Bloomberg Surveillance-Max Kettner, HSBC Global Research Chief Multi-Asset Strategist
-Sharon Miller, Bank of America President and Co-Head of Business Banking
-Tiffany Wilding, PIMCO Economist
-Troy Gayeski, FS Investments Chief Market Strategist
Max Kettner of HSBC recaps a volatile two-week stretch in the equity market and looks ahead to next week's FOMC policy meeting. Sharon Miller of Bank of America says she's sensed 'cautious optimism' among small business owners with Fed cuts on the horizon. PIMCO's Tiffany Wilding and Troy Gayeski of FS Investments walk through the implications of the Fed cutting rates by a quarter-point or more.
Bloomberg Audio Studios, Podcasts, radio news.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am Marie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App. Max Ketner of HSBC writing, we don't think it's time to pull the plug on risk. We therefore add to US equities as Q three warnings, or rather earnings expectations. Also don't look challenging to be. Max joins us now for more Max Good Mornings.
You, sir, good morning.
That's the equity call. I want to get to the credit call. There was a shift on high yeal FEME in the last week. You move that overweight from max overweight to where are we now?
Slight overweight? Slight overweight from exciting to boring.
So what's that shift about? Let's start there.
I think look, when we look at high yield, it's not like it's bearish, So certainly in your high yeld things look still pretty okay. Valiation wise, it looks a bit more attractive. I think in you as high yeld there's partly a story around valiations. You know you have high yield spreads around three twenty. There's not an awful lot to go anymore. There's not an awful lot of spread tightening that you can still see. So at some point it gets around pure carry it and then you sort of okay, is that still the best place where I get the carry? Or is other places better such as EUM local debt for example, where perhaps you know you get higher carry.
It's a bit sure, it's sort of equal.
Similarly short duration, and it looks a little bit more attractive now given how much has been priced in since April, they're similar to the fair and I guess you know, when we look at it from a total return perspective as well. In high yields, if you get now these sort of ten eleven cuts priced and by the end of this year, if you get just a few priced out right, let's say compare high yield to equities, then if if you're a long equities, now, if you're long the S and P, do you care whether they cu't ten eleven times by the end of the year or they can't seven eight times by the end of next year. Not really right, That's not really the big tail risk anymore. The big tail risk, particularly in April or in September October last year, was they're not going to cut at all, or they may even have to hike. The tail risk now is well, maybe I'll do only four or five, but they will be cutting. So for equities it doesn't matter. For high yel that matters because obviously the front end of the curve goes up.
Well, doesn't it matter for em as well? Can we get into EM a little bit more? What are the assumptions you're making on rates on the US STARLA to make that cool?
Yeah?
I do think however that in EM again, valiations are a little bit more enticing if you look at EMD spreads in particular, you know, year today, so there's sort of flattage. Of course, there's been some index composition changes as well, yes, of course, but from a valiation perspective, certainly there's a bit more juice left compared to you as high yields. So we're really at the stage now where it's not really bearers about high yield and much more bullish on the other stuff. It's a bit like, okay, you're really harvesting that carry. Where's the carry best across all the epic classes?
How much is this just a revival of the fomo trade? Essentially look for the biggest return and go, And that's essentially because the FED is cutting rates and so.
Yeah, yeah, pretty much.
I think it's it's sort of the you know, we were saying in twenty I think it was twenty twenty one that it's all pretty much a yolo world, right, and it was sort of the return to Yola. You could argue that's sort of what we're seeing, for example this week. But let's be honest, we could also sit maybe by the end the next week, we could sit here and you guys talk about one and a half trillion.
Being wiped out again.
Like if we had had this chat last Friday, we wouldn't be that upbeat. No, we would all be like, oh my god, is this recession? And you know, are we closer to the end now and the start of a bear market, and what is commodities trying.
To tell us and all this sort of stuff, And now we sit there and we're like, yolo, yeah, everything's great.
So you know, this is how much it shifts within a week, if we're honest.
We were having a conversation to start the show about twenty five versus fifty basis points, and I wonder how much you were rolling your eyes and how much you are actually saying this is going to matter to the market.
You want me to roll my own.
I don't.
Happy you're viewing who actually can go seeing on his weekend, But I am curious about whether you are seeing a market that is likely to sell off in response to a fifty basis point rate cut or respond with that cheer and you're low.
Yeah, so it depends.
I think they would have had the chance in the last few weeks to say, look, we're so comfortable with this disinflation picture. If they had had look we're so comfortable with this disinflation picture. Look what has happened since April this year. We've had super core down, We've had all these you know, all these components down. So because of this inflation, we could cunt higher, right, we could cut more, we could start more aggressive. The problem now is that, of course, particularly with Jackson Hole you said, oh, we're attentive to growth risks more than inflation. So the problem is if you start with fifty now, particularly with what John was saying in terms of the data, the totality of the data, you.
Know, sorry, not making fun of course, of course, now, of course it's not more language anyway, while we play, we me for that.
That's chairman Belle.
So if we look at that, then the last couple of weeks actually has been really good. Look at look at weekly same store retail sales data. It's been picking up from four and a half to six and.
A half percent.
Now when we look at jobless claims, you look at weekly consumer confidence data, you look at you know, some of.
The electricity output. Look at the Dallas Fed's.
Weekly Economic index, look at the GDP now from Atlanta Fed.
We're talking two and a half percent. So it just doesn't warrant it currently. So the risk is if you go fifty.
First, the market wall say what do you know that I don't?
What am I missing?
And that's I think that's what the market will take a bit of, like, oh, God, this, I don't like this. I really don't like that.
Can't the chairman just clean that up in his press conference?
I think he could, But I think particularly with Jackson Hall, they've sort of missed the boat. And it was particularly also with Jackson Hole that they could have said, Look, it's it's really because of inflation. It's really because of the disinflation that.
We're so comfortable with.
That is why we could be cutting much more aggressively from the start, right, That's why we could sort of rush out of the gates and be like, we can cut fifty. Yeah, growth has been a bit of wobbly, but we're really comfortable with this still. It's just because of disinflation, and they sort of missed the boat on that.
Since you're visiting US from abroad, I have to ask about the US election. How concerned you about the risks that are tied to November?
Yeah, look, not an awful lot.
But because when we look, for example, at twenty twenty five, I think people talk a lot about the US election, I'm not sure how much people have positions on. Certainly when you look at our tactic glance allocation convictions, they are really not particularly tied to the US election, because I think what we're missing looking a bit into twenty twenty five as well, there is the debt ceiling issue looming, for example. So but the Treasury has made it clear that we want to have these seven hundred billions stocked up in the Treasury General account in order to be able to pay that down, which could be at least perceived by the market, again but as temporary stimulus, you know, similar to what we had in Q two last year, which is actually pretty good.
Now, that's independent of the election.
We know that in twenty twenty five, of course, there's a couple of those tax cuts from twenty seventeen expiring. Again that's independent of the election. We're going to have to deal with that. There is some sort of fiscal cliff awaiting us perhaps second half of next year, when the negotiations start. There is going to be something looming that's independent of the elections.
Any evidence from your conversations that the Europeans are willing to de risk from US as sets ahead of all of that. Are they concerned about it?
No, not at all, not at all, not at all.
I think if anything we've seen in the last particularly let's call it five months.
We've seen the opposite.
I think we've had this sort of long Europe trade into April, call it April May long europeerhaps long Japan, a bit of diversifying. Oh is the XUS performance is that really now kicking off? And in fair is when we look at all the activity data, when we look at the high frequency data, it's really strong. Still in the US, we're talking about the fiscal picture of the fiscal support, it's really strong in the s Look at what drag he was saying this week around come on, we've got to be with supporting more, right, We've got to be supporting more. And where it's happening is here. It's in the US. So if anything, you know, then you've got this, uh, you have the.
French elections of cars.
So there was these sort of concerns around that as well, whether the unwarranted or warranted, don't care.
But all of that really led a little bit more of the inflo picture back into the US.
Max, It's good to see you here in New York, Thank you, sir. Going to catch up Mass Canada of HSBC. That's where Bank for America's Business Owner report showing cautious optimism from small and mid sized businesses as the FED prepares to cut interest rates. Sharon Miller of Bank for America writing rate cuts will reduce the cost of debt servicing on floating rate credit facilities. This easing of the expense environment may create cash flow capacity for expansion or investment opportunities. We're lucky this morning that Sharon gets to join us on this program. Sharon, Welcome to this program. I just want to start with this one. The amount of insight that you and the team have across one in every three small businesses in America. We're worried about stress starting to build, weakness starting to materialize. What are you seeing in the businesses that you cover at the moment.
Well, you're right. We cover three point four million small and mid sized businesses in the US and we are the number one lender to small business across the US, and so we do have a lot of insight into what's happening. In our most recent survey that we did with business owners in the spring, we found cautious optimism from our clients and so they do expect their revenues to increase over the next twelve months. And we know that that debt servicing, as you said in the opening here, will be reduced because we do expect that rates will be cut as wese our economists do you here at Bank of America twenty five bass point in the next five said meetings.
So Shanny, you saying they've got the confidence the expansion linds of reading that just waiting for small reductions for the Federal Reserve over the next few cooltzas.
They are, and we still see demand in the marketplace now, So I'm not saying that they're rating entirely. There is good growth in the across the small and mid sized company sectors, but they are watching that and certainly as we see rates come down, that will improve their cash grow and certainly consumer demand.
Sharon I got to say, I was reading this report and I was shocked to the recent.
Report that you put out.
I was kind of shocked that actually we saw such sanguine sentiment that people were expecting to continue to hire, that they were continuing to expand they had positive outlook for their businesses. How do you reconcile that with some of the rhetoric that we hear every single day. This is an economy that's on the raisor edge of turning negative.
You know, I think with small and.
Mid sized companies.
So we've bank clients in the business banking space from startup to fifty million in revenues.
And so when you have a.
Smaller company, you're certainly more nimble, You're able to really think about your business, your growth, and you can pivot easily. Bigger corporations may have more of a hard time doing that, and so that is a competitive advantage of small to mid size companies and we see that come through in the data and just in our conversations that we're having every day across the death from these clients.
What I thought also was striking was in the market, it seems like inflation is no longer a significant concern. We heard just a couple of days ago from Mike Wilson over at Morgan Stanley that's dead. Essentially, Inflation is no longer an issue when it comes to what you're seeing in bonds. Nonetheless, sixty eight percent of small business owners so they've raised their prices over the past twelve months, and on average they've raised prices by twelve percent. They're talking about inflation as a more pressing concern than many other things that we talk about every day.
How do you.
Understand whether this is really a small business issue or whether maybe we're not giving enough credence to just much ongoing inflationary pressure there actually is.
Well, there is ongoing and inflationary pressure. It is a sticky issue, and so we continue to hear that that is the number one concern of small and mid sized companies. And so you have seen price increases brought along because of all the pressure they are. So I do see it as a concern. We hear it from our business owners, and we do feel that as we go forward and the cycle begins to ease a bit, that it's going to take some pressure off.
Sharon, given that pricing pressure, how difficult is it for these small companies to keep up with the bigger players?
Well, I think that you know, there is some difficulty in keeping up with the bigger players, but I would say that you know, they also have a competitive advantage. And so you know, as supply chains have improved, and as businesses have expanded, and certainly they've gone more online, gone more digital, they have more UACh and scale than they might have had before the pandemic, and so what we are seeing are expansion plans from small and missized companies and they are competing and certainly, you know, they benefit from the downstream impact as well from larger corporations.
We're talking about inflation, We're talking about the fact that they're preparing for these rate cuts. When you talk to clients, what is their number one concern right now in this economy?
Their number one concern is inflation, and then right next to that is hiring and making sure that they have the right skilled labor, the right employees to go into their business to work. And so those are the concerns that we hear every day. We were also in an election year, so you do hear that as well, but we hear that with every election cycle. We've been doing this report for the last ten years, and so in each election cycle, we'd see, you know, concerns once the election is over, no matter who wins, no matter what party, that there's certainty and so people can move forward. So that's what we're hearing discycle as well. And you know, I anticipate after November there'll be certainty and people will continue with their plans.
Sharon talk to us a little bit about how things have changed since March of last year, given all the banking stress in this country and some of the banking failures as well. How some of your clients have changed the way they do business with you. Where they've managed to attract a lot more small businesses over the last twelve months, worried about where they place that cash, and they want to put it with a bigger institution like Banks of America.
Sharon, how much has changed, Well, I mean, I think, listen, we are the number one small business bank in the US, and we're very proud of that. We have been for the last four years plus, and so you know, we continue to stand on our clients and good times and bad and certainly you know we every day we work to attract new clients and to retain the clients we have because this is our mission. This is where communities meet business, and that is what we do at Bank of America. So we want to be sure that we are there for our clients. We have capabilities they need, whether it's to transact internationally, to be able to have expansion in their business, to get a loan, to provide payments for merchants.
So all of.
Those different areas we are able to help our clients, and so we want to make sure that we're there for them, whether it be our online tools and capabilities to manage their PASK flows. So we're investing in the business based on what we hear from clients and what they need.
Well, we were thankful that you managed to make some time for us this morning, and we appreciate it. Sharon, thanks for joining the program. Thank you, Sharon Miller. That thanks America. Over the next week, a busy slate ahead with retail salves and a FED decision next week. Tiffany Wilding of PIMCO saying, we're heading back to pre pandemic conditions. Develop market economies now look more like they did in twenty nineteen than are any time since the pandemic. In that context, we think the more question is this, why are interest rates still well above where they were in twenty nineteen? Tiffany joins us now for more So, Tiffany, you've got to give us the answer. What did that conversation sound like a pincoke this past week?
Well, I think the bottom line for US is certainly interest rates are coming down. The Federal Reserve, I think has also been very clear about that. Pale when he spoke at Jackson Hole, I think acknowledged the fact that monetary policy now probably doesn't reflect the underlying conditions in the US economy. And if you look at the labor markets, we don't think that the US economy is in recession, but nevertheless, the recent loosening in labor markets just suggests that there is some possibility for overshooting on that side.
And in that kind of vein.
You know, the Federal Reserve should be focused on moving policy rates back to neutral, and I think the question at this point is is just how quickly they get there. We think they probably will revise down their own estimates for the rate path in September.
We're looking for a.
Twenty five basis point rate cut, but for them to really signal they're going to do sequence.
Of cuts here, Tiffany tell us why you think neutral is if they revise the path down, what is the path two?
Yeah, I mean I think that's a great question.
So the Phtal Reserve still believes it's between two and a half and three on a nominal basis, you know, And I think ultimately that's why they will get there, you.
Know, with not overnight.
They're not going to move the policy rate there overnight because they're not exactly sure where it is. And when you're not sure, you want to just go slowly. Now how slowly, I guess is the question. It's about balancing risks. You obviously don't want to take the economy into recession because your.
Policy is too tight.
We think a reasonable kind of baseline for them is to kind of write down a median rate path of kind of three and a half percent by the end of twenty twenty five, could even be a little bit lower than that, you know, And so that's the kind of pace every meeting, type of pace over the next several meetings to see how the economy responds, and then they can they can reassess and make a further decision from there.
Tiffany, we've been talking a lot about twenty five basis points or fifty basis points on Wednesday, and before we get into the guessing game of how you interpret the tea leaves that have come out of a number of publications overnight, I am curious about how you will be gauging the trickle through effect the real economy of whether they cut twenty five or fifty.
How will you understand how.
That's being sort of deployed in the real economy.
Yeah, well, I mean I think if you know, a fifty basis point cut is if they if they end up doing it, you know, it suggests to us that or would suggest I think that they're they're more worried about downside risk to the economy and they want to you know, kind of more quickly get to neutral. You know, we've said they've achieved a stoff landing. Now really it's going to be about sticking that soft landing and keeping it going, you know. And I think again the question is about how quickly they know they need to get to neutral.
How quickly do they get there?
You know.
So that's how we would be read.
I mean, we still think a twenty five basis point rate cut is probably reasonable here. We don't think the economy is in session right now. You know, certainly the labor market indicators you know, are worrisome, but we have had this big surgeon immigration that is kind of blurring the picture with some of those indicators. So you know, I think there's a lot of things they have to take into consideration here, you know. And so again twenty five with a sequence of costs that they signal seems reasonable to us.
Just what I'm trying to get at is what's going to be the actual implementation of lower rates in the economy. Will you'll be looking for some sort of significant uptick in small businesses borrowing. Are you going to see increases in consumer borrowing or reductions in say some of the delinquencies as people as borrowing costs go down. What are the sort of signs that this actually is working at a time where the efficacy of monetary policy has been profoundly questioned as rates went up, and now the question is how quickly I'll be implemented on the way down.
Yeah, I mean, I think if you look at the household sector. We've been talking a lot about this as well. You know, households just haven't really felt higher interest rates. Many of them have low rate mortgages that they locked in two of.
Thirty year periods during the pandemic.
So the household sector probably won't feel a lot of it, you know, unless you have new home buyers or first home buyers. But where I do think it could be potentially helpful, you know, is in terms of housing supply. So we've all known that we've been in a period of underbuilding relative to population growth over the last decade post pandemic or more. And that's resulted just in you know, supply demand and balances in the housing market, which which suggests us that as you have rates coming down, you can have real residential investment that picks up. That's obviously going to be helpful for the economy. We think housing investment probably subtracted a point and a half from GDP in the third quarter. That's a pretty big subtraction, you know, so just getting that back into some modest growth we think is probably helpful, you know, and you could certainly get that as you have rates coming down.
I'm glad you mentioned housing. There's been this debate on what actually will happen when rates come down, Well, people start moving and more supply will come in the market and costs will come down, or potentially will we actually see housing prices go higher?
Yeah, I mean I so in terms of you know, the moving and the existing home sales and things like that. You know, when people move, they usually move from one house to another, so you know, in terms of the aggregate supply picture from that, yes, you get more churn in the market. But it's not on net really that it doesn't It shouldn't increase by that much the overall supply of homes. What increases the overall supply of homes is new building, and so that I think is is.
Really the key.
You know, building you know, has been slow and sluggish this year because interest rates are elevated. You know, many builders you talk to say the economics are you know, make less sense with higher interest rates, and so we when rates come down, we do think that you know, building will you know, will accelerate somewhat, and I think that's ultimately good for the economy, you know, it's good for the supply demand and balances. Eventually hopefully that helps to moderate housing prices, you know, although you know, we don't think that they drop. Housing prices will probably be you know, kind of five kind of five percent type is ranges, you know, But again I think I think that's not necessarily.
A bad thing for the economy.
Tiffany, and just circling back to what Lisa alluded to, some of the tea leads that are coming out of things like the Wall Street Journal or the Financial Times. If the market is now presented with potentially next week, the FED going fifty basis points. Does that mean now there's outside weight on retail sales next week?
Well, certainly.
I think if retail sales next week is bad, is much worse than expected, I think that would maybe potentially increase some probability.
You know.
I think if you just kind of take the whole the broader range of data that we've gotten over the last you know, month or two, labor market data in our minds is important. And the labor market data that we saw, you know, it wasn't great, but it wasn't terrible either, you know.
So it does.
Suggest that labor markets are slowing, and I think the Federal Reserve wants to try to understand what's going on there a bit more. The slowing that we've gotten over the last couple of months, I think has been more pronounced than many people expected, both in payroll growth and of course the unemployment rates taking up. You know, So I think, you know, they they probably look at that and they say, you know, we.
Are a little bit concerned about that.
And if you're concerned about payroll growth slowing the labor market slowing, of course, you'd expect consumption to be slowing as well, so they probably will be looking at retail sales and those consumption indicators, you know, to kind of confirm or deny, if you will, whether the labor market slowing is having a broader impact on the economy.
Tiffany, I appreciate the updiate. Thank you, Tiffany Welding the pincome looking ahet some explain. Joining us now to discuss is Troy Gasking of FS investments. Troy got to say, as always, welcome back to the program. Before we get into the markets, let's talk about the Federal Reserve. What's the base case for you and the team?
Yeah, so three twenty five basis points cuts. You know, we came into this year thinking two to three. There was some overreaction obviously early on at there'd be six, and then when the inflation data came hot in Q two, some folks were arguing for none. But you know, it's almost a certainty at this point that we're going to get three cuts.
Clearly, believer market softened and there's no doubt about it. Inflation's gotten much more under control. That's the right policy response. And I'll tell you.
Know, when you think of credit investors like ourselves or originators of private debt. You know, we're more than happy to trade off some degree of incremental income to further reduce the risk of a recession going forward.
And so that's where we're at.
The economy, and it's going to be an appropriate response to your point before it's now about next year in the year there after, where there's much much more certain.
Yeah, much more to play for, Troy. I want to get to the quote from Tiffany Wilder just moments ago from PIMCO when she said this, and I'd love your reaction to it. Develop market economies now look more like they did in twenty nineteen than any time since the pandemic. In that context, we think the more relevant question is this, why are interest rights still well above where they were in twenty nineteen? Troy, what's the best argument for that? Do you think?
Yeah? So when you think longer term, right, arguably the biggest.
Reason why we should have more sustainable inflation going forward than we did pre pandemic, and particularly in the post GFC realm, as we all know that that was struggling just to.
Get inflation too. It is a much globally tighter labor market.
Right, you think of places like Japan or even China now climbing working age population.
The US labor market has gotten much more structurally and efficient. So that's arguably reason number one.
And then reason number two, of course, is this really desire to onshore production.
Obviously we're going through a period of protectionism.
So you know, I think that debate is new term, right two and a half or three, We can debate that quite vociparously. However, it's certainly not zero unless we have some type of major exogy shock that is unforeseen.
There is this question right now of how much we can really count on just sort of inflation continuing to diminish. And I just want to build on what you're mentioning. How are you arranging how are you sort of countering the assumption in markets that inflation is dead in terms of more contrariant investments that push against that.
Yeah, you know, I don't think we're arguing our most rational market participants are arguing that inflation is dead.
It's just that we've made significant progress and the balance of risks is now much more symmetric between the.
Labor markets and inflation.
But in terms of countercyclical to that thinking there's really nothing specific there. However, you know, opportunistically, we have to look across markets and try to find areas where there's more inefficient pricing. So, for instance, if you look at most spread product whether it's HYO bonds or levered loans, and even in on the run.
Private credit spreads your relatively tight.
They're a little bit tired than they were coming into twenty twenty two.
You still have very attractive yield. However, if you look over at public markets, what you're seeing is markets you're pricing about a twenty two percent probability of deal breaks in each individual deal. With mergers.
Historically, over ten twenty years it's been five Even in this environment.
It's peaked at eight percent.
So we're trying to identify and efficiencies like that that we can take advantage of in our liquid strategies.
I know you focus on liquid strategies and some of the private investments. You're talking about merger arbitrage, and let's go there, because this is actually one area that a lot of people don't want to get caught dead in just simply because a lot of these deals have been broken and we have seen a very different FTC under Lena Kan.
How can you have confidence.
To go in and bet the deals are going to get done now given how politicized so many of these deals are actually getting.
Yeah, well, I think again that gets back into pricing.
Let's say, for instance, markets are pricing in twelve or fifteen percent probability deal breaks and the historical averages somewhere.
Between five and eight. Depending on how aggressive the FTC was or not, it would be a different story.
But you're as an investor, you're always trying to look at market miss pricings versus empirical data, and this is one of the more glaring and we're going to say it's an overreaction to your point of very active STC. It's just presenting itself with a very attractive them over the next twelve eighteen months.
And I think at this point, regardless of the political outcome in November, that looks.
Like a very attractive risk reward to us relative to other strategies out there.
Interesting, Troy, It's going to hear from everybody as always. Trokski then of FS Investments, Thank you, Troy, appreciate it. This is the Bloomberg Seventans 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 out
M
