- Emily Roland, Co-Chief Investment Strategist at John Hancock Investment Management
- Armin Papperger, Chairman at Rheinmetall AG
- Sonia Meskin, Economist at UBS
Emily Roland of John Hancock Investment Management offers her take on the market selloff to begin 2025 and whether choppiness is to be expected throughout the year. Armin Papperger, Chairman at Rheinmetall AG, talks about the latest on the war in Ukraine. Sonia Meskin, Economist with UBS, reacts to today's PPI data.
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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App. Joining us now, Emily Ryblands of John Hancock. Emily, good morning. We have been whibsored from headline to headline, from data point to data point.
Is this one any different?
I mean, it's just remarkable. And one of the things that we've been watching closely.
Is the moves in the US dollar.
One of the things that we think is started to constrain equity markets so far this year, as you've seen the significant strengthening in the US dollar, you think about large cap equities which or just carrying the crown of leadership. Last year, forty percent of their revenues are derived from abroad.
So that could be a significant.
Issue for large cap stocks this year. So I think this morning you're seeing a bit of a modest pullback in the dollar and that's probably helping risk outs as a little bit.
Mike Wilson Molkan Stanley said, right, strife beta and what you're seeing in foreign exchange strife's dispersion, are you starting to see that beneath the surface on the S and.
P we're seeing a little bit of a broadening out in market leadership. Leadership is a tough word, I guess right.
Now where we're seeing some pressure.
On markets, But what we typically see in these environments where bond yields are backing up inflationary pressures or potential inflationary pressures.
To your point our.
Building is things like value stocks start to do a bit better.
Small caps get hurt.
Of course, they have the highest levels of indebtedent indebtedness which can be an issue when the cost of capital is elevated. But I think value equities, in particular areas like energy, utilities, infrastructure related assets, those are lower beta than more defensive business is they have dividends and they have some element of inflation protection here that we think might be a creative to investors into this year if we see maybe another twenty twenty two type playbook.
This is a confusing moment. This is a confusing for all of us.
It's hard to.
Really understand where the load star is at a time where there's so many different narratives that go completely contrary to each other. I want to go back to six am this morning when we got nfib A small business optimism which came in at the highest rate going back to twenty and eighteen to one hundred and five, really superseding expectations. Do you want to be more levered to a growth story or more levered to a conservative portfolio, one that is more protective and levered to maybe downside risk.
Right now, we.
Would say a more conservative portfolio right now. What we're seeing right now is the biggest catchup in history between soft data and hard data. So the hard data had been coming in well, things like the labor market.
Of course, we added two hundred and fifty thousand new jobs last month.
But when we look at this, soft data had really been struggling, and then boom, you get the results of the election, and you have this massive amount of optimism and sentiment just pervading the markets. So we want to be mindful of here of watching this kind of mini bump in reacceleration and animal spirits and sort of in the way that business owners and people are feeling in general. Of course, there's a huge divergence between Republicans that are responding to those surveys and Democrats that are responding to those surveys, so we want to be mindful of that. We may be seeing a modest reacceleration.
In the economy, but the challenges.
And you guys have talked a lot about this on the show, is kind of the self limiting dynamic of this backup and treasure yields that we're seeing on this potential reacceleration and growth. Borrowing costs are high, mortgage rates are above seven percent, Mortgage applications are plunging, inventories are up.
Housing is the economic.
Cycle, and if we start to see the shelter component of CPI decelerating, that could speak volumes to the process asset dynamic.
But this story has been one that's consistent over the past couple of years, and it's been a frozen housing market and that's only led to higher prices because everything else is doing okay and there hasn't been enough supply. How much conviction do you have in this call of a slowdown to go headlong into longer term treasuries at a time where other people are saying, you know, you might want to wait.
A little bit.
Well, it's not headlong, so we still haven't been overweight duration. We've just suggested that investors that are sitting at the short end of the curve leg into the intermediate part of the curve with a benchmark level of duration, and right now the way the yeal curve is slow, if we now have the potential for rolldown as well, with the short end of the curve actually being significantly lower than the long end of the curve. I think what's notable about the housing market is you're seeing inventories up about thirty percent year over year, and a lot of that's concentrated in the hot spots. Like remember when everybody left Manhattan during the pandemic, or the West Coast and they went to Austin, and they went to Nashville, by the way, Great Cities, they went to Colorado.
So what's happening now.
Is Manhattan based companies are saying you have a job in New York.
Gu's where you have to go New York.
So you're starting to see all that built up inventory come back online in some of those areas as people migrate back to the major city.
Family do have a call on how high you think we could see the ten years. People are debating whether or not we actually will hit and consustain five percent.
Yeah, so five percent, I think is about the area where you kind of see that self limiting mechanism creep in. We're watching bond yields of course overseas, which you're going to see sort of an element of tracking there. And if all these overseas markets also have a harder time adjusting higher rates, you could see some downward pressure on treasury yields from there. But let's just do do we want to do a little bond math. I know it's really early in the morning.
Lisave, like, so think about say.
Yields went back up to five and a half percent, You're still not seeing a negative return on the aggregate bond index.
Because the yield is there.
We're looking at yields that are above five percent on high quality bonds right now. You might have to get paid to wait on the duration front. If yields sort of chop around from here. But think about what equity markets might do in an environment where we're at a five and a half percent treasury. I don't think they would like it. So I think the fact that you're flat on bonds you might want to take that.
I'm not sure what Lisa's started, but Kevin Gordon, the Schwab has ridden in and said it's Bob Arra bonds are ready back and ready awesome.
I love it.
I'm not sure that's catching on either.
More of this.
I got another message as well on the Bloomberg terminal. Turn her Bloomberg off and tell it to start her vacation. Now, what's this vacation?
Hey, hey, I know you really want me to go on vacation. I'll happily lease. Thank you so much, it's been really real.
Emily, appreciate your time's going to see you. Just turned to the rush of Ukraine Warresident elect Donald Trump continuing his push to increase defense spending. The German chancellor I'll have Sheltz, rejecting Trump's demands. That night, Allies increased defense spending to five from two percent of GDP joining US now. Armin Papager, CEO of RAEMATAU, a German defense and engineering group. I'm in good morning, it's going to see you in New York.
Good morning.
It's got to start with a very serious topic and from there the topics get even more serious. But let's start with you first of all, said personally, according to multiple US and Western officials, the Russian government plan to assassinate you. This has been in the news over a number of months. Now, can we start with that and taught you about how things are going personally? When were you told about that and by who?
It's about one year ago and the information we've got from the US from FBI, and I'm very happy about that that they very early gave us that information. German government took that information and the protection level now is very high. I have the same protection level than the chancellor.
Wow, you have the same security protections as the chancellor. I'll f Sholtz and you feel secure.
I feel secure.
So the reason why you wanted to stay in the job even though that threat was hanging over you.
I love that job. We have to work. We have to to work for freedom and we have to work for democracy, and nobody can stop.
Us, including Russia. Let's talk about the challenge that comes from Russia now and the push from the incoming president to push defense spending perhaps as high as five percent is GDP, and we know it's been a struggle for many NATAL members to get to two percent over the last number of years. Do you think that's doable to get to five percent of GDP?
I think five percent. It's a big value. Five percent, and I believe that if we first of all get to three percent, it would be it would be great because over the last twenty five years, the Europeans did not invest in US money in security. I understand one hundred percent President Trump, He's right that Europe has to spend more into the Western security and we have to do it well.
My reporting over the summer was actually they were looking at three percent, so potentially this falls down to anywhere from three to five. Germany, though, is only spending two percent. Do you think they can spend more on defense?
I think they can, and they think they have to do because at the end of the day, Germany is the biggest economic in Europe and they have to help her to make Europe safe.
We just heard from Mark Rutta last month talking about it's time for Europe to shift to a wartime mindset. For decades, Europe decided to curb their defense spending and really outsource their defense to United States. That failed, obviously when Russia invaded Ukraine. Do you think Europe is still unprepared for the war that's on their doorstep.
We prepare ourselves and if you see what we do in rymetal is we invested over the last two years more than seven billion to build up the capacities and that's very important. And in between, I am able to produce one point one million's artillery rounds, which is more than the US is doing at the moment. So I think we prepare ourselves, but we have to do more.
You also have production facilities inside Ukraine? Yes, how quickly will we be able to get ammunition production going inside.
The country in twelve months time?
In twelve months time, there is potential that in twelve months time, according to President elect, this war could be over. Do you first see a scenario where Puchin will agree to some sort of ceasefire in Ukraine?
Nobody knows that, and as you know, President Trump said he's able to do it very fast. We will see if that really will happen. But even if that will happen, we need a lot more defense goods because at the moment, as you know, the stocks are empty, especially for ammunitions. But although the tanks, we have not enough tanks, we cannot protect ourselves.
What about the incoming administration in terms of communication, you are really the massive player in Europe, almost the only game in town when it comes to the European defense industrial complex. Are you talking to the incoming Trump administration?
We start to talk to that and I will talk very very early with a Trump administration because we have to do it. And the reason is that I also have a lot of investments here in US, and I invested some months ago more than one billion to buy a company here because I believe in the transatlantic relationship.
Do you think that you can partner with this incoming administration? And how was the communication in partnership with the buy An administration.
It was good. But at the end of the day, we as a company, we must be politically, let me say, a little bit independent, and we have to work with all governments and that's very important. And I believe that we really can work with the Trump administration because I believe that he is right and the pressure that he is creating at the moment is good for Europe.
He's right with respect to spending more on defense, but is he right about the US retracting some of its spending on Ukraine and really leaving it to the European Union to finance the efforts there.
I believe that we have we have to help Ukraine. If Ukraine will fall, we will have a big problem in Europe. If we have a big problem in Europe, because I believe that Putin will not stop with the Ukrainian on the Ukrainian border, So what about the Baltics, what about Georgia, what about Moldavia and all the other things? And I believe that it'd be look very, very helpful if the US and Europe is working together in this area, and at the moment Europe needs us because the resources are not good enough in Europe.
Do you think there is.
A political will in Europe to offset any decrease in financing from the United States At a time of political turmoil, where there's even upset in leadership in Germany and real questions around how much the public wants to keep financing this.
I believe that the new government in Germany, and as you know, we have election in seven eight weeks, that the new government will create a very strong contact to the Trump administration, and I believe that they want to work out a good plan and to make a deal together. Europe and the US has to make a deal for security.
You talked about how you're investing in the United States, and I'm wondering how important it is to get a foothold in the US to get around any potential tariffs or other types of issues that come down the pike.
Very important, very important. I understand all the issues that the US has, and I said, Okay, we want to make money, and President Trump wants to make deals, and he's right about that, and we have to take care about that. That's the reason that we are investing also in the US.
Are you also ratcheting back certain businesses in Europe that you think are going to be more exposed.
We grow at the moment forty percent per year, so we can grow in Europe and we have to grow in the US.
The President wants to make Dale's. Do you want to make Dale's? Do you think we need some consolidation in European defense.
Yes, it's I think it's possible and I think it's important to do it. As always said, Europe needs also a bigger, bigger machine in defense, and what I believe is we need a company which makes forty billion per year. We are at the moment only on the level of ten billion, but we will grow over the next years to twenty billion, maybe more. And the backlock is a very good one. So I believe that consolidation is very important.
You can grow organically to twenty s Yes, acquisitions, have you got any in mind?
Yes, we have a lot of You have a lot in mind because, as you said, over the last two years we bought the lot Lock Performance here in the US and the Spanish company. We invested two point two billion in that, and we want to invest more and we have more firepower.
Have you spoken to Bia.
We always speak with PAE, But i'm.
About a possible acquisition.
No, we didn't speak about to merge or other things.
Would you be open to that?
At the moment, there is no discussion, but.
Would you be open to it?
Would that make sense? I'm always open if it makes sense.
And does it make sense?
I'm not sure, but we have to analyze that.
I want to go back to how John really started this topic, the fact that your life was put at risk. You're basically on a Russian hit list, but it goes beyond that. Dmitry Peskov last year said your company is called a legitimate target. How is a company are you responding to Russia's hybrid warfare on the continent.
First of all, we have a very very good cyber center. That's the most important thing. That cyber attexts will not come in. And the second point is we are not in war at the moment. I have not the air defense and missiles around my factories. But if there is a higher potential that something will grow up, then we have to do that. For sure. We will protect our factories and we have to do it right.
And you feel like the German government is a partner with you in this.
Absolutely, absolutely, we are absolutely fighting shoulder on shoulder.
And when it comes to this assassinization attempt on your life, do you believe it came from Vladimir Putin himself?
I don't know. I don't know, and I at the end of the day, the information, as I told you, came from secret services, and we have to take care about that, and the government in Germany takes care about it. Not only the German government, also government if I travel to other countries, although that governments take care about that. I'm very grateful about that.
You've been very gracious with your time, sir, and we appreciate it this morning. Thank you very much, thank you, thank you. I'm in Pampaca, the Ramata cup, Sonia masking a ubs Chiant just Nata how Parsida's question Sonic and mornech Co. So how good news is that papia from Molitzagog.
It is very good news.
But to be clear, we do actually expect in the ubs, and we have been saying this for a while, we do expect inflation to be porarily a little sticky in Q one of this year and then to continue to disslerate.
What is it about Q ones because we did this in Q one of last year. What is it about the first quarter?
It's the seasonals and frankly, since COVID, really some of these seasonals have been just off and we see it in the labor data and we see it in the inflation data.
So how much do you see an actual disinflation that's taking hold because the numbers have been very noisy. PPI tends to be something that people look through as not necessarily indicative of what's going to come out with CPI. What do other data really say when you take a look at them.
You're exactly right.
So the PPI is actually more relevant for the PCEE, which is in turn quite relevant for the Federal Reserve. Right the Federal Reserve has said many times that they really see the core trend and inflation as the core PCEE trend over time, but the CPI is very important. That's what the consumer piece at the register, so to speak. And for the CPI, we do see still an upside for the release this week tomorrow, and that is coming primarily from just like here, we saw an optic in energy goods prices. We see that also in the piece in the CPI tomorrow as well.
What's fascinating to me is that people are trying to wrap their head around the ramifications of the strong dollar. And we've been talking about it with respect to corporate earnings, We've been talking about it with respect to demand for US assets. There's also a question of the disinflationary impact of that when exports and imports in particular have been increasing quite significantly. How much is that a piece of what we're seeing, particularly in data like PPI.
Absolutely, But however, historically it's taken quite some time for the strong dollar to translate into prices in the United States, and so here we would only really see it so quickly if we saw truly good evidence of a ramp up in you know, in imports ahead of anticipated tariffs. We don't really see much conclusive data on the ground on that front to definitively say that this has had a name.
What do you make of this basically competing narratives we see in the space when it comes to tariffs, broad based ones that may be a bit more gradual. How do you take all of that and put it into an outlook for twenty twenty five Extremely difficult.
The main point I would say of the outlook is that what we're expecting is uncertainty, and the key area to watch for US is business investment and how much this uncertainty around tariffs that business businesses have already expressed in some of the survey data, is actually going to translate into their investment plans and into their hiring plans.
So everyone is talking about Trump two point zero being solid for growth, But the fact is, if it's so uncertain, so unpredictable, do you just have paralysis?
Well potentially yes, And that's exactly right. And I think the narrative has been shifting, and the narrative has been shifting in part because there is so much uncertainty regarding what the administration will actually do.
So when we look forward, we have a core CPI tomorrow and then we're heading into the administration, we hear that we have inauguration day and beyond when we start to get a whole host of executive orders. What are you looking for in particular, what can really move the needle for your forecasts?
Well, any certainty around what it happens around immigration and tariffs will be very important into our input for the labor market and for industrial production and business investment.
Sonny Meski, if you bs or the back of p Api PPI coming in just a little bit softer than expected. That This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, angiot politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern, Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business Amp.