00:00I do want to start with what your read is on the various markets out there.
00:04The moves in the bond market, moves in equity markets, and the moves in commodities and energy.
00:09Are they all telling the same story, or is there one market that might be a little bit more predictive
00:14than the others?
00:16I think the equity market is telling the cleanest story, which is that we do have a resilient economy.
00:22We have people who have jobs.
00:25We see that in the weekly jobless claims coming down steadily since late 2005.
00:29And that's supporting earnings and stocks.
00:31Of course, AI is a big part of this story.
00:35Brookings put out a report yesterday suggesting that between 2025 and 2032, so eight years, over $10 trillion in investment.
00:45That is incredibly large stimulus for the U.S. economy.
00:49So that, to me, is a clean story for now.
00:51The bond market is rising.
00:54Yields are rising partly because of that strong growth story.
00:58So that's fine.
00:59The problem is it's also rising.
01:02The yields are rising because of inflation worries and because of supply concerns.
01:06When you take a step back, I think the biggest common denominator is not oil.
01:11It's AI.
01:12AI is the too good to be true.
01:15It's so big.
01:16It's driving the economy.
01:18But it's also crowding out demand for U.S. Treasuries.
01:22If I can get a higher yield on an AI company's debt, I'm going to think twice about how many
01:28treasuries I want.
01:29So it's almost too good.
01:31It's actually starting to cause some problems.
01:33Well, is there a breaking point, particularly when it comes to AI debt?
01:36And I think about SoftBank's deal earlier this week that was reported.
01:41Obviously, the demand was there, 11 billion U.S. in total.
01:46Demand that, based on Bloomberg reporting, was more than twice that.
01:49But also a rate, at least on the dollar bonds, that was 10 percent, which is eye-popping to me.
01:55And I do think, OK, that's fine.
01:58People are coming back.
01:59But if you were to come back in a few months and have to offer 12 percent, would the market
02:03still be as receptive to that?
02:06Look, when it comes to yields and cost of capital, the level matters.
02:10But I think, actually, more importantly, is why yields are rising and the speed of the move.
02:16So why yields are rising, we just talked about.
02:18There's good news and bad news there.
02:20Growth is good news.
02:21Supply and inflation, less good news.
02:23But the speed is the thing you need to be careful about.
02:27The move we saw this week, 17 basis points in the 10-year before things settled today, that is really
02:34fast.
02:34We saw the biggest move in the bond volatility index, the BOA move index, biggest rise, biggest levels there since
02:43March at the start of the war.
02:45When you get that kind of volatility in bonds, portfolio managers reduce risk broadly, not just in bonds but also
02:52in stocks,
02:53because the cone of outcomes for the macro environment has widened.
02:57And so when we have these bond moves that are really fast, that's when you need to be more concerned
03:02that it could break something, so to speak, along the way.
03:06And I think we're in that territory now that, you know, look, if the oil crisis is over, if we
03:12actually have a deal soon, that's amazing news.
03:14And we'll all be delighted to see equities up, bond yields down.
03:18But we have seen this promised a few times before over the last six months.
03:23So I'm not holding my breath on that.
03:25Well, I mean, let's talk a little bit about that.
03:26And I want to talk it through the lens of the consumers, because you're seeing a lot of contradictions there
03:30as well.
03:30We got the U-Mish numbers today.
03:32It shows consumer sentiment still dour and the outlook for inflation still higher.
03:36But then, of course, we got the durable goods report that seems to suggest a lot of ordering out there,
03:40which maybe seems to suggest companies are confident that they're going to be able to sell those finished products.
03:46I mean, what is our economy right now?
03:48And just strip out AI.
03:49I understand AI is a huge driver of this.
03:51But without AI, what is our economy?
03:54No, that's a great point, Romain.
03:56Look, at the end of the day, GDP in the United States is 60%, 70% driven by consumers.
04:01So right now they have jobs, and because of jobs, they're spending, but they're not happy about it.
04:08We see that in the sentiment.
04:09Look, University of Michigan has some different considerations to it with politics, but other types of sentiment are showing us
04:15the same stories.
04:17Consumers are grumpy.
04:18They're grumpy about borrowing costs.
04:20They're grumpy about how expensive everything has gotten.
04:23But they're still out there buying things and going to events and experiencing things.
04:29So we have to keep an eye on both their confidence and on the jobs.
04:34The job report next week will be important.
04:36I wouldn't blow off the Michigan survey today, but as long as people have incomes from jobs, America's a nation
04:44of spenders.
04:45We are running down our savings rate, though.
04:47I almost forgot to make that point.
04:48That's a biggie because it means if the job market were to turn for any reason, they don't have a
04:55cushion there.
04:55And you could see things for the broader economy and for equity expectations turned down pretty quickly.
05:01Well, give me a sense because, I mean, we get the jobs report next Friday.
05:04We're also going to get that PCE report in the middle of the week, and at least for the markets.
05:09I am curious as to which maybe takes precedence.
05:12Is the idea that if we get an inflation report that's hot versus an employment report that maybe is strong
05:19or vice versa, does one sort of maybe rattle the market more than others?
05:24I mean, the Fed right now has been very clear that inflation is its priority.
05:29And so with that in mind, the PCE is going to matter.
05:32But PCE is also something you kind of know once you get the consumer and producer price reports.
05:38You can back into that PCE inflation figure.
05:42But to me, if you get any surprise at the margin, a little on the higher low side, that's going
05:48to be important.
05:49But at the end of the day, the bias of risk is that we're going to have inflation hot enough
05:54to keep the Fed rate hiking cycle in play.
05:59It's unlikely, given the prints we've gotten on CPI and PPI, that a rate hike later this year doesn't happen.
06:06The question is, do you have one or two?
06:08And then on the jobs report, look, we know we have a lot of volatility in that monthly report.
06:13And yes, you'll get some immediate trading on the back of the number and the surprises.
06:19But you have to take a step back with the labor market and look at all the different indicators.
06:24Again, the timeliest indicator, the best single indicator for the labor market is weekly jobless claims.
06:29And jobless claims have been coming down steadily since the end of 2025.
06:35More Americans are working.
06:36That's the important thing to take away.
06:39Yeah, absolutely.
06:40And we saw that fall in the most recent number that just came out.
06:44But back to this idea of the interplay between AI and consumer spending.
06:48If we were, hypothetically, to see any sort of material pullback in spending, particularly along the middle and lower income
06:54consumers, more so than maybe what we already have,
06:57is the AI spending and investment, is that enough to maybe keep not only the economy going, but the financial
07:04markets as well?
07:05I mean, it has been so far, right?
07:09I mean, we have had shock after shock after shock hurting consumers.
07:13But the AI buildout and the jobs that's creating in concentric circle industries, whether we're talking about machinery and industrial
07:22goods or energy, etc.,
07:24that's been enough to hold the economy up, alongside with some fiscal stimulus from last year's big, beautiful bill.
07:31That said, as interest rates keep going up and if inflation stays sticky, which right now it is, at a
07:38certain point, consumers can't keep tapping into their savings anymore.
07:43And then it's not clear to me if AI is going to be enough, especially if it's coming at the
07:47same time that borrowing costs are going up, which they are.
07:51And that is going to flow through, not to the AI companies as much as other sectors, but now that
07:57they're issuing more debt, they have to keep an eye on that, too.
07:59So, let's see.
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