Bloomberg Surveillance TV: May 2, 2024

Published May 2, 2024, 4:00 PM

-Andrew Hollenhorst, Citi Chief US Economist
-Savita Subramanian, Bank of America Head of US Equity & Quantitative Strategy
-Stephane Bancel, Moderna CEO

Citi's Andrew Hollenhorst reacts to the Fed's decision to hold interest rates, saying inflation data will give the Fed the opportunity to cut rates this year. BofA's Savita Subramanian says the US will achieve a soft landing where the market adapts to higher rates. Moderna CEO Stephane Bancel reacts to better-than-expected first quarter earnings and discusses the company's upcoming RSV vaccine.

Bloomberg Audio Studios, Podcasts, radio news.

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. Savera joins us now, SAVERA, good morning to you. Which one is this? Stagflation? Hard landing, no landing? Where are we going?

I think we're going to a soft landing with a reasonable market environment, maybe better.

Growth ahead than what we're used to. Higher rates, a little bit of higher inflation. But look where we are on inflation.

These are the levels that we all used to write about as the Goldilocks levels. Right, We're not at nine, we're not at zero, We're around.

Three or four. Those are healthy levels for equities.

It doesn't sound late cycle when you speak where are we in this cycle?

Who knows?

I mean I think this cycle is very asynchronous, if you will. So it's you know, there's some areas that are booming. We're still kind of coming off of COVID, So we've got services demand maybe slowing or tapering off, goods demand potentially picking up.

We've got still tight employment.

But then there's also a couple of structural factors that I think.

Are skewing the cycle call.

So we have a very tight employment market, and one of the reasons for that is demographics, which we're you know, we're in an aging demographic scenario. And then on top of that, we had a huge number of early retirees during COVID. Unless we loose an immigration, I think that we're going to remain in this very tight labor market. So that's the other factor. And you know, we've talked about this. I think the consumer is in a very different balance sheet set up than in prior cycles, where you know, long term fixed rate mortgages eighty five percent, very different from prior cycles. You've got baby boomers sitting on wads of cash.

So I just think that.

This cycle you can't just map on the typical you know, oh, the FED is tightening, it's.

You know, or late cycle. Now the FED is stopped and they're going to start cutting. We're early. It's a different a different type of market. You use the G word.

Sorry, I apologize to fans.

It's been a long way goldilocks. And we hear this from Max Kettner's too, and this really raises a question, or can we have goldilocks with five percent FED funds rates?

Is this actually just a new rate?

Is it not actually restrictive?

And is it something that can actually even allow a broadening out and a rally even without any rate cuts this year?

I think so.

I mean, I think there's a very high probability that the FED remains on hold. Our economists have talked about this as well, So we expect to cut in December.

Maybe no cuts.

Look, I think five percent is a manageable number, especially if you have corporations that have locked in fixed straight you know, long term debt you've got And this is the S and P, not necessarily small caps or other regions. But I think that the SMP has actually prepared for this moment. Now you've got big tech companies, the go go growth stocks initiating dividends. Right, We've got an environment where the market is adapting to higher interest rates, shortening their duration, giving us more cash. I think this is actually a kind of a reasonable setup for equities here.

I don't want to be cynical. There is this concern with people focusing on large caps that can handle this. The people shrug off the highest delinquency rates. Going back many years, this idea that if a number of people just get blown out, fine, it's okay, you know, we can just go into luxury, we'll go into big tech, we'll go into the areas that'll do fine, and we'll be fine, even if other segments are getting kind of blown.

Right, right, How long can that go on? I think that is a key risk.

And I mean we've seen that income gap widen for decades now, right. I think what's happening now is actually potentially better for the middle to lower income customer if you're in certain sectors. So look at manufacturing in the US. There's still a very tight labor force. Real wage growth is positive. Where you're seeing a lot of the layoffs is more in white collar, you know, not necessarily Middle America, where you're seeing still very strong signs of this restoring boom that has a long tail, right. I mean, you can't build a factory in a year. It's going this This restoring theme is a very long term theme that I think has legs over the next several years. And that's where the job tightness is, that's where the real wage growth is really positive.

And I think those are areas.

That are, you know, different from where we've seen benefits in the past. So that's one way to stave it off. And then you know, I think higher oil prices are also a concern if you think about geopolitical risks. But where we are today is I think the US is in a better position because we are now a net exporter rather than an importer, so we've got a little bit more wiggle rim around oil than we did in prior cycles.

But you're right, it's a concern.

Well when it comes to these low age workers saying people they're getting jobs in manufacturing. But I go back to what Diane Swanks said yesterday to Jonathan, Lisa and Tom. These individuals move from the shadows of the economy into the sun. Maybe that's the labor market that's getting a better job, but then they get hit by inflation. They get burned by inflation. Right, So how does the FED think of these individuals when it comes to higher inflation, because we know they have no appetite.

For a hike, right, right, right, right.

So I think that where we are now is an environment where we really do need to see some of these inflationary forces subside, and we're I think there's a couple of things going on that could actually continue to create a ceiling on inflation.

So think about it.

There's still demographics and demographics, We've got aging population, less demand for stuff. That's that's another that's sort of a disinflationary pressure. You've also got disruption from AI tech automation, so that's a continued disinflationary pressure. I don't see inflation going to the seventies levels that's really untenable for your average consumer. I think there's enough of a secular disinflationary force at play that we've all been talking about, you know, for the last twenty years that can can actually stave off a really aggressive level of inflation. And then on top of that, I think the energy independence of the US is a really important factor because you know, that's a benefit to the US that most other developed.

Economies don't have. And I think that's something we should be happy about.

Let's finish on something you've been focused on for quite a while allan to call Amy value, and it's industrial staff to capital. I remember you outlining this, I think maybe twelve months ago. Still a big thing for you and a team.

Yes, and it's worked for maybe two months out of the last twelve.

But you know, I think where we are now against throwing much Just for the record, I was genuinely interested in that faces well.

You know again, I think we're in an environment where the broadening of the market is still a theme we talk about, and it's started to happen in the last couple of months.

Look who's going to benefit from all.

These chips and this AI and you know automation. It's old economy companies that get more labor light. And I think that's the benefit that we could see over the next you know, twelve to twenty four to.

You a few years.

I think the areas are you know, industries like ours, the banks, right, I mean banks are very labor intensive.

Now there is this tool that.

We can use to replace people with bots and processes.

Et cetera.

So I think, you know, it's it's a potential streamlining or cost cutting story self help for a lot of these old economy services sectors that haven't really addressed their labor intensity for for quite a while.

This was it's going to s.

Andrew Honposo. City office is one. We maintain our base case from one hundred basis points of counts in twenty four, substantially more than priced by interest rate markets. Andrew's with us around the table, Andrew Hallo, let's go straight to it. Four cuts in twenty four. This is not consensus. Where does it come from?

Well, the Fed's going to cut this year.

I think that was very clear from CHERA Powell yesterday that at least the next move is a cut, and the way that they get there is because the inflation data is.

Going to give them the opportunity. I don't think it's.

Going to two percent, but it's going to be slow enough that it lets them cut. And then the labor market is going to weaken. And we heard that from Chaerir Powell, this idea that we're seeing that the trend is really towards a weaker labor market.

Here, I think this is your signature cool for this year. It's the weakness that you're anticipating in the labor market. Do you see it now? Where's it coming from?

This is really important because what we heard from Chair Powell is with the two mandates, the dual mandates and better balance than their words, has come down. It's not a two percent, but it's come down. They're looking at employment now. And when you look at employment, Chirpewell highlighted some of these things. You look at the conference board, do people see jobs plentiful or do people see jobs hard to get?

They're seeing jobs as harder to get. You ask people, are you more worried about keeping your job? They are more worried.

We see that in the New York Fed survey, and then you go to the NFIB Small Business Survey. It's going to come out to day at one pm. Let's see where it is. But you're seeing small businesses that are saying they're not excited about hiring.

So all of these indicators are going in one direction.

At the same time, we've been seeing signs of cracks for a really long time. People expected things to weaken.

Substantially earlier this year. They haven't.

Late last year they didn't. So at what point do you have conviction. This time is different.

So I think a lot of those calls were maybe not wrong, but just very premature. And the cycle has just extended a lot longer than many people thought. And what we were going through in the labor market was a kind of normalization. We had job openings that were extremely elevated, We had just incredible will need to hire people and restaff and we've really worked through a lot of that.

Now when we look at these trends, take the quit rate.

And yesterday's Jolts report, that's a decade low, and what that's telling us is that this isn't just normalization.

At this point.

This is people that at least in the last ten years, people have not been this worried about holding onto a job, which really.

Raises an interesting question about tomorrow's non farm payrolls report. We're talking about how how high numbers will be and how high numbers have been, and it really is one of the reasons why people say this is a robust labor market. Are you saying that those numbers inaccurately represent the true labor market and are distorted by immigration, by other types of features that.

Really might mask a real level.

Of weakness that could catch us to as sooner than many people think.

I think that's right.

And one of the great things about being a US economist is we have an incredible range of data to draw on, especially with something like the labor market. So the biggest focus is usually right that establishment survey, non farm payrolls, those have been strong. If you look at almost any other labor market indicator, they range from slightly weaker to that than that to a lot weaker than that. Take the household survey. That's where the unemployment rate comes from. The unemployment rate has been moving up because employment in the household survey has been softer. Take the Business Employment Dynamics survey. Now this is something most people don't watch. It comes out very, very lagged. The numbers just came out from Q three. Nine million firms that are accounted for in this This is really the official data on what firms we're doing in Q three.

If you look at that data, we lost jobs in the third quarter. I'm not saying that actually happen.

But you look at all these different data points, you kind of PLoP them all together and try to figure out where the trend is.

That trend is towards a weaker job market.

Let's take a look at the heart landing versus solft landing shop. We'll do that together. I'll do it in the air for you. It's been a long night, okay, So soft landing here, all right? Heart landing over here, self landing and macular disinflation, big supply side recovery, et cetera, et cetera. Sounds like you're somewhere over here. Is that fair? You're looking for something close to a heart land in this year?

That's fair?

And I think that markets have actually moved away from this soft landing idea. It's pretty clear from the inflation data that we're not getting the soft landing. If activity holds up, then maybe we're going to have more of an issue with inflation. The reason I think that the Fed's going to see enough to cut is because that's right, We're more towards that hard landing end of the spectrum.

So when you look at market pricing, and this has echoes of a conversation we had with Gershen distant found of a lince Burn steam in the last week. Do you see the pricing of say one rate cut this year as just a weighted average of a whole range of possibilities and maybe not the most likely outcome.

That's right, markets are always going to average over all the possibilities. And you heard Chair Powell, it was kind of this multiverse of possible Fed outcomes. Yesterday they could not cut at all. They could be cutting. I think what's important is a symmetry of the Fed's reaction function. You don't need both softer inflation and a weaker labor market. You just need one or the other, and that's why they're going to cut.

It's fascinating to me that you said we're not getting a soft landing. You expect one hundred basis points of federal cuts. Is that basically you saying that you think the damage will be done enough that even one hundred basis points of rate cuts won't be able to give that sort of surge of stimulus into the economy soon enough to stave off a real downturn.

This is what happens in almost every monetary policy cycle, and I don't think that there's good reason to think that this cycle is going to be different. We have inflation that's run higher than expected, still higher than expected even in the first quarter, that has kept policy rates higher for longer.

We're in the higher for longer stage of the policy cycle.

The next stage of the policy cycle is a weakening of the labor market. Once it starts gradually weakening, it then weakens more sharply. I think that's exactly what's playing out now.

Just quickly. How united is that commits see on the FMC.

I think there are a lot of different views around the table right now, and I think Powell is probably something of a master in terms of somehow bringing things enough together to do that press conference.

Yesterday Andrew Houn host Stephan I'm wonderful to catch up with you, sir. The stock is just about positive in the pre market. Can you talk to me about how you're balancing cost cutting with investing in innovation given what's in the pipeline.

Sure, well, good morning, Thank you for having me so very pleased with a quote. We basically try to focus on how do we drive sales, how do we drive R and D, how do we prioritize opportunities, which is why, for example, we announced that we are stopping the partnership with Metagenomy in research engine editing.

Same thing if you.

Look at the portfolio we're looking very carefully at all investments. And a good thing about those vaccines like respiratory vaccines is your only pay the fase free study. What So if you think about COVID, we still have sales from COVID, but the investment in the idea of COVID has come down a lot. As you said ours, we we are antipating a launch this spring, but we're not going to do another phase three four URSV. So you can still basically have a lot of new studies going on on reusing the capital you used to put in the other products before. And then if you look at oncology, as you know, when a fifty to fifty profit shared with Merk, so merk is paying half of a face free study. So that's how we're managing. When we're seeing a lot in technology. You might have seen last week an announcement with open Ai. We have actually more than seven or fifty gpt is going and that is helping us a lot scale the company across not only science, but striving a lot of productivity in manufacturing, in commercial illegal So that's kind of how we're doing it.

So Stephan, let's talk about something that our colleagues here at Bloomberg are extremely focused on and that's your RSV show, which according to our colleagues, some data is showing that maybe it doesn't last as long as others in the market. What we all want to know here at Bloomberger is whether that raises questions about the promise of your technology in treating other diseases. How would you answer that?

So we first said that if you look at the data the duration of the over vaccines, they are very similar. So I don't think it is scientifically correct to say that one of a vaccine doesn't last as long as the ones of a tool that are improved. And our look at the data. This will be debated at the CDC meeting at the end of drewn that for recommendations. So this doesn't worry me. If you look at duration, the duration of vaccination is induced by T cell. If you look at cancer product, the only reason it works is T cells, not antibodies. Antibodies don't have a rowing cancer. It's about T cells going and attacking your cancer. If a vaccine technology don't have good T cell response, the cancer product will not look as good as it is. So I'm not worried at all about duration.

Pretty much every time we speak Stepan, I ask you basically, have we couraged cancer yet? So I'm glad that you went there because that's been sort of one of the big questions and I hope for a lot of the mRNA vaccines. You have this melanoma vaccine in the works.

What more do you have to do.

To get it sort of set up for the approval process to apply for that? And are you using artificial intelligence to extracite.

That great question?

So if you look at cancer treatment in melanoma, we've said that we need to achieve three things to be able to talk to regulator about accelerated approval. So the face to day ties data we shared on the show several times, we see duration. If you remember in December we had a three year survival, it was better than the two year survival. So the difference between people on all treatment and people that are just getting cathedral is getting wider. So there's a very strong evidence that the drug is working. So that's number one. Number two is we need a phase free study to be substantially enrolled, and so we are working very actively. Face free study started two months earlier than planned last summer and so when we are substantially enrolled, we will meet that criteria and it could be later this year. And the third one is a plant, because of course we need to file in the restrection does all the information about the manufacturing process BFD, and the day you file is allowed to go of course audit your plant. That plant is being built. I had the chance to go there two weeks ago. The team is working NonStop, scheduling literally by the days, a bit like we did during COVID during the pandemic, and so I ancipate that potentially sometime next year. You know, the if a regulator was willing to look at the acceleted approval file, we should have this product available to help a lot of people, because one in two people benefit with notices coming back or no deaths compared to the best drug available today to them on the market.

Stephan, can you just give us a sense of you talk about artificial intelligence. Everyone's talking about artificial intelligence.

Could you just talk.

About how much that could expedite generally some of the drug production that we're seeing. Just how much that could really get us to achieve, you know, that cure for cancer, that cure for als, cure for Alzheimer's. You know, it's funny you're talking about sex and city. I sit around and worry about these things. You know, what do we secure these things? So I'm just wondering. You know, this is going to be in our lifetime in the next couple of years because of some of the machine learning.

Yes, So I think there's a few things to tear part in your in your great question. First is I think machine learning in academic labs, in research labs, in industry is helping accelerate the understanding of a human body.

If you think about you know, this.

Is Alzheimer and others complicated disease that we do not have solutions for yet as a society. It's because we do not understand the biology. We do not understand how the disease happened, how a disease evolved, and so we are just trying things and some work, but very few work. Most of them don't work because we're just trying and guessing. If you look at biology, once we understand that something works, then the industry can comes with very very good actions to deal with those. So I think AI will accelerate the understanding of biology, which would be fundamental to bring new Then AI is already used to accelerate discovery in terms of what tool do you go after a disease once you understand it at modern already we have different chemical matters that are generated by our AI system that are helping us to accelerate the work that humans are doing. So it's an accelerator to the teams. And then there's a huge chapter on productivity. If you think about clinical development phase one, two and three, it's basically doing experiment in human getting the data, finding the doors, doing more experiment, and when you have all studied on, you gather all the data and you submit by realator. My point is it's all about data. We are literally hundreds of business processes that need to happen, and I think many of those, if not most of those, you've got to be able to apply AI to shrink time to go faster. An example we shared in March in a Vaccine Day, the team wrote a GPT to help us to do those selections. When you do clinical study your phase one, you try several those is and then based on the data you get in the clinic, you decide which jows go into your phase free.

Well, it used to.

Take around a monph to do that by having people and meeting and experts looking at the data. Will we develop a GPT that basically get all the data from the clinical study and suggest to us a doose in literally a minutes or two. That is already a tool that has been developed that I've seen used at the company. There's just one example. So here you go to shrink them off. And if you do that on the hundreds of business processes that have to happen in preparing the drug for the clinic, the clinical testing, the analyzing of the data, the communication with VFDA. I think you can save a lot of time. I don't know yet, because only history will show us in the next few years, can you shave thirty percent, forty percent, fifty percent of how many years it takes you to develop a drug?

I think it's going to be very significant. Stephan, We've got to leave there. Is fantastic to catch up. This amazing to listen to you talk about the efforts taking place at Maderna. But then see have Stephan bands. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. 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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