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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.
David Kelly of JPMorgan Asset Management joins us now to build on some of this. David, welcome to the programme, sir. What's your initial reaction to these numbers this morning? How useful are they?
Well, you know, usually when we're on this call on CPI Day, it's like the biggest news of the week. And today, obviously, it's the tariff news. But also, I think the other big part of the inflation story going forward is the fiscal stimulus that's beginning to emerge on Capitol Hill. Because what it looks like is, OK, the tariffs aren't here and consumers are relatively quiescent right now. We're not seeing a lot of enthusiasm there with airline fares and so forth down.
But it looks like they're cooking into this bill stimulus for 25, 26, 27 and 28. They're implementing a lot of the president's promises on the campaign trail in addition to extending the tax cuts. And if that comes through, you're going to have a surge in consumer spending in 2026.
helped by fiscal stimulus and perhaps even later in 2025 that'll keep inflation a little higher so um this is good news in inflation but i think the um the the signs are that inflation is going to move up in the short run because of tariffs and then in 2026 uh because of renewed fiscal stimulus and david is that a reason to be bullish the equity market uh probably not you know it's
I mean, the equity market is hard. I don't know exactly where we are right now, but it's hardly down year to date. And it's I mean, we've done a sort of a round trip on tariffs here, but we still end up with a higher tariff rate than we had at the start. I think we've got slower, slower long term economic growth. So in some ways, the relief rally has been stronger than the downturn. And I think it may be a little bit overdone. So I'd still caution people, you know, longer term.
the huge premium that US equity prices have over the rest of the world probably isn't justified. And I'd still be in the diversification camp here. I do think there's a 10-year treasury yield of 450 to 5 is probably more reasonable than a big fall from here. But I think it's too early to be really bullish about equities because of fiscal stimulus, because we're talking about a full employment economy where the Fed's going to have less reason to cut.
We've been struggling all morning with whether this really is the beginning of the return to the United States and the dialing back of some of the loss of U.S. exceptionalism types of narratives or whether this is just a pause in the go international trade. David, you talk about diversifying. What does that mean if you think that 10 year yields are going to be in a 450 to five range and you don't really find U.S. equities particularly attractive right now?
Well, it does mean international equities. I mean, yes, the U.S. equity market has almost done a round trip year to date, but European equities are up very strongly. International equities in general are up strongly for the year. And the dollar is down. I think that will continue because, you know, if we will still end up with significant tariffs at the end of all of this, even though we're seeing, you know, it's calming down.
We're going to end up with higher deficits. We're going to end up with lower immigration, probably lower economic growth. So I know this is a package, an agenda that the public has voted for, and that's why we have elections. But it does suggest a slower trajectory in U.S. economic growth with higher deficits, somewhat higher inflation in the short to medium term. None of that is really very pro-U.S. And the thing is, I think the U.S. will do okay, but does it deserve...
to be a 50% premium over the rest of the world in terms of P/E ratio. So I'd say international equities, yes. And then also alternatives. If fixed income is not going to help you because of higher inflation, alternatives, there are plenty of alternatives, things like infrastructure, transportation, real estate, which have a degree of inflation protection. So I think people just need to broaden their definition.
of diversification in this kind of environment. You mentioned the Fed's response, and this has been a subject of a pretty heated debate. And frankly, it feels like people are bifurcated on just whether this gives the Fed more incentive to cut rates just for the good reasons or less incentive. From your perspective, is this more of a...
a reduction in potential inflation in terms of the lower tariff rate than it could have been that gives the Fed more of an ability to cut rates without a recession at a time where the data that we just saw, albeit messy, does point to something of a much lower pace of price increases.
well yes but the fed's target is two and i think that on the consumption deflation i think jay powell put it pretty well at his latest press conference you know they're going to have to look at where they think inflation's going where they think unemployment is going and i think the the both fiscal stimulus that is beginning to emerge from capitol hill and then also a somewhat lower tariffs they suggest that the risk of recession is receding here i think it's
you've probably just gone below 50%. So risk of recession receding, maybe the unemployment rate ends the year 4.5% to 5%. But the CPI, or sorry, the consumption deflation could easily end the year above 3%. In fact, it probably will. So we're probably going to be further from the consumption deflation target than from the unemployment target. In that kind of environment, there's not much excuse for the Fed to cut at all.
Because we're at, you know, fairly close to a neutral level. So I think the Fed will take it very easy here. And it's, you know, part of the story is tariffs, but the other part is putting more fiscal stimulus and higher deficits into 2026 really doesn't give the Federal Reserve a reason to be easy. It's your base case, no cuts now, David.
No, not quite. I think we will get at least one cut this year by the end of the year. I think the Fed realizes they can edge rates down a little bit, but I don't expect a cut in June. I don't expect a cut in July, to be honest. I think they'll want to see much more certainty around...
what the tariff picture really is and how much stimulus is in this bill before they contemplate any cut. So I think we're going to have to wait some time for the first rate cut. Interesting. David Caddy there of JP Morgan. David, good to see you, sir.
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You'll love the presentations you can easily design with Canva. Your clients and coworkers will too. Love your work with Canva presentations at canva.com. Joining us now to discuss Tiffany Wilding of PIMCO. Tiffany, welcome to the program. We were told to ignore some of the data throughout this morning. Can we ignore this data now?
Well, yeah, I mean, I think there is a lot. It sounds like there's a lot going on under the hood. But the overall message is that, you know, the U.S. economy prior to any sort of tariff pass through was just on a continued path towards normalization after, you know, after the pandemic related shock.
Inflation was elevated. It's remained elevated. And I think overall this report suggests that some of that is coming down. And if it weren't for tariffs, the outlook would be towards more moderation. But I do think you have to discount this a little bit because we know eventually the tariff costs, which are major, will be passed through to some extent. Now, maybe one more point on that is I think the interesting thing is that we're hearing from some of these larger retailers
you know, as they are trying to hold the line on prices, it seems like as long as they can to increase market share, they had the ability to front run this by importing a lot of inventory ahead of time, you know, so they might have a bit more of a window before they really need to raise prices.
That said, Tiffany, if you look at some of the details under the hood, there is this question about whether some of the components that contributed to the smallest increase since February of 2021 are sticky, are durable. And I'm thinking of housing, which we were talking about with Emily Rowland earlier, as well as the gasoline prices. How much is that going to be a disinflationary force that will be thematic through the rest of this year?
Yeah, well, certainly we've seen a fall in gasoline prices. You know, I think the interesting thing is, is if you look at U.S. gasoline and other U.S. energy prices, they have not fallen as much as global oil. So it'll be maybe a little bit less disinflationary.
than if you're just looking at oil prices, but you will get some benefit from that. I think on the housing side, I think there's real questions here. The tariffs clearly will raise housing costs. The things that we import in terms of appliances and other inputs into building homes, most of that comes from China. And so that will cost more, and eventually that will filter through into higher rental prices. Now, I think near term against that,
We found evidence that the increased flow of migrants into the United States did raise rentals in sort of the lower, smaller rental apartments and things like that. And we think that's why you saw OER moderate come down, inflation come down there much slower than many people were expecting is because you had this offsetting inflow. Now, obviously, that
force is waning and potentially even reversing. So that could result in some faster deceleration near term and some rental costs. But I think ultimately the longer term outlook there is for stickier housing costs as a result of some of these tariffs. John pointed out that we're all kind of tying ourselves in pretzels as we try to get all these counter forces together, whether it's the immigration story, whether it's the tariff story, whether it's what the economy was heading into all of this.
He also asked me, and I had no answer about when the data would be clean, when we would get actually something that we could rely on. So I will ask you, at what point do you think that you can see sort of the new normal in the data, or is that not really going to come back? Are we going to have to watch these trends sort of in parallel fashion and try to compile a picture?
Well, I think that the new normal is--I think we're quite a ways away from that. You know, I mean, I think the bottom line here is just that taking a step back from the headlines and things like that, the average effective tariff rate that we calculate as a result of these trade policies has increased more than any time in a century. That is a dramatic economic shock.
And it will take time for that to flow through the system. And, you know, and we aren't going to see the quote unquote new normal on the back of that, we think, for quite some time. You know, when I say quite some time, you know, maybe a year or more for the economy really to adjust, assuming these tariffs stay in place. So, you know, I guess to settle in,
And let's see what happens. Do you think you have a best guess right now? Any kind of guess, any kind of take whatsoever on the nature of that shock? Tiffany, I get that it's a policy shock, but is it a inflationary shock, a disinflationary shock, a growth shock, a negative supply shock? What kind of shock is it?
Well, I think it acts like all of those that you mentioned. You know, and I think the bottom line is, is because we haven't seen the type of policy like this in quite some time. You know, we don't exactly know how it's going to filter through into the economy. You know, again, we have the best guess about that, which is that we think you will get some price level adjustment that occurs.
because firms have to pass on the additional costs of tariffs, and they will do so eventually, that will result in a real income squeeze because you don't see wages adjust as quickly. We ultimately think over time wages could adjust, but during that real income squeeze, that just means that real consumption is hit by that.
And there's some knock on second round effects from that as volumes start to decline because prices are higher than that just means you potentially need to hire less people. You'll probably get some margin squeeze. It could be detrimental to investment trends in the United States. I think the magnitude of these things and how they play out over what time frame, I guess, is really the question here. And then how inflation expectations adapt to all of this.
I think the real concern from the Federal Reserve, for example, is that we've come off of a period of elevated inflation. You know, and having another shock that should be a one-off sort of temporary thing can result in inflation expectations drifting higher, can start to creep into wage negotiations, and can result in more persistent inflation. I think that's what the Fed is concerned about. Tiffany, appreciate your take as always. Tiffany Wilding there of PIMCO.
With us now for more, Monica Guerra of Morgan Stanley. Monica, good morning. Good to see you. Good morning. Let's get to the congressional math and numbers. How narrow, how tight are the margins in the House? Very tight. They only have, you know, just a...
just that 51% majority that could get this budget reconciliation bill through, which is why it's so important that the SALT Republicans and the fiscal hawks all come together and get a deal. This, I think, slows them down in their effort to get a bill to the president by that Memorial Day. We're thinking maybe they get it through committee by then.
But we're already seeing those hiccups and things that are going to slow the pace of this. So we're still looking much further out into the summer. You nailed it. Help me with a solution. How do you please SALT Republicans and the fiscal hawk simultaneously?
I think that's a really good question. I think it's going to be very hard to do. What you're likely to see is more movement on the tax revenue side. You can get some wiggle room on SALT if, say, for example, you put in caps on corporate SALT deductions, right, for example. So for those corporate spaces. Now, there's lots of other options that they could explore as far as raising taxes on the margins, like maybe addressing the carried interest loophole.
So, again, this is still early days. While we have a blueprint and we see where the priorities are, there's a lot of negotiation that still has to happen. And that's really exemplified by those two issues. Which of some of the campaign promises from President Trump do you expect to have a harder time getting through to the final draft? Yeah, so one of the things that we've talked a lot about is the no tax on Social Security benefits.
This is a huge sort of campaign proposal that was bringing a lot of seniors to the table that actually can't even be addressed in budget reconciliation because of the rules or the parliamentarian rules around it. So we think that if something like that is going to come up, it's either going to be a 2026 campaign proposal or later in the year. Things like the no tax on tips, no tax on overtime, and now the seniors bonus are all
on a temporary basis. So while we're getting a little bit of fulfillment on that campaign piece, it is still limited. And so that's important to just keep in mind. - There's also the promise that there's gonna be revenues that aren't necessarily written into the budget that come from tariffs. And this has been a pretty big proposal
from a lot of Republicans that have argued we're not even including the pay-fors that come from these levies. The Yale Budget Lab estimated that all tariffs to date in 2025 would bring in roughly $2.3 trillion of the next decade if they were to remain in place, even accounting for some of the negative economic effects. How much is this going to be the quiet arguing point behind the scenes? I think that that loses steam as they put in these pauses and capitulated.
Even if you look at the deal with China right now, where we've gone back down to that 30% tariff rate, if that expires, it would bump up to 54%. So speaking of campaign promises, it would be right in line with Trump's campaign promises. What that means, though, for this budget is that the potential revenues that could be used to offset
aren't necessarily going to be there in the same way. You're still going to be looking more at that 700 billion level that was first, you know, analysed. I think Yale also put out an analysis about that prior to the April announcement. This is a moving target, of course, but what is your base case now for trade? What does policy look like by year end?
By year end, I do think we get that 10% universal tariff. I think you have 54 to 60% on China. What's been interesting is how much we've capitulated on almost every single negotiating piece with China, even to get us to that 30% right now. So there could be additional wiggle room there, but I do think that we might actually end up right where Trump wanted us, right? At the end of the year, at that 10 and 60 with some, you know,
very specific reciprocal tariffs that would impact other Asian countries. Do you have any sense of what was gained in some of these negotiations, particularly on the U.S. side from China? Well, the only thing I think we know right now is that we're now going to be able to send over Boeing planes, right? That that's really the big give back. Plus, they reduced their
tariff rate on us to about 10% on a temporary basis during that 90-day window. So we got a little bit back, not anything significant over the long run, but I think that that just again highlights that while we're getting some certainty, we're starting to see the plan get fleshed out, we are still very much in the sausage making process.
and that this is not final. And so it does really get back to that broader sort of call for us that while markets are up, that is still market volatility, right? And so we're still in that Q1 through Q3 sort of market volatility window. And once we get this budget finalized, I agree with Besant, there's gonna be a lot more clarity.
Discussion isn't going to be about taxes anymore. We can pivot to other things, and then it's going to be about that growth, that pro-growth policy agenda. Deregulation, tax cuts, et cetera, something that a Treasury secretary would like us to spend a little bit more time on, I think, away from trade. We would be happy to if everybody wasn't trading around.
every single headline like a whack-a-mole in every single hour or day. And that's really the ultimate question. How do you get to that when there still is that uncertainty of is it just Boeing planes? What happened to the rare earths minerals? There's some discussion that maybe permitting is going to be easier for U.S. companies, but unclear.
I think it's a pretty safe assumption right now that that 10% baseline tariff is going nowhere, based on the comments we've heard from the administration over the past few days. Monica, good to see you. Monica Guerra there of Morgan Stanley.
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You'll love the presentations you can easily design with Canva. Your clients and co-workers will too. Love your work with Canva presentations at Canva.com. To extend the conversation with us now, Skylar Montgomery Koenig of Barclays. Skylar, good morning to you. Good morning. You're a dollar this morning, 111. Yesterday, the biggest one-day move lower since the day after the election. Good news for the dollar. How bad is the bad news for the dollar?
for the Europeans? Yes, well this is the issue, right? The euro has largely been trading as a liquid alternative to the dollar and so yesterday it saw a lot of downside because it saw a lot of upside when the dollar was under pressure as well. I think for the euro itself, the domestic outlook isn't great from a growth perspective. You're balancing tariffs versus fiscal policy. Right now tariffs are more growth negative than the fiscal we've had so far is positive.
So, you need another kind of boost there before you can get more positive on the Euro. And I think the other issue is, as the price segment before alluded to, it's really hard to get a trade deal with Europe because you're negotiating with a number of countries, but you also have these non-tariff trade barriers that make it very hard. And you saw that even with the US-UK agreement. There wasn't a lot of detail there. It was just an outline.
So it seems like that will be a headwind certainly for the Euro going forward. The trade wars in the past couple of weeks has been treated as more of a problem for the United States than the rest of the world, including Europe. Is this the tipping point where that discussion changes and you actually see more downside for the Euro versus the dollar because that narrative is going to flip on its head?
Yeah, I think it's something we certainly need to consider. Part of the story for the dollar was that you had this turn in the soft data that meant that you had Fed expectations re-evaluated quite strongly and that weighed on the dollar a lot. And so you could say to some extent because you had that turning consumer and corporate confidence that Fed into dollar weakness, whereas you've not had tariffs imposed on Europe for very long, so you haven't seen it feed into the data in the same way and you haven't seen that corresponding weakness. So potentially there's more growth worries priced in the US than elsewhere.
And I'll give you Canada as an example of what could happen, because Canada had tariffs imposed earlier. You saw that turn in confidence. That's turned into the hard data. And they've had a couple of labor market reports that have been very weak as a result. How much do rate differentials also start to matter again at a time where people are pricing in maybe fewer rate cuts by the Federal Reserve at the same time that the ECB might be prompted to cut more in the face of weakness? Well, yeah, this is another reason that you should really have euro-dollar be a lower level, because rate differentials tell you, and you can look at different points on the curve,
But they tell you that euro-dollar should be closer to 108 than where it is currently. And for us, we think those rate differentials should be more in favor of the dollar even in terms of we think the Fed will be restrained by inflation. You won't have unemployment rises you might have otherwise because you have the supply side of the labor market constrained by immigration. And so that means we see the Fed cutting only twice this year. And in contrast...
There's other economies because they don't get the price level adjustment of tariffs. They haven't retaliated. At the same time, they have lower oil prices. They've had a stronger currency. And there's likely going to be the supply glut from China. That means disinflation is more likely in these other places. And so for Europe, that means we see the ECB cutting towards 125. And that's a big gap to the US.
The damage done to the US dollar is multi-dimensional. It's not just about what's been happening with one thing. It's across several different dimensions. How repairable is that damage done with a simple truce between the US and China over the weekend? Yeah, I think over the weekend, that was a big positive surprise for the US because the expectation was tariff rates would be significantly higher than the levels we've gotten. And we've actually gone from an average effective tariff rate at the beginning of last week of 25% to 15%. So it's a big up
side surprise for growth for the US economy. At the same time, you've had the soft data turn, but the hard data is holding up quite well. And because of that, you can have a more supportive dollar environment. I think for us, fair value for euro dollars, somewhere closer to 107, you have that gap
because there was somewhat of a risk premium priced in. But that risk premium, while it might be a little bit sticky, it can come off if you have more policies from the US administration that seem practical or more poor growth. And that means you could also have more flows into US assets, especially if other assets aren't as attractive. - The dollar diversification, as you know, has been a conversation that predates the trade story. We've been seeing that diversification of the central bank level to gold now for a number of years. Is it enough to unwind some of that? Would you push back that far?
I mean, I think we'll see how it evolves. If it is truly an unwind story from dollar assets, then it can take a while to play out, and you might get kind of rounds of depreciation in the dollar as a result of it. But it's very hard to undo a decade of policy that's been very favorable for the U.S.,
And you're only seeing like little changes here and there at the margins, and the flows don't really support abroad unwind from the US to elsewhere. The only place you really see it is in the COFR data. So in central bank reserves, those have diversified away from the US, but it's been very slow. Over the last five years, it's been about a percent a year that you've seen diversify away. That was accelerated somewhat by the Russian invasion of Ukraine because it was shown that the US could be used as a weapon. But since then, you've also had big cyclical upswings in the dollar. So it's not been a detriment
in terms of the story of the dollar more broadly. We keep coming back to the same question that we were asking several weeks ago. Is this a negotiation or the new rules of the game that lead to a system level shock? And it just feels like a lot of people now going with the former and certainly not the latter. Talking about maybe this isn't a system level shock where we ultimately have the same trading system that we had before, just with slightly higher tariffs. Skyler, it's good to see you. Thanks for dropping by.
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