Bloomberg Surveillance TV: June 4, 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.

Kate Moore of Citigroup writing this. We view the market as exhibiting the relief due to the recent tariff roadblocks. However, uncertainty remains and corporate management teams will resist large capex and hiring plans until further clarity on trade rules. Kate joins us now with a dose of cold water.

on the Goldilocks. Sorry. It is so good to have you. Sorry, the porridge is too cold apparently this morning. Well, I'm just wondering, you know, what do you make of all this Goldilocks talk? I mean, not all this Goldilocks talk. Savita Subramanian was just talking about that, but this feeling companies will adapt and adjust and get it through, and that's what we have continued to see. Yeah, look, I have all of the faith in large cap companies being able to adopt

but we still don't know what they're adopting to and this is the big question mark. Everyone says, "Okay, we're going to get past tariffs or we're going to get past the worst in terms of tariff news." But we know that all of these sectoral tariffs can have much greater impact than some of the reciprocal tariffs. And if I was a company making investment decisions, this is what I was writing in that note, I would say like, "I can wait it out for another couple months or another quarter or two before I make decisions

because I want more clarity into what my margin story is going to look like. And I think that's a prudent thing to do. And it is the behavior that these large cap companies have exhibited through many years, over a decade at this point, and really managed their bottom line. It's one of the reasons why we love them and one of the reasons why we want to continue to own them. There's this larger question, and we were talking about it at the open, this idea of...

How long can this sort of feeling of adapting, adjusting continue without recognizing the structural framework that could be shifting? We just got news that the European Commission is recommending that Bulgaria joins the Euro next year. There is this question about whether the Euro is getting fortified as a viable alternative to the dollar at a time where we have seen the dollar really lose steam. How much do you give credence to that?

the idea that outside of the US you can rely more considerably on the adapting and the adjusting and the framework remaining the same. I think it's too soon for us to call the end of dollar dominance not just because of trade but because there is to this point not a viable alternative.

But I think all these moves on the margins are very much worth watching. Like, if we see different governments, if we see different policymakers, if we see different investment communities start to take a good look at other currency alternatives and just incrementally shift their own positioning.

and many of them do it at the same time or over a number of years, that can really start to move the needle. I think most currency strategists would agree the dollar was a little overvalued even before all of this stuff. And so kind of we're getting back to a more normal valuation for the dollar, but this idea that we're gonna have a massive and consistent decline and there are gonna be these viable alternatives by the end of '25,

I think is probably too far gone. And does there need to be a viable alternative? I mean, there's been a lot of talk about this is just kind of rebalancing that equilibrium. And when you look at the currencies that have performed so well over the past few months, you look at the Swiss franc, you look at some of the other European, or even the euro, which that probably won't last. But I mean, let's take the Swiss franc, for example, because I think a lot of people have talked about how a lot of asset managers...

have shifted some allocations over to the Frank as a way to hedge against what's going on here in the US maybe that's not a structural change yeah but over time that can whittle away at the value of the dollar what I will say is a lot of our clients particularly some very large clients and I'm gonna highlight clients in Asia specifically have been asking about ways to hedge their dollar exposure they just want to kind of neutralize that in portfolios and that makes a ton of sense so we're seeing this across

all segments, but particularly the larger clients who have this outsized dollar position or if we've seen that kind of drift in the dollar position over the last couple of years, looking right now, now that there's relative stability as an opportunity for making that move. Is there, though, a long-term case to be made for a certain level of instability, a certain lack of trust in the U.S. system that had bolstered the dollar for basically the last 56 years?

I think it's a fair question, honestly. And I think as we go through the discussions around tax and as we watch what happens to the deficit and we understand that there are going to be some significant challenges to the bond market over the next year or two, unless we have a significant reverse, of course, it's fair for global investors to revisit their portfolios and say, hey, we may have the best companies in the world in the U.S., the most innovative, the best free cash generators,

But we're not as confident that we should have this much of our fixed income allocation in U.S. bonds. And again, this is on the margin. We're not talking about a wholesale reversal. But when this happens over a period of quarters or a period of years, it can have a really significant impact on yields. But Lisa was showing the 30-year yield at 4.9. And I look at 4.9 and change over there. Let's just round it up to 5. That's not attractive with a 10-year at 4.5. It's not attractive if I look at the contours of this tax bill.

I love the tax cuts. I'm not so great about the fact that they're not making that up in any sort of way, shape or form. So if you're a long-term investor, why would you go longer out on the curve right now? I mean, we certainly aren't. Like a lot of asset allocators, we've been hiding in the short end, maybe a little bit to the belly, but really being very concentrated there. And we keep on having this debate within the team and across all the city. You know, at what point do we want to buy duration?

And it's not just the level, it's how do you get to that level, what the drivers of the, that move to that level, and whether or not we feel it adequately compensates us for the risk on the fiscal side, on the risk on the tax side.

And, you know, the truth is that growth is okay right now. It's not phenomenal. And we're not looking for kind of a 3% to 4% GDP world for the U.S. in the next couple of years. So it's pretty tough. It also raises questions about what drives that kind of desire.

to own long duration assets. Is it a good thing? The idea of fiscal responsibility or some sort of sense that maybe you can get compensated with this kind of yield? Or is it the idea that we're really going to hit some sort of slow patch? And this is something that was introduced by Savita. At what point are we looking at bond yields going up as a positive thing? As a sign of risk on elsewhere because it's coming with growth. I mean, can you get your hands around that argument?

You know, I'm not at a place where I think bond yields are reflecting better growth in the future, right? And a lot would need to happen. By the way, I thought the economy was slowing even before the introduction of these tariffs, which I think are quite growth negative, even if, as I was saying before, the reciprocal tariffs don't end up coming through. And we're just talking about the sectoral tariffs. This is a headwind.

We just need to acknowledge that. But the consumer and certain segments of the consumer were showing stress at the end of last year and the beginning of this year, even if the aggregate data looks pretty good.

And we were starting to see more cautious spending from companies in general after a prolonged economic cycle. So all that was in place before this uncertainty. So I think it's really too soon for us to say we're going to be able to forecast an acceleration in the U.S. economy, maybe based on tax cuts or based on consumption looking good when there are so many other challenges. Just to sum up, would you sell this rally?

I would not be adding a lot of equity risk to this rally. But again, I think large caps are going to be the better place within the U.S. market.

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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Wendy Schiller of Brown University joins us now. Wendy, wonderful to see you. Thank you so much for being with us. I want to start with the idea of some of these trade negotiations as part of the three-pronged stool that President Trump's administration has put out there. What do you make of the progress being made, both racing ahead when it comes to trade deals as well as the deficit discussion down in Washington, D.C.?

Well, Lisa, I think that they are related in the sense that President Trump wants to shore up, particularly in the Senate now, Republican support for his big, beautiful tax bill and to settle the trade environment and not put inflationary pressures on the U.S. economy and also sort of raise consumer fears about future price increases. That's really important not only for him but also for members of Congress that have to go back to their town halls and hear all

about people's concerns. First it was Doge and the budget, and now it will soon be inflation, deficit spending, bonds, treasuries, all those sorts of indicators of economic health. So it's important for the president to inject, I think, more stability into his trade negotiation persona or platform, because that will

also affect Congress's, particularly the Senate's, willingness to try to really pass this bill by July 4th, which was supposed to get passed, as we recall, by Memorial Day. And that deadline came and went. Wendy, China's lead negotiator with the United States, Haylifting, says that the nation is ready to discuss all major issues with the U.S. Does that include Taiwan? I mean, what sort of messaging do you take out of that?

Damian, I think it's a treacherous path for the president and his staff to sort of conflate--not sort of, just conflate tariffs and economic policy with our military stances. You know, he's got a complicated situation with Ukraine, a complicated situation, obviously, with Israel-Gaza, and the Taiwan issue is something that if it's loaded up onto the plate without really consistent U.S. foreign policy right now, that

will complicate his negotiations, not make them simple. And I think the president likes to cut deals and he likes to cut relatively clear, straightforward deals where he can claim victory. Taiwan's going to be more complicated and it puts the United States in a position that affects its military stances in other conflicts around the world. Wendy, Treasury Secretary Besant's on the tape discussing global imbalances and points to China's inability to shift from an export-oriented economy to one that's driven by consumption.

I mean, this flies in the face of decades of conditioning as Chinese households' propensity to save is grounded in an overall lack of trust on Beijing themselves. So, you know, what do we really hope to accomplish here? You know, what comes next? What is Treasury Besant really trying to accomplish here? I'm just curious.

I mean, I think George Besant has seemed to, from what we can tell, exert influence on the president, right, stabilizing the president, getting to back off really huge tariffs and trying to add more consistency and more justification for the tariff policy. So I think his public remarks about China and saying, OK, you've got an economy that really depends on the United States' consumption tendencies, and we want to produce more of our own goods.

Let's strike a balance so that we can do that and you can still have U.S. markets, but you've got to shore up your own consumptive markets. I think that's a sensible public persona when you're trying to get China to come to the table. You know, what that actually results in in terms of internal economics in China, we'll have to see. But on the steel plants, you know, we've lost hundreds of thousands of jobs in steel over the last 30 years. And we can't bring steel back completely at all.

And it was interesting that the president's going to take credit for saving existing jobs that are in the United States. And they're relatively small compared to the rest of the economy. So there are some imbalances we will not be able to fix.

Wendy, you know, I'm curious. So we've been in an environment where demand for U.S. assets, bonds, equities is sort of imperiled. Do you see Section 899, which is this remedy against foreign, you know, unfairness and foreign taxes, do you see that as a big hit to demand for U.S. assets?

Well, and I think it produces instability. I mean, if the president could wake up in the morning or in the late, early hours of the morning and decide, okay, I'm going to change the rules of the game today, and that just wreaks havoc, you know, on markets but also on small business people. And then, you know, as they, in their

own communities get concerned and get worried and think about passing on costs to consumers, then those consumers in those communities start to worry about the economy. And we've seen some real dips in consumer confidence. So I think there are ripple effects to this sort of ping pong or yo-yo-ness of the president's trade positions. And certainly we rely on the rest of the world and internally to buy our treasuries to float our debt. And that's where the really big debt ceiling increase comes in. And that's what Rand Paul

is complaining about, that it's not just deficit spending, it's also creating, you know, unsustainable, literally unsustainable debt, because sooner or later people will stop buying it. And if they stop buying it, you know, we have no way of floating our expenses. Wendy Schiller of Brown University, thank you so much for being with us.

Here's the latest. The U.S. 30-year underperforming short-term debt year-to-date as investors continue to monitor fiscal risk, leading to speculation the Treasury might scale back or even halt auctions of its long bond. Molly Brooks of TD Securities writing this. Rates have been very focused over the last weeks with passage of one big beautiful bill. However...

If we see the macro data turning, the markets will react to recession risk. Molly joins us now for more. It's sort of a question of what would you like to focus on today for every market, it seems like. Molly, I want to start with that. This question of if we get negative economic data, do you believe in your core that 30-year yields will truly rally substantially and could even potentially outperform? I think that they would probably outperform.

Rally, however, not as much as the front end in the last couple weeks We have seen kind of the correlation between the two-year and the third-year Declining so that's showing that the third year isn't being driven right now as much by Fed cuts and macro risk it's being driven more by

deficit concerns and concerns of the quality of the long bond. So I do think that while it'll rally on Fed, you'll probably see the front end rally a little bit harder than the long end there. Is there a risk, though, at those two worlds kind of converging, meaning the concerns about what's going on with the deficit and obviously the macro read-through?

Yeah, I mean, at some point, if 30-year yields increase enough and they're high enough, then conditions are going to be tight enough that we might see that feed through to growth. And then that would therefore be feeding through to Fed cuts as well. So it's kind of circular in that that you can see just the...

pure level of the long-end bond is impacting growth concerns. But what becomes that light? I mean, because, I mean, we kind of already know what's in the bill. I mean, you can model out the increase in debt servicing costs based on what we know already. So what becomes that light that the market is going to look to as sort of, okay, now we finally reached that Rubicon? Is it the labor market? Is it, as you said, actual economic recession of some sort? What?

I would say they don't really need a recession in order to begin this rally. Investors might need more of a kind of catalyst that is more recessionary for them to actually be able to jump in into longs, just because we've been burnt a lot in recent weeks of just kind of sell-offs here.

But I do think that if we see any type of weakness in the labor market specifically, and on Friday specifically the unemployment rate, that's what the Fed is going to be looking at. So if we're seeing the unemployment rate rising and rising quick enough, that's when markets are going to start to get concerned and that they're going to react to the likelihood of Fed cuts in the near term.

Molly, I wanted to ask you, because I've seen a lot of like wringing of hands and gnashing of teeth ahead of all these auctions in recent weeks. People have been really stressed about it. And of course, they've gone really smoothly. You know, if it's not the auctions and they continue to get that bid, what should we be watching to really kind of signal a meaningful change in the direction of yields, especially at the long end?

Yeah, I think right now I would say stay focused on the macro data. The Fed has continued to be... Is it payrolls, do you think, at this point? Yeah, I would say less so the headline, but we're looking more at the unemployment rate, just given that it's a little bit more of a clear signal there. So if we see unemployment rate go up to 4.4, 4.5, that's when we think the Fed will get concerned, and that's probably when we'll see most investors more comfortable to step in.

- Kate, I'll turn that question back to you. I mean, how much do you expect this to really turn from supply concerns that have been on the peripheries but really aren't center stage? How much will that shift immediately the second we get some sort of pessimistic print in the data?

Well, I think we have to be very careful around the labor market because this is the place where, you know, to this point, it's been holding strong. And in fact, we've seen companies continue to hold on to their workforce, to not really engage in widespread layoffs. But when you peel back the surface, much like if you're peeling back the labor market report, you do find that there are pockets of companies that have been trimming on the margin or, and this is something else I've been watching really closely, have stopped filling their open requisitions. You know, lots of job openings,

But whether it's a CEO or the CFO or some HR manager saying, you're going to hold off there. I mean, that on balance shakes people's confidence in the labor market and their future earnings. And so if that then feeds through into consumer spending and these, I mean, there could be this sort of slow moving domino effect impacting growth in the second half of the year. And that's kind of what I'm watching. And that's just hard to wrap my head around. And I assume that has to just make your job, Molly, just a lot.

Definitely makes it more interesting. Um, it's seeing how does this pass through pass through come through? We saw soft data versus hard data, the whole debate on does soft data turn into hard data? Uh, we're seeing kind of weakening in different areas of the labor market to your point that are maybe not the traditional headline payrolls. Um, and so it's, when does this hit these big numbers that then kind of scares the market into, uh,

rallying a little bit sharper in pricing and more Fed cuts. Molly Brooks of TD Securities, thank you so much for being with us. Molly Brooks there.

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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We begin this hour with stocks higher. After posting back-to-back gains, Jim Caron of Morgan Stanley writing this. We have rebalanced by increasing equity exposures, not just in the United States, but also Europe. Our highest conviction overweight. Jim joins us now. Jim, thank you so much for being here. Thank you, and good morning to both of you. Good morning.

question here going forward about how much this long Europe trade was just a trade or whether it's something that actually can stick. You're making the argument even with the recent gains in the U.S., you would still be a buyer of Europe over what we've seen. Yeah, it's really about balancing. So it's not that we don't like the U.S., we just think that Europe has a higher risk adjusted return profile. They've got fiscal stimulus, they've got monetary stimulus, they seem to have their inflation a bit more under control.

Plus, a lot of the investment and a lot of the money that's being put through, whether it's the defense spending or it's through infrastructure spending, all of this is actually a positive for them. And essentially, we also have to recognize that their valuations, they're a large cap value area for the markets. People are trying to diversify their portfolios from large cap growth in tech into something like large cap value.

Europe is actually the poster child for that in our view. Plus, you get to invest in an asset whose currency is appreciating relative to the dollar, so you get a tailwind. Okay, I want to pick up on that because we've been talking to your colleagues over the past couple of days, and this is the point that I think is fascinating. Morgan Stanley sees everything rallying except for the dollar. This idea that you could see rates rally, and even in the U.S. you could see...

equities rally even in the U.S., but the dollar is going to be the continuing weakest person in the boat. And I'm just wondering at what point that really is the entire trade that you're talking about here. It's a currency play more than anything else.

So I would say it's a rebalancing. It's a global rebalancing. So if we look at the Fed's broad nominal trade weighted dollar index, the dollar has appreciated in value since 2010 to the end of 2024 by 40%, 4-0%.

So essentially the rest of the world became overweight US assets. They had to buy US dollars in order to do that. Now you have growth coming in other parts of the world. This is the rebalancing. What that means, and we're doing it too, right? We are actually overweight European equities. So we are seeing other opportunities in other parts of the world. US markets are going to do fine. It's just that it's not the only game in town anymore. So

Ultimately, what that means is that if the U.S. has a deficit, which it will have a deficit, the dollar needs to adjust lower to get foreign capital to come in. So all of this is part of a readjustment. It's not necessarily a bad thing. This is a very common, normal readjustment that's taking place, and we want to get on this.

But do you have conviction that it will last? I do. I think this is a long-term thing. I mean, look, the dollar rally lasted for about 14 years in the period that I'm talking about, 2010 to '24. I think this is a multi-year process. This is a multi-year trade reset. I mean, tariffs, we all know this is going on too.

This is a trade rebalance and a trade reset. We get these types of cycles every 15 to 20 years, and we're just starting one right now. But there's a reason why we kind of had that advantage here in the US, because we were the growth story globally. And I get this idea that, okay, the fiscal constraints in Europe are loosening just a bit. China and other parts of the world are trying to sort of fill the void of where the US is pulling back.

But at the end of the day, I'm still not seeing a growth story in Europe or maybe there is one.

Well, I think there is one. I mean, Europe doesn't have sectors like large cap tech, right? So you're not going to see a stock go up like 200% or something like that like we have in our large cap tech spaces. So I think this is more of a slow grinding move. When I look at PEs and I look at multiples and valuations, if I look at as much as I can a like for like company, say in the financial industry, a big bank in Europe, big bank in the U.S.,

The P/E multiple trades at about a 40% discount. And I'm not saying that they should be absolutely equal, but what I am saying is that Europe has a lot of catch up. It's going to be a slower, stable, lower of all, higher Sharpe ratio, higher quality of

And it's going to be more than just defense contractors? Yeah, oh yeah, I think so. Because, see, what we have to understand is that an ecosystem gets created. Once Europe decided to spend about close to a trillion euro in stimulus, which they did back in February, early March,

you start to develop an ecosystem. You have to develop supply chains. You need energy, energy security. You need to reshape your economy. You need housing if you're going to build more industry, potentially even data centers. So a lot of different, there's a big ecosystem that's starting, and I think that's underappreciated by the markets. Let's take a step back.

Because right now we're talking about where is the best place to find value in a ship that is undefined, which is the global economy and where we are in terms of the U.S. and how either we're entering some period of stagflation-like behavior, whether we're going to have higher inflation and faster growth, or whether we could see an outright recession. And that really matters for all of this in terms of the adjustment of

portfolio management, I just wonder how you're viewing the data. We're getting the ADP data just coming up about five minutes away. We get the jobs report on Friday. How do you view that within this paradigm of understanding, you know, okay, should we shift around a little bit more to duration? Should we shift a little bit more to risk?

So, you know, the data has been disappointing to the better side of the equation. Right. So many people have been focusing on we're going to fall off a cliff. We're going to fall off a cliff. We've been talking about this. The markets have been talking about this since 2023. We're going to have a recession. We're going to have a recession in 24. We're going to have a recession. And it really hasn't happened. So ultimately, what this is really down to is the consumer and the jobs report.

So if you have a strong labor market, reasonably strong, and we saw that from the JOLTS data yesterday, then what you have is a consumer that stays relatively robust. You can't really have a recession, a deep recession in the US unless the consumer rolls over. What you end up having is a mid-cycle slowdown. So everything that you're saying matters. There's a lot of uncertainty. But look, people were telling me by June we'd have empty shelves in stores and things like that. It's not here yet.

The data, I think the jobs data will get a little bit worse going forward. That's anticipated. I believe that's going to happen. But ultimately, if the confidence in the U.S. in terms of the direction that it's going with the economy, I think that keeps the confidence alive. And remember, it's deregulation, it's tariffs and taxes. We can't focus on any one. It's the package that we're focusing on. And right now we're hearing the tax component, which could be stimulative, and that could actually be helpful to employment.

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