Bloomberg Surveillance TV: June 12, 2024

Published Jun 12, 2024, 4:00 PM

-James Bullard, Fmr. St. Louis Fed President, Dean of the Purdue University Mitchell E. Daniels, Jr. School of Business
-Frances Donald, Manulife Investment Management Global Chief Economist & Strategist
-Scott Chronert, Citi Research Managing Director

Former St. Louis Fed President James Bullard and Manulife's Frances Donald react to May's cooler-than-expected CPI print and look ahead to the Fed rate decision and Chair Powell's remarks. Scott Chronert of Citi outlines his equity market outlook and the reasons he's bullish on tech stocks.

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie 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. We begin with our top story. CPI is about twenty six minutes away. That inflation print coming as the fmc's two day meeting comes to a close, likely determining what the dot plot looks like going forward. The former sen lewis FED president Jim Bullard saying he only sees one or two cuts on the table this year thanks to slow progress on inflation.

Jim is with us here in New York.

Jim, good morning to you, Good morning, good morning.

Just fantastic to see you, sir. I want to talk about your dot plot from a long time ago. We all remember when it came out years ago and you said enough of this, You put your dot right at the bottom and left it there for the next couple of years. How do you approach the dot plot and how do you think these officials would approach it today?

Yeah, I mean at that time I wanted to get the idea across that we had just switched to a low interest rate, low inflation regime and that we were unlikely to break out of that regime anytime soon, and so it was probably a better forecast just to say that you're going to stay in the regime. Now that the pandemic came along and up ended the global macro economy, it looks like we're in a different regime now, So maybe it would be a different dart today.

Well, let's play it.

Do you think it would be POSTDFC in reverse? Would you just leave it up there at five point fifty for a couple of years out?

I think that's a little high.

I'd like to see the your curve normalize here as a final piece of the soft landing, But I do think yields will be higher going forward than anything we saw between twenty nine and twenty nineteen.

Do you think that the FED is accurately reflecting that in their current projections that.

Rates will be higher for longer.

They've got their long run dot at two point six. Maybe that'll shift up a little today. I think the idea that you're going to have that low of a policy rate, I don't know, that's getting a harder story to tell.

I think, well so steeper.

Shudo is on earlier and he said, essentially, there's a real test of the Fed's credibility right now at a time or some people are saying that we're essentially going to vacillate between two and three percent in terms of inflation, or even stay at three percent, given the feds proclivity to cut rates in the near term. Do you agree with that that essentially this is a three percent inflation target that just hasn't been enunciated by the Fed.

No, the target is two percent, and if inflation stays above two percent, then policy has to be at least mildly restrictive to try to push inflation back to two percent over a reasonable time horizon. But a key thing is what what time horizon do you think you know it should take to get inflation back to target? And if you look at these projections, they're probably talking.

Two years or something like that.

So you've got eighty basis points to go on core PC inflation. You know, you can do forty basis points in one year, forty basis points the next year, and so it's not it's not the urgency that we had when inflation was much higher just two years ago.

When you put in together these forecasts, how much collaboration is there on the FMC, I'll go off into a corner and just sort of plot it down.

Do you do it ahead of science that's proping on it what it is?

I have actually tried to call around my colleagues and stuff, but it's very time consuming to call everybody, and they've got their own staffs and their own stories to tell. So it works better just to give your own view. And and so there's a lot of communication by asthmosis to you kind of know what everybody's saying because you see them all the time and you hear their speeches and everything.

Because we heard from someone yesterday that kind of implied basically said that for the Federal Reserve would be better if the implied cuts. This year, the median DOT for twenty four came down from three to two and not down to one at least when I would basically send to that individual.

But what are you talking about.

You're telling me that Chairman Pal is going to get on the phone and say, look, guys, we need to massage this and collaborate and make sure the median dot just shows two cuts for this year and not one. That's not how it works, is it.

No, And people have strong views, so I don't think, you know, they take their role very seriously on the committee and they're not really willing to say, you know, I'm going to compromise my view just because of, you know, something that might happen on that particular day.

Yeah, but this says raised this question of how do you message it perfectly? Is there a true consensus and what's the differential between consensus view and I dare say group think or something where people all to sort of are coalescing around this idea that inflation is maybe a little bit higher but not that much higher, that rates are restrictive even though the economy keeps chugging along.

Yeah.

I think one thing to keep in mind about this is that the board staff serves the whole Board of Governors, so they kind of have Thus they all see the same analysis and the same have the same projection, and then they may have a view relative to what the staff presents, and then they might deviate a little bit.

But they don't have their own independent.

Staff, whereas at the banks, all the banks have their own research teams and they might have very different views from what the board staff thinks. So so you know, the tendency for some of the dots to be clustered would be at the Board of Governors.

You were on a FED in twenty twenty when you were dealing with some of these issues, and that was the last time that we had a CPI print the same day as a FED decision.

Yeah, it's like a solar eclipse or yeah, yeah, business.

So we're tearing into the sun, the political sun, and it's a solar eclipse.

You're here for us.

How much does it really alter the discussion?

Yeah?

I think I just caution viewers here and listeners that what happens is on this day of the meeting.

This meeting will start at nine o'clock this morning.

The first thing will happen is that the staff will come out and say here's what the CPI reports said. And most people will know the number, at least the headline number at that point, but they'll give a brief analysis of that. But the only thing that will matter is is it different from what the staff forecast? So did it come in hotter or colder than the staff forecast? If it came in about is expected, and the staff will say, well, this didn't change anything because we already expected this.

So usually it's not big news at the committee. It would have to be some blowout difference.

Do you think that it is correct that the balance of risks between inflation and slow down in growth is roughly balanced or do you think that it's more heavily weighted to one than the the.

Well, inflation's been high, and I think you want to finish the job here and get inflation back to target. So I think that's still job one. And labor market seems pretty strong based on the jobs report you know last Friday, and other aspects of the economy seem pretty good.

Atlanta fed GDP now.

For the second quarter up over three percent at an annual rate, so it's daily it does. But I think if you're just tracking and just trying to make a statement based on the data that you have in hand right now, growth looks pretty good, labor market looks pretty.

Good, inflation's still too high. Might as well stay a little bit hawkish, Jim.

I've never seen people so skeptical of its two seventy two on payros as they were on Friday. Can you walk me through how you interpreted that economic dight butN the establishment survey and a household survey, and how you'd read into that, because when you say maybe we need to be holkish today, some people think based on that number of Friday, we should be dubbish. I mean, how would you incept but that economic tight set.

Yeah, unemployment ticked up to four percent, and that's interesting, but it's still below pretty much everyone's estimate of the natural rate of unemployment. So they've been saying that, We've been saying at the FED that unemployment should probably be expected to run a little bit higher than it has and a four low fours or mid flors on the unemployment rate is a very good number still for the US. And then on the headline number, I was just thinking about this, so I plotted something that no one ever plots, which is the percent change year over year in nonfarm payrolls so if you look at that a year ago, you would have been at two and a half percent.

Growth year over year.

Now you're at one in three quarters year over year. That might so that does show the slowdown, but the one in three quarters would still be faster than so if you took that to be the run rate. We always go on the monthly number, which is so volatile, and you know, how are we supposed to interpret this? But other measures of the economy will go on a year or year rate and that controls a little better for seasonality and stuff like that.

Francis doano to Manuel life alongside us as Wow, Francis, I want to get out to you and get your ready reaction to that CPI print.

I literally breathed a sigh of relief. For a lot of reasons. I suspect your palladed too, for consumers who are not going to see as much month over month increase in prices. For all the economists out there with a September rate cut in their forecast, they're probably also relieved. But also a bigger picture, higher rates are working to bring down inflation. This was an increasing concern. Our rates restrictive enough? Do we keep them? This high. Why is inflation not moving downward? That said, John, this is one point. We have three more before the September meeting, And as exciting as this is this morning for a few hours, I'm more interested on the CPI print that comes out September eleventh, just one week before the FEDS September cut. That number may end up being much more important than this one, so we'll take it as a win. It's good news for consumers, for markets, for all. But it's one print and we got a lot of information coming through.

Today, Francis.

Jim Bollerer was also talking about the Pain speech in Jackson Hole that Jay Powell gave a couple of years ago, when he said that essentially, this is inflation that's running too hot, and we are going to get inflation back down and it is going to require pain in the economy. Francis, you are expecting to see that pain. We haven't seen it on a broad based level. Do you have a sense of whether this is inflation, is the immaculate type that we've been talking about, or whether this is just one dot in a series where things are kind of shifting. We're at a tipping point.

I would hope that would be the outcome for the American people. At the same time, are leading economic indicators on the jobs front continue to show weakness ahead. We're at a four percent unemployment rate. I'm watching today to see from the Federal Reserve they already had four percent penciled in for the end of this year. Are we really going to go through the next six months without an additional tick up and the unemployment rate? And let's remember the simple rule of thumb is that it takes about two years for those rate hikes to work their way through the system. And we're two years and some change after that first rate hike. We're not at the end of the impact of rate hikes. We're at the very beginning. So while magnitude of the downside for the US economy is up for debate, the direction shouldn't be. There probably will be much larger slowdown in jobs than the second half of the year, and this is when the Federal Reserve will have sufficient data to begin cutting interest rates and bringing those rates down beginning we think in September.

Jim Boy, what's their take on that, given the fact that it seems like something that feels like a stretch.

The unemployment rate to stay where.

It is for the foreseeable.

I think it is immaculate disinflation. And again I think that, you know, by being credible and moving quickly, the FED was able to get firms to change their pricing strategies quickly. The inflation came down relatively quickly. And so, you know, one simple theory about how this works would be that the FED threatens recession, everyone looks ahead, they see that that might be a possibility, they don't want to raise prices into that, and the inflation goes away relatively quickly. So that isn't the most popular theory around here or on Wall Street, but that is, you know, that is something that you have to take into account because the anticipated effects can overwhelm sort of the mechanical effects and you get lower inflation right away. So this is something I was advocating for in twenty twenty two, that we you know, let's move quickly, let's try to quash the inflation quickly. And this report today is helping that story.

Forgive me for going off pace, but just entertain me for a moment. French tenure yield's down by about seven or eight basis points right now, that CPI print was more important to the European bond market than anything Macrons had to say in the last twelve hours.

The banker to the world, the reason why J. Powace would go on tour. But ultimately it does highlight how this is the market that everyone is watching, regardless of some of the external factors.

Ara Jersey Blueberg Extelligence joins us. Now for a little bit on this bond market are the most important data point in global finance?

Your thoughts on this one.

Yeah, obviously better than some people had feared, you know it on the core CPI it was a low zero point two so it was actually under zero point two percent, and I think that that's something that traders have been able to kind of grasp on to. And like you noted, you know, this is pulling down you know, all global sovereign bonds at the moment where bond yields at the moment. So you look at German yielder down by six basis points, like you said, France down by seven basis points. And but remember the beta to that is only half of what's going on here in the US where you have five year yields off fifteen basis points at at at one point, and that just shows that you know, you know, we're now going to be pricing in for two fol cuts probably before the end of the year. And then as you get additional data, obviously the market's going to have to shift those expectations pretty dramatically.

So Ira, I have a question for you. So the if you just took.

Rebase where inflation is now, and you said point two every report through.

The end of the year, you would get year over.

Year core PC inflation on a twelve month basis at two point eight at the end of the year. So you started out at two point eight in January.

On that metric, we'd end up at two point eight. So maybe that's not really enough. You need you need even.

Better reports in order to be able to show progress through through this year, I.

Think, But I think I think part of it, James, is the fact that we're you know, not increasing, right. So so a couple of months ago, when we had a couple of inflation scares, the market really dragged onto that and said, okay, what happens if the Federal Reserve doesn't cut it all this year or maybe even hikes Because keep in mind, in January, the market was pricing for almost no chance of the Fed staying on hold this year, and now we're actually pricing, or were pricing, I don't know where we are at the second, but we were actually pricing via options on short term interest rate futures for the about a twenty percent chance of potential hikes by the end of the year. I suspect that when you get if you get another print similar to this, where you have another well at zero point two again on the core, that people will say, like, hey, progress is being made. The federal Reserve is still more likely to remain on hold and or cut than they are to be even thinking about hiking interest rates before you June twenty twenty five at this point, so I do think that there is a sea change and it matters. And to your point, you know, I still think that the that the market is going to say, okay, what's the trend versus where we were as opposed to as opposed to just looking at okay zero point two forever is probably not going to be sustained.

Ara Jersey of Flamberg Intelligence. Ara, thanks for that, appreciate it. If you want just joining us about thirteen fourteen, minutes ago, we got this data zero point zero percent month of a month headline inflation against the estimate of zero point one previous number point three stripping out food and energy Bramo zero point two percent was the number.

Zero point three was the estimate.

And Jim Bullard, a former Saint Louis Fed president, just moments ago saying that this is the immaculate disinflation that many people were looking for. Francis Donald's still with us, and Francis, I'd.

Love your take on that.

Do you see this as the friend as the immaculate disinflation? Can you bet on that and arrange a portfolio around it?

Well, for June it feels like immaculate disinflation, or for May we had this really large decline or no change in inflation month over month and are pretty good non farm payrolls number. That's exactly what this immaculate disinflation would be defined as. So now it's about what do we see next. And on this front, I do see some downward momentum that is occurring in the economy. But let's remember, if you're sitting on a trading floor, you're managing portfolios. Numbers like this aren't just about changing your base case. It's not that something like this would make Q move from a December to November or even to a September rate cut. It can often be about reducing the balance of risks or the tails of the risks to your base case. So this number probably isn't going to change anyone's outlook as to what will happen next. That'll be based on their forecast. But it does reduce the chance that the said would, if you had it in your scenarios, have to hike again, or that they have to stay for a prolonged hold. So sometimes it's about reducing those fat tails on your outlook as opposed to the individual. That is tradable, but usually around the conviction of your trade or the balance of risks, or how much leverage you're putting onto it as opposed to the trade itself.

We could J Powill say, Jay Francis would really move the needle in your book.

Well, he could speak to some of his longer term concerns that aren't inflation or jobs for example. Well, he can't do it. But interest cots for the federal government are very high. They are about nineteen percent of revenue is going towards interest cocks. If you were to talk about and he probably wouldn't some of the risks of higher for longer that would move the dial. But we have three more inflation reports, three more just about everything until we get to September. The seat is in a holding period, the market is in a holding period, and each individual data point, each individual FED commentary will be far less important than the sum of all of their parts. So as much as this meaning we'll get a lot of attention, I'm sure we'll talk about it all day. I'm far more interested about the evolution over the next three months. That will be more important than any singular event.

Francis one of the best. Thanks for faminess.

Francis Doan with Emanualife City. Scott chron right in this the market appears to be pricing a first FED cut in December. Cities economists have confidence in a September cut predicated on desalrating macros. All told, the S and P five hundred continues to be influenced by the structural growth opportunity in generative AI as an offset to the mixed macro picture.

Scott's with us.

Now for more, Scott, I'm going to say it for you because you won't do single names on TV. But is this just another way of saying ignore the FED and buying video.

I think it's another way of saying that Wall Street's much different than Main Street, and the fed's influence is mainly a Main Street issue. In terms of the economic activity. The underscores us equity fundamentals.

We've heard it a million times that the equity market is not the economy. Is this S and P five hundred in its current form a pretty good example of that.

So we've done some what we call Sandy Chuck work on this, and if earnings solely followed GDP over time, our back of the envelope is that the SMP would be worth forty six hundred. Okay, So what you're paying in current levels fifty three and above is going to tell you at some level what you're paying for the expectation for growth over and above economic activity. And clearly this is being influenced by the megacap component and the AI tailwind that it now has. What he basically says is that for those that think, my gosh, we're in an equity market bubble, I'd say, well, your downside is probably fifteen percent in that regard, and when you step back and look at it with a new growth driver that we do have regarding spending on AI and other metrics around that, the SMP is actually in a pretty good fundamental place.

We've been joking Scott. The best bet right now, or the bet that everybody comes on and says, is they're having cash in video. And that's essentially the Barbell approach that they've been taking. Are basically tech and big tech stocks that are generating a lot of cash and then cash itself. And that's the approach to take in a macroeconomic environment that is highly uncertain. How concerned are you about this type of behavior leading to real crowding and a specific number of stocks.

You know, Lisa, I think it's a really good point where obviously very concerned about crowding. But what I would say so far is that you look at valuations, got it. When you look at PEG ratios, which is your pe over growth, it turns out that your PEG ratios have actually come down. So what's been happening is that the underlying earnings expectations for these vega cap growers have actually been supporting the price action and the valuations now to your earlier point.

Though.

Whether you want to call it a joke, but I think it's reality is that you're right. What you have is a FED policy circumstance that is at risk of undertended consequences. So on main street, if you're a non saver, you've got issues. You've got higher inflation that presumably is coming down now, and now higher interest rates. That's a much different setup than if you're a saver and you're now earning a decent return on your cash, which is much different than prior to COVID. It's the same thing in corporate America. So the megacap growth tech part of the market does tend to carry lower debt, more cash. That's a market different discussion from looking at sectors like commercial real estate or real estate and utilities staples parts of industrials where they do tend to be more debt laden. So the fact here is that the FED, whether it's intended or not, is providing a different type of headwind and tailwind to different parts of the economy and different parts of the stock market.

If the FED were to start cutting rates, would that make you more constructive on these other areas or would It kind of depend.

It kind of depends.

So the other work that we've done recently basically says, if you were to cut two hundred basis points of FED rates over the next year, that would create, all things equal, roughly one point seven percent earnings drag on the S and P five hundred. Essentially, those megacap growth companies would lose less, would lose more in their cash income than they would in what they pay on their debts. So you know, it's a bit of a circuitous argument on this. But as you go down cap, as you go down into small MidCap, this is where now you begin to trade more aligned with the underlying economy. You don't have that megacap influence in small mid by almost by definition or implication, you've got a lesser tech weight, you've got higher industrials exposure, you're more economically sensitive as the margin small MidCap would benefit from a rate shift. But the perspective here is that historically, when we've gone into more prolonged periods of fedes, it's usually been on the other side of recession, and during those recessions you tend to have a major drawdown in earnings. We don't think we're looking at that right now, so it is a more mixed picture this time, Lisa.

Scope before you go, I just wanted to mention the post model set that even the Taine put out and pick out the s. An opportunity, of course to talk about the like great Tobias Leftkovich as well. Can you talk to us about where sentiment is right now, Scull, because it feels like on this program, one minute, Everyone's parish, the next minute the super Polish, and it changes date today, where are we.

Well our seniment read we're in euphoria. We've been there for a couple of weeks now, We've been in and out right. So we went clearly into euphoria at the end of Q one. We had that April pullback pulled us back out of euphoria, and now we're back in the way we're spending it around, John, is that we're focused a bit more on your process evaluation work, which off of this recent rally, what it has done is begun to switch the cross asset valuation a little bit more in favor of bonds, and so the combination of that where we're trading versus our estimates of fair value for the SMP and the Lefkovich Index all suggests to us that we're looking at a market that's due for a bit of a digestion in here, but that that's a different discussion than the longer term fundamental setup, which we still think looks pretty good.

Scott, you're one of the best. I appreciate your time this morning. Thank you, sir, Scott Croned there. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angio 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 app.

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