Bob Michele Talks Second Quarter Markets, Third Quarter Outlook
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When it's time to get growing, there's one platform for all business. PayPal Open. Grow today at paypalopen.com. Loans subject to approval in available locations. Bloomberg Audio Studios. Podcasts. Radio. News. Bob Michael at J.P. Morgan. We're going to try to get him in here. You have an outlook out there, and I see an outlook of price up, yield down. Is that the outlook at J.P. Morgan? Yeah.

Yes, it is. We're off to a fantastic start for the third quarter. Probably not a repeat of the second quarter with all the volatility. Right. But some expectation of the Fed bringing rates down by the end of the year. Is in the bond world, is there fear of missing out? Is there FOMO among bond buyers?

We're starting to feel that now. There are more and more conversations with clients who are in cash looking for an opportunity to get into the bond market and trying to figure out where in the bond market to go. There's still a ton of money in money market funds and in

cash accounts, deposit accounts, checking accounts, savings accounts. The last time we looked, it was over $21 trillion, which was a new high. Bob, we saw earlier in the year a move of capital out of the U.S. into other markets, notably the European equity markets, and they're outperforming the U.S. equity markets. Have we seen that in a fixed income world as well?

We actually haven't. There's been a lot of discussion about it, a lot of conversation. There was a bit of a pause in the end of April, start of May, where foreign investors who had typically put money to work in the U.S. bond market just stopped investing.

And then it started up again. And we've seen no selling of U.S. fixed income assets and reallocation overseas. What we have seen is rethinking whether they want the dollar exposure to go along with that. Most now are taking some dollar exposure, but hedging some back to their base currency. Bloomberg Dollar Index, you bring it up, the Bloomberg Dollar Index is down almost 10% this year. We don't see that very often, do we? What do you make of it?

For us, it's a reflection of an overcrowded, overbought trade where coming into this year, everyone wondered, how is the dollar up there so high? What's keeping it up there? And it kept going. And then there was a catalyst and a reason to diversify out of dollars. We think actually there's another 5% move in the dollar index lower. I modeled it today.

I did not use Fibonacci's, which I really don't believe in. And I came with a further decline of BBDXY of 6.3%, total 14, 15% down. And that takes it back to that range that we're at. You're in meetings with lots of foreigners using JP Morgan for wisdom on American full faith and credit.

Do you see any tendency that they want to walk away at the margin of a belief to own and at the margin buy, acquire our bills, notes, and bonds? None whatsoever. There is no concern about the full faith and credit of the U.S. Treasury. There was a bit of a pause on the amount of supply. Would it be too much?

But there was a lot of conversation about looking for an alternate. Do we have to have everything in dollar assets? Isn't there something else that could act as a calm in the storm to treasuries and dollars? I think that's why you've seen gold, and we should see continued support of gold. We should also pay attention to what's going on in Central Portugal this week, where the ECB has some- I'm surprised you're not there. Exactly.

Do you know what? I wish I was there. I wouldn't be surprised if Bruce is there. But it's an opportunity for them to...

to try to establish more of a leadership role here. - When you were studying Greek and Latin at Penn, I'm sure you looked at the x-axis probably in all three languages, but the answer is, okay, they want to buy US, but they adjusted their maturity perspective because of all the fun and games we're going through.

By and large, the investors we deal with, where we've seen a lot of flows from wealth management channels and total return investors, has always been the intermediate part of the curve. The long end of the curve is really owned by pension funds and insurance companies, and they're far more strategic in where and how they invest, and they have certain trigger levels depending on their estimate of liabilities. I would say they've been pretty steady investors.

In the current environment, it feels like there's no sponsorship for the long end of the curve. You usually get that when you have the Fed bringing down rates. Let's not forget, when we get to the point in the cycle, hopefully years from now when the Fed is hiking rates, then curve flatteners will be in vogue again, and then there will be buying at the long end. Paul, can I help this morning? Please. Price up, yield down. Pretium octum.

- Proventus diminutum. - Oh my goodness. - Latin. - Okay. - That's what Michael, he goes out on the floor when the world's blown up, starts talking Latin at JP Morgan. - I'm a big fan of Vatican II, which did away with Latin. - Was that Google Translate? - Google Translate. - And I'm sure that Bush put you there. - Exactly. Bob, how much credit risk do we take here? I think, I'm not hearing anybody talk about recession, so shouldn't I be taking some credit risk here?

Absolutely. You get concerned about credit risk when you think you're headed into recession. It makes sense. Recession, by definition, is lower corporate profitability. The most levered companies have to go some sort of restructuring. Defaults go up. You get widespread de-risking because everyone's concerned where the defaults could occur. We've been trained every other time there's a backup in credit spreads,

you buy it if there's no recession. And we saw that earlier when credit spreads got to about 450 on high yield. And then suddenly there was a break in tariffs and probabilities of recession went down. And suddenly here we are through 300 basis points on high yield. All right, you're CIO and head of global fixed income currency and commodities group. So I'm gonna ask you about commodities. Gold, what are we doing with gold here? Why are we all not owning gold?

Well, actually, we think you should. We think of all the options for an alternate safe haven, a counterbalance to risk. Treasuries are out there. High-quality bonds are out there. Investors are adding those. Gold is another one of those generally accepted vehicles. We expect to see more buying. I mean, it's just amazing what's going on. Is that just...

Chinese banks and Chinese consumers buying it? Or is there something else going on with gold? No, it's...

Developed market central banks have been adding to their gold reserves. Its wealth management platforms have been talking to clients about holding some gold. It's not only a safe haven, it's also a reasonably good hedge against inflation. And just in case we get into next year and suddenly all the liquidity in the system gets ignited and inflation rears its ugly head again and stays,

then gold will be a pretty good hedge. Bob, I'm doing it. I mean, this is the way we roll with Bob Michael at J.P. Morgan. Good morning on your commute across the nation. Good morning, 92.9 FM in Boston. I did a log linear regression of the Bloomberg Corporate Total Return Index. Get a little more yield.

And I went back 30 years and it's stunning the recovery off the gloom of a couple of years ago in price. It's happening. You guys nailed it. Do you envision in your head that with price and, you know, making the coupon, we will get back on trend of a wonderful linear trend from about 2003 straight up that we'll get price up back on trend that we knew before the debacle?

It feels like it. It feels like we're, first of all, in an interest rate environment that will have yield to it. We're not going back to 0% interest rates. I don't know if the Fed brings rates down to 3%, maybe 3.5%, but somewhere in the 3s,

puts treasury close to four and puts credit close to 5%, which is kind of where we are. That's a pretty good level to be a holder of high quality corporate debt. Where's job in Manhattan? Internship with Bob Michael at JP Morgan. It's like, you know, you're working six days a week. They love it. Do you just throw Fibosi at them? Because none of these kids remember like a normal yield market.

So we now call them analysts. We don't call them interns. They're summer analysts. Did Jamie approve that? And then they come...

They come prepared far more than I ever remember. - Isn't it frightening? - They come with a level of knowledge of markets and how the financial system works that probably took me five years to get there. - The great Al Hunt used to lecture at your Pennsylvania, and Al told me once, he said, "Tom, you're in the classroom, "and every single person there is smarter "than Al Hunt was at 30 or 35."

Yeah, and you know what? There's a lot of truth to that. They just know it. Bob, what's up for them? Analysts. Exactly, not interns. Make a note, Eric. They're called analysts now here. Some are analysts. Noted, thank you. Okay, noted. What is our Federal Reserve thinking these days, Bob? I mean, they could probably just give themselves a nice pat on the back and say, we've engineered a nice soft landing. We've weathered some of the uncertainty from tariffs. Inflation seems okay. The economy, okay, it's slowing, but it's still there.

Did they get to know anything? They're thinking, how fast can I get out of here and go to the beach? I promise I'll come back after Labor Day. That gives me a couple weeks to look at the data, see how the US economy survived this summer. We'll have more clarity on the one big beautiful bill. We'll have clarity on tariffs, hopefully. We'll start to gauge the impact to the labor market and to prices.

Then we can make a decision whether we can and should bring rates down in September or whether we stay on track for December. Let's go back to your outlook. What is the insight? I think of Jamie's great annual letter, which I really advocate, folks, is a long read. And there's four, five, six themes. What's a theme secondary within your mid-year outlook that deserves note?

Well, I think within that is a view that we're heading into an environment that's more normal, that existed pre-great financial crisis, when there is a demand for capital

because there's a productive use for capital and there will be a cost for that capital and it won't be zero. Does that mean the Fed funds rate belongs about where that first dot was that the Fed put out in 2012, four and a quarter percent? Maybe, could be, get ready for that. Get ready for markets where you could see a surge in inflation. The Fed may have to go to 6% and they may have to, you know,

apply a little stimulus and go down to 3%. I think that's the market we're headed for, and I think that's an exciting market. Bob, do we ever have to worry about

deficits and national debt. I'm looking at the negotiations going on down in Washington right now. We're all seeing, you know, talking about two, three, four trillion dollars of deficits coming out of this budget plan. Do we ever have to worry about that? I mean, you're the front lines of the fixed income markets. How do you think about that? We should. And I think we all have a sense of righteous indignation because we

Every month we go home and rebalance our checkbook and pay bills. And it seems like our government doesn't have to. But the reality is we're watching deficits go up globally. We're now seeing Europe starting to borrow and spend more.

And it seems to be the generally accepted principle that governments should be allowed to borrow and spend, and you appoint central bankers, which will help underwrite that borrowing and spending. Bob Michael, generous time with you. Thank you so much. Mr. Michael is with J.P. Morgan. Get their outlook from...

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