Episode summary
Bond Selloff Fades as Oil Cools; Trump-Xi Takeaways | Bloomberg Surveillance
Bloomberg Surveillance
· · 35 min · Hosts: Tom Keene, Paul Sweeney, Lisa Mateo, Michael Barr · Guests: Michael Gapen, Lindsay Newman, Darius Dale, Karan Sood
Summary
Morgan Stanley’s Michael Gapen argued that the recent oil and diesel spike is likely to produce second-round inflation effects that could linger into 2027, especially through airfare, transportation, and other cost-of-living pressures. He said the Fed cannot control energy prices directly, but it is already responding, and markets are pricing in three to four additional hikes as real yields have done most of the work in the recent bond selloff.
Gapen also said the US consumer remains resilient, helped by tax cuts, lower saving, and wealth gains tied to the AI boom. He warned, though, that AI capex itself may eventually slow in 2027 or 2028, which would matter for growth even if the current spending surge keeps supporting the economy for now.
On China, Lindsay Newman said the Trump-Xi meeting was mostly about optics and maintaining a “constructive relationship of strategic stability,” with the real takeaway being a two-month trade extension that gives Trump more flexibility after the midterms. She said China wants predictability and bounded competition, while the US keeps leverage through uncertainty and has not budged on Taiwan policy.
Darius Dale argued that the market is underestimating how much higher yields could go, saying his models put fair value on the 10-year Treasury at 6.04%. Karan Sood said investors are turning to defined-outcome funds because portfolios can look diversified while sharing the same risks, and he described options as insurance that lets investors trade upside for downside protection.
Key takeaways
- Michael Gapen said second-round effects from oil, diesel, and transportation costs make 2027 inflation and affordability a continuing concern.
- Gapen said the Fed is already responding to higher energy prices, and markets are pricing in three to four more hikes.
- Lindsay Newman said the Trump-Xi summit was mainly optics, with the real market takeaway a two-month trade extension.
- Darius Dale said his models imply a 10-year Treasury fair value of 6.04%, leaving room for yields to rise further.
- Karan Sood said investors are buying defined-outcome strategies because diversification can fail when crisis correlations jump to one.
Notable quotes
“the second round effects on inflation are related to, as you've been discussing, gas, diesel”
“we're going to get second run effects that mean inflation, affordability, the cost of living remains a concern in 2027”
“the mean of those models is 6.04%”
“The global derivatives market stood at roughly 628 trillion in notional value”
How the episode opens
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I don't know what else to say about it. Michael Gapen brings prodigious academics and abilities across market economics now with chief US economist at Morgan Stanley with a couple brilliant notes. And what I would really It's Indiana University Paul
Love it. — It's like grounded. — Yep. They're solid,
You know. You know, it's like serious serious economics. Good morning, Mr.
Bullard as well. Ex St. Lewis Fed Michael buried in one of your notes is the heart of the matter which no one's talking about and this goes back to Friedrich Bastiad 1850 which is second and third round effects and that everybody's looking at the immediate oil bonds and that but what we need to consider are the second round and third round effects of what we're living right now.
Can you see out into 2027? What are the second and third round effects of all this inflation, these yields in the central bank policy? Well, in one direction, well, first of all, good morning, Paul.
Good morning, Tom. Uh, thank you for that introduction. Um, the second round effects on inflation are related to, as you've been discussing, gas, diesel.
Normally, oil shocks are relatively short-lived. Oil goes up, oil comes down, and we don't expect second round effects. But we're we're 6 months in, and it's anybody's guess when when this might end.
Airfares, for example, are up about 24% yearon year. So it it's increasingly likely we're going to get second run effects that mean inflation, affordability, the cost of living remains a concern in 2027.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- bond selloff
- oil prices
- trump xi takeaways
- us-china trade
- macro outlook
Companies and tickers mentioned
- MS
- Morgan Stanley
- Chatham House
- 42 Macro
- Vest
Watch the episode
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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