Bloomberg Audio Studios, Podcasts, radio news.

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. Mike Wilson's capitulated. He's moved from forty five hundred to fifty four hundred and all of that. Can we just start with the scube the wide range of outcomes, because that was the headline of the piece, the bear case versus the bull case. Has it ever been this wide?

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. Mike Wilson's capitulated. He's moved from forty five hundred to fifty four hundred and all of that. Can we just start with the scube the wide range of outcomes, because that was the headline of the piece, the bear case versus the bull case. Has it ever been this wide?

Well, not for us, I think for other people they've had wider skews, And look, it just reflects the uncertainty that has been the case for the last several years. And quite frankly, I wouldn't be surprised if we had both sides, you know, I mean, like that's kind of the world we're in, which is, you know, think about this year, and we talked about this at the beginning of the year, which is, we had three sort of equally similar opera, you know, sort of outcomes. One was a soft landing is the goldilocks, which is kind of consensus now and that's our house view. Then you have the no landing, which is kind of a reacceleration, the stickier inflation, even maybe a stagflationary outcome, which is what the market was thinking about in April.

Well, not for us, I think for other people they've had wider skews, And look, it just reflects the uncertainty that has been the case for the last several years. And quite frankly, I wouldn't be surprised if we had both sides, you know, I mean, like that's kind of the world we're in, which is, you know, think about this year, and we talked about this at the beginning of the year, which is, we had three sort of equally similar opera, you know, sort of outcomes. One was a soft landing is the goldilocks, which is kind of consensus now and that's our house view. Then you have the no landing, which is kind of a reacceleration, the stickier inflation, even maybe a stagflationary outcome, which is what the market was thinking about in April.

And now you're back to a soft line.

And now you're back to a soft line.

But you still can't rule out of recession either, right, So like all of these are very possible, and you know, they could all happen with a higher than normal degree of you know, certainty.

But you still can't rule out of recession either, right, So like all of these are very possible, and you know, they could all happen with a higher than normal degree of you know, certainty.

So that's that's really.

So that's that's really.

The headline that should have been out is that, look, nobody knows anything, right, I mean, and particularly at a point in time, and I think maybe maybe our mistake is just admitting that we don't know as much as maybe everybody else claims to. That's called humility, something that we've learned the hard way over life.

The headline that should have been out is that, look, nobody knows anything, right, I mean, and particularly at a point in time, and I think maybe maybe our mistake is just admitting that we don't know as much as maybe everybody else claims to. That's called humility, something that we've learned the hard way over life.

But anyways, the point here.

But anyways, the point here.

Is that the meat of our report this year or this this update was really more about how do you make money in an environment whe have basically zero percent ups side and the base case and you could have twenty percent upside or twenty percent downside.

Is that the meat of our report this year or this this update was really more about how do you make money in an environment whe have basically zero percent ups side and the base case and you could have twenty percent upside or twenty percent downside.

And that's what clients pay us for.

And that's what clients pay us for.

Right.

Right.

It's the process.

It's the process.

It's understanding, Okay, what kind of environment and how are we going to navigate that and manage that. So we spend a large part of the report yesterday talking about trade ideas, specific sector ideas. That's not the headline that people want to write about. That's fine, and it's your prerogative, but that's what we want to talk about.

It's understanding, Okay, what kind of environment and how are we going to navigate that and manage that. So we spend a large part of the report yesterday talking about trade ideas, specific sector ideas. That's not the headline that people want to write about. That's fine, and it's your prerogative, but that's what we want to talk about.

That was never going to fit in the headline. We will talk about some of that stuff in just a moment. Let's talk about the headline just brief flake, Sure, are you de emphasize in the fifty four hundred are you saying as a price target is not actually that important to you in the firm?

That was never going to fit in the headline. We will talk about some of that stuff in just a moment. Let's talk about the headline just brief flake, Sure, are you de emphasize in the fifty four hundred are you saying as a price target is not actually that important to you in the firm?

What is that?

What is that?

Well, it's not important to most clients. Institutional clients don't care about the target on the S and P. Five finals to being honest, they're trying to pick stocks and look, one of the most important things we talked about in the report is alpha generation. This year has been spectacular. The way we measure it with our client our client base, which is significant, is this is the best alpha generation alpha capture we've seen since we've started recording it since twenty ten.

Well, it's not important to most clients. Institutional clients don't care about the target on the S and P. Five finals to being honest, they're trying to pick stocks and look, one of the most important things we talked about in the report is alpha generation. This year has been spectacular. The way we measure it with our client our client base, which is significant, is this is the best alpha generation alpha capture we've seen since we've started recording it since twenty ten.

So that's what people care about. We're trying to help them in their.

So that's what people care about. We're trying to help them in their.

Process of Okay, what kinds of stocks work in this environment? Oh, by the way, when we skew from these different outcomes, you need to be ready to pivot towards different types of securities.

Process of Okay, what kinds of stocks work in this environment? Oh, by the way, when we skew from these different outcomes, you need to be ready to pivot towards different types of securities.

Right now, like.

Right now, like.

Our house call is it's a soft landing goldilocks outcome. We're not that confident that we want to make that bet fully. Like we think it's still late cycle, which means quality. Okay, large caps over small caps. Still, we like staples over discretionary. We have two defensive sectors overweight utilities and staples because that kind of protects against slowing growth risk. So there's a bunch of different things, but the main factor that's.

Our house call is it's a soft landing goldilocks outcome. We're not that confident that we want to make that bet fully. Like we think it's still late cycle, which means quality. Okay, large caps over small caps. Still, we like staples over discretionary. We have two defensive sectors overweight utilities and staples because that kind of protects against slowing growth risk. So there's a bunch of different things, but the main factor that's.

Been working is quality.

Been working is quality.

Quality has been the most consistent factor and we don't see that changing.

Quality has been the most consistent factor and we don't see that changing.

I just want to say that if you wrote a headline saying nobody knows anything, I mean, we could do that every day, but it probably wouldn't really gain that much attraction. I am wondering if there are certain areas that would win in either scenario, the fifty four hundred or the forty five hundred.

I just want to say that if you wrote a headline saying nobody knows anything, I mean, we could do that every day, but it probably wouldn't really gain that much attraction. I am wondering if there are certain areas that would win in either scenario, the fifty four hundred or the forty five hundred.

Well, I think that we lay that out once again, that's our bare case.

Well, I think that we lay that out once again, that's our bare case.

A forty five hundred scenario is that's not really our bare case, that's our base.

A forty five hundred scenario is that's not really our bare case, that's our base.

Case for a year end.

Case for a year end.

Originally that obviously has proven to be wrong, mainly because of multiples, right. I think this is the main thing said that people have either gotten right or wrong in the last twelve months. Is that I mean a twenty one multiple is you know, in the top death style of the last eighty years. I mean that is an expensive multiple. So the question I think investors have to ask themselves is is that a fair multiple to be paying well and the goaldilocks, you know, perfect soft landing.

Originally that obviously has proven to be wrong, mainly because of multiples, right. I think this is the main thing said that people have either gotten right or wrong in the last twelve months. Is that I mean a twenty one multiple is you know, in the top death style of the last eighty years. I mean that is an expensive multiple. So the question I think investors have to ask themselves is is that a fair multiple to be paying well and the goaldilocks, you know, perfect soft landing.

I think that's plausible.

I think that's plausible.

But that's where we're trading, and that's why there's not a lot of upside at the index level.

But that's where we're trading, and that's why there's not a lot of upside at the index level.

Which raises this question, are there specific sectors that win regardless of the overall index? Do you see certain areas that are kind of independent of this overall shift of whether there is this momentum in international money that pours in and keeps valuations high and sends them higher.

Which raises this question, are there specific sectors that win regardless of the overall index? Do you see certain areas that are kind of independent of this overall shift of whether there is this momentum in international money that pours in and keeps valuations high and sends them higher.

It's large scamp quality.

It's large scamp quality.

I mean, I mean that is what's continues to and by the way, it's not just high growth. It's also cyclicals can work in that. But it's still up the quality curve and we show it in the note very clearly. I mean, it's just it's the it's been the best carry factor for the last year, year and a half, which is a classic late cycle winner.

I mean, I mean that is what's continues to and by the way, it's not just high growth. It's also cyclicals can work in that. But it's still up the quality curve and we show it in the note very clearly. I mean, it's just it's the it's been the best carry factor for the last year, year and a half, which is a classic late cycle winner.

Which is where we are.

Which is where we are.

So you know, don't overthink that and don't try to be cute and say, well, I'm going to jump over here because I think there's better returns there could be. Look in the small cap and in the lower quality areas. We can't own nothing. I mean, it's very idiosyncratic. It's very idiosyncratic. It's not a factor that's carrying well. It's a okay, I have a stock specific idea. It's a low quality stock potentially that has a very unique story to itself.

So you know, don't overthink that and don't try to be cute and say, well, I'm going to jump over here because I think there's better returns there could be. Look in the small cap and in the lower quality areas. We can't own nothing. I mean, it's very idiosyncratic. It's very idiosyncratic. It's not a factor that's carrying well. It's a okay, I have a stock specific idea. It's a low quality stock potentially that has a very unique story to itself.

Next week's still for this market, as you know, it's tomorrow afternoon. We get numbers from Nvidia megacap Tech. What supports that fifty four hundred? What supports it? For you? Is it mega cap tech, the NVIDIAs of this world? Is it elsewhere?

Next week's still for this market, as you know, it's tomorrow afternoon. We get numbers from Nvidia megacap Tech. What supports that fifty four hundred? What supports it? For you? Is it mega cap tech, the NVIDIAs of this world? Is it elsewhere?

Well, it's basically you're assuming that multiple stay elevated.

Well, it's basically you're assuming that multiple stay elevated.

Right.

Right.

You know, we didn't change our earnings forecasts in this report. We've had this sort of boom idea that we had the boom bust thesis for a while. We probably were early in calling for a recovery in earnings this year in twenty twenty five, so that didn't change. So you have earnings coming from a lot of different groups. Now, I would say the biggest contributors have been technology, Energy spent a big contributor surprisingly industrials because of all the spending that's going on fiscally. So those are three major sectors that are contributed to the earning story. But ultimately the fifty four hundred is being supported by policy, right by very loose fiscal and monetary policy. Now you may say, well, monetary policy is tight, not really. I mean we have an incredible amount of liquidity coming in to pay for that fiscal So to me, the risk in the story for the next six to twelve months is do the market start to balk at this unsustainable fiscal policy and the way that they're funding it, and we've wrote about this, you know, in detail. We have these liquidity provisions in place now, the reverse repo which everybody knows about. The Treasury General Account can be drained if necessary to pay for fiscal stemus in a budget if they need to. And the Fed has already said they're going to start tapering QT. Well, that's like a trillion dollars of liquidity. That's pretty loose right to pay for the fiscal So to me, does the market and I think this is just something we're watching very carefully. Last fall when multiples came down hard, it was because rates were going up due to term premium widening. Mean the bond market we're starting to push back on this strategy right now, that's not a problem. So one of the things we're going to be watching, you know, to change our view on how things trade at the index level is does the term premium start to widen again?

You know, we didn't change our earnings forecasts in this report. We've had this sort of boom idea that we had the boom bust thesis for a while. We probably were early in calling for a recovery in earnings this year in twenty twenty five, so that didn't change. So you have earnings coming from a lot of different groups. Now, I would say the biggest contributors have been technology, Energy spent a big contributor surprisingly industrials because of all the spending that's going on fiscally. So those are three major sectors that are contributed to the earning story. But ultimately the fifty four hundred is being supported by policy, right by very loose fiscal and monetary policy. Now you may say, well, monetary policy is tight, not really. I mean we have an incredible amount of liquidity coming in to pay for that fiscal So to me, the risk in the story for the next six to twelve months is do the market start to balk at this unsustainable fiscal policy and the way that they're funding it, and we've wrote about this, you know, in detail. We have these liquidity provisions in place now, the reverse repo which everybody knows about. The Treasury General Account can be drained if necessary to pay for fiscal stemus in a budget if they need to. And the Fed has already said they're going to start tapering QT. Well, that's like a trillion dollars of liquidity. That's pretty loose right to pay for the fiscal So to me, does the market and I think this is just something we're watching very carefully. Last fall when multiples came down hard, it was because rates were going up due to term premium widening. Mean the bond market we're starting to push back on this strategy right now, that's not a problem. So one of the things we're going to be watching, you know, to change our view on how things trade at the index level is does the term premium start to widen again?

We don't know, but that's what we're going to be watching.

We don't know, but that's what we're going to be watching.

So big risk factor is in the bond market, and in the bond market, the big focus is November. Does this have a political twist to it? An election call embedded in it?

So big risk factor is in the bond market, and in the bond market, the big focus is November. Does this have a political twist to it? An election call embedded in it?

Well?

Well?

I mean yes, and no, because I wouldn't say either party has shown any fiscal discipline, right, So in other words, I think we're going to get a strong fiscal support no matter who wins the election, both in Congress or at the presidential level. The real question for markets is how does it get funded?

I mean yes, and no, because I wouldn't say either party has shown any fiscal discipline, right, So in other words, I think we're going to get a strong fiscal support no matter who wins the election, both in Congress or at the presidential level. The real question for markets is how does it get funded?

How is it funded?

How is it funded?

Can they fund it at a reasonable rate? Right now, the bond market seems very relaxed about that feature, which is why multiples have expanded again.

Can they fund it at a reasonable rate? Right now, the bond market seems very relaxed about that feature, which is why multiples have expanded again.

So if the bond market stays relaxed about this, but there's a lot of people prick that it will and believe me, I get very excited about auctions, but every week people tell me that I shouldn't because there's plenty of interest at these levels. If there isn't pushback, then fifty four hundred is that too conservative?

So if the bond market stays relaxed about this, but there's a lot of people prick that it will and believe me, I get very excited about auctions, but every week people tell me that I shouldn't because there's plenty of interest at these levels. If there isn't pushback, then fifty four hundred is that too conservative?

Maybe you could be.

Maybe you could be.

I mean, look, I can make a case for seventeen times, which is when our target was originally for this year, seventeen eighteen times. I can make a case for twenty one times. I can make case for twenty two times. That's the problem, right, We don't know, So that's why we have a wider skew.

I mean, look, I can make a case for seventeen times, which is when our target was originally for this year, seventeen eighteen times. I can make a case for twenty one times. I can make case for twenty two times. That's the problem, right, We don't know, So that's why we have a wider skew.

And I would say this, Lisa, that the.

And I would say this, Lisa, that the.

Target will be more determined, probably by multiples than we're going to be wildly surprised on earnings. Okay, unless it's recession, of course, then you'll be surprising the downside. But I don't like the earnings haven't really moved that much for twenty twenty four and twenty five. Right, If you think about since October, which is with the low last fall, twenty twenty four, earnings estimates are up a couple percent. You know, the market's a twenty five thirty, so it's all multiple. So this is why you just need to be alert to think changing potentially in the bomb market first, and then that will feed into the equity multiples.

Target will be more determined, probably by multiples than we're going to be wildly surprised on earnings. Okay, unless it's recession, of course, then you'll be surprising the downside. But I don't like the earnings haven't really moved that much for twenty twenty four and twenty five. Right, If you think about since October, which is with the low last fall, twenty twenty four, earnings estimates are up a couple percent. You know, the market's a twenty five thirty, so it's all multiple. So this is why you just need to be alert to think changing potentially in the bomb market first, and then that will feed into the equity multiples.

When you talk about fiscal spending, to go back to John's point earlier in the election, it's very different what the fiscal spending may be used on depending on who wins the White House. You're talking about potentially industrials, the green energy economy. This is a new industrial policy from the Biden administration that could continue or it could stop short if it's Trump. How are you thinking about twenty twenty five, Well.

When you talk about fiscal spending, to go back to John's point earlier in the election, it's very different what the fiscal spending may be used on depending on who wins the White House. You're talking about potentially industrials, the green energy economy. This is a new industrial policy from the Biden administration that could continue or it could stop short if it's Trump. How are you thinking about twenty twenty five, Well.

I mean, look, I think the industrial policy will remain strong. I mean, that's our reshoring thing, which was part of the Trump administration.

I mean, look, I think the industrial policy will remain strong. I mean, that's our reshoring thing, which was part of the Trump administration.

So half of the industrial policy.

So half of the industrial policy.

Is potentially green energy and half of it, I would say, is reshoring in the de globalization trend. So there's going to be spending either way. It may be redirected, like I could see maybe the energy policy shifting back towards traditional energy, but I would be surprised if spending is curtailed in a meaningful way. From that standpoint, I think we will see changes or differences is in maybe in the tariffs, although recently that seemed to be more aligned. And then of course immigration is a big one, and that was a huge surprise this year that really nobody saw it coming around the label to positive labor shock from immigration.

Is potentially green energy and half of it, I would say, is reshoring in the de globalization trend. So there's going to be spending either way. It may be redirected, like I could see maybe the energy policy shifting back towards traditional energy, but I would be surprised if spending is curtailed in a meaningful way. From that standpoint, I think we will see changes or differences is in maybe in the tariffs, although recently that seemed to be more aligned. And then of course immigration is a big one, and that was a huge surprise this year that really nobody saw it coming around the label to positive labor shock from immigration.

So to me, that's a while.

So to me, that's a while.

That's probably the single biggest wildcard depending out who.

That's probably the single biggest wildcard depending out who.

Wins the election.

Wins the election.

Bigger not tighter is if you coming from men and Zentner and the team Molk and Stanley, this economy can grow without it getting tighter and generating inflation pressure. Are you saying that could flip the other way pretty quickly based on the outcome the election?

Bigger not tighter is if you coming from men and Zentner and the team Molk and Stanley, this economy can grow without it getting tighter and generating inflation pressure. Are you saying that could flip the other way pretty quickly based on the outcome the election?

I think, well, depending on how things behave if policy really changes, But yeah, sure, you if you all of a sudden shut the borders down, and you know Trump's talking about deporting people, that would be a negative labor shock, and then we'd be in.

I think, well, depending on how things behave if policy really changes, But yeah, sure, you if you all of a sudden shut the borders down, and you know Trump's talking about deporting people, that would be a negative labor shock, and then we'd be in.

A reverse situation.

A reverse situation.

So look, right now, I think the election is literally a fifty to fifty I mean, I mean the polls are right there forty eight, forty nine to fifty percent for both sides.

So look, right now, I think the election is literally a fifty to fifty I mean, I mean the polls are right there forty eight, forty nine to fifty percent for both sides.

So this is not an issue yet.

So this is not an issue yet.

We talked about this in the note two, which is that volatility and election years typically doesn't start picking up until August September, So I think it'll be okay for the next month or this is not going to be a topic, but it can come at as quickly, probably post conventions.

We talked about this in the note two, which is that volatility and election years typically doesn't start picking up until August September, So I think it'll be okay for the next month or this is not going to be a topic, but it can come at as quickly, probably post conventions.

With us around a table Deutsche Banks Mattlasi joining us, also Aberdeen's Luk here look heickmore. If I may go through the lineup again today Williams Boss the Baking bah, Walla Collins, Ande Mester all speaking once again, Luke. What is left to know that we don't know already from these officials.

With us around a table Deutsche Banks Mattlasi joining us, also Aberdeen's Luk here look heickmore. If I may go through the lineup again today Williams Boss the Baking bah, Walla Collins, Ande Mester all speaking once again, Luke. What is left to know that we don't know already from these officials.

Yeah, it's tough, isn't it.

Yeah, it's tough, isn't it.

I Mean we've been talking about Table Mountain earlier in the year. In the films, they're all deck chairs waiting around at the top can't see a thing below them. If you've ever been there, it's like that so often.

I Mean we've been talking about Table Mountain earlier in the year. In the films, they're all deck chairs waiting around at the top can't see a thing below them. If you've ever been there, it's like that so often.

And that lack of visibility.

And that lack of visibility.

It's useful to have all these BED speakers with us now to get a sense of where they are, what they're thinking. But they don't see any further than we see, and we need to see the data change.

It's useful to have all these BED speakers with us now to get a sense of where they are, what they're thinking. But they don't see any further than we see, and we need to see the data change.

I think it is changing.

I think it is changing.

I think there's early signs of it changing, and they need to see the data change. So I think this whole thing that might was talking about, the three month visibility period feels about right set hand and feels about right, but in years time will be hundred basis points line rates.

I think there's early signs of it changing, and they need to see the data change. So I think this whole thing that might was talking about, the three month visibility period feels about right set hand and feels about right, but in years time will be hundred basis points line rates.

Mattmasseetti if you had enough a FED speak, Yeah, yeah, you know.

Mattmasseetti if you had enough a FED speak, Yeah, yeah, you know.

I think we're hearing obviously a pack calendar today. A lot of it is not related to the outlook. We have a lot of commencement speeches on the docket, so I'm focused on a few things. One we had Jefferson yesterday. I think hearing from the vice chair is important. He noted that the fed's forecast essentially for core PC at the end of this month is basically twenty six basis points. We're talking about getting progress that is definitely progressed from the very strong princes that we had earlier this month, earlier this year. But we also have to know the context that is still well above the fed's objective. It's still annualizes to above three percent today. I would have like Governor Waller, you know, in the past he has given actually some decent for guidance about the deity. He's looking at the number of prints that he would likely to see. Perhaps he doesn't go that far. I think the FED is fully pulled back from calendard based guidance at this point in time. But the reality is that the FED is highly data dependent. Forecasting the high frequency data is hard in this environment, and so the data should do more in terms of market moves than the FED speakers should.

I think we're hearing obviously a pack calendar today. A lot of it is not related to the outlook. We have a lot of commencement speeches on the docket, so I'm focused on a few things. One we had Jefferson yesterday. I think hearing from the vice chair is important. He noted that the fed's forecast essentially for core PC at the end of this month is basically twenty six basis points. We're talking about getting progress that is definitely progressed from the very strong princes that we had earlier this month, earlier this year. But we also have to know the context that is still well above the fed's objective. It's still annualizes to above three percent today. I would have like Governor Waller, you know, in the past he has given actually some decent for guidance about the deity. He's looking at the number of prints that he would likely to see. Perhaps he doesn't go that far. I think the FED is fully pulled back from calendard based guidance at this point in time. But the reality is that the FED is highly data dependent. Forecasting the high frequency data is hard in this environment, and so the data should do more in terms of market moves than the FED speakers should.

Luke was saying that he thinks that you actually are starting to see a turn in the data. There is something going on under the hood that's consistent. Do you agree that that there is this feeling not only does inflation but weakness. It's coming through maybe more than the overlaw overall data might suggest.

Luke was saying that he thinks that you actually are starting to see a turn in the data. There is something going on under the hood that's consistent. Do you agree that that there is this feeling not only does inflation but weakness. It's coming through maybe more than the overlaw overall data might suggest.

Yeah, you look at economic surprises, they're negative. Now on average, the inflation data did improve in the last month, but it's too high IFED needs a lot more evidence on that. Some caution I have around these three month rates that everybody's talking about. Everybody thinks that there's residual seasonality in the data. We get stronger prints earlier in the year, we get weaker prints in the back half of the year. If that is true, and I believe it is, the FED should be cautious about overinterpreting three months of data if it does improve broadly. More broadly, you had some giveback on the retail sales data that was probably welcome from.

Yeah, you look at economic surprises, they're negative. Now on average, the inflation data did improve in the last month, but it's too high IFED needs a lot more evidence on that. Some caution I have around these three month rates that everybody's talking about. Everybody thinks that there's residual seasonality in the data. We get stronger prints earlier in the year, we get weaker prints in the back half of the year. If that is true, and I believe it is, the FED should be cautious about overinterpreting three months of data if it does improve broadly. More broadly, you had some giveback on the retail sales data that was probably welcome from.

The Fed's perspective.

The Fed's perspective.

You have a labor market that did soften a little bit, but the context is we grew above three percent last year. The land of FED is tracking very strong GDP growth.

You have a labor market that did soften a little bit, but the context is we grew above three percent last year. The land of FED is tracking very strong GDP growth.

For Q two.

For Q two.

It is softer, but it's not obvious at this point that it's soft enough to get inflation back down to target.

It is softer, but it's not obvious at this point that it's soft enough to get inflation back down to target.

Softer but not soft, as John's been talking about quite a bit. I am wondering if, from your perspective, if there is a signal with in specific areas like retail sales. We see this discussion around more discretion price cuts from target. All of these types of things that are leaving us feeling like things might be shifting, but not enough to change the narrative. How do you interpret this?

Softer but not soft, as John's been talking about quite a bit. I am wondering if, from your perspective, if there is a signal with in specific areas like retail sales. We see this discussion around more discretion price cuts from target. All of these types of things that are leaving us feeling like things might be shifting, but not enough to change the narrative. How do you interpret this?

Yeah, I can see the thing too, But I'm also looking at what's going on with companies.

Yeah, I can see the thing too, But I'm also looking at what's going on with companies.

Are they spending? Are they capex plans growing? And they're not. The federal budget is.

Are they spending? Are they capex plans growing? And they're not. The federal budget is.

Probably a big p now that's starting to be less of a stimulus going forward. So consumer may be stalling, maybe not going down, but stalling that. Companies are happy diagonaled cat quite frankly, and the federal government participation may be easing off a little bit. All of those are just those early warning sides. I mean, it may be that will pass is in the next two to three months and we get back and stare these levels of interest rates to you next year. But I don't think that's where we are. I think we are in a period where that in the thirty yield curve is starting to bind, is hitting consumers, companies, and the fiscal side from the government's changing.

Probably a big p now that's starting to be less of a stimulus going forward. So consumer may be stalling, maybe not going down, but stalling that. Companies are happy diagonaled cat quite frankly, and the federal government participation may be easing off a little bit. All of those are just those early warning sides. I mean, it may be that will pass is in the next two to three months and we get back and stare these levels of interest rates to you next year. But I don't think that's where we are. I think we are in a period where that in the thirty yield curve is starting to bind, is hitting consumers, companies, and the fiscal side from the government's changing.

Matt, you read a lot about the labor market in your most recent note. What are these factors that can be a tight labor market but also low turn.

Matt, you read a lot about the labor market in your most recent note. What are these factors that can be a tight labor market but also low turn.

Yeah, so the labor market is fascinating. At the moment, you have a very low un employment rate. We're turning out two hundred and forty thousand jobs per month on average over three six twelve month period. At the same time, when you look at some of these other indicators, the quits rate, the hiring rate, it actually does show what looks like some weakness. The quits rate is the lowest since twenty eighteen, the hiring rates of the lowest since twenty fourteen. Those are typically associated with a much higher unemployment rate, you know, probably something in the four and a half to five percent range. So understanding what's going on there, I think is absolutely critical. It is the result of a very low layoff rate. Now I don't think it's just about labor hoarding. If it was just about labor hoarding, you expect productivity growth to be quite low. Productivity growth of the past year is actually quite strong. You expect people not to be working their workers very long hours.

Yeah, so the labor market is fascinating. At the moment, you have a very low un employment rate. We're turning out two hundred and forty thousand jobs per month on average over three six twelve month period. At the same time, when you look at some of these other indicators, the quits rate, the hiring rate, it actually does show what looks like some weakness. The quits rate is the lowest since twenty eighteen, the hiring rates of the lowest since twenty fourteen. Those are typically associated with a much higher unemployment rate, you know, probably something in the four and a half to five percent range. So understanding what's going on there, I think is absolutely critical. It is the result of a very low layoff rate. Now I don't think it's just about labor hoarding. If it was just about labor hoarding, you expect productivity growth to be quite low. Productivity growth of the past year is actually quite strong. You expect people not to be working their workers very long hours.

That that's not really happening.

That that's not really happening.

So I think we don't understand.

So I think we don't understand.

It all that well.

It all that well.

I speculate that this big burst in labor market trend that took place, basically everybody was able to quit their jobs around the pandemic and it led to this much better matching between employers and employees.

I speculate that this big burst in labor market trend that took place, basically everybody was able to quit their jobs around the pandemic and it led to this much better matching between employers and employees.

We also have a.

We also have a.

Lot more flexibility in the labor market with work from home.

Lot more flexibility in the labor market with work from home.

If that's true, you should.

If that's true, you should.

Have less people cutting their jobs, less lay also taking place, less hires, but also big productivity gains, which is at least is what we're seeing over the past year.

Have less people cutting their jobs, less lay also taking place, less hires, but also big productivity gains, which is at least is what we're seeing over the past year.

Mid cycle adjustment. It's a phrase that I first read in your research. I think a lot of other people started to think about it in the months afterwards. You've put forward this idea that what we're going to get as a complic counts and maybe that's it a high neutral rate as well? What underpinds that view? Where did that come from, Matt, Because the world seemybe is coming around to your perspective.

Mid cycle adjustment. It's a phrase that I first read in your research. I think a lot of other people started to think about it in the months afterwards. You've put forward this idea that what we're going to get as a complic counts and maybe that's it a high neutral rate as well? What underpinds that view? Where did that come from, Matt, Because the world seemybe is coming around to your perspective.

Yeah, so, I think when you look at the FED historically, oftentimes they are cutting because they're seeing recessionary dynamics that and when that happens, they cut aggressively. They cut well blowed what they think the neutral rate might be. We have two historical examples where they're not cutting because we have a weak economy, but they're cutting because maybe there's some downside risks or inflation has come off a lot.

Yeah, so, I think when you look at the FED historically, oftentimes they are cutting because they're seeing recessionary dynamics that and when that happens, they cut aggressively. They cut well blowed what they think the neutral rate might be. We have two historical examples where they're not cutting because we have a weak economy, but they're cutting because maybe there's some downside risks or inflation has come off a lot.

That's the mid nineteen.

That's the mid nineteen.

Nineties and twenty nineteen. Both episodes had three twenty five basis point rate cuts the mid cycle adjustment. So as we look at the outlook and if we think it is only about inflation at least upfront, I think it's more likely that the Fed does call it three twenty five basis points pauses at that point in time until they either see some weakness in the economy or inflation is all the way back down to their target.

Nineties and twenty nineteen. Both episodes had three twenty five basis point rate cuts the mid cycle adjustment. So as we look at the outlook and if we think it is only about inflation at least upfront, I think it's more likely that the Fed does call it three twenty five basis points pauses at that point in time until they either see some weakness in the economy or inflation is all the way back down to their target.

I want to get to Luke in just a second, but match just to follow up. Then, doesn't a mid cycle adjustment indicate that we have some idea of what the neutral rate is?

I want to get to Luke in just a second, but match just to follow up. Then, doesn't a mid cycle adjustment indicate that we have some idea of what the neutral rate is?

I think the mid cycle adjustment gives you the sense that they think they're well above where the neutral rate is. Are they, I think, according to any metric that they are. I mean, I don't think it's as low as the two point six percent they have in their long run off lot. We think neutral and nominal terms is somewhere closer to three and three quarters to four, which is at the upper range of what everybody's saying. But we're still one hundred and fifty basis pointoints above that range, So I do think that they are restrictive. From that perspective, I think it will flow through to the economy over time, and they can take out some insurance rate cuts, but there's massive uncertainty about where neutral is, and so just plowing forward to what they think neutral is probably not the correct path.

I think the mid cycle adjustment gives you the sense that they think they're well above where the neutral rate is. Are they, I think, according to any metric that they are. I mean, I don't think it's as low as the two point six percent they have in their long run off lot. We think neutral and nominal terms is somewhere closer to three and three quarters to four, which is at the upper range of what everybody's saying. But we're still one hundred and fifty basis pointoints above that range, So I do think that they are restrictive. From that perspective, I think it will flow through to the economy over time, and they can take out some insurance rate cuts, but there's massive uncertainty about where neutral is, and so just plowing forward to what they think neutral is probably not the correct path.

This is actually one of the critical questions for investors. Luke id Love you awigh in on this, because we were talking to Mike Wilson earlier, and frankly, one of the biggest mysteries to him has been the interplay of incredibly loose fiscal policy and monetary policy that's restrictive when it comes to rates, but not necessarily beyond that with balance sheet issues and the repo lines. What's your take on just how much you're following what the FED does, not just with rates but beyond and that interplay in order to just get more and more bullish because there's just still so much liquidity in the market.

This is actually one of the critical questions for investors. Luke id Love you awigh in on this, because we were talking to Mike Wilson earlier, and frankly, one of the biggest mysteries to him has been the interplay of incredibly loose fiscal policy and monetary policy that's restrictive when it comes to rates, but not necessarily beyond that with balance sheet issues and the repo lines. What's your take on just how much you're following what the FED does, not just with rates but beyond and that interplay in order to just get more and more bullish because there's just still so much liquidity in the market.

You need that equity to be always increasing, and I think with that's behind us, I think we are getting through balance sheet roll off. I think we are getting through shifted in the kind of FED tries to control the economy. It's more interesting than every other tool that they've used in the last fifteen odd years, and that should start coming through at the moment.

You need that equity to be always increasing, and I think with that's behind us, I think we are getting through balance sheet roll off. I think we are getting through shifted in the kind of FED tries to control the economy. It's more interesting than every other tool that they've used in the last fifteen odd years, and that should start coming through at the moment.

It's not. You're right, liquidity's massive.

It's not. You're right, liquidity's massive.

Credit markets are seeing new issues like we have never seen and that's soaking up money too. But again, unless it's incrementally increasing, we will start to see that down to start to hit us over the next quarter two quarters. I don't know, right, it will come through this year for sure. So it does come back, doesn't it About do the Fed need to act and are they better to start acting before they have to start acting? And as we were saying earlier on normally we get fast rate cuts, this time is slowing rate cuts at stay two this year, two three next year.

Credit markets are seeing new issues like we have never seen and that's soaking up money too. But again, unless it's incrementally increasing, we will start to see that down to start to hit us over the next quarter two quarters. I don't know, right, it will come through this year for sure. So it does come back, doesn't it About do the Fed need to act and are they better to start acting before they have to start acting? And as we were saying earlier on normally we get fast rate cuts, this time is slowing rate cuts at stay two this year, two three next year.

I'm probably a little lower than that.

I'm probably a little lower than that.

I think on the neutral rate maybe two and a half to three rather than something over three. But we do need to see evidency inflations, Okay, into the long term as well.

I think on the neutral rate maybe two and a half to three rather than something over three. But we do need to see evidency inflations, Okay, into the long term as well.

Look, I've got ten seconds. Give us a trade. What's your favorite right now?

Look, I've got ten seconds. Give us a trade. What's your favorite right now?

Sure?

Sure?

Short call eighty one seven a half eight percent, no interest rate risk and very little risk of not being called luke kikmore.

Short call eighty one seven a half eight percent, no interest rate risk and very little risk of not being called luke kikmore.

Thank you, sir, appreciate it. Deutsch Banks Mattlazeli alongside him with Aberdeen's Luke Kikmore gents appreciate it.

Thank you, sir, appreciate it. Deutsch Banks Mattlazeli alongside him with Aberdeen's Luke Kikmore gents appreciate it.

Thank you.

Thank you.

Low's beating sales estimates and Macy's beating profit estimates. The department store warning that consumers will remain quote discerning in their discretionary purchases. Chuck Grum of Godon Haskett right in this, if trends have seen a further step down, this would suggest to us that deeper consumer issues are servicin, which would be most problematic for the lower income of price retailers. Chuck Grum is with us from God and Haskett. Now, Chuld, I start with Macy's. What do you take away from a raise to guidance but ultimately once again conveying that that consumer is somewhat cautious.

Low's beating sales estimates and Macy's beating profit estimates. The department store warning that consumers will remain quote discerning in their discretionary purchases. Chuck Grum of Godon Haskett right in this, if trends have seen a further step down, this would suggest to us that deeper consumer issues are servicin, which would be most problematic for the lower income of price retailers. Chuck Grum is with us from God and Haskett. Now, Chuld, I start with Macy's. What do you take away from a raise to guidance but ultimately once again conveying that that consumer is somewhat cautious.

Yeah, I mean, the mass not were decent this morning. Comps came in a little bit better. Gross margins, however.

Yeah, I mean, the mass not were decent this morning. Comps came in a little bit better. Gross margins, however.

Were weaker.

Were weaker.

They noted in their release they had to move some summer seasonal and spring seasonal items uh to get inventories in better shape. So that was that was smart for them, and then they essentially kept guidance intact and nudged it up both the low end and the top end by about five cents, So what we can take care and you can also look at the Low's numbers, which also came in a little bit better. You can see the preaction on both stocks that you know, the numbers weren't weren't terrible, weren't much worse than expected.

They noted in their release they had to move some summer seasonal and spring seasonal items uh to get inventories in better shape. So that was that was smart for them, and then they essentially kept guidance intact and nudged it up both the low end and the top end by about five cents, So what we can take care and you can also look at the Low's numbers, which also came in a little bit better. You can see the preaction on both stocks that you know, the numbers weren't weren't terrible, weren't much worse than expected.

But we do agree.

But we do agree.

We think the consumer is discerning right now and we expect that that trend to probably continue for most of the year with.

We think the consumer is discerning right now and we expect that that trend to probably continue for most of the year with.

The numbers better than expected, because these retailers are doing a good job at figuring out where consumers are willing to spend, or are they better than expected, because the consumers may be discerning, but they're still spending quite a bit.

The numbers better than expected, because these retailers are doing a good job at figuring out where consumers are willing to spend, or are they better than expected, because the consumers may be discerning, but they're still spending quite a bit.

Probably neither.

Probably neither.

Actually, I mean that most of the beats are really below the below the line. In case Macy's, their esten are it was a little bit better, and in the case of Lows, the gross margins actually a little bit better. And like I said, the top line pretty much intact, you know, a little bit better. So we'll see how it plays out over the next few days. We have a lot of earnings coming up with Target and TJ tomorrow follow by b Jason Ross on Thursday and then and then a lot more actually next week as well.

Actually, I mean that most of the beats are really below the below the line. In case Macy's, their esten are it was a little bit better, and in the case of Lows, the gross margins actually a little bit better. And like I said, the top line pretty much intact, you know, a little bit better. So we'll see how it plays out over the next few days. We have a lot of earnings coming up with Target and TJ tomorrow follow by b Jason Ross on Thursday and then and then a lot more actually next week as well.

Chuck.

Chuck.

When it comes to Macy's, you know, we've been looking at the Blooe Mercury numbers versus flagship Macy's, and bloem Mercury is doing very well. What does that tell you about the state of the consumer on the upper end and the lower end.

When it comes to Macy's, you know, we've been looking at the Blooe Mercury numbers versus flagship Macy's, and bloem Mercury is doing very well. What does that tell you about the state of the consumer on the upper end and the lower end.

That's a great point.

That's a great point.

Actually, Bloommrking numbers were up. I believe the four and a half percent relative to Macy's being down. Bloomingdale's pretty much flat. I mean, I think what we're learning is the lower income customer is under the greatest amount of stress. The upper income customer because the housing prices and where they are and the wealth effect of the equity markets being strong over the past couple of years, are are are more resilient' that's not new. I think the question that Mohammad pointed out in his pre comments, you know, are we going to see the middle incomes start to come under pressure? And that's something we are going to, you know, try to discern over the next few days and into next week.

Actually, Bloommrking numbers were up. I believe the four and a half percent relative to Macy's being down. Bloomingdale's pretty much flat. I mean, I think what we're learning is the lower income customer is under the greatest amount of stress. The upper income customer because the housing prices and where they are and the wealth effect of the equity markets being strong over the past couple of years, are are are more resilient' that's not new. I think the question that Mohammad pointed out in his pre comments, you know, are we going to see the middle incomes start to come under pressure? And that's something we are going to, you know, try to discern over the next few days and into next week.

The Chuck, do you think Target might give us some information on that front.

The Chuck, do you think Target might give us some information on that front.

Well, I mean targets numbers should should come in close to expectations, down three to four percent. They did announce surprisingly a big rollback program, lowering the prices on close to five thousand items. Is that reactionary? Is that proactive? You know, we'll find out tomorrow. Given what Walmart's been doing on rollbacks. I think they noted that their rollback count is up forty five percent in the first quarter. And the consumer is looking for a value and looking for lower prices, So it's intelligent on the part of target to do that. Is that supplier funded? Is that coming out of their own pocket? That's something you know, we'll be looking for clarity on tomorrow morning.

Well, I mean targets numbers should should come in close to expectations, down three to four percent. They did announce surprisingly a big rollback program, lowering the prices on close to five thousand items. Is that reactionary? Is that proactive? You know, we'll find out tomorrow. Given what Walmart's been doing on rollbacks. I think they noted that their rollback count is up forty five percent in the first quarter. And the consumer is looking for a value and looking for lower prices, So it's intelligent on the part of target to do that. Is that supplier funded? Is that coming out of their own pocket? That's something you know, we'll be looking for clarity on tomorrow morning.

Yeah, that's the margin question, Chuck, what's your base case on that question.

Yeah, that's the margin question, Chuck, what's your base case on that question.

I think it's probably a combination of both. I think a lot of the suppliers are looking to move units, and I think that in that case that you know, if it's similar to what we've heard out of out of Walmart, I think it's probably margin neutral. But again, we need to see, we need to hear from the company to turn to learn more on that. But like I said, I think it's I think it's the smart and proactive thing to do, given that the consumer wants value. Historically, Target's prices tend to be five to ten percent higher than Walmart, So it's something they need to address. In our opinion. Are they funding that through their media network? Are they funding it through other parts? That's probably the case as our assumption, Chuck.

I think it's probably a combination of both. I think a lot of the suppliers are looking to move units, and I think that in that case that you know, if it's similar to what we've heard out of out of Walmart, I think it's probably margin neutral. But again, we need to see, we need to hear from the company to turn to learn more on that. But like I said, I think it's I think it's the smart and proactive thing to do, given that the consumer wants value. Historically, Target's prices tend to be five to ten percent higher than Walmart, So it's something they need to address. In our opinion. Are they funding that through their media network? Are they funding it through other parts? That's probably the case as our assumption, Chuck.

When Walmart say trade down, are they saying trade down from Target? Is that who they're talking about? Who loses when they talk about that theme?

When Walmart say trade down, are they saying trade down from Target? Is that who they're talking about? Who loses when they talk about that theme?

Yeah, I mean it could be Kroger, it could be Target, it could be could be all the above. It's probably Target to a degree though. I mean that tends to be the most where the greatest customer overlap is. And as you heard from Walmart, the greatest share gains they had yes leer last week was on the upper income customer. The customer makes more than one hundred thousand dollars a year. And then the key for Walmart really, you know, they saw this coming out of the global financial crisis ten years ago, ten fifteen years ago, but they they did not retain those customers. And that's the real opportunity for for Walmart, and that's why they're doing more rollbacks. That's why they're investing in story models. So we think the prospects are good there for Walmart to retain those customers.

Yeah, I mean it could be Kroger, it could be Target, it could be could be all the above. It's probably Target to a degree though. I mean that tends to be the most where the greatest customer overlap is. And as you heard from Walmart, the greatest share gains they had yes leer last week was on the upper income customer. The customer makes more than one hundred thousand dollars a year. And then the key for Walmart really, you know, they saw this coming out of the global financial crisis ten years ago, ten fifteen years ago, but they they did not retain those customers. And that's the real opportunity for for Walmart, and that's why they're doing more rollbacks. That's why they're investing in story models. So we think the prospects are good there for Walmart to retain those customers.

Interesting, Chuck, one of the best. Thank you, sir, almost there, so it was like such a long earning season, Chuck crom there. This is the Bloomberg Surveillance 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 app.

Interesting, Chuck, one of the best. Thank you, sir, almost there, so it was like such a long earning season, Chuck crom there. This is the Bloomberg Surveillance 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 app.