Will we have a recession this year? | Bloomberg Surveillance 07/10/2023

how high is the Fed gonna have to go because the fence not going to quit until Labor Market quits the data clearly suggests that the FED needs to continue to tighten it depending on what we see from the inflation data we could see another rate increase there's still a long way to go in terms of bringing inflation back down to the fed's Target things are moving in the right direction but gosh we really want to go faster this is Bloomberg surveillance with Tom Keane Jonathan Farrow and Lisa abramowitz Here We Go Again live from New York City this morning good morning good morning for our audience worldwide this is Bloomberg surveillance on TV and radio alongside Tom Keane and Lisa bramitz I'm Jonathan Farrow your Equity Market Equity future is just a little bit softer going into CPI later this week in earnings season TK earnings season kicking off on Friday JP Morgan City Wells Fargo just around the corner and as we said here in John particularly when you're away Lisa and I really focused on this and Lisa really decided she was going to dive into it this time is different I think that after CP TI Wednesday to start earnings Friday is a huge mystery and will be a little bit smarter what two and a half three weeks the CPR on Wednesday catching on CPI Wednesday just ahead of API first date brought to you by Bloomberg surveillance welcome back all the dates are coming up after payrolls and payrolls for most people disappointing relative not to the estimate but relative to the ADP report leaving the door open for another hike at the FED later this month what happened I go on vacation ADP matters tremendously all of a sudden that's the most important number that's going to shake up markets and then people look at the actual data from the US government and say who's wrong we're not sure and The Angst arises my question is how much are people bringing forward some of the rate hikes and will they get confirmed by the CPI print making it impossible for the FED not to hike at this month's meeting and potentially even in July yeah I think all the data over the weekend I thought it was a really rich weekend for people thinking about this Mike Wilson reaffirm some earnings challenges as well but the one statistic that that stuck out to me and I'm going to give the economist credit for this I'm not sure where is prime age America Prime time America I'm not prime age America John you're not Lisa's prime age America prime age employment I got someone in trouble once TK I don't think you want to go 22 years 22 years I say Lisa we are fully employed around all these challenges at 80 plus prime age employment I will say I was on vacation last week and the amount of spending is dramatic the amount of inflation is dramatic the amount of people who are saying help wanted in every single storefront is still the same as it was a year ago even at a time we're talking about a slowing economy So to that point how does the FED deal with not necessarily the year-over-year comps but the last Mile and that I think is what a lot of people are going to be talking about with a stickiness underlying some of the inflation we've seen precisely what Sarah House of Wells Fargo said on this program many months ago just for the record we are all in our Prime we agree on that 100 okay for everybody let's just move on like Transformers Futures on the s p three day losing streak on the S P 500 and on the NASDAQ as well let's see if that goes into day four in the bond market yields just a little bit higher let's call it unchanged on a 10-year north of four percent early today inflation data out of China seemingly the takeaway from that Lisa just opened the door leaving the door open to stimulus out of China if they want to deflation outright deflation now are concern which is just kind of shocking given the fact that everyone else is worried about combating inflation what we're looking at today President Biden is beating right now with UK prime minister Rishi sunak this is ahead of of course going to the NATO meeting that starts tomorrow in Lithuania very curious to hear what kind of consensus they can get on allowing Ukraine into NATO at a time Juanito doesn't want to be in an active war with Russia I mean that's sort of one of the key questions here as they debate this today fedspeed Galore fed Vice chair Michael Barr at 10 A.M San Francisco's Mary Daly at 10 30 a.m Cleveland fed president Loretta Mester at 11AM Atlanta fed president Rafael boss sick at noon are they going to say anything it's going to be useful let's stop here this is important what's the so what here John what are we gonna what are we gonna know at 4 P.M this afternoon remains closing the markets what are we going to know from these four we didn't know before what will be nice so far is this um division on the fomc captured by the most recent minutes and we're going to find out who's who who wanted to make a move in June but didn't because they want to wait until July and I would say take July out of the debate Bremer this is about September and Beyond this is about how do you reset things at the end of August in Jackson Hole and push on from September especially at a time when there is a key question of why the resilience in equities in credit at a time when yields are going higher does that mean that the implied neutral rate is significantly higher than previously expected at 3 P.M the last thing I'll leave you with fed is releasing some Consumer Credit Data for the month of May the previous read show the biggest uptick in borrowing in five months how much of the Boom in consumer spending is what I did on my vacation which is charge it to your credit card and leave it there you've seen the credit card outstandings absolutely Skyrocket over the past few years and then I know you got to keep going here but in the new regime of interest rates do we breach a 30 percent per year on credit cards is can they do that I don't know I'm just asking but go rates you're going to pay that statement off Bremo I'm I'm going to pay that statement off at some point no I will pay that statement off I don't like having points I did the same thing just to collect the Box yeah come on this is the biggest biggest I hear this at the home John I'm doing this for the points I have to pick up a beverage of my choice with somebody does this you don't do that on vacation you do it for the points Echo here a lot of canvas scene enjoyed this now at a U.S Equity strategy at RBC Capital markets Larry wonderful to start the week with you we're just reading a note from Barclays and they said this we don't see the tech Centric rally broadening to the rest of the S P 500 we've got Bank earnings on Friday do you see that rally broadening out well thanks for having me as always and look I think this Market wants to broaden out we've seen the small cap part of the market make several attempts to fight back uh we have looked at financials earnings revisions as well in particular and we're seeing that they're generally negative territory but they've been getting a little bit less negative same thing on energy when we look across the s p most sectors are in recovery mode in terms of earning sentiment which means they're rate of upward revisions has either flipped from negative to positive or they are starting to get less negative so I think this is a market that has really done well in the backs of the tech sector kind of the broader timt space so far this year for good reasons but I do think that especially from the earnings perspective there are some healthy undercurrents going on in other parts of the market as well Lori I'm looking over the weekend I thought there's a lot of really good Equity Zeitgeist as we get ready for the roulette wheels starting Friday with JP Morgan and the answer I see is a massive strategy strategist bet that's pretty darn negative is that what you observe out there there's a pretty gloomy strategist tone forward I I think so and you know we've talked about this before my target is 42.50 on the S P I pointed to potential upside to 4400 4 600. three of our models are three of our models are bullish the 4250 is splitting the difference but even in that context time and I tell people you know I personally feel pretty neutral I don't feel like the Market's been crazy I do see the potential for some upside but this is a December 31st game so any incremental upside you might get some profit taking all of that Tom people keep telling me I'm one of the big bulls out there on the street and I just kind of laugh um but I think the reality is that there's been this view that the earnings expectations are too high need to calm down Como markets I don't you know we could walk through that later but I think that's you know interprets how stock prices discount stuff like that in advance and did it last year but I also think that this is a you know unique moment in history and so if we do have a recession I think we were all talking about it last year is technical in nature I do think the market has the ability to focus on the bigger picture and might not be as damaged by that as some assume give us two attributes when you screen for quality in mid-cap small cap I get it I can screen for quality in the world of Apple but how do you screen for quality in mid caps I think it gets tougher when you get down into the small mid cap space one thing we talked to a lot of clients about is Healthcare and Technology that's where a lot of your loss makers are sitting in the Russell 2000s so if you were to screen in small cap say on positive negative earners on things like Roe especially on that positive negative earners you're going to come away with the idea that technology is a low quality sector that Healthcare is a low quality sector sometimes you know we say that investors are like okay fine that's just what the data is we we like these factors over time let's just let that work in the filter but right now there's some more Nuance discussion happening in the small cap space which is that if we're going to have sort of a subpar economic recovery next year the DDP stats and even for 2025 are both comfortably below two percent which is the long-term Trend in a subpar economic backdrop you want to buy growth stocks so people are having to look at things like Tech and biotech and Healthcare and say okay our losses are is that necessarily low quality not you know not necessarily you really have to do it more from an art than science perspective take into account the data but I'll taken to the long-term long-term gross Dynamics out of management team is something else you have to look at in small cap as well Lori how much do you push back against people who say that stocks are just ignoring this feeling in bonds that perhaps were underpricing the risk if it has to go a lot further that the real neutral rate is significantly higher and as you can see the real yield go higher you're not seeing that commensurate sell-off even in small caps how do you rebut that so it's it's interesting Lisa and sort of my late June early July conversations with us-based investors they keep asking me about balance sheets and I think that's really where the interest rate discussion intersects with the ability of companies to manage through this higher rate environment and we talk to people about how I think only two percent of s p companies have an effect or or have an average weighted maturity of under two years and the Russell 2000 even it's less than 10 percent so and we have a lot of other methods we take people through right so long-term debt has risen short-term debt has come down what does fixed versus variable look like and what we come away with is the idea that a higher interest rate isn't as damaging to companies and their balance sheets and their ability to manage their cash flows now as it was in the past and I think that investors and portfolio managers who are really deep in the weed are trying to wrap their head around that issue this seems to me this higher interest rate environment like another one of these like five or six things since 2018 that's you know a hurdle it's a challenge but it's something that companies seem like they're able to manage through so far and that's giving at least some of the investors I speak with some comfort does that mean Lori that right now fed policy is not as restrictive as people think and that in order to bring inflation lower to truly their goal they have to go significantly higher because those higher rates aren't as damaging to some of these companies I think that higher for longer is still what I hear I'll tell you pre-svb I have a valuation model where we plug in interest rates GDP 10-year yields that sort of stuff um inflation rates as well pre-svb everyone wanted me to run that model at six and seven percent and see what kind of PE estimate was spit out I don't get those requests anymore we've got I think five three five fake in the model right now and people are pretty content to sort of use that as a general kind of you know rough bogey for the end of this year and we've got some Cuts baked in for the end of next year people seem pretty sanguine about that I think in general investors want the inflation fight to be won and if you go back to the debt ceiling Lisa I know we haven't talked about this in quite a bit but I think one of the reasons why the market didn't collapse around that is I do think the equity Market was on McCarthy's side and wanted spending to be reigned in so ultimately inflation could be brought back down to more reasonable kind of levels I think that calculus at least on the equity side of the business I can't really speak so much for fixed income investors but I think a lot of the equity PMS I talk to they want that inflation site to be won so they're willing to tolerate you know another hike or two and hire for longer although it's just a 30 second tease if you can if you can I've got an article set to one side for reading later this evening it's in Barrens over the weekend I saw the headlines your name and it said something like it's kind of like the 1940s what's the takeaway so in 1945 we had a recession that the stock market completely ignored it was a technical recession that occurred because of a transition from a wartime economy to a peacetime economy underlying economy was still okay but you had a massive withdrawal of government support back then in terms of fiscal very very analogous to what we're going through today and a lot of the rhetoric we've heard about recession over the past year I think that's one of the reasons why Equity markets have been so resilient this underlying economy is still in pretty good shape and people really understand what's happening here looking forward to reading the article a little bit later Laurie thanks for being with us to kick off the trading week Laura cavacino there of RBC on the week ahead tons of data we talked about Wednesday CPI Thursday PPI Friday earning season so it's earnings season but Lisa mentioned the deflation in Japan it's one of the lead stories from Bloomberg news this morning reporting on the disinflation and deflation and John you nailed it with your cover to cover read this week in a Barrens the basic idea here of 47 out of 5152 and the collective memory and study of extra efforts like calvisina is the Truman Eisenhower deflation outright deflation in the early 50s and that was percolating into Zeitgeist over the weekend I could have sworn a week ago that if you got soft ditra out of China late into a conversation about stimulus Brahma that was good news wasn't it well that's the funny thing about this people are viewing this as potential slowing and growth that's even further in China not necessarily looking at the potential stimulus that they haven't Unleashed but they clearly have an opening to at this point so is next week going to be return of China It's the Return of the band I think the band's back together for the first time in about a month no we're doing this all week we're doing this all week oh wait very cool TK you committed to that I'm committed okay no it's not convincing features on the S P to kick off your trading week negative 0.2 percent from New York City this morning good morning thank you [Music] is the risk of recession completely off the table from your point of view I mean where do you put the odds it's not completely off the table but we would expect with the job market as strong as it is now to see a slower pace of ongoing job gains Janet Yellen on tour over the last week U.S treasury secretary speaking on CBS on the risks of a recession following a slight bit of controversy over the last couple of days Bowing in in China well I was confused you're talking about diversity or something whether it's Diversified there's a new word so they've been trying to draw a distinction between not de-risking term not decoupling it's now Diversified right Brahma what's the difference between decoupling sounds really dramatic de-risking and diversifying I mean I took a look at her own words over the weekend de-risking involves attention to clearly articulated and narrowly targeted National Security concerns as well as broader concern with diversifying our supply chains basically anything we wanted to mean and then I think is this key distinction at a time when the U.S is going to possibly ban X Sports of chips and China is going to possibly ban the exports of the raw materials needed to make said chips that's where we are I'm going to go back to Michael Rosenberg the Giant and foreign exchange his textbook is treasured worth a fortune on Amazon and also the work of the academic Catherine Mann now holding court at the bank of England and Rosenberg and particularly Professor Mann codified the the psyche of this the co-dependency of this maybe yellen's over there in therapy or giving therapy I'm not sure but the answer here I mean everyone's vulnerable right now baloney it's a codependency of Beijing and Washington must be so thankful premo's back your headline Monday morning is secretary Yellen went for therapy in China I don't but but Catherine nailed this 15 years ago we are wildly codependent with China for different reasons why does that change her I just don't think can I get your take on international relations this morning I guess the president's turn to go on tour he lands in London he meets with the Prime Minister Richard sunac the ukrainians want some new weapons President Biden's willing to provide them other people in Europe don't want it to happen you've got this other issue Tom that Sweden wants to join NATO turkey's not keen the president's got some work to do over the next couple of days it's a stew in the backdrop here we'll get to this with Maria today I'm told at some point and the backdrop here is a new conservatism that we see across Europe and maybe it redowns and accentuates in America as well we could talk about root of Netherlands out as well but the big big problem um I see with Europe is and this is true of every president they end up loving to go abroad going abroad is so much easier and sitting at 1600 Pennsylvania Avenue worried about the senator from Kentucky it usually is this time though might be different last year at this time there was real consensus among NATO members about helping Ukraine it was a real kind of come together Kumbaya moment now is not now is a time of Divergence where you've got the U.S and Germany coming out against supporting outright Ukraine's membership in NATO and other people saying well hold on a second you're not giving them really the backing full backing that they really need but the issue is how do we do that without declaring war on on Russia and really engaging in World War Three really complex stuff looking forward to the coverage from Maria today out of Europe this week alongside Bloomberg's ambery Hawarden as well stand on top of the price section two for you with equities a bit softer over the last three days coming into Monday we're down again by 0.2 percent it's a big week ahead for earnings for the economic data as well and if you go through the latest from Barclays it's the takeaway at the moment they've raised their price Target to 41.50 it was as low as 37.25 that's about as far as the Bears will go right now as far as capitulation goes and they say this we think equities would remain range banned through year end we do not see the tech Centric rally broadening to the rest of the S P 500 that's going to be the debate going into Friday morning brammo when we get those Bank earnings here's the tension right now if the FED is truly restrictive is it that this economy could just slowly and softly land or is it that the FED isn't quite restrictive enough and I think that really is the key question behind the resilience that we keep seeing and people saying okay perhaps we have to capitulate perhaps we have to get into the fomo trade which seems to be what everyone's doing but then does the music ever stop or does it just keep going like this until we're just this new neutral that's just fabulous I would look at the revenue line as being the key to determine here and with sticky inflation you may get a little more persistent nominal GDP more persistent Revenue remember the Gloom 90 days ago OMG we're all gonna die 180 days ago you were all gonna die the bank crisis and all that and I I'm sorry I'm broken record corporations will adapt and they're going to do it right now into the end of the year Primal use that word fomo this is from Miss love mataker over JP Morgan today fomo is in full swing there is complacency being built into stocks with the vix at the lows of its range Miss life goes on to say if the activity momentum does weaken in the second half relative to the current projections of no and or soft Landing Lisa's stocks are unlikely to shrug it off and members from his analytics team point out that you've seen a complete piling in in capitulation with asset managers and hedge funds and individual investors piling into a more overweight position in some of the tech names Etc going back months and months so this nearly 18 months they had so here we have a situation where people are piling in creating maybe a dynamic where there needs to be some sort of I can't catch both ways to me the most important chart of the week and I think bar chart out on Twitter had this it's all not on threads on Twitter that's a whole other topic it's that handle it's like a handle yeah it's very valuable These Guys these are smart smart value-add the strategist Wicked Laurie calvicina are wicked negative they're they're like Wicked that's not true she actually came on and she said that she was that item carry-on no but but I like your points and I'm I'm gonna search it right now to be sure I have that right bar chart on Twitter look at bar chat just want to make sure Tom and what's on bar chart on Twitter smart charts and particularly showing that strategists like Lisa mentions are negative where the negative crew they're not adjusting to Bulls your Point's taking 3 800 up to 4100 is all we can get but the low for some of the Bears is getting less low because they're looking around and they're saying hey maybe Tom Keen is right and companies adapt and adjust we should just keep repeating that in our heads and then we'll be just fine and that seems to be where we are with these upgrades that we get from here and again I'm going to go off the October lows I just did it with a total return we'll do bonds later but the bottom line here is October was the low we had a surprise OMG bull market fine now what that's where we are so now what earnings we had a guest lined up and they've gone so hopefully they'll come back soon and we apologize that we never got to see it that was kind of here on a bit of attention let's go and attention about the Federal Reserve Andrew holness a city thinks we go again in July in a few weeks time we go again in September Morgan Stanley Zen and Zen was on the program on Friday ahead of payrolls she agrees we're going to go in July does not agree about September the incoming data will not make the bar for the FED to deliver a hike in September the labor market remains strong there is continued evidence of slowing that we expect to persist over the next two jobs reports ahead of the September fomc meeting July debate is done with like I think everyone's moving on unless you get something dramatic later this week from CPI PPI and or a big surprise from elsewhere it comes down to what happens after August into September Tom and you've got September 20 not like September 5 after Jackson Hole 10 days no it's a good amount of data after Jackson Hall and again it goes to the idfc of CPI Wednesday and you know we'll have that data but I I do agree strongly that we've we moved Beyond July 20th you want to finish on a bit of sport Silverstone last weekend to enjoy this enjoyed it immensely high speed Corners beautiful track where is it is it like where you grew up is it near north of London Santa where I grew up somewhere in between yeah I I just thought it was great there's a lot of it I still don't understand um this first happened to me I mean I just they just don't give them enough love they're so worried about the netflixy stuff and the battles for Ninth Place can I just say sports for dummy they're talking about Formula One and I'm very excited when I came in you guys started talking about this and I was like I know what they're talking about they're talking about car racing so what did you observe everyone's into it I know it actually is true everybody is they're talking about it but do you think that it's actually going to have the same flavor in the US and Miami yeah you know what I think about the cracks you know what I think of anything Silverstone one of those Legends of the F1 Canada it's so so cool it's made for car racing and I look at what's happening in America with some of these tracks and should let should Lando have pitted should he have gone to mediums oh look at you getting technical there we go she's so proud of himself [Music] [Music] did the work in the break so you don't have to bar chart is real and on Twitter follows me so I'm following back great charts Tom thanks for that chat you know we've been working today this morning we're celebrating grandma back and I just got to say folks if you want to send in your emails or tweets or whatever on we're doing it for the points that's the biggest thing we've learned this morning here on economics finance and investment if I get 5 000 more points I'll pick up the Platinum yeah I had kids for the points some controversy I'm just kidding I don't wake up 6 30 do they yeah no because that's the good news Okay equities shaping up as follows on the S P 500 software by 0.2 percent three-day losing streak on by the S P 500 and on the NASDAQ the longest losing streak of the month so far if you switch to the board and get to the bond market two-year ten years thirty year two year yields higher for five consecutive weeks not by much last week though I think you have to look at the 10-year for the major move up find more than 20 basis points last week on the 10 years so we had that deep deep inversion a bit of sleeping actually but a statement three last week some haven't talked about this this is really really serious and I was sitting there suddenly going what am I going to do as first thing look at the terminal Monday morning and this is brahmo's world the Bloomberg Total return index the Lehman Barclays series at Bloomberg picked up really really informative John just about what you're talking about the worst was negative 18 down in price a glorious major Bond bear Market well we've recovered but no we haven't we've rolled over in the last couple weeks as you say higher yield and the answer is now it's negative 13 from the peak in Bots have we brought us through to new Gloom no but we're there bit of a potential paint trade emerging there given that people were starting to lean into duration taking on the 10-year believing deal to a drop the back of this recession debate but the date has been pretty decent relative to expectations even if you have a look at a payrolls report on Friday I mean let's face it if you take out the ADP report that was still pretty solid pretty solid to see payrolls where they were and unemployment as low as it was let's finish on Foreign Exchange the Euro looks a little something like this no drama pretty much unchanged just at the 110 109 59 on the Euro against the dollar plenty of data this week plenty of fed speak to a of fed speak on the way today from bar Master Bostick daily had a CPI on Wednesday JP Morgan's Bruce kasman writes in the following we should see global core Goods inflation fall sharply in the second half as the disinflationary impulses propagate more broadly the decline in global core inflation through the third quarter should not be extrapolated as robust labor markets strong wage inflation and elevated near-term inflation expectations hold core inflation above Central Bank Comfort zones Tom well into next year a smart Insight here on the Dynamics of price change and the review here there is inflation there is disinflation which is a lesser inflation there is outright price decline the great fear of say middle 20th century England deflation and there's Cosmic thing which is only understood at Columbia at University reflation Bruce kasman first in his class on reflation at Columbia a few years ago joins us right now Bruce there's a question out of the time of Greenspan but here we are people will go OMG China deflation can we import deflation can we import deflation from China or on a global slowdown basis I think we can definitely import deflation in Goods pricing and I think there is definitely a force at work which is related to China downshifting uh the Yuan going down um and it and perhaps more powerfully simply the unwind of uh Goods price pressures in a world in which manufacturing has been contracting so I think Goods pricing not is not going to deflate but there's a deflationary impulse I think the problem is that other things are going to be blunting that downward movement and keeping core inflation on an underlying basis probably around three percent perhaps a little higher in the US and globally as well are we beyond the pandemic um I think we are hopefully by on the pandemic from the point of view of of its impact on Behavior but there is reverberations from this which are powerful and profound I think what you're seeing in the U.S for example right now is in the employment report a moderation in some of the post-pandemic recovery sectors Leisure and Hospitality perhaps being the most notable but I don't think that transition and that decline in growth of jobs is a sign of shifting from strength to weakness I think it's a sign of shifting from strength to more normalization I think it'd be a mistake to use the normal business cycle Dynamics and try to attribute that to the uh the move towards an early start of a U.S recession one consistent aspect of both the ADP and the jobs report was the strengths in the wage figure that was far beyond what the FED would like to see and this comes in the heels of people worried not about the year-over-year comp so to do see coming down because of rents and because of used cars and things of that nature but because there is this wage pressure on underlying some of this strength and some of this ongoing inflation how much are you factoring that into how high real rates neutral rates truly are so I would be a little bit hesitant to put a lot of weight on the the swings at average hourly earnings which went down sharply earlier this year and have bounced back up but I do think wage inflation in the US is running above four percent on an annualized basis uh that's too high to be consistent with getting inflation down into the mid twos I would not argue that wage inflation is the primary driver of U.S inflation though I think there's an issue here of tight labor markets there's an issue here of psychology having shifted uh and I think the interaction of those things in the absence of a slide into recession or something like that it's just going to blunt some of these unwinds that are happening here and we shouldn't ignore that as well we were running inflation at the core of five percent this year I think we're going to slide below four but I don't think we're going to slide on a sustained basis below three how long is it going to take to get there I think it's going to take a recession to get there I think you have to blunt hit hit pricing power pretty hard I think it's a mistake to think that the primary thing you need to do is create unemployment what you need to do is hit pricing power unfortunately when you do that uh you change labor market Behavior and the unemployment rate will go up alongside it are rates restrictive enough right now where they are to induce some sort of recession I don't know might be I I don't think the fed's going to wait around though and I think in our forecast of the FED boiling the Frog they don't wait uh they continue leaning against this they tighten again in July and possibly more later this year and by the time they're done rates will be high enough uh with the lag to create a recession probably sometime in 24. it's just your study Dr K act to higher interest rates do they actually you know if we breach through and we start talking a six percent level for early ages whatever it is if we get a higher interest rate structure does a central bank respond um well I think when you look at the move up in tenure yields we've been seeing in the last uh month or eight weeks I think some of that is a tightening in financial conditions as we reprise the FED but some of it is also taking out recession risk and you can see more broadly Financial conditions moving up and I think in that environment it's very hard for the FED to look at that and say okay this is lags in the monetary transmission mechanism and we can be patient against that backdrop so I think the FED is as you can see struggling to figure out where is the right degree of restrictiveness in this economy uh it's probably going to be moving too much uh at least in the context of trying to preserve an expansion because of the inflation news and that's eventually going to take us down I think it's just really hard right now to get the timing and to be too cute about the time the level of race that's going to end this cycle I think that's dead on and I thought about this over the weekend Bruce are we asking too much of our central banks by definitely Mission they don't get the timing right I think this is this this absurdity that they're going to nail plus or minus 14 days a turn in the macro climate is absurd well I think we're in a really difficult macro environment in terms of getting right the inflation Dynamics the appropriate level of what rates are but I think the fundamentals here are relatively straightforward this economy is resilient it has elevated inflation and I think the chances of delivering a soft Landing here are pretty small uh so there's every reason for the FED to try to calibrate and try to deliver that kind of outcome But ultimately I don't think it's going to be successful and ultimately I do think we're going to need a recession it's a question of getting the timing right getting the rate path right which I think everybody should realize is hard people are forecasting recession starting this quarter people have been very confident about forecasting recession forecasting a break in the economy like that is just not that easy to do there's also a question I understand that there's also a question Bruce about what the trigger could be of some sort of recession and I was thinking a lot about geopolitics over the weekend with Yellen in China how how closely are you watching the price of rare metals of some of these sort of tit-for-tat focused areas of chips and the the instruments the commodity is required to supply said chips I think it's very unlikely that that Dynamic specifically will be the Catalyst for recession but I think your point is really important which is recessions are about the FED recessions are about the vulnerabilities of the U.S private sector and recessions are about shocks oftentimes those shocks are in the commodity space and energy specifically and I think it's quite reasonable to say that the next recession will not only be about the FED hiking rates but it'll be about some Shock that hits us again shocks are not easy to to anticipate both in terms of when they hit and exactly where they hit how do you measure the vulnerability then of a financial system to a potential shock because that really is the key to How deep the recession may be so I think vulnerability is Broad it's it's vulnerability in the financial sector and as we well know we've got banking sector stress and credit tightening that's going on we're not seeing that spill over to the broader Financial space and I think that's important but vulnerability is also about where the private sector is and this is one of the reverberations of the pandemic is how healthy the U.S and Global private sector is both on the household and business sector side that doesn't mean they're going to be a strong engine for growth but what I think they're going to be are buffers against the potential for a break at least for the near term Bruce love catching up with you sir good to hear from you as always Bruce kassman there of JP Morgan just a little distracted here by Max Kellerman HSBC bullish and right in the first time let's put it that way this is what he got to say on the second half contrary to expectations the first half proved to be a good half for risk assets and we see little reason to change risk on stance it goes on to say for the second half we see risks around macro data running too hot far from recessionary expectations brahmo that's Max pushing back once again he's been correct he's coming back the idea of a positivity uh from what we've seen in the past from HSBC which has usually been quite negative highlights how much people are really changing their tune we see risks around macrodata running too hot from recession far from recessionary expectations again does this mean the FED has to counter it does this mean it's okay does this mean just Bulls can keep on running Max Kettner hsbct okay Stan bullish it seems yeah well I I think there's a lot of different opinions out there Mike again as I said I believe in the resiliency of of what's going on and you know we're going to get it Friday with JP Morgan we're going to launch into the week following maybe 10 days out from there we'll have a lot better handle on you know you know the the Gloom that's out there I I go to the the bar chart from bar chart that says there's a lot of Gloom out there the strategists are really cautious You Love This Bar chart don't you no I just like the chart it says it says what Calvin Cena Wilson all the other costs and all the other Gina Martin Adams sure what they're all saying and they're all really who you know there's a the Bulls are a lonely group right now getting lonelier based on a price action I think Bruce did a great job by the way in the last 10 minutes re-pitting his hand on the tension on the fomc at the moment the point of division amongst participants do you believe in the long and variable lags the amount of timing of the pipeline of the last 12 months and change at least what do you think we've got to do more and that's the debate they're going to be having right Beyond July and through the rest of this summer and what we're seeing right now in terms of expectations in the market is a peak fed funds rate of 5.4 percent and staying there for a couple of months and that coming around November so again people are saying yes they've got to do more but do we misunderstand the vulnerability of this economy to race or perhaps just the sort of immunity of it I mean no no I'm saying the resilience of it I think we have to get away from this binary recessionary debate if you look at manufacturing right now there is a recession you look at Services there isn't one if you look at good prices they're rolling go for look at Services prices you've just been away stick here from a bus that's ridiculous and look it depends where you look and I've had a lot of people writing to me particularly over the weekend talking about these rolling recessions popping up Here There and Everywhere and if you just have this singular approach which is recession yes or no and that should obey and you take it from there I think you're missing a lot that's going on this economy at the moment I agree what I really notice is growfeld couldn't tiebrem or shoelaces grow felt tried to do the Gloom crew oh did she ever go she's gonna go out and she tried she didn't get to the edge of toxic group and did you get a brim you give Katie that feedback oh yeah I gave her that feedback you gotta be more gloomy it works is that the requirement for anyone that sits I'll sit there and just tell her about what's this I said it's a bramble cam I thought he's a bit softer from New York this is Bloomberg the big strategic issue is that Ukraine wants membership in NATO should it get membership in NATO I don't think it's ready for membership in NATO I don't think there is unanimity in NATO about whether or not to bring Ukraine into the NATO family now at this moment in the middle of a war I think we have to lay out a path for the rational path for Russia for excuse me for Ukraine to be able to qualify to get into NATO president bond is speaking on CNN over the weekend coming into a key week for him in the UK at the moment alongside the British prime minister Richie sunac later this week on to Lithuania for a NATO get together we'll get to that in just a moment if you are just tuning in welcome to the program Equity Futures just slightly negative down by 0.2 percent on the S P 500 a few days of weakness to close out last week coming into a new week and Tom softer once again it's a softer once again and I I think more than anything it's a compendium of it you mentioned foreign exchange before and what's it critical on a Monday is there's not much information from foreign exchange and that's okay because we're waiting for CPI Wednesday that's the next big step PPI Thursday low to bank earnings too then Bank earnings moves over to Tech earnings to close out the month of July Federal Reserve decision in between yeah take care I'm getting excited you're cutting in you know just let me build up the enthusiasm going into August are we close to August already you know just in terms of the calendar thinking about it sure have you got a vacation planned at some point are you taking some time out no I'm not taking it all right I'm the father you know they're like in six time zones and I'm at home with that bill nice that's that's what it's like this is important this is a conversation particularly for our American listeners and viewers it was buried this weekend there's something going on in Europe expert on this and the moment is Maria tadeo our Bloomberg Europe is getting more conservative correspondent at the distraction of Lithuanian or important conversation with the leader of Lithuania later but far more Maria todayo All Eyes quietly are on the Netherlands Mr Ruda is out the door why well Tom and and I think you you nailed it it's a shift that we're seeing across Europe and this is not an opinion you just have to look at the elections and the election cycle the European Union is tilting to the right and Mr Rude had a spat with his Coalition over migration and quotas and today he has decided he is going to leave politics obviously this is a shocker because Mark Ruto has seen as a very smart and also very smooth uh operator obviously he can probably tell the wind is changing in Europe too and he's leaving but this is someone with incredible experience more than 13 years in office and now leaves a gap in the Netherlands and I think to me even today operational we're not even sure who's going to represent the Netherlands here in NATO and of course as you know anything that happens here has to be ratified by all the Allies so I think this speaks again to some of the turmoil that we see in the European Politics As I say in this shift that we're definitely seeing with the continent turning to the right what does it mean for the big nations of Germany in France and the United States we had a president who got very discreet and tried to build a wall to Mexico you can't build a wall in Europe can you what are they going to do about migration in Germany and France look technically in some places you could but the problem is that some of the progressive voices will tell you those are not European values those are not our European standards and obviously we don't want to do anything that President Trump suggested at one point the U.S wanted to do the issue here of course is that when it comes to migration this is becoming now a toxic debate and you see it on the public opinion again changing and wanting tougher measures I think when you see a lot of the turmoil play out in France over the past weeks when you look at the situation in Germany obviously Olive shots is not pulling well in that Coalition well obviously this brings about a new debate as to what to do with migration but this is a never-ending issue for Europe time and ultimately the issue comes down to the fact that nobody at this point wants to take in more migrants essentially that is what it comes down to it's not politically correct it's very tough it's very crude to say but ultimately that's where Europe is at and this underscore is a shift to a sort of more conservative Viewpoint more on the right side of the political sphere in Europe how does this debate Maria color the NATO discussions taking place in Lithuania where you are starting tomorrow at a time when there's a lot of disagreement over how to proceed with respect to Ukraine and NATO well Ukraine is one big issue of course but today if I have to be honest it's about erdogan and turkey that is the Zeitgeist this morning especially now because we hear from the Turkish uh president what is a power move uh on behalf of turkey suggesting okay if you want me to say yes to Sweden joining NATO then we have to talk about the European Union and turkey and you know very well there is very little appetite at this point in the European Union to talk about turkey joining the European Union and I suspect European leaders will say this makes things very difficult it's not the time nor the place to talk about this but also for Sweden now this is incredibly complicated because those are National Security but if you're the one is serious about this EU component well they're probably going to wait a long time to enter NATO what would the sort of Olive Branch be I mean where are the sort of nodes of contention but also the nodes of agreement of where there's going to be some sort of potential resolution uh well look on the turkey Sweden specifically we know there's going to be a bilateral meeting today between President erdogan and the Swedish prime minister Mr staltenberg II the Secretary General is going to sit that meeting but remember this was about legislation changes in Sweden this was about Sweden proving to or the one that they are serious about some of those issues when it comes to potential terrorism when it comes to the pkk which is an issue that erdogan really cares about but now this issue of the European Union membership really changes the game this was not in the debate I have to say when I woke up this morning at 5am I was not expecting this uh today and obviously it really changes things if you make a connection between NATO and the European Union it definitely makes things for the EU and I'm not sure they want to get into this debate not right now right just quickly you with the leader of Lithuania a little bit later walk us through what's going to be the topic of conversation well the medium is a message and of course we have a NATO happening in real news this is the heart of the Eastern flank this is a Baltic country huge supporter of Ukraine but also when you look at it on a map it's right next to kalaningrad that belongs to the Russian Federation and it is right next to Belarus because I think one of the key points that we're going to talk about is pregocian where is he and also does he worry about Wagner potentially operating out of Belarus that is something that you can really feel here they're so sensitive what is going on with uh Wagner and what about percussion Maria only you can say this the way you say the Eastern flank what is Central Europe think about redeveloping redeploying military assets material to the tadeo Eastern flank well I think they would probably say yes and I would point to a speech that Eminem made in Bratislava just a few weeks ago in which he said there isn't a western Europe and in Eastern Europe it's Europe overall the fundamental issue however is that this is a continent and you know this world that did not spend enough on defense for a very long time so even if you want to move some of those capabilities to the Eastern Front the question is who's going to make them do we even have enough and what is going to happen with the European industry we need more obviously that is what European leaders will say but then obviously the question is what about the money how do you finance this and you have to really think big about the next 10 years an important conversation coming up a little bit later Maria looking forward to it Maria today are there with lithuania's President the host of the NATO Summit taking place this week the conversation taking place Tom I understand a little bit later today language is everything and and I'm sorry when we say Eastern Front you know it's Hollywood and movies and the history of this war and that war but just to hear Maria today or say that's chilling the Eastern flank and and that's where we are in this new world we in Daily day in day out we have to remind ourselves this has all changed the reality of things to those countries involved Lisa you wonder what the dividing line is over at NATO at the moment for those countries that would support the president's effort to provide this new Weaponry to to the likes of Ukraine when others are trying to push back it's a complicated debate especially because of the type of Weaponry that the U.S government is looking to provide cluster bombs which have been banned in other places and have been really castigated for some of the the negative effects however you take a step back there is a difference between supporting uh Ukraine and bringing it into NATO now at a time where that would essentially bring the entire NATO membership in the middle of the war right into war with Russia so a lot of people are saying wait until the war is over and then we can discuss this and probably you know we can have a real conversation but that's that's the tension here that sounds like a non-starter TK for most people raging debate steeped in history good morning Ambassador Haas at CFR with a great leadership they've done in thinking about this and the answer is it goes back to I believe it was Belgrade 2008 Condoleezza Rice and others saying be patient go slow and America didn't and some people attribute that to the jump start of how Putin responded coming up very shortly Alicia durawana of the Rock Creek Group look out for that in the next hour we'll also catch up with Mandeep Singh of Bloomberg intelligence he's got a lot to say on threads Instagram's effort Twitter respond we'll get TK's take on evil lichen for that we'll get that in the next hour from New York City Futures just slightly negative this is Bloomberg how high is the Fed gonna have to go because the fence not going to quit the labor market quits the data clearly suggests that the FED needs to continue to tighten depending on what we see from the inflation data we could see another rate increase there's still a long way to go in terms of bringing inflation back down to the fed's Target things are moving in the right direction but gosh we really want to go faster this is Bloomberg surveillance with Tom Keane Jonathan Farrow and Lisa abramowitz getting your way started here live from New York City for our audience worldwide good morning good morning this is Bloomberg surveillance on TV and radio alongside Tom Keane and Lisa bramitz I'm Jonathan Farrow your Equity Market's slightly negative recovering just a little bit off session lows we're down by 0.1 percent on the S P 500 just a few days of weakness to close out last week Tom and we start this morning with a touch of softness as well we started with a touch of softness to get to a CPI on Wednesday and under earnings on Friday and it's not that Monday and Tuesday don't have value but I think it's you know it's churning off of the jobs report I thought Dr kasman from JP Morgan was brilliant they're the the mysteries of their jobs report the way it cut both ways and it gets to a CPI report that may cut both ways CPI later this week PPI as well I've been talking about how earnings season begins with the big banks on Friday what's the big risk for the second half Max Kettner of HSBC in the last hour publishing this one Lisa for the second half we see risks around macro data running too hot too hot far from recession and re-expectations he says maybe the ADP report's correct maybe this is the issue suddenly we have an economy that still uh has a lot of steam I will say that based on the tourism industry that I partook in last week it seems like it is a very robust economy and it is internationally so which kind of rebounds upon itself there is this question though of how much the fed's going to respond to it and how that factors into market pricing do we have to worry about the FED again there was about a month where people were less worried about the fed and suddenly that seems to be changing any crazy Airline stories from your travels no which is fantastic the only thing is is that when you travel an unnamed family-friendly Airline there is a an announcement that comes on that says if there's any inappropriate behavior please alert us which was really interesting to me where I didn't necessarily get some of the other other airlines um can we talk about a shift here which I think is germane to everybody worldwide and John you're living it terribly in the United Kingdom and that is it's not the first thing I looked at this morning but the 30-year mortgage rate with its jump condition and rates is about 2.6 standard deviations that's a huge deal for the fancy people and the middle of America 7.38 on the bank rate 30-year mortgage and John this goes to your observation which someone codified this weekend I was shocked at the percentage of mortgages under four percent I was completely this completely confirms this is some hard data folks on what John's been talking about for weeks and the basic idea that I believe it's 70 of mortgages are four point zero zero percent or under I would have never guessed that that's the question we've got to ask right who's paying it and this is the problem the feds go as they try and tighten policy and slide this economy down at least how and where are those interest rates biting and the same debate goes to corporate debt because a lot of the companies haven't refinanced and don't have to so they're still paying relatively low coupons just like people who are staying in their homes not moving those houses are not going for sale pushing up prices and people are not paying those higher rates so at what point does it bite does it bite soon enough to really inflict the damage necessary to bring down my issue is and I think Jeff Curry was the interview of the second quarter on this at Goldman Sachs the new rate regime the new rate environment for us it's a Bloomberg surveillance Financial exercise let's do a data check let's look at 14 spreads this has real impact across the the real economy as Jeff Curry said about a barrel of oil and the cost of moving Commodities home builder stocks get the joke just on the house in a shoe they get the joke those stocks are absolutely flying year today on the s p on the S P right now future is a little lower trying to recover here we're down by 0.1 percent on the S P Lisa it was basically unchanged as well we're still north of four percent on a 10-year right now what we're looking at is uh the discussion that President Biden is having with UK prime minister Rishi sunak they are meeting today some initial uh communique out of that meeting our relationship is Rock Solid this according to Biden couldn't be meeting with a closer friend and a greater Ally we've got a lot to talk about a lot of that has to circle around Ukraine today the FED speak the parade of speakers fed Vice chair Michael Barr at 10 A.M San Francisco's fed San Francisco feds married daily at 10 30 a.m Cleveland fed president Laura Mester at 11AM an Atlanta fed president Rafael Bostic at noon and at 3 P.M this will be interesting credit card data how much bunch of people just spending on debt on Leverage The Fed release is the latest Consumer Credit survey for the month of May the previous one showed an increase that was far beyond what people expected this to me is really a key question especially as I look at my you know own circumstance just in terms of you know the second time you've brought that up now you go you go on these vacations then you look at your bill and you're like oh my goodness and then you think all right well I'm getting at least a lot of points and did some of that over the weekend yeah it's pretty intense I know I know TK saving TK's been saving not contributing to the US economy team oh no when you're across six times the king family is spread across 14 hours of time zones we're on the far side of the world where it can't you know the camp is the thing that kills you oh it's ridiculous you just didn't have Camp as a kid that just wasn't a thing well we're a champion you had a bicycle and a football and you were left yeah to make a Summer Event if you're a Big Spenders like uh George T Keen I got 10 bucks which went a long way for Mars Bars now I'm getting an email can we do Chinese takeout for 16. you know she wants to bite after thought wants to buy Chinese food it's like a full week forever you know those two camps there's lacrosse camp at Disney World where you go away for a week but it's four days that's the other swing yeah yeah and then there's yeah cams can cost ten thousand dollars you have no idea what parents put up yeah I don't I don't do that the summer rack I think it's it's just it's just it's just numbing let's say specific segment of U.S society yes be clear on that okay I think it's a hardship for a lot of society I mean it creates a lot of employment for people I'll give them that but you know it's there it is all right it's joining us now Olivia darawana Rock Creek growth and if you're wonderful to catch up with you big round of year today we've talked to a couple of people about whether they think it continues can broad now I was looking at your notes and you were saying remain overweight us underway em sure to turn positive view on Europe let's start with the US and break it down that way why remain overweight the US after big games already this year yeah look I think investors have been investing as you mentioned in a new regime from the last 10 years right we're in the higher rates higher inflation for longer but if you look at Equity markets while we're cautious on equities in general after a very strong first half what's going to break the equity markets you know I think consumer spending is something that we're looking at very closely to see if that's what brake Equity breaks Equity markets but I think we also have to remember that within the equity markets the bull market this year has been driven by eight Mega cap stocks it's more than 70 percent greater cumulative return in the top eight stocks versus the rest of the Russell 2000 year to date seems immune to Fed action so when does the Party Stop Olivia I want you to take a long-term view let's be honest if your leader Miss best loss went to Marrakech in the IMF meeting people would just simply stop to know her opinion on the linkage of the global economy and hydrocarbons when you guys look out to a three to five year look do you have the Gloom of the IMF do you share their view of tepid Global growth I think growth is going to happen and and particular Niche sectors and areas so we are investing quite a bit right now in Alternatives it continues to be very interesting investors can take advantage of those secular long-term trends U.S Europe Emerging Markets you see Tailwinds from the IRA and climate infrastructure projects you see huge innovation in AI you see things happening in agriculture technology Healthcare data centers as you mentioned companies producing renewable fuels for rails terminals livestock there are so many interesting investment opportunities today but they are not going to necessarily make you money in the next three months how do you sort of navigate the idea of being less positive over the next three months but very positive particularly about the U.S over the longer term how do you tell and communicate that message to investors who are not looking to day trade you know we manage very institutional portfolios for endowments and Foundations and they are long-term investors they want their endowment to be there for the next 50 hundred years so they can continue doing the good work that they do and so diversification in an Institutional portfolio is key especially in this type of Uncertain environment think about it just in the public equities Market if you had taken a very singular view of small cap stocks you would be missing out entirely on the first half of this year's rally so you have to be Diversified we think but you also have to look long term and start to plant the seeds now for those areas that are going to really be your biggest return drivers in 10 years it feels like diversification is changing the meaning of it and the people we talked to used to being stocks and bonds and now it means private credit private debt some other a private uh Equity other aspects real estate that really are coming to the four becoming more mainstream and have been over the past couple of decades but from your Vantage Point how has the idea of diverse vacation shifted you know that's a great question and again the flip side is that there's a lot of money chasing some of those opportunities that you said as well right so you know I wouldn't say that we want to just run into diversification for the sake of diversification but it has changed because in any particular period of time over the last 10 15 20 years you've seen one of those asset classes really be able to drive returns in your portfolio even today fixed income right there's a spread between shorter term and longer term bonds about one to one and a half percent maybe you can do something there eke out a little return and fixed income even today so diversification means something different today because I think that if you don't have allocations across different asset classes you will end up getting in a hole in a certain period of time during the market and then it's very difficult to climb back out and again we're looking longer term we want our endowments to be there in 10 15 20 years well let's talk about something longer term just finally the geographic diversification Japan Japan's getting it done yeah today tough week more recently over five sessions or so but Olivia where are you on that country we're hearing a lot of people say they start to get interested you know Japan's funny I think over the last 20 years that we've been investing there's been fits and starts in Japan and the question is can Japan really start to change their economy change the demographics and really get out of the disinflationary environment that they have had over the last 10 years if they can do all of that and there's a chance for Japan to continue on this path but I think it remains to be on you know it remains um I think a question on whether they can actually get those things done and in the meantime it is a stock Pickers Market probably more so in Japan than in the U.S or emerging markets today if you look at this version for example in the U.S Equity markets there's more dispersion on a single stock level in the Japanese market today so from a stock Pickers Market it's great right now I think longer term we're going to have to see whether there's some fundamental changes in the economy okay yeah today of 23 it's not bad Olivia darawala of Rock Creek Olivia thank you on the latest still constructive on the United States this question mark over Japan at least there's so many people talking about the same thing I've heard a lot of people start to think about allocating a little bit more to what's developing there yes I heard about that from Steve paliuka he was really hot in Japan has been investing tremendously at that Nation not only because of the fact that you are starting to see some growth and inflation that we haven't seen before but also because perhaps a knock-on effect of some of the labor some of the manufacturing some of the dynamism moving out of China into other regions could potentially also bolster that economy well this is critical John I got a new they got a new governor of the central bank I don't think it's a small matter I don't disagree I don't disagree if you are just tuning in welcome to the program Equity Futures right now on the S P 500 negative 0.05 coming up very shortly coming up at 7 30 Eastern Time Gennady Goldberg of TD Securities on interest rates on on the future of the bond market the Federal Reserve decisions as well just a final word on Japan I think that people have been there all year are probably thinking bramo yeah if you're interested maybe it's time for me to get out after again a 20 or so especially if you have the idea that perhaps there could be some abandonment of yield curve control in the future and what does that do suddenly if you've got rates going up do people go in or does that disrupt some of the models of companies that have been built on cheap debt I mean how much of the debt Market does the Japanese Central Bank owns oh it's ridiculous that number Japanese is it a Japanese bond market I would say John you've been great on this because of your coverage on the real yields see it with Katie greifeld uh and the on Friday and the answer is there isn't a Japanese bond market no there are Japanese bonds the market piece of it I'm I haven't been sure about for a while Tom Kennedy of JP Morgan Global wealth management next hour don't miss that Equity Futures right now negative 0.1 from New York good morning [Music] foreign [Music] meetings served as a step forward in our effort to put the U.S China relationship on a sure footing I do think we've made some progress and I think we can have a healthy economic relationship that's benefit benefits both of us and the world Jenna you had another U.S treasury secretary after concluding her visit to the world's second largest economy China your Equity Market more broadly to kickoff things this morning and good morning to you Equity Futures just about unchanged on the S P 500 three-day losing streak to close out a session on Friday payroll's a bit softer relative to expectations a whole lot softer relative to the blowout surprise crazy ADP report the day before but still leaving the door wide open for the FED to hike once again later on this month before we get to that Federal Reserve rate decision we do have some economic data for you if you are just joining us we've gone through these dates a few times but happy to do sub again Wednesday CPI Thursday PPI data and then the bank earnings start to come through on Friday into next week you know the Arc of earnings season you get the banks first and then time we move over to Tech later on in the month uh Apple August 3rd I looked it up is well are you aware that Adler local the Short Straw for the Sun Valley Conference now why he goes to Idaho and it's like a hat it's a hazardous Duty I mean it's seriously he's got to wear rattlesnake boots up to his knees because in the summer the rattlesnakes come out and he's like I'm the one I did this with David gurr years ago years ago David David is on the lawn at the Sun Valley Conference and everybody's in their Patagonia trying to you know they'll tell when they leave they don't exist anymore and and I'm worried about Eduardo's Health here you know I mean it's a security appreciation I'm sure he appreciates that Lisa let me guess you're volunteering too to save him the Lord of trouble and that you'll head out we're letting grandma go let's do this let's get to something serious this weekend that's in The Ether and is actually really really important there is a strident agreement in the United States that China's the bad guy giving perspective this morning and occur in Bloomberg global economy reporter in Washington truly encyclopedic on the Pacific Rim and I I was really taken away by the aloneness of Janet Yellen as chair of the Federal Reserve she is our Arch labor Economist the loneliness of her Secretary of Treasury how lonely was she on U.S policy in Beijing this weekend well she's certainly framing all of this through the economic lens Tom she in Beijing spoke all about the need for you know guard rails deepening of communication pushing this line that the U.S measures against China are not about economic containment they're actually quite targeted in the areas of National Security and of course she spoke about it's not about decoupling it's about de-risking but even within de-risking she acknowledged childhood concerns and she's willing to listen to those concerns so all of his messaging coming from Beijing over the weekend as her colleagues reported a doesn't quite gel with some of the more hawkish rhetoric that we hear here in Washington but it does underscore this idea that the administration seems to be putting some kind of a guard oil or the very least getting lines of communication open again between both governments what are the great realities of landing at PNG in Shanghai is you realize there's Goods trade with Shanghai and with China King yelland or Biden or anybody in the future in America partition a tech dialogue from from the massive manufacturing Goods dialogue that we have with China well this is where the big complication is you know churches turkey Allen is making the point that they're focusing on National Security areas and that might be AI Quantum Computing higher end technology Tom like you mentioned and maybe you can separate manufacturing manufacturing from that but I think the broad point is when you have tensions the way they are between both governments it overshadows all economic activity it overshadows the broad manufacturing sector as well that's why we have this ongoing discussion about our supply lines being reshuffled our company's MNC companies looking to alternatives to China for example so you can make the argument that there's a narrow path and it can be navigated but I think for business people it's the broad sentiment that matters most is there any way and uh that her view could really represent the mainstream and the Biden administration at a time where it is politically toxic for him to take anything other than a hawkish stance with respect to China well you would assume all right Miss Allen was clearly given license a growth and at least reopened these communications she had about nine to ten hours of talks with her her counterparts and economics fair in China stressing this point about let's talk to each other and Michelle and said they're willing to listen the feedback from China and the actions they take and also of course the um by the Administration has the four-year statutory review of tariffs underway for example China's asking for those tariffs to be on round or complaining about sanctions or complaining about economic containment so you know on the one hand to give Missy Ellen her Jews she might be just saying this is basic communication here by the basic efforts not wanting to overstate it but you'd have to say against the back job of the ongoing hawkishness from the administration and politics in general it doesn't quite gel with the picture we've seen over the last few years I was struck and I wasn't as aware before some of these meetings how dependent the U.S was in the Raw Commodities from China to supply some of the chips that the U.S is now saying they aren't going to send over to China how does that complicate the issue how does that give China a bit of Leverage at a time when the entire economy is so dependent on these chips on quantitative Computing on AI yeah it seems to be fueling this kind of tit-for-tately so as you know as we mentioned the White House is considering further export restrictions on controls on investment China responding with some uh talk of controls over some of those special minerals like gallium for example I thought you mentioned so China's showing that they have some leverage too but let's not forget how weak China's economy is at the moment those inflation numbers are overnight speaking to how weak consumer is underground and who weak the manufacturing sector is surely China wants to do business with the world's biggest consumer which is the US so it's a question of how far China can push that leverage without cutting off its biggest customer and uh thank you and to Karen Adam Washington the treasury secretary playing nice over the last week with China who knows what's going on behind closed doors though so much of this brown as you know is for public consumption particularly after the events of the last couple of months this is the second meeting by a high-level official in the past month from the U.S right Anthony blinken was a first that was a couple weeks ago and now we have uh Jenny Ellen the idea is we're trying to set a floor have we set a floor did we establish any anything over the weekend especially given the blowback in terms of the body language of Janet Yellen so some of these Chinese officials meet and greet we showed up we showed the flag and on on you go but I do agree that an economist a legit first order Economist doing a politician's job as Secretary of Treasury is unusual can you imagine some of the secretaries of Treasury that we've had which are basically secretaries of Commerce they were business they were CEO types over there doing it I just think it's a different debate with the giant Janet Yellen do you think yellen's any different behind closed doors I think she's a tough what's great about yellow and I've seen this at the economic Club of New York I mean I'm in the way back up in the cheap seats and uh she gets upset at Hyman will ask her some smart-ass question yeah and her voice changes and she gets tough Brooklyn is she's she's I asked because access to chat with a story this morning Old Yeller Biden's private Fury you read this yet no I haven't read this it's nice an interesting read there's a quote in it I think this is really funny some Banda Knights think that the president would be better off occasionally displaying his temper in public as a way to address voter concern to the 80 year old president is disengaged and too up for the office oh dear Lord that's one way I spit in the message isn't it to answer us this morning he should shout in public to get more Angry get get riled up I have to if I if I see someone at that age getting angry in public I'd be more concerned about their Fitness for office wouldn't you if that's really the discussion that we've got bigger problems that's all I can say no no no no I mean yeah [Laughter] show us you're bigger you done TK okay I'm done equities look like this on the S P 500. the tank just a bit unchanged that's what calms you down that and bar chat Futures right now down by 0.1 no real drama here yields unchanged let's call it 4.05 on a US 10 year let's see if things are unchanged by the end of the week after getting through a ton of fed speak later today which Lisa kindly went through just a little bit earlier than onto the data CPI and PPI to get another read on inflation in America going into this Federal Reserve decision later on Tom this month well we're gonna have to see I mean it's just it's just huge inflation report and you know you mentioned PPI as well that's not a small matter I used to ignore PPI and I don't anymore I mean the linkage in of the two inflation reports is powerful you certainly don't ignore it out of China at the moment disinflation deflation what are you calling that Bremo deflation the risk of it it's disinflation for now keeping the door open to some stimulus potentially out of the world's second largest economy Futures are lower as we kick off a brand new trading week good morning to you all [Music] [Music] live from New York City getting your training week started Futures look like this on the S P 500 on the NASDAQ 2 on the S P just slightly softer negative by 0.05 then that's like down by 0.2 will it be a four day losing streak for both the s p and the NASDAQ after closing down on Friday for a third day of losses plenty of banks publishing this morning including City us out performance taking a pause as the headline of their read this morning our U.S strategy team thinks Mega cap growth is set for a pullback U.S recession risk could still bite they raised Europe back to overweight this is their take on Europe after the data out of China this morning Europe is once again trading at a record discount and should benefit from a weaker dollar and any stimulus out of China that latest read of course following the latest PPI data that came out of China the latest read on inflation in the world's second largest economy you will have a read on inflation later this week from the world's largest economy the United States CPI Wednesday PPI coming out on Thursday your bond market shaping up as follows let's slash entice the yield curve up two-year 10-year 30-year look at twos your two year 490 82 your 10-year still north of four percent with a big move last week time of more than 20 basis points higher on a 10-year and the vanilla spread comparing the two-year yield to the 10-year yield we've really come in with we've disinverted from a negative 105 negative even 111 basis points a full percentage Point difference higher two-year yield lower 10-year into 86 basis points so there's been I think it's been underreported this week except by creating Katie greifeld on the real yield I mean there has been disinversion great shot 1pm fried ice even now in a summer Friday which is impressive stuff from Kate good for Katie great show look out for that 1pm Eastern Time on Bloomberg TV Bloomberg real yield with category fat I want to finish on FX away from the bond market for a moment before Lisa gets you some single names your FX Market just below 110 on the Euro against the dollar 109.57 we're negative 0.1 percent on a single currency the Euro actually Lisa last week shown a bit of strength to close out the week even with high yields on both the two year and a 10-year a curious development as dollar weakness began to reassert Just a Touch when I take a look at some names that I find possibly more interesting than some of the macro stories rivian shares the electric vehicle maker up 3.6 in pre-market trading now this is interesting because it has rallied 84 over the past eight sessions it has been on a record streak this comes after the company said that it manufactured more EVS over the past quarter than expected has shipped first time commercially outside the U.S Tom is it a meme stock is it like is it like the theater stock that was before there is some substantial story underpinning this stock that people believe that it can prove to be some sort of significant competitor to Elon Musk I just always felt that way good to see this I mean she's up in the Adirondacks the kids are outside the pup tent day trade Caribbean they look like Ford Broncos but that's exactly it they're kind of just like before yeah and I know people very good ordered them but the problem is that people would pay for them and then they'd get them in two years yeah so the fact that they're able to deliver more is is better oh he's got to stop the problem I'm really sorry I just think we have to stop this EV climate change nonsense and just call them what they are I mean are they good for the climate for the environment it's driving me nuts every The Branding around this is just incredible it's so stupid you've made an incredible point which is we have to address the size of a vehicle and if we're looking for efficiency it's probably not the best just put a different kind of battery in if you're going to have you know a Hummer we can can get to that discussion later well we should we will and we will get into that discussion we should have it I will say I'll do that later John that was not how I said it we will do it later Alibaba I want to take a look at some of the Chinese shares they're down about two tenths of a percent they were down uh vastly more earlier today in the pre-market trading after the negative data that came out uh overnight from China the risk of deflation potentially and slow down in growth what's interesting is that there was a feeling that perhaps the veil of the fog of concern was lifted from some of the Chinese tech stocks on Friday that seems to be at least a little bit eased today IEP this is the most fascinating story of the day the Carl Icahn Enterprise company up more than nine percent because the Wall Street Journal is reporting that he has finalized agreements to decouple his loans from the share price of his company so basically the fear was he had leveraged some of his purchases backed by the shares of his company the more they went down the more he could be susceptible to margin calls that could potentially spiral the shares lower today he came out and basically said we've got a stop Gap here we're not going to be doing that and so you're seeing the shares arise quite significantly so that's like a Wednesday or Thursday discussion is too much information from us it was interesting and again I'm sorry for jumping in no gosh just I think you know sick to death if it's having us these expensive EVS shoved down our throat and we're told to save the world and spend however many thousands of dollars to go and buy one it's I just think it's nuts and then everyone you know you see the the leaders of various countries get together with the automakers I understand the industrial policy and that's really interesting and I think they're really sexy cars and in many in many circumstances and perhaps get one if you want one but this idea you're going to save the world by dumping this kind of cash into a massive Hummer I don't get it I think that the size of the vehicle is very important and I think you're absolutely right on that there is a question of how to get the materials out of the earth and what's required to do that there's a larger discussion that's important to have I think I take your point I'm going to go to Michelini's in 2020. here's the title of the academic article thermodynamics and the energy usage of electric vehicles okay I got a quality C in thermodynamics it's really tough stuff it's really difficult but I think to your point John there's a lot of questions in the public and the Zeitgeist not being asked on this we'll ask those questions through the next year and I hope let's talk about the FED speak bad Bostick daily Meester excited stuff on the outlook for the Federal Reserve TD Securities pushing out their recession call from the fourth quarter to the first quarter of next year adding given our new expectation for a downturn in the economy We Now look for the FED to implement its first rate cut drum roll March 2024. we believe the market is sharply underpriced and a potential for deeper Cuts next year the longer the FED keeps real rates elevated at high levels Tom the more likely a hard Landing becomes the calendar of the x-axis and what we're going to do about it seriously about price of bonds Gennady Goldberg joins us rate strategy at TD security he's gonna I want to go to the outcome of this which is TD Securities reaffirms with a vengeance curve inversion and we could even get out to a steeper curve inversion down the road what is the process that gets us to a deeper inversion thanks for having me uh well I I do think that front-end rates remaining quite elevated for a while is what's going to get us there um I wouldn't be surprised to see it it's been one of the most painful trades uh this year I've I can't tell you the number of clients who have tried to enter uh curves deepeners here and actually haven't been able to hold on to that trade just because they're very expensive from a carry enroll perspective what you can see is the front end of the curve continuing to actually move a little bit higher as the market has capitulated to the fed's view of slightly higher for slightly longer and that's very painful for the two to five year part of the curve that's going to keep pushing up two to five year rates and in my mind could keep the curve actually very very deeply inverted for at least the next couple of months and I can tell you you know the steepening typically starts about three to six months before the first cut at least that's what our research shows market right now is pricing in a cut actually even after us we've got ours our first cut penciled in for March of 2024 the Market's all the way in May of 2024 they're not looking for a cut anytime soon Gennady is that including some sort of trauma to the financial system are you basically plotting in this idea that there's going to be some Catalyst to that downturn that's going to prompt the cuts and that's sort of the reason why you expect the deeper and sooner Cuts than the west of Wall Street correct typically you do have higher rates acting in some unexpected way we saw that back in March with the svb crisis I wouldn't be surprised to see more Tremors in the months ahead I don't think the market is looking ahead and realizing that irates a real high cost of cash you know five percent is not exactly cheap at this point that tends to put some downward pressure on the growth momentum that could actually push the US economy into recession over time I do think people underestimate how much that can create shocks in the economy over the course of the coming year I don't think we're quite pricing that in just yet let's say we don't get any shocks Gennady let's say that the economy is truly more resilient higher rates than anyone previously imagined that companies continue to as Tom would say adapt and adjust then how high should rates go and how high should they stay for a longer period of time well I think what you're describing right now is the nightmare scenario for the FED um you know they think that they're right near the terminal right they're actually dancing around where exactly they want to dial into on on the terminal funds rate if you know inflation continues to rage right if there's no real impact on the economy higher much higher at that point and that would be very very scary and honestly the higher you push rates like that the more likely you are to get downside shocks to the economy to the financial system you know something on the on par with what we saw with svb get any people like you talk about The Economic Consequences of price down yield up I mentioned the Bloomberg Total return aggregate index here earlier it hasn't breached through to new price lows but nevertheless it's on the cusp if we get bonds to go down in price up in yield on an aggregate do we get gamma do they have an accelerative behavioral tendency like equities where it picks up steam well you saw that back last year where investors are looking at their bond portfolio and saying well what is this I thought the these Bonds were safe you know I don't think they were supposed to lose value and they were down a very substantial uh at some point last year they were down quite substantially if that happens again this year certainly you can have investors actually selling out interestingly enough the rates are now attractive enough where a lot of investors are going in and saying you know even though I think rates can go there's a lot of investors who are you know really looking at the bond market and saying you know these yields are quite attractive even if they back up a little bit more even if I'm down a little bit on my garden portfolio I'm looking ahead to the next one year two years and that's why actually this year despite the fact that the aggregate index hasn't done much you've seen tons and tons of inflows you've seen over 120 billion dollars flowing into the fixed income space overall um and really not a lot of outflows so I don't know if there's necessarily that kind of moment that happens with fixed income this year Gennady uh I I just find it fascinating what's your 10-year yield call quickly here what's a 10-year yield call well as as we're heading into the end of the year we do think things start to slow down the consumer starts to slow labor markets are to slow so we're looking for three and a quarter on tenure rates by the end of the year appreciate it and sorry for cutting it seems to be my thing this morning get a Goldberg there of TV Securities on the bond market slight technical issue at the end of that conversation there but you know that happens it happens it's live TV and radio you know just warming things up on a technical side yeah just moving those we aspire to the stability of the Bramble cam you know I mean on a technical basis the Bramble cameras just Rock Solid because it's consistent in one note right it's up and running there's film in the camera 16 millimeter if you want just tuning in welcome to the program Equity features on the S P 500 just about unchanged here we're negative 0.02 coming up in the next hour 8 30 Eastern Time Steve rashido of mizuo Securities he's gonna have something to say on the economic data in the week ahead the bond market Federal Reserve and maybe it may be a read on what's going to happen with these Bank earnings later this week I remember it wasn't too long ago we were obsessed with Regional Bank earnings and what that would tell you about the future the US economy and had anyone no one talks about the sector anymore Tom they've moved on and moved on quickly you know I'm going to bring up pack West here just because I remember the symbol pac-w and I mean you talk about dead it's just it's just like Flatline and eat you know it's Flatline it went from 27 to 8. I would argue that the bank earnings that we get including the regional Banks they will become more in Focus coming up as soon as they come out sort of the short-term memory of the market that it will be really important everyone will say oh my goodness everyone has to watch this maybe more interesting than CPI maybe more telling and instructive for what kind of dynamism there is and how much we have actually withdrawn some of the momentum from the economy because right now we have had Lowered Expectations companies continue to raise prices firsthand and so how do we see that play out you know what's great here John is the president drives a Corvette you think the king of England when they meet here in a couple minutes at Windsor Castle is he arrived yet you think they're going to talk British Grand Prix you know the president's got to be in they're going to talk about climate engagement a little bit later on really with philanthropists and investors for those of you interested later on this afternoon so a lot of people look out for that an engagement between the president of the United States and its Majesty King Charles III [Music] threads can it get critical mass I think it's gonna be very difficult to get critical mass I think right now the name of the game for Zuckerberg and that is just further expanding Instagram base in terms of the cross-sell opportunity eventually advertising they're trying to strike while the iron's heart given some of the issues we've seen with Twitter and must but getting the scale is going to be difficult done Ives of wedbush senior Equity analyst the latest tie up meta launching threads or rather Instagram launching threads but the same thing going up against Elon Musk and Twitter tku with promised her some analysis they got to get their act together the news business is in an uproar you saw it clicking into Saturday evening Sunday Etc it's not Twitter that's the that's the major message over the first the review is it's not Twitter can you write that down but you can't it's way too hard it's way too soft I got way too many people drunk at parties on Saturday because it's an Instagram feed into threads I don't want that I want to know what our competitors are doing what the Zeitgeist is and it's not there they don't want people like the three of us would you like period some more of this the president of the United States Tom just mating with King Charles the Third Windsor Castle U.S national anthem I'm told is plank president's hand across his chest Damian from billions saying God saved the king at the Grand Prix you know what did you think of that yesterday I wasn't impressed by that I was gonna defer to Mr Pharaoh I don't defer to me I'm no expert on on national anthems but that was that was odd and Silverstone yesterday this is really something and seriously the tension here folks is of course Mr Biden's affection to Ireland a little bit of delicacy here this is the king of the United Kingdom after his and I'm I may speak out of turn here after his coronation in Scotland in the last week in Edinburgh so there's some some emotion here just to go through the next few hours Toms so the president will participate in a ceremonial arrival and inspection of the honor guard with King Charles III I understand there's also going to be a private meeting with the king at winter castle then later this was the climate engagement story I talked about earlier time the president's going to participate in a climate engagement with his majesty King Charles and philanthropists and investors after pandemic to Castle particularly after war in Ukraine has the debate of climate cup 25 26 27 Etc has it adjusted and changed and what will these leaders do about a new debate over ESG and new debate over climate change still while the war goes on and how involvedful Kim Charles be in that effort we know as the Prince of Wales Tom he made a big push on that front but you change his King I believe he changes president as well you know the the imagery here at Windsor Castle and of course it brings back John uh the funeral of the King's mother and late on that afternoon uh the final private Ceremonies for the family at Windsor Castle I mean it's it's the history it's the history of it away from Buckingham Palace we'll step away from some of those pictures now and if we get any headlines a little bit later on this morning we'll bring those headlines to you the president making a stop in the United Kingdom he'll go from that time to Lithuania then the focus is really going to shift towards all things international relations and NATO I'm here today in Lithuania with an important conversation with the leader of Lithuania coming up here on Bloomberg radio and television right now we looked at technology Mandeep Singh gives us a brief here and there can only be one brief and that is the Twitter threads mandate I don't mean to make jokes about this Mandy how unusual is it that one billionaire copies the platform of another billionaire well so there is a history if you look at what Facebook has done meta has done over the years they have been very good at uh copying features or just iterating uh on their core apps and uh they did that with SNAP they have to an extent done that here but look I I think it just goes to show that Twitter as a platform didn't have the kind of modes that you could argue uh meta has with the engagement they have on Instagram and maybe this is an idea for them to you know do something similar for Pinterest as well so it kind of opens the doors for anybody to go out there and experiment with a new app now we know Mastodon and blue sky didn't work because they never got the traction going so in the case of meta they clearly got that transfer over from Instagram to threads which is why you see that 100 million users in the first week which raises a question of could it potentially be a Twitter killer or is it going to be distinct and a separate entity was talking about how it doesn't necessarily have the same tone as Twitter I concur with that I think it's much more chatty people kind of having to give their take and personality and much less of here's the facts here's the data let's have an economic discussion I mean is that how it's geared I mean it's still week one and look I I think one change you can see with social media is there is a lot more AI driven algorithms than it was uh you know before with the user graphs and and Facebook to their credit did realize that you know as they realize the engagement declining for core Blue app they did pivot to AI with reels and now they are doing the same with uh threats so the thing about AI is there's obviously a lot going on in terms of innovation and your remote isn't as strong as it used to be with uh user graphs because that was more data driven with AI it's like anything you can do to train your algorithm for better recommendations that's going to help your engagement but how does this really feature into whether this is a Twitter killer I mean a lot of people are saying this and certainly Elon Musk has demonstrated some deep-seated insecurities over the weekend with some tweets I'm just curious from your Vantage Point do you think that this is truly going to annihilate their business model from much bigger competitor I mean look uh with social media or any consumer app for that matter it's all about engagement and if they are able to take engagement away from Twitter that's gonna hurt and look at the time spent on social media apps isn't growing use a great growth has stagnated so in the end it's a zero-sum game and and in meta's case they really needed something to drive engagement they tried that with metaverse last year I think this is probably the answer for the near term and they may look for more drivers down the line but metaverse we know was a flop this thing definitely is showing a lot more momentum early on just to build on Lisa's line of questioning it's really difficult to break this out but mandate we've got a number of new sign ups to threads but I want to understand how much of that is new numbers to Instagram and how much of it is just people coming over from Instagram and spending some time on threads then the number becomes maybe less impressive I mean you were right uh John that first week it was really onboarding existing in this Instagram users but there are network effects and look at the Facebook has three billion uh users across their family of apps even if they convert you know 20 to 25 of their daily active user base they're probably gonna bring over a lot of those Twitter users and more and that's the power of their platform that no one else has I mean alphabet could have tried to build something similar as well and they failed with Google plus they probably may be thinking that they could do something similar as well because there are only very few platforms that have over a billion uh daily active users across their platforms and they are the ones who can try out a new app and you know Port over the existing users to the new functionality man they love your coverage and insight on these topics man Dave singed a Bloomberg intelligence what's the number over at Twitter monthly applications something like North 300 mil it's about 330 million okay but it's yeah exactly in just you know couple weeks you've got 100 million that's the estimate the latest estimate as many Depot is talking about if those are active users is that the end I mean is Elon Musk facing 40 billion dollars of useless loans that he's got to repay you'd have to think Tom he starts making some changes but I mean in terms of using actually using git in the same way that I'd lose Twitter uh why I want to get it I can't the point that you just made there Meadow used to be the bad guy people were talking about Facebook and Instagram how they were collecting too much data and had too much power suddenly people are cheering for Threads because they were that fed up with Twitter which just shows you how Fed Up the Twitter people have been but are people concerned about giving one company so much uh Power they want to make it lightweight and fun they don't want to make it the news organization is let's be honest folks and our team in the control room when news breaks we use Twitter with attribution because it's the fastest thing in the world from legitimate news sources that's where you learn it as news is breaking are we going to say that about threads don't know yeah I mean I honestly don't know just from a personal standpoint I'm still making my mind up on whether I'll actually I don't want to be on the platform hosting garbage take a walk get some fresh air you know get some take up golf I think you know like myself again I might start playing golf again yeah instead of threads yeah yeah why not you wanna you wanna come play with me and I yeah why not look at the necklace thing is it's about tennis Tom a bit of tennis he's Wimbledon inspired you it's good at tennis we're calling for a soft landing and not recession we're still we're still pretty cautious in terms of whether the FED can pull off this soft Landing when it all goes wrong it's going to go wrong pretty quickly and that's why the FED may have to reverse course very very quickly you have to worry that you might be too restrictive for too long they're going to end the year closer to six and they build a five this is Bloomberg surveillance with Tom Keane Jonathan Farrow and Lisa abramowitz good morning everyone Jonathan Farrell Lisa Bremer since I'm Keen all together again on radio and television CPI Wednesday upon us and then earnings begin on Friday John I'm going to call it a quite essent Monday but there's this tension in the air go to build on last Friday Tom did you put more weight on the wage growth more weight on the low unemployment rate or more weight on the declining Payroll Services it's no words about it wage growth that's where she's looking she's the number one thing and you're back to what Neil daughter The Optimist he said was okay wage growth comes down but if disinflation witness CPI Wednesday comes down even faster you get flat to actually true wage growth will we see that that's going to guide you a call for the Federal Reserve going into the meeting this month looking for a hike most people are then beyond into September bit of division City say hike Morgan Stanley say no and Adam zetner and Morgan Stanley say no because they think the Slowdown you're seeing at jobs Tom will persist and ultimately the bar to get that next rate hike from the FED after this one um they won't meet it TD Bank making clear when they cut out into 2024 they will cut with a Vengeance Lisa what did bonds indicate to you over the weekend as you came down from the seven carry racket River Portage with lots of mosquito bites what I'm looking at right now is a market that looks early it's a bond market that looks very similar to where we were right before the bank crisis right we have reversed almost all of the declines in yields all of the expectations of rate Cuts we have priced them out we're now pricing in the same kind of terminal 5.4 percent rate by the Federal Reserve but stocks are flying and this is the tension I think right now can stocks keep Rising even if bond yields keep Rising as well even if bonds are saying a very different thing than stocks well they have done haven't they and that's been the difficulty that so many people have had Yota writes her up home builders are flying let's pick a pick a sector pick an industry group The Home Builders are flying because interest rates are high so everyone's staying in the home they've got because they don't want to remarkage the house or get a new mortgage so new houses are doing great and the housing recession's over is that right that's correct that perfect summary I mean it just demonstrates how complicated this moment is and how so many people get it wrong so one guest after another this morning has come on and said they're pushing out the recession forecast they're getting more optimistic oh yeah right it's like and again we're going back to this is sort of going back to March 1st we're back there again yeah within the confusion I see and I'm gonna go back and this is ancient history and I don't think it's an equivalent analog I want to make that clear I thought Lori calficino was brilliant by the way in the late 40s into the early 50s earlier but what we're looking at here in the equity debate and we're going to do that in a moment is the second leg of a bull market the first leg is easy to to pick out at some point there's enough Gloom boom up you go but how do you get to a second leg into me it's January of 1976. it's not that anybody saw 74 4 coming or 75 I should say it was a second leg John in January of 1976. nobody saw that coming are you looking for broader participation going into bank earnings I'm looking for corporations to adjust in earnings without again will surprise they will address it's a broken record I'm sorry it's all right do you want to check the markets let's check the markets I mean right ingredient the Dow up 35 points nice Equity Futures on the S P Unchained recovering in the last hour or so three day losing straight longest since late June something like that and if on Market yields just about unchanged on a 10-year still north of four percent in the FX Market not doing much this morning I have to say it's a bit of a snooze the Euro Tom 109 55 against the dollar it's good to see right now we're going to get started here uh looking at the equity markets Chief investment strategist JPMorgan Global wealth adjusts as he's adjusted Thomas Kennedy joins us this morning what's the key adjustment July 1. I think your key adjustment has to come back to where you've been since Silicon Valley Bank in those last call it 90 days what has really changed from the macro perspective is that working from home is a pretty attractive opportunity set for people the supply side of the labor market in the US economy has really improved participation rate in prime age really trying to hone in on historic Highs but we've blown through the pre-covered levels but why does that even matter it matters because your Trend inflation level that we really thought we were fighting about five percent during Silicon Valley Bank has stepped down closer to three and a half percent so the macro Community now has to really adjust to maybe the fed's not fighting as big of an inflation problem as we thought just 90 days ago so what are we thinking about then three percent is the new five percent and the fed's still going to get a little bit higher and gross going to be okay so the FED I think is still in risk management mode so let's put that aside for a second okay but what you have to acknowledge is that the fed's job is to maximize employment and stable prices that stable price level has come down I haven't talked about it nearly as much as we did at the Silicon Valley Bank time but core service inflation core Services X shelter has stepped down to three three and a half percent that's your best indicator of Labor imbalance and that one in of itself suggests there's a little bit more balance in the labor market let's get to the market Cody is this another West sang your bullish um I think it's another it's another way of saying that the Slowdown we are likely to get 65 of all economists in your survey say there's a recession it's so natural to believe that that's going to happen you have interest rates far above anyone's estimate of what a normal time would be but how persistent does the FED have to make that slow down and if the labor market can come more into balance they don't have to push nearly as hard so this risk management mode for the FED I think is part of the challenge that people are having but just to build on what John was saying if that's the case if we do seem to be having some sort of soft Landing do you pile into the equity trade as a good place to be I think you have to recognize what the Market's pricing for you and say where is your opportunity set JPMorgan Community wealth management one of the biggest pools of wealth assets in the world 26 of all of our investable assets are in cash and cash equivalents so we're trying to help people invest for the long term that doesn't feel like the right opportunity set for them what's the easiest thing to do is to buy fixed income you buy a municipal Bond it's fine on the equity side though where do you need to reinvest for our clients the community is wildly overweight Tech and we can start to find ways to rebalance them why because the rest of the market is actually pricing in a decent earnings downdraft what about the potential that we were hearing from Bruce kasman from others about the vulnerabilities of a market at a time when borrowing costs are substantially higher and there is a lag effect I mean it's unclear how to measure that but as companies have to refinance as people have to move they have to start actually recognizing and feeling the higher rates how much are you expecting some sort of significant accident to interfere with some of these calls I think that risk is certainly elevated Lisa I think that's part of the reason why two-thirds of Wall Street think that you will see a downdraft the question becomes what is it what do you do in the meantime while you're waiting for that and equities can rally quite a bit during that time what can you do to help get your Investments to where you need them to be over the long run and things if the risk of a deep recession goes down even if it's subtle you have to make adjustments in your portfolio right and opportunities private credit opportunities subordinated Bank capital and more of an equal weighted s p angle can help you get there there's got to be a huge percentage of people that feel like they miss this how did I haven't asked this question how did 60 40 do in the first half and can you just stay a vanilla 60 40 forward the 60 40 did fantastically well it was driven to your point though on equities rather than bonds but again our clients are underweight bonds how can I help them renormalize diversify Tom and find a long run strategic because they're looking at a total return I mean the reality is here's how they think they're looking to Total return of let's say five six seven percent and they're looking granted s p hasn't participated but all their friends on Nvidia and they're making 15 18 20 Blended in a stock portfolio that's why they're not buying bonds Market Market breath has been a problem without question Tom every bull market though is a hated bull market every time we've been through them and in this experience though I think we're just balancing where we were I loved your Anchor Point we have to go back to where we were pre-silicum Valley Bank and that shock to this system wasn't the thing that macro economists like me thought it was going to be we have not seen the material slow down in lending yet it doesn't mean we won't get it but you have to be able to balance out what the risks are and the risks of a deep recession I think are lower than what they were at silica this is critical Tom Kennedy's calling this an anchor point so so if Bramble says something profound we're calling it a Bremo point it's a brown-up point it's brahmos Anchor Point it's a prima point oh boy Bank earnings Friday sorry Tom what are you looking for from Bank kearney's Friday all of this in mind Bank earnings are going to continue to show a challenged Outlook you have from the deposit side banks are needing to pay up to shore up their deposits and on the lending side you are seeing lending growth slow but remember at Silicon Valley Bank what we thought was going to happen small Banks would slow their lending materially and it's been the opposite large banks have slowed their Lending materially it's keeping all ourselves honest here it is different but the outlook for the economy is quite challenged it's very normal to assume growth will be below Trend until something happens and something breaks that's what the fed's goal is meant to be in our Baseline scenario S P 500 earnings below trend for three years 2021 2022 2023. how do you start to move and adapt to what that world looks like diversify find good ways to get to your goals with a little bit less risk and that's what yields are offering you well let's finish their top pick favorite thing right now in fixed income what is it I think it's just core boring on sexy bonds muni's core IG and you're locking in an interest rate of five and a half six percent look our community doesn't love unsexy ideas but you can get six percent not take too much risk tell them candidate good to see you JP Morgan Global wealth management on fixed income going back to svb Tom we've been talking about that the last last week yeah I wasn't here for much the last month I didn't talk about it I miss you but did over the last week I I don't think this is a marginal issue and what tells me that it's still there is the stock price action given the healing of the bank system and the verbiage from institutional authorities pacwest should not be flatlining like it is it should be have a bid to it it does not there's a distinction between the risk for regional Banks versus the risk to the broader economy and what Tom was saying there that from a macroeconomic perspective the regional banking crisis was not an economic crisis and didn't have the bleed through effect that many thought that it would and I think that is what we're seeing priced into a lot of the bond market at least as well as potentially equities John is supporting there because you listen there for the brahmo point I always did the marginal brammo point if something a few months ago you know really was only a few months ago when was the last time we were all together I mean a month I think it's been a month it's going to have Brahma back around the table if you are just tuning into the program welcome to the program the S P 500 turning positive 0.08 coming up at 8 30 Eastern time so 18 minutes from now Steve rashido of mizuo Securities pushing ahead to inflation data later this week CPI Wednesday top Thursday PPI it's going to be a great brief no question about it that you take away from Steve no it's going to be a great proof I mean the guy's wicked wicked granular you know there's no question about I've got 90 seconds on the clock and you give me three word answers well you know it's like I'm focused on the king and the president you know I'm watching the king and the president I'm trying to adapt and adjust how's it going painful like Corporate America Steve rashuto let me explain this not only does he have the glory of having Dominic constant with him to provide a great financial synthesis around it but he is expert at digging into the Dynamics of that algebraic GDP function he's the best at it there's no question about it coming into next year as we push that recession call out and start to think about a second half which maybe will continue to deliver and we reflect on the calls that came in through the start of the year when we were thinking about dip and then ripped over there and then it was just rip and then maybe rip some more a bit more yeah you're in temora Fidelity but I don't know that I thought was really interesting over enough Mr he was talking about how the market always inflicts the maximum pain on the maximum number of people and a maximum amount of pain would be to flush out all the shorts to have it rip higher keep going recession gets pushed out and then eventually when everyone's rightly or wrongly positioned then it will hit Krishna said last week high yields that's your next paying trade long tent ten year happening last week at least not this morning 10-year 4.04 five seven percent Steve rashido 16 minutes away foreign it's my hope that and belief that there is a path to bring inflation down in the context of the healthy labor market and the data that I've seen suggest we're on that path Janet Yellen U.S treasury secretary speaking on CBS over the weekend to set you up for the weekend with tons of economic data still to come this from Stuart Kaiser over a city Equity markets are a nominal growth plus risk asset so continued positive economic data alongside stabilizing inflation is a positive combination for markets we have had the first part of that the positive economic data you need the second part of it stabilizing inflation numbers we'll see if we get that on Wednesday and on Thursday respectively at the moment your Equity Market just about turning positive as we inch towards the opening about one hour and 13 minutes away Equity Futures here Tom up by almost I say almost 0.1 percent it's going to be interesting to see in a predicancy of the equity Market rebounds perhaps Into The Angst of OMG what's uh JP Morgan going to do Friday but John it's amazing to me that we're 12 13 vix and we've pulled back in this Gloom to 15.31 a hundred days ago 15.31 would have been you know a religious experience That's How Far We've Come talked about this over at JP Morgan the low volatility fomo full swing complacency being built into stocks with the vix at the lows of its of its recent range yeah I I wonder what Global Wall Street like Tom Kennedy was just with us from JP Morgan what do you do to people who are up four percent Blended up seven percent Blended going um excuse me sir what are we doing I think there's well that's not enough after the double digit gains elsewhere I just think that that permeates the Zeitgeist here of a busy summer somebody over the weekend in the Hampton said there's no Hamptons this year that wall Street's just Grim about the potential layoffs the right sizing whatever you want you went to The Hamptons no I did not okay you're talking about the article in Business Insider maybe I think maybe it was chaneli basic's threads account you know she was on the Hamptons yeah you know on the Hampton okay Zeitgeist as well right now and I want you to Lean Forward on this very lovely it's hugely qualified out of Syracuse University senior fellow at the Peterson Institute to speak of the mysteries of China including her leadership at the China Economic Review here a number of years ago Professor lovely thank you so much for joining us uh this morning I want you to sum the mystery now the Zeitgeist of China the Pacific Rim three or four big cities and then all of that distance of China to the West out to Chengdu is China struggling is China flat on its back or can we be more optimistic Dinah is struggling it is not flat on its back it clearly is struggling we're we're waiting for the Q2 numbers to come out in a week or so and we'll know how badly it is struggling but it definitely is struggling it had a little bit of wind under its sails coming out of the end of zero covid but consumers are just not having it and of course uh the global economy has slowed it has managed to have several good quarters with its net exports but it's looking for drivers of growth Tom and it's not going to find them in the households is the hierarchy and I'm going to use this phrase as an amateur the hierarchy of the Communist party that all that matters is employing people no very much not it is of course preserving the uh rule of the Chinese Communist party and preserving the role of the state and of course one of the key ways you would do that is to keep people employed but we've seen some very serious problems with Urban unemployment unemployment among college-educated youth hitting almost 20 percent uh so they have a really serious problem in terms of driving jobs not in the factories that were hit with the Trump era tariffs from the U.S instead this isn't a service economy it's in the higher Tech sector it's in finance it's in the kinds of jobs that college-educated young people you know we're trained to do and expect to have given this backdrop Mary how does that influence how does that color the discussion uh the discussions I should say that were had with Janet Yellen treasury secretary over the weekend the second high-level U.S uh policy maker to how to Beijing in the past month it's a great question because of course the two intersect the Chinese would love to see a decrease in tensions uh with the U.S they would like to see some rollback in the Trump area tariffs uh Janet Yellen coming is good news not only is it's a it's a further visit from some someone very high up in the buying Administration but is someone they're familiar with it's someone who has enormous respect globally enormous amount of experience in the U.S both the fed and out the treasury and in other ways and so they treated her I think with the dignity and respect that she's due given that there is that respect on one hand there didn't seem to be a lot of resolution to anything do you think that there were any inroads made over the weekend especially given some of the blowback that Janet Yellen has gotten for cow Towing maybe even quite literally to uh Chinese officials in a way that perhaps people in the U.S are not as interested in yeah that's just noise if you you know if you look at it she's an older woman tiny woman she's going up to shake hands this is noise she's there to actually do business and I think that her main message from President Biden was that we are trying to put some guard rails on the relationship we do have major disagreements with the Chinese but it's a relationship we want to manage and manage in a way that doesn't lead us into high higher and higher levels of conflict Mary your Peterson Institute has led on thinking about an America that post-pandemic will adjust to a higher rate regime Adam Posen and Olivia Blanchard really leading the charge on this how does China fit into that if we bring our general level of interest rate up what does that do to China well it's clearly a challenge for China because it leads to a tendency if they didn't have Capital controls you'd see Capital flight AS investors would try to get higher yields so there's Capital flight there's pressure on the currency that they don't want so that makes that sort of takes their monetary policy and says we have to do this with it at the same time they would like to continue to stimulate the economy they've tried to do it with what's called targeting credit expansion and they have a number of different individual pots of money for small businesses for different sectors Etc but they're still having trouble they're not really that is not really having the effect on the economy that they're hoping Mary thank you we have to leave it there Mary lovely there of the Peterson Institute on the economy in China we talked about the surprises of 2023 so far just moments ago in the market this Market's ripped the NASDAQ doing tremendously well after a really difficult year last year that's the market surprise the economic surprise what happened to China to win all the heavy lifting Lisa the reopening story The Boom we were expecting there to spread through Europe and now we've got what Germany in recession and China's struggling we're talking about stimulus in China in the middle of the year really right and we're talking about not necessarily just a reopening but a lack of willingness to invest a lack of willingness to spend by consumers who can't find jobs as we were talking about with Mary lovely taking it a step further how does this play into the commodity space and the importance there the idea that we didn't see also the Boom in Energy prices and perhaps that was a Tailwind that offset the fact that China didn't provide the boom if you've got an answer for that I'll pick plus and the Saudis would like to know I'm sure that they would because Tom I don't think they're too happy they're still down in the in the 70s after pandemic surge I mean we went from 2020 in the Blended Bloomberg commodity index to a boom index we've pulled back and technically there's no way we've broken Commodities to a higher visibility no way whatsoever great lineup in the next Air to get your weight started Amanda line up at BlackRock Brian Levitt of Invesco submissive Mana of Wells Fargo Tom those conversations coming up in about 35 minutes time be interesting to see I mean there's no question about it wouldn't Brian Levitt does here in terms of acid allocation and to me I mentioned it earlier the 60 40 conundrum for me for a huge body of our listeners uh in in viewers I mean this was gospel you put 60 in here you put 40 in there and you play golf and gone you know the fountain out some yeah you put some money and some some cash-like Securities you pick up five percent you put some money in Ai and you do something more interesting than play golf I don't you know I sir surf yeah got away for a long weekend lots of points in they don't need to put up that on a credit card we're having an October conversation in July that's the heart of the matter yeah you're just skipping summer aren't you yeah no interest in summer no vacations TK okay kids um [Music] [Music] surveillance good morning everyone Jonathan Farrell Lisa Branson Tom King raw together again Farrell's gone off to get ready for a nine o'clock cineramic excavate it'll be wonderful to see what he has at nine o'clock given markets churning here it's a turn before CPI uh Wednesday Lisa bramlets and Tom Keane uh with you here and it's a rich discussion to be the least in this morning for those just joining in uh Across America it's real simple it's about China The Whispers inflation to put it all together there were a lot of weeks so far this summer where not a lot happened and people are just sort of spitting their wheels trying to come up with a new narrative this week is actually going to be incredibly important with both the CPI report the last week of feds Beacon lots of it before the quiet period the geopolitics of China and the U.S yeah potentially deflation there but also what's happening with respect to the Tit for Tat between the U.S and China and then to put the boot on all of this we've got Friday we've got uh Bank earnings kicking off you put that together that is a massive pivot point for people who are already reassessing and pushing out further recession calls to get out to Wednesday and CPI Wednesday we'll have complete coverage for you at 8 30. beneath the headline data we stopped Tuesday it's something that we're not spending enough time on which is the Small Business Report the nfib school Business Report what is the mood of people small enough to run in their businesses off their charge cards but frankly companies that are bigger than that there's I don't like the phrase small business but this is the heart of America 6 a.m Eastern tomorrow we do get that small business optimism survey how not optimistic are people who actually have to pay the bills and pay higher salaries and find the workers and everything uh that we have been seeing when we do go on vacation or if you don't and you just you know play tennis in Central Park like Tom Keane every day I I watch them play tennis I'm not playing tennis anymore which is a good thing for the tennis community if you watch Wimbledon I have I have not watched them a little bit brief me on it well I I mean just uh we will get more from there but yes carry on CPI data you're talking about that due out on Wednesday Stephen rashido of Mizzou Securities pushing out his recession call among uh many others as well on Wall Street to 2024 adding without a rise in joblessness the economy remains stuck on the current trajectory which would eventually lead to Rising inflation expectations and higher long-term rates despite Global excess saving and Tom to me this is really the key question the resilience that we see in businesses the adapting and the adjusted and the economy and the labor market how much higher do rates have to go to really bring inflation down to where the FED would like it to be and it comes to the granularity of Stephen ricciutto he's chief U.S Economist at Missoula Securities and be a cost across the core equation y equals c plus I plus G plus something to do with net exports but rashido of course in a recent note goes much bigger and broader I love how you push back against secular stagnation that's the Gloom that's out there and you say America's different talk about America in the media frenzy on secular stagnation you know the point behind the U.S economy is the underlying resilience the body in the administration as well as the Trump Administration provided an enormous amount of excess savings into the system through the coveted stimulus and they're still by our estimates about a trillion dollars there which contrasts easily with the San Francisco fed number of 500 billion but even more important than that we have healthy balance sheets for the household sector and for the corporate sector the non-financial corporate sector when we look into the banking industry despite all the Regional Bank hiccups we've seen there's still a solid balance sheet for the industry in general and I think that drives home the liquidity so between the liquidity the excess savings the health of the balance sheet this is not a credit crunch recession that we're anticipating that's why it's hard to call the beginning of it this is an inflation recession which means the FED has to get short rates High Enough to choke off levels of economic demand and they're trying not to do that and the net result of that is they're slowing the economy but delaying the inevitable so you run the risk that you could wind up with increased inflationary pressures built into the system what they need to do is they need to get the belly of the curve up because that's what securitization takes place that's where everyone funds they don't Fund in the FED funds Market or in the 30 60 90 day Market they Fund in the three to seven year maturity Gap I look Steve at the respect that you and I have for someone like Lawrence Summers is early research on hysteresis with Olivia Blanchard among many other accolades as well but there's still there's Lawrence Summers on stagflation should we worry about stagflation it seems to be is there something at least a disc stagflation is that a word well I think you do have a greater potential for stagflation to fold from this if policy makers hold on to this experiment that they're trying to run for too long which is to craft a soft Landing you look at the what the markets are doing the markets are being very rational the equity Market saying the fed's forecasting a perfect soft Landing so they've priced in a perfect soft Landing you look at the curve the curve is saying the fed's going to keep on raising short-term rates but then they're going to cut rates real quickly so the market has this downward slope to it and we were over 100 basis points inverted between twos and tens about a week ago and now we're about 80 to 90. the difference is almost all of that downward adjustment in the curve is concentrated in the FED funds the two-year to five year sector which means a lot of the impact that you're getting from monetary policies not winding up finding its way through to the cost of financing for households and corporations you've said a lot that we have to unpack the idea that this is not a credit crunch recession building what we heard from Tom Kennedy of JP Morgan that the verdict is in we have seen that the Regional Bank crisis was not an economic crisis and didn't have of the ramifications for the economy that a lot of people believed how high do you think the FED has to raise rates for it to be restrictive in a way that it is not now it's a function of the curve and to the extent that we have to get the five-year note to current two unit levels that gives you the impact Now how hot is the Fed funds rate have to be to get there is the question and that's a difficult question to answer I do believe that if we had the five-year note trading where the two-year note is trading right now we would have a very very different level of macroeconomic activity so that differentiation there then gets into well how much of a curve does the FED anticipate a cut and that's what's important about the dots in the SCP because the dots in the SCP although they did raise the level of rates okay they actually made the curve drop steeper over time so they went from saying 80 basis points worth of adjustment downward 200 basis points worth of downward adjustment so they kind of took out the sting of what they were doing this all goes to if you're just uh trying to parse through Bond speak this idea that the higher you raise rates the near term the more quickly you'll induce a recession that bring rates lower over the shorter to medium term which offsets the actual effects of monetary policy where does the balance sheet play in then is that the other tool at a time when you have seen it actually accelerate in terms of its deceleration of its decline well I mean you got to remember they've put so much into the system with the 5.4 trillion that they monetized and the economy has grown so some of that excess is being eaten up by the growing economy and the expansion that's necessary in the underlying balance sheet for the economy but they've got more room to take out but I don't think they have the opportunity to accelerate it to be honest with you I think there's there's a good degree of risk in Fallout in trying to do both interest rates and quantitative tightening at the same time and I think they would have been smarter to have just done one first and then done the other later when you talk about pushing out the recession that seems to be consensus with a lot of people who you talk to it's kind of obvious if you take a look at the data which is not consistent with recession very much in most areas of the U.S what is the nature The Contours of the recession when you expect it to hit next year well it's going to be very shallow or it should be very shallow they're not going to try to kill it um and and that's part of the process so it's an evolutionary process of trying to get there and this gets back to Tom's question about stagflation if you're not going to kill it and wring out the excesses in the system you run the risk that inflation expectations get embedded in the system and if inflation expectations get embedded in the system then you could get an environment where the economy slows but you don't necessarily get the full bang for your buck on the disinflationary side that you have the benefit of the global deflation story time is it's holding down long-term real yields and nominal I should say nominal long-term rates that's helping to keep the economy growing as well because that continues to contribute to the idea that there's still ability to finance out the curve and it's helping to invert the curve between twos let me squeeze this and I got like eight ways to go here and any questions this is so interesting is a great moderation and over I mean I just did a log concave chart of what the price of bonds has done according to the Bloomberg total return index and the slope that acceleration of the great moderation is ebbed can we say it's Peak done and we're going to cut down to a new non-great moderation that's darn good question um I think the global deflation story is the key to that um and to the extent that we have it expanded our production facilities by diversifying our supply chains in an environment where the global economy is Aging in an environment where the global economy is slowing you do have cyclical inflation that's taking place in the U.S Europe and to some extent in Japan but you have Global deflation taking place outside of it and it's that trade-off that's being reflected in this Indian version of the curve the long ends being held down by the global constructs the short end is being pushed up by the domestic cyclical constructs and that's created the feds creating the problem by anticipating Cuts if they weren't anticipating Cuts we'd have a different matter here in July on getting to October my first question to gorgeous at Marrakesh is simple given the imf's 2028 Gloom which you just voice with disinflation how does America adapt and adjust to a global slowdown in global deflation it's hard it's hard but we do benefit from the fact that we are the largest net importer so so we wind up suffering from the potential deflationary risk which gets back to your question could we get back to the great moderation the answer is if they deal with the cyclical issues correctly yes we would get back to the great moderation if they deal with the cyclical issues incorrectly we could wind up with stagflation before we then have to deal with those issues and get us back to the great great moderation Steve rashido thank you so much for a brief here from sixty thousand feet on the American economy Lisa to me and I thought about this over the weekend the basic idea of John Williams reaffirming a low R starred and I've been taking about how many people I respect agree with the president of the New York fed that we can be optimistic and get back to some form of that great moderation with a sustained more subdued our start Ellen zettner the soft Landing from Morgan Stanley a lot of people talking about this that the amount of debt the demographics the Aging population make it very difficult to see inflation Gathering steam which is a reason why I'm so curious about some of the geopolitical tensions that could raise prices of Commodities in a way that we have not seen so far this year where do some of these other factors come into play when we start talking about the bigger underlying inflationary it goes into the oil call very quietly here Brent nudges up near 80 a barrel I mean did you go along while you were gone did you go long oil no I went long barrels Airline Futures and pretzel pretzel futures for uh all of the all the flights which I think uh is I don't know how you did it I heard it was terrible we will continue running green on the screen right now the vix 15.41 to pick up on that though I just want to say yesterday was the busiest day for commercial Aviation ever recorded by flight tracker which is this tracking mechanism online which to me I mean again that's sort of the tenor behind some of our discussion about inflation prices are higher experience it's worse Pro tip and yet people want to travel and get out there and they're related look at the celebration of Greek recovery and of course the Prime Minister who's been a great supporter of the efforts of Bloomberg surveillance winning a resounding reelection I guess everyone's celebrating I saw an image of the Acropolis this weekend I wouldn't want to be there it's so touristy and crowded you know I I just why would anybody go over and wait in line for six hours and when you bought a ticket three months ago the Vatican the across olives I mean if you go to enrollment if you go to any of these it's it's incredibly crowded from all uh accounts it really shows what Pharaoh did where he went to four different islands and no one was there yeah well I mean but this to me goes to this sphere of if you don't have inflation globally it could potentially simmer down but since you have it so strongly in Europe since you have it so strongly in the U.S since you have it so strongly in so many places around the world it gets harder to see how we get down to something that's more reasonable without some sort of more material intervention I'm in the camp that there's other factors out there like technology and maybe some American exceptionalism as well I have to admit Europe is to me the biggest mystery right now not the least because they have a war going later today our Maria tideo in conversation on that Europe with the president of Lithuania and again I am hordon scheduled I believe to be in Lithuania as well the president is in London with the King stay with us worldwide on Bloomberg News good morning [Music] there's an issue here of tight labor markets there's an issue here of psychology having shifted and I think the interaction of those things in the absence of a slide into recession or something like that it's just going to blunt some of these unwinds that are happening here and we shouldn't ignore that as well we were running inflation at the core of five percent this year I think we're going to slide below four but I don't think we're going to slide on a sustained basis below three our treasure team there giving you the voices on a Monday morning you need to reset for the week Bruce kasman is Chief Economist head of global economic research and JP Morgan I really want to state that you know on Friday you know first of all we don't plan for anything here it's surveillance but the basic idea is somebody went to me or Lisa you're you're in the racket River somewhere or pharaoh who was having a gelato I think they called up pharaoh and they said what do you want to do and he says I want to reset for inflation on Wednesday and that's really what we're doing today that's right reinstating for inflation you could go on vacation too you know rather than just sort of lobbing these jobs 14 time zones and I'm covering now I'm home with vet bill and uh kennel fee uh uh getting it done I will say though I take your point about CPI and how important that's going to be it's the last major data point before the quiet period and then the FED although and we were talking about this earlier I think you brought this up Tom where we kind of believe July is a lock it's going to be a hike what about after that no we're gonna have to see and the red and green on the screen right now two-year-old 4.95 down from that 5 5.05 shock here we've heard a lot on interest rates today joining us right now what's really good about this is our kids are at Camp 2020 hindsight Gina Martin Adams joins us Chief faculty strategist at Bloomberg intelligence 2020 hindsight October of last year what did Bloomberg intelligence say about the equity Market um well we our models did give us an indication that at the very least we were in a massive sentiment washout for the index which historically are pretty good conditions to start taking on a bit of risk at that point in time our fair value model also suggested that the market was positioned for a 15 downdraft in earnings growth coming for the next 12 months so really big earnings recession was priced into equities and luckily enough that earnings recession has not happened we've seen earnings remain weak but actually excluding the energy sector get a little bit stronger or at least less weak and that's what's taking the market by surprise so far I went back in in my youth and I looked it was a week where I bought two Bob Seger albums these are records and the hardest thing off the bottom in that pessimism is the second leg of a bull market I identify it is January of 1976. is this the second leg of a bull market what are the attributes that will allow you to identify yeah we need to see leadership broadened beyond the top five in the index or even beyond the top seven in the index to establish that second leg we did see that occur in June we saw a pretty significant broadening of the events in advance indeed but I think there's still a great deal of nervousness as to whether anything other than the top five can produce some earnings growth into the second half of this year which makes this earnings season pretty consequential because the top five is absolutely leading earnings growth that those group that segment of the index is expected to post 17 growth in EPS year over year that's a big earnings gain relatives the biggest the biggest stocks in the index but but that really uh just to build on what you're talking about highlights the concern that some people have which is that the largest companies are masking what's going on elsewhere does it make it difficult to talk about an index level when it's so heavily skewed and doesn't reflect some sort of mean it does because when you focus only on an index level you miss everything that's happening underneath and this is being that goes beyond the top five as well remember last year everyone thought oh earnings are holding up much much better than expected but if you decompose the index and you looked at earnings X energy you saw a very clear earnings recession emerge in the s p 500. we're having the opposite occur today so I think it's extremely important to ex to decompose the index into its constituent Parts look Beyond even the sector level look at Aggregates in a very different way because otherwise you're not going to get the investability right which is why people are increasingly looking at equal weight uh indexes and I've seen a number of reports particularly over the weekend highlighting that you're seeing actually a real comeback there as well because people are looking for other places to put their cash in the fomo that JPMorgan talks about how can you judge whether that's gone too far if you just take a look at the bird's eye view yeah it's it's challenging but I do think you want to look at things like valuations for the equal weighted index which are still well below their pre-pandemic average levels there's plenty of room for that valuation sort of level to re-rate outside of the big cap tech stocks and outside of the largest stocks in the index I do think you want to look at earnings growth excluding the top five which even when you exclude the top five and you look at earnings growth X energy you are starting to see some stabilization emerge we need to see that continue we need to see a bit of follow through into the second half of this year we need to see the macro conditions continue to support that stabilization and critically this has been an earnings recession that's really all about inflation and not about growth and I think that's left a lot of people on their back foot because we've been in an environment where growth was the only thing that really mattered and now we're in an environment where inflation is predominant and so it took a lot of people by surprise when the earning stream turned out to be a little bit better than anticipated and most of that is because of the inflation Dynamic which shifted materially earlier this year we need to see that continue CPI has to grow at a pace faster than PPI both need to continue to decelerate to really support this margin stabilization which will should lead to a broadening in the in performance and earnings at large I just brought up a small store out of Bentonville Arkansas and I'm looking at a PE on Walmart of 2426 something up there which I think is just absolutely insane if it's growing at single digit level but I'm looking at the BQ screen folks the BQ screen is where Gina Martin Adams goes every day in the Bloomberg terminal to become wiser price to cash flow of 11 times cash flow yeah that's a lot smaller number what does that signal to you yeah I think that this is really important very important because cash flow was under an extreme amount of distress in 2022 as well and this is another thing that was completely missed in the sort of the consensus speech was earnings are better than expected but cash flow fell throughout 2022 year over year cash flow is starting to improve we saw our first quarter of improvement in the first quarter of this year we should see cash flow continue to improve for the rest of this year and importantly investors are not paying for that cash flow and I do think that that provides an opportunity for companies that can produce that bottom line cash flow growth for some multiple expansion now is it for the overall index at large not necessarily because you're still paying an enormous amount for some pretty Grim cash flow Dynamics for the broad index but on a stock by stock basis an industry by industry basis there are tremendous opportunities and Lisa to give you an idea I got the HP 12C on folks because if the day gig doesn't work out I'm going to go work for Gina Martin Adams at Bloomberg intelligence Apple's free cash flow from pre-pandemic to a model of where we are now it's only up 79 I know it's been a tremendous tremendous rally I take what you say Gina about the importance of both CPI and PPI and CPI needing to rise at a faster price than PPI we get CPI on Wednesday PP API on Thursday this is another way of saying that they can keep jacking up prices more than the their base costs that's another way of basically saying the same thing dovetail that into Friday and the bank earnings and what importance you place on them at a time when people are looking to some sort of lending contraction yeah so Bank earnings is a whole another story for what's going on in the S P 500 because this is like energy one of the weaker components of the index where people are actually losing a lot of faith Bank earnings expectations for growth have roughly been cut in half a little bit more than half over just the last six weeks as investors are continuing to get very nervous about that and this is about loan quality it's about credit quality it's about sort of deteriorating credit conditions it is about growth more so than inflation with the one exception of the inflation's dynamic on the inflation impact on the yield curve so financials are sort of in this worst place sort of position because they've got negative yield curve spread an inverted yield curve is terrible for Bank earnings as a signal they are not particularly expensive but nonetheless no one has any faith in the earnings Outlook because of the risks that are still sort of underneath the surface of this economy and that is credit quality is a real concern everybody's very worried about the degree to which credit quality can maintain some stability going into the second half of the Year financials are there for Ground Zero for this risk and I don't think that's necessarily going to change in second quarter we've seen no indication of change at all as so we probably will start off the quarterly earnings season with some relatively unique results and then have to ramp up into the stronger components of the index as the season goes on Gina Martin Adams thank you so much I got to go move on to a surveillance correction okay to see if I can come back tomorrow kimon from Athens listening he's with one of the major athletes thank you for all of you in Central Banking in Greece and Commercial Banking and listen every day to surveillance he says Tom you're an idiot he says he says I was comparing the Acropolis to Disney World equating them and I apologize if that was the tone that I took I was not equating the Acropolis of 525 BC as compared to Pinocchio of 1949-80 I didn't want to be disparaging to Mr mitsataka your apology has been recognized can I come back tomorrow good morning oh yeah foreign

Channel: Bloomberg Television

Views: 115,580

Keywords: Jon Ferro, Lisa Abramowicz, Tom Keene

Id: mceWilq6HgM

Length: 145min 58sec (8758 seconds)

Published: Mon Jul 10 2023