October Jobs and Tech Selloff

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1:07This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. On this important jobs report, we begin our coverage as always in honor. With Claudia Somm, her work at the Federal Reserve System over the years, definitive on the measurement of different recession statistics. And of course, she has been wonderful in talking about the American labor economy. You know, Claudia, my favorite is the ECI wages and benefits index. We ballooned out of COVID to 5 % year over year.

1:51We've come back, but we haven't come back enough. but inflation's high. Are we getting ahead every month in our wages and benefits? Not in an inflation-adjusted sense, particularly this year once. And that's really about inflation having picked back up again after the conflict in the Middle East began. And we've seen on the wages side some slowing, particularly in what goes home to people's paychecks. I thought what was really notable out of the employment cost index last week was that unlike today's data, average hourly earnings, the ECI also brings in the cost employers pay for benefits, including health insurance.

2:36And those are rising pretty considerably, the health insurance costs. So that's one where, you know, if employers have got to put those costs into the benefits, they're not going to pass on in the wages. And you just don't see the, you know, the wage improvements. And so I think given the backdrop of inflation has picked back up and wages just aren't rising, like it is not a recipe of getting ahead here. I would suggest, Paul, on this jobs moment that health care costs, housing insurance costs line up the list of costs is just a huge story. Huge story. And I think we kind of saw that in the midterms here.

3:12Yes, thank you. Affordability is the broader number. So, Claudia, is a 70 ,000 change in on-farm payrolls, is that kind of the new normal? Because there was a time we were all used to something 100 ,000, 200 ,000. Is sub-100 ,000 the new world here? So, yes, I think so, at least for now. And it's true. Since the beginning of the year, payrolls have averaged a little under 70 ,000. Now, we've had some times where we've got some upside surprise on that and saw some, you know, in the hundreds of thousands and some good months, but that didn't hold. and we've seen some pretty weak months. Last month was just a little under 30 ,000, but it has been really pretty stable around that average of about 70 ,000, which is a big improvement over last year.

3:57Like we ended the year with some really like scary payroll numbers. But if you go back a few years from that, 100 ,000, 200 ,000, these were the averages. And the thread that ties this kind of average moving around so much is we have had really big shifts in labor force growth in the US And a lot of that ties back to big shifts in immigration policy. And we've also seen, you know, an aging of the workforce. We've got, you know, so demographics are kind of pulling that average down. So, yeah, we might get a good month today, but it's going to take a lot to pull that average up to some to numbers like the 200 ,000s we've been used to for some time.

4:31Claudia Sam with us. We'll come back with Dr. Samir after the jobs report. Paul's got, you know, Paul's, Alexis, it's like working with Scarlet Fu. Paul's got like eight written down questions ready for Dr. Samir. It's like the foo. I mean, you know, he's prepared. It is jobs day. And the smartest thing I've heard was from Paul Sweeney, which is you noted that there's 70 whatever thousand nonfarm payrolls. Are we supposed to get used to that? It seems like I don't agree with Dr. Sam. That's the math. Yeah. it's not acceptable for the american spirit well i think with this labor supply shortage uh resulting from the change in immigration policy and the aging dynamics just as dr sam was talking about this might be it that's just kind of how the math works exactly so and but the question is what does that mean for longer term gdp growth uh when inflation is pulled out i mean is well i don't In the last blur of 48 hours, we've seen productivity numbers that were wonderful.

5:35How much is it benefiting America? Futures up 19, NASAC up 1.6 percent. This jobs day in America. The October job numbers are crossing the Bloomberg terminal and they show improvement from September. The U.S. economy adding 165 ,000 jobs in October, more than double what Wall Street was estimating at 70 ,000 and much more than the 29 ,000 we saw in September. And we also saw the jobless rate now slipping to 4.1 percent versus estimates for 4.2 percent. It was at 4.2 percent the prior month. Now, this jobs number, this gain of 165 ,000 in line with the highest estimates and above what most see as the so-called break-even rate.

6:21That's the pace of job gains needed every month to keep the unemployment rate stable. Taking a look at the inflation component of this report, we are talking workers' wages, average hourly earnings month over month up, four-tenths of a percent, about a tenth of a percent better than expected and much better than the tenth of a percent rise we saw in September. Year over year, average hourly earnings up a better than expected, 3.1 % versus the 3 % we saw in September and the 2.9 % estimate. The labor force participation rate also improving a bit, 61.9 % versus estimates for 61.8%. The underemployment rate at 7.9 % estimates were for 7.6%.

7:03Just want to point out today's report follows recent jobless claims data showing companies are holding on to workers. So it appears this is still a low fire, but maybe a more higher environment. Once again, the unemployment rate at 4.1 percent for the month of October. We added a much more than expected 165 ,000 jobs. That is a look at the October jobs report. Back over to you guys. She just like lights out. You have no idea the skill of what Karen Moscow and Alexis Christoffers does. Markets on the move here. The dollar stronger. Yen. Could I get a 159 print? That would be extraordinary. Paul, the bond market surges, yields up there substantially, up six basis points of a 10-year yield.

7:47Yep, looking at the two-year, the short end of the curve, up seven basis points, suggesting that the Fed maybe will be hiking here. Fishes up 15. Nasdaq puts on a little bit of strength, 1.4, up to 1.5 percent as well. And the VIX, 26.86, down from that 28 level in the carnage yesterday. today. This gives Dr. Sam time to look at this data. Claudia, I see two Americas. I see a boom with revisions, 249 ,000 boom number on non-firm payrolls. And I see the Greenspan underemployment rate going from a 7.6 % up to 7.9%. Is this a fully employed America? The labor market has had this really uncomfortable, curious balance of the low hiring, but the low firing.

8:43Right. So it really still is a difficult environment if you are looking for a job or a better job to get that. But people are holding on to their jobs, which is a good thing. Right. The layoff rate is low. It's very unusual. So I think it does give this this view of like there's two two Americas in the labor market. And there's some truth to that. But we do like to see, I mean, the payroll numbers, surprise to the upside. You know, as I said before, we've seen some some big surprises like this earlier in the year. And then they ebb away. You know, so I've got to see some some months of this before I'm really convinced we're seeing an acceleration of the labor market.

9:19But, you know, good news is good news. And the unemployment rate, the overall unemployment rate did tick down with participation going up. So, like, that's a good setup. We're going to take the good where we have it. But we have been head faked by this labor market in terms of acceleration several times this year. Paul, am I right Kevin Hassett of the White House will be with Bloomberg? Yes. Nine-ish? Yes. We're going to have him. We'll get his thoughts here. Paul Sweeney with Claudia Somm. Average hourly earnings on a year-over-year basis, Claudia Somm, came in a little bit better than expected at 3.1%.

9:51Are you surprised that number's not even higher given how tight the labor market is? Why can't I walk into my boss and say, I need 10 % increase if you want to keep me? Well, I think the boss will be like, good luck in that job. I mean, that's the thing right now. And I watch really carefully the quit rate. So we did get an update on JOLTS this week. And there was, you know, a little tick up, but it's still pretty low. And that's a good sign of the bargaining power. If workers are out there quitting to get better jobs, that's when they have the leverage for the higher wages. It just does. It's just not there right now.

10:24If you don't have hiring being strong, the workers just don't have that ability to bargain. Can we like do like, there's no recession talk, but can we do like Claudia Sam wheelhouse here? Sure. Claudia Sam wheelhouse, folks, she's famed for looking at how an economy slows. Let's go to the opposite way, Claudia Sam. When you studied at Michigan, you never, never thought about a sustained 6 % or more nominal GDP. How do you presume with our new politics that we will bring in this boom economy constructively?

11:05So, you know, there's a lot of pieces to that. I do think going back to the question about immigration policy, labor force policy, like I'm less looking at, you know, the downturn in the labor market. But I am worried about some of the structural pieces of the labor market. And I think without a growing labor force, it's going to be hard to really consistently have those GDP gains. I mean, I am optimistic about some of our technology improvements on the horizon, but that is really tough to string together quarter after quarter, year after year improvements and productivity growth. Right. And so I think you've got to have a multi-prompt approach in terms of the policy.

11:43Hanging our hats on AI is not the way to go in terms of really like wanting to keep those those strong growth numbers. I think there are some structural pieces on the labor market that deserve attention and may very well get some attention given the election results this week. Labor force participation rate, again, a little bit better, 61.9 percent. Where's a healthy number? Like what should we be looking for? Is that a good number, 61.9? Should it be higher or lower?

12:12Yeah, I mean, it is hard. You know, work is onerous, right? We don't want 100. People should have a choice as to what they do. I think given the fact that we have so much aging of the workforce, probably keeping a focus on the prime age. So, yeah, no, I'd say, well, you know, people should get to retire at some point if they want to. Some point. But I think looking at the prime age statistics, which have been really pretty solid, but there's always, you know, there's the separation of like we look month to month, quarter to quarter at the labor market. And then there's the big picture. I mean, we've had some demographic groups that for decades have been puzzling, like men, prime age working used to all work.

12:54And there's been declines over many decades. So then there's questions about why is that happening? And but that's not a that's not this near term discussion. So so I don't have a ready answer of what's what's the right number because it depends on people and their lives. Spearheading our labor, our labor coverage, I should say, Claudia's with us. Thank you. Thank you so much this morning. Look for her publications and, of course, wonderful out on Twitter and particularly on LinkedIn as well. With a bigger, broader picture, futures up 10, Nasdaq up where it was pretty much level 1.3 percent, but yields higher today.

13:30Ten-year yield by a solid four basis points as well. Constance Hunter joins us, chief economist EI at U and her work with Julia Coronado, macro policy perspectives as well. Constance, I look at this and it's clearly a fully employed America. Link it to what we observed in the election. I see two Americas and there's an America that isn't in the jobs report this morning. Well, if we look at the voter turnout, a lot of the voters probably had jobs, right? So I wouldn't say that this was an election determined by the unemployed. We have a very low unemployment rate. And of course, remember that 33 percent of the population are made up of independents.

14:16And those are the swing votes that put the sort of moderate Democrats in states like Iowa and Nevada and Texas into office, even in Ohio, I would say. So I think that this election is a reflection of what's happening in foreign policy with Iran and possibly Ukraine, what's happening with inflation. That was the number one issue. And it doesn't necessarily mean that the economy isn't churning and working underneath. It's just people are still feeling the effects of the price, the level changes we had during COVID. Then they didn't dissipate. then we've had another step up in levels. And and that is what people voted about.

15:02So that kind of goes to the issue. Again, we look at average hourly earnings on an annualized basis constants up three point one percent. That's better than forecast, better than last last period. We had an upper revision for last period, actually, the three point two percent. But that's just not keeping pace with inflation for most people. That's something's got to give there. Well, it's a double edged sword, right? Certainly what we what we don't want to see is we don't want to see runaway inflation that's demand pull. And so what we see here is a lot of cost push inflation. And the Fed is trying to to curb that.

15:37You had Beth Hammock and Barkin coming out yesterday, Barkin, who will be a voter in 2027, saying the Fed should raise rates. And what I'm looking at in this labor market is sort of how durable is it? And when we look at things like the diffusion index, we had a solid increase there. And one of the things that I've been watching this year is the mix of cyclical versus non-cyclical jobs. And now let's remember the big concern when we were coming off the COVID highs that we were still having high headline prints, but it was dominated by health care and government and social assistance workers, non-cyclical jobs.

16:11Now we're in a situation really starting this year where we can see a surge in cyclical jobs and cyclical jobs are dominating the hiring. That suggests that there's some underlying economic momentum. Now, it may take time for people to feel that, but it's certainly there in the data. So given the labor backdrop, what's your view of the consumer going forward here? It's kind of, boy, if you have a job, that's a big, big part of the game here. Is the consumer OK? I think the consumer is OK. And a lot of it is going to depend what does happen, for example, with the Iran war and with gas prices. You know, we're getting oil out of the Gulf because we are engaged in escort operations, but it's very expensive to get that oil out.

17:04And so the market, the oil market is pricing and all risks around that. If we see a resolution to the Iran war, I think, and you see a really durable structure built around getting oil and gas out of the Gulf of Hormuz, or the Strait of Hormuz, then you're going to see oil prices come down. That's going to give immediate relief to people's pocketbooks. Constance, what are you going to write about this weekend? Folks, commercial free for you for the next 20 minutes. Christina Katmany coming up with Invesco, but right now, Constance Hunter, EIU. What are you going to write about this weekend? I mean, you have such a broad mandate.

17:40I'm just fascinated. What's the Constance Hunter theme? Well, I'm looking at really what is happening with this global AI sell-off, right? So you had Hong Kong down. You had Taiwan down. Taiwan is engaged now in pricekeeping operations to stabilize that market. Where are those fault lines? We still have Japan engaged in this massive carry trade, invested in inequities around the world. Are we at a tipping point there? what is happening with regard to economic policy that the Democrats are going to be able to enact. And obviously, this comes down to the state level. And one of the big themes that the market has been focusing on over the last several days is this sort of curb of AI build out.

18:25And so really, the thing is, to what extent is that happening? And are we talking about an end or are we talking about some more sensible policies that make it more palpable to the general public? Because if the public is really against the AI build out and we don't do anything about it, then we would have such significant backlash down the road. So I'll be looking at all of this and really thinking about what are the economic vectors we need to look at going forward. But if I were looking at just this jobs report and not thinking about the shock of the election, I would say that we are on solid footing based on this jobs report.

19:02Thank you so much, Christine. Excuse me. Constance Hunter with us here. from EIU. I couldn't concentrate because I'm like, did Christina go to college with Jalen? Maybe. I mean, that's the last time Christina Katmany came in, for whatever breaking news reason, we were so rude. You were here for two, like, like, like two, two questions or something. Investor called up from Atlanta and said, how can you treat her like that? So for a long conversation this morning, Christina Katmini, on this crazy global bond market and what it says to us. Were you in college at Villanova with Jalen? I wish I could say I was.

19:41He's a number of years younger than me. But we have cheered him on. They're just over in Rome. Yes, they were. Did that work out? Did you go? We did not end up going. I was actually in Rome with a Villanova crew in May. But I feel like with the marathon and Halloween and the little kids, stayed stateside this time. We're dying on Yield this morning. What an honor to go from Priya Misra to you, Ira Jersey, coming up later with Tony Crescenzi as well. As I said, in this blur that we're all in, what will you write about or think about through the weekend on Yield? Well, it's interesting because we were even saying coming in today, like, it's payroll Friday.

20:22I completely forgot. And you're like, what the market is most not focused on payrolls. And again, like it's a, that's a big number. Those are big revisions. Even if you look at the three month, I was looking, there are three month moving average now for payrolls is 119. The sixth month is only 73. These are like big gaps, but I don't think that's where the market's focused at all. I mean, it's been such a rollercoaster week between elections and changes in oil prices and what's going on in the Middle East and obviously equity markets and AI. And it's just this confluence. Everyone's like, where are we?

20:55And what is the driving path forward? And it feels like there's a lot of fear and agita in the market, for sure. How did the debt markets perform over the last few days? Because even during all this craziness, Meta came to market again with a Eurobond offering. So, I mean, how's the bond market these days? So, we've actually, again, we sold off. I mean, it's been adrift to higher yields across the board, across the curve, across the globe. all year. And we kind of got the peak five or six weeks ago. And for five or six weeks, we've retraced 40, 50 basis points, kind of in every point across the curve.

21:31It feels a bit overdone. I think some of that was positioning. I think some of that, again, is this fear about AI. But I'm not sure that the underlying has changed so much. We also, I think, are still grappling with this Fed that doesn't want to have forward guidance from the chair, but the rest of the committee is giving forward guidance and we have very different messaging meeting to meeting. So I think there are people out there that think like there are real recession fears and this is that this is the end of AI. We're a little skeptical of that. I think the base case is still that the Fed is going to go in December.

22:07And if you if you didn't get that communication ahead of the last inflation prints, you would have expected them to go in October as well. All right. So, again, the Fed probably is going to do what it does in markets pricing in certainly one for December, maybe one or two more for next year. But again, I kind of go back to all the craziness this week about AI and about what it means for AI. Again, Meta just came out with this mega euro bond offering. So it kind of feels like the market. Did you buy it? We have been a bit cautious on some of the hyperscaler issuance. So we were not involved. But I think the market is also grappling with there are these massive CapEx numbers out to 27, 28, 29.

22:53And so I think it's a question of does this blue sweep, does that change the speed of all of this build out? Does it change that? I love that. It's about the speed. It's about the first and second derivatives. I think it is. I mean, like we have had just exponential growth. And CapEx has been what has driven U.S. growth this year, right? Like that's that's not a deniable thing. It has been in the driver's seat. But I think people are still. Credit spreads have moved, but are still tight by historical standards. I think people are being choosy and they know that because of this pipeline, there's a lot more to come.

23:34But I mean, deals are still being taken down for sure. Absolutely. Focus this week here was on U.S. domestic elections. You guys think globally. So what's your non-U.S. call these days? So I think FX is a little trickier. When we take a step back, we still are a bit more negative, the dollar. But that has been a bit challenged. You haven't had participation from Asia. I think that is or dollar Asia. and I think you need to see dollar Asia resume lower so the likes of the yen finally participating and strengthening Korea coming back to the table some of those to to see a broader FX rally weaker dollar and then globally again we still say we've rallied now 40 50 basis points in the U.S.

24:26the rally has been driven by the or has been led by the U.S. more than the rest of the world. So we do still think that there's value in some DM. We think Europe has probably more value there. It's a kind of weaker underlying growth system. And in EMs too, I mean, Brazil, obviously, was that only this week? The second round election, maybe that was last week. I don't know. It's been, it's been a whirlwind. It's been nuts. It has been. October was a long month. Rob Waldner of Invesco wore a bow tag. Oh, yeah. That's how I'm sorry. I mean, I mean, was it? He had to match your style. It was amazing.

25:04Rob Waldner driving all the research at Invesco. So let's summarize this for mere mortals. I mean, you and Paul are like pro discussion. In this uproar, if I have fear of missing out in the Christina Katmany world, am I buying credit? That's a Paul Sweeney question. Am I extending duration? How do I express fear of missing out? Because to me, what no one's looking for is price up, yield down. Yeah, so it's funny. Our latest big right on our whiteboard in the office says less FOMO. So we're not doing fear of missing out. But I think a global fixed income portfolio still makes sense. We don't have to just be concentrated in the U.S.

25:47We're coming off 10, 15 years of U.S. exceptionalism. And we still think there's a case for global fixed income. Can you buy French paper? Not before the election. No, there's no need. We need to be wise about our choices. I think, again. I love harassing her. Thank you, Cy, for that question. It was very brilliant. We have another six months before the election in France. I think it will be noisy. Will there be opportunities to play? Yes. Are European government spreads exceptionally tight? Absolutely. So what that comment was is so Rob Waldner hears her say that. So she gets a junket to Paris to do research, Bob.

26:29Post-election, absolutely. I'm heading to Atlanta next week. Don't get me in trouble. Christina, in your portfolio, how do you guard against AI concentration here? Because it's not just owning an Invesco bond or something, but if you own a utility bond in Virginia, that might be. Yeah, yeah. It really, again, I think it goes back to that has been the driving story and the driving force of the U.S. economy this year. So it has been it's been utilities. It's been the chips. It's been the hyperscalers. It it feeds into all of these things. We have been and you guys know this from our conversations a bit more cautious on our of our three levers, FX credit, foreign exchange credit or rates.

27:08We've been the most cautious on credit just because of how historically tight we are. I think that still kind of remains our bias. I think there's still not really a case that you need to extend out the curve to duration yet. One question from Stephanie Ross. People are like, let's get to Stephanie. I'm like, okay, one more to Christina here this morning. I can't emphasize enough the hysteria around hedge funds, bonds. What is it? Core Weave? It's like a 16, 15 % yield or whatever. How should our listeners and viewers separate the noise of AI garbage paper from the real world to capture in a coupon?

27:51Look, I think like anything out like with stocks, with bonds, especially as an individual investor, to go be chasing the one name, the highest yields, there's obviously all inherent risk in that. I think broad portfolios, diversification, you want exposure to the theme. And I think when we take a step back, the theme of AI is because of the election or because of a wobble in equity markets is not going away, right? The pace may slow down, the way it's implemented may change, but I don't know, even we look at our own world and how your job has changed in the last six months and what we're trying to incorporate, that's not stopping on the switch of a dime, right?

28:34Christina, thank you. Christina Kemeny with Invesco here this morning. Greatly appreciate it. As we go to Stephanie Roth here, we say good morning across America. I guess it's a fully employed America. Change in nonfarm payrolls, two-month revision. Even I could do the math, 249 ,000. A big 165 number plus 84. A nice revision upwards. A lot of other data which bent price down, yield up the 10-year yield. now three basis points, two-year yield explodes, higher yield by six basis points. Stephanie Roth, to look at the economics of the moment. Stephanie, can you program out with this jobs report, with the inflation reports, with the data, can you program out a continued buoyant nominal GDP?

29:27Yeah, I think that's the environment that we're in. I think it will be slightly less than where we've been running. You're probably talking more like a four and a half percent nominal GDP for 27 as opposed to something that's notably higher as where we've been. But it's still, you know, robust economy and one that's incrementally going to be driven by real growth as opposed to inflation. This year, you know, the mix was a bit different because inflation was just running so hot for a variety of reasons. But like overall, the economy's buoyant and it's not just AI. The economy's running on firm footing outside of just the sort of the AI CapEx space.

29:59So, again, the change in nonfarm payroll data we got today says, you know, the U.S. labor economy is in pretty good shape. All right. If that's the case, let's turn to inflation here. What's your inflation call for 2027? Because I've got, you know, energy prices whipping all around here based upon whatever the latest tweet is. Yeah. Well, when you think about sort of forecasting into the future, energy prices are not going to repeat. I certainly hope they don't repeat what happened in this year in terms of sort of year over year growth rate. So you're naturally going to get disinflationary pressures from oil prices, even if they stay where they are.

30:31And there's good reason to believe that oil prices may sustainably come down a little bit. Therefore, you're going to get disinflation on a year-over-year basis from the things that were elevated this year. So anything related to sort of energy prices, anything from airfares, you're going to have the tariffs roll off the data. So all of these factors that kept inflation elevated this year because they were largely one off will fade into next year. And we're looking for at two and a half percent inflation, which is certainly higher than what the Fed would like, but something that's a lot more tolerable.

31:03Stephanie Roth goes right to where I want to go. It's like the budget lab at Yale, Natasha and Martha and all that. Stephanie, do you frame out an amendment to our tariff policy given the political bombshell two days ago? I think the tariff policy is largely unchanged. Really? The revenues are kind of too high to really make any adjustments from that perspective. So tariffs are going to remain. Come on. Come on. Stop. We're addicted to tariffs at a fiscal basis? Kind of at this point. And I don't even think, even if we have a Democrat in, you know, when in 2028, I'm not even sure we're going to bring down tariffs all that much, maybe on a targeted basis.

31:44But my expectation is the tariffs will remain elevated for quite some time because from a deficit perspective, it's not really attractive to trim them so much. I believe my recollection is the president of the United States touched on this with our John Mickleswaite in conversation. OK. Once the tariffs are in, they're like an addiction to politicians. Yeah, I guess so. You and I are paying them. Yeah. Look at the tariff on your vest. I know. That was unthinkable. That was unthinkable. So, Stephanie, given this backdrop here of a pretty firm labor market, a market where in 2017 you should see inflation come down somewhat.

32:22What does that mean for our Federal Reserve then? So these cases, they still go in December. They get that markets have been pricing the odds down the last couple of days, just given the concerns around AI, provided that the financial markets kind of hold up well enough between now and the December meeting. They're very likely to go in December. They certainly communicated that they want to hike again. The data have been firm. It's not accelerating a bit. And then we think they'll probably go once more at the beginning of next year in Q3, probably at the March meeting. And then at that point, you'll see the inflationary pressure subside a bit.

32:55You might see activity cool down modestly. And then the Fed can just kind of wait and see. And then they'll be kind of on hold for quite some time. So, again, that's pretty interesting. Backed up, because that sounds like things are generally in pretty good shape. Does that how do we think about it from the consumer level? Because, again, we have the K-shaped economy, but we don't see it in consumer spending. Consumer spending continues to hold up pretty well. That's the case for a lot of this year. The consumer has held up really well, even though, you know, they're the bottom end of of the consumer has certainly been a lot more challenged than everybody else.

33:29but because the strength has been persistent across the spenders that spend more, it's been masking any softness that's been happening at the bottom. That will probably just continue. We're likely to see, especially given the data that we got today, it's just further confirmation that the labor market is good. You're likely to see spending continue to remain fairly robust. It's largely a function of nominal income growth, which is tied to the labor market. How much are people working? How much are they getting paid? all of those trends are moving in a positive direction, energy prices, you know, the margin might come down a bit, which could then fuel a bit of a pickup in consumer spending for next year.

34:08Stephanie, thank you, thank you, thank you on short notice. I mean, it's better than Kevin Hassett. I mean, do we want Kevin Hassett or do we want Stephanie Roth? Stephanie Roth, anything. Wolf Research, and thank you for your work on the Fed Day as we decide as well. Stay with us. More from Bloomberg Surveillance coming up after this. If you invest or lead a business, one-sided views aren't enough. Join me, Brad Rogoff, and my team at Barclays Research as we debate what's driving markets on the Flipside podcast. Find the Flipside wherever you get your podcasts. With ChatGPT, you can do more than get answers.

34:48You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. ChatGPT can help you prepare. Connect your Google Drive, point to relevant files and reports, and ask Chat to research competitors, industry forecasts, and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team. Growing a business is ambitious, and ChatGPT can help you do it with confidence. Get started at ChatGPT.com.

35:26You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. I heard you had a tantrum this morning. You had Max Kettner on earlier. And you just said, we have to have him on surveillance. I have to. Why don't you bring in Max Kettner of HSBC? Sure. Max Kettner joins us here. Chief Multi-Asset Strategist for HSBC. Max, you're a grizzled pro. You've seen it come and go here. Love to get your thoughts about the market action over the past two days.

36:04Yeah, I've been quite surprised, to be honest, about the rip that we had, the almost 250 point swing that we had on Wednesday from the Asia session up until the US session. And that sort of retrofitting of the narrative, why the blue sweep isn't really that bad and why we've all expected it and the midterms being the risk clearing event. We've been pretty skeptical about that, to be honest. So Wednesday was quite puzzling to us. Yesterday, equally puzzling, but of course, we're probably more in liquidation mode, full on liquidation mode right now in terms of fast money accounts. But overall, the price action, particularly on the semis, it kind of does make sense because yeah, like for us, it's never been about risk clearing.

36:50the risk or the event clearing is about AI CapEx. It's the Antropic IPO in the next two weeks. Is it going to come? Is it not going to come? Right. It's about the Middle East, not really about the midterms. Okay, but is there contagion? I love, Max, I love your phrase, fast money accounts. Mere mortals aren't in fast money. We're like just trying to get to where, Paul? Retirement at age 90? Four o 'clock. Something like that. Max, is there a contagion risk of all this folly over to people more cautious, more slow money? I don't think so because, you know, we've had a lot of damage already. So when you look at, you know, the charts around how many stocks in the S &P or in the Nasdaq are now away from all time highs, have declined since the start of the year or have had multiple compression.

37:40You know, we've shown those charts in the last few weeks multiple times that actually your PE compression since the start of the year, or even only since May, since really the rebound after the Middle East will broke out after the rebound ended. You know, we've had an awful lot of multiple compression, both in tech stocks and in US equities. Look at tech. Look at S &P tech. We're now cheaper in S &P tech than the overall market. It's trading at a discount. So, you know, I think the contagion, you could have argued that maybe three or four months ago that that's a risk. I think we've derated so much now already that in order to talk contagion, I'm not sure.

38:23I would rather actually look at the other side of the coin, look at things like staples. Staples now traded over 24 times earnings and tech traded, what, almost 16. Now, that doesn't make sense. We know that doesn't make sense. Like a Costco going up almost 25 % in the last couple of weeks. A Walmart, a Target. Like, come on, in a world of tariffs, in a world of higher energy prices, to say, hey, I think the safe haven is buying the stuff that's exposed to the lower end of the K. That doesn't make sense. It's a point of timing now when we unwind that. Paul Swinney with a fast money headline. There it is, Paul.

38:59I mean, it's the ultimate fast money headline this morning. Yeah, Max was just calling out the Anthropic Trend IPO. So Bloomberg, red headline here, Bloomberg's reporting. Investors said to discuss anthropic IPO value at$1.2 to$1.3 trillion. Yes, that's a big number, but it is below what they had initially hoped to get, something closer to$2 trillion. So maybe the volatility in the marketplace is being reflected in this valuation here. Max, from your perspective, have you materially changed? Has your shop materially changed its view of AI as an investing theme? And if so, how? Not really. I mean, you know, the interesting thing is, if you looked at the chip prices over the last three months, look at, for example, P300, one of the oldest NVIDIA chips, the rental yield has gone parabolically higher in the last three months.

39:49And that's the funny thing, right? That, you know, fundamentally in the last three months, actually, the outlook for chips probably has become better. Unless you say, oh, in 2028 and in 2029, the picture is going to change upside down and they're not going to make any money anymore. But actually, in the last three months, they've become more profitable. Rental yields have gone up, not down. So if you told me three months ago, this is what rental yields, this is what the chips outlook is going to be. Trust me, my trade would not have been, oh, yeah, dump semis. Absolutely not. So the fundamental outlook I don't think really has changed.

40:24But having said that, is that the environment where we trade fundamentals? No. Like just go a month ago, a month ago, we didn't talk about AI. We didn't talk about tech or things. We talked about fiscal deficits. We talked about too much government debt and fiscal sustainability and how the 10-year maybe has to sell off to 6%. Who still talks about that? It's been a month ago. And a month ago, the narrative was only fiscal, fiscal, fiscal. And no one cares anymore. Let's wait a month. Let me get out front of your weekend note. We're down 6.25 % non-futures on the Standard & Poor's 500. You say you need to see more before you reaffirm a bull market.

41:02What do you need to see? Do you need to see further catharsis? Yeah, Tom, I think for us, it's really the sentiment and positioning side that we've been flagging in the last few weeks, that there isn't yet a contrarian buy signal, that in fact, some of even our contrarian sell signals are still flagging. You know, at the bare minimum, that needs to go. At the bare minimum, we want a full-on neutral sentiment and perhaps a couple of buy signals triggering. This is certainly the stuff that we look at right now from a broader positioning perspective. Obviously, yesterday, with no longer it just being a rotation out of tech, but really a broad-based flush out that has led to the VIX sell-off and VIX inversion and all these sorts of things.

41:49So that's the first kind of thing where we're looking at it and like, OK, this is good in the sense of capitalization. And the other one from an event risk, again, it wasn't the midterms. The event risk near term for the year end is the Entropic IPO. It's around the Middle East. So we've got to wait until, you know, it's as good as anyone's guess what's going to happen with the Middle East. And we've got to look at what's happening with the Entropic IPO. Is it coming? Is it going to be delayed? Is it going to be canceled? sold that i think in the next really two weeks that's probably going to be the actual risk clearing event for us well get one more if you were advising uh anthropic max would you say hey come to market the demand's still there we're not price sensitive we just need to get exposure here or would you say hey let's wait till this ai kind of uncertainty plays out like i definitely would you know what john i definitely would i would say come to market but actually make it a reasonable valuation.

42:44Don't try to squeeze it out because the worst that could happen to you is that you're saying, right, we're going to squeeze the lemon as much as we can in terms of the valuation and primary. And then we're going to listen secondary. And actually the stock dumps 20, 30 % on day one. I think the better thing, particularly from a sentiment perspective, is come out in a more reasonable valuation. And then you realize the first couple of days, oh, look, stock is up in secondary market. So that means sentiment around AI, demand around AI is still there. And that actually then, I think, would be, again, that would be the sort of clearing event for the entire tech sector, I think.

43:23That is so charming, Max. Ed Ludlow just fell off his chair in San Francisco. Paul, can you see the tech bro saying, let's come out so it has a nice pop in the opening? Max Kettner, you're a trooper. Thank you so much. Stay with us. More from Bloomberg Surveillance coming up after this.

44:06joins us right now with Bloomberg News. Anthony, I brought up Taiwan Semiconductor, and it's beyond elegantly down to a three standard deviation move yesterday. Did you see any sign of a bid in Asia on the Asia semi-stocks? Well, the bid in Asia is coming from local retail. So that's good and bad news. They've been buying all the way down. They have unlimited pockets from the money Asia is making today. You know, there's this huge exports out of Taiwan and Korea and that's ending up in people's pockets. And they are true believers in the AI story out in Korea and Taiwan. They will buy all the way down.

44:45And they bought$5 billion between the two countries just today from foreigners. They've bought$250 billion year to date from foreigners. So they have, you know, invested in the AI trade. But that's the good news. The bad news is they've been wrong all the way down. Professionals have been right. And the hedge funds right now are under so much stress that they blew out of their positions right on the opening. So we saw Taiwan open down 9 percent, which I know I've been trading Asian markets for around 18 years across a bunch of shops. I've never seen that. Korea opened down 9 percent, was halted for 20 minutes.

45:22And then the local retail bought it back. And just to conclude, the local governments are helping. So Korea has loosened margin rules. Taiwan is trying to limit short selling. But these are technical measures to slow the slide. The slide is coming from the U.S. and no one has any control over U.S. policy, nor any visibility on U.S. policy. From your window in Hong Kong, looking up that famous mountain, explain this to me. What does fear of missing out mean on the streets of Seoul, the streets of Tokyo? Well, now we have fear of being down on the year. That is much more important than fear of missing out.

46:00In June, July, we got a lot of greed in the system. Volatility was spiking. People were launching triple levered ETFs, etc. Now the narrative has become, oh, my God, we've had such a good year. How am I close to flat on the year? If you look on the terminal, you run a huge list of absolutely blue chip hedge funds that are close to down on the year. The likes of Aspex, Lone Pine, D1, Walleye. I covered these clients directly myself. These people are not stupid people. They're the best of the best. They work, you know, 16, 17 hours a day on the tech trail. And for them to lose 11 percent in October and then close on double digits again in November, two weeks in, that is coming as a shock to the system.

46:43People are not concerned about missing out. People are concerned about being flat on the year. We welcome all of you to an interesting Friday. Jobs Day coming up at 830. Of course, the politics of the moment as well within the United States. Protests in France. I think that's way below the radar this morning. Anthony Stephens from Hong Kong with Bloomberg News with his pro perspective on tech with Paul Sweeney. Anthony, I'm reading a lot of research coming off of Wall Street here this morning, and a lot of folks are saying a lot of the trading over the past two days has been technical in nature.

47:17What did you see from your perch in Asia? That's absolutely on point. When you see a coordinated bounce in volumes this late in the year, alongside a big pop-in volatility, a big pop-in implied correlation. We see a big tick-up in capital markets activity in terms of unwinding, people looking for block risk. We had Goldman on a Bloomberg article saying the phones were ringing off the hook. And you call up a sales trading desk. You don't call them for news. You can read the news yourself on the terminal. You call them for liquidity. That's why people are calling banks like GS or MS or JP. They want to get out using liquidity that's not in the market.

47:58And we saw that in the volumes in the U.S. We saw it in Korea. Right. So that's one thing we're seeing from the technical side. Now, fundamentally, it's a very different picture. And we've seen the street defend the fundamental picture. But that time horizon difference can be 20, 30 percent. On a standard deviation move, Taiwan's semiconductor is sort of a mirror image, sort of kind of like here of April of 2025. Anthony, it popped 259 % off that trade war, tariff war low. Right now, it's up 162 % from there, even with a pullback yesterday. Is anybody talking about a return to the linear extrapolation of what we've enjoyed the last year and a half?

48:42There's some discussion of the repricing of the profitability, right? There was this profit bubble. People like TSMC are booked out to 2027, 2028, right? Once you come off that cliff, though, if the democratic kind of vision of data centers changes, the pricing of that visibility disappears, right? So we have order books that are full up to 2027. And does it fall off a cliff right after that? So then the linear model of price mean reversion, you know, comes back into play. Because we were pricing until now a structural change in how these names are valued. These names used to be valued as cyclical plays, right?

49:20Some technology will blow up. You get a bunch of demand. You produce for that demand. And then it cycles back to being less demanded. People were pricing in Samsung, Hynex, TSMC. These things have fundamentally structurally changed to producing these mountains of cash. Now that has changed because 2028, 2029, you have no visibility. And this has been wonderful. Let's do it again. Let's do it seven days a week. I love it, Anthony. Major, major shout out to Mr. Stevens staying up late for us in Hong Kong. Anthony Stevens with Bloomberg News with some real cred on the Pacific Rim. Stay with us. More from Bloomberg Surveillance coming up after this.

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51:38You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube. Tony Crescenzi-Jones, Anthony Crescenzi, with all of his work in the bond market, with PIMCO, with all of his authorship. I mentioned Stiggums here earlier. Christina, no, it was Priya Misra. Oh, and his five oldest. Yeah, there's other books. as well. What was the job in your act when you were 24 or 26 where you needed to get experience? This is an odd thing. So in Staten Island, New York, where I was, I would drive to Sears, Sears Roebuck, the department store, which, by the way, you could use that as an example of how the Internet ages can change things and how AI could change things.

52:29But yet the 4.1 % job is where it tells you what we are worried about. Sears is gone. But here we are with 4.1%. Anyway, I would drive to the parking lot and try to see how crowded it was. That's how naive the analysis was. We didn't have big data. We didn't have AI to try to figure things out. I would go to Disney World and see whether or not, because there were periods of weakness in the economy, try to put your finger on the pulse and see whether or not the consumer was out there. And so those were odd ways, arcane ways, but they kind of helped me with sentiment. Because in the end, final word, you have to understand people to understand the economy.

53:06how they'll behave, how they'll react to things. And so in the end, that's what I try to attain. Did the election result this week, did it change your view, PIMCO's view on the bond market broadly defined? Well, let's do math. Instead of driving to Sears, which I can't do now, instead it's a Primark and a kid's store. Look at the destruction and wealth that occurred yesterday. No one knows whether it'll be permanent. The consumer doesn't know either. But apparently, doing the math, it's about$5 trillion of wealth destroyed. Now, importantly, the last five years, household net worth has increased$50 trillion to$196 trillion, a giant increase.

53:48So it's a small in that context, but that strength had driven the consumer. So if you do the math, the typical math an economist would do is to take three to five cents on the dollar of change and say that's what the change in spending will be. So if there's a$5 trillion hit to wealth times 3%, 5%, you're looking at a potential big hit to spending if it's sustained. But it's already – it's been pretty strong. So all it does is bring us back to Goldilocks. Goldilocks scenario is what PIMCO predicts for 2027 where growth is aligned with growth potential, which should lead to significant disinflation that helps the bond market.

54:26This is a charm of Tony Korsenzi, folks, putting it in scale. Five is one tenth of 50. I don't hear that, Paul. Let me check AI on that. In the narrative right now, I don't hear that common sense from Korsenzi. So it shouldn't change it. But the sense of balance, the sense of Goldilocks, just right economic growth, should lead to the disinflation story, especially when looking at the wage figure from today, 3.1 % gain year over year. juxtaposed against the productivity gain of this week. You see unit labor costs, as it's called, what it costs businesses to produce a unit of good or service, only up 2%.

55:06Now, that number typically, as the Fed is speaking this morning, John Williams, for example, that's consistent with 2 % inflation. That, along with, final word, housing, very weak. The housing-related statistics are important to the Consumer Price Index, 40-some-odd percent of the Consumer Price Index. and the inputs from that, for example, Zillow rent lease index below pre-COVID levels should be a moderator and lead to contribute to disinflation next year. So given that backdrop, because it's not the first time today we've heard that disinflation call for next year, does that suggest that this Fed can maybe, you know, hike in December if they want to and then just sit on their hands next year?

55:48Well, the PIMCO call is for another hike in December and potentially another hike in the first quarter. A lot could happen between now and then, but we'll see. What we believe is occurring now is the Fed is in the midst of a risk management exercise to ensure that the inflation rate moves downward toward the 2 % target, having missed on it for more than five years. And that's what Kevin Walsh is likely to do. Okay, like Jerome Snyder's, I probably had to medicate him after the election results here. But you're short. I mean, everybody talks PIMCO, you know, PIMCO total return long term. I want to go all Crescenzi here.

56:25One year, 96th percentile. Three years, Jerome Snyder failed, 85th percentile. Five year, 89th percentile. I mean, what is he doing? You know, I mean, he's not doing anything. Nathan Ciaravini's doing all the work. But what are you doing in short term? Nate's almost as tall as you, by the way. It might be taller. But smarter. And Richard, what are you doing in short-term paper to get that kind of sharp ratio? The regulated money market world, the so-called 2A7 world, confines an investor to super safe, super short instruments under 60 days, for example. Whereas we can step out a little bit beyond that 2A7 world into, for example, commercial paper that goes out a few months.

57:11getting yields that are somewhat above so-called repo. The repo rate today is in the 380s or so, but the commercial paper rate, this short-term debt issued by companies, is about 40 basis points over that. So that's one way to beat the index, along with lots of other opportunities that arise now. And then, for example, the period of stress when the selling of corporate bonds, short-dated corporate bonds, move up in yield and spread versus treasuries. And these companies are likely to pay you back in three, four, five, six, seven, eight months. So why not take a shot if you've done the research on those companies?

57:46Thank you, sir. Thank you so much for coming in here and crushing. Great to see you all. Anthony Crescenzi is executive vice president, portfolio manager at PIMCO as well. Look for his academics. He mentioned he's got like five, six books out. It's like Nancy Drew or the Hardy Boys. He's like putting out something every 18 months. A lot of good work there, I should say, as well. This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 7 to 10 a.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app.

58:23You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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