Bloomberg Surveillance TV: June 16, 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.

Joining us now is Amanda Linem of BlackRock. Amanda, a difficult time for the Federal Reserve to be meeting, given that their dueling risks seem to be, their double mandate seems to be very much increasingly in conflict. Do you think we're going to learn anything at all this week? Good morning. Thank you for having me.

That's the one thing that we are focused on. I would say the summary of economic projections has the potential to give us some incremental clarity on their reaction function. We think on the margin it will reflect a more challenging growth inflation mix. But keep in mind, this is just the median of all of the different committee members. It's not actually a cohesive projection from the committee. So we need to kind of discount that.

What we are most focused on is what would be the scenario analysis, the reaction function, if the dual mandate comes into tension? A few months ago, you started to see Chair Powell, Beth Hammack talk about that being on the radar. I think the incremental news has become, as you alluded to, even more challenging with the geopolitical situation. So that would be the, hopefully, the one nugget that we will be looking for is how would they navigate that backdrop?

what would they prioritize? This SEP already reflects an unemployment rate of 4.4% for this year, so we know that they are baking in some weakening in the labor market. How much weakening would we need to see in order for their posture to change? - Earlier this year, there was a feeling that any inflationary shock from tariffs or trade tensions in general would be transitory. They even used that word, or even short-lived.

Now there's a question of dual shocks. You have the tariff risk, and then you also have potentially some sort of oil shock that is persistent. Even if it's not the closure of the Strait of Hormuz, there is this feeling that there's going to be a higher premium. How much does that complicate things and create a more sort of long-lasting inflationary impulse? I think you nailed it. It's not just the inflation data, but inflation expectations. So even though they're navigating to core PCE, which would exclude energy, if we do have a rise

in oil prices that is sustained, does that alter inflation expectations for consumers and could that cause them to react? I would say there's kind of two-fold impacts that we see from this geopolitical backdrop. It's one, should there be higher risk premiums on corporate credit? And then two, are there actually sector-specific implications if there are sustained supply chain disruptions? We haven't seen that yet. Hopefully we don't. But those are

really what we're focused on. And then the magnitude and the duration of that has yet to be seen. Even when the Fed was, I would say, casually using the word transitory, when was that? Back in the March meeting. It was also caveated with a healthy dose of we're not quite sure really where this is going. I remember that meeting very well. And so I think they're even hesitant to say that they'll be able to look through it. I think they're just raising the possibility that maybe they can look through it.

Well, to the point of credit markets, again, it's another thing where we see spreads widen a little bit and then not really react that much, where you have seen some weaknesses in the junkiest part of the market. Is the risk real there? Could you start to see defaults pick up in that area? Sure. So two things I would say. Our conversations, and really since early May, have focused on two-sided risks, exactly as you noted. Widening episodes have been short-lived, and actually the common refrain from a lot of investors is, oh, I wish I would have taken advantage of that more. So that's a very

real risk and so we're very focused on the two-sided risks. Where we are trading carefully and have been are those kind of left tail pockets of the market that were already under pressure before the economic data deteriorated. So for example, US triple C's had interest coverage below one times already last quarter. It's rebounded a bit.

That was before the economic data deteriorated. You see that in pockets of the leveraged loan market. You see it in pockets of private credit. So that's really where we need to focus is saying, okay, let's not be too defensive. There's a real opportunity cost to being under risked. But at the same time, if a company was already having trouble growing into its capital structure or a sector was already having trouble navigating this environment, nothing on the horizon is going to make it

easier. And so that's really, I think, where we are mindful. I will add, though, the high yield and leverage loan default rates have been quietly creeping for the past year and a half, and it has not derailed the performance of the speculative grade parts of the market. So I think what that's telling you is it's the smallest capital structures that are defaulting. It's oftentimes repeat defaulters. And that is, by definition, priced into the market. Well, if we do see a Fed that falls in between that dual mandate and they can't take action and they can't cut and rates do remain elevated,

Does that start to spread? Well, actually, somewhat counterintuitively, it's probably going to support the yield-based bid for corporate credit, which has been a really powerful technical force. I would say the yield-based buyer has exhibited some patience on and off, so they're sitting it out sometimes. But in general, structurally higher interest rates coupled with okay growth, even below trend growth,

That's not a bad recipe for corporate credit that would probably bring some of that yield-based demand in off the sidelines. This is also part of the reason why we like selectively moving down in quality. You were talking about the volatility in the treasury market, kind of one of the understated differences between IG and high yield is high yield is a shorter duration market. So you're kind of less exposed to those swings in treasuries, especially at the long end.

Just real quickly here, is the private credit market exposed to forced selling based on the fact that you're seeing endowments of universities looking to raise money? Not forced selling. Illiquidity is a feature, not a bug of private credit. What I think that is reflective of is a multitude of factors, and I think it's a positive that actually folks can make asset allocation shifts over time when they need to with illiquid assets. But it's not a liquid market by design. Amanda Lennon of BlackRock, thank you so much for being with us, as always.

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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Starting price for 25 megabits per second LTE internet plan with smartphone plan savings, plus taxes, fees, and economic adjustment charge. Terms apply. For J.D. Power 2024 award information, visit jdpower.com slash awards. AI is redefining what's possible for your business. Are you up for the challenge? Microsoft is helping leaders like you get AI ready faster with unified data and simplified platform management, unlocking up to 150% improved output.

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Right now, Aaron David Miller of the Carnegie Entowment for International Peace joins us. Aaron, I just want to get your sense of how realistic it is for the calls for de-escalation to actually resonate with either Netanyahu or with Iran at a time where both of them seem to be really digging in.

Great question, Lisa. Thanks for having me. I think it's completely unrealistic and detached from the current reality for three reasons. The Israelis want to destroy as much of Iran's nuclear program as possible, but they're going to have a very difficult time doing it.

And they have escalation dominance and their superiority and political superiority. There's absolutely no pushback from anyone in the region, Europe, from the United States, from the Trump administration, for the Israelis to stop. As one Israeli general put it, retired, we're playing soccer with the Iranians, but they have no goalie.

The Iranians, having invested $5 trillion in this nuclear program, having been embarrassed and humiliated to a degree that is unprecedented probably in the history of the Islamic Republic, are not going to yield on this. How deep their ballistic missile inventory is, what, 2,000, 2,500 ballistic missiles? They can keep this up for some time.

And the Americans, I think, are faced, the Trump administration is faced with a dilemma. He does not want to enter this war, but he cannot stop it. It reminds me of Lyndon Johnson's description in the Vietnam War of a hitchhiker in a Texas hailstorm. I can't run, I can't hide, and I can't make it stop. Question for Trump, for all of us, I'm not sure Trump wants to make it stop.

- Well, that's actually something he's hinted at, this question of maybe they have to fight it out and just complete it from that perspective. What is the ultimate goal though, Aaron? I mean, given the fact that you just said that as one general told you, Israel is playing soccer and Iran has no goalie,

But what's the ultimate aim? Is it regime change? How do they achieve something that actually can be sustainable for the entire region? I mean, critical question. Have you told me on October 8th that 18 months into the Israeli Hamas war in Gaza, there will be absolutely no sign of this conflict abating? I would have said you basically are a bad analyst.

The fact is, the prime minister in Gaza has identified total victory as a goal. I think what he would like to do, his aspirations, would be regime change on one hand, and number two, deploying the United States, if he can, to do what the Israelis cannot, which is to destroy Fordow and really make a, not a dent,

but a major crippling of the Iranian nuclear program, which would set it back at least two years. So I think right now there's no reason for Netanyahu to stop. Ballistic missiles in Israel are very problematic. I mean, the Iranians are launching maybe 10 to 15 percent are actually

getting through and striking. But you've seen, Ethan reported, you've seen some of the damage, 24 Israelis killed. I think the public will endure this for quite some time. So right now, I see absolutely no way, no off ramp, no possibility. And then you, of course, raise the question is what, in fact, would a negotiation, other than cessation of hostilities, what would a negotiation between the United States and Iran

produce. Two months of negotiations produced an impasse. And I think the Iranians are in no mood, frankly, right now for compromise. Erin, I hear you saying that there is not a likely off-ramp in the near term. But for investors, what can we watch to look for any signs of de-escalation or escalation from here? You know, what are the key

points that you were looking for. Right. I mean, de-escalation, I think, right now is not in the cards. I think there's a really good chance that we'll be in for weeks in this. It's the escalatory possibilities that concern me. This is your guy's business, not mine. It would concern investors as well. And escalation, I think, could occur in

One of two ways. Number one, Iranian ballistic missiles actually end up surging and you end up with a mass casualty event in Israel. Scores, hundreds of Israelis are killed or wounded.

The Trump administration, under those circumstances, Congress, are going to be hard pressed, I think, to enter the conflict. And the second path to escalation, maybe there are three, second path to escalation would be a bad decision on the part of the Islamic Republic to go after American assets, U.S. forces in Iraq, Syria.

or obviously forces 30,000 to 35,000 Americans that are deployed in the Gulf. And they have many short-range ballistic missiles, thousands of them, that could produce that. The third possibility is that the Iranians try some sort of asymmetrical strategy in which they go after Israeli interests abroad, Jewish interests abroad in a terror attack. I think that's a backdoor that would also probably bring in

in the United States. But again, we've watched over the course of the last 18 months, we've steered clear of the one thing that investors worry about, the one thing I would worry about, the one thing the region worries about, and that would be a major regional war. We've avoided that.

This is bringing us, the longer this goes on, the greater the chances of an escalatory cycle and an Iranian-Saudi conflict and a U.S. conflict, which would essentially push oil prices probably well in excess of $100. Erin, just quickly here, one thing that the market keeps focusing on that could catalyze that kind of regional war would be shutting down the Straits of Hormuz. How realistic is that, given the fact that would anger everybody in the neighborhood?

I mean, the Iranians could probably close it and the Americans would definitely open it. But again, we're talking about a prolonged delay filled with uncertainties, all sorts of exit ramps of an unpleasant nature that is going to make this extremely unpredictable. Erin David Miller of the Carnegie Endowment for International Peace. Thank you so much for the insight.

Here's the latest. The Federal Reserve's two-day meeting kicking off tomorrow. The FOMC widely expected to hold rates steady, but updated its economic forecast, giving markets a clue about how officials will handle tariffs, inflation, and more. Joining us now for that potential scenario analysis is Steve Rusciuto of Mizuho. Steve, great to see you. Thank you so much for being here.

Just before we get into what the Fed does, I want to bring you into the debate that Kelsey and I were having earlier. How important is it that in the face of risk on Friday and today, you are not seeing bonds, full faith and credit, rally?

I think there's a number of things. A, people have questioned the dollar's reserve currency status. People have questioned a lot of interesting information about where people are going from a global perspective in terms of investing in the United States. The reality is we haven't seen much.

OK, so, yeah, the dollar is down a little bit, but on a DXY basis, it's still very, very healthy. Under Joe Biden, we were at 90 on a DXY basis and we're talking about 97, 98 now. What's the big deal? The reality is when you look at most markets, there's very little impact of anything.

And I think this goes to the fact that there is no systemic risk in the economy. There is no balance sheet related risk. There's excess liquidity. There's excess global savings. And there's a lot of oil floating around in the world. And I think when you put all of that together, you can easily see why markets are just sitting there saying, OK, we've tried to sell off several times. We've tried to rally several times. We've had eight recession calls since 2022. None of them have worked.

Let's just get on with life. So you're essentially describing a bit of an equilibrium where everything is just kind of at this steady state. And so that gets me thinking about this concept of the neutral rate, which the Fed estimates in the dot plot. And they're going to do another crack at that. That neutral rate has been ticking higher. It's about 50 basis points higher over the last year.

But the Fed still thinks that the current level of policy is restrictive. What do you think? I don't think the current level of policy is restrictive. Haven't for quite some time. I think the Fed rate cuts last year were a disaster. I think trying to repeat that again this year would be a bigger mistake.

I think when you look at a 2% real greater growth in the economy, an inflation rate that's running about 2%, 2.5%, you're looking at 4.5% neutral rate from a nominal Fed funds rate perspective. And to me, where are we right now? 4.5%. I think we should be ending the year closer to 5% because I think inflation will be 3%.

And I think the only reason why you haven't seen inflation from tariffs coming through is because in this environment, while there's negotiations going on, a lot of CEOs are sitting there saying, I'm not gonna be the first one to move to raise prices 'cause I don't wanna lose market share. I pre-inventoried a lot of stuff.

I've got time, I've got opportunity, let's see how this plays out before I make any decisions. Well, we would certainly agree with you in terms of the inflation assessment. We also took a look at that and said, yeah, I mean, you're not going to get negative goods prices month over month on a persistent basis.

But I do want to kind of drill into this idea of Goldilocks and how long it can persist, this equilibrium, particularly on the labor market side. Because what caught my eye last week was continuing claims which continue to rise. You just those cracks under the surface, do you see those as a concern, is there anything

for the Fed to be worried about? Claims and continuing claims on a four-week moving average are at exceptionally low levels. When you look at them at covered employment, they're even at a lower level. There's no risk whatsoever in this labor market, and I think that's the key. I think if you're looking for one market where there's potentially a movement out of equilibrium, it is the labor market. But that is only a move towards a tighter labor market.

Okay. Once you get this tax cut done, and this tax cut I think will be bigger than anyone still currently thinks, I think you'd wind up seeing with a much tighter labor market and a much greater push on inflation. And therefore, I question whether or not the Fed's going to get the so-called two rate cuts out this year. So you think that maybe the Fed's not going to cut? Is that kind of your call? Our call has been the Fed shouldn't cut whatsoever, and therefore we believe the Fed won't cut. So there's a question here about longer-term bonds and how that really works.

bleeds through at a time when people have not seen this as a haven. And there's been a real question about the inflation risk being priced in or not. And I'm just wondering, do you see yields going higher from here with questions about U.S. assets as a haven, as well as potential inflation that's only exacerbated potentially by inefficiencies and oil shocks that might come up along the way? I mean, I think we're supposed to get to 5 percent on the 10-year note.

I don't think that's a disaster. When you look at what's happening in the BOJ market, for example, they're having a significant amount of problems there as yields rise in Japan. You look at Europe. European rates probably aren't going to go up because Europe's a mess. And Christine Lagarde doesn't think she needs to cut interest rates, and she does.

So I think you've got this situation Well, I'd rather buy Europe because Europe's more likely to go into deflation than by the US where we're likely to have 3% inflation So I don't think we have to get beyond the macro into this geopolitical concern about you know solve solvency and sovereignty and all this other garbage and reserve currency to explain what's happening in markets what's happening in markets is a

you're reflecting relative interest rate differentials based on relative inflation differentials and relative real growth and there's nothing that's mysterious about this it's traditional macroeconomics so we're continuing to work through one big beautiful bill that's going on in under underneath all of these headlines that we've been dealing with and i was

I was curious, the way I think about deficit expansion is there's deficit expansion and then there's fiscal impulse. So some of the improvement or deterioration in the deficit is a function of just extending the tax cuts, which isn't necessarily a fiscal impulse. How do you differentiate between the two? And you mentioned already that you see the risk is actually to more fiscal impulse and more deficit expansion from here.

Yeah, no, I agree with you. I mean, if you were just going to extend the tax cut alone, you would not have a major positive impulse into the economy. But we're not going to do that. And I think the interesting thing is all this stuff is going on and the bill is working its way through the system without the political, without the news oversight to it that it would normally deserve to get. And this is what happened when suddenly the House...

passed the bill, okay? When it came out of committee in the House, suddenly people walk up, "Oh my God, it's not just extending the Trump tax cuts." And I think this is part of the process, it's how the bill is getting done as quickly as it is. And I still think their game plan is to get it done by July 4th and have it implemented by October 1, so they could have a full year of real tax cuts coming through the economy going into the November elections.

And I think that's the game plan here. I think the game plan is tariffs are the diversion to get the tax cut. Tax cuts are the reason to get the midterm. The midterm is to get to what they really want to do, which is drain the swamp. Well, this is what we're going to try to focus on as we parse through all the different risks that are coming up and dominating the news. Steve Rusciuto of Azuho, thank you so much for being with us.

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.

Switch to Verizon Business and get more from your internet without paying more for your internet. Get LTE Business Internet starting at $39 a month when paired with select business mobile plans. That's unlimited data and with it, unlimited possibilities. Start saving today with Verizon Business. Ranked number one in small business internet customer satisfaction by J.D. Power. Starting price for 25 megabits per second LTE internet plan with smartphone plan savings.

plus taxes, fees, and economic adjustment charge. Terms apply. For J.D. Power 2024 award information, visit jdpower.com slash awards. AI is redefining what's possible for your business. Are you up for the challenge? Microsoft is helping leaders like you get AI ready faster with unified data and simplified platform management, unlocking up to 150% improved output.

Just look at the NDA. They're using AI-powered insights to deliver more personalized fan experiences. Then there's BMW, driving change confidently with safe, secure AI tools and guidance. And the LEGO house? They're creating new interactive experiences for people to explore.

No matter where you are in your business journey, Microsoft is here to help you achieve real breakthroughs that drive impact. Their industry-leading trustworthy AI fuels innovation in ways that are safe and secure. Business leaders Microsoft surveyed saw an average of 3.7 times ROI per $1 invested in generative AI.

Growing and innovating your business is your job. Microsoft helps you achieve that with innovative AI tools and experiences to guide you confidently into the future. Whatever change comes next, let Microsoft help you keep pushing forward. For more details, visit Microsoft.com slash challengers.

Back to our top story for markets, a fourth day of fighting between Israel and Iran, raising uncertainty for energy markets. Ellen Waltz of the Atlantic Council writing, if Israel can take out Iran's ability to produce gasoline, diesel and provide electricity, the situation becomes significantly more dire.

If the regime cannot maintain control through the use of force, it will likely fall. Ellen joins us now. Ellen, thank you so much for being with us. And we are just getting word from the prime minister, Benjamin Netanyahu, that Israel is on the way to destroying Iran's nuclear and missile threats. Do you have a sense, Ellen, of what the end game could possibly be?

You know, it's interesting because I think for Israel, the real end game is just to take out all of the Iran's ability to threaten them. So the missile sites, the nuclear sites, I don't think that they're really aiming for regime change. I mean, they don't want to participate in that. I think that there's also the understanding amongst them and also amongst U.S. policymakers that what would take its place? And sometimes

the lack of a regime or a power vacuum could be even more dangerous. I mean, you know, there's the IRGC is probably the strongest entity in Iran. And so if, you know, the civil government falls, it's potentially,

possible the IRGC or what's left of it would take over seeing that they have you know control of most of the use of force there and that could be you know potentially a worse situation than they're in now so I think there's a very delicate balance here between what's

causing widespread destruction. If you're going to take out multiple fueling stations and you're going to take out multiple refineries, then you're going to essentially send a run to the dark ages for a period of time and things could really fall apart at the individual and city level. So I think that they're really working more towards taking out the military capabilities

as opposed to trying to, say, foment widespread destruction. Ellen, a lot of people have talked about the idea of some sort of broadening out of the conflict and embroiling a greater number of countries in the region in this war. I just wonder, who's Iran's friend? Why is there anyone, or is there anyone coming to Iran's defense in any capacity? Or are more of the nations on Israel's side or just frankly don't want to get involved in any way, shape, or form? So I think the

I think that in terms of, say, friends, I think that Iran has potentially has maybe some strategic allies that could be useful in maybe arguing Iran's case in a diplomatic situation. So take China, for example. China buys a lot of oil from Iran or relatively. They're Iran's largest customer. But because Iran

buys that oil and they accept Chinese currency, they have to spend a lot of that Chinese currency on goods and services from China. So China does a lot of business in Iran. And China doesn't want to see this situation fall apart.

If, in fact, it gets so dire that there are threats to Chinese ships or oil tankers that are heading for China, you know, coming out of the Persian Gulf, and that's not just Iranian ships, that could also be ships coming from Saudi Arabia, from Kuwait, from other oil suppliers, then China is definitely going to exert the full weight of its economic might internationally and on Iran and say, OK, you know, you've got to cut a deal. This has to end.

you know, this is not worth threatening our economic relationship. Russia, likewise. In fact, we saw Russia saying now, hey, we want to, we're ready to, you know, facilitate negotiations and we'll accept all of your uranium, Iran, which, you know, is kind of an interesting offer from Russia. But they're definitely, I wouldn't say they're necessarily on Iran's side. They're not going to come aid them in the event of, you

military catastrophe, but they would definitely be there to support them in a diplomatic sense. And I also think, you know, you've got Saudi Arabia. The Saudis definitely aren't best friends with the Iranians, but relations have certainly improved. And I think the fact that you see them essentially quiet

is really almost a sign of not support. They definitely would like to, they're more than happy for Israel to take out Iran's nuclear arsenal and nuclear reactors, but they don't want to see Iran completely devastated. That's not a good situation for them. A power

vacuum in the Gulf is not going to be a good situation for the Saudis or for the Emiratis or for anyone else. So if it gets to that, you are going to see them standing up and I think trying to support the regime. Ellen, whenever conflicts arise in the Middle East, concentration quickly goes to the Strait of Hormuz and the likelihood of it being closed.

Is that the right thing to be concerned about? Or is there a scenario where you get what's happening in the Red Sea, where you get one, a few tankers attacked, and that's enough to convince insurance companies that it is not worth trying to insure ships going through the strait?

So it's interesting. I think there are two points there. I do think that we're a bit stuck in this old paradigm from the 20th century where we all, as in the West, need oil from the Persian Gulf. And we all remember, or at least those of us who were alive then remember the Iran-Iraq War and there was the tanker war. And both sides were—Iran was trying to prevent certain tankers from leaving the Gulf.

and certain tankers needed basically U.S. military escorts in order to get out. And that caused havoc with oil prices. So I do think the Strait of Hormuz is a very important waterway. But if you look at the traffic patterns and the way that ships go around there, there are other ways to traverse the straits that don't involve going through Iranian waters. You know, so if Iran did threaten the security of ships there, there are workarounds.

They're not that easy and would take some time to work through, but it is absolutely possible. The other issue though is that, like you said, can Iran actually do this? It's not clear that they could physically close the straits. On the other hand, they could cause enough trouble that insurance companies are going to raise their rates through the roof. Now, does that make it impossible for ships to go? No.

People will pay, but oil prices will have to go up. Customers will have to pay more in order to compensate for that insurance rate. When you look at the Red Sea, that's a little bit different because there is an alternative route. You can go around Africa and a lot of large ships are equipped to do that. But with the Strait of Hormuz and the Persian Gulf,

other than a couple pipelines that are able to get oil and other products out without going through the streets, there really is no other way out. So for Iraq, Kuwait, some Saudi oil, Bahraini oil, there's no other way. The UAE

has a workaround. And so modifications could be made, but there's nothing else they can do. So they're going to just have to pay the higher insurance rates. Ellen Wald of the Atlantic Council, thank you so much, as always, for your insights. 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 6am to 9am 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. Switch to Verizon Business and get more from your internet without paying more for your internet. Get LTE Business Internet starting at $39 a month when paired with select business mobile plans. That's unlimited data and with it, unlimited possibilities. Start saving today with Verizon Business, ranked number one in small business internet customer satisfaction by J.D. Power.

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