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00:00So, Rick, the unemployment rate goes down, but a surprise contraction in jobs.
00:04Last time we spoke for last month, you said the employment picture is stable, broadly unimpressive.
00:10Has your assessment of this labor market changed since then with these numbers in hand?
00:15No, broadly not impressive, I think is the right terminology.
00:19In fact, I was thinking about it.
00:21I think it's actually remarkable how unremarkable the data is.
00:25Listen, I think when you look at, people say, well, gosh, we're not hiring many people because we have a
00:30supply issue.
00:31And you saw some of that play through today.
00:33But that being said, you're not seeing any wage growth.
00:35So, meaning there's not that demand for labor that you would expect when you've got an economy that's doing as
00:40well as it's doing.
00:42I mean, we're going to grow.
00:42I think you're going to see 6% nominal GDP.
00:45You've got corporate top line revenue that's strong.
00:48Earnings are strong.
00:49But you're seeing operating leverage for companies kick in like you read about.
00:52I mean, you look at all these earnings reports, particularly in the tech space, companies are growing.
00:57They're spending immense amounts of CapEx, but you're actually cutting people in many cases.
01:01So, anyway, I think we're seeing a productivity revolution.
01:04And I think we're watching it play out month in and month out.
01:07I mean, to have only 20,000 jobs on a three-month moving average, you strip out health care, you're
01:11having negative job growth in aggregate.
01:14So, anyway, I think it's, listen, I just think we're going through.
01:17I think when they summarize this years from now, you're going to witness something that is productivity.
01:22People say it's AI kicking in.
01:24I actually think it's just been an ethos around companies growing their business and seeing how you can operate without
01:30that much employment.
01:32Well, also, you've got the fall in immigration that is probably contributing to these big declines we're seeing in the
01:39labor force.
01:40But the people who want jobs are apparently getting jobs with unemployment of 4.1 percent.
01:45So, I assume this tells you, as well as the Fed, that we don't have a problem with the labor
01:51force side of the mandate.
01:53Yeah, I mean, I think that's right, Mike.
01:55I mean, you know, I've been pretty adamant about it.
01:57I don't think the Fed needs to hike.
01:58And, A, I don't think you really will solve the inflation dynamic.
02:02Part of why I think these task forces will be so powerful is you'll get into what are some complex
02:07subjects.
02:08When you break down inflation today, you look at the difference between services and goods.
02:11You think about what's still sticky in inflation, education, health care, insurance.
02:16Because you're moving the overnight funds rate up really do much.
02:19And you get to the point being, if you're restrictive on rate and you're driving mortgage rates higher, I just
02:24don't see that as really effective, trying to bring inflation down.
02:28You've got what I would argue is, yeah, maybe it's an okay labor market.
02:31But, you know, you still need, in particular when you have this much debt on the country, you need to
02:37grow faster.
02:37You need to put more people to work.
02:39And I think that, to me, is the philosophy that the Fed has to employ today.
02:44Well, on the inflation side of things, Rick, I know you've been a big proponent.
02:47Again, the type of inflation we have isn't something that's fixed by hikes, but perhaps by policy, not monetary policy,
02:54but fiscal policy.
02:55What is the policy you think that could start to eat away at inflation?
02:58Is it just, like, ending a war, basically?
03:02I mean, listen, the war is a big deal.
03:04I mean, obviously, not only do you get higher prices in terms of fuel, but you're, you know, there's a
03:09transmission effect through that when you talk about, obviously, trade getting slowed somewhat.
03:13So, anyway, the war is a big deal, obviously.
03:15So that will change.
03:16Then the dynamic, and people will focus on tariffs.
03:19You know, the goods inflation, you know, with the U.S. economy, it's not that large of an importer of
03:23goods.
03:23So, yes, and I think people got really worked up about that last year.
03:27So what do you do?
03:28And how do you create fiscal velocity?
03:31You know, there's a bunch of things you could do.
03:33And I think, quite frankly, deregulation is powerful.
03:35I think the idea around how do you help with housing, things like zoning, permitting, et cetera.
03:40How do you get, like, some of the stuck student loan asset or liabilities that young people have?
03:48How do you transition some of that?
03:50How do you help with some of that?
03:51I think there's a whole series of fiscal dynamics that can help with inflation.
03:56But I don't think moving the overnight funds rate will really do it.
03:59And we've seen that before.
04:00It doesn't really have that much of an impact.
04:03I guess I would ask you, then, in that case, because I agree that there's probably not going to be
04:07anything happening on the fiscal side because they can't even vote on an attorney general at this point.
04:12And the Fed is maybe leaning now towards a hold in September.
04:18We'll see after the Wednesday CPI report.
04:21But that leaves us with an inertial economy.
04:24And what do you think happens to the economy if there's no movement on the fiscal or the monetary side?
04:31Mike, I mean, I think you're unbelievably good at analyzing this.
04:35And I always appreciate the questions you ask at the FMC meeting, et cetera.
04:39The only thing I will say is I'm not sure I agree with the inertial concept.
04:42I actually think the economy is operating at an amazingly strong level.
04:46And if you look at the capex, it's obviously a big driver of that, that from AI that's getting into
04:51straight growth of the economy in so many different forms.
04:56And then you look at consumption today.
04:57Consumption, you see this, you know, particularly in areas like leisure and hospitality.
05:02You see this in some of the transportation dynamics in terms of travel.
05:06Listen, the economy is operating.
05:08And actually, the thing that was pretty amazing to me in the last two months is somebody had a fiscal
05:12tailwind.
05:12But they actually had lower and middle income that was actually starting to accelerate.
05:17And we see that in all of – we use a lot of this high-frequency data.
05:20You actually saw consumption in a pretty good place.
05:22So, listen, I think the economy is operating at an extremely solid level.
05:26You know, you would think in the second half of the year you'd start to moderate a bit post the
05:31fiscal tailwind.
05:32But, boy, you know, you see this.
05:35I mean, this was a pretty amazing quarter of earnings reports that – not pervasively across every single company or
05:44industry.
05:44But, boy, I thought it was pretty darn good.
05:46And, you know, part of what – when you look at the equity market and having a pretty good run,
05:49particularly recently, you're actually looking at multiples that are coming down because these companies are earning so fast.
05:54So, anyway, I'm pretty enthusiastic about where the economy is today.
05:57And I'm assuming that that enthusiasm over equities translates into your world of credit, Rick.
06:03You have Bank, of course, a fund that has been outperforming the broader benchmark by a healthy clip for the
06:08past few couple of years.
06:09I know last time you joined, you expressed skepticism on USIG credit.
06:14You like carrying higher income.
06:16I think all of this is so interesting time at a time, Rick, where, as you point out, so much
06:20is happening because of AI, especially in debt with the huge issuance we're seeing from the hyperscalers.
06:26We've got another $25 billion that this market easily took up from Google just this week.
06:31And at the same time, we're going to get more issuance from the Treasury next week.
06:34What are you thinking about where you want to place Bank just given the sheer amount of issuance that continues
06:39to hit this market?
06:41You know, Danny, I would say one thing about, you know, because you've had a backup in rates, you're able
06:46to hit your yield targets.
06:48I mean, talk about we're hitting almost seven.
06:49I mean, six, you know, high sixes in terms of yield.
06:52And so a couple of things we've been doing is you actually don't need to go down in credit quality.
06:55You actually don't need to go that far down in terms of the liquidity in the portfolio.
06:59So, you know, we've been keeping it, you know, we've been adding a bit in terms of European fixed income.
07:05You know, I think emerging markets are interesting, particularly if you assume the dollar is not going to be moving
07:11aggressively.
07:12You made the point right.
07:13I think investment credit, give the amount of supply we're going to see, data center, hyperscaler.
07:17Investment credit credit is not that interesting at all.
07:19But in the securitization market, you know, they've securitized assets, both in commercial real estate, ABS, RESI, you know, those
07:30markets are in pretty good shape.
07:31So, you know, we're in an environment where we don't feel like we've got to stretch a lot.
07:34You know, these real rates that today give us an amazing ability to keep our yield up without really stretching.
07:40We're running Bink now at an average rating of A minus.
07:44You know, you're hitting high sixes like that.
07:46Pretty good today.
07:46So I think we're trying to be in bonds, we're trying to be as boring as you could be and,
07:52you know, take the risk in equities, which, you know, I have a little bit of volatility to them, particularly
07:57single name.
07:58A little bit less risk maybe in the bond market, but there's such an appetite, I guess I would say,
08:06for debt, for the hyperscalers, et cetera.
08:11How's that affecting how you can sell all of these bonds?
08:14I was really surprised yesterday with the Google Alphabet offering that it was so oversubscribed.
08:22You know, Mike, we're living through something.
08:24And so one of the real benefits to all the financing that has to come, data center, hyperscaler, U.S.
08:30Treasury, UK, Japan, is we're actually going through a pretty historic demographic that is supporting this demand for yield.
08:39Insurance companies, life insurance, pension.
08:42So it's amazing.
08:43If you price assets right on the debt side, you can place an awful lot of debt.
08:48Now, that being said, I mean, the hyperscalers have clearly widened quite a bit.
08:52And so you're getting the levels.
08:54I say these real rates, if you're, you know, if you're a pension today and think, gosh, I can defies
08:58a good portion of my liability stream at these real rates.
09:02It brings a lot of people in, particularly if you get some spread on it and you're watching that play
09:07out.
09:08Like, I would say one thing.
09:09I mean, the supply is not going to stop coming.
09:11And, you know, next week we get a lot of Treasury supply.
09:14So, you know, in terms of interest rate exposure, we feel like we don't have to be in a rush
09:17to add much interest rate exposure and just like clip coupon.
09:22All right, Rick, you're going to stick with us.
09:23We have to see how this market opens up and would love to get your commentary on a continued market
09:27reaction to this jobs report.
09:29We are back with BlackRock Chief Investment Officer of Global Fixed Income, Rick Reeder.
09:34Rick, OK, so this basically takes, in your view, a hike off the table.
09:39I wonder about cuts, though, because when we had spoken about a month ago, you said perhaps we still could
09:44get cuts in the back half of this year.
09:46Do you think that's still a possibility?
09:49So, listen, I mean, I, you know, you still have a Fed committee that is that is generally hawkish.
09:56You still have a committee that is more focused on inflation than the labor readings.
10:01So, listen, I mean, I think, I think you could, it could still happen.
10:05You'd have to see some deceleration in economic conditions.
10:09You'd have to see, you know, we think core PCE is going to come into the, into the high twos,
10:14down to the high twos.
10:16Next year, we think you're going to get in the mid twos.
10:18Can you still get it done this year?
10:20I think so.
10:21But it, listen, I mean, I think you have to, one thing I've learned about investing, it's not what you,
10:26it's not what you think they should do.
10:28It's what they're going to do.
10:29And today, the structure of that committee clearly is in the, we're going to fight inflation and, and, and use
10:34the rate tool to, to be that, that tool that you get there.
10:38So, listen, I think they still could.
10:40I just think hiking doesn't make a lot of sense today.
10:43Pre-interpret Wednesday for me, though, the, the CPI, we saw a big drop in market expectations, sort of an
10:49e-jerk move after the labor report.
10:51What's it going to take to move one way or another in the fixed income markets on Wednesday with CPI?
10:57Yeah, that's a great question, Mike.
10:59So, you know, you've gotten a couple of softer prints on inflation recently.
11:03You know, we think we're in this mode of getting 0.2s type of, type of numbers when you look
11:09at core.
11:09And then, you know, even, you know, I was looking at the numbers for core PCE, maybe a little under
11:15the 0.2 monthly reading.
11:17So, yeah, listen, if you got something significantly aberrational to that, you know, that would certainly move markets.
11:23Listen, if the number came in significantly higher, which would be incongruous to what you've seen over the last couple
11:28of months.
11:29Listen, you know, is the Fed going to be on alert for that?
11:32Yes, I think so.
11:33You know, you know this better than anybody.
11:34I mean, I think this I think this, you know, what the chairman has stated, what Chairman Walsh has stated,
11:38it's not just one number that he's laser focused on.
11:41He's looking at the panoply of readings and our senses inflation is slowly moderating.
11:50But, you know, it'll be interesting to see those that report, like you said, that comes out Wednesday.
11:54I do wonder, obviously, yields are coming in now.
11:56But we have had a 30-year yield that has been stubborn and stubbornly moving higher above 5.2 at
12:01one point now.
12:02It's obviously below 5.20.
12:04Do you think that this market is at all reflecting its concerns about credibility over the Fed and Chair Walsh?
12:13You know, I'm a little surprised at the concern around, you know, whether it was the last FOMC meeting or,
12:20you know, some of what I thought was a little bit harsh on credibility.
12:25I think, you know, I think reduced forward guidance is not terribly intimidating to market participants.
12:32So, you know, I don't really think, you know, can we get more from the Fed in terms of the
12:36metrics they're looking at, in terms of the structure of what is going to be important to them going forward?
12:41I think so.
12:42And I think we'll get more details around that.
12:44Listen, Andy, I think it is we're getting a lot of supply of product.
12:47You know, you're pushing real rates up because you're getting a financial transmission that is historic in terms of whether
12:54it's fiscal supply that's coming from not just U.S., but obviously, you know, pressures and whether it's U.K.,
13:00Japan, plus the amazing amount of supply we're getting into the credit market.
13:04So I think it's more that than it is anything else.
13:07And like you all have said, I mean, we still have some stickier inflation that is keeping these rates up.
13:12So anyway, those are where I would put the what's the influences.
13:17Hey, Rick, just super quickly, because we're about to talk to our tech reporter, Ed Lolo, about all the A
13:21.I. debt coming in.
13:22And we talked about it just a moment ago.
13:24You talked about what it does to the I.G. market.
13:25Do you think it changes the attractiveness or the pressure on the Treasury market at all, getting all that supply
13:30from the A.I. hyperscalers?
13:33I mean, I mean, whenever you push that much supply on the market, you think about there's a crowding out
13:37effect.
13:37I mean, listen, the U.S. Treasury is still the behemoth in terms of issuance.
13:41But, you know, you take what's coming in I.G. asset backs on the back side of it through data
13:45center.
13:46So, yeah, I just think we're getting a lot of supply and all markets, including government bonds, are reflective of
13:52that.
13:53Hey, Rick, we always appreciate your time, especially on a Jobs Friday.
13:56BlackRock's Rick Reeder.
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