Transcripts For BLOOMBERG Bloomberg 20240704

Morning. This bloomberg surveillance. More than a decade since the last one, s p Global Rating the gene the top rating for u. S. Of america. Fitch follows up after the close yesterday with this quote, the written downgrade of u. S. Reflects the expected physical deterioration over the next three years. The erosion of governance relative to aa and aaa rated peers. Whether it is justified, and if it matters, are two different questions. Lisa i would agree as this is the second Major Company to downgrade u. S. From aaa rating. The response arbitrary and based on outdated data. That is janet yellen. Larry summers the idea that it is a decreased default risk is absurd. Here is the question, is there Something Real behind this in terms of how much Interest Rate expenses are going up and like a convention there is on capitol hill . Jonathan theres governance issues u. S. Has that is inconsistent with other aaa rated peers like germany. Lisa i would agree because we were talking about u. S. Possibly defaulting on debt even though there is not a fiscal issue. It raises serious questions. Fitch first raised this issue back in may. It stuck two is because even as u. S. Government worked with the debt ceiling. This highlights the ongoing concern that this will be an issue every year Going Forward. Jonathan equities negative. 75 on s p. On the bond market. The market fallout, can we called this far out on the screen . Lisa as we did notice that said had to do not buy it. I read one, it is an excuse to sail and capitalizes with the gains especially in light of the main data out of china and certain sectors across the world. I buy that more than i do this because the move has been always the same. Go into treasuries. The exact opposite if you expect a decrease default risk. Jonathan secretary yellen, whichs decision does not change with americans, investors, people around the world now. Treasury securities remain the worlds safe and liquid asset, and American Economy is fundamentally strong. How did this will go down . Annmarie is going down differently depending on who you ask. Republican is going to point to biden and save the president and legislate of agenda he is on has added more money to the market that is increase inflation. Now you have this downgrade. Democrats are going to show brinkmanship and chaos that sometimes happen on capitol hill. That is Something Interesting about the downgrade. It comes after they were able to come to is a consensus on raising the debt ceiling but what fitch is looking at is going to 10 is there is not a lot of consensus about appropriation and because the a Government Shutdown and fitch seems to be evoking with a and americans see all the time. There is constant 11 hour deals being done in washington. It is not important for the Fiscal Health for u. S. Jonathan they reference that directly, governments issues the last two decades has manifested in repeated debt limit standoffs and lastminute resolutions. Is there any reason to believe the last minute standoffs and anytime soon . Annmarie absolutely not. This happens time and time again. Remember when s p downgraded u. S. 2011, they also did reach an agreement on the debt ceiling, yet they were still downgraded because this brinkmanship is the concern even though fitch did point to what the charges terry treasury secretary tried to get across to the american people, u. S. At this moment has good momentum and Economic Health but it seems fitch is incredibly concerned with the brinkmanship in washington. Going into an Election Year is going to get much worse. Lisa the comments i have read have a say it does not matter to markets, politics, to a lot of people who are shrugging it off is saying why are you doing this, on the other hand, u. S. Interest rate payments have increased by about 50 the past year to nearly 1 trillion a year. Looking at likelihood of increased default risk based on the brinkmanship alone. Is anyone in d. C. Who does care, does not necessarily agree with janet yellen and thinks it is a big deal . Annmarie republicans do and im sure well hear from more of them as the weeks go on. The issue politically with the downgrade, people are shrugging it off, treasury secretary is call it arbitrate them and others are puzzled because the timing and why it is happening on the with the need to looks good, the fact is, this president , Biden Administration will own a downgrade on their watch, this headline will not be used in every campaign ad and we know time and time again the economy consistently ranks top of americas mind they had to the polin box. Jonathan we will catch up with you in the next hour. We talked about the governance issue being inconsistent with peers who were rated aaa by fitch and others. Also the debt burden, and consistent with peers elsewhere. U. S. Debt burden set to reach about 100 of gdp by 2025. Take the median of others in aaa bucket, it is 39 . It is night and day. Lisa especially at a time of raising Interest Rates. Rapid pace that the fineness and are increasing is going to raise eyeballs especially today when we get refinancing plan from the Treasury Department. What do people do . They buy treasuries. That is the haven trade. You have resilience and robust growth that is outpacing some of the other nations to have smaller debt loads. Jonathan it is all we had a visceral reaction. I believe that the American Economy u. S. Debt market as a special place in our market universe, it is the sun and everyone else orbits the sun. Theres nothing else out there. For a lot of people u. S. Is never going to default so why weatherbeaten anything other than aaa will it be anything other than aaa. Lisa Fund Managers came out overnight is it are we actually going to adjust anything as the arbor portfolio because of this . No, not a chance. Rating agencies have not boasted their credibility the fast 20 years. Jonathan terry haines joins us now. We have seen little more these before. Can you tell me whether it is justified . Terry the issues you have brought up is valid about Interest Payments and the rest. I will start their. Politically it is bad news for biden. I question fitch across the board and the timing. Fitch is older than the debt ceiling. They were founded three years before the first debt ceiling law happened. Now they are be staring themselves to complain about the process through which u. S. Appropriates money and. Deals with its debt. Whatever else is going on, i think there is a motivation that is less pure the people want to talk about. The economists, lots of the same people complaining about fitch, are the same people that were entirely silent through the money printing and fiscal bloat era. Think they are more concerned that might be ending for good. I think overall this is not going to be worth very much. Lisa there is concern over how much the budget is ballooning in debt versus gdp, how much Interest Rate expenses are going up. To that idea they went from 600 billion 200 trillion a year is shocking given Interest Rates going up. To 100 trillion dollars a year is shocking given Interest Rates going up. Is anyone talking about remitting this or bringing in because that could cut benefits . Terry no, they have not talked about it for decades and they will not talk about it. The concerning news every year when spending is fix is the same thing. On book spending tends to be more or less status quo with minor adjustments. The outlook obligations, whether the Student Loan Debt or housing, are humongous. That is never dealt with. It is not going to be. Theres no percentage for any of these politicians to want to take it on. Theres no percentage for the white house to address it forthrightly and explain to the public why it is a bad thing, buy it and also attacks on them. Why it amounts to a tax on them. Lisa you said it would be politically damaging to President Biden to the election, it comes at a time with indictment of former President Trump, people thinking a runoff between biden and trump, would end up with abiding winning biden winning. Do you question that the echo terry i never thought he was a shoe in at the time and a student not today. You can go back to her three months ago where Different National polling and see that trump was either between biden was running neck and neck with him. That is still true. The indictments for meat mean markets have a lot less certainty about what the outcome is going to be. I think theres going to be more trepidation in this and this goes on for a well as a silent market negative. Jonathan theres a sense that we have lost sight that is as if its the country create to go to federal charges comes conspiracy to the u. S. , for sperry to obstruct a special proceeding, these things come up and people in this country, many of them shrugging their shoulders. How serious are some of the charges . Terry the charges are quite serious. To prove them is difficult. You have the world where trump is indicted, you got a slight reach in biden matter where slurge in the biden matter whereby the seams have been involved in his sales business which is directly contradictory to what he has been saying for years. That is a problem. You have a situation with prosecution is selfaware itself where the indictment where trump has the right to speak publicly about the election or to claim closely there have been outcome to terminator fraud, but now were going to start prosecuting based on what he did about that. The prosecutors going to have to establish motivation and it seems a few good men code red examination, cross examination. If youre going to have to get the state of mind at a time where you know the white house had different advisors telling the president one thing. How to get to the bottom of that . Difficult. Jonathan terry haines, thank you. Equities down by 0. 7 . Bob michele of jp morgan coming up later. Live from new york city, good mo the first time you connected your godaddy website and your store was also the first time you realized. Well, we can do anything. Cheesecake cookies . The chookie manage all your sales from one place with a partner that always puts you first. we did it start today at godaddy. Com you got this. Lets go. Gobble gobble. Ive seen bigger legs on a turkey rude. Who are you . Im an investor in a fund that helps advance innovative sports tech like this Smart Fitness mirror. Im also mr. Leg day. 1989 anyone can become an agent of innovation with invesco qqq, a fund that gives you access to nasdaq100 innovations. I go through a lot of pants. Before investing carefully read and consider Fund Investment objectives, risks, charges, expenses and more in prospectus at invesco. Com. This is surprising more of the timing than the actual downgrade. I think will be used as political cultural against democrats and president going into the election cycle. Where in the politics of austerity creep back into the zeitgeist. It is does it all really matter in market landscape . Probably not so much. Jonathan there is a feeling the clinical followup will be larger than the market fall out. Political fallout will be larger than the market fall out. U. S. Stripped of his aaa rating by fitch more than a decade after s p Global Ratings. Heres the market fall out. It is muted stuff. We are down by zero. 7 of the s p 500. The bull market, would you have a clue that anything is happened based on the mood this morning . 10 year 10. 0. The move was yesterday is your guess is as as we get lisa the fitch noises going to be a political cultural but we are looking at a real situation where the u. S. Has the refinance choice of dollars of debt at a time or Interest Rate expenses are surging. When did this become a problem for congress and for president ial candidates that are not proposing to cut such security or other things that will be dead in the water . Jonathan here are the numbers. Treasury Department Said to increase its net borrowing estimate for July September quarter to 1 trillion. It is much larger than a lot of people thought. Were going to find out later where on the curve some of the issuance is going to land. Lisa 8 30 a. M. To get the announcement we work through it with Michael Mckee. How much does that push up along and yields we should use moved to they have moved to the highest levels in years . Normalization, what is normal look like in a different Interest Rate environment . This government keys borrowing more money. Jonathan we have fantastic lineup of guests to dig through. Chris verrone joins us around the table in new york. Good morning. Not a quiet summer, not a quiet start to august. This talk about the market fallout. Does it matter . Chris i was thing about the difference between the downgrade yesterday and i think august 5 2011 the downgrade. The yield to set up was different. Like kate was falling into the 2011 downgrade yields was falling to the 2011 downgrade. The trend is up right now. I understand the reaction is muted but you have a gripper in grace the last couple weeks a ripper in rates the last couple weeks. You go back to the cpi print july 12 and yields traded to 370 made the move back. They are 402 this morning. 30 year yields have moved also. The surprise will be yields up in the direction of the trend. Jonathan the market interest backdrop the market backdrop and economic backdrop between 11 was a different. But there was a conversation, he said if they get downgraded from aaa to aa, it would not be treasuries that people sell, itll be other stuff to make space for treasuries. Is that dynamic in play . Chris im a were getting the 2011 call wrong remember getting the to 11 call wrong. I really do think this time around it does mean yields up here. I would emphasize that led to an easier centralbank, easier Monetary Policy response. You had to eat two or qe3 that came out of that. It did not think theyll be the Monetary Policy response from this. You speak of all of the thing since the 3 cpi print a couple weeks ago, commodities have ripped here. Commodities up, rates of, and you delete . Like to see around the equity market after a very strong start of the year. Lisa could you imagine if jay powell comes out to talk about the fitch downgraded . Jonathan is a different time. Lisa i am wondering if you spent Going Forward and were talking about the Political Risk with terry haines who said he does expect this to get price in more with move away from certain u. S. Assets given the uncertainty around the political backdrop. Do you buy that argument . Is that one of the reasons you see yields going higher . Chris it is a question of where you go. The dollar response has been fairly muted the last 12 hours. I do think bitcoin has rallied a bit. If there is another difference may be from the 2011 experience versus today, look at the chinese and japanese, they are big net sellers are treasuries and they have been for the last year. That was not the case in 2010 period. There is a different dynamics. Im almost hesitant to compare this incident with 2011. Think they are different. Think the outcome will be different. Lisa we have been talking for the past a blood how it seems like risk assets are not noticing couple of months, how seems like risk assets are not noticing. Because people are kind of getting a little uncomfortable here and started to wonder whether this guild space going to create something more significant. Chris we look at how strong the first half of the year was, it is really only rivaled by other years in history, 95 was strong, 98, and 87. Look at 9598 the strength continued in second half. 87 we know is the opposite. Bond yields ripped in the summer of 1987 and you get this uncomfortable set up yields are up and equities are up. Im not saying that is what is happening but i find it curious we get yields up big and stocks up big, something tends to become unsettled quickly. Jonathan is that technical or is it somehow linked to fundamentals . Better outlook on the cycle . Chris heres how i try to answer that are put the puzzle pieces together. Written rates are rising and cyclicality is still up outperforming companies a message that economic utility is the robots. When i see defensives outperforming as yields goes up, that is a different message. Yields is she telling us something about the change. Are telling us something is about to change here. Euros of the defense is working is not compatible. Yields up with divisive workings is not compatible. We are trying to put these pieces of the puzzle together. We put out a list last week, 13 science commodity three inflecting. The break out in the scum or socks have been compelling commerce stocks have been compelling. It is all have been basically says the 3 cpi print in early july. Also coincident with Janet Yellens trip to china. You wonder what the deal mapping brokered. May have been brokered. The debt commodities and theyre acting like chinese are going to put their foot on the pedal. Jonathan this conversation for a break. Thank you. It is good to see. Equities down. 75 on s p. Plenty more on this downgrade from page of the u. S. Credit ratings. John ryding coming up. Let Innovation Refunds help with your erc tax refund so you can improve your business however you see fit. Rosie used part of her refund to build an outdoor patio. Clink dr. Marshall used part of his refund to give his practice a facelift. Emily used part of her refund to buy. I run a wax museum. Let Innovation Refunds help you get started on your erc tax refund. Stop waiting. Go to innovationrefunds. Com you really got the brows. To that. Four 8621 going into the adp jobs report a little bit later on this morning. That comes at 815 eastern time. So one hour and 45 minutes to finish in foreign exchange. But a yen strength out there may be sort of speaking to that risk off move some Euro Weakness just a touch. Were negative by 0. 1 euro dollar at 109 73 under surveillance this morning then Fitch Ratings stripping the us of its top tier sovereign Credit Rating cutting it from triple a to double a and a statement writing this, fitch saying the rating downgrade of the United States reflects the expected fiscal deterioration over the next three years. A high end growing general Government Debt burden and the erosion of governance. Think this is the issue here, lisa. This line here, the erosion of governance relative to doublea and triplea rated peers over the last two decades, its hard to argue against that last line. We were just worrying about whether the us would default on its debts just a couple of months ago, and it was a really real risk simply because of political gridlock down in washington, dc. We dont get that from other countries. That said, even at that time, what would the response be to a default . Probably buy more treasuries because it was just viewed as political gridlock, exactly what it was. So theres sort of odd dissonance right now to markets being like, guys just quit it. We all know that treasuries are fine and the economy is good. And then youve got the political reputation where there is some sort of risk and feeling of instability that fitch is reflecting. You mentioned a push back from the administration, secretary yellen calling the move both arbitrary and outdated and some high profile economists piling on fitch as well. Mohamed elerian, a good friend of this program, good friend of ours, writing this. The vast majority of economists and market analysts looking at this are likely to be equally perplexed by the reasons cited and the timing. Overall, this announcement is much more likely to be dismissed than have a lasting, disruptive impact on the us economy and on markets. To Larry Summers, you mentioned this line a little bit earlier, lisa. The idea that this is creating the risk of a default on the us treasury market is absurd and i dont think the fitch has any new and useful insights into the situation. Its telling that you talk about this, we talk about this right after you mentioned Euro Weakness versus the dollar, the response in markets emphasizes, underscores what were hearing from Larry Summers, from mohamed elerian, from janet yellen, which is we dont care. And if anything, in a moment of instability, we will go into us assets. That said, longer term, and we have heard this from a lot of people questioning the dollars dominance and a lot of people have gotten that wrong many times. Again and again. But there is a question of longer term consequences of just the debt borrowing. What were going to get at 830 that think are real and are going to be really important issues for these conversations are precisely the same ones we had more than ten years ago. And if you draw a line in the sand, i think it was august 5th back in august 2011, take the dollar index, have a look at what its done since then to now its up Something Like 40 , 40 . And we had exactly the same conversation as more than a decade ago. The Growth Profile right now, of course, and this is just an observation about the past and where we are. Its not about where think were going, but the growth conversation now is so much better to the growth conversation we had back then. Mike gapen of bank of america capturing that. And just wanted to bring you this quote. The head of us economics over at bank of america saying this recent incoming data has made us reassess our prior view that a mild recession in 24 is the most likely outcome. Growth in Economic Activity over the past three quarters is average 2. 3 . The Unemployment Rate has remained near all time lows and wage and price pressures are moving in the right direction, albeit gradually. Theyre dropping their recession. Call lisa, who isnt dropping the recession call, saw this and its pretty much one after another dropping recession call, upgrading expectations for risk assets and what theyre going to return at a time when more people are leaning into the soft landing kind of narrative. I do wonder whether people are feeling like maybe theyve gotten over their skis. A couple of recent hints on the Consumer Spending side, a couple of recent earnings reports raising some issues on that. Think about starbucks, for example. Im not saying that, you know, frappuccino is going to really make or break the us economy, but my point is you are seeing some pushback on the margins in a couple of different sectors and you do wonder whether there it does actually mean that there is weakness. Its hard yesterday just going through the earnings and this is always my my issue with earnings sometimes you can pick a company and tell whatever story you like. Yes, starbucks is one. Lets take jetblue. So jetblue is telling us the domestic economy isnt as good as you think. And caterpillar is telling us the International Economy is not as bad as you think. Can you make sense of that from those two names . But this is actually the most interesting part, because this is what a lot of people have been calling a manufacturing resurgence, which caterpillar perhaps points to. And the rally that weve seen in oil prices points to at the same time, the consumers get more discretion and maybe they dont want a frappuccino, but maybe they want to go and stay in a hotel, a luxury hotel. And so in the pool, i mean, these are the kinds of things its not like anyones crying for them. But my point is youre seeing some real gangbusters kinds of earnings from the hotels, from other airlines that are international. Yeah. Are people just kind of shifting their money slowly in a way thats going to have significant ramifications . Its a confusing market when you look at the earnings, it doesnt really help. As paul said, this morning, im told he may or may not join us tomorrow without a frappuccino into payrolls, without a frappuccino. Of course, something much stronger than that. Ive talked a lot about our lineup this morning on the bond market. Youll hear from robert tip of bob michael at jp morgan Asset Management through the next couple of hours on the politics, the political fallout down in washington, dc, henrietta trace have faded. Partners will be joining us in about 25 minutes, joining us now is a man whos seen it all, john rynning, chief economic adviser at brin capital and a former economic adviser to the bank of england. John, good morning to you. Good morning. What did you make of that one yesterday afternoon . Uh, what are we talking about here . The the downgrade, not the indictment. You know, it seems 12 years out of sync. I agree with the comments about some years. And elerian, i mean, theres no particular news to spur it. We know the fiscal trends in the us have been bad and will continue to be bad as signaled by the outlook from the cbo. So i dont i dont we got through a terrible political battle over the debt ceiling and somehow now we got through that. So but but but in the end, its the us treasury. And you know, i dont think people buy us treasuries because of a rating of some Rating Agency. There may be technical issues for some people and what they can and what they cant own in certain structures, but i think its just its a bit of a head scratcher while recognizing all the bad things that theyre saying, including the questions about, you know, the breakdown in governance. It reignites the same conversations as we all understand how privileged the us treasury market is and how privileged the Us Government is to issue that debt. The question still remains are we abusing that privilege . Would you agree that we are . Well, i think the us has abused the privilege and i think they abused the privilege that the more important one that the privilege of seigneur ridge, of the printer, of the currency and so much of the currency is held internationally. And, you know, in an era of Digital Assets and so on, its amazing how rapidly the growth of paper money has expanded, and most of that is created up and shipped out of the us and circulates overseas. Um, but in terms of that and, and lisa, you just made reference to it, but there really is no viable alternative for a long time for the us dollar in terms of its role in international finances. So again, a change in rating by debt agency is isnt going to change for sure. And we can question the relevance of fitch and question the political implications of it. As terry heinz was raising some questions around how pure the motives were of this Rating Agency. However, there are some real issues going on, and theyll be highlighted in about two hours time when we get the refinancing agreement or we get the refinancing plan by the us treasury expected to be more than 200 billion more for this quarter than people previously thought. At a time when interest expenses are surging, does that not matter . Oh, i think it i think it does matter. Um, you know, the us in terms of its responses during the covid period, what it did in march march of 2020 was absolutely needed. But the the fiscal actions that were taken in, in um, you know, late 20, 21 when we and you know, Larry Summers and others were doing calculations to say, hey, you know, this is just too big a fiscal stimulus for the us economy and, you know, long term issues. I think you made mention i think i heard you saying about, you know, not cutting social security. I mean, thats the you know, thats the third rail. Thats thats never going to be touched, especially in a in an era where you know, demographics are getting older. So voters are getting more entrenched in terms of of receiving social security, the opportunity to reform that, change, you know, disappeared in the early 2000 when the Bush Administration even considered creating private ownership, as the president told me, not privatization, private ownership of of social security. And that died a that died a death. So theres terrible fiscal trends are going to remain in place. So as an economist, though, there is a question if at what point do Interest Rates become unsustainable unsustainably high based on the debt load that we have . And i ask this because of the response of 30 year treasuries yesterday to the debt issuance, not to the fitch rating cut. And im wondering at what point at what profile does this become a real negative concern for the credit worthiness of the United States . Well, lets take some rough numbers. Weve got a debt to gdp ratio right now of around 100 . And weve got a ten year treasury of 4 . So if we assume that that 4 was the was the number of in terms of Interest Rates, were thinking about financing that means youve got 4 of gdp each year to pay the interest on the debt. Um, now in an economy let lets if we get back to 2 inflation, its going to be a while before we get there. And lets say underlying growth is 2 . Thats roughly equivalent to being able to sustain 100 debt to gdp ratio. The problem in that as you do that, is the Interest Payments to keep that stable have to squeeze out other spending. And thats the problem. The Interest Payments will get bigger. And if theres no counterbalancing reduction elsewhere, then those fiscal ratios continue to deteriorate. Now, if we end up in a 5 Interest Rate world, which i dont think we will for the long haul, but if we do, then the debt numbers start to become problematic and then youll have people saying this is one of the troubling will say, well, the us will inflate its way out of the debt. Well, the fed wont let the us inflate its way out today. Yes, the fed made some terrible mistakes back in 2021. Continue ing to ease by purchasing 120 billion of debt per month as inflation picked up. But you got to remember on top of that, that fiscal trend, the fed is essentially be selling. Its not actually selling. But by not reinvesting, its forcing the treasury to issue more debt to to the marketplace. So the debt trends are sort of worse than the fiscal trends because of the fed getting out of the quantitative easing game. This is a political question, so forgive me any reason to believe that politicians in washington somehow embrace austerity anytime soon . I dont think so. You know, the theres just such a dysfunctionality in washington, dc. And with coming into, um, you know, the election process next year and with divided government between the senate and the administration, on the one hand and the house on the other, i dont see there being any kind of sensible reform package out there. And you do have the potential for these, these these battles that give you a problem the next time the the debt ceiling comes around. Unfortunately, thats been kicked down the road for a little while. But, you know, its just just as a mechanism, its just really weird that you authorize the spending and then you have a second thing saying, well, youve spent it, youve run up the credit card bill. Oh, but youre not authorized to pay the credit card bill was okay to spend it. But its its its not okay to to to to pay it. You i dont mean the kind of debt but thats kind of what i agree with you every time this comes up its kind of odd. Its its bizarre. Its bizarre. And youre not raising the debt limit for spending already agreed and already spent in many in many cases. Its its kind of odd. John, thank you. John riddoch of brewing capital. John, appreciate it. What a situation here. We go again. Somehow desensitized by the events of more than a decade ago, theres just a shrug of the shoulders this morning. Lisa, is it justified, divided opinion on that . Does it matter . I think the consensus is, does it matter that much, at least not this morning. Desensitized is the word of the day will say to a lot of things and that seems to be a trend. Does it change anything for him, rob . A tip of fixed income up next from new york, this is bloomberg. Dont be wall streets useful idiot. Leading banks and brokers are paying you Interest Rates that are obscenely below market rates. Why . Maybe they made long term loans at lower rates and would lose money if they paid you higher Interest Rates. 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Sometimes people are looking for that relatability. Theyre looking for someone who looks like them being able to share parts of your identity with your therapist can really important. Disagree with secretary of treasury yellens notion that this was arbitrary. It wasnt arbitrary. The us has is the strongest growth. It is able to service its debt and investors around the world shouldnt be concerned at all. Itll be after we get over this initial market response. S itll be back to normal. The treasury market is in a class of its own. The words of Bloomberg Intelligence and ira jersey this morning. That, by the way, was mickey levy, the Berenberg Capital markets chief economist, has stirred plenty of debate and a collective shrug of the shoulders in the market in many cases, particularly in bonds, without Much Movement whatsoever over in treasuries. This is what fitch is essentially saying. Theyre making three points here that this downgrade of the United States reflects, one, the expected fiscal deterioration over the next three years. The second point, a high and growing general Government Debt burden. And the third point, which i just find impossible to disagree with, the erosion of governance relative to doublea and triplea rated peers over the last two decades. Pick out those three points. Point three bramo i find it really, really difficult to argue against point three. We were just talking about the potential for the Us Government to default, not because of a wherewithal to pay, but simply because there is political gridlock in washington dc. You say the third point is difficult to disagree with. Well, all of them are difficult to disagree with. And this is the interesting thing. People have been talking about the increasing debt load relative to gdp and the interest expenses that are surging. I mean, really climbing rapidly on the heels of rate increases by the Federal Reserve. So you put this together, theyre not wrong, but people still shrug their shoulders and say, you know what, this has been the story forever. The us has a stronger economy than ever. Nothing has changed. Why did you do this . As weve said over the last 50 minutes or so, is it justified and does it matter . Two very different questions. We have to grapple with this morning. Lets deal with the latter with robert tipp, the chief investment strategist over at fixed income. Robert, does that decision by fitch more than a decade after s p Global Ratings, did the same thing change anything for you and the team . This morning . No, not really. I mean, the United States is is unlike gold in terms of having a market for government bonds that is liquid and secure. And thats going to remain the case for for our generation. But it is interesting and it does cause people to stop and pause and ask these questions, which they should ask. And in terms of the last 20 years, i would say there has been an erosion in terms of the us and our governance relative to other countries. Take a look at the european union, for example. Uh, they have a stability and growth pact which they flout, but its on the sidelines and it is debated. And so, you know, there is an acknowledgment that debt matters, that you want to be sustainable. And the United States has had a soaring debt. You know, its not just a little bit its not a creep. Its from 40 debt to gdp to rocketing, you know, towards an over 100 in the last 20 years. And this was never the case. You know, in the last century, people would rack up debt and they would pay it down and then people would wring their hands about the countries that ran 100 debt to gdp. I dont know if you recall the time in the eurozone crisis. All of those analyzes that 80 to 100 was the death zone for sovereign credits. Now nobody cares. Monetary finance is is commonplace. And so having Something Like this, even though these are really vanity ratings from a practical perspective, it causes you to ask the questions. Because over 50 years, 100 years, eventually you do lose flexibility. But in terms of what we do in a trade on this now, it is the independent assessment of americas credit worthiness on behalf of fitch and to some people it matters. To others, it doesnt. Many people on this program, it doesnt seem to matter. Robert, im wonder if this matters to you, the Treasury Department coming out and essentially telling us that net borrowing, the estimate for july through september this quarter is going to be a trillion. Its not going to be the 733 that they thought it would be back in may. Does that additional supply change where you think this yield curve is going to develop into. Yeah, now were talking. John yeah. The, the um, deficit had had some had some low prints looking back several months which were kind of surprised given that actually, you know, nobody is trying to reduce the deficit anywhere but especially here in the United States. So having a few hundred extra billion hit the market i think does matter. And what were talking about is a little bit of an impact on the absolute level of rates. It puts a little bit of pressure there, but also puts pressure on relative rates. Thats really the thing to watch. You know, if you go back 30 years, treasuries used to trade rich to swap rates as if there was a scarcity or a quality premium, people would pay up for treasuries. Now, by the time you get to the back end of the curve, treasuries trade cheap based plea to the fed funds swap curve to the sofr curve to, you know, a riskless alternative out there that doesnt have the supply pressures of the us treasury. So this definitely makes a difference in terms of relative spreads. And as these numbers continue to become more and more unbelievable, i mean, on a daily basis, the United States treasury on a day when theyre hitting the bill market, the coupon market will do more than all other countries in the world combined. And thats pretty stunning number. Robert, you were talking about how for a number of years we cared about 80 to 100 debt to gdp. Now no one cares. We have the us with about. 120 debt to gdp. Does that shift where people start to care again, given that rates are not zero anymore . In other words, are we in a new regime where Interest Rate pressures and expenses suddenly make this a top priority and make debt . So and there were, you know, technical things people may not be aware of. I mean, there was an effort to consciously balance the budget, which succeeded. And by coming into the century, we were in surplus and we were on track to literally pay down the debt. People were talking about. But things like pay go various restrictions that actually kind of contained these deficits over time. Those have all been scrapped and and, you know, we need to get to that time where people look for sustainability so that when you hit a crisis, you have the fiscal flexibility to react. Given the fact that there doesnt seem to be a lot of impetus in washington to bring that under control or pay it back or have that ammunition, as you were saying, how high could long term yields go . Right. So, you know, like i said, i think the fundamentals are driving the level of yields and those are around current levels. I think if the expansion continues and it turns out that this drop in inflation weve seen here is transitory, you could get a little bit of an increase in rates. You know, tens over 4 , but its going to be more owing to the fundamentals than to this technicality here. I think, though, that you know, fitch and on the governance side, you know, on the one hand, its its interesting timing because in this last showdown, there was, you know, open talk of those 13 words you could take from the 14th amendment about the sanctity of the us debt. And that was uplifting. But the fact of the matter is the politics, you know, ping pong and you have lawmakers that are upset about an unfettered rise in the level of debt and they can, you know, really cause a lot of trouble in that process. So i think its noteworthy that fitch brings this up and its worth keeping in front of people. Robert tip of page in fixed income. Robert, thanks for jumping on in front of the camera to give us your latest thoughts from pjm and what it means for this fixed income market. Nothing yet so far this morning, i think is the general consensus is what is the alternative is a question that were going to talk about repeatedly through this morning. The team here at bloomberg getting a variety of sources on the phone in front of a camera, emailing in, working out what on earth is going on. This is pendal group. Okay. Allow me to share this quote with you. What would be the alternative euro garveys thats still a currency breakup accident waiting to happen because of a lack of fiscal unity. China nobody wants to own that sovereign risk. Japan, the boj still owns half the market. Its a privileged position. The us is in that if you ask people this morning whats the alternative if they cant find one . So basically the United States is saved by the incompetence of other governments or basically the lack of concentration around and around the other nations and the idea that even if theyre bad, theyre not as bad. And so its a relative game. The bottom line is that treasuries are so entrenched in the Global Financial system, the dollar is so entrenched in the Global Financial system that countries that try to move away, struggle and that has been a perennial issue, especially when, you know, people are talking about the weaponization of the dollar. Certainly during russia and some of the other things. This is going to be an ongoing question when does it matter is going to be a key one. Also, it is the sun in our market universe and has been for a long, long time. Henry the trays of Veda Partners on the political fallout down in washington, dc coming up shortly, well touch base with annemarie. Looking forward to that conversation. Down in washington. Well speak to Brian Weinstein of Morgan Stanley Investment Management on the bond market. Hes coming into the studio here in new york. And well speak to rbcs Amy Wu Silverman all of that in the next hour on bloomberg. 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Mom can see your search history. Thats what i thought. Introducing the next generation 10g network. Only from xfinity. I sympathize with the animalistic vision and the list vision when it is not a moment of brinkmanship. No country that has the strength of the u. S. Is going to be affected. Does this compromise the reserve currency status of the u. S. Dollar . I have learned one that never wants to forecast the demise of the dollar. This is bloomberg surveillance with tom keene, jonathan ferro, and lisa abramowicz. Jonathan i cannot tell you how many messages i have had this morning that start with that nobody cares about fitch. Live from new york city, good morning. This is bloomberg surveillance. On tv and radio. Reacting to the news yesterday afternoon are at the close, fitch more than one decade later joyce s p stripping the u. S. Joins s p stripping the u. S. Of its rating. Making three planes. Points, the erosion of governance in washington dc. Lisa they originally came out flagging they may downgraded u. S. During the high of the brinkmanship we saw in washington dc. Now coming out and saying, we are going to go ahead with it even though you did resolve it. You did see the reaction as he markets yesterday. It is important to fight it even if no one cares about fitch flag it even if no one cares about fitch. I think the issue is they do raise well points. Jonathan is it justified . Does it matter . The market speak for themselves. Futures are negative by 0. 4 . We were down more than that a couple of hours ago. In the bond market, yields up. The dollar is a little stronger against the euro. Lisa the move did come yesterday when we did see 30 year treasury yield go up on the hills of the feeling the treasury will borrow more money than expected. 18 15 a. M. 8 15 a. M. We get the unemployment report after jolts, job openings fell to the lowest going back to april 2021. You are seeing a deceleration here, whether it is orderly and soft landing or not, do something where trying to parse through. 8 30 a. M. May be the most important issue of the day. The treasurer leasing refining policy statement where they expect to borrow say to borrow 274 billion more than expected. This class of 30 year treasury to start yesterday. Caused the 30 year treasury to surge yesterday. Lots of earnings as you take a look at incredible gains, particularly with some of the less stocks the last year. What is it tells about the economy . What is it tells about the strength of the u. S. People are pointing to that should eradicate any concerns about Political Drama . Do we see people still want to go to hotels and gamble and buy homes and even if the Mortgage Rates are high, it is not matter . Qualcomm coming up with chips. It is the u. S. Zionism people are coming about dyanism people are coming about. Jonathan you have the likes of secretary yellen calling the moves the downgrade the country arbitrary and outdated. Let me share the quote with you. The decision does not change with the americans, investors, people around the world no, treasury securities are made agreement it safe and liquid asset an American Company is fundamentally strong. That backs of people who have dropped the recession call. But on the same day, they have to increase the net borrowing estimate as much they had to, is it really arbitrary and outdated to bring up the issues again . I do not think it is. Lisa especially if we are not building out an economy that was in distress. Waste ammunition to do that . This is a push poll where is the ammunition to do that . Just like the s p lost credibility. Yet they do point out things that are having market implications. Jonathan wall street is saying, there a chorus, we do not care about fitch. The rest of the country, what is fitch . Annmarie the market jonathan the market fallout this morning is muted created the political fallout is loud. Annmarie we have been coowned yesterday as this was breaking and she was talking about this is going to be used as the latest political against the democrats and Biden Administration. You see a public is talking about blaming biden for this republicans blaming biden for this. The Biden Campaign say this is a trump downgrade, defined by chaos, recklessness that americans continue to reject. This is going to be used as the latest economic weapon, both parties want to use against each other, but the bottom line it happened while biden is in the white house. Republicans will use this november 2 024 we know americans are concerned about the economy. We saw the latest poll from New York Times. Number of interesting tidbits especially given the fact you see trump dominating his republican field and it likely going to be a trump biden matchup that could be close if it is those two. If you look into more questions of the poll, how do you feel about u. S. Economy now . Do you think it is doing well . Only 2 said exceptional. 39 said poor. They come 49 said poor. It is not bode well for the sitting president. Jonathan we want to bring an Henrietta Treyz. Your initial reaction to the move yesterday evening . Henrietta my first reaction you have got to be kidding me. It is not going to be well received. I want to get across to our clients was congress is not going to like this. I would like to push back a little bit on the narrative that President Biden will be the one that is here. 2011, majority leader lost his rates and Speaker Boehner was out shortly after. It is important to think of who gets blamed in these fiscal debacles where there is the Government Shutdown which historically so the blame lens with republicans and it is why the Senate Republican leadership including Mitch Mcconnell do not encourage House Republicans to go forward with the shutdown narrative. This is not something that is cut and dry. We saw that in 2011. The first reaction was a visceral you have to be kidding me. Lisa there is a question of who in president ial candidates rates will come out and say, we plan to cut the deficit and all, here are the benefits you will not get as a result of it. We are getting republican candidates plans and it looks like the former President Trump plan where he talks about not cutting anything but having fiscal discipline. Where is the fiscal discipline going to come from . Henrietta i comb through ron desantis economic agenda and a part of the it is unclear, i cannot fathom how either one of those get 3 gdp growth or reduces the deficit. Unsubsidized electric vehicles, i do not know how it gets there. What we saw in 2011 is president obama and Speaker Boehner had agreed to reforming entitlement on medicare and medicaid as well as hiking and you billion dollars worth of taxes. They had fiscal discipline. There were ideas thrown out all day. The rally was the Congress Reality was the congress could not find a way to get to yes on anything practical to get the deficit. Want you billion dollars at a 2024 is not going to move the needle 100 billion dollars at 2024 is not going to move the needle. Lisa we are asking with respect to the president ial rates where there is more uncertainty be empowered on with each additional legal case that comes out on both sides the iu aisle. When will that start to matter . Henrietta i think what we have seen from Business Community is little blips. In the wake of january 6s direction, there was a temporary freeze on all political fundraising and donations for major corporations. That is gone away. Members are back to pouring in money. They are fighting for influence including spending dollars and giving to campaign donations. That is a proxy for waspy participation on capitol hill. Has shown no signs of materially changing. Jonathan Henrietta Treyz there Veda Partners on the latest. Equity market was down by Something Like 1 on s p 500. Were negative by 0. 44 percent. People saying the decision does not matter but also saying why they do not think it does not matter. Jason on twitter says this, one year ago fitch upgraded u. S. Aaa crediting a look from negative stable exit criteria for a downgrade. Replace they made it comes to the vacant replace they made, deterioration in governance quality, it is hard to see that much as change. On the third point, he is making a point much more improved from last year. Based on the criteria they offered for a downgrade, last year, what is change, respective fitch today, it is a template to have a conversation with them about what has changed in the last 12 months . Lisa i would add strange coming from fitch reiterating that u. S. Debt to gdp is heading down. Talking saly about the same point. To that point, if things have improved, what is the threshold . Because the debt ceiling once again it was an issue in washington dc as it has been every year . Jonathan both of those individuals have worked from the Biden Administration and for the obama administration. It would be a lot of political back and forth in he said, she said and again will continue. Welcome to the program. S p negative by 0. 45 . Coming up at 8 00 a. M. Hour, 45 minutes from now, we catch up with bob michele of jp morgan, Asset Management. We work out what we have been talking about all morning. We do not care about it, it is justified, not justified. Does it matter . Markets . We have both fitch and s p Global Rating saying you no longer aaa, your aa. Lisa i also want to hear from him to push back to fitch matter says u. S. Economy instrument and it has been a stronger than it has been. How could that be underpinning some sort of different call from his perspective giving treasury yields going down materially to about 3 . Jonathan this much more going on the justice. The adp report comes out in one hour from now. This appetizer head of the main event. The payroll support on friday. And between the two earnings reports to get from apple and amazon and thursday session after the close. A look ahead to all of that with Amy Wu Silverman of rbc capital in 30 minutes from now. Five minutes we had to back down to washington dc to take base with amh. Good morning. With your hearing, if you start having a little trouble, youre concerned that its going to cost you money. To this day i only paid what i had to pay for the device. When i go back everything is covered. Theres so much youre missing by not having hearing aids. Well find you a hearing aid that fits your lifestyle and budget at one of our over fifteen hundred locations. Call miracle ear at 1800miracle and schedule your free, no obligation hearing evaluation today. Is made for sam who makes, everyday products, designed smarter. Genius like 2. 5 cash back on purchases of 5,000 or more, so sam can make smart ideas, a brilliant reality chase for business. Make more of whats yours. Today an indictment was unsealed charging donald j. Trump to conspire to defraud the United States comes conspiring to disenfranchise voters, conspiring to attempt to instruct of official proceeding on january 6 2021 was an unprecedented assault of american democracy. It is described as he indictment fueled by allies. In this case, my office will seek a speedy trial so evidence can be tested, judged by a jury of citizens. Jonathan that was jack smith, the third criminal prosecution of the former president. The indictment coming on the same day we got this poll from New York Times showing 54 of likely gop voters across demographic supporting the former president compared to 17 , his nearest competitor in his upcoming primary for republicans. That support is not a claim. Lisa within minutes after the indictment can out, the Trump Campaign sent out a fundraising email. In it, he said, it is not just my freedom on the line, but yours as well and i would never let them take it from you. It has been used as a fundraising tool and it has been effective even though people know their money is going to fight a legal battle. Jonathan and losing count. Annmarie is the third indictment. We have the charges yesterday and theres one more we are waiting on in georgia. Fani willis, the da says shes ready to go. We can expect that likely before september 1. That would be a fourth indictment for a former president and we need to really make it clear that this is not just former president , this is a candidate for the republican nomination for 2024. This will be an election like no other if he does end up becoming the nominee for the gop. Jonathan of these four, if you were to rank them, are some serious than others . Annmarie absolutely. We spoke to ty cobb and he talked about this overwhelming evidence of the document case ntpc that if you read the and you can see it if you read the case. In terms of trump trying to allegedly alter the surveillance video, there is a lot of hard evidence. This one as terry haines talk about is very serious. Conspiracy to defy the u. S. As well as obstruction of and conspiracy against rights. Conspiracy to say your vote does not count. These are incredibly enormous. I cannot express the gravity of these charges but potentially theyre going to be harder to prove as terry haines said. These two are the top ranked ones. Georgia follows just below that because that would be a charge against trying to defraud voters rights. The and of course theres the hush money case in new york which many have shrugged off. Lisa Going Forward, there is a question of when it starts the matter for the election. If former President Trump is convicted, does any of this potentially eliminate his chance of being president . Does any of this matter legally for its ability to rule the nation . Annmarie we need to see how it plays out in core. Court. They should would become difficult if there is a charge the issue would become difficult if there is a charge in a state that he was to become president hypothetically, if there is a charge in a state, he cannot pardon himself from that state charge. He would have to get a friendly governor to do so. Say in georgia, that could be the case, but in new york, not. Lisa meanwhile President Biden coming under fire for his participation reportedly in some calls with his son with business transactions he said he was not aware of or involved with. How much are people become desensitized or does it matter more on one side than another, at this become a capitalize election regardless . Trivial election regardless . Annmarie there is fatigue in the country with it is indictment or cases against hunter biden. Sometimes theres so much news out of washington dc it is hard for individuals to sit through all of this. But you will see both sides want to talk about the weaponization from republicans, some of which are talk about the weaponization of bidens Justice Department they call it, and her also talk about republicans will talk about as biden they will say he lied of this business deals with hunter biden but we did have the close associate of hunter biden testify behind closed doors at a hearing this week and devon archer basically said according to lawmakers coming out off record saying that the president would call but it was just to say hello to hunter, it is not involved with the business dealings. This is something optically will be a problem for the current president as he looks for reelection. Jonathan these legal issues remind us of the kind of issues might when this is the emerging markets. Fitch comes out insights governance issues, does these issues speak to that . Annmarie i think theres a link between the two top stories and i say that because if you look back at the report that fitch put out in june they talked about Political Polarization and that is gotten worse since the debate. Or the Trump Campaign trying to relitigate the 2020 election and 23 election interference of the Trump Campaign was trying to. That is what fitch decided in their june warning then we get a downgrade yesterday mom is ahead of the former president being indicted moments i had to the former president being indicted. That is going to show how much more politicized weston is an potentially what it means for reputation and Fiscal Health of u. S. Economy. Jonathan three weeks away from the first debate and we do not really know who is going to be on the stage. Is the former president going to show up . Annmarie to be determined if he shows up. Im sure his lawyers want him to sit this one out. Hes going to be attacked at least by governor Chris Christie and we had a statement yesterday from Vice President mike pence, saying no man is above the constitution. That person should not be president. He knows he will be attacked so maybe he was to be there to defend himself and make sure he is a part of the show, but we do not have a yes or no from the Trump Campaign on whether he will attend the debate in milwaukee. Jonathan amh, thank you. Three weeks away from the first gop debate. Have a decent idea of how both the former governor in new jersey Chris Christie will deal with these. How is Governor Desantis going to approach the subject three weeks out . Lisa he has gone against the former president. He has lost support. How to go head on while not alienating debates that do associate themselves with the former president . I for the noise is overwriting some of the issues that when you ask for peoples daytoday what matters most of them. Jonathan some people suggest we had the pivot from Governor Desantis, the declaration of economic independence, we win, they lose. Still trying to work out who the wy is. Lisa it is we be u. S. And china being the day. Jonathan china and the rest of the world. Or just china . Will find out. Equities on the s p trying to stage a recovery. Negative by 0. 5 percent. Plenty more coverage on this downgrade from fitch. Live from new york city, good morning. I dont want you to move. Im gonna miss you so much. You realize well have internet waiting for us at the new place, right . Oh, we know. We just like making a scene. Transferring your services has never been easier. Get connected on the day of your move with the xfinity app. Can i sleep over at your new place . Can katie sleep over tonight . Sure, honey this generation is so dramatic jennifer the reason why golo customers have such long term success move with the xfinity 10g network. 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Jonathan lets try and drain the drama out of the situation for you. Equity markets staging a bit of a recovery, down by zero. 5 on the s p 500. On the nasdaq, negative by 0. 7 going into a very important day when we hear from amazon and apple. The equity Market Reaction so far pretty contained to the downgrade from fitch yesterday stripping the United States of its aaa Credit Rating. In the bond market, not much reaction at all. 10year is doing nothing, basically unchanged to down may be a basis point. The two year yield down by four basis points, so i a little bit of a rally there. The move really was yesterday, the longer end of the curve on the 30 year yield a high, 4. 0948 is where we are right now. The Treasury Department has increased their net borrowing estimate for this quarter july through september to one trillion come up from the previous estimate of 733 billion. Those billions matter to this bond market and they matter yesterday. I want to finish on the euro in the fx market, showing a bit of weakness against the dollar, the dollar a bit stronger. The japanese yen a bit stronger, perhaps speaking to a little bit of risk aversion out there. The emphasis is on a little bit of risk aversion out there at the moment. Fitch rating stripping the u. S. Of its toptier sovereign Credit Rating, cutting it from aaa to double a . In a statement, writing this. The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general Government Debt burden and the erosion of government governance relative to lisa that 30 year treasury, the borrowing we are going to see in about an hour in terms of how much the u. S. Needs to keep borrowing, these stories are interlinked. , it raises a question even if you can shrug off fitch, can you shrug off a financial profile that is not as good when it just comes to the interest expenses and the outright borrowing at a time when, who is buying . Jonathan we know the United States has a special place in our market universe, an exceptional place, and arguably, many people make this argument, irreplaceable. The governance issues are inconsistent with other peers in the aaa rated market. Weve talked about germany. We can do a basic assessment of that. The debt to gdp ratio of the United States is north of 100 on the median of a aaa rated company, or rather, a aaa rated country, is close to 40 . It is night and day. Lisa this has been the case for more than a year. Its not like something has changed. If anything, the debt to gdp has come in slightly. You can see that the u. S. Economy is on a better trajectory, people are talking about soft landing. If they were going to do this, why now . Jonathan the decision to publish that decision came literally moments before this. The former president indicted in washington on federal charges over his efforts to overturn the 2020 president ial election. Special counsel jack smith saying the attack on our Nations Capital on january 6 was an unprecedented assault on the seat of american democracy. It was fueled by lies, lies by the defendant. The charges can carry policies, of course, of as much as 20 years in prison. The president expected in court on august 3. Lisa he is expected to come with a host of lawyers. I cannot get over the the fact that within minutes of the indictment he sent out a fundraising email and that people are viewing this as a rallying call in terms of his supporter base. It raises a question, what are the legal consequences, and what are the political consequences at a time when a lot of people view the state as being politicized . Other people are saying if you look at the nuts and bolts, it looks like this is highly problematic and some serious charges. It is the decency to take in desensitization. Jonathan if you want to in a line around the debt profile of america, even easier. Well done, fitch. I think bottom line is, this economy right now compared to whats happening elsewhere, germany is just about coming out of recession, europe is struggling to grow, china is talking about stimulus, and we have guest after guest dropping their recession call. Recent incoming data has made us reassess our prior view that a mild recession in 2024 is the most likely outcome for the u. S. Economy. Growth and Economic Activity over the past recorders has averaged 2. 3 . The Unemployment Rate has remained near alltime lows and wage and price pressure are moving in the right direction, albeit gradually. Forgive me if i get too personal about this, it is easy to trash the politics in america, it is easy to trash the debt in america. Every time i had to go and get a visa before i went and got a green card, there was a line around the building, literally around the building before the sun even came up. The amount of people lining up to still come into this country, despite political problems, despite problems with the debt, this economy right now better than most of the developed world at the moment. And the political situation, i get it, its incredibly divisive but people are literally lining up to leave their country to move here. Lisa its the economy and the fact that you can make money and consumers are spending and willing to spend on a lot of things and businesses profit. We talk a lot about Consumer Spending and how long it can continue. Well, after about one third of results from, u. S. Consumer facing Companies Consumer discretionary companies, theyve be in earnings projections by 13 versus an average of 7 across 11 sectors. They are doing better than the others even though you have some outliers. People still spending and that is leading to profits at a lot of the companies that service them. Jonathan lets get back to trashing the market with Brian Weinstein head of fixed income at Morgan Stanley Investment Management. Welcome to the program. Weve asked this question of many people this morning. How did you respond initially when that headline dropped . Brian i mean, i was minding my own business, a quiet summer friday at my desk, and i was surprised. I mean, not surprised. All the things you guys highlight, we have known. The discourses ugly, the amount of spending is tremendous, it is mindboggling. Theres the simple fact that the u. S. Treasury market is kind of the key to all the markets, so its not going to be treated differently today than it was yesterday. I look at the market and go, wait a second, all the good stuff you said. You have the good things happening, plus the fact that we have some political issues, and fiscal issues, are people willing to accept a 4 10 year yield . To a longterm chart. It seems to me the warning sign here is there is a lot of public debt coming and you do not really need to chase it. I was surprised we do not sell off more this morning at the end of the day. Jonathan what you said i think is so important. The 10 year yield feels so high because over the past 10 years, its been so low. If you can erase the history of the last decade or so, if you can reset and go through the fundamentals of america and acknowledge it has this privilege position in our market universe, what do you think the yield should be on a 10 year . Brian listen, i think about this all the time. We think that inflation is going to average higher than 2 . Do a longterm chart of inflation, 2 target seems low. I think what you really want is you want to think about inflation being say 2 to 3 . And if growth averages 2 to 3 , than 4 is the bottom of your tenure range. Can you have a 10 year range in 46 . Maybe this is the bottom of a range if you have normalish growth and inflation averaging more than 2 . And by the way, a central bank that does not buy all the supply. I dont think its crazy to see the 10year note go another 10 basis points higher from here. Lisa how much conviction do you have in that . Are you allocating differently as shifting away from duration in response not necessarily to fish but the borrowing announcement that we are going to get . Brian theres a lot of borrowing thats going to happen. I think the surprising resilience in the economy and the fact that you are not getting good yields and credit if you look at bank loans, highyield. You can get a percent to 10 . You will get some defaults 8 to 10 . You will get some defaults. This was the year of the bond. The year of the bond was supposed to be not the year of the equity. Bonds have done fine. Bonds have given you the coupon that they promised. Thats what you should expect. If we have a longterm selloff, 10 year notes move higher over time, you are much better off in nonduration sectors with yield, i. E. Credit, than i think you are just trying to buy duration and hoping yields go back to. We are investing more go back low. We are investing more and more in that direction. Lisa how much of that evolution in terms of an investment thesis has happened over the past few weeks . Brian i think i was on six weeks ago and i believed we could take a run back towards 3 in 10 year notes. That you could play that recession story, the fed was obviously wanting to pause, and here we are. I think the fish thing might be the fitch thing might be the final nail in the coffin. With stronger growth, inflation looking stickier, i think when you go towards the end of the year, you will see inflation not falling so much on a yearoveryear basis, its just a math, right . Its evolved. At the beginning of the year i was not in the camp that you could see 4. 5 10 year notes, but the last couple of weeks has made me feel that investors should be demanding more premium in a world where inflation is more sticky, growth is seen sticky, in a good way, and then you throw in some of the fiscal irresponsibility on top of it. I think its going to happen, i just think its a matter of time. Jonathan here is a nice exercise for you. Someone somewhere has started to write a speech for chairman powell, potentially to deliver jackson hole at the end of august. If you had to write that speech at the moment and it was going to have some shelflife to deliver at the end of august, what do you think that speech is going to sound like . Brian i think you might take a different approach. I think he might not want this on to have shelflife. I think this is a point in time where the fed has raised rates a lot. On the others to raise rates a lot, over the next 12 months, there will be impacts, there will be slowdowns. You are seeing it it some of the subprime sectors. It matters. I think the fed is taking a pause because they just do not know. I hate to answer your question, sounds like a copout, i think this speech could be boring because the fed wants to be boring, they want to let the markets go. If they could engineer a soft landing, it would be an amazing outcome. He might talk about fiscal responsibility. Weve seen fed chairman take some stabs at that, he has not really yet i think this speech could be one where we forget about it. Jonathan i still dont know if he is going to speak in jackson hole, wyoming. Thank you for weighing in. Brian weinstein of Morgan Stanley Investment Management with an honest assessment of where he thinks this bond market is going to be. I think its a difficult one for chairman powell, certainly the specie he is going to deliver if he does deliver one will be very different to the one he delivered 12 months ago. Lisa are you trying to get him to take august off . Pretty steadily, you raised this suspicion, maybe hes not going to show up, maybe hes going to stay on vacation. Jonathan i am suggesting there is not much to say right now. Lisa i agree. Jonathan there is two cpi print, two payrolls report, one of which we get on friday, why say anything . Let those come in. Let the market move on the information and make a move in september if you need to. Lisa the one thing he could say is the importance of getting back to 2 with speed. Does it matter that its going to take until 2025 to get inflation back to the level they are looking for . Jonathan if you are just joining, welcome to the program. S p 500 negative by 0. 5 . We will catch up with Research Affiliates. Before we get to rob, weve got a great lineup. Amy from rbc Capital Markets. And then in the 8 00 hour, starting i in about 18 minutes from now, j. P. Morgan Asset Management, nathan sheets of said group, and of citigroup, and somewhere in between, you get an adp report. We will catch up with mike mckee. About a month ago, we had an adp report that had a blowout number and completely change the conversation going into payrolls friday. Lisa thats why i always say it always matters until it doesnt matter. If we are data dependent, when does the data matter . Do you take some sort of signal from the data we got yesterday . Or do people just shrug it off and say this is noisy and backward looking . It seems like a choose your own narrative but people are in a narrative shift moment. It feels like there is something and a reassessment happening in the past couple of days. Jonathan people want new narratives to come to life all at once. We are in this process were job openings are coming down, lending standards have tightened in response to the increases from the Federal Reserve over the past year. You sing that pretty continuously over the last few quarters. Lisa but nobody is collapsing so nobody cares, until they do, and that is sort of the issue. We are seeing that shift slowly grind its away in some parts of the market. Jonathan unemployment star expected to come in on friday in or around 3. 5 or so, 3. 6 to be precise. Equity market recovering well obsession lows in the s p 500, negative by zero point 47 . From new york, this is bloomberg. Urchases of 5,000 or more, so sam can make smart ideas, a brilliant reality chase for business. Make more of whats yours. I was thinking about this last night, the differences between this downgrade yesterday and actually i think it was august 5 of 2011 was the downgrade. The yield set up was actually very different. Yields were falling into the 2011 downgrade. Yields were down trending. We kind of have a saying, surprises always break in the direction of the trend. The trend of the yield is up right now. Jonathan that was chris verrone. Special thanks to Robert Burgess of bloomberg for i would say inspiring this exercise to look back on august 5, 2011 and take a look at whats happened with the across assets since then. All the doom and gloom about americas position Financial Markets, what would happen to the u. S. Dollar, dxy has advanced 40 since then. U. S. Dollar denominated Financial Markets have outperformed the rest of the world in a big way, particularly against places like europe. The compare and contrast in 2011 was europe is drowning in a eurozone debt crisis. We were talking about double dips here and all over the place. We are talking about pretty robust growth in america this point. Lisa what is the alternative . What is the haven that could replace the u. S. . You brought this up earlier. I think its increasingly important to think about people are saying this is a concern with u. S. Debt increasing and the borrowing increasing so significantly. Jonathan i mentioned that one guest we caught up with, that one source i think down in australia, what does replace it . Japanese government bonds . Lisa bitcoin. Jonathan the european debt market, we know that mess over the last 10 years or so. What replaces it . Lisa bitcoin evidently and apple and amazon. Thats what people have done. It does not have the depth. Nothing can replace it and thats what everybody is saying. Jonathan joining us now on the equity market, Amy Wu Silverman, the head of derivatives strategy at rbc Capital Markets. Allow me to share your note with our audience. There is a reluctance to be the strategist who cried low vo l. Explain what you mean by that. Amy look, we have been telling folks for a while now that when you look at the cost of hedging over a decade, we are really at historical lows. In a s p or q put struck 5 out of the money, these are trading at historical lows. Low vol often begets low vol. You dont want to be the strategist who cried low vol, but it is just really important to highlight how inexpensive these hedging costs have gotten in the face of kind of this huge sentiment shift into something more positive. Jonathan when you say that low volatility can beget low vol, we are seeing that developed currently. Is that what you are seeing . We are. To some degree, it is a little concerning, because there are these time frames when the low vol begets low vol begets low vol, until it doesnt. I know you guys were talking in the context of the last debt ceiling, or 2018 in the derivatives world, it does not mean that necessarily harkens these events, but often times, these low volatility cycles does beget kind of a gap down at some point to higher volatility regimes. Lisa does it feel, based on the metrics that you look at, that we are at a tipping point, a narrative shift, a point at which the higher treasury yields and some of the jitters we see in certain corners are starting to percolate out into the way people are shifting . Amy you know, not yet, lisa. May be that changes a little because the u. S. Is relatively fresh. When you look to earnings because the downgrade news in the u. S. Is relatively fresh. To toms favorite word, the skew of the market has leaned much more to the call side. Thats part of this low volatility situation that you are seeing, which there has just been much more demand for upside and a lot of that has to do with the relative lack of positioning we saw that caught people off sides, that created fomo. And there are still folks who need to dive into the pool. Thats how i would characterize the Options Market right now. Lisa how important will do earnings from amazon and apple be in shaping that optimism . Have earnings confirmed the optimism and this feeling of fomo that everyone seems to be expressing . Amy yes, i think it has. I think the two earnings we will get tomorrow, which is kind of 20 of weighting, will be a very important. With amazon and apple, you are seeing a divergence. Amazons call skew is very high. There is a good deal bullish sentiment. That is actually not true in apple, which is a very different from the other mega cap tax. Youre actually seeing on mega cap techs. Jonathan can we just finish up by may be thinking about what has developed in the last 12 hours from fitch and the downgrade of the u. S. Government Credit Rating from aaa to aa . From someone in your seat, do you consider governance issues, political disputations, the disputes in d. C. As a source of volatility or something to ignore . Amy i think it absolutely is. One thing i will say is the Options Market in general is absolutely terrible at pricing political and geopolitical events. It just really is bad at handicapping it. And you saw that in 2011. If we go back to that debt ceiling, we had the vix spike at 40. Part of that was this inability to handicap how situations like this play out. I would say the market is nodding this off. I dont know if that changes down the line but historically, the Options Market tends to be the worst at pricing events that are not catalysts but much more of these political overhangs. Lisa people are talking about the election next year and how much of an overhang that could be, introducing potential volatility. Is that something you are expecting or seeing anything related to . Or for now, is it basically just all about the earnings, about the economy, and not at all about drama that people have gotten desensitized to . Amy i really think investors should be focusing on that because it is this tie in to what needs to happen this year because it likely would not happen next year. One thing that has happened in the Options Market is we have gotten much more shortterm. Thats partly related to the rise of zero dte trading. The Options Market, which was shortterm to begin with, has gotten even more shortterm, while i would say the longterm risks have risen. Jonathan great to get your input and some insight from you on the latest in d. C. And beyond. Amy will silverman of rbc Capital Markets responding to that downgrade from fitch yesterday afternoon. Looking ahead to those earnings from apple and amazon on thursday. Getting the likes of bob michele at j. P. Morgan Asset Management to respond to the latest development in the bond market. The treasury issuance we can expect through this quarter and beyond and where he things this treasury market should be. He was looking for a real slow down not so long ago in this economy, imminent rate cuts, and yields dropping to 3 right across the curve. We will get the latest from bob. But comparing contrast from citi this morning pretty clear. On the downgrade, just one line, we expect no Market Reaction. Here is the bulk of the peace. 10 year treasury about 4 , 30 year yields are at the height of the year for 2023. The move higher in longterm yields anticipates a sluggish jobs number on friday, which would highlight the resilience of the u. S. Economy. Wait for this estimates for heroes payrolls, 290,000. Lisa if you look at the earnings, they can from the strength. You care about hiring on the margins, even as a number of Companies Still prone. They have been paring back. The layoffs have already happened. A lot of companies have shown reluctance to cut further because of their experience during the pandemic. If we get that kind of number, is that a catalytic event . Are people so basically drilled into this feeling that you get a soft landing, yields coming in, inflation coming in, you can keep chugging along without the pain that we heard about a year ago . Jonathan we hope we can do that. When inflation is threatening to go through double digits, you can make the argument may be that higher unemployment is a price worth paying to get inflation down. And of course, i have always said this, its easy to say when it is not your job on the line and you are the chairman of the Federal Reserve and youve got a guaranteed term. When inflation is down to say 3 and i unemployment is stil 3. 5 , can you make the argument the higher unemployment is worth that 100 basis points lower in cpi . Is that something . You are fully committed to . Lisa thats exactly why what Brian Weinstein was fascinating to me. In the past couple of weeks, hes thinking more about that reality, not getting down to 2 , going more to 3 . 4 is the bottom of the range for yields for 10 year treasuries. Thats a game changer for the entire risk reward spectrum. I am very curious to hear what bob michele has to say about that. Jonathan a higher inflation rate, many people have pushed back against it. Pimcos Richard Clarida talking about tolerating to point something in their outlook. If youre just tuning in, this is how the stage is set. About 20 minutes, will get the adp report, a jobs report from adp ahead of the real one, the headline one on friday, the official payrolls report. We are looking for a decent number on friday, 200,000. Mike mckee will break down that adp report. Bob michele from jp morgan will be sitting in that seat breaking down this market. S p 500 is negative by 0. 5 . Live from new york, this is bloomberg. My cpa told me i wouldnt qualify for the erc tax refund, so i called Innovation Refunds. Their team of independent tax attorneys will work with your cpa to determine if your company is eligible. [whip sound] take the first step to see if your Small Business qualifies. It is never good when a Rating Agency says we dont like your debt as much as we used to. Clearly its not good news. If we look at the initial Market Reaction, pretty moderate reaction in the bond market. No country that has the strength of the u. S. Is going to be affected. Does this compromise the reserve currency status of the u. S. Dollar . I have learned very painfully that one never wants to forecast the demise of the dollar. This is bloomberg surveillance with tom keene, jonathan ferro, and lisa abramowicz. Jonathan a collective shrug of the shoulders on wall street this mind, calling the move arbitrary, outdated. Mohamed elerian labeled it a strange move. Larry summers said he cannot imagine any serious analyst giving the decision wait, the decision to strip america of its aaa Credit Rating, fitch the latest. Or than a decade after we saw the same thing. From s p Global Ratings. They gave three reasons, we have gone through those reasons all morning. Welcome. We can do it again if you wish. Refax the expected fiscal deterioration, a high and growing general Government Debt burden, the erosion of governance. Those three issues topics we have been talking about for more than a decade. Lisa this from peter share of Academy Securities a monster, no one buys treasuries because of the rating. What he talked about were all of the same issues including some of the desolate debates and the lack of agreement in washington. He said, why do people buy the assets of the u. S. . Not the ability to tax but the value of the land and things like drilling rights. That i think is what people are really demonstrating this morning. Jonathan well said. We can talk lots about the political fallout. Lets talk about the market follow and how limited it is. Equity futures down by Something Like 0. 5 , for now. In the bond market, no movement at all. You would have no identity happened. 10 year yield, 4. 02 , totally unchanged. The euro against the dollar, totally unchanged. The data arguably potentially more important for now, not over the next five, 10, 20 years but the data for now more important for many. Lisa which data . This will be the key question Going Forward in the next couple of months. You are talking by adp and the implement report from them. The latest read the employment report from them. The latest read on whether there strength. There is data from the Treasury Department talking about how much money they are going to have to borrow in this quarter and is expected to be almost 275 billion dollars more than previously expected. This plays into the fitch point, but its having a more direct impact potentially on markets. Jonathan the estimate for borrowing this quarter july out to september has gone from 733 to one trillion. When secretary yellen because the decision to downgrade the debt both arbitrary and outdated, thats probably a conversation we have to have now. Annmarie hordern joins us from washington. We know the political back and forth, the fallout, the blame game. Can you pick up on what secretary yellen has got to say about this decision . She is calling it outdated, arbitrary. When she spoke to me recently, she was talking about how optimistic she is regarding the u. S. Economy as it is coming out of the pandemic. She pointed to very strong labor market and the fact that she does not see a recession on the horizon, something that fitch potentially disagrees with her. I think it was interesting talking to Libby Cantrell yesterday of pimco, what she says she has heard from clients around the road when looking at the u. S. Economy and how they are viewing the economic resurgence following the pandemic, what she said is that the u. S. Is the cleanest of the dirtiest shirts. Meaning everyone is dealing with economic problems, but still, individuals, Global Investors still want to put their money in america. Lisa yesterday, we got the fitch downgrade of the u. S. Rating and then we got the announcement of the indictment of the former President Trump. Are these two stories linkedin anyway . Annmarie linked in any way . Annemarie i do think they are linked when you look at the crux of why fitch is coming out with this is coming out with this downgrade now. It comes at a time when they put washington on watch. In june in a report, they talked about the Political Polarization that is happening in washington, d c i am looking at the report now. They specifically point to this 2020 election, in terms of the trump trying to overturn the 2020 election results, something that trump was indicted for just yesterday. And within moments of fitch coming out with that result, to be honest, we were all on the edge of our seats waiting to see what the charges would be. We knew that special counsel jack smith was going to announce something, President Trump it would be at 5 00 a. M. We got the trump truth social saying hes about to be indicted and then fitch downgraded the u. S. Credit rating and then we got the charges against the former president , which go to the crux of the matter of the 2020 election conspiracy, as well as why you are sing this Political Polarization. This indictment against trump is obviously going to be very political, because this is not just a former president , this is a candidate to be the nominee for the president ial election of november of 2024 for republican party. Jonathan can we just go to the timeline briefly . What are you expecting when are you expecting to care from the former president . He can truth social any moment. His lawyer has been out on all the Major Networks this morning. We heard him on the today show speaking with Savannah Guthrie talking about the fact that it is the defendant that has the right to a speedy trial because jack smith said yesterday he wants a speedy trial, but that they want to take their time. He said the department of justice, he called it bidens department of justice, they are really trying to say this is political, had three years to investigate this and they want to take their time. This is going to take months and years. The most eminent date to watch is going to be tomorrow and that is when trump will be arraigned. We dont know whether or not he is going to come in person to washington, d. C. , or if you will be arraigned over zoom, because that is a possibility. Jonathan Annmarie Hordern with the timeline for washington and the events in the Nations Capital. In about nine minutes, we will get the adp report. The estimate is 190,000, the previous number 497,000, close to 500k. Payrolls came in at 209,000 the following friday after that report. The estimate for friday in the payrolls report is 200k. Bob Morgan Bob Michele from j. P. Morgan Asset Management joins us to go through some of this. Good morning. What a morning already. Lets start with the downgrade. I wonder from your perspective, does it matter to you personally . You hold a lot of this stuff. Does it change anything . Bob thats what we asked ourselves last night. The first thing we did is go through our client portfolios and make sure that the guidelines exempted treasuries from any kind of ratings. They all do. We went through that exercise in 2011. Then we looked at treasuries in the market. We confirmed that they are still exempt from sec registration and they still maintain a zero risk weighting in terms of bank capital and liquidity considerations. There are also very important in the Collateral Management market. We just confirmed that the cftc and the cme do not reference rating agencies, they only reference u. S. Treasuries. We wanted to make sure the markets would remain stable. We are confident they would. I think the next thing we are looking for is, what does fitch with the gses, what do they do with the Mortgage Market . Do they say because it is securitized, it has a higher rating than the sovereign . I dont know. I am a shoes to see what they do. Jonathan from the same things, the same reasons you went through and set ultimately this downgrade does not matter. With the downgrades would the downgrades off the back of it matter, if we got downgrades in other areas because of those reasons . I dont think so. What did fitch do . You have to go back to may when they put it on watch. That was a pretty clear signal that in no reasonable period fo time would do u. S. Be able to get its fiscal deficit, debt to gdp, or how the governance process works, into line with what are the nine other remaining aaa rated sovereigns. If you go through them one by one and look at debt to gdp, the u. S. Is headed to 100 . The median of the other nine aaa rated fitch sovereigns is 39 . The u. S. Is going to run 6 to 75 . Zero is the median of the other nine aaa sovereigns. You are miles away. I wont touch governance. I think i heard what annemarie said. Jonathan i think thats been dealt with already this point. Bob we have a lot of clients who love the u. S. Markets, love u. S. Assets because of the rule of law and the governance. They like the transparency. They like to see the battles on the floor. Lisa there is a question of just how strong the u. S. Economy is. A lot of people have pushed back against the fitch downgrade, saying the u. S. Economy is actually increasing and the momentum is just developing. You have not been saying that. You have been seeing a recession. Do you take that argument that the u. S. Is arguably in a stronger position . Or do you kind pushback on the . Bob on that . Bob the one that stands out is modeling the fiscal deficit to on employment. With unemployment at 3. 4 , you would not expect the u. S. To need to run a fiscal deficit of 6 to 7 . But for us, unemployment is a lagging indicator. Unemployment is confirmation that we are not in recession or confirmation that we are in recession. The high in unemployment is generally a couple quarters after the recession. The low is generally a couple quarters before recession. We still think we are headed for recession sometime around year end. Until we are in a recession, unemployment will yes, remain low. Lisa something we were talking about with Brian Weinstein and i know jon has been talking about with a number of guests has been that the fed may allow inflation to go back to 3 or 2. 5 or Something Like that and stop there with respect to how high theyre willing to hold rates. Brian weinstein was saying that in that case, you look at 4 as a floor for 10 year treasuries. Why do you not see that as a likelihood . Bob so, this brings back flexible average inflation targeting. Go back to 2019, makes sense for me because i wondered if targeting 2 inflation exposes you too much to the 1. 6, 1. 7, 1. 8s, which we learned is too low foran economy the complexity and size of the United States. I am all for 2. 25 . What people are now saying is we hit cpi 9 , other measures, high single digits, that the fed has thrown an array of policies at it, and you are now in a disinflationary trend, but disinflation will be transitory. That it is coming down like a ski slope, and it will stop at 2. 5 . I dont believe that. I think the policies are in place, the long and variable lags are biting, they will hit. People talk about employment, nobody has really talked about the ism employment component. It was 44. 4. It has never been at that level without the fed cutting rates. Throw that in the basket of things that has a perfect track record of the u. S. Economy is either in recession, headed to recession, or the fed should be cutting rates. I dont think you can dismiss all those things. Jonathan he talked about the lags. Did you read the bill dudley piece on the bloomberg terminal yesterday . The former new york fed president said there is considerable evidence that the lags have shortened, meaning the economy has already found nearly all of the has already felt nearly all of the impact of the feds policies. Whats your reaction . Businesses and households have lockedin a lot of low cost funding over the last couple of years. The supply of housing on the market is not there. When you look at corporate fundamentals, businesses have lockedin very low cost of funding. Those things will change as the quarters roll by. Things will need to be refinanced, there will be more borrowing put in place. Consumers may have lockedin 2. 5 to 3 mortgages but what is alarming is the amount of revolving credit that has been put in place. Credit card usage is up like that. That is in the 20 sphere. Consumers are struggling to pay higher prices now. They have tapped out their excess savings, they are on their credit card, we will see where it all ends up. Jonathan you are going to stick with us i hope after we break this number, the adp report. Estimate is 190,000, the previous numbers 500k. Before that number breaks, when do you expect the weakness to turn up in the labor market if we still believe in these long and variable lags . Later this summer, later this year, early 2024 . Bob i think we will see it before the end of the year, over the next several months. Jonathan that jobs report on friday, the estimate for fridays that we will not see it on friday, that the estimate in our survey. Moving target, of course. I always say that. We get new estimates. Estimates get upgraded, downgraded. The median estimate is 200,000, the previous read was 209,000. Welcome to the program. Going into the job numbers, the equity market looks like this on the s p 500, down by about 0. 5 on the s p 500. Yields are not doing much at all, the 10 year at 4. 0171 . Downgrade, what downgrade . With the data is mike mckee. This is the most important, least important date of the month. 324,000, a lot bigger than the 190,000 that had been anticipated. However, the previous month, 49 7,000, we will have to see if that is revised, was much higher than the government reported on friday. Looks like the big change in goods producing comes in Natural Resources and mining, as manufacturing lost 36,000 jobs, adp says. They said they had lost a lot of jobs last month and that had not happened. Service providers and 303,000. Of those, two are in that leisure and Hospitality Group 200,000 are in that leisure and Hospitality Group. 138,000 jobs in medium establishments, and Large Businesses lost 67,000 jobs, they say. We get the pay change numbers from adp. Job stairs saw their pay increase by 6. 2 , job changers saw there is increase by 10. 2 . Those are numbers, those numbers are down from previous months, so that does look like perhaps some good news for the fed. They do Pay Attention to some of that. You know whats really interesting is the fed gets this adp rod data and they have their own model that they make out of it and it does not seem to match up with what we get. At this point, adp suggesting a strongerthanexpected july payrolls number coming friday. Jonathan mike mckee, stay close, buddy. Upside surprise on adp, it doesnt matter,. And then it does. 324 is the number, the estimate was 190, the previous was that blowout 427. There was a rally at the front end of the curve, weve given that up, yields are now unchanged. We are down now by only one basis point. The 10 year not doing much. The dollar showing a touch more strength, not a major move. Equities have not really moved at all in response to this, still negative by 0. 5 . Alongside lisa, i am jonathan ferro. Joining us is bob michele and nathan sheets. Youve had a chance to go through that number, 324, does it matter . Then you get a number like that. Does it matter . Bob it fell within my range of expectation for adp of 500,000 to plus 500,000. It does not matter. I am looking for the unemployment report on friday and i am looking for hours worked. Jonathan that is super helpful. Do you want to stick around . Sure. Jonathan great. Nathan, year thoughts on that jobs number going into friday . You are looking for a big one friday, 290 . We are at 290. I think part of the upside of it is a seasonal adjustment issue. The real narrative is we continue to see th u. S. Labor market as being very strong and buoyant. The underlying driver is the u. S. Consumer spending on services remains very strong. And services are laborintensive and that has supported employment for the last 18 months or so. And when you think we think that story continues. Lisa what do you make of what bob michele is talking about, the ism component of the Manufacturing Survey showing aerial deterioration in the employment . There does seem to be signs that not all is right. The flip side of the strength in services has been weakness in the goods sectors. We are in the midst of a rebalancing, rotation in spending toward services. Thats been ongoing for a while while but it seems like it continues. For me, one of the puzzles has been, as the goods sectors have softened to the extent that they have, that we have not seen a little bit more kind of shedding of labor in the manufacturing sector. And i point to that as an example of labor hoarding. May be some of those firms are saying, well, given where we are and the pressures we are facing, we are going to have to let some workers go. Or at the minimum, we will not be able to hire quite as much as in the past. Lisa could this just fall off a cliff . This is a very important question. I think when you look at labor Market Dynamics and you look at the Unemployment Rate, going into recessions, the Unemployment Rate is usually pretty flat, and then it moves in a sharp kind of vshape and it does not send invitations beforehand saying hey, im ready to go, it just goes. I think these dynamics could be quite abrupt. Jonathan bob michele is quite like me, he cannot help it, he wants to jump in. Nathan is exactly right. I have said it many times, the low in unemployment is before recession, it is confirmation that you are not in recession. I understand that spending patterns on the consumer have shifted from goods to services. But how long can that continue with credit card borrowing get going vertical, and with excess savings being burned up . The key metric we are looking at is the savings rate and the savings rate remains low by historical metrics. It is running around 4. 5 . Another prism into this is the quote unquote excess savings. By our reckoning, there is still some. It really boils down to the question of when is that savings rate going to normalize . As all i know is that for the last few quarters its been pretty stable at around 4. 5 . That makes me think this thing can continue, particularly the strength in services spending, could continue for maybe a couple more quarters. May be there will be another discussion in early 2024 but through this year, things are looking pretty solid. Lisa has that dovetailed to this idea of a spike in unemployment and a hard landing type of narrative that has all but been taken off the table . We have the hoarding and the manufacturing sector, may be some of that is starting to give. I think we need to see some easing in services spending, a rise in the overall savings rate. I think we will see that but its more likely to be in early 2024 story. There is more uncertainty around it. Many of our competitors are shifting their macro calls away from recession in early 24 to soft landing. You know, based on history and the tightness of the labor market and some of the imbalances in the economy. We are not there. We still think that there will be a recession next year, but boy, this is a very, very finely balanced call between soft landing and recession. Jonathan lets talk about the Federal Reserve calls between you both. Going into the summer, you are calling for a cuts potentially as soon as september. Where are you now on that call on fed policy . We think this is going to be closer to 1981 where the fed did not start cutting rates until right on the doorstep of recession. If we are right, recession happened sometime right around year end, thats when the first rate cut should be. No rate cuts in september. Jonathan there is a bit of disagreement between you both but when it comes to the fed, i imagine you are only a few months apart. Where have you got rate cuts . We have got them in q2. Jonathan we are arguing over six months here . I would say broadly speaking. Where it gets trickier if we are wrong and there is not a recession and we are looking at a soft landing. I think a feature of a soft landing scenario that is not getting enough attention is it means that rates are going to be higher for longer. That recession is going to open the door, if and when it occurs, to more aggressive fed rate cuts. If we do not get it, its going to be a gradual glided down in the fed funds rate in coming years. Lisa when you say rate cuts are going to happen, does that happen well before inflation rates are south of 3 . I think that in in gauging inflation, it is really important to be and engaging inflation, it is really important to be looking at those monthly prints. I think it will happen kind of in the second part of a two quarter recession. By that point, the fed will be fairly confident the inflation is moving down sustainably into the 2, 2. 5 range. Jonathan bob, i wanted to give you the final word. I think the kind of things you are talking about, the longterm are not getting enough attention. Are you still in the view that weve broken out of this world of rate hiking cycle going from lower lows to higher highs . As we go forward from here, never mind the cycle, the next one, the one after that, are we going to a world of higher lows and higher highs in each rate cut cycle . Absolutely. We think we will go back to something that looks more normal. Like to tell clients, go to their first dot back in 2012. Makes a lot of sense to me. You are targeting 2 inflation over its history. To that point, the real fed funds rate had been 2. 25 . Slapper the two gather, slap the two together, there you go. We think we are surely headed back to an active, vibrant economy but the path may be0 to 5. 25 to 5. 5, then maybe next time up to 6 , then back to 4 . Lisa what this means to me is the market is going to be less and less interestrate sensitive, because everyone will wait until they go back down to 02 refinance of thing. Jonathan we will go from zero to three and then three to five will not make a difference, . Lisa at what point does that volatility rendered completely unuseful in terms of a tool . Jonathan this was great. Thanks for dropping by on the latest adp report. That number, 324,000. The previous number, 490 7000. The estimate, 190,000. Payrolls coming up on friday. More hag men of invesco, chris and lori campesina of rbc Capital Markets. From new york city, good morning. Well, we can do anything. Cheesecake cookies . The chookie manage all your sales from one place with a partner that always puts you first. we did it start today at godaddy. Com hi, im katie, ive lost 110 pounds on golo in just over a year. we did it golo is different than other programs i had been on because i was specifically looking for something that helped with insulin resistance. I had had conversations with my physician indicating that that was probably an issue that i was facing and making it more difficult for me to sustain weight loss. Golo has been more sustainable. I can fit it into family life, i can make meals that the whole family will enjoy. It just works in everyday life as a mom. Lisa this is bloomberg surveillance. We are getting some data from the Treasury Department as they announce what they plan to do with their financing for this quarter. The expectation is that they are going to borrow quite a bit more than they previously expected, which did lead to a selloff in the 30 year yesterday afternoon. In the 30 year treasury right now, you can see it going up 4. 1 . That is the highest level going back to november. Joining us now with the latest numbers from the Treasury Department is Michael Mckee. The treasury said they were going to borrow over a trillion dollars in this quarter. How are they going to pay for it . Pretty much as the market expected, by raising option sizes, not so much in august auction sizes, not so much in august, but they will in the third quarter. These will be auctions held next week, 103 billion total, refunding 84 billion in ensuring securities and raising 19 billion in new cash. Three year note at 42 billion, 10 year at 38, 30 year bond comes in at 23 billion for next week. The increase, as i talked about, are going to be relatively substantial but not unexpected. They are raising the twoyear by 9 billion, the three by six, and the five by nine, and 7, 10, and 30s as well as they go to the quarter, they will parceled this out month by month but it will end up with a much higher auction schedule. They say Going Forward, it will depend on the performance of the economy and what tax receipts come in. One other note of interest in this release is that the treasury says it has made significant progress on his plans to implement a regular Buyback Program in 2024. They dont have that program in place yet but it does seem to be moving forward so that is something to look forward to perhaps at the next refunding. We will see you in november for that. Lisa it also says the treasury does expect auction sizes to be boosted Going Forward. How much is this a sign this is just a signal of whats to come . Its a signal of whats to come. But again, the mixture is what matters to the market. They do say they are going to raise Treasury Bill issuance some because they are still trying to rebuild the treasury general account by the end of september. Lisa we will follow up on this in just a bit. What you see in the market is a tepid reaction. The two year yield did sir on the hills of the adp report, with the jobs number higher than expected. Just a little bit higher than where we started the session, 4. 89 . Thats what settled down after this announcement and thats where it settled down. Similar muted reaction on the 30 year. This was baked in already yesterday afternoon when we got the news. There is this broader backdrop today after fitch downgraded the u. S. Credit Rating of whats debt does to the profile of a nation that is seeing interest expenses surge and a lot of spending stay fairly high. Rob burton joining us now robert drawings now, chairman of Research Affiliates robert joins us now, chairman of Research Affiliates. To me, there is a key question here, at what point do you care not about the fitch rating but about the debt overhang that does have a much more expensive profile . The debt overhang matters but it matters less than the spending. If the spending was under control, the debt would be just fine. The fact that there are buyers for the debt toes you that tells you that its ok. John mauldin likes to refer to the big moment when everything is going fine and then suddenly, bang, its not. No one knows where that moment is but it is out there. We have to be very concerned not about the deficit spending, but about the spending itself. Every dollar that is spent by the government represents resources, human resources, Financial Resources being pulled away from the private sector where products are created that people want to buy into Government Programs. How often do we go, consciously seek out government to help us on this or that . Not so much. Lisa what we are seeing right now is a number of candidates for president who are coming out with economic plans, none of whom are going to say they will cut social security, because thats dead on arrival in terms of political candidacy. You see interest expenses arising. There is this serious consideration of at what point this matters at a fundamental level. As an investor, one do you start to say we need to build in a higher risk premium, yield premium on treasuries . Rob i think the market is telling us that that is happening. It is not necessarily happening on equities just yet but that does represent a risk. We came out with a report just two days ago taking a deep dive on inflation. Back in january, we looked back at 2022, we found that 6. 5 inflation was about 6 in the first half of the year and about 0. 5 in the second half of the. Thats 1 10 of a percent a month and the second half of the. Why does that matter a month in the second half of the year. Why does that matter . What if inflation month by month exactly matches the three year average, 46 basis points a month . If you replace 1 with 46 basin points, yearoveryear inflation will seem to be dropping half a percent a month, but its an illusion. If you replace 1 10 of a percent with 46 basis points, it will appear to be rising one third of a percent a month, but its an illusion. Flat line inflation during calendar year 2023 will not look like a fat line flatline, it will look like a v. Weve shown that with that really simple assumption, inflation would fall to 2. 9 by the end of the year. Lisa the lead on this is that you think there is a much greater risk that inflation researches and goes resurges and goes substantially higher and stays higher for a longer time than the market is accounting for . What is being mispriced in markets right now . Rob inflationary shocks. And its interesting. It should not be a shock that inflation tank to the first half of the year, it should not be a shock if inflation rebounds the second half of the year because of the month we are replacing. We are replacing no inflation with some inflation. Which should not be surprised sadly is a surprise what should not be a surprise sadly is a surprise. They have not done their arithmetic. That would imply one to 2 annualized inflation second half of the. The investment implications are straightforward. Inflation surprise is a risk off. Inflation is a risk of trade risk off trade. I would be cautious coming into the second half of the year because most investors will be surprised by inflation. The fed may be surprised by inflation. They have 400 phd economists, which is four times as many as harvard and m. I. T. Combined, but they seem unable to forecaster gdp, unemployment, inflation. If they cannot forecast it, how the heck are they going to manage it . Lisa which has been a concern, the credibility gap you hear people talking about. Things chug along and then theres a bang moment and thats kind of when people come to some realization. Do you have a sense of what that catalytic moment would look like, what it is . Rob firstly, i think it is a ways off, but it can happen a recession where you find that you want to stimulate and the markets will not let you. That happened with greece in their debt crisis in 2011. And we are not greece of 2011, let me get that straight. But we are headed that direction, which is alarming. Lisa hold on a second. Youre basically saying the u. S. Will not be able to borrow in the way they think they will be able to borrow at the rate they continue to borrow . Rob at some stage. Whether thats three years from now or 12 years from now, i dont know. Its like wiley coyote running off a cliff and suddenly looking down and then he falls. Lisa this is what some people are pointing to, the idea that we have the debt profile that we do at a time when the Unemployment Rate is 3. 5 , 3. 6 . It is concerning because where does that leave the juice to stimulate . Bob michele of j. P. Morgan Asset Management was just here and he was saying it is a backward looking indicator and the economy is not that strong. Do you pushback on the . That there is this sort of loss of momentum, this loss of strength under the hood that you could see in small corners that will come to the fore more meaningfully later on . I think hes right. The economy always looks booming just before a recession and people think, how can anything go wrong here . The good news is there is two job. Openings for every job seeker. That is unusual to have that in advance of a recession. But we do have an inverted yield curve. Cam harvey, whos been on this show i believe, was the one who first discovered that an inverted yield curve predicts a recession. I dont think it predicts a recession, i think it causes a recession. Lisa that is actually a good question around the opportunity to lend long versus lend short and what that does to peoples money. This is a high moment of uncertainty and everybody keeps talking about the. May be talking about that. May be its a better thing to talk about the distribution of risks and understand the probability of certain risks and how they are priced. Which probability is the least priced or the most mispriced that you see right now in markets regarding the economic trajectory . Rob the most mispriced is inflation. The breakeven inflation, which is the difference between tips, yields, and treasury bond yields, is 2. 2 . Ou work suggestsr our work suggests that 3 to 3. 5 is a more likely 10 year number. It takes a while for inflation to get rained in. We did a study looking at all 14 of the developed economies that were already developed in 1970. 50 years of data on 14 countries. When inflation crosses 6 and especially when it crosses 8 , it is rarely transitory. It is usually a consequence of policy blunders. The inflation does not really get settled down until the policy blunders are reversed. We are not seeing that yet. Lisa robert arnott, thank you so much rob are not, thanks for being with us today rob are not, thank you so much for being with us today. S p futures substantially unchanged. They are down a little bit after yesterday, also being somewhat range bound. We are seeing a decline of 0. 6 , 4572. Michael mckee, Bloomberg Economics correspondent, back with us after taking a look more closely at the refinancing agreement. And i have to say it is really quite material to me that this is the discussion of how much more the u. S. Treasury department has to borrow at a time when we are talking about the Credit Rating of the company, of the company, country i should say, excuse me. I wonder if there are any details you think people should be paying attention to in this refinancing agreement that do point to the borrowing proclivities of the United States . Its almost of the borrowing needs release that came out on monday that gets your attention because they are going to borrow a trillion dollars next quarter this quarter and next quarter, a little. Over a. Hundred billion dollars youre talking about 200 billion trillion dollars, im sorry. Lisa its hard to lose. Trillion here, trillion there. Thats a significant amount of money but it does not seem to be moving the markets in terms of. Repricing risk. You look at the term premium for the twoyear, the 10 year, they are still well negative so the market is telling you it is still going to buy this stuff. It will be interesting to see now that japan is may be moving forward to getting rid of yield curve control, whether that brings money back to japan and away from buying. Some of these u. S. Treasuries. We will see what the numbers tell us when these auctions take place next week. But it does seem that this is something that if projected out cannot continue, but then you think about the old a lot about if it cannot continue, it wont. And you know, we will see. Lisa Michael Mckee Bloomberg Economics correspondent, thank you, as always, for all that. Twoyear gilt session highs, 2. 9 after an adp number coming in substantially above expectations as well as a refinancing agreement, refinancing plan by the u. S. Treasury department that is higher than they indicated a while back. This is bloomberg. It is interesting and it does cause people to stop and pause and ask these questions, which they should ask. In terms of the last 20 years, i would say there has been an erosion in terms of the u. S. And our governance relative to other countries. Even though these are really vanity ratings from a practical perspective, it causes you to ask the questions because over 50 years, 100 years, eventually you do lose flex ability. In terms of world we do a trade on this, no. Lisa vanity ratings, a fantastic description as many people shrug off the fitch downgrade of the United States to aa from aaa. That was robert tipp who was on earlier to talk about the rating shift. It comes at a time when we got the Treasury Department saying they are going to borrow a trillion dollars in this quarter versus 730 3 billion previously expected. A big question in the market today is how much the political instability, the political questions, some of the overhang is really going to cause volatility in markets amid earnings that have been coming in strong. Gina martins adams joining us now. How much are you seeing any sign that we could end up with volatility in markets, some response, some adjustment to the political overhang . Gina i think the equity market will take their cues from the bond market frankly. Until you see some elevated volatility emerge in the bond market, it is unlikely the equity market will Pay Attention, mostly because of the point we are in the earnings stream. Earnings are coming in significantly better than anticipated. More than 80 of Companies Beat expectations so far this reporting season, something we have not seen since 2021. Really strong earnings beats are translating into pretty consistent outlook improvements for 2024. The equity market is going to tighten that sort of earnings environment. Recall coming into this year, we were anticipating a massive earnings recession, at least that is what our models suggest it was implied in prices. Not to get that earnings recession is the trigger for equity market strength, unless the bond market starts to capitulate or create sort of waves for the equity market, the equity market is going to look at the Earnings Data and certainly tied to that, in my view. Lisa one think people have talking about this morning is why the equity market has not responded to higher yields that are inflicting higher yet again today. Do you think that that is an accurate assessment . That equities have not responded to these higher yields . Or do you think that the earnings have been good enough for a lot of traders to just look past about . Gina yeah, i think it is just a shortterm thinking, frankly. Equities did respond to the higher yields over the course of the last year. When you look at the index, the equity market is trading below prepandemic average levels. I think a lot of that is really just shorttermism. The equity market does not necessarily part handinhand with the bond market, but over the longterm, you would anticipate that higher bond yields will translate into lower valuations and that is pretty much exactly what we have seen, with the exception of the biggest stocks in the s p 500, which have rerated to enormously high premiums. That segment has rerated sort of anticipating a much stronger earnings environment emerging as a result of some secular shifts, in particular with ai, but also with whats going on in the semi conductors industry and some Government Programs in response to the pandemic. I do think you have to decompose equity market into its moving parts to get a clear analysis of what is going on. I certainly would not suggest a the bond market is the only factor that drives stocks. Lisa in the bond market, where looking at the United States saying that it is going to continue to increase its borrowing after planning 103 billion in debt sales and announcing some of the refinancing plans. Joining us as well is ira jersey, who covers all things rates for us for Bloomberg Intelligence. Can you get us a sense of the how well this is being priced in in terms of the degree to which the Treasury Department is going to have to ramp up borrowing . Ira yeah, so the Treasury Department just of this morning about 20 minutes ago announced it was going to increase the amount of twoyear notes, three year notes, all of the treasury coupon auctions are going to be increased by a little bit more than what i think the market is expecting prior to mondayannouncements. Monday, the Treasury Department told us they were going to borrow a trillion dollars instead of 750 billion. Everyone took a step back and said maybe there is going to be a little bit more issuance. I think thats one of the reasons you saw some weakness in the market yesterday where you had 10 year yields go about 4 once again. That is in anticipation of this additional supply. Supply is meant to have an effect on the pricing out treasury securities. Lisa we are hearing pretty much a collective shrug about the downgrade that fitch made to the u. S. Credit rating. Ira, i love your take on this. We heard from pet, he said nobody buys a treasury for its Credit Rating. Do you think there are longer term implications just in general with Interest Rates rising and the idea that we are going to have higher Interest Payments and possibly a more discerning buyer . Ira so, i think there are kind of three components to what you just said. Number one, there is no structural forced selling thats going to happen because of the ratings downgrade. There is this misconception that people can only by aaa securities, thats not true. Treasuries are their own asset class so thats one thing you have to get out of your vernacular and thinking when you thinking about the downgrade. The second thing is that yes, you are right, there will definitely be, you know, additional potential risk of future downgrades. Moodys still has not downgraded the u. S. Yet. That could easily be coming in the next couple of weeks or months. And primarily because of that highinterest cost, larger deficits plus higher yields mean you have higher interest costs for the government, which reduces fiscal flexibility. What happens when we do get an eventual downturn in the economy that requires some kind of fiscal response in order to deal with a weak economy . You dont have as much fiscal flexibility now with the Interest Payments being such a large part of discretionary spending. The government does need to. Maybe this will be a bit of a wakeup call to congress to say you have to deal with some of the fiscal imbalances that we have right now and get them on a more sustainable path. Lisa from your vantage point, how much do treasury yields matter at a certain level . You said that right now they are not the main driver, you are looking at earnings. To the extent that yields matter, they are being priced and. At what point do yields become the dominant story for stocks . Gina they could become the dominant story if Earnings Growth deteriorates materially or the economic environment deteriorates materially resulting in another downdraft and earnings trends. The two primary drivers of stocks. Rates are a very strong driver of valuations. But then youve got Earnings Growth. Rates have a very small impact on overall Earnings Growth in the s p 500. In an environment where earnings are actually you get the earnings side of the equation really powering some great degree of optimism. Lisa you are freezing up. Thank you so much, gina martin adams. Ira, final word in terms of what you look for, especially after hearing from Brian Weinstein of Morgan Stanley saying he sees the floor for 10 year yields a 4 . We have heard from bob michele saying no, what we are seeing is inflation coming down rapidly. Do you have a view on where the market is pricing it and what is the likely outcome . Ira well, when it comes to inflation and where we are probably headed, one of the things that we note is that, you know, the size of the Government Debt market matters insofar as where, how low you can get versus say fed funds and the pricing of other instruments. I do think that 10 year yields will probably rally into year end if anna wong and the Bloomberg Economics team forecast are right and we will see a weaker economy later this year, i will still suspect we will see a three handle on 10 year yields by the end of the year, may be around 3. 5 , maybe a little bit lower depending on how weak the economy ultimately gets. Lisa that comes even with fitch downgrading the u. S. Credit rating. Ira jersey, thank you for joining us on a day where very much the u. S. Debt profile is in focus. Coming up at 1 00 p. M. , richard francis, cohead of the americas sovereigns at Fitch Ratings, the person who everybody wants to speak to in terms of why this decision was made and why now . Given the fact that we have seen the debt to gdp ratio really kind of fluctuate and adjust even lower slightly as the u. S. Economy has increased. Right now in markets, you are not seeing a major reaction to the Fitch Ratings downgrade, although you did see yesterday reaction to the refunding announcement that we got today from the Federal Reserve. The nasdaq lower by about 0. 8 , s p lower by about 0. 6 . You can see a bit of dollar strength. Euro, 1. 0964, yields slightly higher, 10 year yield at 4. 06 . Crude, we do not talk about this today but really a question if you have an ongoing economic recovery, or at least strength, crude, how high could ago . Of 0. 7 trading on the nymex. The chase ink business premier card is made for people like sam, who make everyday products, designed smarter. Like a smart coffee grinder, that orders fresh beans for you. Oh, genius for more breakthroughs like that i need a breakthrough card. Like ours with 2. 5 cash back on purchases of 5,000 or more. Plus unlimited 2 cash back on all other purchases. And with greater spending potential, sam can keep making smart ideas a brilliant reality the ink business premier card from chase for business. Make more of whats yours. Jonathon downgrade, what downgrade . The from new york this morning, good morning. We market a little lower. Negative by 0. 6 . Account onto the open starts right now. Announcer everything you need to get set for the start of u. S. Trading. This is bloomberg the open with jonathan ferro. Jonathon live from new york, coming up, the u. S. Stripped of its triple rating by fitch. The white house scrambling to stem the political fallout, as Market Participants lineup to criticize the move. We