Bloomberg Surveillance TV: June 12, 2025
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This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-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 6 to 9 a.m. 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.

Team over at RBC writing, while this may have temporarily calmed markets, households are still grappling with the after effects of significant inflation over the past five years. Frances Donald of RBC joins us now for more. Frances, good morning to you. Good morning. Spoke to a lot of people yesterday and they all said a very similar thing. We're going to see the pass-through today. We're going to see it today. Then we didn't see it and they said we're going to see it next month and the month after. Your team's taking a different approach to all of this. Just walk us through it. It's going to be

more months and there's a range of reasons why and one of them is you might remember this massive inventory bill that we saw in the past few months that means there's plenty of inventories that did not get hit with those tariffs yet and that's going to take some time we've got to see that inventory depletion we saw this in 2018 with washing machines three to five months before we saw it show up in the data so there is some precedent there we also don't know how many of these tariffs are going to come through in cpi versus ppi so we're still just going to be a couple more

months before we see this. And I think that's the reason why, while I'm happy to see that inflation is not accelerating right now, two things. One, it's a bit early. And second, inflation is not just a tariff story. Inflation is actually also a story with respect to a tight labor market.

market. We have a very strong ultra wealthy consumer. We have big governments. So there's structural forces under inflation as well. And actually, while tariffs are important, they're not the most important story with inflation. Credit to you and the team for the approach you've taken so far. Let's sit on the labor market, I think, and agree with you that it's ultimately very important for the pass through and whether we can stomach it as consumers. This is something we discussed over the last several weeks. Is the labor market tight enough for individuals to demand higher wages to fund higher prices?

So, in my view, Americans don't need to worry about losing their jobs this year, but they do need to worry about their grocery bill. And in this particular case, we have to segment which consumer is doing what. Because if you're a low and middle income household right now, yeah, you probably have a job, but rent, food prices, those are up almost 30% in the past five years, and even though

on aggregate, we've seen wages rise more than the inflation over the past few years. That's not true for low and middle income Americans whose inflation basket is tilted towards those areas that have seen larger inflation. So we can't paint the same brush with inflation or wages to the entire consumer household. Now, if you're trying to

to get a sense of what a retail sale is going to do. If you're forecasting GDP, you pretty much are focusing disproportionately on that high income household and they're going to be just fine in this environment. But forecasting GDP and saying what's best for the American economy and American people is a very different thing.

When you're talking about underlying inflation, you're saying tariffs aren't the biggest story. What is it? Is it the labor market or is it big government? Well, there's structural forces and it's both these things. So when we talk about the labor market, we're not talking about, oh, there's so much cyclical demand here. The economy is booming. We're talking

a lot about demographics and we think of demographics as being a 10 year horizon story but the demographic crisis is accelerating every single month. We see more retirees than we did the week before, the month before. That's creating huge exits out of this labor market and there's not enough replacement demand. So that unemployment

rate, even though we believe the economy will soften this year, we have it peaking around four, five, four, six percent. I mean, I'm old enough to remember when that was an extraordinarily strong labor market. That's going to be our bar for a weaker labor market right now. We can't use the unemployment rate anymore as a cyclical indicator of growth. We have to turn towards other areas. You're talking about retirees. What about Trump's immigration policy? What's that doing to labor markets? Well, that's going to amplify the issue. I remember being here at the

end of 2025 and saying, yeah, tariffs are going to be a big deal, but keep your eye on the immigration story. In our view, how much available labor is actually going to be the big issue in 2026 and 2027. We've said it before. America doesn't need jobs. America needs workers. And if you want to see a boom economy, you've got to have people not just who are willing to do those jobs, but actually in the labor force. Sometimes we get pushed back and they say, oh, well, the labor force is that there's been a decline since 2001.

The labor force participation rate is around 63%. But prime age worker labor force participation rate in the United States, 18 to 54, is near its highest ever. So there's not a lot of folks sitting on the sidelines right now who are of that age. And this is having impact on month-to-month data now, a structural trend that's showing up in the cyclical data as something we need to monitor.

It's going to take time to figure out and we need to be open-minded about potential outcomes because I've been surprised so many different ways since the pandemic with regards to the economy. How much flexibility does the Federal Reserve have with that in mind?

Well, not enough. And so the key is just going to be what side of the mandate are they focusing on? And also, how are they being flexible with respect to how the data is changing in this environment? CPI is one indication of what's happening with inflation, but we're going to see a dashboard of inflation that's going to see problems in some area of prices and other areas where it's going to be okay.

isn't just a divergent economy in terms of growth, in terms of consumers, it's also going to be a divergent economy with respect to prices. That's going to complicate the Fed's job. You've heard of Trump derangement syndrome. No data of Ren Macca's kind of new term that the Treasury Secretary used yesterday, tariff derangement syndrome. Does the Federal Reserve have TDS?

- Okay, well, we don't know what the policy's going to be, and we don't actually know exactly how it's going to impact the economy. So we have two sources of uncertainty in play. And that's why I say, yes, tariffs are hugely important. When we look at our inflation forecast, it can be as much as half a percentage point on headline CPI, which could be make or break for the Fed.

But the time right now is to focus on what are these underlying trends that are happening, this K-shape that's involved in the economy, massive government spending, which in our view is muting the economic cycle in play. We got to talk about that labor market and how things are changing. And we have to talk about some of these other issues, like a very extended troubled electrical grid.

that is limiting the ability to move forward. These are things that exist with or without trade and tariffs. And I can come up with a whole economic view on which the tariff is sort of the whipped cream on top of the ice cream, but not actually the core meal, even if right now it's the area where we have the most volatility. Sometimes I'll take that as the core meal. Francis Donald of RBC.

If this government spending in defense goes towards things like R&D that have dual use civilian purposes, you could get spillovers that actually end up enhancing productivity in Europe and so have a more long lasting impact on growth.

To learn more about the intersection of national security and global trade, subscribe to PGM's The Outthinking Investor in your favorite podcast app.

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Just to turn back to the markets, let's talk about crude. Giving back some of the gains today after spiking on reports of rising tensions in the Middle East. The U.S. ordering some of its embassy staff in Baghdad to leave the region due to heightened security risks. Joining us now is the former senior U.S. intelligence official, Norman Rule. Norman, welcome to the program, sir. We always enjoy leaning on your expertise in a time like this. Could you just frame for us whether this is the real deal, something to be concerned about, or just one of those things that we typically see every few months out of this region?

Good morning. Well, it's something to be concerned about. What we're watching are three issues that are coming together after months of work. The lack of progress in the Iran talks, the dangerous expansion of Iran's nuclear program, and right now the IAEA Board of Governors finding that Iran is in non-compliance with its nuclear safeguard obligations under the Non-Proliferation Treaty.

The Trump administration is committed to diplomacy, but it shows every sign of willing to use military force to prevent Iran from acquiring a nuclear weapon. And the actions taken over the last 24 hours are meant to signal Iran that that intent is indeed sincere without raising the temperature in the region significantly.

Norman, what does it say to you that the IAEA Board of Governors is saying Iran is non-compliant of its obligation? What does this mean? Does it mean we're going to see more countries take more action and sanctions on Tehran?

Well, first, the issues that the IAEA has worked on in the last few weeks are longstanding, in some cases for many years. But diplomacy has very slow wheels and people put a lot of effort into trying to avoid this step. Indeed, this censure of Iran is the first time something like this has been done in 20 years.

This will require now that the IAEA push this towards the UN Security Council for what is known as snapback to in essence restore all UN Security Council sanctions on Iran probably in September. They have until October, but since Russia takes over the UN Security Council in October, that's unlikely to happen. What we're seeing is that Europe

is seeing that diplomacy has come to its end. There are no other options here and they are agreeing with the United States that the more severe pressure needs to be placed on Iran. And again, Iran's nuclear program is reaching a very advanced stage. Most of its enrichment capacity is now being devoted to military, which is not nuclear weapons, but still military-grade enrichment for which it has no actual purpose.

Well, Norm, maybe an even further breach of IAEA obligations. What we're hearing today is that Iran says they're going to establish a new uranium enrichment center in response to this decision. At the same time, the Omani foreign minister confirmed that the sixth round of talks between Iran and the United States is still set to go on on Sunday. How is there a path for diplomacy if Tehran is continuing to enrich uranium and announcing new centers?

It's a great point. I think you're seeing several things here. First, I think whatever Iran announces, it planned to do in any case.

It's just using the IAEA Board of Governors resolution as an excuse. It's likely going to expand its scale of nuclear enrichment, as I say, to continue its program in this dangerous direction. We should be most concerned if it further restricts IAEA access to its program, which it has been doing for a number of years. That would be most concerning. Iran, however, has already

all the reason in the world to continue talks, to drag out this process. And that is what has been of greatest concern to the Trump administration and others, because again, there has been no substantial progress in the talks. Iran refuses to halt domestic enrichment, to close any facilities and to halt advanced research and development. And unless you have significant constraints on those activities, besides temporary constraints,

you really do a program that any moment can be turned into a nuclear weapons program norm what kind of attack would it look like given the fact that we do have reports that israel's ready to launch an operation into iran well to be clear there's no evidence that we're facing on imminent attacked by the united states of israel on iran all of such a likelihood is increasingly likely will grow like the more likely as a roof or on refused to cooperate such an attack would be uh...

uh, would have a number of different elements to it. It is certainly unlikely to take place in a single strike. Iran knows this. Iran has almost certainly been preparing, uh, to, uh, live through such an attack and to respond with its own ballistic missiles and other tools against, uh, Israel. It will be a, uh, prolonged event, uh,

both diplomatically as well as militarily. But again, the United States has more than sufficient capacity to overwhelm anything Iran may seek to use to defend itself. Hey, Norm, thanks for your time today. No doubt we'll catch up again soon. Norman Rowe there of CSIS.

Let's turn back to trade. China affirming a U.S. trade deal announced earlier this week. Officials out in the country always quote, keeps its word. Joining us now is Adam Posen of the Penison Institute. Adam, welcome back to the program, sir. Let's talk about what ultimately you've been engaged with.

over the past week or so. I think yesterday after the inflation print, there might have been some excitement that maybe we could escape the higher prices off the back of the policy we've seen implemented over the last month or so. Adam, do you think maybe we're getting a little bit too excited too soon?

I think we're getting too excited too soon, Jonathan, for two reasons. First, as you imply, there is still a chance, and in fact, I think a very great chance, that we are just at the start of the tariff cycle. I appeared before the Senate Finance Democrats in a hearing yesterday, and there were small businesses, an array of them sitting next to me, talking about how they are having to make hard decisions on what tariffs to purchase or what to cut back on.

And we're seeing that in all kinds of data, even though it's not in the New York Fed inflation expectations, admittedly. And so I think the Fed's right to sit tight. But the other thing that's going on is we're not going to duck this as a real income hit.

There's huge income hit because we're losing purchasing power of things people want to buy through tariffs, where it's a real income hit because uncertainty has gone up and it's going to remain up as the non-deals of the last month show. And so we might end up possibly with not that much inflation, but incomes are going to be hit.

Adam, when you look at the core inflation yesterday, we saw the decline was from airlines, cars, clothing. There was a drop across the board when it comes to energy prices. When do you think it'll actually hit the hard data? It's a fair question, Anne-Marie. And after four months of uncertainty,

under expectations inflation, even somebody like me who's been forecasting inflation to go up has to take a pause. Four months in a row is real information. But the fact remains that the used cars, new and used cars number is weird, to use a technical term, given what we know is going on with Ford at GM, at Toyota, at Stellantis, at Honda, given what we know is happening to their supply chains.

given what we know is happening to credit availability for cars, it's odd. It doesn't mean it's not literally true, but I wouldn't put too much weight on it. But more than that, I think there just needs to be, as the Fed I think is rightly doing by weighting, you need to wait to see what happens. If it turns out there isn't inflation, then great. And we just have to deal with the real income loss.

Well, Adam, what about if we do get trade deals and this is all wrapped up in terms of the uncertainty by the middle or the end to the summer? It still doesn't fix the underlying problems, Anne-Marie. I mean, two things. First is, again, two things. Again, it's both direct and uncertainty.

The direct effect is we still have tariffs that are 20 times on average as high as they were for 80 years. And that has to work through the system. And that is paid for by American companies or American consumers or American companies who buy inputs. So full stop, that's there.

Second, because of the nature of the tariffs, that they're not done through legislation, they're done through presidential emergency power executive orders. And because everything gets negotiated, everything's up for negotiation at all times, the uncertainty doesn't go away.

I know Jonathan hates it when I bring up Brexit, but the analogy is to Brexit. From 2016 to 2020, people kept saying, well, once the uncertainty is resolved, once we know if it's a hard or soft Brexit, it'll be okay. And I kept saying the problem with Brexit is an uncertainty. The problem about Brexit, the problem with Brexit is Brexit.

And so it's not the same thing, but there is that parallel here. The regime has changed, and we're seeing that in the fixed income markets, we're seeing that in the currency markets. People do not view the U.S. assets or U.S. policy or U.S. fiscal policy as safe as it once was. It's not gone to heck, but it is less safe, more than zero risk asset. And that has a cascade of effects that will not go away.

Adam, if you ask me seriously what Brexit is, what it was, I couldn't tell you. I stopped following the conversation a long time ago. I just feel lucky to live in America and no longer in the UK to track that story anymore. Did you give up too, Anne-Marie? I gave up years ago. I sort of did. I did give up, especially because I moved to the UK at a 172 handle. Soft Brexit, hard Brexit. Yeah, and then I left after Brexit. Enough of that, Adam. Enough of that. I wanted to get your view on the next Fed chair.

and the kind of characteristics that you would like to see from the incoming Fed chair after, of course, Chairman Powell steps aside next year? I think, Jonathan, as Ben Bernanke, Thomas Laubach, Rick Mishkin and I argued for after Greenspan, it should matter less who the chair is. It should be a system. It should be less about the personality. Obviously, it does matter. Jay Powell has had unique attributes that have mostly been extremely great leadership.

I think the next chair is going to end up having a very simple job because they're either going to get lucky because AI kicks in. And so like Greenspan in the mid 90s, you get higher growth and lower inflation and they can sit back and thereby please President Trump or inflation will be obvious and the committee will leave them no choice and they'll have to hike.

So there's going to be a lot of hype around who's the next chair. And if there is a crisis, it matters whether it's Ben Bernanke or not. So I don't mean to dismiss that. But I think people are overdoing it. The Fed will do what the Fed does. Adam, let's talk about what the Fed will do and what they'll do next. You said for quite a while there's a real risk that the next move might be an interest rate hike.

And you also acknowledged this morning that four months of softer than expected inflation is not noise, it's information. So, Adam, with that in mind, what's the view now on what you would expect to come from the Fed?

You're right to call me on that. I had been expecting higher inflation this year, and I was expecting that the Fed would be hiking before the end of the year. A few months ago, even before this run of data, I changed my forecast. It was still out of market, out of consensus, and remains a bit so, that the Fed is not going to be cutting inflation.

until November or December at the earliest. And if they do, it's only going to be two cuts before the end of the year. There are a bunch of reasons for them to sit still. Some of them were articulated by Fed Atlanta president Raphael Bostic the other day. The general sense of the committee, I think, is broadly right.

that we're not falling off a cliff in terms of unemployment or growth. So anyway, forecast, they're going to sit tight and they're going to sit tight at least through September, probably till fourth quarter. And I think if they do make cuts in the fourth quarter, they're likely going to have still likely to have to take them back by the middle of 2026. Interesting. Adam, we get new information. The outlook changes. Appreciate the update. Adam Posen at the Peterson Institute. Thank you, sir. Thank you very much.

If this government spending in defense goes towards things like R&D that have dual use civilian purposes, you could get spillovers that actually end up enhancing productivity in Europe and so have a more long lasting impact on growth.

To learn more about the intersection of national security and global trade, subscribe to PGM's The Outthinking Investor in your favorite podcast app. Thrivent can help you plan your finances for the people, causes, and community you love. What makes Thrivent different? Financial services and generosity programs are combined to help you build a financial roadmap for the future while also creating opportunities to give back along the way. Visit Thrivent.com to learn more.

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Still ahead then, later on this afternoon, 30-year debt coming to market. Lindsay Rosen of Goldman Sachs is with us around the table for a preview. Lindsay, it's good to see you. Thanks for having me. Let's talk about fixed income, the kind of risks out there. Lots of people worried about the long bond, the 30-year issue. Yes, and that it's been trading more like risk asset than it has been trading as a flight to quality, which I think we're used to.

The big thing here is just trying to figure out where fiscal is on the going forward. And what we've been telling clients is there's no need to go into the 30-year bond. There are a lot of bonds in the belly and the very short end of the curve. Stay there and you'll be better served. If you're worried about risk in treasuries, does it upend how we perceive risk elsewhere in corporate credit? Absolutely, because treasuries are the base, which is what we then build everything off of. It's the risk premium above it that gets us to where spread risk is valued.

So, what we're seeing in the back end actually influences our views on back end investment grade corporates, for example. And as a result of what's happening in the back end of the rates curve, we've actually also stayed in the front end of the corporate curve and stayed away from the back end of the corporate curve. Jeff Gundlach yesterday talking to Lisa. John's been talking to a lot about these comments, but he says it's certainly behaving differently than it was for the last four decades. Things are behaving differently. He's talking about how he won't touch the 30-year Treasury.

Why do you think this is so different than what we've seen with skirmishes in the last four decades? Yeah, I do disagree a bit in that this isn't something we've never seen before. Questioning fiscal, questioning the fiscal sustainability or unsustainability of the government is not anything new and it has been a concern.

What's different is the problem's gotten larger and larger and larger, and I think we're getting pretty close to a breaking point. And that's what the back end of the curve is telling you. That being said, there's always a right price for something. And I think we're getting fairly close in the back end to an area where it seems interesting. And certainly we've bounced off today, yields are lower on the back of the economic data that we got that were surprising.

But there will be a point in time where the third year is something that you want to own because we're putting in some real, real yield in the back end. Let's talk about this economic data. Neil Dutton was with us moments ago, I'm sure you heard. I did. Very worried about the labor market and continuing claims. I wonder what your perception of where the economy is right now is and ultimately how that's shaping your approach to corporate credit more broadly. Sure. So for us, the labor market is gradually softening. And I think each piece of that phrase is important. Gradual is comfortable.

And softening is actually okay. It's when you have something that's more extreme. And I think that's what Neil is trying to suss through, is that are we seeing continuing claims at an alarming level? Are there things that we should be more worried about? The nonfarm payroll last Friday, I think, was kind of the beginning in telling us that we are for sure in this softening episode. But the read-through for that, for us, is not that the economy is falling off a cliff. But

but it puts us in a position where we think it is important that the Fed begins acting. Agree with Neil completely. It's not at the next meeting. I know that he joked, he said that they should cut, but I don't think he really means that. We don't think that they should cut either, but I think it'll be really interesting to see the dots, and we are hoping...

that they at least preserve one or two for 2025. I think if it was zero, that is really going to upset the market. - Speed matters and it's not happening quickly. And I think that's important, not just for policymakers, but also for corporate balance sheets. So can you describe the kind of corporate balance sheet strength that you see at the moment and how resilient corporate credit would be in a continued downturn?

Sure. So, balance sheets look really good. All the things that we look at, metrics, leverage metrics, that they've termed out debt, thinking about just their business models, not all of them, but most of them are in really, really good standing.

For example, we did have a fallen angel earlier this week with Warner Brothers. That's getting a lot of fair and fair. That's the fifth largest fallen angel. But if you take that out of the equation, we've had a really solid investment grade corporate market that's been extremely resilient. That makes us feel comfortable with the balance sheets. The problem that we're dealing with right now is spreads.

So are you being compensated for the potential going forward economic softness? Spreads are really tight right now and they are pricing in that everything's going to go fine. That's where we take issue. Are all-in yields attractive enough to compensate for that? They have certainly in some of the backup we've had gotten to levels that have hit triggers for some of our clients. We've seen clients saying that we're actually interested in getting into fixed income. We want to add, we're underweight our fixed income allocation. So yes, the all-in yield is good.

But what we really encourage, and I think our clients agree is important, is active management around this exciting yield thing, because not every corporate is going to have a solid balance sheet on the going forward. And tariffs are happening. Maybe they're less than we thought, but they still are happening. So down 1-800-GOLDMAN-SAX-ASSET-MANAGEMENT is the pitch, I think. Yes, that line should ring. Thank you. Lindsay, thank you. Appreciate it, as always. Lindsay Rosen there of Goldman Sachs.

This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from 6 a.m. to 9 a.m. Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business Hour. There's nothing like sinking into luxury. Anabase sofas combine ultimate comfort and design at an affordable price.

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