Episode summary
AI Spending Spooks the Market | Bloomberg Surveillance
Bloomberg Surveillance
· · 30 min · Hosts: Tom Keene, Paul Sweeney, Lisa Mateo, Michael Barr · Guests: Jim Caron, Matt Bloxham, Daragh Maher, Julia Coronado
Summary
Higher oil prices were treated as a broad macro problem rather than a purely U.S. story. A guest from Morgan Stanley said bond markets are reacting rationally to a global inflation impulse, with oil, Treasury yields and even dollar/yen moving together, and argued that inflation could stay higher for longer if energy costs remain elevated. He also said the Fed’s task is complicated because monetary policy is better suited to demand shocks than supply shocks, so the key question is whether energy costs bleed into core inflation and expectations.
The discussion shifted to portfolio positioning, where the guest favored underweight duration and interest-rate risk while still preferring quality and value equities, especially health care and parts of the consumer sector. Another guest from Bloomberg Intelligence said the market is increasingly worried that AI capital spending will not produce enough return on investment, and that the next 12 to 18 months will be crucial for separating winners from losers in enterprise AI.
HSBC’s strategist argued that the dollar still has room to strengthen because resilient U.S. activity makes Fed tightening more dollar-positive than hikes by weaker European economies. The final segment emphasized that the consumer and labor market remain resilient, even as higher real yields and oil-driven inflation put more pressure on the Fed and on non-AI sectors such as housing.
Key takeaways
- Morgan Stanley’s Jim Caron said the recent rise in yields reflects a global inflation shock, not just a U.S. story, and estimated 10-year Treasuries could test about 4.85%.
- Caron said investors should be underweight duration and interest-rate risk, while favoring quality, value, health care and the consumer.
- Bloomberg Intelligence’s Matt Bloxham said the AI capex boom is facing tougher scrutiny because investors want proof that higher spending is translating into revenue and ROI.
- Bloxham said the next 12 to 18 months will be decisive for enterprise AI spending, with possible overcapacity if companies cannot justify budgets.
- HSBC’s strategist said the dollar can stay stronger because U.S. growth and labor resilience make Fed tightening more supportive for the currency than hikes in weaker economies.
- Julia Coronado said the Fed is more likely to stay focused on inflation because the labor market remains resilient and demographic trends are limiting labor force growth.
Notable quotes
“I think the bond vigilantes are at work. Um you know, clearly oil prices are higher. It's dragging up um US Treasury yields”
“we want to be underweight interest rate risk. So underweight bonds, underweight duration”
“what the market's getting very concerned about is is is is all of this spend, all of this capex spend, will it turn into a return on investment”
“I think the next 12 to 18 months is a really important uh part of the cycle for enterprise spending uh on AI”
How the episode opens
Bloomberg Audio Studios podcasts, radio, news. This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m.
Eastern on Apple CarPlay or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. James Karen joins us right now.
Thrilled to have him on with Morgan Stanley and of course our CIO Cross Asset Solutions. Uh Jim, tomorrow Bloomberg Money 12:00 noon Ed Yardeni will be with us. Let's get right to the Yardenni moment.
Are the bond vigilantes at work? Jim Karen,
Good morning. Um I think the bond vigilantes are at work. Um you know, clearly oil prices are higher.
It's dragging up um US Treasury yields, but look, I mean, you know, you were mentioning it mentioning it earlier, dollar yen is also up around 163. Um global bond yields are up, right? So, I I I don't think this is uh you know, we should frame this story as not an exclusive US story, but this is more of a global macro story in terms of what's taking place.
It seems like inflation, you know, is moderating, but it's still high. And I think the I think the takeaway here is that inflation is going to likely stay higher for longer given what's happening in in energy prices. And that resets the entire yield curve.
It shifts the entire yield curve a bit higher. Whereas we had a little bit of a break, you know, over the past couple of weeks when oil prices went down. And I think that's just reasserting itself.
And you know, with all of the issuance that we're getting from all of the corporates in um particularly some of the technology large technology companies, there's a lot of weight on on these bond markets.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai spending
- fed cultural change
- dollar strength
- tech news misses
- digital assets
Companies and tickers mentioned
- MS
- GOOGL
- GOOG
- TSLA
- IBM
- HSBC
- Morgan Stanley Investment Management
- Bloomberg Intelligence
- Tesla
- IBM
- HSBC
- Macropolicy Perspectives
Watch the episode
Watch “AI Spending Spooks the Market | Bloomberg Surveillance” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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