US Economic Outlook and Bond Signals — Bloomberg Surveillance

[00:00:00] Speaker 1: Bloomberg Audio Studios. Podcasts, radio, news. This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. [00:00:26] Speaker 2: David Seif joins his chief economist, developed markets at Nomura. He's just been outstanding over the recent number of months. I want to get out to the Fed chat. Paul's been doing a little bit. I've been remiss on this. Are we at a Bank of England point where Warsh is alone? [00:00:44] Speaker 3: Good morning. I think I might characterize it a little bit differently, but a Bank of England analogy, I think, is actually very apt here in that, you know, when the Bank of England votes, it's one person, one vote. And, you know, the governor who's the equivalent of the Fed chair has no enormous amount of power to dictate things. And that's very much in contrast to how the Fed has worked for at least the past 50 years, where it's been, I would say, a de facto dictatorship of the chair. And now we have Warsh, presumably not only the most dovish person of the 19-member FOMC, but also with only a couple of others on the Fed who are even, I would say, remotely dovish at this point. And so he probably finds himself in a minority. [00:01:32] Speaker 2: Is there a dovish framework going into this meeting? I'm not sure I can find it. [00:01:37] Speaker 3: Well, I think, you know, I think the dot plot is likely to show a number of dots that still have a cut or maybe even two appropriate for this year. And that's even with, you know, under the assumption that Warsh chooses not to submit a dot, as has been reported. Now, it's going to be a scatterplot, to be clear. I mean, we're going to have plenty of dots for a hike this year, but I think there are still members of the Fed who are looking for a cut later this year. [00:02:09] Speaker 2: Paul, if Governor Christophorus was down there, she'd just go like this, I'm sorry, I'm not submitting a dot. [00:02:15] Speaker 4: No, exactly. We're going to get some inflation data tomorrow, David. I mean, I'm just, you know, looking at the Bloomberg terminal, the CPI headline, 4.2 percent. That's not bueno if you're the Fed here at all. [00:02:29] Speaker 3: I mean, what's going on? I mean, you know, inflation appears to be actually rising. Now, we do actually see at Nomura a fairly soft print tomorrow of 0.2 and more risk of a 0.1 than a 0.3. That's for poor. But that really is not what the overall trend is. The trend, especially when you look at the Fed's preferred measure of core PCE, it's 3.3 percent on a year-over-year basis. And in a couple of weeks when we get the print for May, we expect that year-over-year basis to rise to 3.4 percent on a year-over-year basis. So too high and going in the wrong direction. [00:03:08] Speaker 4: But the reality is there's nothing the Fed can do, right? [00:03:12] Speaker 3: I mean, well, the Fed, I mean, the Fed could raise rates, and that would be the classic sort of move that a central bank is supposed to do when inflation is above target. GDP is growing at or above trend. And unemployment is low and, if anything, set to fall a little bit. Yep. [00:03:31] Speaker 4: We don't think they will, but inflation, I mean, I'll use the term, I don't care, transitory. I mean, is it because of the war here? And if the war backs off, we got energy coming back down, maybe not the pre-war levels, but certainly coming down, and there you go. [00:03:46] Speaker 3: We're all set. I really think this is hard to say that this is transitory, especially when you look at core inflation. So headline inflation, which the Fed doesn't concentrate as much on, there you can make a very good argument. But, you know, when you look at how much the Strait of Hormuz and the energy price bump is hitting core inflation, probably no more than a tenth of a percent or so. So that's pretty small. I think what we're seeing is a much more classic sort of econ 101 overheating of the economy where there's a huge amount of, one could say, price insensitive demand from hyperscalers for everything chip related. And that is outstripping supply. And therefore, with demand outstripping supply, prices are rising. And I think it's really hard to make a case that this is Strait of Hormuz related again. And key thing here, inflation on a core basis would be at or very close to the level it is right now, even had the Strait of Hormuz not ended up being closed, we think. Okay. [00:04:51] Speaker 2: That's really interesting. That's controversial. [00:04:54] Speaker 4: If I'm Mr. Warsh, I'm like, now what do I do? [00:04:57] Speaker 2: I mean, come on. I just did an honorarium for John B. Taylor out of Stanford, one of my first supporters. And we have this architecture of certitude of a 2% inflation. Where did that go? I mean, we are miles from a trendline 2.x% statistic. [00:05:16] Speaker 3: Yeah, I mean, this is going to be the sixth consecutive year with the inflation target. [00:05:20] Speaker 2: What would Martin Feldstein say? You had the privilege. You know, I knew Martin, Professor Feldstein, well, we grieve his loss every day. You worked the grind with Feldstein. What would he say? [00:05:31] Speaker 3: He certainly has missed. And I think he would almost certainly be calling for rate hikes at this point. And so, you know, I think the argument, the dovish argument that Warsh and others who are doves will make is that they see disinflation coming because of the fading of the tariff effect, because of AI being disinflationary. But, you know, we've heard these arguments year after year now for six years. And where are we? We're, again, well above target. And if anything, moving in the wrong direction on inflation. [00:06:07] Speaker 2: Paul, this is serious stuff. I mean, we're benumbed by it. Paul and I are numb. Alexis is not numb because we have Tito's and Tang on this side of the studio. But, I mean, this is serious stuff. [00:06:18] Speaker 4: Serious inflation. And I don't see it going anywhere. Labor market. What's your sense of the labor market? [00:06:24] Speaker 3: Labor market is in somewhat of a Goldilocks zone. So, obviously, we got a fantastic print just last week. Now, if we took that print just at face value, the NFP, I mean, it would actually look like the labor market might be overheating. A lot of that stuff was temporary. So, we had a big bump in state and local. That's probably just a statistical noise sort of thing. And then leisure and hospitality, that may well have been related to the upcoming World Cup. So, that's unlikely to keep going. But still, you know, even taking those out, we're sort of right where we want to be at low 100,000 sort of jobs. And, yeah. [00:07:02] Speaker 2: Are you going to be in the Nomura seats down low in the sun? Or are you going to be in the Nomura box? [00:07:08] Speaker 3: To be determined, I think. David, thank you so much. David Seep. My pleasure. [00:07:12] Speaker 2: With this with Nomura, I can't say enough about his work. Just exquisite research notes from Nomura. Stay with us. More from Bloomberg Surveillance coming up after this. [00:07:29] Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. [00:07:40] Speaker 2: Or watch us live on YouTube. Amrita Sen joins us from London. Amrita, I'm just going to cut to the chase. A lot of people predicted a spike, a surge, a jump in Brent crude. There's a rationalization now of why that has not happened. Does our audience still need to get used to much higher oil prices? [00:08:02] Speaker 5: Down the line, yes, Tom. Agreed. I'm in New York right now. I've been seeing clients here. And that's exactly the question everyone's asking. You know, why are we not higher? What have we missed? People are misconstruing this as though demand must be super weak. Because if we've lost 12 million barrels per day plus of production, then that's the only way to rationalize it. The reason is we have we had a really big buffer of oil, 400 million barrels of stocks that we're still running down and add to that 400 million of SPR. So we did have and we still have that buffer. You know, we forget this. I mean, people were talking about us being at $40 right now, remember, for this year. We were going to be 3 million barrels per day oversupplied. So it's that overhang that we are running down. And that's what the market's almost forgotten about. Once that's true, yes, of course, prices will be going higher. But then the question is, how long does this go on for? [00:08:56] Speaker 2: Well, with energy aspects rigor, do you have an x-axis on this? Paul wants to go to the week when the Vespa becomes expensive. [00:09:06] Speaker 5: I'd say we still have a couple more weeks, right? It's more like weeks or months. It's in July that on our numbers, we start to get like, you know, critical levels between end July and end August, depending where you are, what you're buying and so on. [00:09:20] Speaker 4: Amrita, if we were to get an end to the hostilities today, do we have a sense of when the golf would be back up and running and the oil would be free? Are we flowing and we'd have it back to somewhat of a normalized market? [00:09:34] Speaker 5: That's actually the million dollar question. And I think the market there is getting very complacent. I've seen some reports that it's going to be much quicker to recover. I was just in the Middle East and everyone there said that the damage to infrastructure has actually been a lot more than people have let on because for obvious reasons. Right. And I think it's not an overnight thing. The tankers are in the wrong place. Half the tankers are here in the U.S. They need to reposition tankers. The owners are still very cautious because of casualty. You know, despite the ceasefire, you still get these occasional ships being hit, mines, the other issue. And production is not a light switch. It takes a few months. Now, some countries like UAE, even Iraq and Kuwait now are starting to kind of let some vessels, they're managing rather, to get some vessels out. That means they are going back in there, seeing what damage is. So it won't be like too long, but, you know, officially they've still come out and said months, not weeks. Like it's going to be three, four, five months before production fully recovers, if not longer. [00:10:36] Speaker 4: Is there a sense in that part of the world, Amrita, that they need to de-risk the Strait of Hormuz? I don't know if it's through pipelines or other ways to get the crude out of that region of the world. Is there any plan there to change how that works? [00:10:52] Speaker 5: Absolutely. That was probably one of the biggest points of conversation. And I think Saudi Arabia really stands out there, right? Like they already had invested in spare kind of alternative capacity. And they've always said, look, we don't get paid for it until we do, right? And I think the kingdom is probably the least affected because of the east-west pipeline. They are coming up with four pumping stations that makes the flow of that pipeline actually sustained at 7 million barrels per day. Right now it's more like six. They're twinning two gas pipelines to also flow crude. They're going to dredge the port so they can do more. Kuwait and Iraq are talking to them about new pipelines through Saudi Arabia. I think in two to three years' time, that entire region will look different. UAE has already got that second pipeline going. [00:11:35] Speaker 2: Yeah, absolutely. Amrita, one final question. And we know you've got to get off to energy aspect meetings this morning. Karg Island. Okay, I get it. It's a thousand miles from Israel and all that. But are we doing a sort of kind of like war because we don't want to easily take out this incredibly important oil hub for Iran? [00:11:59] Speaker 5: As in, are you asking why they haven't taken it out yet? [00:12:02] Speaker 2: I'll go with that or when or, you know, what's Amrita's take on the importance of Karg Island? [00:12:12] Speaker 5: Super important. You know, we've actually just acquired a company called Kairos and they are satellite based and they're literally going through tank by tank. How much is there and Karg is Iran's lifeline in terms of how much oil sits there. They have been managing to get oil down there because they're still getting ships through the U.S. blockade, right? That's been amazing to watch. I think, look, kinetic action is not something the U.S. wants to do or anybody wants to do right now because the Iranian IRGC in particular has shown their asymmetric powers, damaging infrastructure in the region. And, you know, they are the kind of people, they really believe in scorched earth. If they can't have it, nobody else can have it. And I think there is some real risks to, again, kind of restarting kinetic action. And that's why the U.S. has backed off. [00:12:58] Speaker 2: Amrita Sun, thank you. Thank you so much. Thank you. I appreciate it. Look forward to speaking to you way more often into 2027. Brilliant research with the energy aspects of the minutia of what she does is just really, really uncommonly good. Stay with us. More from Bloomberg Surveillance coming up after this. [00:13:20] Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. [00:13:38] Speaker 2: Lizanne Saunders joins us. Should we try it around Bloomberg Money? Friday, 12 minutes. It's okay. It's okay. So we said, let's get her back. So Lizanne Saunders here. And I hate it. It's now mid-year review. We're in God's name to 2026 go. I mean, there we are. How do you write a mid-year review given the noise out there? [00:14:00] Speaker 6: Well, we always start with, all right, what did we say for the full year? And what did we get right? What did we get wrong? And as you guys know, Kevin and I work on it together. He kind of tackles the economic side and I tackle the market side. You know, sometimes it's frustrating because in this instance, you know, we like to put them out before the end of June. And I think one of the missing links that would otherwise be in a report like this would be about Fed policy, especially under a new Fed chair. But we have to get them out beforehand. So you just sort of take stock of the year so far. And we're not market timers. We're not out there trying to time inflection points in the market, but just share some perspective. And we think the macro environment looks decent. Neither side of the Fed's mandate is suggesting they should be even considering easing policy here. And I think that's the right stance. But I think that's going to be the most fascinating thing is this first meeting and what Warsh has to say about how he's going to think about running the Fed. [00:14:59] Speaker 4: I guess the good news is that earnings are driving this market. Maybe the less good part of it is it's kind of concentrated here. We have that concentration risk that's come back into the marketplace. How do you guys think about that? [00:15:10] Speaker 6: Yeah, well, we've written and spoken about concentration within the market in terms of performance. But you're right, Paul. There's a lot of concentration within the earnings story. Now, the AI story and the infrastructure component of that has broadened out into areas like materials and industrials, but you still have a relatively small handful of names that sit behind the huge surge in what were first quarter earnings, which contributed to a big jump in full year earnings. We were, before reporting season started, we were in the teens in terms of estimates for calendar year 2026, and that's up to 25 percent right now. So the bar has set high. [00:15:57] Speaker 2: I got a massive Dow Jones Industrial Average drawdown of 1.66 percent from the record high. You've got a piercing single sentence that 3 percent of S&P 500 are hitting 52-week highs. Have you ever seen this before? [00:16:12] Speaker 6: No. [00:16:14] Speaker 2: So discuss. This is really, this is the key question for me. [00:16:17] Speaker 6: And by the way, it's only about 20 percent of S&P constituents that are outperforming the index itself over the past couple of months. Now, in the past week, there's been a little bit of breadth improvement, but we do have an incredible concentration in terms of performance. The one thing I wanted to point out, though, when we discuss the mega caps and their contribution to a cap-weighted index like the S&P 500, an example would be NVIDIA, which I think is still the fifth largest contributor to S&P 500 returns, but it's not even ranked in the top 100th within the S&P in terms of price performance. And that's an important message for individual investors, because I think sometimes they feel they have to be in, say, a cohort like the Magnificent Seven. But there's a big difference between contribution to return and actual price performance. So there's 100 plus stocks performing better than the Alphabets and the NVIDIAs of the world. They're just large contributors by virtue of the multiplier of their cap size. [00:17:30] Speaker 4: So, I mean, what are your Schwab – I mean, you and Kevin, you're on the road all the time talking to your Schwab clients. What's their big issue today? What's their – is it FOMO? Is it – you know, I don't understand AI. What's the big issue that you get? [00:17:45] Speaker 6: Some of it is age-dependent. I think FOMO is more prevalent among younger investors. I would say then – lately, a lot of questions on the IPOs. Okay. And, you know, much to your chagrin, their chagrin, it's not something I can talk about with any kind of specificity. I would say for our more seasoned investors, still the number one question that we get is on debt and deficit. [00:18:13] Speaker 4: Really? [00:18:14] Speaker 6: Without a doubt. [00:18:15] Speaker 4: But you and I have been in the market the same amount of time. It's never been an issue as long as people keep showing up to the Fed and our Treasury and buying our debt. [00:18:23] Speaker 6: For whatever reason, I think the investor class cares deeply about this subject. I think the average constituent maybe cares about it in the abstract, but they don't tend to vote based on it. So, as a result, something that those in Washington on both sides of the aisle just continue to play nice with the kick the can down the road. [00:18:40] Speaker 2: Can I say, Gui? Sure. There's all these fossil acts out there. And I saw Springsteen the other day, and he's just absolutely phenomenal. He did not mail it in. [00:18:49] Speaker 4: Never. [00:18:50] Speaker 2: September of 1980. Ready? 46 years ago, we lost John Bonham. And they had the courage to say, it's just never going to be the same. I mean, they really, Led Zeppelin, Lizanne, you should see her living room, the merch she has and the collector stuff. It's unbelievable. They had the courage then to just say, we're not going to fake it. That's right. [00:19:12] Speaker 6: And, you know, but what's also interesting is the unwillingness, at least on Robert Plant's part, to do some sort of get back together. Because John Bonham's son, Jason, is an extraordinary drummer. And they did it the one time at 02 in 2007, a tribute concert. [00:19:31] Speaker 4: Have they sold their catalog like a lot of other people? [00:19:34] Speaker 6: I haven't seen that. I don't believe so. [00:19:35] Speaker 2: Trust me, Schwab will be the underwriter. Yeah, I know. I know. I don't know whether they know or like it or not. Yes. Okay. But then Rush comes out with Anika Nelson. They're just starting a brand new tour with Neil Peart dying. They, they're trying to do it. It's very cool what's going on out there. [00:19:52] Speaker 6: And then you got the Stones still doing it. [00:19:53] Speaker 2: Yep. Are we seeing the Stones at some? I don't even know. Are they touring? [00:19:56] Speaker 6: No, I don't, I don't know if they're touring. I've seen them so many times. Yes. [00:19:59] Speaker 4: But I mean, it's, that's the only way. Well, one of the few ways left for these folks to make money is to go out on tour. [00:20:04] Speaker 2: My biggest agony of this sitting on a bed at Rochester Institute of Technology, looking at Stairway to Heaven in that album and saying, what is this? Is Jimmy Page just didn't go forward like Robert Plant did with Alison Krauss and all that. [00:20:18] Speaker 6: And it's been a huge loss. [00:20:20] Speaker 2: Was that a good segway? Yeah. I like that segway. [00:20:24] Speaker 6: You can always segway that. [00:20:25] Speaker 2: We had to do that segway or Lizzie won't show up again. Well, thank you so much for coming in. But do you have a vision into 27? I don't. [00:20:35] Speaker 6: I don't. No. It's just nuts. Other than, I think that there's a greater connection now between the bond market and the stock market. Pretty significant inverse correlation between bond yields and stocks. I think the bond market is keying more off the inflation side of things than on the employment side of things. And as long as that stays the case, I think that inverse correlation is maintained. [00:20:57] Speaker 2: 30 year bond, 5.02%. Lizanne Saunders, thank you. Thank you. Thank you. Stay with us. More from Bloomberg Surveillance coming up after this. [00:21:14] Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube. [00:21:27] Speaker 2: Nisha Patel writes really smart notes for parametric. It's about like the dynamics of municipal bonds. Are muni bonds like everything else? If it's priced down, yield up. Are munis like governments, full faith and credit or corporate bonds? Recently, have muni price gone down? Because everybody else's bill note and bond prices have gone down. [00:21:51] Speaker 7: So I would say we had a little bit of a hiccup, obviously, as the war started, right? We saw treasury yields increase. Prices come down. That did affect markets generally across the board in the fixed income side. Munis as well. Of course. Now, always, it's never going to be a linear move. Directionally, you can expect it to go into the similar direction. The one nuance with munis, different than treasuries and corporate markets, is that your primary buyer base are high net worth individuals, typically are retail investors. And that is what we saw last year as being a really big catalyst for a lot of the underperformance, a lot of supply, and not a lot of demand. We talk about technicals in the muni market. Now, Tommy, that's a good question. I think what's changed this year is that we've seen the demand pick up, right? So we've had a tremendous inflow cycle in munis, the second highest since 1992. Now, why is that? It's because yields start getting attractive enough, right? You have clients who are looking to move out of cash, high tax brackets. Paul, we always talk about New Jersey and tax equivalent yields there. Tom, I think you have a muni account. But, you know, when you start to see on a risk-reward basis yields getting this attractive, you start to see the inflows kind of. So that has been incredibly supportive so far this year to where, as of late, we've actually seen muni yields come down and prices go up. [00:23:23] Speaker 2: That's where I want to get because Paul's walking around different. [00:23:25] Speaker 7: Paul's very laddered. He's very happy, a bigger smile. [00:23:29] Speaker 4: Very happy. So there's demand there, but there's also a ton of supply, it seems like. Record years of issuance in 24, 25. How's 26 shaping up? [00:23:37] Speaker 7: So 26, we had a record year last year. So far, year to date, we're actually, versus the same time last year, slightly higher. Wow. Now, so expectations, you know, from underwriters on the street is that we will likely be at 2025 levels when we close out the full year, or could even be slightly higher. The reality is that there's a lot of pent-up demand, right, for infrastructure needs. And so when the economy is on a stable footing, look, as we are seeing currently, there's more confidence for issuers to issue debt, right? Balance sheets are healthier. And again, across all sectors, you're seeing that to generally be the trend. And again, the biggest caveat is, if demand is sustainable, if demand stays strong, then that will help absorb the supply, which is exactly what we've seen as of late. [00:24:28] Speaker 4: Is this refinancing, or is this new borrowing in the muni market? [00:24:32] Speaker 7: So some of this is refinancing, but a lot of this is also going to be new borrowing as well. So it is a combination, but a good portion of this is going to be new money issuance that we're seeing across the board. Again, if you look at kind of, you know, the trends over the past few years, we have seen just an increased demand for infrastructure needs. You know, I will kind of integrate AI and AI kind of capex spending that is happening. So, you know, as these actual physical warehouses and storage units are being built out, you also need supportive, right? Utility infrastructure needs to help with this. So that's just one of the elements that you're seeing. And look, in the muni market, issuers are never timing rates. It is very difficult to do. So if they have a need, they can finance it. If they got voter approval, they're going to come to the market to issue. But again, you know, with even the recent rally, we still see an opportunity here in munis. And I think for the foreseeable future in these summer months, we should see demand side hold up pretty well. [00:25:44] Speaker 4: Haven't seen much credit quality issues out there. I haven't seen a Puerto Rico kind of blow up or Chicago or I don't know. How's credit quality out there? [00:25:54] Speaker 7: Yes. Good, good question. And I think that's another reason for really the supportive demand. I think generally the credit story has been very strong. You still are seeing, you know, net more upgrades than downgrades across most sectors. Again, the economy has been very strong. So think about that across the board. Tax collections are high across the board. These kind of GOs, cities, towns, states have built up very strong reserve levels and strong balance sheets. But again, I would say professional credit management is still key here. Sector by sector story, health care, higher education, airports. It's all going to depend upon the sector. [00:26:32] Speaker 2: I saw you in the third row last night at the Knicks game. Oh, yeah. You're such a bond nerd that, you know, you don't look at this like we do. Yankee Stadium and in Citi Field were muni bond transactions. But MSG's wacko and wasn't, is that, there's not like MSG muni bonds, right? [00:26:50] Speaker 7: There's not MSG muni bonds, correct. [00:26:52] Speaker 2: Correct. Because there's some taxing I don't understand. [00:26:54] Speaker 7: Right. So Yankee Stadium, they will issue through a muni conduit. Madison Square Garden, I have not seen that ever being issued. They have an exception. [00:27:06] Speaker 2: It's a 1982 state law. They have a permanent 100% property tax exemption, I guess. [00:27:14] Speaker 4: So, I mean, people want to move Madison Square Garden. Good luck with that. Better people have tried. So, talk to us about just kind of the, the Fed, does the municipal bond market, how much does the muni bond market care about the Fed and what it does? [00:27:29] Speaker 7: That's a great question. So, when we started this off, look, munis are going to be dependent on just overall rate picture, right, and treasury rates for that matter, directionally, typically in the same direction. And we've seen this over the past few years. You see a major uptick in treasury yields. You see volatility, munis have typically underperformed in those markets. So, my answer is on the Fed side, it is very important in the sense that it's important for the treasury market and just on the directional move of where rates go. Now, obviously, we've seen an uptick in short-end rates because of the market now increasingly pricing in rate hikes, right? So, the market is saying, look, the Fed is off. They're wrong. Rates are not restrictive enough. Next week is a big meeting. That is going to be a big one. So, any market reaction from that, particularly in the treasury market, could be a catalyst for a move on the muni side. [00:28:27] Speaker 2: Anisha Patel, thank you so much. SMA, fixed income portfolio manager at Parametric. Greatly appreciate that. [00:28:33] Speaker 1: This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 7 to 10 a.m. Eastern, on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal. And, and, and, and, and, and, and, and, and.