
9:52
Speaker 6: Twenty four because very little in migration keyportations so speak,
9:57
Speaker 6: slow down in the layer force growth.
9:58
Speaker 7: So what that means is you can have growth and
10:01
Speaker 7: not have much change in the unemployer rate.
10:03
Speaker 6: So I think the unemploy rate is the summary statistic
10:06
Speaker 6: that I'd be focusing on.
10:07
Speaker 5: I agree with that, doctor Dudley. And my question is,
10:10
Speaker 5: is a four point four to four point five percent
10:13
Speaker 5: YOU three unemployment rate? Is that the same as a
10:16
Speaker 5: YOU three unemployment rate of ten or twenty or thirty
10:20
Speaker 5: years ago.
10:22
Speaker 6: Oh, I mean, I think the unemployed rate consistent with
10:25
Speaker 6: full employment has come down over time.
10:28
Speaker 7: Part of that's due to the aging of the population.
10:31
Speaker 6: You know, older workers are employed at a higher percentage
10:35
Speaker 6: of the time.
10:36
Speaker 7: So I think, you.
10:36
Speaker 6: Know, the fed's view is that we're basically at full
10:39
Speaker 6: employment right now four percent or so. But if we
10:42
Speaker 6: go it to four and a half, the Fed's going
10:44
Speaker 6: to be starting to worry that this whole thing is
10:46
Speaker 6: unwinding in a bad way, and then they'll be really
10:49
Speaker 6: assessing is if inflation bad news bad news transitory or
10:53
Speaker 6: is it getting into into into inflation expectations.
10:57
Speaker 2: It's difficult to say. With that, you might build that
10:59
Speaker 2: this FED is a is in a good place. Do
11:01
Speaker 2: you think it's in a good place.
11:03
Speaker 6: Well, they're in a good place in the sense that
11:05
Speaker 6: the the starting point for the commie is in a
11:07
Speaker 6: good place. They're not in a good place in the
11:09
Speaker 6: sense that they're being hit with shocks that are bad
11:12
Speaker 6: for growth and bad for inflation, and they don't really
11:15
Speaker 6: know what the policy is going to be yet.
11:16
Speaker 7: So I think they're not in.
11:17
Speaker 6: Good shape in the sense that, let's put it this way,
11:20
Speaker 6: they like where their car is sitting today, but they
11:22
Speaker 6: now have to drive down the road a very big
11:26
Speaker 6: foggy environment.
11:27
Speaker 7: Hi.
11:27
Speaker 2: Bill, thanks for having to make sense of it. Appreciate it.
11:29
Speaker 2: Built down be that the former New York FED president lates,
11:32
Speaker 2: after a conversation like that, you wouldn't have guessed the
11:34
Speaker 2: equity market is up by one point percent.
11:37
Speaker 3: On a SMP.
11:38
Speaker 1: I don't go understand in any way why a stagflationary
11:41
Speaker 1: environment would be positive for risk assets. I think that
11:44
Speaker 1: that was sort of what Bill Dudley had to say
11:46
Speaker 1: as well.
11:47
Speaker 8: You raised a point though, if this is a FED that.
11:49
Speaker 1: Still is going back to the transitory idea and believes
11:52
Speaker 1: as their base case that these tariffs are going to
11:56
Speaker 1: have a one time inflation ramification, but that will die down,
11:59
Speaker 1: then why wouldn't they be more inclined to cut rates
12:02
Speaker 1: in the face of weakness, And that goes to this
12:05
Speaker 1: dubvish aspect that's being reflected in markets.
12:08
Speaker 2: Mi McKay joins us. Now he's run out of the
12:10
Speaker 2: news conference to catch out with us. Michael McKay, the
12:12
Speaker 2: T word makes a comeback in the news conference.
12:15
Speaker 9: What was your reaction, Well, it did cause my eyebrows
12:19
Speaker 9: to go up a little bit, and I wondered if
12:21
Speaker 9: he had been warned against that. But seriously, you guys
12:25
Speaker 9: had the smart people out ahead of me, Bill Sadley
12:27
Speaker 9: and Lisa brahm Witz. I agree with both of the
12:29
Speaker 9: things that they said. That Bill Dudley said, this FED
12:33
Speaker 9: is lost, and I think that is the case. They
12:35
Speaker 9: don't have any idea what's going on in the economy.
12:39
Speaker 9: And as Lisa said, you really can't believe or take
12:42
Speaker 9: seriously anything that they projected today because they don't know.
12:47
Speaker 9: This stuff has a half life of the next tweet.
12:50
Speaker 9: So at this point, the FED is just trying to
12:53
Speaker 9: reassure the country, which probably explains what we're seeing in
12:57
Speaker 9: the markets today. Is that J. Powell sounded like he
13:01
Speaker 9: was reassuring, But I wouldn't take any message out of this.
13:05
Speaker 9: Everything after that, he said, after good afternoon, I would
13:08
Speaker 9: sort of put to the side.
13:10
Speaker 1: What did you make, Mike of his complete dismissal at
13:13
Speaker 1: the University of Michigan sentiment survey.
13:17
Speaker 9: Well, that's this kind of standard thing for Fed officials,
13:20
Speaker 9: the old uh. We watch what they do, not what
13:23
Speaker 9: they say, and people have The inflation numbers in these
13:27
Speaker 9: surveys have been distorted a lot in the past because
13:30
Speaker 9: people don't really have a good handle on what the
13:32
Speaker 9: inflation rate is. They just know their grocery prices are
13:35
Speaker 9: going up. So I can understand why he said that,
13:37
Speaker 9: And it was just a one month move in the
13:39
Speaker 9: longer run. The shorter run has moved up for a
13:42
Speaker 9: couple of months, So I think this is maybe a
13:44
Speaker 9: little whistling past the graveyard in terms of not trying
13:49
Speaker 9: to give the impression that the Fed is worried and
13:51
Speaker 9: going to have to take some action.
13:53
Speaker 2: Mat McKay appreciated the updates, looking forward to your conference
13:56
Speaker 2: frant today and into the weekend as well. Lost the
13:58
Speaker 2: process here, equity is up nice by one point two
14:01
Speaker 2: percent on the S and P five hundred. That bounce
14:03
Speaker 2: continues with us around the table to close things out.
14:05
Speaker 2: Amandalina of black croc Amanda.
14:07
Speaker 3: Where to begin? So lots of process here.
14:09
Speaker 2: One thing we haven't talked about enough, and Lisa mentioned
14:11
Speaker 2: it coming into the decision, a reduction in QT.
14:14
Speaker 3: How important is that to this market?
14:16
Speaker 10: Well, good afternoon, thank you for having me. Two things
14:19
Speaker 10: jump out to me. One is going back to the
14:21
Speaker 10: growth inflation mix being more challenging. A lot of this
14:24
Speaker 10: was baked in heading into this expectation, and so I
14:26
Speaker 10: think that's part of why we're seeing the market reaction.
14:28
Speaker 10: We've had just such a bruising few weeks in the
14:30
Speaker 10: equity market. Most forecasters have reflected a lower growth and
14:34
Speaker 10: higher inflation, and I think that's part of what's driving
14:37
Speaker 10: this here. And I would just underscore something that Bill
14:39
Speaker 10: Dudley said, which is I think this just makes the
14:42
Speaker 10: growth backdrop all the more critical because the FED is
14:45
Speaker 10: telling you that inflation will not allow them to be responsive.
14:48
Speaker 10: And so really that one point seven percent growth in
14:51
Speaker 10: the s SEP slightly below trend that really has to
14:55
Speaker 10: hold up for risk assets to validate this move, because
14:57
Speaker 10: the Fed's telling you that they can't respond as it
14:59
Speaker 10: really to QT. I think maybe that's why you're seeing
15:02
Speaker 10: some modest relief in longer and yields and in the
15:04
Speaker 10: bond market. I think on the margin that could be
15:06
Speaker 10: somewhat helpful versus the counterfactual, but I don't think it's
15:09
Speaker 10: the main driver.
15:10
Speaker 8: I think the main driver here is that.
15:12
Speaker 10: A lot of this bad news was baked in heading
15:14
Speaker 10: into this expectation. A more challenging growth inflation mix is
15:17
Speaker 10: the base case, and I think it warrants some widening
15:20
Speaker 10: in credit spreads.
15:20
Speaker 1: Do you think it's positive that he resurrected the transitory word.
15:24
Speaker 10: I mean, I think it was accompanied with a healthy
15:26
Speaker 10: dose of we're not quite sure what's going on, I
15:31
Speaker 10: think so, I don't. I think the market is kind
15:33
Speaker 10: of looking through that. But from my perspective, his kind
15:37
Speaker 10: of reinforcing that the labor market is still in a
15:39
Speaker 10: solid place is to me the key thing, because if
15:42
Speaker 10: you think what's driving the resilient growth that we've seen
15:45
Speaker 10: over the past few quarters in the US, it's the
15:47
Speaker 10: consumer in aggregate, if we have a higher layoff rate,
15:50
Speaker 10: so if corporates start to be concerned about margins, they
15:53
Speaker 10: flex that layoff tool more aggressively, which is still quite
15:56
Speaker 10: low that's a situation where that weakness that's so far
15:59
Speaker 10: confined to the low end consumer could extend more broadly.
16:02
Speaker 10: So what to watch micro level commentary, high frequency data
16:05
Speaker 10: on a labor market, capital markets functioning right, like the
16:09
Speaker 10: idea that corporates can issue just at a higher cost.
16:12
Speaker 10: That's fine for market functioning. I think where the FED
16:14
Speaker 10: starts to get concerned as if the markets are frozen.
16:17
Speaker 1: There's also this question of the long end of the
16:19
Speaker 1: yield curve and why it should go down. If this
16:22
Speaker 1: FED is biased to looking through any inflationary shock as
16:26
Speaker 1: simply near term, if that is their base case and
16:29
Speaker 1: we will not know for a longer period of time,
16:32
Speaker 1: does that raise concerns about longer term entrenched inflation, especially
16:36
Speaker 1: at a time of global fiscal releveraging.
16:38
Speaker 10: Absolutely, And I think our base case is that longer
16:41
Speaker 10: end yields are structurally higher.
16:42
Speaker 5: Right.
16:43
Speaker 10: So that's the view across a variety of platforms at
16:46
Speaker 10: black Rock, and I think right now what we're seeing
16:49
Speaker 10: is that treasuries are not a reliable hedge in risk
16:53
Speaker 10: asset underperformance. And so what you've seen, you've seen to
16:56
Speaker 10: a certain extent, treasuries can rally when there are growth
16:59
Speaker 10: can but it kind of peters out at a certain point.
17:02
Speaker 10: And really for rates to rally significantly, you actually need
17:05
Speaker 10: to have more valid recessionary like concerns.
17:07
Speaker 8: You can't just have a growth slow down. So what we're.
17:10
Speaker 10: Seeing is that it's almost like a quasi hedge, but
17:14
Speaker 10: it's not a firm hedge. As for the inflation expectations,
17:18
Speaker 10: I do think it is concerning that they're not expecting
17:20
Speaker 10: inflation to get back to target until twenty twenty seven.
17:23
Speaker 10: Similar message from the ECB Frankly, where President Leaguard said.
17:26
Speaker 8: It's going to be a further path.
17:27
Speaker 10: When you think about the spillovers of German fiscal spending right,
17:30
Speaker 10: higher bund yields. These markets don't operate in a vacuum, right,
17:34
Speaker 10: So equity is verse credit or you're versus us, and
17:37
Speaker 10: so I think we are bracing for structurally higher rates
17:40
Speaker 10: and structuring higher inflation.
17:41
Speaker 5: If we have one point seven percent, and if we
17:44
Speaker 5: get the X axis were on and it extends, that
17:47
Speaker 5: tells me Republicans get tossed out of Congress just as
17:50
Speaker 5: one talking point, and it'll be huge pressure. Does it
17:54
Speaker 5: just evolve down to price up, yield down? And we
17:57
Speaker 5: go through four percent. As Bob Michael told us the conference.
18:00
Speaker 10: I think, I mean, I think you asked earlier the
18:03
Speaker 10: unemployment rate that's really problematic for consumer credit. Five percent
18:07
Speaker 10: is the metric that we're hearing that things really become problematic.
18:11
Speaker 10: But I think on the way to that journey, so
18:13
Speaker 10: when you start to get to four and a half percent,
18:15
Speaker 10: I think you start to get concerning. It's the velocity
18:17
Speaker 10: of that move and then and often these are nonlinear, right,
18:20
Speaker 10: so the deteriation happens quickly, as we've seen in prior cycles.
18:22
Speaker 8: I think that is very concerning.
18:24
Speaker 10: But to me, it really just hinges on Sharpal mentioned
18:27
Speaker 10: a low hiring, low firing environment. If that firing picks up,
18:31
Speaker 10: that's really problematic.
18:32
Speaker 2: That's exactly where I wanted to go. Tomorrow morning, I
18:33
Speaker 2: got thirty Eastern time jobless claims drop. Help me understand
18:36
Speaker 2: the scenario. If we start to see some weakness that,
18:39
Speaker 2: how will markets respond to that? How will we think
18:41
Speaker 2: about the federal reserves response to it?
18:43
Speaker 10: I think markets have front loaded it a bit. You've
18:45
Speaker 10: seen some widening in credit spreads. European credit is still
18:48
Speaker 10: holding in well, So I think that points to the
18:50
Speaker 10: US concern. From my perspective, the FED, though, is somewhat
18:55
Speaker 10: constrained in how they can respond to.
18:56
Speaker 8: That given the inflation backdrop.
18:57
Speaker 10: So I think that's why the deterioration in the growth
19:00
Speaker 10: backdrop is so important to monitor. And it's also probably
19:03
Speaker 10: more critical than it was even a few months ago,
19:05
Speaker 10: because a few months ago the expectation was inflation will
19:08
Speaker 10: continue to cooperate. If further progress on inflation is delayed,
19:12
Speaker 10: then you somewhat have one hand tied behind your back
19:15
Speaker 10: in terms of what you how I guess the question
19:17
Speaker 10: is how much of a growth deterioration needs to occur
19:20
Speaker 10: before the FED can react, and it seems to be
19:22
Speaker 10: that the bar is pretty high for that.
19:23
Speaker 2: That's another way saying bad news is bad news if
19:25
Speaker 2: it is bad news over the next few weeks.
19:27
Speaker 1: Especially when accompanied with even your term inflation. I'm just
19:31
Speaker 1: struggling to understand what kind of offset they can provide
19:34
Speaker 1: by cutting rates at a time or inflation is a
19:36
Speaker 1: concerned I just keep going back to that and this
19:39
Speaker 1: question about how supportive that will actually be. I guess
19:42
Speaker 1: that if the news is bad enough and they cut rates,
19:44
Speaker 1: it'll still be bad. But you also might get a
19:47
Speaker 1: little cheaper borrowing.
19:48
Speaker 2: Cause this goes to the wait and see. Confidence was
19:51
Speaker 2: a word that came up in that news conference. How
19:53
Speaker 2: long before you have any confidence. I'm not sure anyone
19:55
Speaker 2: can have any confidence right now. How long do they
19:57
Speaker 2: have to wait before they see?
19:59
Speaker 10: Well, that's that's what I think makes the high frequency
20:01
Speaker 10: data so valuable. And as we saw during the pandemic,
20:03
Speaker 10: it was the company commentary that actually shined the light
20:06
Speaker 10: on how pervasive the supply chain disruptions are.
20:08
Speaker 8: I think that's just.
20:09
Speaker 10: Underscores the point you have to be invested for a
20:11
Speaker 10: wide range of growth, inflation and policy outcomes. All right,
20:14
Speaker 10: So it's not even just the growth inflation mix, it's
20:16
Speaker 10: the policy mix. So incorporating floating rate exposures, real assets,
20:19
Speaker 10: inflation hedges, those are all things that are really valuable
20:22
Speaker 10: because I think there are just so many paths on
20:24
Speaker 10: this probability tree that we really have to position for
20:26
Speaker 10: all scenarios.
20:27
Speaker 1: When we were coming into twenty twenty five, there was
20:29
Speaker 1: this belief that we have on one hand a FED
20:31
Speaker 1: put and on the other hand a Trump put. Trump
20:33
Speaker 1: put still out there is sort of a question mark.
20:36
Speaker 1: The FED put people are saying, well, maybe they're going
20:38
Speaker 1: to be willing to step in. Can we really frame
20:41
Speaker 1: the issue in that kind of way? I guess that
20:43
Speaker 1: that's sort of the fundamental question of today, where the
20:46
Speaker 1: market's treating a duvish response from the FED as being
20:49
Speaker 1: positive for risk assets. Is that is that the new paradigm?
20:53
Speaker 3: Is it the old paradigm?
20:54
Speaker 10: The one thing that jumped out to me from chair
20:56
Speaker 10: Pouse comments. Previously he had talked about that they would
20:58
Speaker 10: respond to an unexpected weakening the labor market. If the
21:01
Speaker 10: now base case is four point four percent unemployment, then
21:05
Speaker 10: it seems to me like you'd actually have to have
21:06
Speaker 10: something beyond four point four percent unemployment to step in
21:10
Speaker 10: and respond to that. So I guess it's saying that
21:12
Speaker 10: the bar is actually high, because right now they're telling
21:15
Speaker 10: you that they're expecting some weakness in the labor market
21:17
Speaker 10: beyond that.
21:17
Speaker 5: Unlike the three of us you went to class on
21:20
Speaker 5: Friday at Villanova years ago. I mean remember this, well,
21:23
Speaker 5: when you study stagflation or hints of stagflation, there's a
21:28
Speaker 5: point where every central bank has to choose price change
21:31
Speaker 5: finance or jobs, jobs, jobs. I see no indication of anything,
21:36
Speaker 5: but they're going to capitulate to a higher unemployment rate
21:40
Speaker 5: down the road and ignore the rate markets. Is that
21:43
Speaker 5: the way you read it?
21:43
Speaker 10: I mean, I think that's what their forecasts are telling you,
21:46
Speaker 10: is that they're baking in some deterioration. And so what
21:49
Speaker 10: does that mean for risk assets? Stag A stagflationary environment
21:52
Speaker 10: is unquestionably negative for risk assets because in that scenario
21:55
Speaker 10: you have a bit of a double whammy of wider
21:57
Speaker 10: spreads and higher rates.
21:58
Speaker 5: We don't do logs as late we've all been since
22:00
Speaker 5: five am or four am, But the answer is as nonlinear,
22:03
Speaker 5: is it?
22:03
Speaker 3: That's really what that's right?
22:05
Speaker 10: And I think I think that's right, And I think
22:07
Speaker 10: when you take a step back, yes we've had some
22:09
Speaker 10: widening and credit spreads, but all things considered, we're still
22:11
Speaker 10: really tight, and so we're baking in an expectation for
22:14
Speaker 10: an ongoing rebuild of versus premius.
22:16
Speaker 8: So I think the market.
22:17
Speaker 10: Is rallying today because this was not as hawkish as
22:19
Speaker 10: it could have been. I think the risk coming into
22:21
Speaker 10: this was maybe we just saw one cut in twenty
22:23
Speaker 10: twenty five, we kept the two. But going forward, I
22:27
Speaker 10: think we should be baking in some widening in credit spreads,
22:29
Speaker 10: and we would do that as an opportunity. And I
22:31
Speaker 10: heard your conversation with Bob earlier. There is a lot
22:33
Speaker 10: of demand on the sideline, So I think being opportunistic
22:36
Speaker 10: is really the key to take it.
22:36
Speaker 3: You say the same thing, how much appeatize is that's a.
22:38
Speaker 10: Fix thing case we are And I think I would
22:41
Speaker 10: say save for the lowest quality pockets of the market
22:44
Speaker 10: where for example, triple C interest coverage is still below
22:46
Speaker 10: one times, and so that's a very tenuous place. But
22:49
Speaker 10: foreign demand, yield based demand, long duration spread product, high
22:53
Speaker 10: quality spread product. The US is the largest broadest market
22:55
Speaker 10: for that, and so there is a significant amount of demand.
22:58
Speaker 10: But but I do think there needs to be a
23:00
Speaker 10: rebuild of risk premium, given this is unquestionably a more
23:02
Speaker 10: challenging growth inflation mix.
23:04
Speaker 8: Where is that money coming from.
23:05
Speaker 1: Does it come at the expense of risk assets like stocks?
23:09
Speaker 1: And I speak at a time where Howard Marks of
23:10
Speaker 1: Oak Tree came out and said he prefers credit right
23:12
Speaker 1: now over at equity risk because you are getting income
23:16
Speaker 1: and you have a greater degree of certainty.
23:17
Speaker 8: And you're higher in the capital structure.
23:19
Speaker 10: And I think maybe one of the understated themes of
23:21
Speaker 10: the past few quarters or maybe past few years, is
23:24
Speaker 10: that corporate bonds, because of the higher interest rate, are
23:26
Speaker 10: throwing off more cash just on an ongoing basis, and
23:29
Speaker 10: so just reinvesting that cash is something that's important.
23:32
Speaker 8: Foreign demand has been a big talent. I will say, on.
23:34
Speaker 10: The margin, we are bracing for some of the foreign
23:36
Speaker 10: demand for US dollar credit to overtime perhaps be repatriated
23:40
Speaker 10: back to European markets now that European yields are quite attractive,
23:43
Speaker 10: and so on the margin, that's something to watch for.
23:47
Speaker 10: But again, these risk assets don't happen in a vacuum.
23:51
Speaker 10: But I do think there's a significant amount of demand,
23:53
Speaker 10: whether it's coming from equities, it's coming maybe from different
23:56
Speaker 10: parts of.
23:58
Speaker 8: Foreign markets.
24:00
Speaker 5: One thing we haven't talked about here. We got black
24:01
Speaker 5: rock on the desk here. I mean, John is just
24:03
Speaker 5: simple bit dog moonshot out to eighty five thousand. I mean,
24:07
Speaker 5: you know, these are the indicators, and technically it's not
24:10
Speaker 5: telling me anything, but I'm sorry, you're going seventy eight
24:12
Speaker 5: thousand to eighty five thousand.
24:14
Speaker 3: Galla six know something too?
24:16
Speaker 2: What are we seeing that from crypto from gout I
24:18
Speaker 2: think that's diversification.
24:19
Speaker 8: I think that's the market saying that p'erhapping, that's fear.
24:23
Speaker 8: I think that the gold.
24:24
Speaker 10: Is perhaps central bank buying, some other dynamics going on there.
24:28
Speaker 10: But I think a big part of it is portfolio diversification,
24:30
Speaker 10: real assets, inflation, hedges, uncorrelated exposures, real roads, the stagflationary
24:36
Speaker 10: backdrop that we suggested that the sixty forty portfolio wouldn't
24:40
Speaker 10: fare that well in that sort of passive.
24:42
Speaker 5: She's a machine, he's been false.
24:45
Speaker 3: Need to buy rucks.
24:47
Speaker 5: Look, I'm looking at this. I don't have any technical
24:49
Speaker 5: veracity on baitcoin that well.
24:52
Speaker 8: As I got pause.
24:52
Speaker 1: Is that your haven trade?
24:56
Speaker 5: My haven trade is tuition.
24:58
Speaker 2: Okay, find out what's happened with a triple leverage cash
25:03
Speaker 2: down to rugs.
25:04
Speaker 5: Oh my god, I just upset Blackrock. I was in syndication,
25:07
Speaker 5: but then they wouldn't go for triple everstoll cash.
25:09
Speaker 2: Amanda appreciate the time. Fantastic, What a moment, Amanda lanam
25:12
Speaker 2: there of black Rock. Perhaps we're being fast and loose
25:14
Speaker 2: with the s words stagflation. We're looking for growth close
25:17
Speaker 2: to two percent and inflation anywhere between two two and
25:20
Speaker 2: a half three percent. But it's the mix, and this
25:22
Speaker 2: is what Amanda was talking about. The mix here, This
25:25
Speaker 2: is the challenge the feder reserve is facing. It's the
25:27
Speaker 2: central banker's dilemma. Typically the tind of dilemma you see
25:31
Speaker 2: in emerging markets are not in developed markets. Downside risk
25:34
Speaker 2: to growth, upside risk to inflation, and a feeder reserve uncertain,
25:38
Speaker 2: low on confidence and not sure what to do.
25:40
Speaker 1: And that's the reason why gold is really telling us something,
25:43
Speaker 1: and that is this real question about whether the United States,
25:46
Speaker 1: with the policy mix and the monetary policy backdrop and
25:49
Speaker 1: inflation where it's coming from, can avoid a stagflationary like spiral,
25:54
Speaker 1: not necessarily stagflation of the nineteen seventies, but an environment
25:57
Speaker 1: that makes it more difficult to repay a debt load
26:00
Speaker 1: that's causing a lot of concerns for a lot of people.
26:02
Speaker 5: Peter Fisher taught me is get your hands out. This
26:05
Speaker 5: is on radio. It doesn't work. We're going to go
26:06
Speaker 5: with this. The answer is here on a nominal GDP basis,
26:10
Speaker 5: today the lower growth was balanced up by stagflation to
26:14
Speaker 5: a pretty much level nominal GDP. What happens to amandoline
26:19
Speaker 5: loans call if we get nominal GDP to begin to compress.
26:23
Speaker 5: That's what's not in the discussion.
26:25
Speaker 2: I'll tell you what this market is doing for the
26:26
Speaker 2: benefit of our TV audience. Like this up into the right,
26:29
Speaker 2: just sort of up into the right. That's the story today.
26:31
Speaker 2: We'll see if this holds. We're positive by one point
26:33
Speaker 2: five percent on the S and P five hundred going
26:36
Speaker 2: into the closing bow. Coming up on the close, the
26:37
Speaker 2: team's going to take it over. They'll be catching up
26:39
Speaker 2: with the former Fed Governor Betsy ju from New York
26:42
Speaker 2: City this afternoon. Good afternoon, tea, Well, thank you for
26:44
Speaker 2: choosing Bloomberg. This was Bloomberg surveillance