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This is the Bloomberg Surveillance

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And as always, on the Bloomberg terminal

and the Bloomberg Business app. We begin

this hour with stocks adding to losses

following an underwhelming start to tech

earnings. Jim Karen of Morgan Stanley

Investment Management joins us now for

more. Jim, welcome. The numbers from

Alphabet, the numbers from Tesla. Do we

have a capex problem, a spending issue,

or a positioning and price problem in

this market?

>> I think it's a readjustment in prices,

honestly. I mean, you know, look,

there's been a lot of expectations for

many of these companies. The earnings

have been decent. It's just that they're

not beating expectations in the way that

maybe, you know, people want them to

going forward. And and look, the

earnings run so far for the first half

of this year have been very strong. Of

course, the markets are forward-looking.

They're looking into the next 6 months,

into the next 12 months. And what

they're saying is that the pace of

earnings is just not going to be what it

was because effectively this run rate of

of very uh you know accelerated earnings

is is really unsustainable. But that's

okay because these companies in this

sector um has actually been performing

you know not so well this year. It's

actually you know the value sectors the

broadening of the market that's done

better this year so far. So I think

markets are being very efficient in

terms of taking down some of these um

you know more technology uh company

prices and the growth sector prices in

anticipation of slowing earnings going

forward. So this isn't to me an alarm

bell. It's just a natural progression of

the of the earning cycle.

>> So Jim, just to build on that, peak

earnings growth is a sufficient enough

reason alone to stay away from these

names.

I I I wouldn't say that because it's a

question of it's a question of the

valuation. I think that yes, you know,

second quarter earnings will probably

mark the peak. I mean, it's going to be

hard to beat that going forward, but

that doesn't mean that the cash flow and

that the run rate of of cash going

forward is is going to all of a sudden

dry up. Look, what we're hearing from

the broader economy is that they have a

lot of demand for technology, for

compute and for all of these uh things

that that that many of these uh you know

hyper hyperscalers provide. So the

demand I think is going to be there and

it's only going to grow. It's just that

the earnings growth rate may not be as

fast as it was you know like in the

first half of this year just going

forward. And I think that's why these,

you know, many of these companies are

are are adjusting in price. And that's

actually a very good healthy sign. And

meanwhile, John, you know, as all of

this is happening, the equity markets

are holding up and they're holding up

because the markets broadened out. So,

so, so to me, this is, you know, you

know, this is okay.

>> How unusual is it, Jim, to see the stock

market holding up and the broadening out

continue with yields continuing to

climb? If we were having this

conversation um 6 months ago, 9 months

ago, we would have said that if many of

these hyperscaler stocks go down and and

and bond yields go up, that would

absolutely spell spell a disaster for,

you know, for equity prices broadly. But

that's not happening right now. And I

think that's a really important signal

for us to take away. So, is it unusual?

Yes, it's unusual. Is it uh is it is it

a shock right now? No. Because what

we're seeing is is the other sectors of

the markets, the other broadening. If

you look at the healthc care sector, if

you look at the consumer, if you look at

financials, if you look at industrials,

if you look at materials, all of these

other sectors are holding up and they're

and they're making up for some of the

losses that we're seeing in in the

technology sector that people were quite

frankly were wor worried about. Let's

say next week uh Kevin Walsh comes out

and announces that the Fed just hiked

rates by 25 basis points is prepared to

take further action to limit inflation

and frankly gives what the market

already has priced in. Would that affect

things in a negative way or in a

positive way?

>> Yeah, that's a really good question. Um

I'm going to say that it's actually

going to impact things in in in a

negative way. And the reason I'm going

to say that is, you know, number one, I

I don't think that the Fed is going to

hike rates, you know, this year. Um, and

but but the other issue here is that

this is a supply side shock. The Fed's

tools, monetary policy is is there when

the economy is overheating because of

demand side issues, you know, that are

taking place, you know, higher wages,

you know, rampid hiring, a lot of

spending, things like that. When you

have a supply shock, when you have an

oil or an energy uh, you know, shock

that's coming through, a rate hike is

basically just saying we're going to

hike into something that's going to slow

the market in the future. Higher oil

prices is a headwind to the market. Why

would you hike into a headwind into the

market? It it it doesn't to me that

doesn't make a lot of sense. So that's

why I think the markets would take it

negatively

>> when it comes to what they should do.

though higher oil prices potentially can

become entrenched in this economy,

especially when you're dealing with an

economy that is farm to road to table

when it comes to things like groceries.

At some point, is the Fed going to have

to move given the fact that last year

they said the cuts were insurance cuts?

>> Yeah. So, so if it does become a

pervasive uh you know higher level of

inflation that's seeping into the core

uh you know and it's becoming very very

permanent then you know absolutely the

the Fed would have to hike hike interest

rates. I don't think that we're there

yet though. I don't think that we're

seeing really you know the material

sides of that that would be running

through their large scale macroeconomic

models what they call the FRB US models.

Um, so I I still think, you know, look,

there might be a disscent. I mean, you

know, and and I think that Worsh needs

to explain that, but uh but I think

that, you know, a lot of what Worsh is

really looking at is this task force and

trying to decipher the data and have new

data points come in that can help him,

you know, disseminate this information.

But I, you know, and it's a it's a great

question, but I just don't think that

we're at the point where we're seeing

widespread inflation to the point where

the Fed would feel the need to hike

interest rates, at least not at this

moment. Jim, this is new territory and

given the average age on a trading floor

right now, it might be territory that

they've never experienced before. We're

going into a meeting next week and we

don't really know what's going to happen

and that might be a feature, not a bug

of new leadership. You've written about

this, Jim. Do you think they are

strategically reintroducing volatility

into the front end of the curve? Can we

just start there?

>> Yeah, I I I I do, John. I mean look so

so so the way that I think that Worsh is

approaching this is that he wants to

have more contemporaneous more realtime

uh policy reaction meaning you know Fed

interest rates hikes and cuts and you

know depending on the cycle think of the

front end of the market as the shock

absorber to inflation and inflation

expectations. If you get the shock

absorber right you get a smooth ride for

the back end of the curve and the back

end of the curve could get more normal

stabilized interest rates. Um and that's

where most people borrow. That's what

corporates borrow. That's what people

borrow for mortgages, for cars, autos,

and and and everything else. So, I think

the uncharted territory that we're

moving into here is that is that is that

Worsh will likely be more volatile in

terms of his short-term views on on

inflation and and interest rate policy,

but that's there to smooth out the long

end. And I think this is a very very

different Fed right now that's going to

introduce more supply side indicators,

not just rely solely on demand side

indicators to help uh you know make make

their policy decisions going forward.

Stay with us. More Bloomberg

surveillance coming up after this.

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under Savylvanas this morning, doubling

down on the war.

>> We don't need the hormon street, but we

do it because we have to do it because

we cannot let Iran have a nuclear

weapon. They're getting hit so hard and

they want to make a deal, but I say

they're not ready to make a deal

because every time they make a deal,

they want to change it and everything.

They're not ready. They'll be ready very

soon. So, here's the latest this

morning. House Speaker Mike Johnson

delivering a win for President Donald

Trump's effort to fund the Pentagon.

House narrowly passing a record $1.15

trillion defense bill setting up

billions more in spending for the war

with Iran.

>> So when it comes to this, the president

really wanted Congress to act. The House

did. The issue is we're probably not

going to see the Senate take this up

very quickly. This is part of

reconciliation. They approved $95

billion. Part of that, as you mentioned,

73 billion in funding for the Iran war,

12 billion in farm aid, and 10 billion

aimed at incentivizing states to adopt

elements of the Save America Act. So all

these are the president's priorities.

The issue is only the house was able to

push it forward and potentially it might

be a very hard vote ahead of the midterm

elections for some individuals to take

that vote. And I don't see Senate

Majority Leader Thoon acting on this

very quickly.

>> Well, let's talk about the view from the

House. The Republican Congressman French

Hill voting to pass the budget, saying

that bill, this bill ensures our

military has what it needs to deter our

adversaries and defend American

interests around the globe. Congressman

Hill joined us now for more.

Congressman, welcome back to the

program. It's been too long, my friend.

Let's get into some of these issues. You

understand? Well, the asymmetric nature

of this conflict we have at the moment.

The American workforce, the American

military is spending an absolute

fortune, an absolute fortune right now

to fight and defend American interests

and global interests for that matter in

that straight. The Iranians are able to

use very cheap one-way attack drones. Do

we really want to get drawn in to an

enduring billion dollar ski shooting

over in Iran for as long as the eye can

see?

Well, first, thanks for having me back.

It's always good to be with team

Blueberg early in the morning. Uh the uh

spending bill for budget reconciliation

was important to make sure we keep our

stocks high. And I think it's important

for the American people to understand

that after decades of trying to pay the

Iranians, offer the Iranians diplomatic

capability, uh the long-standing Obama

negotiation, uh the risks to Iran having

a nuclear weapon were rising and Iran's

provocative nature threatening its Gulf

neighbors, using terror with the Houthis

to close the Red Sea, to attack Gaza, to

continue to disrupt in Syria and

Lebanon. I think the president just took

the decision we have got to prevent them

from having a nuclear weapon which she

initiated this spring. So, uh I agree

that Iran shouldn't have a nuclear

weapon and we also need global open uh

seas in the Persian Gulf. I would hope

that we would have more support from

around the world for those international

waters. And I think that's something

that I've been a little disappointed in

in our strategy is not [snorts] the

maintenance of those sea lanes. Well, we

do have the Senate majority leader

though when it comes to the funding

saying earlier this week that he's not

going to move on the House budget

blueprint until the Senate solves the

September 30th funding fight. So, when

do you actually think we're going to be

able to get that money that you think is

critical to our troops and military

actually out the door?

>> Well, I would hope we could get that

done before September 30th is the answer

to your question. I think Senator Thun

recognizes that the House has now passed

also. you didn't mention it, but a

continuing resolution fully funding the

government until December 4th. That's

also a tool that John Thun has that he

can bring to the Senate floor because

he's fearful that Democrats in the

Senate once again to try to get an

election advantage if somebody considers

it one will try to shut the government

down. Chuck Schumer's done that twice

over the last uh during this Congress

for the longest shutdown in American

history. And what I think John Thun has

now in his uh arsenal of suggestions is

one, we have a CR to fund government

with no uh additions through December

4th so that we don't have a government

shutdown. And secondly, he could use the

budget reconcil reconciliation act in

the Senate potentially to fund uh

government for the rest of the fiscal

year. So, he's got some choices and I'm

sure he'll work with his new budget

committee chair, Senator Johnson,

replacing Lindsey Graham, on what those

options are.

>> Was this a hard vote to take? The

majority of Americans oppose this war

and now gasoline prices are north of $4

a gallon across the United States.

>> Well, I don't think anyone wants high

gas prices. There's no question about

that. Uh and it's unfortunate that the

Iranians don't recognize that they have

a once-ina-lifetime opportunity to

return uh their country to an open

society that is lives in peace with its

neighbor and not the largest exporter of

terror or threatening Europe and Asia

with ballistic missiles and a nuclear

weapon. And so I think that balance is

pretty clear to me. It's been 50 years,

f my entire working career, we've faced

assault from Iran, killing Americans,

killing our allies, threatening our

interests, trying to assassinate our

officials on our own soil here in the

United States. And so I think that

balance is just something we have to

cope with. But I no one wants high gas

prices. What we want is the Iranians to

come to the negotiating table and stick

with a deal. Uh and that's what uh we

need to continue to have our allies

including the Pakistanis and others help

forcefully make that case.

>> Congressman, can we afford a protracted

fight right now with our yields

climbing, with our deficits climbing,

with the bill already uh significantly

higher than some people were prepared to

pay for.

>> Look, it's not whether we are can

afford. There are a lot of challenges

that we have in the world that we have

to be prepared for. China uh

infiltrating our telecommunication

networks and threatening our

infrastructure here requires a major

investment. Uh countering that uh is a

significant investment. Countering

terror around the world that threatens

our interest and our allies interest. Uh

countering Putin's advances in Europe

and his unwillingness to quit uh his

invasion of Ukraine. All these things

cost money and America is in a leading

uh position both in intelligence and in

military affairs.

>> Congressman, I guess I'm I'm watching

the bond yield space, not to surprise

you, you know, here in my seat, but I'm

watching how yields have reached the

highest levels going back to earlier of

last year. Looking at the fact that a

rate hike is almost evenly priced in

next week for Fed Chair Kevin Worsh. Do

you think it's appropriate to

potentially hike rates a bit to bring

down the long end of the yield curve as

the US is facing all these bills that

are getting more expensive to pay?

>> Well, that's a decision the Federal

Reserve will have to make. I think what

we have to do in Congress is make sure

we meet the needs of the national

defense to counter the threats that we

have that are threats that uh we've

inherited for decades and coped with for

decades. These are not new threats, not

new uh forces that we face whether it's

uh Ukraine, the Middle East generally,

the Gulf or Iran's threatening in the

region. So, I just think we have to be

prepared. Preparing for a common defense

and funding that is one of our most

important obligations here in Congress.

We of course want the Iranians to come

to the table. You've seen the volatility

uh since February in uh global uh oil

prices based on what's happening there.

And the minute they come to the table,

bring peace and work with their

neighbors uh to reopen the Gulf, I think

you've seen gas prices and crude oil

prices drop precipitously as they've

we've already witnessed at least twice

in the last few months.

>> Stay with us. More Bloomberg

surveillance coming up after this.

>> [music]

>> Yields still climbing. Here's the tape

from Safhir Kernney Leman of FHN

Financial writing, "We think the Fed

will be on hold for the remainder of

this year and through the first half of

next year. That being said, there is

more likelihood of a hike than a card."

Sophia joins us now for more. Sophia,

good morning. Good to see you.

>> Good morning. Thanks.

>> Thanks for dropping by. Thanks for being

here. What's the argument for a hold

given this backdrop right now?

>> You know, I think the big thing is one,

you guys just hit on it. Things are

changing very rapidly, right? a week and

a half ago after CPI PPI is maybe a

different picture than where we are now

with WTI crude at 90 and Brent almost at

100. Um but that being said, you know,

the the Fed is working off the data they

have and we did just get that better

than expected June inflation data. Um so

I think that this meeting puts them on a

hold. That being said, right, more

likelihood of a hike than a cut without

a doubt this year. And I think the

really big risk is where do we go from

here with what we've seen in oil with

what we see in expectations um and from

what we have you know we know there are

several people on the Fed Lori Logan

Beth Hammock Neil Kashgari that desented

only a couple of months ago because they

really were worried about inflation and

now there's more upside inflation risk

>> CPI PPI over the last week. Why is that

a source of comfort for you?

>> Well, you know, I wouldn't say it's a

source of comfort. I do think we cheer

one good data report, right? We just got

the jobless claims number super low. Um

but we also have to remember it's one

month and it was one month that was so

good that in the context of inflation

you have to go that's just one month. I

think part of it is a reaction to um

firms are a lot quicker to change prices

right now right we had oil come down and

we saw the immediate reaction not just

in energy prices but also in different

core inflation right core was the big

surprise um we saw that core inflation

that was flat that actually came down to

2.6%. And so the other way you think

about it is now it's going the other

direction. and our firm's going to be

equally as fast to pass along price

increases from fuel again. Um, so I

think we have to put that in the context

of it's one month, but I do think it

sends the Fed into the meeting next week

on that sort of wait and see more than

ready to take action. Do yields at this

level start to impede economic activity

in the US?

>> You know, I don't think just yet because

again, I think we're in this very

volatile period, but I think the longer

we're here, maybe. That being said, you

just mentioned it, we have seen a less

interest rate sensitive economy. um

right even in the last couple of years

when you know the Fed tightened rapidly

we saw we keep joking this word

resilient this remarkably resilient

economy and we've continued to see that

growth um so I think it depends on how

long we see yields at these high levels

because the big thing is we've been in a

very volatile period right if you look

at the evolution of the yield curve over

just this last 6 months we've been high

and low largely high since the war in

Iran began but we're seeing a lot of

movement and I think it becomes we have

to see a sustained hold at these high

levels.

>> If it's a more volatile market and it's

a more volatile world, does it make

sense for Fed policy to be more volatile

as well in terms of not just forward

guidance or the lack thereof, but also

for them to be able to kick up rates one

month and then take them down another

month?

>> Yeah, I think that might be where we're

headed, right, with that lack of forward

guidance, lack of commitment to a path

forward. Um, they want to be nimble. Um,

and maybe that's a good thing, right? A

lot of people think this is a big shift.

We've had J. Pal for a long time, for

eight years, who was very clear in his

forward guidance, very communicative,

but he really was the one that set that

precedent, right? We haven't always had

a Fed that is this communicative than

we've gotten used to. And so, we might

be going back to this. Every meeting is

a live meeting depending on what needs

to be done.

>> You think next week is live as well?

>> I think it's live, but I don't expect

that they will make a change. I do think

there's a not a small chance there could

be dissents, right? Again, we have heard

some vocal people that that are in favor

of uh raising rates, that concern of

inflation. Again, I mentioned uh Beth

Hammock, Lori Logan. Um but I don't

think that there's necessarily the group

yet that's ready to make that change.

>> Do you think that does wash a favor

dissenting next week?

>> Maybe. Uh do you think you mean given

him some credibility and that

>> Yeah, on the margin maybe having him

anchor inflation expectations without

really doing anything.

>> Yeah, I think it could. That's a great

point, right? it could sort of set the

tone that we are ready to react and

Worsh has been nothing but clear that

inflation is the Fed's number one

mandate right that the statement from

June uh was was quite short but it ended

very clearly we will get inflation back

to 2% he reiterated that week last week

when he was doing his congressional

testimony they are committed to 2%

inflation and so maybe those dissents

with that would tweak the market I think

to think oo September probably is live

um that could actually maybe help

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