Government Shutdown Clouds Fed Outlook

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3:28Plus, global business, finance and tech news as it happens. The Bloomberg Business Week Daily podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. I want to bring in now Kay Herr. She is U.S. CIO of Global Fixed Income, Currency, and Commodities at J.P. Morgan Asset Management. And Kate, do you think that we got anything new from this latest Fed Minutes? I mean, we knew that Stephen Myron was an outlier, and these minutes certainly showed that. But what did we learn in terms of the debate going on inside the Federal Reserve? So, Scarlett, first off, I'm glad to be here. Thank you for having me.

4:04And Nora, too. Second off, I think the short answer to your question is no, we didn't learn anything new. And I think one of the best ways to think about whether we've learned anything new is what the market's reaction is, and the market's really not giving us much of a reaction. Maybe at the margin, the minutes are showing us that there was some discussion about maybe we didn't need to do anything, but it was pretty clear that we only had one dissent when that was released, September 17th, and not a lot of new information in the minutes today. Okay, not a lot of new information, and of course, as we're looking at the trade, still green across the screen right now, all across the board here when we're looking at equities in particular.

4:46But what do you think the Fed should be focused on right now? It's such a great question, Nora. As everybody knows, we've got a government shutdown and we are in an absence of data. So the Fed or the Bureau of Labor Services did not release the employment data on Friday. It's unlikely that unless the government reopens, it's unlikely that we're going to get CPI next week. So what are we looking at? What's the Fed looking at? The next major piece of data that we think is two things, I would say. The first is corporate earnings start on October 14th. And I think that can be a great indication of what we're seeing from a bottom up perspective on the economy.

5:28The second one on a macro perspective that I'm sure the Fed will look at is the Beige Book. So we've got the Beige Book coming out on October 15th. Yeah, and I feel like the Beige Book has taken on greater importance in this period of uncertainty where we're not sure if companies are passing along higher costs to their customers or how they're dealing with it. We're kind of in uncharted territory and every company is doing things differently based on the experience of their executives. When it comes to corporate earnings, Kate, as someone who is in a fixed income market, what do you watch for?

5:59What do you look for? Is it the banks that will really tell you the most about what kind of credit quality we have in this economy? Sure, that's a great thing to think about. I think first off, you know, we're not entirely in unprecedented territory. We have had government shutdowns before. And when we take a step back and think about the overall impact to gross domestic product, it tends not to be that material in the grand scheme of life. So from an earnings perspective, I think we're going to be looking for a couple of things. Number one, from the banks, what's the credit quality look at? What's the indication of the consumer?

6:32As we've seen in the macro data, we've seen some softening in employment. So is that going to flow through into reserves, into credit quality and banks? And then from the broader companies and the industrials, what are we seeing in revenue growth versus EBITDA, obviously, or earnings before interest taxes, depreciation, cash flow, as it were. So what are we seeing in cash flow? I think for the most part, companies have very high margins. And are they going to protect those margins? Are they going to pass through costs onto consumers? And then what's that going to do to demand? I think that's what we'll be looking at.

7:05So as we head into earnings season, just around the corner here, what sectors in particular are giving you the most concern just based off of what you were saying? I'm a bond portfolio manager. I'm paid to worry and lose sleep. So everything gives me concern. You never know where you might see a pocket of distress, and it's the unexpected that are the real concerns. Well, we've seen pockets of stress in the auto sector. When you look at first brands, when you look at tricolor, what does that tell you about the state of the consumer, especially at the lower end? You know, these were two credit blow ups that took people by surprise.

7:43And a lot of people will say, OK, there it's idiosyncratic. There are some maybe fraud issues that are particular to those companies. And that may be the case. But these are also sectors that are very much affected by tariffs, and they are not the only ones affected by tariffs either. So I think there's a couple of things going on here, Scarlett. And yes, on a certain level, tricolore, and apparently that's how it's pronounced. Oh, thank you. I didn't know that. That's your pro tip. I've been saying tricolore. I think there's a couple of things going on. Tricolore in particular, and I'm not going to talk about specific credits, but I think we should take a step back and think about what's going on in the broader economy and broader financial markets.

8:24And the reality is there's a lot of cash sloshing around. And when there's so much money sloshing around, that tends to be the point late cycle where excesses happen. So that tends to be the point. If you went back to the 2000s, you send to see it's not uncommon to see corporate malfeasance. And it may be in these types of instances where are seeing corporate malfeasance. To answer your question with regard to the consumer, you know, we had been talking for a while about what we referred to as a K-shaped economy, and that was high-income consumers with a lot of exposure to stock markets and were doing very well.

9:02Lower-income consumers had been hit with inflation. Actually, that seems, lower-income consumers seem to have stabilized some. We're more focused and concerned about maybe more prime consumers that are going to start repaying student loans and looking at defaults and type of behaviors that we're going to see there. So let's dig a bit deeper into the lack of data that you pointed out just a bit ago here. So we have traders that are really bracing for a range of Fed outcomes here. Some of them even hedging flows, flavoring outlier dovish scenarios and others focusing more on the possibility that the Fed forgoes a move at one meeting.

9:40How are you thinking about all this right now as it relates to the bond market? Yeah, a couple of things. I think if you look at what the market is pricing in now, a 25 basis point rate cut is almost fully priced into the market for the October meeting. I think, is it October 25th? So that's almost fully priced in. October 29th. 29th, sorry. No, no, no. I mean, how could you not know? How could anyone not know this? Just kidding. So the market's pricing almost an entire rate hike in October. And then on the December 10th meeting, the market's pricing another, let's call it, 20 basis points, something like that.

10:20But I think the other interesting aspect is that volatility in the rates market has been very low. So you get this base case that the Fed continues to ease. And if we go back to the Fed minutes and what the Fed said on the last meeting on September 17th is that they are saying that they intend to do two more cuts this year. And that's the base case. I think in periods of economic uncertainty and the government shutdown is perpetuating that uncertainty because we're not getting regular economic data updates. then I think that logically follows that people worry about tail risk outcomes and they look at unusual patterns in behaviors or in particular markets and worry about what they could glean from those.

11:04So we don't have any data right now. What we do have are the government auctions of U.S. Treasuries because we need to raise money. So that continues. Is the risk of a tail event tapering off a little bit here? For a while, people were monitoring every single auction with bated breath. And it feels like we're excelling a little bit here. We still monitor them with bated breath. And I think off the top of my head, today's auction at 1 o 'clock was something like 91 % end users and something like a tail of 0.45 basis points. So you're right. That's a strong auction. And I think that has settled down.

11:42I think concerns about the U.S. government, U.S. Treasury as a safe haven have abated as people have gotten more comfortable with the macro environment and the geopolitical environment. So safe haven here may be abating, but what do you think is the next story here? Next story. Gosh, I don't know. I'm not the reporter on this. We're just we're just I want to leave that to you. In the market. In the markets. I think it's probably earnings. I think it's going to be, you've got earnings kicking off on, look, as you all said, in the absence of any macroeconomic data being released by the federal government, I think people are going to obsess about every single earnings release and anything that they can gleam from that, specifically in, as you all know, there's been an extraordinary amount of investment in AI and looking, maybe starting to look for returns on that, look at that investment cycle.

12:33So I think that's going to be important. I think to Scarlett's earlier question, always credit quality, return of capital to shareholders, increases in dividends, looking at flows. I think that's the next story. But, yeah. Where do you want to be on the yield curve? Yeah, we still like the belly of the curve. Everyone loves the belly of the curve. Everyone loves the belly. Isn't that just fun to say, though, the belly of the curve, right? We fixed income geeks. But yeah, I think we think that the rates are going to continue to be pretty range bound here between 375 and four and a quarter. And we continue to like high quality intermediate duration credit.

13:12You know, as my dear colleague Ian Steely says, spreads are tight, but yields are right. And that's really what the driver is for investors. You know, they're not investors who are thinking about investing for pension funds, endowment funds, individual investors. They care more about what the yield is, not what the spreads are. So, of course, as we mentioned, the belly is what everyone's talking about. But is there any sort of opportunity on the other end? I mean, there are always opportunities, but where we would are most comfortable in the yield curve is really in the belly. What about gold?

13:46I'm curious what you think about the relationship of gold to fixed income these days. Gold continues to zoom higher. Now,$4 ,061 an ounce and just pierced$4 ,000 this morning. Insane. Yeah. So and there seems to be very little that people can identify that's going to stop this momentum. It's driven by inflows into gold ETFs and also central bank buying. How does that play off of what's happening in treasuries or doesn't? Yeah. So you've just hit on a key aspect of it, Scarlett. So there are obviously two components of any market, supply and demand. And you just hit the two main components of demand and that central bank buying.

14:22And that's the ETF buying. I think the ETF wrapper is providing people with an easily accessible way to buy gold instead of buying bullion and storing it someplace. So you've got an increase in demand for gold. On the other side, if you look at the supply of gold, it's really been pretty constant. So you've got this mismatch between supply and demand. I think in terms of the relationship that we've seen, historically, gold has been correlated with real yields. So when you see real yields come down, gold prices go back up. So why is that? The opportunity cost is lower. If you can't get a high rate in treasuries or in risk-free assets, then maybe gold becomes more attractive.

15:02But what we've seen really, post-pandemic, that relationship has broken down. And I think it's really a function of the supply and demand. But I think the point would be that that's broken down really over the last five years. So I don't read anything different in gold pricing about, you know, U.S. exceptionalism or the dollar flight to currency or anything like that. I think it's old fashioned supply and demand fundamentals. You don't see it as part of the debasement trade that everyone keeps talking about? Not really. No. You don't buy into that. I guess someone who's the global head of fixed income probably doesn't see much value in that.

15:38But had to ask it. I mean, do you think we have more room to run here on gold? You know, my only strong view on that is I like it as jewelry, as you can see from my necklace. I'm not enough in the weeds on supply and demand of gold to have a strong view on that. I think I've got a good handle on what's going on, the fundamentals, and why we've seen prices going. But I'm not a technical analyst on gold and whether we've got more room to run. All right, Kay, always appreciate you joining us. Thank you so much for coming into studio. Kay Hur is U.S. CIO of Global Fixed Income Currencies and Commodities at J.P.

16:11Morgan Asset Management. Stay with us. More from Bloomberg Businessweek Daily coming up after this. Support for the show comes from Public.com. If you're actively involved in your portfolio, you probably catch yourself repeating the same actions. Buying the dip, manually sweeping idle cash, putting on a hedge. On public, you can now create AI agents that handle all these tasks on your behalf. Just describe what you want to do in plain English. Like, if the VIX hits 25, buy a put option on the S &P 500. Or, if my cash balance goes above$20 ,000, move the excess into my direct index. You approve of the workflow and your agent handles the rest.

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20:08You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. All right, let's head over back to Europe because we now have some more details coming out of France. And I want to bring in Stephen Carroll. He is, of course, the host of Bloomberg Daybreak Europe. And Stephen is an expert on all things France. He's certainly my expert on all things France. We go to him constantly for the latest. And there's been a lot to stay on top of here. Stephen, Sébastien LeCourneau, who is the outgoing prime minister of France, says that Emmanuel Macron, the president of France, can name a new prime minister in the next 48 hours.

20:51He can do that. He may not do that. Where does that leave us? What does this mean for his government? Scott, things are a little bit clearer now than they were earlier today, but not much. What we know is that the theory that fresh elections could be called for the National Assembly looks less likely than it did this morning, for example. what Sébastien Le Corneau has just said on French television is that he believes there is now a political situation that allows Emmanuel Macron to name a new prime minister and take the next spin on this wheel that we've been on since June of last year of trying to build a minority coalition in parliament that's able to pass a French budget.

21:32Now he did this after the 48 hours of intense consultations with political leaders from across the political spectrum, not all parties but most, And what he was trying to do was see if among those groups he could find enough support for central ideas that he believes that could lead to a budget. Essentially, he wants somebody else to take the reins from here. That's what he's told the president, Emmanuel Macron. He came to this interview this evening on French television straight from the Élysée Palace, where he spent an hour and 40 minutes with the president briefing him on what he'd learned over the past two days.

22:05he now expects the president to name somebody else to take on the job to lead those discussions. He was asked repeatedly, should it be a candidate from the left party? He said it's up to the president to decide. Should it be a technocratic prime minister? It's up to the president to decide. He has made it clear, though, that nobody who's going to be in this government should have presidential ambitions for the 2027 presidential election. It looks like he's pointing towards a sort of technocratic arrangement, but very much involving the politicians who are in the National Assembly now, who are on the political scene, to be able to put that compromise together, because they have some pretty big issues.

22:43They have to decide. And the calendar on this budget is already running very, very tight. So the rush is to try and get something done in time that can be passed through Parliament and actually keep the public finances running over into next year, avoiding the sort of emergency measures that we saw at the end of last year, which, as we know, didn't go down very well on the bond markets. Can investors force the hand of the centrist parties who must decide whether to play ball with Le Corneau or, for that matter, Macron? Look, that's a really good question, because what we've seen so far is a little bit of tension in markets, but not something that our own economists or any of the market analysts that we've been speaking to would describe as a fiscal or financial crisis in France.

23:25This is still a political crisis. We have seen the spread of bond yields between France and Germany widen, although it did actually tighten a little bit today when Le Cornu signaled this morning that he had been making some progress in these talks. Realistically, looking at it for markets right now, nothing's really changed in the past week or really since the middle of the summer when the last prime minister, François Beirut, proposed his budget. They're still in this phase of negotiation. There are still signals that a compromise could be found. when markets will run out of patience with France is very much an open question.

24:00You don't have the cliff edge of a government shutdown in France in the way that you do in the United States, because the way it works is the system runs into sort of keeping the lights on measures where taxes are collected and public services operated. That's not a situation any politicians want to be happening. It's not a situation the public wants to happen either. But the cliff edge moment looks that little bit further away, at least for now. The situation that markets were most worried about is what fresh elections could produce, National Assembly elections, or in an extreme case, a fresh presidential election.

24:32Both of those look off the cards this evening, but things are moving very quickly. And who Emmanuel Macron could pick in 48 hours time is going to be a very interesting question. So very quickly, if legislative elections would be unsettling to investors, I'm guessing that presidential elections, Macron actually resigning as some in the opposition parties want him to do, is not something investors would welcome. No, indeed. I mean, that would be a much more dramatic shift in France's both fiscal approach and some of those big, heavy issues like the pension reforms, which is the central thing politicians here are fighting over at the moment.