Stocks, Bonds Fall as CPI Data Fuel Fed-Hike Bets

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1:25This 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. Phil Newhart is Director of Market Economic Research at First Citizens Bank. It has been wonderfully patient in our world headquarters this morning with the Hex's press conference, etc. et cetera. Phil, thank you so much for joining us. Jay, is this inflation a buoyancy for revenues and then the stock market, or is this not good for equities? Well, it certainly has been a buoyancy.

2:04I mean, look at nominal GDP running 6 % to 7%. That is pacing revenues higher in the S &P. The concern I have is that we have two consumers. We have a K-shaped recovery. And when you look at the lower quartiles of the consumer, that inflation is crushing them. Look at the survey of consumer finances from the Fed. The bottom two quartiles, half of U.S. consumers have seen negative net worth gains from 2022 to 2025. Their net worth has declined over those three years. What happened? We had inflation, right? If you aren't exposed to stocks, you aren't exposed to the housing market, that is really taking a chunk out.

2:41I think that's playing out in the political sphere, maybe not in the earnings sphere, where we have earnings growing north of 30 % in the S &P 500. This is from Robert, who is working with the hedge fund, and I can't use his name. It's sort of like the disclosure thing. He models out core CPI of 2.8 % up from the recent low of 2.4%. That's some interpolation. When you go to Hamilton College, you learn both interpolation and extrapolation. Well, I don't want to take anything away from what Phil was just saying here about the importance of the PA, so to speak, the personal account, the wealth that has been accumulated across U.S.

3:23households over the better part of post-COVID, let's just say. It's really not been across all sectors. It's really just been concentrated in those with the very wealthy. And this is now being felt on the street where the consumer needs it most. And we expect more of this. Is that right, Phil? Yeah, I think this is a trend that's in place really probably until this cycle ends. Does it matter for the fundamentals of the market? I'm not so sure. Earnings grew over 30 % the most recent earnings season. That's the third straight month of north of 25 % earnings growth. All 11 sectors saw earnings growth as well.

4:00Earnings and the lower quartile consumer are two different things, and earnings are clearly driving this stock market higher. Well, what are your thoughts on this cross ownership? We talk about Anthropic, how all the Mag7 own it. I mean, just how much of these earnings forecasts, how much of the sum of the parts analysis is really a lot of their holdings of, or their writing up of valuations that might just not be worth what they once were. I think it's part of the story in terms of those hyperscalers. It's why the market has started to pay attention to free cash flow yield. When you see a hyperscaler report, the earnings number matters, but the free cash flow yield probably matters more.

4:34Then at First Citizens Bank, what are you hearing from your clients? I mean, I'm seeing adult portfolios lightening up on big tech is a basic statement. Is that what you're experiencing among your customers and clients? If you look at our internal equity strategies, they're factor-based. We're up in profitability. We do own tech, but we own defensive sectors as well. Staples, utilities. So a little bit of a barbell approach. Okay, but what kind of tech? This is my question of the day. What kind of tech do you own? We own it all. I think that what you've seen in semis in recent days just shows that if you're ultra concentrated in one industry, that you can really take it on the chin.

5:15It was interesting to see certain hyperscalers and the real noise of the two days last week actually rallied as semiconductors sold off. So we think you need diversification across the tech sector. Sorry, I'm going to make this up as I can. A giant of the bond market just walked in the studio. I had no idea he was with us today. A.J. Rajadaks is global chairman of research at Barclays. Can we talk to both of you at the same time? Because we have two different worlds here. I've got A.J. Rajadaks, definitive on fixed income. And I've got Phil Neuart of First Citizens Bank, really looking at the blended outcome of it.

5:52I've got Waller for the first time saying 50 beeps. I've got a manufacturer. Your economics department is aged today at Barclays. It's so screwed up. But I got an inflationary tendency. Do you just model price down yield up? Or is there something unique you see at Barclays that stuns the market? For December? For a December meeting? Get me out to 2027 as you can. Okay, so Tom, I'm lucky if I get the next two months right. Let's start with that. But no, I think the Fed will not rock the boat. They should. I mean, I've known Chris for a while, Governor Waller and I mean this with the utmost respect he has been a bit all over the place, if you remember he was dovish at one point, not so far ago he seems to be driven exactly by what is going on in three months core CPI, regardless of everything else so I don't think the FMC is going to pay heat to him saying we can go 50 the heart of the matter to everyone listening both Global Wall Street, the clients of Phil Noir and even Damien Sassauer, is this phrase of Thatcher, expect the unexpected.

7:06Are you and Barclay's research quoted worldwide on this, and particularly the hyperscaler debt issuance, are you expecting the unexpected or are we living with a predictable, guessable milieu right now? I think for monetary policy, we are living with something predictable. There are entire client conversations, 45-minute long meetings, where I don't mention the words Kevin Walsh once. And the reason is because what happens with the AI capex cycle, which is where the unexpected comes in, matters enormously more than traditional macro. So it depends on what you ask. Well, Phil, let me pivot to you here, because I go back to that SoftBank$11.1 billion high-yield bond raise just a few months back, And now I'm seeing this wasn't, you know, them writing down data centers like actual collateral.

7:55They were writing down$3.7 billion,$3.7 billion in non-refundable advance payments for data. I mean, that's almost like, you know, like they just, you know, burnt money, right? I mean, talk to us about what this means for the AI trade. Yes. If we look at fixed income, first, the point of higher yields, we see an opportunity in terms of balanced portfolios. We are reminding clients that fixed income is a viable asset class. You have an aggregate bond yielding this morning at 5.2%. So there's opportunity. Sector-specific, when you look at our fixed income strategies, we've really avoided the hyperscalers.

8:28We're just not comfortable there. We are emphasizing sectors like energy and financial. So we're fully invested, investment-grade credit. We do not play in high yield. But we've been pretty cautious around the hyperscalers, to your point, Damian. Well, look, I mean, do you see, I mean, look, I mean, Ajay, let me shift to you here. We've just seen an emerging market sovereigns, right? We've seen a lot of high-yield issuance hit the market, Pakistan, Egypt, Turkey, Colombia. You know, do you see the risk rising of crowding out into other areas of the U.S. dollar pay fixed income market? Yeah, there's no question.

8:58So just to put some numbers out there, Damian, in 10-year equivalence in duration, the U.S. private sector will have to absorb about$1.6 to$1.7 trillion in treasuries and IG, including the hyperscalers this year. Next year, that number goes up to about$1.9 trillion. And the problem is the amount of treasury duration that the market has to absorb goes down because the buybacks kick in full scale next year. So the amount of hyperscale additions is exploding. It's going up by a factor of at least one and a half next year. We say good morning to all of you across America, particularly to global Wall Street.

9:35We've got some great conversations coming up. Phil Nahr, thank you so much for joining us for First Citizens today. A busy, busy morning to Hex's Press Conference. And then futures coming down a little bit. NASDAQ off 1.1 % right now. In the yield market, A.J. Rogidox has aged here with a higher 12 basis point, two-year yield as well. I want you to discuss, away from your full faith and credit analysis, what it means for the off-balance sheet hyperscaler shenanigans. I've got Barclays. I've got Amanda over at Goldman Sachs, Morgensen and others. You guys are thinking as hard as you can about this.

10:18Yeah. What is the risk to our viewers and listeners of this off balance sheet? This is my own word, Damien, shenanigans. What's the risk? The risk is, and I don't think, Tom, this is a risk for 2027, but the risk eventually is of massive overbuilding on the compute side because each individual hyperscaler thinks they are making rational decisions. But because so much of it starts to go off balance sheet, they're not aware of what the others are doing. And eventually, I don't think this is 27, but you end up with, you know, an oversupply of compute, you know, that overwaves demand. And then problems start.

10:58I mean, big problems. Again, Satya is out there. You've seen that, right? Satya is out there talking to everyone, saying we're not going to repeat 1873 because we are watching the history of that. These off-balance sheet things make me uncomfortable. So blend your fixed income world into a quant world. What are the dynamics you see right now, almost the quantitative drift day-to-day of all this fancy paper? Is there something unique that you see in the Greek letters here that signal what could come? I think what we see most is that despite all the noise and hand-wringing about the extent of fiscal profiles worsening across the west the vast majority of the reason why bond yields are higher this year is simply because the economy was stronger than expected and the inflation was stickier than expected but tom premia associated with you and i worrying about us fiscal so you know solvability is not remotely reflected in in the tenure right now Stay with us.

12:04More from Bloomberg Surveillance coming up after this.

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14:13You'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. Right now, we're going to get back to where your inflation is. We start strong with Tiffany Welding, obviously economist at PIMCO driving all of their perspective. If I just go on to Google or whatever, Tiffany, and I look at this joke that we're modeling a 2 % target for whatever inflation is, You know, depending on how I look at it, I'm back five and a half years. When do we throw in the towel and get away from a 2 percent, 2.0 percent ridiculousness?

15:04Yeah, well, clearly the Fed has has missed their inflation target for for, I think, a more prolonged period than they're clearly comfortable with right now. You know, and ultimately, I think that's why you're seeing Chris Waller come out before the CPI report, you know, basically warning that if it's strong, that, you know, 50 basis point hike in December is on the table for discussion. You know, and when we look at the underlying details of this report, you know, it does like we're it does look like we are seeing, you know, a broadening out of inflation. Now, we think that it's related to passing through of higher energy costs, diesel shipping costs and things like that.

15:42If you look all across core goods prices, they were just unanimously strong. But also on the services side, you know, public transportation outside of airfares, you're seeing broadening out of increases there to offset higher energy costs. But then more generally services, ex-shelter, recreation services and things like that, they're also accelerating. So, you know, this is one of those prints that, you know, is incredibly disappointing for a central bank that wants to make sure that, you know, what should be price level adjustments are not broadening out into more inflationary pressures. Damien Sassar, what Tiffany Wilding just described is how I feel at home.

16:22That's simple. Well, look, I mean, Tiffany, you know, look, you rightly to point out Chris Wilder's comments earlier this morning, but this is just the tip of the iceberg this week. Now, I mean, we see a lot of Fed speak coming through. Can we can can any Fed governor outgov what Waller just said this morning? Well, I think what we're looking for now is is that you have some consistency across the the language of other Federal Reserve officials. You know, so it does seem like as you've had Chair Warsh that has stepped back from any kind of guidance, whether it be framework or forward or what have you, that Christopher Waller has sort of stepped in and, you know, provided a bit of a guiding light on what the central bank may do.

17:07And it does seem like after he speaks, there is more of a thematic effort from others to sort of echo and emphasize what he has said. So I think what we're going to be looking for is other central bank officials and how they're viewing this report. Clearly, 50 basis points is on the table. Now, what I would say here as well is when we look across the inflation data and the broader economy, I mean, we don't think the Federal Reserve is sort of behind the curve like what it looked like in 2022. Now, of course, you know, that early on, you know, did appear to have more transitory factors, you know, clearly than inflation broadened out.

17:49You know, but if we we look now at, you know, the Fed's own Taylor rules, for example, you know, they're not that far away from what monetary policy rules would suggest they should be. You know, whereas in 2022, you know, those simple Taylor rules were suggesting that the Fed was, you know, much lower than they should have been. So we still think this looks like an adjustment. But nevertheless, it's concerning that inflation does look like it's broadening out a bit here. I want to get back to first principles, folks. Codified by Greenspan, they used to do eighth of a point. Codified by Greenspan was a quarter of a point, 0.25 or 25 basis points.

18:28And all of a sudden today, we're talking, Tiffany Wilding even said the 50 basis point phrase there, folks. I mean, Damien, it's just too much. Well, Tiffany, I'd really love to get your opinion on the true state of the U.S. consumer here. And more to the point, you know, what is your belief? Like, what is the impact of equity market valuations and, of course, housing affordability on the U.S. consumer? Do you see it sentiment deteriorating at all here? Yeah, I mean, I think higher prices are certainly weighing on the consumer, at least certain consumers. We've been talking about the so-called K-shaped economy for quite some time, where you have higher income that's doing quite well because they are enjoying the equity market gains that they've received over the last number of years, several years.

19:17And I think that's still the case, But, you know, I think what we're seeing is just that demand in the U.S. economy, you know, is incredibly strong. And that is, you know, despite the various shocks and headwinds that we've seen this year, the energy shock, you know, tariffs and otherwise, we've seen consumption and also obviously investment, which is related to the A.I. buildout that's been incredibly strong. Now, we think some of it cools from the kind of breakneck pace that we saw in the third quarter. And you get some of cooling that is happening in the fourth quarter, the first quarter of next year.

19:51But nevertheless, I think what the Federal Reserve is concerned about is that you have an economy that looks incredibly strong from a demand perspective, final domestic demand. And you have inflation that looks stickier than they would like here. And so they want to make sure that they keep financial conditions broadly tight and from easing anything here to reduce the risk that these inflationary pressures broaden out. Tiffany, 50 basis point welding, thank you for joining us this morning. She's with Pacific Investment Management Company, PIMCO. Stay with us. More from Bloomberg Surveillance coming up after this.

20:39you'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 cameron dawson gets us started strong did a new edge wealth and she knows i'm gonna rip up the script i mean you know i gotta go there my essay of the year is Rob Arnott and Cam Harvey and company talking about below revenue is gross profit. That's what they look at. All the other noise is there. I've got a technology industry we're addicted to where Microsoft has a gross profit of some ginormous number here.

21:21I'm bringing it up right now. Gross profit, 66 cents in the dollar. Yep. Generous Mills, just out where they reorg is half that, 33 cents on the dollar. Why should we invest in a less profitable everything else out there in the market? Well, you know, it has a gross profit that's even higher than that. It's Micron at 86 cents on the dollar. And that's an incredibly impressive stat because we've been in this world where demand for semiconductors has been absolutely powerful. That has led to huge gross margin expansion for a name like that. But we know that those gross margins are not sustainable, at least on historical standards.

22:01But what's fascinating is the market expects them to keep on continuing higher, expanding further, staying at these very, very heady levels. But history would show that once you start seeing gross margins start to roll over for a cyclical company like a micron, they typically don't fall a little, they fall a lot. Oh, it's my turn, huh? Oh, great. Thank you. So I need to... First time anchor. I'm just waking up. Cam, the Anthropic IPO, right? I mean, about a month ago, we were looking at a 2 trillion market cap. Now we're looking at 1.1 trillion. We know that Amazon, Alphabet, a lot of these mag seven companies own large stakes of Anthropic.

22:40My question for you is, I mean, we saw Amazon back in June, you know, 200 billion, you know, stake in the company. How much of that has been smoothing out their earnings in recent quarters? And as you do this, some of the parts, as walk the motor in, and valuation of these companies on a forward basis. How much of that factors into your analysis? Remember in the first half of this year, we saw massive contribution from below the line gains on non-marketable securities, which is just a way to say that Anthropic and SpaceX gains were massive drivers of earnings upside in 1Q and 2Q of 2026. And the reason why those gains happened is because the companies were raising capital in those quarters.

23:18If you look at the last time that Anthropic raised capital is about a$985 billion valuation. So when Anthropic goes public, let's say it comes out at$1.1 trillion, that will be an uplift to somebody like Google in their overall earnings. But the challenge you have is that that's not nearly as much as what we saw in the prior funding raises and the increases in the valuation that we saw. I would look very closely at 1Q and 2Q 2027 estimates. Important to note that the street currently has headline earnings growing above the 2026 estimates, which means that the operating earnings are expected to make up for those gains and then some even when they don't repeat.

24:00Cam, there's clearly a positioning dynamic in play. You've mentioned it in your notes. You know, I look at the low ball factor, the style factor in equities. I mean, we've seen an 18, 19 full percentage point round trip. I think was down 9 % only a few months back. Now we're up 9 % on the year. So sentiment is shifting. Talk to us a little bit about the industry that you're watching most here as a sort of gauge of litmus paper, so to speak, Tom, of investor sentiment. Is it the banks? Yeah, we've been thinking that you need to watch the banks very, very closely because the banks will effectively tell you whether or not they see this issue happening with some of the questions around AI funding and the sustainability of that trade, whether or not it becomes a bigger economic issue.

24:41If the banks hold in, mostly the regional banks, some of the large cap banks are skewed by investment banking, year over year comps being very tough. But watch the regional banks. If those remain in uptrends, if those continue to hold support, it's effectively the market saying, look, we're not so worried that this becomes a broader growth scare. It's more contained. I want to go two ways here. One is off the banks there. And to me, the whole thing hedges on the banks doing well, given a sustained nominal GDP. I think it's been a dearth or quiet since the election. Are you modeling out at New Edge a continued buoyant nominal GDP that keeps the gravy train going?

25:19Well, remember, we have two components of nominal GDP, real GDP, which we don't see signs is going to slow materially. But then you have the inflation part of nominal GDP. And that's where we continue to expect inflation to run hot in the near term, but start to ebb off when we get into 2027 simply because of your comparisons with energy prices. Yeah, OK, I get that. Energy prices, Brent crude,$90 a barrel, West Texas Intermediate,$85 a barrel. Are you modeling out a nominal GDP that just ebbs back so the gain keeps going? Or is it something more dramatic? Yeah, look, we don't see a big fall off in underlying real GDP demand.

26:02If that was the case, if we were thinking that we needed to cut forecasts for 26 or 2027 real GDP, then it certainly would augur a more risk-off kind of environment. But we continue to come back to the fascinating point that household consumption forecasts are now higher today than they were prior to the war starting, which just means that forecasters are not seeing overall the energy shock causing households to pull back in a meaningful way because there's been offsets in other things like OBBB and the wealth effect. Cam, the U.S. Treasury 10-year yields off, what, something like 43 basis points off its October 5th peak now.

26:40It's come down quite considerably. Back then, BlackRock was saying, you can easily build a diversified fixed-income portfolio with an A-minus rating, a 7 % yield, and a duration of three years. Has that changed? Well, you're not getting nearly as much yield as you did at those peak sell-off points. I would note that we're finding support at the 10-year or the 100-day moving average for both 10s, 2s, and 30s. We have some hawkish comments coming out of Waller this morning, which is giving a little buoyancy to those two-year yields. So could we find ourselves in an environment where yields start to march back up?

27:16The thing I'd be watching closely is economic surprises. Typically, we see a strong relationship between the 10-year and economic surprises that's broken down in the last month because the tenure has rallied on equity market weakness. But the reality is, is if economic surprises continue to push higher, that puts upward pressure on tenure yields. Kim Dawson, thank you so much for New Edge Wealth this morning there on the banking sector. Stay with us. More from Bloomberg Surveillance coming up after this.

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28:53You'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. Delance Coupintracht with us with Yardini Research this morning. And they've got a blistering note out post-election. To be clear here, you're still in the equity market. You're still long the Yardini roaring 20s, even after this election. We absolutely are. Yes, sir. We think, you know, there has been a sell off on Wednesday following the elections. We think investors have been a bit quick to price in that there is going to be this roadblock to the AI investment boom.

29:35Look, we think there are going to be constraints. We split them up into three main constraints to the build out financial constraints, political constraints and physical constraints. But we think there are going to be speed bumps on the path of the AI investment boom and not roadblocks. So we are quite optimistic. Are we undergoing, you know, I know it's a shift in sentiment, but is it a beta regime shift what we're witnessing here? I mean, I'm seeing the low-of-all style in equities, you know, rallying here. I'm seeing bonds coming off. I mean, I'm seeing oil prices come off. I mean, talk to us about the beta regime.

30:06How does that factor into your, you know, asset allocation view? Mm-hmm. Something Ed Yardini is very good at is really separating signal from noise. That's something I've learned from him. And despite all of the volatility that we're currently seeing, we're sticking to our 7 ,900 target for the S &P 500 by year end, 8 ,400 by mid-next year. That continues to be our anticipation. Well, I mean, look, but earnings are still, even though we've seen the sell-off in rates, I mean, earnings yields are still so, so low. So on a valuation perspective, on a quality perspective, you know, talk to us about that.

30:41Is it going to be tech? Is it leaning into tech here? Is it leaning into growth? Is that how we get to those numbers? Yeah, absolutely. Great question. So we think what we have seen throughout this year essentially is this tug of war between FIMO and FOMO, right? We have seen fabulous earnings momentum surge, but the fear of missing out. So the PE multiple has contracted quite a bit. We think you may actually see a reversal of that throughout the rest of the year, because when you look at current analysts' earnings expectations, they're assuming 2028 EPS at 495. Our 2028 EPS is only 450. So there's a$45 delta there.

31:17So we do think there is some irrational exuberance in earnings that is expected to come in a little bit. But maybe that then allows the multiple to lift as investors feel more comfortable about the earnings. The hallmark of Yardini research is Yale economics into the stock market as well. The underpinning of a street earnings number, which I can't frame it such a big number, or Ed Yardini and Elias Gripenchag's more responsible number, is a continued boom economy. That's the core Yardini thesis. Is any of that subdued or broken? No, we don't think so. So we split this economic resilience in three pillars.

31:57You have a very strong consumer because of a labor market that is resilient because of the wealth effect. When you look at second quarter net worth, it's surged by record amount. Then you look at business spending that is also still very resilient. We think the AI investment boom will continue, albeit at a slower pace. And then you have the government with a 6 % fiscal deficit during an economic expansion. So the government is printing money, is injecting money into the economy during an economic expansion, and that is also adding to the fuel that we're seeing in this economy. Well, I know Ed and the team are bullish on equities, but what if you wanted to be defensive?

32:32I mean, I'm a big baby. I don't believe in this whole tech thing, let's just say. And, you know, what sectors, where do you go if you want to hide out in the current environment? We know the Japanese yen, the Swiss franc haven't kind of behaved as they normally would, historically speaking. I mean, where do you go? Do you go to utilities? Where do you go? Diversification is a beautiful thing. So what we have seen throughout this year, a pretty strong correlation between oil prices and the 10-year. It turns out that the biggest driver of the 10-year probably is the AI trade. So very strong correlation between the 10-year and the NASDAQ.

33:03So we think if you expect the AI investment boom to slow, which is likely then going to suppress economic activity, bond yields are the place to be. The 10-year is the place to be. So we just saw, obviously, the rally in U.S. Treasuries. You know, yields are down. And, you know, what side of the dollar smile was really causing that? I mean, do you see it being, you know, this flight to quality, the safe haven bid that was driving the bulk of that move? Or was it perhaps the echoes of U.S. exceptionalism again, this resilient U.S. economy that you, Ed, and the team kind of talk about? Do you mean the midterm reaction?

33:36Well, I'm talking about the last month, month and a half, really, where you've seen the U.S. 10-year Treasury yield come off something on the order of 43 basis points. I mean, what was the big driver of that move? Yeah, look, we think the 10-year reached a level, it turns out, that starts to take some heat out of this hot nominal GDP, right? We started to see financial constraints on the AI build-out intensify, and the 10-year started to come in. I got to get this in. It's too important what we're talking about, folks. So price down, yield up, and that breaks the economy. Does that assist the Fed in a tightening cycle, a la Waller's comments today?

34:15Great question. And Christopher Waller talked about this. Christopher Waller. Fed Chairman Kevin Walsh talked about this, right, during the October FOMC meeting. Financial conditions tightened somewhat. That allows the Fed to be slightly more patient here. Look, we think the number one job of the Federal Reserve right now is to get rates back to neutral. We think the neutral interest rate is between four and a quarter and four and a half percent. I think that is where the Fed needs to get back to. And that's 50 more basis points of hikes here. Elias, thank you so much. Elias, you've been talking with us with your Denny Research.

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