Inflation and Bonds Amid AI Concerns

PodcastBloomberg SurveillanceDavid KatzOct 15

The discussion weighs sticky inflation against softer signals in retail sales, with higher input costs potentially pressuring margins and markets pricing in more than three Fed hikes through the end of next year. Speakers describe consumers as selective and see higher rates weighing on housing, while investors are balancing earnings support against the possibility of slower growth in 2027. Market views include renewed appeal in Treasuries, caution on credit and data-center debt, and a more selective approach to AI and China exposure. The guest also sees a conditional path from an Iran exit ramp to lower oil prices, cooler inflation, and a more favorable market backdrop.

Inflation Interest Rates Fixed Income Economic Growth Artificial Intelligence Oil

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Key Takeaways

Wholesale prices rose 1.3% month over month and 6.3% year over year, with core PPI up 0.7% and 5%, respectively; the speaker said elevated fuel costs were lifting input costs and that PPI rising faster than CPI theoretically pressures margins. Alongside a relatively weak retail sales control group, that margin concern may have helped explain the 30-year Treasury rally, though the speaker presented it as a possible investor interpretation.

Consumer spending was described as selective, with upper-income shoppers retaining discretionary money while other consumers focused on particular purchases, including experiences and viral products. Target was up more than 50% this year amid new merchandise, collaborations, and value-seeking shoppers, while the fastest part of Walmart’s growth was from its highest-income customer households; the guest nevertheless expected a decent holiday season, with activity already underway.

Higher interest rates were described as a headwind to housing, and Home Depot and Lowe’s are waiting for improved housing activity to lift demand while preparing their business models for a possible acceleration. The speakers also said GLP-1 use is prompting some consumers to buy new apparel as their wardrobes change.

Markets were pricing in more than three Fed hikes through the end of next year, but the guest said labor-market conditions gave the Fed room to wait and that a September hike would not necessarily begin a sustained cycle. Separately, a speaker said that if an exit ramp emerges from Iran, oil could fall sharply, cooling inflation and easing pressure on the Fed—a conditional chain he viewed as bullish for markets.

GEO-POLITICS

Election Outlook — The guest says Republicans appear likely to lose the House, where their three-seat majority leaves little ground to make up, while the Senate could remain narrowly Republican. She sees the anticipated backlash as part of voter angst building since COVID and warns Democrats could mistake a win for an endorsement rather than a protest vote.

“And, you know, Republicans are pretty down and out on the house. I think that they've just almost capitulated that they are going to likely... The house will flip…”—

ECONOMY

Wholesale Inflation — Wholesale prices rose 1.3% month over month and 6.3% year over year. Core PPI rose 0.7% month over month and 5% year over year. The speaker says elevated crude, gas, and diesel prices were raising wholesale and manufacturing input costs. When PPI rises faster than CPI, margins theoretically should compress.

“Let's take out, volatile food and energy for a moment and month-over-month, PPI up seven tenths of 1%. That is hotter than the 0…”—

Retail Sales — Retail sales rose 0.8% month over month, down from 1.2% the prior month; sales excluding autos and gas rose 0.2%. The retail sales control group feeds into personal consumption expenditures, which account for about two-thirds of GDP, and was described as relatively weak. The speaker cautioned that one month does not show whether the softness will persist.

“Let's get to those retail sales numbers now. Month-over-month, up 0.8%. So, consumers continuing to spend despite higher inflation…”—

Selective Spending — The speakers describe spending as selective: upper-income consumers have discretionary money, while lower- and middle-income consumers choose specific purchases, including experiences and products they see going viral. They say GLP-1 use is prompting some consumers to buy new apparel as their wardrobes change. Higher interest rates are a headwind to housing.

“There's discretionary money out there for upper income. But even when you're looking at lower and middle income consumers, they're choosing what to spend on…”—

MARKETS

Long-Term Investing — The guest recommends setting a long-term plan, sticking with it, and keeping costs low rather than fixating on day-to-day volatility. He says the growth-heavy S&P 500 alone does not provide broad diversification and names small-cap, mid-cap, and international stocks as other areas to consider. He also says a 60/40 or 70/30 allocation can provide stock-market participation with some bond protection.

“What the book focuses on is the old way…”—

Treasury Positioning — The guest's team upgraded front-end and back-end Treasuries and downgraded U.S. equities to manage risk, citing potential focus on AI policy and buildout. She says years of yield repricing have made bonds attractive again. Under the discussed two-year scenario, the yield would have to double within a year for a buyer to lose money.

“So on Monday, we put out a note essentially upgrading treasuries front end and back end and downgrading US equities to manage risk and just thinking about the potential focus…”—

Treasury Rally — The 30-year Treasury yield rallied after the data. The speaker suggested investors may have focused on the weak retail sales control group and may have worried that high PPI would compress margins.

“Yeah. So so actually, we've... Since these data came out, the thirty year has actually rallied. Right? So we've actually seen lower yields than way where we were before…”—

FORECASTS

Iran Oil Scenario — The speaker says that if an exit ramp emerges from Iran, oil prices could fall sharply, cooling inflation and easing pressure on the Fed. He views that conditional chain as bullish for the market.

“We do think in terms of today's hot inflation number, if there's ever sort of a exit ramp out of Iran, oil prices will come down sharply and the inflation…”—

Long-Term Investing Plan

David Katz favors a disciplined long-term plan, balanced diversification, and avoiding reactive trading, while identifying utilities and consumer staples as potential opportunities.

Wholesale Inflation Surprise

September wholesale prices came in much hotter than expected, while retail spending continued but slowed, adding to questions about inflation and consumer momentum.

Luxury and Consumer Spending

Dana Telsey describes selective consumer spending, luxury demand shaped by branding and social media, and pressure on apparel and leather goods from weaker Chinese demand.

AI Trade Selectivity

Ross Mayfield argues higher rates call for selectivity in AI, favoring quality earnings, strong balance sheets, and businesses that can gain productivity without funding massive infrastructure spending.

Treasuries Regain Appeal

Wei Li says bonds have regained appeal after years of yield repricing, with BlackRock favoring the front end and holding a neutral view on long-duration Treasuries.

Fed Path and China Exposure

Li notes markets are pricing more than three rate hikes through next year but sees no certainty of a sustained hiking cycle, and recommends selective exposure to China.

Credit and Data-Center Debt

Credit analysts see wider spreads and growing scrutiny of hyperscaler and data-center borrowing, while higher interest costs may pressure coverage and investors demand compensation for future issuance.

Midterm Election Outlook

Libby Cantrell expects a competitive Senate race and likely House losses for Republicans, while emphasizing the influence of affordability and state-level resistance to data centers.

Congress and Affordability

Cantrell says Democrats may focus on achievable issues such as affordability, healthcare, housing, and data centers, while warning that voter sentiment is entrenched and could be misread.