← Bloomberg Talks
Loading summary
Transcript21 lines
- [00:01]
IBM Representative
The thing about AI for business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across hr, IT and procurement processes, we've reduced costs by millions, slash repetitive tasks, and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM,
- [00:33]
Torsten Slok
Bloomberg Audio Studios Podcasts Radio News
- [00:37]
Interviewer (Bloomberg Host)
we're pleased to welcome Torsten Slok. He is chief economist at Apollo for this macro conversation. And Torsten, you heard what Mike was saying about inflation expectations and we see that in some measures what are you thinking about inflation expectations? Because there's market based measures, there's also survey based measures. It's not really time to worry until everything points in the same direction. Right?
- [00:59]
Torsten Slok
Well, and the key issue is that of course headline inflation is showing signs of higher inflation. That makes total sense because headline inflation also consists of food and of course importantly energy core inflation expectations. We don't quite know yet what they are doing, but what we do know is that when you look at various other sentiment indicators, including today, we've got consumer confidence also starting to go down. If you look at the daily indicators for consumer sentiment from morning consult is also going down for low income, middle income and high income households. But the key issue at this point is that if you look at the actual spending, the daily data for how many people travel on airplanes is still good. The weekly data for rates book, same store retail sales, meaning what was sales in stores last week relative to the same week a year ago is actually also still very strong. And what you're also seeing, even hotel demand on a weekly basis from Star is also very strong. Both rev is strong, the daily rate is strong, the occupancy rate is strong. So there's a very different divergence between what are consumers saying relative to what are they actually doing. So at this point, the duration of the shock has simply not been long enough to actually create that demand destruction that we all worry so much about.
- [02:02]
Interviewer (Bloomberg Host)
Right. And in fact if you look at longer term inflation expectations and you see that within universal University of Michigan sentiment survey today, those are well anchored.
- [02:10]
Torsten Slok
Absolutely. So both on a market basis and a survey basis, long term for inflation expectations are very, very stable and have not shown any signs of going up. In fact, some of them have actually started to go down. So. Exactly. The Fed would mainly worry about markets getting worried about inflation becoming out of control. Maybe. Yes. In the next year we can Call that transitory, temporary, whatever we want to call it. But it's very clear the market is saying this is absolutely something that's only here for a very limited time and then we will go back and have inflation expectations at the longer run more stable.
- [02:38]
Economics Commentator
Now the one difference here between the Wall street folks and the Fed folks is perhaps the inflation indicators they're looking at. CPI has been going down and it'll obviously on a headline basis go up a PC even without oil has been rising and that's the index that they follow. When you listen to Fed folks, they're not talking about rate increases yet, but have they pretty much wiped out the idea of any rate cuts this year? Because the Bloomberg survey today showed economists think we're going to see a rise in inflation, but we're still going see two cuts before the end of the year.
- [03:11]
Torsten Slok
Absolutely. And what was also very interesting, the ECFC go Bloomberg survey was that the probability of recession actually went up from 25% to 30%. So we almost looking at more bifurcated distribution where either you worry a lot about inflation being higher and potentially above 3 now for a very extended period, meaning at least the next several quarters. Alternatively, people are beginning to worry about that maybe there is a harder landing that is also potentially an outcome. So that distribution tells you exactly what the problem is for the Fed. Namely they worry on the one hand about inflation being high, but they also worry about if the labour market begins to deteriorate, including of course also if AI puts upward pressure on unemployment. And all those factors are of course the challenges for the Fed. Namely how much should they put a weight on inflation relative to how much weight should they put on the risk that the labor market might begin to deteriorate over the next several months.
- [03:56]
Interviewer (Bloomberg Host)
Well, let's stay with the labor market because the jobless claims numbers that we got this week ticked up slightly but remain pretty much near historically low levels. Is the low, higher low fire market still intact and at this point not an immediate source of concern?
- [04:10]
Torsten Slok
Absolutely. I think it was low, higher low fire because of the trade war for most of last year and now I think is low, higher low fire because of the energy shock. So that's why companies are responding in probably the most rational way by saying we don't really know exactly how long time the shock will last, we don't know what oil price will go to. So for that reason it makes sense that the labor market continues to show this fairly cautious overall properties especially as you mentioned Scott, that jobless claims continue to be relatively Low.
- [04:37]
Interviewer (Bloomberg Host)
What will we need to see in the jobs data, whether it's high frequency data or the monthly reports to signal some kind of Fed relief is on the way?
- [04:45]
Torsten Slok
Well, the key issue of course is next Friday and particular for fixed income more broadly. That is the most important number across the board, both for rates and for credit. Namely, is the economy still producing jobs? Or as we saw last month, are we still losing jobs the way that we did with the 92,000 decline that we saw in the previous month? And the key issue therefore becomes the labour market data is just taking a very, very prominent, more important role than usual because inflation is telling us to hike. But now we certainly have that. The other side of the dual mandate, namely the labor market might begin to show some more cooling, especially now that immigration restrictions and the labor supply is also weighing down on the overall outlook for non farm payroll. So that's why next week is becoming very critical for thinking about what is the Fed going to do? Because so far it's been easy for them in the ACP this week to just say, oh, we rise up inflation and they also revised up gdp. But if the labor market begins to show softness, then that would of course become more challenging for them.
- [05:37]
Economics Commentator
I have to ask you, when I was studying economics, they taught us a couple of rules. One was it's never different this time. And another was you can make a point forecast or a time forecast, but never the two at the same time. But in your chart this week, and this has gotten a lot of play in social media, you say we're going to have a very short term disturbance in the bond market and 50 years of security in the Middle east that will keep down oil prices. That's quite a time forecast.
- [06:08]
Torsten Slok
That's true. But I think the logic really here for investors is quite simple. We should all be stepping back and looking at this with a much more long term perspective. Let's agree that the situation we have today, it's not sustainable. We cannot have this. We can discuss for how long time. But we cannot have this for several years. Definitely not. And we cannot perhaps even have it for several months. And if that's the case, we should expect to have some resolution. It makes sense that it's complicated for everyone to figure out what is the military strategy, what's going to respond on both sides. But the conclusion must be that from a market perspective, we're getting closer to the midterm election in eight months. From that perspective, there's probably also some political considerations both in Iran and in the US that comes to the conclusion 50 years. But I do think that at the end of this, we will probably have a situation that is quite different in the sense that we will probably have, at least from the GCC side in the Middle east, probably more connection with the us, probably more connection with Europe, and therefore probably also more stability more broadly relative to where we were just a few months ago.
- [07:06]
Interviewer (Bloomberg Host)
All right, well, I mean, we have to get through the fog of the current next few months in order to get to that point. You did bring along a chart with you this time that shows that there's a lot of supply coming to market. Investment grade supply, a combined $14 trillion worth of supply. How did you get to 14 trillion?
- [07:21]
Torsten Slok
Yeah, so the chart you look at here, it shows you from the treasury, they put out data. What is the total amount of U.S. treasury debt that needs to be refinanced in the next 12 months? And as you can see in the yellow line, it is about $10 trillion that needs to be refinanced. In other words, US government debt that rolls over. So this is bills, this is coupons, this is across the whole curve. If you now add to that two other things. On top of that line, we also have 2 trillion in government budget deficit. So that brings us to 12 trillion. And finally, we also have about 2 trillion in net gross issuance and from the hyperscalers and the banks and ignore. So that means that the total supply of investment grade bonds that are coming to the market is about 12 trillion from the government and 2 trillion from corporates. That brings you to a number that is roughly given us GDP is 30 trillion, roughly 50% of GDP that needs to be absorbed by financial markets. That's a very, very, the highest number we've seen in history. That's a very substantial amount of bonds of investment grade credit and investment grade bonds that are coming to the market. So the short answer is if we already worry about inflation going up because of Mike's job, with inflation expectations going up, we have tariffs putting upward pressure, oil prices putting upward pressure. We have a fairly strong economy also putting upward pressure. And now we also have significant supply coming to the market. That does bring the risk that there is some upside pressure on rates both in the front and the long end. And that's also on top of that because of the significant increase in IG debt. Also upward pressure on credit spreads. That means that both spreads and credit are under upward pressure for these technical reasons. And also the level of yields in rates is also under upward pressure because of the supply being so significant.
- [08:50]
Interviewer (Bloomberg Host)
So very quickly, how are you thinking about the demand dynamics then? Because we already know what the supply is going to be. It's. There's going to be a time of it.
- [08:56]
Torsten Slok
Well, that's why a lot of the people who spoke just before we started here discussing exactly saying that this is actually an interesting time to look at the level of yields. Especially if there is now an environment where oil prices might eventually come down and especially if people begin to worry about that the economy might also begin to slow a bit down. If that's the case. You both have a level of base rates that's higher temporarily at the moment, but you also have spreads in credit that's also temporarily higher and that's just given all in yield in credit, both in investment grade but also some parts of high yield. That actually looks quite juicy. Software has its own problems, but the rest of the high yield market is actually generally also looking at yield levels that are at more interesting levels at the moment.
- [09:33]
Interviewer (Bloomberg Host)
All right, Torsten Slack, thank you as always for coming in towards the slack of Apollo, the chief economist at the firm.
- [09:39]
IBM Representative
The thing about AI for business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across hr, IT and procurement processes, we've reduced costs by millions, slashed repetitive tasks, and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM.
- [10:08]
My Policy Advocate Narrator
Here's a paradox. We buy insurance for peace of mind. Yet the very policies we trust can deliver the biggest financial shocks Across America. Millions of claims are denied every year, not because people did anything wrong, but because policies quietly exclude the things that happened. The psychology of trust tells us we assume the contract is fair. But in insurance, the information gap is massive. The insurer knows every detail of what's covered. The policyholder rarely does. That's where my policy advocate comes in. For just 27 cents a day, their platform reads your policies and shows you in plain language where you're vulnerable. They're not selling insurance. They don't do that. It's about transparency, giving ordinary people the same understanding insurance companies have had for decades. Because when you know what's really in your policy, you can plan, protect and avoid surprises. Before you trust your policy to protect you, let my policy advocate tell you what it really says. Visit mypolicyadvocate. Com today. Peace of mind starts with knowing the truth. Mypolicyadvocate com.