Markets Brace for Rate Cuts and Election Uncertainty

Published Sep 3, 2024, 2:23 PM

Watch Tom and Paul LIVE every day on YouTube: http://bit.ly/3vTiACF.
Bloomberg Surveillance hosted by Tom Keene and Paul SweeneySeptember 3rd, 2024
Featuring:

  • Kristina Campmany, Senior Portfolio Manager at Invesco, talks about equities and the impact of Fed easing on the economy and markets
  • Matt Hornbach, Global Head of Macro Strategy at Morgan Stanley, talks about bond market signals and the outlook for fixed income as the Fed readies to cut rates
  • David Gura, host of the Bloomberg "Big Take" podcast, previews what's ahead in politics as the presidential election gets into full swing, as well as next week's Philadelphia debate
  • Lisa Mateo on newspapers

Bloomberg Audio Studios, Podcasts, radio news.

This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always I'm Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App. I learned this. I sort of stumbled into this. It wasn't a received wisdom when I was twenty eight or whatever. There are exactly two people on the strategy side, fancy academic people that have never enjoyed the big walking away from them. And then there's people that migrate from a trading desk, a rates desk over to strategy and portfolio management.

Who does that?

They're different, they're hard won. You'll learn us at Villanova and I think Christina, I mean, it's's the real deal because she's enjoyed having the bid walk away from.

Her bid walk away.

Christina can't many joins and she's a senior portfolio manager at Invesco. You know what is as a senior portfolio manager? What does your portfolio look like these days? How is it allocated? How is this structured? How's your portfolio structure today?

Of course, so thank you guys so much for having me in. So I work on our Global Debt team, and so our universe that we look at is rates, currencies, ANDFX globally and excuse me, rates, currencies and credit. And I think when we look at the world right now, one of the primary drivers were finally at this precipice of the FED starting their easing cycle. So many others central banks have been waiting for their cues from the Fed, especially the emerging market central banks that started their easing early and now are been kind of waiting. So there's a big focus on currencies, especially right now, because I think that's where the big driver is and it's us central of what's driving it and where are we going from here? And I think when we look at rates, especially in developed markets, it's a little less interesting from what do we want to own out the curve? Because there's not a lot of value of how low rates still are and how flat and inverted the curves are.

So I mean, all right, so I could sit you know, as Tom knows, I'm happy to sit in my two year treasure getting near four percent. How much credit I assume you guys are not just doing that. You're taking some credit risk. Maybe, how do you think about that?

We are so you said you'd be happy to sit in the front end, and I think that makes sense when we look at rates, and in a lot of sense, it makes sense when we look at credit as well. You can be parked in front end high grade credit and even emerging market high grade credit in the front end, and we think there's some value there. But again out the curve, things are a lot richer, and we don't think that there's a lot of value. Just as we have this normalization, we need to have our reprice there.

But I'm looking at the US Corporate High Yield Index, the Bloomberg US Corporate High you In Index. We paid good money for that index.

Six point nine.

That is nice.

How do you like to think about high yield?

But again, if you think about cash, where you're getting for your cash earnings?

Too?

It's really about spread. And I think there is this concept in the market of investors do care about all in yield, But I think you have to break it down and look at spreads, and spreads are at historically tight levels. I mean, we had a little bit of blowing out with the noise early in August. In August, yeah, but we're we via. The quickness with which we snapped back, I think is telling of what is positioning out there. What do we need to be concerned with? Are you susceptible to this?

Again to translate that the bid was put in in non full faith and credit papers snapped right back like equities, yeap? Why what? What is the reason for the bid there? Is it just desperation to capture coupon? You know? FOBOSEI one oh one? What's the why?

I think it's a combo of both. I think that bears when you have just cash cash returns where they are funds perpetually have money that they need to invest. And I think that there's a comfort which is where we kind of fall down the middle on the economic outlook that we're not looking for a recession. We think that there's the FED has this balance they're going to start. The question of twenty five or fifty is not about a recession to us, It's about we've been tight long enough and we can kind of adjust.

I mean, two years ago my Essay of the Year was Lawrence MacDonald, the author writing out just an incredibly clear dissertation of the wall of money that's out there. You're in the turret at investco of where guessing where that money's going to flow? Adjust that now post labor Day? Where is the wall of cash going to flow?

So I think September. Every year in September you have massive amount of corporate supply. Certainly that will be a recipient. And then I think it really is about this. What defines the month of September will be the Fed beginning their easing cycle. That has been this two year waiting period of is the Fed going to go?

Are we on the.

Precipice of recession?

Do we have to go?

And I think that allows people to put money back into the market and say what are we comfortable with? Where do we want to part?

I mean, good morning Larry McDonald. I mean he hasn't done anything since that is the year he just checked out. He's been on the beach. But Paul, to me, the heart of the matter is is the importance of September. Yeah, it's a signal.

I know, hopefully we have a smooth month. Christina, how do you think this Fed's going to proceed here? Do you think they start this month? And then I don't know, every meeting, every other meeting fifty basis points, twenty five basis points. How are you guys on your desk thinking about that?

So?

I think Friday's pay or report will be really important to just set the tone.

Again.

I'm in the office Friday, just pointing out everybody.

And in some sense it is silly that we are even at this point for the start of a cycle that has been years in the making. We're concerned about a data print that's a few days away. But again, our view is that we're talking about a soft landing. And I'd say our base case is still that we're going to get more of a mid cycle adjustment from the FED, rather than that they need to ease to neutral, which means you probably if they start with a fifty, you might get one hundred by year and one hundred basis points. But I think that that's really the outlook into twenty five is a lot less clear because you need election results and what has that adjustment?

I mean, Christina Campany, this is we don't do anything here. All we do is read question. So this is from YouTube. Please comment on portfolios for individuals separating out risk assets. I don't have fifty percent of my money and fixed income, but I don't have one hundred percent inequities. I mean, it's like sixty forty part of the investo discussion or have you come up with new math?

I think that's still is kind of how we think about the balance. And I think the difference in this day and age where we've returned after the GFSA and you've had this extended period of near zero front end rates, cash as an allocation in that mix for the individual makes sense to balance.

Are there sectors in the fixed income space that screen weal for you guys at a visco these days?

So again, when we look I think when we look at particular opportunities in the market in rates, it's more of a curve trade and that readjustment currencies look interesting to us because we think in either case, you have this push and pull of what has buoyed the dollar and you've had US exceptionalism. But the other side of it is you have massive funding needs from the government and all this treasury issues that needs to be funded. We think that as you embark on this easing cycle, you could have a period of a week or dollar and thus there's a lot of currencies that are interesting to us. And then emerging market fixed income as well. Local market debt also looks interesting because the FED starts, these emerging market central banks can continue they're easing cycles and you have some opportunity there.

One final question, are you managing for coupon or total return?

Total return? It always has to be about total.

Returns to job. Okay, Christina Katman, you thank you so much for the Invesco joining us right now, very important conversation. Matt Hornbach joins us right now, global head a macro strategy at Morgan Stanley. Matt, do you have to aggressively rewrite your macro strategy into Q four?

Tom? Thanks for having me on the program.

I don't think we're going to have to aggressively rewrite the outlook. I mean the risks that we put out there relative to our baseline forecasts were pretty clear. In that we did see downside risks to the US Treasury yields, and so I don't think we'll have to dramatically change the narrative as those risks are now being realized, but we probably will have to make some adjustments to our baseline yield forecast at some point here soon.

With your world class view of Japan earned it, Morgan Stanley, is it all quiet on the Japanese front?

Well, for now, yes, it seems to be.

But you know, our economists do think the Bank of Japan will have the data it needs to raise rates.

Once more, but only once more.

And I think in order to get in va Ester is really excited about Japan in twenty twenty five, you're going to need more than just one more rate hike from the Bank of Japan.

So for now, we think it's going to be.

Pretty quiet, but it could get interesting, particularly because positioning in the market visa E. Japan still exists. It's still a story people want to trade. That means people want to see yields in Japan go higher, they want to see the yen continue to depreciate, and it could get interesting because those hopes and dreams may come crashing down if inflation in the country starts to moderate again.

So, Matt, I'm just you know, I know, you spend a lot of time back and forth stationed in Tokyo, and I remember when Tokyo was the place to be outside of New York. Why do our investors paying so much attention to Japan the last twelve, eighteen, twenty four months, even Warren Buffett, when for twenty years we could care less what happened in Japan. What's changed?

Well, yeah, I mean, Japan is definitely a good place to be for your personal life.

But you're right, I think one of the things that has changed is the inflationary environment in Japan has shifted pretty dramatically over the past couple of years. You know, bear in mind that for the better part of the two and a half or three lost decades that we had in the country of Japan, that inflation couldn't get out of bed for anyone. And now we finally have inflation that at one point was higher than two percent on the underlying measures that you can look at, that's now come down a bit below two percent.

But nevertheless, it's really an inflation story.

Is the fad that banker of the world. I mean, you know, then the global mandate that you've got there with the terrific economic work of Morgan Stanley, and that is it a pivot point around your own power in the FED? Or is it more diffuse now in terms of monetary dynamics.

Well, you know, I think certainly today the focus has really been on the FED, and that's somewhat that's somewhat a shame because you do have a lot of different central banks around the world doing different things with their monetary policy tool kits, and so you know, yes, it's true that the ECB is easing, and the Bank of Canada is easing, and the Bank of England is easing policy, but they're they're kind of going about it all somewhat differently, and I think that's that's a pretty unique environment, certainly for the.

Past half a decade or two or.

A full decade. And that's pretty unique that they're all doing different, slightly different things.

What's the character of this bull market you see?

Well, look, this is at the moment a slightly different bull market for bonds and we've seen historically mostly because the yield curve remains very inverted.

This is not common.

This happens less than ten percent of the time, going back as far as as the data will allow us to go back on the yield curve, this is a pretty unique period of time for the treasury market. And so you know, this bull market ultimately is being held back to a certain degree by the inversion of the yield curve. It makes owning treasury security is less attractive when the yield curve is is unverted.

Then what's the dynamic of a disinverting yield curve? The fact is through August we've seen massive twos ten disinversion.

Right for twos ten's absolutely right, Tom. You know, I think a lot of investors who have increasingly been going into money market funds are not really comparing the tenure yield to the two year yield these days. They're really comparing the tenure yield to what they can get in a money market fund. And that yield curve is still extraordinarily inverted.

So you're right tooth tens. Yeah, not so much anymore, Matt.

Thanks to the clinic. Matt hornback with a brief there, Morgan Stanley Global. First of all, after thoughts and orientation today school to big Big, I mean you know, these are huge, huge moments. Then we got like a whole bunch of economic data, Thank for Job's day. None of it matters because then you know, we get to the debate. Yeah, joining us now surveillance debate correspondent host of The Big Take, David Gurra joins, this orientation matters.

I should say I've been told that there for it.

The ice cream truck. The ice cream truck is wheeled up in front of the school. What a con job, David, I got to ask you about what we witnessed over the weekend. I don't buy it for a minute. At the debate, everyone helping Trump, everyone helping Harris is going to say America doesn't care about foreign policy? Am I off the mark?

Well, I think that it's something you don't hear a lot about on the campaign trail traditionally. But what we had happen over the weekend is so tragic and heartbreaking and obviously kickstarted a fresh round of protests in Israel. It's something that's going to be front and center on everyone's mind this week and leading into the debate next week. So I suspect that they're going to be asked about it. We've already heard from former President Trump on social media his take on sort of what led to that moment and what would have been different if he had in the White House. So I think that they'll be asked, But I think that we keep seeing these things that aren't customarily part of campaigns percolaid up foreign policy. I would say this time around A certainly liaks.

Does President Trump have a special relationship with mister net Yea.

They get along very well and they have historically, although there was a breach in that relationship at the end of Donald Trump's term in office when Benjamin Yah, who waited to uh did not embrace what Donald Trump thought, which is that he won the election. Of course he didn't, and that soured things. But the two of them have known each other for a long time and have a familiarity with one another, and I think it's safe to say that the former president feels like that relationship between the two of them is stronger than the one that has been tested, shall we say, between Netan Yahoo and Biden, net Yaho and Harris over these last many months.

David, are we going to have a debate? When is it and.

What should we expect debate? Is going to be on Tuesday of next week in Philadelphia at Independence Hall, and obviously it's closely watched. We've heard that from both campaigns. Of course, there was a lot of fighting over what it might look like, how it might take place, if it might take place. Both were agreed to it, both see it as being important. We had a memo from the campaign cheer for the Harris Walls campaign over the weekend in which she acknowledged this is going to be a really crucial moment for them to try to break through to this small sliver of undesided people. I mean, this memo from this campaign chair was so fascinating to me. So this is from Geno Mally Dillon, who was head of the Biden campaign previously, and she had a stunning acknowledgement in that memo, which is they see themselves as the clear underdogs here, and they also acknowledged the fact that this is going to be decided by a very razor thin margin. So any moment like this they see as an incredibly important opportunity to try to break through and get to that small group of people.

Do we know the is Vice President Harris Is she a good debater? Not a good debater is the expectation that she got up against a very big presidence like former President Trump.

She's done it before, so we think back to the Vice president's debate the last time around, when she comported herself very well against Mike Pence, the former vice president on the debate stage. Of course, she ran for president herself in twenty nineteen, didn't make it to twenty you know, but is a former prosecutor, of course, and has a very prosecutorial style. And I think that's something that came out and was a really interesting contrast in the one interview that she's done in recent days with CNN. She trying to be the one answering questions, not prosecuting the argument that she has, so it'll be interesting to see. And of course that contrast is something that's so astonishing. And then, Paul, something that really stood out to me from that CNA interview was the submission on Vice President Harris's part that she's actually never met Donald Trump, never been in the same room as him. So that'll be a really kind of interesting dynamic to observe and watch as they take the stage.

Where are the rules of the debate right now? Like I thought the last time around was hermetically sealed would be my sophisticated.

It seems less hermetically sealed than the CNN one in which we were kind of held. The press was held in this building five hundred yards away from the room in which the debate was taking place. I think we're still figuring out what the rules are going to be in terms of who's led into the hall. I don't think there'll be a boisterous rally type atmosphere. There will be kind of a pool of reporters and photographers who are going to be.

To interrupt each other.

I think that that's still being debated. If you're part of the If you but the last army was about Mike's and should they have been muted the way in which they were in the.

Last Reporters like yourself, what do you do with this debate? What's your plan of action?

Again?

The Atlanta one was so strange because we were in the Georgia Tech Arena, seated around the concourse watching it on the jumbo tron. That was tough for me.

At the Four Seasons Hotel, you go straight into the body of this gorgeous bar. I've never been in the Atlanta four seasons where there was it somebody, Oh, hi, how are you doing? Great? Great? Great?

I mean you watched I watched it in the arena and then in Philadelphia. We'll see, we'll see what it's like. But I was in this, I was in the room and then down on the spin floor afterward. I think that'll be sort of the same trajectory.

And your plans for the big take into September into Q four, David.

Girl, Yeah, we're really going to be starting to draw Obviously. We talked about this last week when I was when I was filling in for Paul. Labor Day is such a catalytic moment during a presidential campaign, things really get up and running. We're going to be focusing a lot more on politics going forward here, so we'll definitely do an episode, at least an episode on that debate, and we're going to focus much more on the economic policies of both candidates going forward.

There are you back from summer? I mean, you know, I'm back. You know it's great. I'm back.

Do you have the cooler at the desk across the hall?

Yeah.

See that's how the kids do it. They bring the lobsters back from Maine, and yeah, you know it's great.

The girl House orientation is great.

It's a staggered story on every kid in a different school doesn't start till Thursday. Yeah, I'm going to Texas. Can I make another shameless plug? Yes, going to Texas this weekend for the Text Tribune Festival. I'm gonna interview the Treasury Secretary on stage in Austin. So I'll have some This will be Janet yelling, yelling for an hour on stage in Austin. I'll have some tape of that. Maybe I can come in Monday a little bit where it's going to be Austin, Austin, Texas.

Are you just going for some you know, I'll.

Get some brisket now, sure, there'll be some brisket my Southwest, not southes. Now, that would be we would get out the headline of that way headline Texas Tribute Festive.

I think. So it's nice to see you know, nice I.

Mean coming in, I mean are you tomorrow maybe?

Yes, she will be here tomorrow.

John answers unequivocally yes.

Joining us.

We need more seats in here.

Surveillance Congestion correspondent for those of your across the nation in Boston and ninety pricing not here. I mean, John Tucker, come on, it's late related. We're supposed to be deep into congestion pricing. Is it dead?

Well, let's put it this way. It's on hold. It could be on hold temporarily, it could be on hold permanently. But I also said, say the Governor Hokol who put it on hold, either temporarily or permanently. She's taking a lot of flak for any number of things. Democrat.

That's a lot of money that was gonna be.

It's over billion dollars a year in lost revenue.

Have they cut different projects.

In Paris of all these stations right, and I think a lot of subway station repairs have been on it.

That's a lot of You're a ferryman.

I know you take the ferry, so I will do.

I can't to repair those subway staates.

David Gurr the big take, David Gura at the debate. Look for college there, John Tucker. Finally, in the crack of nine fifty five, you daily look, Well, it's the Lisa Matteo hour. Where in God's name have you been? Tucker? The shadow of Lisa Matteo and doing the newspapers.

Go oh, all right, the workforce is changing this year. Okay, how gen Z workers expected to out and our baby boomers in the US workforce? Why is that an issue? Because the bosses don't know how to work with them? So gen Z born between nineteen ninety seven twenty twelve, just to give you that idea for those out there, So a lot of them enter the workforce remotely, so they didn't learn those workplace norms, all those communications. I So now the Wall Street Journal is saying that companies are doing things like mentorships trying to help them. They're giving them guidance how to communicate. They're even offering on site therapists to talk with them and help them through this time as they start to go back to the therapist. On site therapists who for these gen Z workers who are now going to be more outnumber the baby boomers in the workforce.

How old is gen Z Roughly?

I can't keep them straight.

Born between nineteen ninety seven and twenty twelve.

So it's like a summer.

It's younger than the millennials. Yeah.

See my first boss on the Pine Webber trading desk, in nineteen eighty six, just smack me on the head every morning at nine twenty nine, said don't lose money today.

That was it.

I did not.

Yeah, all right, I didn't have a therapist.

But okay, am I deficient? And that I have zero sympathy?

Like zero, You're not alone.

I'll just put it that way.

Well, we have to adapt, I would say, as managers.

Shit, if they're going to outnumber the baby members, this is going to be your journals. So that's what they're saying, you have to dapt because they want more meaning, more mentorship, they want a sense of purpose in their workday.

Okay, my purpose was I had a P and L.

I had a P and L on my computer screen in my trading desk, and if I was positive, that was a good day. Was negative is a bad day.

Can you see mateo in the kitchen now when one of the gen Z your studying throwing a pan, she's taking the Revere skillets shut up.

Next, all right, we go from gen Z to jen Alpha. They're even younger. So that's fourteen on nnder. Okay, so the gens the Alpha, they are into decluttering. They care more about the environment, but they also like to spend. So this is from Business Insider. Yes, so they're more selective though about their spending. So what they spend on, for example, I notice it the Sephora spending. I notice that, Yes, the younger general is spending a lot more on that, so well their parents' money. They're also here's something. They're heading to the mall more often, so they like in store purchasing rather than the online. So back in the day when we I used to head to the mall, that was a thing. We kind of lost that. But now they're saying, with Jen Alpha, it's starting to come back, Jen Alpha.

Yeah, I've heard that. All I know is during a pandemic, Tom, I mean when the whole world was shut down, the sept door across the street on Lexington Avenue packed.

Yes, but I would suggest we need a seamless free door dash free September.

Yes, can we institute I have I've removed the door dash app.

I'm sitting at home with a beverage in my hands, screaming, mister Sweeney cut off his children and you will be two.

Set the example.

Uh, this next story is from Bloomberg screen Time. Really good because you're talking about media and gi struggling with how to make money from the streaming live sports, ESPN held this meeting. They brought reporters in, so they started talking about what they're doing. They're focusing on streaming fantasy sports and gambling. So they talked about a couple of things. They have this thing called Flagship, they kind of nicknamed it. This it's this new service. It's going to integrate ESPN fantasy betting platforms on schedules to longs around this time last next year. No word on how much good it's going to charge. And then Disney, you know about the whole thing with venue, the forty three dollars a month thing. That's kind of still we're going through a legal list.

I think, I mean, the courts kind of shut it down and it's.

Real and now's the time, this weekend.

Exactly next Yeah, so that's what is it they're saying on the sports betting. And finally this was in the Telegraph. The Titanic deteriorating one hundred and twelve years after its sink. You had these underwater robots. They took images of the wreck, the railing of the bow the Titanic, you know, popular in the movie. Right, that's where Nardocaprio Cape Winslet had their first kiss. It's now at the bottom of the sea. So it's starting to break.

It fell off of the boat.

It fell off of the boat. It's at the bottom. That's a huge part of it. And so they're starting to see, like the metal structure is starting to be eaten away. So, I mean, after one hundred and twelve years, it's starting to show its age.

I guess.

Wow.

I mean, I mean spinning.

I mean nineteen twelve. April fifteenth, nineteen twelve is when the Titanic went down.

Wow.

There is a small, lovely little park up Broadway almost up to Columbia, just a little, tiny, beautifully for the City of New York Landscape Park, and it's in honor of I believe it was the couple in the movie that the Asters or whatever, the older couple, And it's just very serene and you can see the whole city was shaken by it.

Yeah, yeah, I mean yeah, you think.

Of that back then exactly, I mean the movie nineteen ninety seven. Can you believe that? Yeah? No, are we talking? We're talking like thirty five what every years? Twenty five years? I mean there it is, and of course it's Seleek. Selene killed it. Highlight of the summer Celine Dion at the Paris Olympics.

Yeah, I mean she nailed it.

She did. I mean there was all that controversy and all that, and Selene was rock solid. This is the Bloomberg Surveillance Podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.

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