♪ >> the fed has latitude that a lot of places don't have. >> if financial conditions are easier, there is less easing for the fed to do. >> we want to cut rates. the problem is the data is not

letting us. >> there's no doubt that financial conditions at ease rather dramatically. i think they should as a matter of long-term strategic policy move back to neutral rates because the economy doesn't need them to be tight. >> this is bloomberg surveillance with jonathan ferro, lisa abramowicz and annmarie hordern. jonathan: the third hour of bloomberg surveillance begins right now. live from new york city this morning, good morning, good morning. it is fed decision today and going into that decision this afternoon, equities, all-time highs adding some weight to it this morning. credit spreads very tight and trying to work out what chairman powell is going to say in his news conference. lisa: honestly what people are looking for is some perspective market activity as well as maybe some walking back of this desire to cut rates because right now in the market there is this belief that the federal reserve wants to cut rates regardless of data. jonathan: he spoke a couple of weeks ago down on capitol hill in front of the house and then the senate, basically said we

only need a little bit more confidence, so what has changed to mark lisa: there hasn't even been a little bit more confident that some people are now saying if you look at the euro per your comps, is going to get complicated to get down to the level that they want to see by summer. that said, how much are they concerned about the risk of a downturn happening very late and all at once? that to me is going to be a key question, do they still see that as a bigger risk than runaway inflation? jonathan: he basically said that strong growth isn't a problem and we can respond to week growth. i wonder if that story has changed. plus we have to discuss how relevant this is to equity markets given how many cuts we rest out in 2024 and the fact we are sitting here in march. and here we are with stocks at all-time highs and that is not the conversation at all. stocks are doing ok. lisa: if your head is spinning come up with the club. i wonder if stock can keep rallying because of the named

their not vulnerable to interest rates. a text, they have huge cash flows and they don't necessarily have much debt. do you see the bifurcation continue, the broadening out that everyone has been looking for simple because those tend to be those other 492 names, the ones that are more leveraged some of these rates? this is sort of the dynamic that everyone wants to die and isn't going away. jonathan: we should stop talking so much because we've got a fantastic line of this hour. coming up this hour, we will catch up with hsbc stephen major on his bullish treasury call. whether he thinks inflation will fall in time for a june rate cut. all eyes on the federal reserve decision coming at 2:00 p.m. eastern time. bond yields rising as data comes in hotter than expected. stephen major of hsbc staying bullish. in anticipation of rate cuts we

take bullish duration exposure in europe and stay at mildly bullish for treasuries. can we start with that mildly bullish story for treasuries, why mildly bullish in the ace of a bit of a selloff we've seen so far? >> mildly bullish is not all in. all in is full on bullish and that is why europe is ranked above the u.s. in terms of possible easing and performance from duration. but we can't let go of this view that yields are going to be lower, not higher by year end, and i get they've been sliding up the last week or so, but the context is important. we've come a long way from the peak of yields in october. inflation peaked in june of 2022. the market changed its directional view in october 2022. the fed pivoted a couple months later. it seems to me that they are not going to change their mind. the next move is down and in the meantime we know it is either

unchanged or down for policy rates, and therefore the trade is sit in the belly of the curve. if not treasuries, you take credit. if you can't take those, t-bills and chill. -here long enough now. jonathan: let's go out to the 10-year. what backs up this call at the moment that yields will be lower, not higher? >> if you talk to the most hawkish individual in the december dot plot you get a longer run equity real rate just below four and you get very little rate cuts in the next year or so. if you just talk about it as a path for rates it is difficult to get the 10 year yield much above 4.5 on our calculation and you would be really going some to get to five. so knowing that that right-hand table of the distribution is sort of in, i quite liked the idea of being long.

it's very difficult at times this, and that is why the best trade which everyone seems to be doing is owning the corporate, taking all of the new issues they can and complementing a position in ig credit with t-bills. that generates a total yield of between five and six. that competes with equities. on a risk-adjusted basis, it is superb. i think that is what is going on. if you are in t-bills and then maturing, you've got the option to roll them again or go and buy something else. the thing is with buying the 10 year treasury, dropped 100 basis points in viewing. but at least if you go to ig credit, you can sit and wait. i don't think we can infer too much reasoning in the credit spread as to say something about affordability. i think it is the all in yield that people like. they can't get enough. lisa: for 70 years i remember all of the people calling for severe selloff in treasuries, and i would get the major letter and it would come out and say

you are all wrong, yields are going lower because a sickly looking at a loan patient, low growth reality. . that was beforethe pandemic a little and after the pandemic it sounds like your thinking has shifted somewhat. has the neutral rate shifted, has something about your view of the world changed? >> the quote that jon lifted is for our march allocation, the monthly. the view hasn't changed. that seems a long way from here, but believe me, once they start cutting it, the market is going to move quickly. this is the issue that people have. it's very dangerous to be short of treasuries here. you've got to have a very interesting narrative to justify the short for treasuries. the minimum you can be is neutral and small long. i think that the growth narrative has been the biggest challenge and if i put together what explains u.s. exceptionalism, it is the fiscal

population group, maybe even some productivity, who knows? but that explains what has happened in the last year or so, doesn't tell you the next 10. the 10-year treasury yield should fleck the average over that period? does anybody really think that 3% real gdp is going to be the case for the next 10 years? because it looks to me that that is very unlikely. lisa: maybe not, maybe the growth story isn't going to be there, but there is an argument for the inflation story to be there, especially given the election, even more protectionist policies, given some of the issues that are not going away with respect to wages and just the fiscal money that has been cyclical which is sort of counterintuitive. how do you dismiss that? >> i don't want to dismiss it, and you are right, but the big picture, or we have come from since june 2020 two looks like asymmetrical reversal. it went up and it came down. we are not quite on the target rate yet, but they don't have to

arrive at the target before they cut rates. it would be almost irresponsible to wait until after they have hit the target. i can't dismiss what you are saying, i don't dismiss it because it is about probabilities and scenarios. the sort of no landing scenario whereby inflation stays sticky and high, growth takes a long, that says there is no rate cuts this year in which year -- which case to yields should be 5.5. that is sort of where they would land with no landing. but soft landing is where we are today, and we got this risk on the left-hand side of the distribution here of a hard landing. has it really gone away? this time last year people were canceling meetings. canceling meetings with me, that is not an easy thing to do, anyway. because it was the regional banks stress. people saying what is a hard landing look like? with the first thing if this

interview doesn't happen. people have forgotten a year ago for a good few weeks, we had the look and the smell of a hard landing. two-year yields were screaming down to were screaming down to 3%. so i'm not saying that i know anything that is going to bring that back but it is just about probabilities. it seems to me that we are leaning a bit toward no landing, soft landing. that is what it is all leaning toward. to become a bond protects you in case that is wrong and you go back the other way. that is the explanation. i can't let go of the fact that i think rates are going to be coming down, and when they are coming down the market will price more. that is how the bond yields get down to a lower level. jonathan: that was q1 last year going into q2. then we printed something like 5% stateside which is kind of wild and then we were seeing the highs of the year on the 10 year end the two-year. something you set about supply and some reflections you had at the time about whether supply matters or not. the answer is it depends.

can we talk about what it depends on? to lisa's point, that we've got this procyclical fiscal policy in the u.s. where deficits are massive, does that matter to the ultimate call? >> i was here this time last year and we discussed it, yields were pushing toward five. looking back with hindsight, maybe the treasury made a misstep with the amount of coupons issued at that time, given that the gdp, the downgrade, the inverted curve. it looked like that was a misstep and it was addressed in the november. on the whole, supply should not matter. it can matter to your near-term tactical view if there is an option coming up with that kind of thing, but the supply impacts turn premium when there is a surprise and there is an imbalance. in the longer run, i think the huge stock, and let's remember, it has virtually doubled, we

were close to $27 trillion of marketable securities. that weighs on future growth, and that pulls everything else down. the way that bond supply deficits feed into the way the bond market behaves is two different names. there is the imbalance which can hit the term premium short-term, and there is the longer term, what it does to the equity and policy rate. and i think there is on the victim is evidence that the stock of debt ways down. so it opposes the positivity of the population growth in the near term pauses that might come from ai. but the debt stock ways the other way. lisa: just to put a bow on all of this, yesterday mark cabana of bank of america was saying maybe bonds should take a message from stocks that keep flying in that it should be stocks taking a message from bonds. do you push back?

do you say that actually stocks need to be listening to a risk that is getting baked into bonds, which is why yields are not even higher? >> i think that is a great debate, it is an interesting insight. it seems to me that the yield on the two-year treasury, you can see quite robustly and justify it based on the path of the short break. it is reflecting a fed that cuts a couple times this year and continues next year. that is an important number because it affects the fives and tens. i think equities seem to be taking the positivity from the bonds are telling them so that rates are coming down. i think bonds are purely priced off of the short rate, i don't think they are priced due to equities at all. it is an interesting debate. i would like to see how we could use equity risk premium to influence our valuation on bonds, and i think we can. unambiguously, it is bonds to

equities, i think. jonathan: this is awesome, we will continue this conversation. steve is going to be sticking with us. let's get an update on stories. yahaira: boeing's warning regular scrutiny and a slower output of the 737 max mean less cash. the cfo telling a bank of america conference that margins will run -20% in the first order as it pays out compensation from january's alaska airlines blowout. boeing says it will still have enough cash on hand for potential purchase of spirit air systems. the playmaker says the buyout is best for quality and safety as the faa ramps up pressure on boeing to improve its culture and practices. samsung shares posting their biggest gains in more than six months after a backing by nvidia. ceo reportedly said he plans to use same son as a supplier of high-bandwidth every chips. nvidia unveiled its next generation ai hardware at its

highly anticipated conference in california earlier this week. intel is in line to receive nearly $20 billion in grants and loans from the u.s. to build semiconductor lands. this marks the largest yet in an effort by the white house to bring chips manufacturing back to the u.s. it comes amid an ambitious turnaround plan by intel's ceo. the stock is up in premarket trading. jonathan: thank you. up next, a shaky japanese yen. >> because it was so well televised and the japanese have been so defensive during the hiking cycle, in reality this is not a consequential move. jonathan: dollar-yen higher for seven consecutive sessions. that is a weaker japanese yen. that conversation up next.

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♪ jonathan: live from new york city, one hour 12 minutes away from the opening bell. shipping a best follows, we are just about negative by 0.03%. going nowhere after going somewhere this year and that somewhere is higher, to all-time highs. under surveillance this morning, a shaky japanese yen. >> because it was so well- televised and the japanese have been very defensive during the heightening cycle, that in

reality this is not a consequential view. they almost need the fed to ease now or soon because that will do a lot of the work for them. if not, you have a risk that this 150 number is a big deal on the dollar-yen. jonathan: the yen is at risk of sliding back to three decade lows against the dollar after the boj and negative interest rates without clear guidance on further heights. steve majors with us here in new york. we've got to talk about this. proving not to be so consequential, how are you reading developments in japan? >> maybe it is consequential because maybe it opens the door up for the next step, the next move. if you are scenario role playing before this event, you would have said you mentioned a scenario where they went all in within rate hikes and the yield curve control, really hawkish. and dollar-yen went up. and actually, that seems to be what has happened. to me, the totality of the

decision and the outcome in the asset market is the measure of success. all the different details and all the asset markets, they are watching this closely. i would say that it looks like there is room maybe through some more of something. from a gdp perspective, maybe yields can keep going if it higher. but the dollar again, that is probably not what they want to see. jonathan: that's true. to define success i need to understand with the objective was. surely the objective wasn't to see a weaker japanese yen. >> the key performance indicated for this one would be not to break anything or make any mess. like any big decision, the first stop is don't make a mess with anything. in that regard it is ok. but it seems to me that it is not really over. this much more that can be done. the fair value with this rate move and the changes on the yield curve could be nearer to

100, and it's interesting that it is the currency that moves. that tells you that maybe investors are putting their views to the fx market more than they are to the bonds. lisa: a lot of people are saying the bank of japan is not going to be bothered necessarily by the smooth the yen do you disagree? >> i think they will be delighted. in that sense, i totally agree. they are not bothered at all because if the objective was to get the rates up without making a mess of anything, then they have achieved. but it is the totality of the asset class response that matters, and that takes time to look through. it has taken them how many years? 17 years to get here and it is step-by-step. i think is conditional. i think their analysis will still be ongoing and they will be looking at what happened to dollar-yen and to the equity market and to bonds, and that will help frame what they do

next. lisa: a lot of people were saying that maybe if the bank of japan and negative rate policies and actually tightened more significantly all the japanese investors who had been pouring their cash into u.s. credit markets, into european markets would come home, and that buyer base would not be there in the same level. do you see that as a potential likelihood, or is what we are seeing what we are getting, which is essentially that the dynamic is kind of the same? >> the japanese investors are still very happy to hold dollars. there is such a big deal gap between the two. for there to be a change in the direction of the yen, clearly more has to happen. if you told me today that policy was being shifted any way that dollar-yen would head back toward 140, that changes everything. that changes all the hedging strategies. but obviously they haven't done enough to change the direction, so i'm not saying this for sure, but it strikes me that the outcome of this could be that

there won't be more moves, more iterative steps. lisa: which raises this question about the threshold for today's fed meeting and how hawkish fed chair jay powell would have to be before you see a move in the yen that would actually cause the bank of japan to say way second, maybe we need a second step. >> i think that is unlikely but given what we've just seen, why not? if we had sat here last week and called higher dollar-yen on the basis of what we've just seen, it would have been an outlier, so why not? let's go with it. chair powell goes hawkish and says it was a mistake what i said before. he's not going to say that. one thing you can say for sure, he's not going to say that. lisa: not like that. >> we can guarantee that is not going to be said.

jonathan: reflecting on this fixed income market, obviously in europe we were there together, we have to talk about negative bond yield. what did we get up to, some ridiculous number of negative yielding assets? how would you describe that? for those who maybe are just joining the industry and were not living it, how would you describe that to them? >> it was an experiment in monetary policy. it was obviously a scary time because the policies were there to address the risk of deflation. we don't know what would've happened without some of these policies. not saying i am a fan or anything, just that they get a bad rap. what else were central banks supposed to do? i look back at it and i think it was an experiment ended might have had some quite serious unintended consequences because

it should not have been a surprise that asset prices went up. jonathan: do you judge the success of them? >> counterfactual. how many people would have lost their jobs? and there has been analysis on this from parts of the ecb. did negative rates actually keep the unemployment rate lower than it would have been otherwise? you can't measure just how important that is for society. just look at negative rates and say look what they did, they created all of this asset price bubble and all of this, the full analysis is going to look at the real economy and especially employment. jonathan: how much worse it could have been. fantastic to see you, good to catch up. just remember that price target, re-present 10 year yield. lisa: he looked slightly in pain. jonathan: are you going to join us before year-end? >> if you are happy to have me. jonathan: of course, always.

we will catch up with one goldman sachs, looking ahead to that decision and little bit to run this afternoon and we will see if chairman powell entered the news conference and says i got it wrong. lisa: that's not going to happen but stay tuned because maybe he will. jonathan: the risk factor in the minds of many is whether that medium drops from three cuts to two. we will see in the projections that begin at about 2:00 p.m. eastern time. a preview from mike in just a minute. from new york city, this is bloomberg.

♪ jonathan: 60 minutes out from the opening bell, equities yesterday closing at record highs. this morning just about unchanged. the nasdaq posited by 0.2%. the bond market, no major moves to talk about. over the last week we had quite a move. very close, very very close to the highs of 2024. plenty of entertainment in foreign exchange. maybe not so entertaining if you are on the wrong side of what is happening at the moment, but seven days of weakness, it is kind of amazing to see. lisa: you've got stock markets in japan at the highest going back to 1989 in you potentially have the yen at the weakest

levels going back to 1990 when you talk about the dollar. going back 16 years vs. the euro. this is sort of the key question, what is the bank of japan care about more? juicing growth at the expense of their currency or really trying to bring that under control more significantly? jonathan: we've had a move one way from the boj, will we get another move from the federal reserve? why the expected hold rates steady but investors are looking for update on the dot plot and summary of economic projections. bloomberg economics still expecting just three cuts this year despite a string of inflation prints. jay powell set to speak at 2:00 eastern time in that meeting, you will be there. what is the focus of this news conference going to be for you and others? >> i think most people are going to be looking to the idea of when did they cut and obviously if there is a change in the dot plot, does that signify something significant?

there is talk that maybe the strong jobs numbers and cpi numbers will because they cut back from three rate cuts this year to two rate cut this year, so that will be the first thing that everybody looks at. it is kind of the same question that we usually run into with them, when are you going to do whatever it is that we think you're going to do? you see that right now, what we are looking at is a tie between june and july for the first cut. markets are still expected going into this meeting. there will be another one in september and another one in december. we may have a big surprise, and we may not. jonathan: he's been saying we just need a little bit more confidence. i'm wondering whether he has lost any in the last month. do you think there is reason to lose confidence? >> i don't think there is reason to lose confidence. i think what has happened is we created more uncertainty. not we, but the data have

created more uncertainty because the economy is stronger than people think. the fed has always thought that inflation be bumpy and hard to get from 3% to 2%. do we think that this is harder than anticipated? that is the question for jay powell. but markets are trying to put this strong economy together with where the fed is and see if they line up. for the moment it looks like they do but of course we have to wait and see what the chair says. lisa: do you think that he will come out and say i'm sorry, i was wrong and maybe financial conditions are loosening a little bit too much? >> anything is possible the generally one doesn't hear that from fed officials. the question is, are financial conditions loosening enough or too much at this point? the economy is stronger than people anticipates that there is a logical action of whether the fed funds rate is tight enough at this point. and whether they think they need to do more if the economy stays this strong or whether it is

just a question of keeping it where it is for longer. that is a question for powell. the one other thing we might look for here is whether they changed the long run fed funds, the neutral rate. has that moved up, it is it now higher than it was? it has been 2.5% since jon was a little boy. jonathan: thank you sir, appreciate the update as always. falling in line with the broad consensus, expecting three fed rate cuts this year. inflation has been firmer in recent months, but we think it is still on track to fall enough by the june meeting for first cut. this has become less obvious and are inflation path for the rest of the year is now in the range were small surprises could have large consequences. good morning to you. >> jonathan: great to be here. jonathan:fantastic to catch up with you.

i remember the outlook to start this year. the hard part was over, it is almost easy from here. do we still think that is the case? >> it is more of a question because of the stronger nation numbers, but i think if you look at the trends, we are still on track to get down to the 2.4% range or so by the fourth quarter. at the start of the year, we thought that was going to be 2.2%, so that has been a little bit higher. we basically going back to the forecast that we had last fall. but 2.4% is still pretty good progress, and by 2025, i think will be at 2. if you look at the drivers of inflation whether it is on the good side or on the rent side or in the labor market, i think the trends still look encouraging. but there is more of a debate about it and the fed is going to

be responsive to kind of near-term surprises. jonathan: as we know, clear and obvious risk factors into debt, whether that medium plot shifts. it only takes two officials to move in that direction. do you think that is something that happens today? >> it is not a base case for me, but it certainly is a possibility. not much has to change in terms of the projections. if you go back to two weeks ago when chairman powell testified in congress, he said they were pretty close to having enough confidence, so that sounded like no later than june. if you take the statements there, we had higher inflation numbers in the past week, so has that changed his view? my expectation is no, but we will find out. jonathan: all things being equal it seems to have changed your view on the margins. you shifted down to three rate

cuts from four. and you said this line that jon noted, small surprises could have large consequences. what do you mean? >> if you add a few additional tenths of inflation by the end of the year, even if it doesn't really change the overall trend, 2024 is still lower than 2023, but they would deliver less cuts. in that sense, i think it would be a continuation of what we've seen in the last several months, where in the early part of the year with an expectation of inflation coming down to very close to two, i think they would have done more, but now it seems like the december dot plot and the december inflation forecast. lisa: it seems like people are split on their views based on whether they think the neutral rate has shifted materially or not. you believe the neutral rate is still going to be around your previous projections.

how do you push back against people who say it is actually 4% or higher to mark. >> i think we don't know. i wouldn't push back very hard because the confidence around any of these estimates is quite high. 4% is still well south of five and three eights. i am pretty confident that at current levels, we are in restrictive territory by a significant amount, but whether the right number is four or 3.54 three, that is harder to know. i do think that the projection, 2.5% if you take the median, that looks pretty stale and that is going to drift up over time. probably by a little bit today, although we've been waiting for this for a while and so far it hasn't happened. jonathan: you are a precise man in very careful with your words. when you say room restrictive

and significantly so, does that come from? >> i think all models of neutral rates, and they are all pretty imprecise, this is not precise, there are many different models. each of them has a significant amount of error, but you are going to be hard-pressed finding a model that says 3% plus on the real rate, on the real funds rate is neutral. it is really guided by a variety of different models, some developed at the fed, some developed elsewhere that say right now we are outside that range of uncertainty. jonathan: can i ask you this question then. if i was a first-year internet goldman sachs and i said unemployment is down to 4%, credit spreads are supertight, why is that a body -- bad model to sit here and say maybe we are not that restrictive at all? >> so there is kind of short run and long-run.

i don't think that the current level is very problematic in terms of near-term growth. as you know, all forecast on growth is well above the consensus and continues to be. over time, once the short-term moves in financial conditions, short-term moves and fiscal policy and other forces play themselves out, i think it is pretty clear that the current level is above normal neutral levels. so over the medium term, it is very likely that we will see declines in rates, but the path is going to be guided by the data. lisa: so you don't think it will be important for jay powell to push back against some of the record highs on stocks and some of the tightening and credit spreads. >> he would never comment on

near-term market moves, of course. >> you say that, but i remember that meeting where that journalist said to him that markets were rallying and i remember his response to it in the news conference. he just came out in the hawkish tone that he used ones he thought that markets were going against what the fed was trying to guide them to was pretty stark, maybe even profound. why isn't that an option he could take today in the face of cpi that is coming in pretty hot? why wouldn't that be something that he would be concerned by? >> i don't think it's a problem because i don't think he's trying to slow things down significantly. the unemployment rate has drifted up somewhat. we are still seeing rebalancing and job openings. inflation is going down. the sequential numbers have been the outlier buffet year on year rate has continued to come down.

i don't think he is going to be particularly worried about having to squeeze the economy. he can respond to surprises by delivering cuts a little later, delivering cuts in earlier, but i don't think -- is a very different situation from where we were a year ago. jonathan: it is implicit in your forecast and you right to point out that your growth forecasts have been above the street ever since you cannot with your outlook. strong growth doesn't appear to be a problem with the federal reserve. what is different about this moment? >> i think inflation is much lower and it is heading down. the year on year rate is still heading down. the labor market is much closer to balanced, so the inflation expectation cut continued to come down. they've now largely normalized, so all the things that that officials were very worried about a year-and-a-half ago that

you would get the anchoring of inflation expectations, and wage price spiral, i think a lot of those things have moved into the rearview mirror. therefore they are much less concerned about easier financial conditions, but they would still be relevant for setting policy, they are going to be much less of a concern then maybe in this episode that you mentioned. jonathan: always fantastic to catch up, it is good to see you. breaking down his outlook for the federal reserve and this economy beyond just the next five minutes. that fed decision, 2:00 p.m. eastern time. we will get the statement, the summary of economic projections 30 minutes after that. the news conference with chairman powell. yahaira: irish prime minister has announced people step down. he says personal and professional reasons behind his decision. he will stay in the position

until his successor has been chosen. ireland's next general election is planned for march 2025. jp morgan lifting its quarterly dividend by 9.5% following record annual profit and regulators signaling they may rethink proposals for tighter capital requirements. it is the second time in the past year that the bank has boosted its quarterly payout and jamie dimon did not provide a reason for the increase. ukraine's prime minister says blocked u.s. funding can arrive as early as next month. he spoke exclusively to bloomberg a short time ago. >> this month or next month, we will have this in the united states will join the european union to the g7 coalition. i mean military and financial support of ukraine in this battle with russia. >> the $60 billion in funding is crucial to the nation's war

effort but has been held up by house republicans in washington. jonathan: thank you. up next, the bull case for stocks. >> ic large caps as safer until we start to see the fed really cut interest rates. even if the fed doesn't cut interest rates, there are still relative health and relative gains. >> that conversation up next. you are watching "bloomberg surveillance."

♪ jonathan: live from new york, 43 minutes away from the opening bell. futures pulling back just a touch, down 0.1%. the euro weaker, dollar stronger against g10 in a big way. some dollar strength out there.

>> ic large caps as safer until we start to see the fed really cut interest rates. even if that doesn't cut interest rates, there is still relative health and relative gains. the s&p 500 is now a different animal than what it was in 2007. there is more high conviction, bullishness on equities. not all equities, but pockets. those are the areas you want to watch. jonathan: u.s. stocks at all-time highs ahead of the fed decision. david of ubs writing this. this support behind the equity market rally over the last year or so remains largely in place. at the same time equity market sentiment and positioning has become somewhat elevated toy modest pullback in stocks wouldn't be surprising. we would stay invested but wait for pullbacks. david joins us now for more. great to catch up with you. you've got to define it to me what a pullback is in this bull market over the last few months or so. >> a pullback is just a modest

decline in stocks. nothing we would necessarily call it correction, which is generally considered to be more than 10% or so. we've just been in a pretty low volatility regime with a lot of good news priced into markets. and admittedly i think the environment is pretty favorable. as we were just talking about in the quote of their. but we also need to recognize that some of the sentiment, some of the positioning measures, they do look a little bit elevated and we are just saying look, you just want to be a little bit careful about when you add to positions in equities . overall, the environment remains good. we have a neutral allocation to equities in our asset allocation. jonathan: we are interested in what you would add to and some of the sectors you would like similar to some of the sectors we hear now. health, industrials, tech, small caps.

what is it about small caps, this is something that comes up repeatedly in conversations that somehow because of this narrow leadership we had we are going to rotate and small caps are going to do well after the dominance of megacap tech in america. why is that the case? >> i think the case for small caps is at the end of the day, it is really going to hinge on if we see a pickup in earnings growth. if you look at the fourth earnings season, all of the earnings growth in the s&p 500 came from "the magnificent seven". but as we look over the course of 2024, i think we are going to see the earnings growth story begin to broaden now. the banks are not tightening access to capital as much as they were, the high gilt markets are open, we've seen a pickup in ipo activity and fallout on offering. the financing environment is getting better. and on top of that if the fed does ultimately start cutting interest rates, that is just going to encourage this trend.

access to capital sort of drive the profit cycle. i think you are going to see this broadening out in profit growth. the other thing to bear in mind is that the small caps segment, the biggest sector in small caps is industrials. we've been in this sort of almost goods recession for the last couple of years at this point. looks like that is beginning to bottom, so if we actually get an improvement, a little bit of improvement in demand and the good side of the economy, that would be pretty favorable for some of the smaller companies in the market. so there's a host of reasons, but i would say crucially it is just that we think we will see a pickup in earnings growth later on over the course of this year. lisa: if the fed has a hawkish message today, that shift your conviction with small caps? >> look, i think we probably do need to see the fed beginning to cut interest rates. that being said, i don't want to

put too much emphasis on sort of that one thing because i do think we are seeing financial conditions more broadly are easing, and that is really part of the thesis here, is that as you see access to capital improve, again, that should be driving profit growth. fed cuts are going to be helpful for that trend, but it is not necessarily the most important thing. lisa:lisa: what about other sectors? this is something we hear from a lot of people, because of this cyclical tilt, they like energy, they like some of the other areas even at a time that people say we are seeing more discretion by consumers in terms of what they buy. do you lean into that story? are we in the early stages of a bull market? >> i think it is hard to say these are the early stages of a bull market. but look, i think there are some elements that are a little bit

early cycle. but at the end of the day, we want to find where the best risk-reward is. part of the reason that we like the small caps trade which we didn't really talk about this just at the valuations are so much cheaper and so depressed relative to their own history and relative to large caps. that has got to be part of the story. then we look at the large cap sectors, we do like industrials, we do like health care and we like tech. i think for each of these, you really need to drill in to find some of the best opportunities. in industrials, the transport area has been week. -- weak. we've had this recession, we think we are probably coming out of that in the next couple of quarters. health care, there is some defensiveness as well as improvements in some of the areas like life-sciences and tools which have been under

pressure. we are just looking for opportunistic places within the market kind of regardless of where we are within the business cycle. jonathan: you are in the business of long-term wealth creation. can we talk about a six hour time horizon? sitting at all-time highs going to the fed this afternoon. >> i think the market is somewhat braced for a little bit of a hawkish message from chair powell, so if the dots to two which certainly is a possibility, i think the market is somewhat expecting that. obviously it's going to be important to hear sort of the timing of when they think they are going to start cutting interest rates. we are also going to hear about the plans for the balance sheet with quantitative tightening and when does that begin to wind down? there's a number of different factors to watch. i do think the market is sort of

braced for a little bit of a hawkish tone, so i don't know. i think it is going to have to be a pretty significant surprise relative to what seems to be the cautiousness going into this meeting for things to be quite negative for equities. but i think the big picture, i just think the big picture is that the fed probably will be cutting rates later this year and i think that is the most important thing for stocks. the precise timing is a bit less important. jonathan: the answer has just been later this year. david, thank you. we were promised a conversation about a balance sheet at this meeting so look out for that as well. let me share the lineup for you. going to the federal reserve decision, a special edition of bloomberg surveillance. joined by kathy june the charles schwab, deutsche bank, jp morgan, kpmg, former new york fed president bill dudley, jeff

rosenberg of blackrock and mohamed el-erian of queens college cambridge. that is quite a lineup this afternoon. lisa: to parse through all of those projections are not and what the implications are, maybe we will hear jay powell come out and say i was wrong, financial conditions matter, we are going to change the neutral rate of 4%. probably not, but we are going to parse through everything that they put out there. jonathan: and here is the lineup tomorrow morning. there is a lot to discuss. the federal reserve decision, 2:00 p.m. eastern time. a huge conference with chairman powell. live from new york city this morning, we will see you this afternoon. this was bloomberg surveillance.

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manus: we have put in my record high. volatility is below average for 99 sessions in a row. we will see if that holds. countdown to the open starts now. >> this is bloomberg the open with jonathan ferro. manus: coming up,