WEBVTT - Surveillance: BOE Steps Up Inflation Fight 0:00:00.120 --> 0:00:03.800 If you enjoy the Bloomberg Surveillance podcast, check out our 0:00:03.880 --> 0:00:08.959 new daily news program, the Bloomberg Daybreak Podcast. It gives 0:00:09.039 --> 0:00:12.840 you the day's top stories with context in just fifteen minutes. 0:00:13.240 --> 0:00:15.960 Look for it in your podcast feed by six a m. 0:00:16.160 --> 0:00:20.280 Eastern every morning. Subscribe on Apple, Spotify and anywhere else 0:00:20.400 --> 0:00:23.799 you get your podcasts, and stay tuned for a sample 0:00:23.880 --> 0:00:27.400 of today's edition of Bloomberg Daybreak at the very end 0:00:27.600 --> 0:00:35.880 of this podcast. This is the Bloomberg Surveillance Podcast. I'm 0:00:35.920 --> 0:00:39.960 Tom Keene, along with Jonathan Ferroll and Lisa Abramowitz. Join 0:00:40.080 --> 0:00:44.240 us each day for insight from the best and economics, geopolitics, 0:00:44.240 --> 0:00:49.200 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:49.440 --> 0:00:53.920 Spotify and anywhere you get your podcasts, and always on 0:00:54.000 --> 0:00:58.360 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. 0:00:58.560 --> 0:01:04.480 With Perspective Coachagabden, Senior Research economist at Aberdeen SRI. I'm 0:01:04.520 --> 0:01:09.560 absolutely fascinated by how you linked together the actions of Switzerland, 0:01:09.800 --> 0:01:13.320 Norway and now the United Kingdom. Suddenly is it a 0:01:13.360 --> 0:01:15.039 hawkish tone in Europe? 0:01:15.200 --> 0:01:17.680 I think this is clearly a hawkish tone from the 0:01:17.800 --> 0:01:21.160 UK and from Norway as well. Clearly this you know 0:01:21.200 --> 0:01:24.520 they've surprived markets Norway this morning, surprise with a fifty. 0:01:24.720 --> 0:01:27.720 There was running into this. There had been quite an 0:01:27.760 --> 0:01:30.520 intense debate. There were question marks about whether there would 0:01:30.520 --> 0:01:33.319 be a twenty five or fifty basis points from the 0:01:33.360 --> 0:01:35.600 Bank of England, also for the Norway as well, but 0:01:35.680 --> 0:01:38.200 clearly this is a surprise and just running through the 0:01:38.240 --> 0:01:42.399 statement quickly, you know, the reasons are very clear. This 0:01:42.480 --> 0:01:45.240 is something that has been signaled actually within the speeches 0:01:45.280 --> 0:01:48.560 for some time. It is the core services inflation which 0:01:48.560 --> 0:01:52.600 has been incredibly strong. Yesterday's data really did help trigger 0:01:52.640 --> 0:01:55.919 that debate about whether twenty five or fifty would be necessary. 0:01:57.360 --> 0:02:02.200 This is really a very very strong picture for the UK. 0:02:02.720 --> 0:02:06.360 If you compare the UK with other developed markets and 0:02:06.400 --> 0:02:10.200 look at that wage number, it is really really standing 0:02:10.240 --> 0:02:14.240 out with an increased wage pressures there while other countries 0:02:14.240 --> 0:02:16.920 are starting to see a bit of a stabilization or 0:02:16.960 --> 0:02:20.359 a rollover. If you look at other European countries, if 0:02:20.400 --> 0:02:23.800 you look at the BED or the US, UK really 0:02:23.840 --> 0:02:27.680 stands out from that core services and wage pressures angle. 0:02:28.120 --> 0:02:31.480 We're watching the pound strengthen in response to this surprise 0:02:31.520 --> 0:02:34.480 fifty basis point rad hike from the United Kingdom, which 0:02:34.560 --> 0:02:36.359 is a departure from what we saw for the Liz 0:02:36.400 --> 0:02:36.960 Trust era. 0:02:37.360 --> 0:02:37.600 Sree. 0:02:37.720 --> 0:02:40.480 How much is this a positive sign that shows people 0:02:40.560 --> 0:02:43.760 believe that economies can withstand higher rates to a much 0:02:43.800 --> 0:02:46.800 greater degree than they thought just even six months ago. 0:02:47.080 --> 0:02:49.160 And then it really gives confidence that you can fight 0:02:49.639 --> 0:02:53.079 inflation with higher rates without creating some sort of deep recession. 0:02:53.639 --> 0:02:55.400 I think that's going to be very challenging, to be 0:02:55.440 --> 0:02:58.720 perfectly honest. I think that you know the fact that 0:02:58.720 --> 0:03:01.480 we've moved to five percent, markets are pricing in six 0:03:01.560 --> 0:03:05.080 percent the last time I looked earlier this morning, This 0:03:05.080 --> 0:03:09.680 this is really triggering a recession. Now. Much policy works 0:03:09.720 --> 0:03:12.359 with long and variable lacks. That's something we often hear, 0:03:13.040 --> 0:03:15.720 and what we're seeing here is that that we are, 0:03:16.160 --> 0:03:22.160 you know, financial conditions have tightened significantly. There is some 0:03:22.280 --> 0:03:24.760 question mark whether the Bank of England will raise as 0:03:24.840 --> 0:03:27.960 high as six percent. There's definitely further to go potentially, 0:03:28.280 --> 0:03:31.320 but six percent will would be triggering not just a recession, 0:03:31.360 --> 0:03:36.760 but a much more severe recession than economists are currently forecasting. 0:03:37.240 --> 0:03:37.480 Now. 0:03:37.800 --> 0:03:40.600 We do feel that the monetary tightening will trigger recessions 0:03:40.600 --> 0:03:42.520 in a number of different countries. I think a soft 0:03:42.600 --> 0:03:47.040 landing is very difficult, and unemployment rates were starting to 0:03:47.160 --> 0:03:50.400 nudge higher. But the tightness in the labor market is 0:03:50.640 --> 0:03:54.320 very worrying in that the longer the recession is delayed, 0:03:54.520 --> 0:03:57.000 the more severe we could see in terms of rate 0:03:57.080 --> 0:04:00.760 hikes and recession in a later on next year. 0:04:01.000 --> 0:04:05.960 Sure we inform our American audience, which we understand the 0:04:06.080 --> 0:04:11.560 dynamics of a fully employed Ohio or Kansas versus challenging 0:04:11.680 --> 0:04:16.120 city unemployment rates. Perhaps in America the perception we have 0:04:16.320 --> 0:04:20.840 is London booming, the South blooming. I'm thunderstruck. A double 0:04:20.839 --> 0:04:25.240 digit unemployment in Aberdeen, way up in the northeast of Scotland. 0:04:25.600 --> 0:04:31.000 How uneven is this debate on monetary policy across the 0:04:31.120 --> 0:04:34.599 United Kingdom? How much of the United Kingdom is truly 0:04:34.640 --> 0:04:36.400 in recession right now? 0:04:36.720 --> 0:04:40.200 I think there is a regional issue and that's something 0:04:40.279 --> 0:04:46.000 that really needs fiscal measures to really address. 0:04:46.560 --> 0:04:46.760 Now. 0:04:46.800 --> 0:04:50.560 From a monetary policy perspective, the Bank of England are 0:04:50.600 --> 0:04:56.000 limited to what's happening to the aggregate inflation rate? What 0:04:56.160 --> 0:04:58.359 is their target and how do we get back to 0:04:58.400 --> 0:05:03.279 the target. The or divergences is very difficult to tackle 0:05:03.640 --> 0:05:11.000 without fiscal measures and structural policies to target those issues. Now, 0:05:11.800 --> 0:05:16.159 if we think about what's happening in terms of a recession, 0:05:16.160 --> 0:05:18.039 we're not quite in a recession yet. We've seen some 0:05:18.080 --> 0:05:22.080 weakness in data for Q two. We have a number 0:05:22.080 --> 0:05:26.320 of different drivers. We have strike action in the healthcare services, 0:05:26.920 --> 0:05:29.680 we had an extra bank holiday for the King's coronation. 0:05:30.000 --> 0:05:33.800 All of these issues will lead to some weakness and activity, 0:05:34.040 --> 0:05:37.080 but that's not necessarily a recession just yet. What the 0:05:37.080 --> 0:05:40.480 Bank of England need is for the economy to call 0:05:41.040 --> 0:05:44.880 so that some of the imbalances that are driving inflation 0:05:45.800 --> 0:05:48.880 to ease and you start to see more sustainable deceleration 0:05:49.040 --> 0:05:51.960 in that core services area, and we're not seeing that yet. 0:05:52.360 --> 0:05:54.960 Street, thank you so much, just really outstanding street culture. 0:05:54.960 --> 0:05:58.120 Govern did with us with Aberdeen, this truly historic moment 0:05:58.200 --> 0:06:00.840 and gyrating moment for the United King. 0:06:00.920 --> 0:06:08.719 And Terry Wiseman, global interest rates and currency strategist at mcquarie, 0:06:08.839 --> 0:06:10.720 joining us here. Terry, what do you make of that 0:06:10.880 --> 0:06:12.480 the fact that you can find out what they're going 0:06:12.520 --> 0:06:13.800 to do, but you're not going to figure out what 0:06:13.839 --> 0:06:14.640 the market response is. 0:06:14.600 --> 0:06:15.200 Going to be book. 0:06:15.200 --> 0:06:17.359 I think it takes a long time to rebuild central 0:06:17.400 --> 0:06:20.600 bank credibility once it's been destroyed. It's not an overnight thing. 0:06:20.680 --> 0:06:23.960 Even with the replacement of the staff and the decision 0:06:24.000 --> 0:06:26.520 makers there, It's going to take a while for a 0:06:26.560 --> 0:06:29.880 central bank that has avoided raising interest rates to gain 0:06:29.920 --> 0:06:32.080 the credibility of the market. The market's going to have, 0:06:33.279 --> 0:06:35.279 they're going to be doubters, and I think when you 0:06:35.279 --> 0:06:37.120 have a situation like this, it's important for the central 0:06:37.120 --> 0:06:40.000 bank to start to reassert its credibility by doing more 0:06:40.040 --> 0:06:42.520 than the market expects, not less than the market expects. 0:06:43.120 --> 0:06:45.800 I want to make a case that in those emerging 0:06:45.839 --> 0:06:48.920 markets that have tried to tackle the inflation story head 0:06:48.960 --> 0:06:51.279 on and early, you have seen a lot of success. 0:06:51.800 --> 0:06:54.160 Obviously Turkey is not one of them. But look at Brazil. 0:06:54.200 --> 0:06:56.360 They're on the verge of starting to cut interest rates, 0:06:56.360 --> 0:06:59.240 perhaps as early as August or September. Same with the Chileans. 0:06:59.279 --> 0:07:03.920 These countries were aggressive and hiking rates during the inflation upmove, 0:07:04.200 --> 0:07:06.520 and they're going to be early in cutting rates with 0:07:06.560 --> 0:07:08.680 the inflation down move that they're seeing. In these countries. 0:07:08.720 --> 0:07:09.880 Turkey is an exception here. 0:07:10.000 --> 0:07:12.480 Okay, it's an exception. However, it's piling on the hawk 0:07:12.520 --> 0:07:14.800 is hilt that we've heard from central banks around the 0:07:14.800 --> 0:07:17.720 world today, the Bank of England. We've seen the fluctuation 0:07:17.880 --> 0:07:20.600 of the pound. Has the Bank of England lost credibility 0:07:20.640 --> 0:07:21.160 as well? 0:07:21.240 --> 0:07:23.400 I think it did, But I think that's exactly the 0:07:23.440 --> 0:07:25.880 reason why it had to raise by fifty basis points 0:07:25.880 --> 0:07:28.200 instead of twenty five. Now, granted we did not expect 0:07:28.200 --> 0:07:30.480 that they were going to raise by fifty The tone 0:07:30.480 --> 0:07:33.080 coming out of the MPC members and their parliamentary testimony 0:07:33.120 --> 0:07:35.880 a few days ago did not signal a hike of 0:07:35.920 --> 0:07:37.760 fifty basis points. But at the same time you had 0:07:37.760 --> 0:07:41.520 an inflation printstance then, whereby implicitly you can make a 0:07:41.560 --> 0:07:43.200 case that the Bank of England had made a mistake. 0:07:43.240 --> 0:07:44.840 They thought the inflation was going to come in about 0:07:44.880 --> 0:07:46.800 eight point three eight point two percent, and in fact 0:07:46.800 --> 0:07:49.080 it came in closer to nine. I think it's because 0:07:49.120 --> 0:07:52.160 of implicitly, this fifty basis points is an admission of 0:07:52.200 --> 0:07:54.400 the mistake and a way to correct it, and I 0:07:54.440 --> 0:07:55.560 think that's why it happened. 0:07:55.800 --> 0:07:58.840 Alan Schwartz put this team together at ur Stearns, with 0:07:58.960 --> 0:08:03.200 your leadership own David Malbek driving the US and global dialogue. 0:08:03.240 --> 0:08:06.600 John writing as well, Terry, You've seen this so many 0:08:06.680 --> 0:08:12.360 times before. How do you link we rationalize idiosyncratic stories 0:08:12.400 --> 0:08:16.160 like Turkey or Argentina back to the central banker of 0:08:16.200 --> 0:08:20.400 the world, Jerome Powell. How do you link Powell's actions 0:08:20.440 --> 0:08:23.000 to what we're seeing unraveling here, there and everywhere. 0:08:23.040 --> 0:08:24.840 I think we have to be very cautious if we're 0:08:24.840 --> 0:08:26.720 going to assume that what Jay Powell is going to 0:08:26.760 --> 0:08:28.680 do is going to be overly dependent on what other 0:08:28.720 --> 0:08:31.360 central banks do. And I think even the vice versa 0:08:31.440 --> 0:08:34.280 case is pertinent as well. The situation in the US 0:08:34.360 --> 0:08:36.600 is not the situation in the UK, or for that matter, 0:08:36.640 --> 0:08:39.719 of the situation in the area. There is not as 0:08:39.840 --> 0:08:42.400 much labor activism and labor strikes in the US. I 0:08:42.440 --> 0:08:44.679 know that the headlines might be prominent, but we can 0:08:44.720 --> 0:08:47.320 measure this and the really the peak of labor activism 0:08:47.360 --> 0:08:50.000 in the US took place last summer. It has since 0:08:50.040 --> 0:08:51.800 died down. It makes plenty of sense. We've seen more 0:08:51.840 --> 0:08:55.120 layoff announcements in the US. The UK and Europe are 0:08:55.200 --> 0:08:58.080 very different. We're seeing a lot of labor activism now 0:08:58.080 --> 0:09:00.200 we're seeing a lot of concessions by the price its 0:09:00.200 --> 0:09:02.760 secretary governments of these higher wage demands coming out of 0:09:02.800 --> 0:09:05.560 the workers, and as a result, the UK and Europe 0:09:05.600 --> 0:09:09.560 are delayed with regard to their ability to fight inflation 0:09:09.760 --> 0:09:12.800 and bring it down. If you look at some leading 0:09:12.840 --> 0:09:15.400 indicators of inflation in the US, they are clearly coming 0:09:15.440 --> 0:09:17.959 down and much faster than they are in Europe. The PPIs, 0:09:18.080 --> 0:09:21.840 for example, the survey based indexes that we're getting from 0:09:21.880 --> 0:09:27.320 the from the Ism Services Survey, the Atlanta Fed's Flexible 0:09:27.360 --> 0:09:30.840 Price Index, they're all pointing downward for inflation in the US. 0:09:31.120 --> 0:09:31.600 I have a. 0:09:31.520 --> 0:09:33.760 Feeling and by the way, Powell even hinted at this 0:09:34.000 --> 0:09:35.920 in his testimony. Yes, Jay, I have a feeling that 0:09:36.040 --> 0:09:37.920 the back half of the year you're going to finally 0:09:37.960 --> 0:09:41.120 see that so called stickiness that we're seeing the PCE 0:09:42.240 --> 0:09:45.240 inflation Index and the CPI inflation Index start to recede 0:09:45.280 --> 0:09:47.400 and come down. And by the way, I think the 0:09:47.440 --> 0:09:51.679 market understands that, and that's why the dollar has resumed 0:09:51.760 --> 0:09:55.000 being weak again, because it sees the FED coming to 0:09:55.040 --> 0:09:57.320 an end with its rate hikes. It doesn't see that 0:09:57.440 --> 0:09:59.040 yet in Europe or the UK. 0:09:59.400 --> 0:10:02.480 Whether they're going to the midyear reviews of JP market publishing. 0:10:02.559 --> 0:10:04.959 There's this morning and they call our disinflation paths and 0:10:05.040 --> 0:10:08.679 compete getting complete. But at Macquarie, one of your great 0:10:08.679 --> 0:10:12.640 studies has to be the greater number of lesser countries 0:10:12.679 --> 0:10:16.080 really struggling. As you just mentioned, is the IMF going 0:10:16.160 --> 0:10:19.040 to come to the rescue here or is the IMF 0:10:19.160 --> 0:10:22.280 lost credibility as we talk about the Bank of England 0:10:22.400 --> 0:10:24.360 challenge by credibility. 0:10:24.240 --> 0:10:26.480 Well, if you mean the IMF coming to the rescue 0:10:26.480 --> 0:10:28.800 with regard to the debt load in the emerging. 0:10:28.360 --> 0:10:30.960 Market Argentina Peso two fifty one. 0:10:30.880 --> 0:10:34.480 Black market five, yeah, I don't think that you're going 0:10:34.520 --> 0:10:37.400 to see that happen unless these countries adopt a much 0:10:37.400 --> 0:10:40.720 more market friendly and much more Washington consensus based approach 0:10:40.760 --> 0:10:43.640 to the policy agenda. The IMF is not going to 0:10:43.679 --> 0:10:46.480 bail out countries that have made a succession of mistakes 0:10:47.120 --> 0:10:49.439 in their political economy and their policy agenda over the 0:10:49.520 --> 0:10:52.240 last few years. It will bail out those countries that 0:10:52.400 --> 0:10:55.760 it can impose on an agreeable basis, a new plan 0:10:55.800 --> 0:10:59.439 of action with regard to fiscal responsibility and monetary policy responsibility. 0:11:00.080 --> 0:11:02.959 Go back to something you were talking about that there 0:11:03.000 --> 0:11:06.040 does seem to be a real difference between the inflation 0:11:06.160 --> 0:11:09.000 dynamic in the US and the inflation dynamic in Europe, 0:11:09.000 --> 0:11:11.439 And you were talking about the labor dynamic in particular. 0:11:11.960 --> 0:11:13.600 Right now, what we're seeing are a number of central 0:11:13.600 --> 0:11:16.280 banks that paused or tried to and now are going 0:11:16.320 --> 0:11:19.760 back and hiking rates again. This is exactly what people 0:11:19.840 --> 0:11:22.640 do not want to see. What gives you confidence that 0:11:22.720 --> 0:11:24.720 the US is not going to be in the exact 0:11:24.760 --> 0:11:27.880 same position with a stickier kind of inflation, especially driven 0:11:28.040 --> 0:11:31.160 by areas like the housing market that have shown incredible 0:11:31.160 --> 0:11:32.240 resilience to higher rates. 0:11:33.559 --> 0:11:35.520 Yeah, this is These are all great questions. Let me 0:11:35.559 --> 0:11:39.120 start by saying that the way that the PEC price 0:11:39.160 --> 0:11:41.400 in dex is computed and are calculated, and the way 0:11:41.400 --> 0:11:44.400 that the CPI and Inflation Index is computed has inherent 0:11:44.559 --> 0:11:47.720 stickiness in it. About forty to fifty percent of all 0:11:47.760 --> 0:11:50.560 the prices in that basket are imputed. So to get 0:11:50.559 --> 0:11:53.320 a really good sense of what flexible prices are doing, 0:11:53.360 --> 0:11:56.560 what prices are doing that are that you can actually 0:11:56.600 --> 0:11:59.760 observe in the marketplace, you have to look at narrower. 0:12:00.480 --> 0:12:02.480 You have to look at only the basket of things 0:12:02.600 --> 0:12:05.400 for which we can observe prices, and when we do that, 0:12:06.000 --> 0:12:09.640 we see a lot more disinflation already. Just compare for 0:12:09.679 --> 0:12:15.280 example that Atlanta FED index. The flexible basket versus the 0:12:15.320 --> 0:12:18.440 sticky basket has seen a huge divergence in the last 0:12:18.480 --> 0:12:19.000 few months. 0:12:19.240 --> 0:12:22.680 What is the potential shock to longer term rates if 0:12:22.720 --> 0:12:26.280 this is somehow reversed, If somehow people are getting it wrong, 0:12:26.360 --> 0:12:29.640 and inflation does remain stickier in the US and follows 0:12:29.679 --> 0:12:30.600 the European story. 0:12:30.760 --> 0:12:32.600 Yeah, so if that's going to be the case, you're 0:12:32.640 --> 0:12:34.400 going to see the back end of the yield curve 0:12:34.480 --> 0:12:36.439 go up a little bit in the US. At the 0:12:36.440 --> 0:12:38.280 same time, it doesn't mean that the curve will get 0:12:38.360 --> 0:12:42.040 less inverted, because we could see short term rates go 0:12:42.200 --> 0:12:44.280 up as well, I should say, however, but to the 0:12:44.320 --> 0:12:47.320 extent that we're going to see longer term rates go up, 0:12:47.480 --> 0:12:49.600 it's going to be because inflation break evens go up. 0:12:49.600 --> 0:12:52.400 It's going to because that inflation expectation goes up, not 0:12:52.480 --> 0:12:55.000 because real rates go up. But yeah, that would be 0:12:55.160 --> 0:12:59.160 effectively the result inflation. Long term inflation expectations goes up, 0:12:59.200 --> 0:13:02.040 inflation break even go up, and that drags higher the 0:13:02.120 --> 0:13:03.280 ten year yield in the US. 0:13:03.400 --> 0:13:06.280 We're linking monetary policy in here into the interests of 0:13:06.400 --> 0:13:09.920 Chairman of Powell. And you mentioned as we were going 0:13:09.960 --> 0:13:12.360 on air here that you had the immense privilege seeing 0:13:12.400 --> 0:13:14.600 Jerry Garcia. I can't believe it's been twenty seven years 0:13:14.640 --> 0:13:18.280 since he died. That's the first shock. But you saw 0:13:18.320 --> 0:13:20.440 the dead when the dead was the dead and not 0:13:20.559 --> 0:13:24.560 the dead in company. Now into parlay off this, I'm 0:13:24.559 --> 0:13:27.280 going to go to what a long strange inflation this 0:13:27.400 --> 0:13:31.439 has been? What does a pandemic disinflation look like? This 0:13:31.520 --> 0:13:35.480 is an original inflation, isn't It's. 0:13:34.640 --> 0:13:36.559 Original only in so far as the Federal Reserve and 0:13:36.600 --> 0:13:39.120 a lot of central banks made the mistake of printing 0:13:39.120 --> 0:13:41.160 too much money at a time when they thought that 0:13:41.800 --> 0:13:43.920 the pandemic would not end, or at least they took 0:13:43.920 --> 0:13:45.920 the risk management view that there's a possibility that the 0:13:45.960 --> 0:13:48.080 pandemic doesn't end, and therefore they aired on the side 0:13:48.080 --> 0:13:51.760 of inflation of liquidity balances in the economy. The important 0:13:51.760 --> 0:13:53.720 thing to keep in mind is that those impulses that 0:13:53.760 --> 0:13:56.760 created the inflation in twenty twenty one and early twenty 0:13:56.800 --> 0:13:59.400 twenty two are more or less over and done with. 0:13:59.400 --> 0:14:02.960 With the possible exception of wage pressures in Europe. If 0:14:03.040 --> 0:14:05.440 you look at real monetary balances in the US, because 0:14:05.480 --> 0:14:07.880 of inflation and because of QT, they are back to 0:14:07.960 --> 0:14:10.400 trend level. They went up about fifteen to twenty percent 0:14:10.440 --> 0:14:12.959 above the trend and they've come down twenty fifteen or 0:14:13.000 --> 0:14:16.760 twenty percent back to the trend. That's a very strong indication, 0:14:16.800 --> 0:14:19.840 a very strong suggestion that the inflationary impulse that the 0:14:19.880 --> 0:14:24.040 central banks had created is no longer in play, it's 0:14:24.080 --> 0:14:25.160 no longer manifest. 0:14:25.880 --> 0:14:28.440 The longest dead concert, Terry was at the concert. He 0:14:28.520 --> 0:14:34.960 stood for six hours, the longest dead concert ever, six hours. 0:14:35.040 --> 0:14:36.280 It's on the edge of Springsteen. 0:14:37.280 --> 0:14:39.600 Yeah, they have epic concerts, and evidently they used to 0:14:39.600 --> 0:14:43.800 have even more epic concerts as older was. 0:14:44.440 --> 0:14:47.320 Terry Wiseman, Thank you so much. Pleasure today, just perfect 0:14:47.360 --> 0:14:49.640 time to have you in here. Well, the challenges that 0:14:49.680 --> 0:15:02.840 we see in Turkey today. I turned to Michael gab And, 0:15:02.920 --> 0:15:07.000 head of Economics, Bank of America's Securities. Michael, my head's spinning. 0:15:07.080 --> 0:15:09.040 There's so many trends going on here, and is Mike 0:15:09.120 --> 0:15:14.280 perfectly encapsulated. The ambiguities of the moment are immense. What 0:15:14.480 --> 0:15:18.880 is the thing at the margin you're studying subject to 0:15:19.040 --> 0:15:22.960 change about American economics. What's the part of the story 0:15:23.000 --> 0:15:23.760 that interests you. 0:15:25.840 --> 0:15:29.920 I think that there's two parts. One is what Lisa mentioned, 0:15:30.200 --> 0:15:33.760 how quickly can inflation come down even an environment where 0:15:33.760 --> 0:15:37.720 the labor market is extremely tight? For Powell's words, so 0:15:37.800 --> 0:15:41.280 can we get further diminishment in goods prices, used, car 0:15:41.400 --> 0:15:44.680 prices shelter inflation? Same conversation we've been talking about for 0:15:44.760 --> 0:15:47.520 some time. But I think the mirror side of that coin, 0:15:47.560 --> 0:15:50.320 which Powell emphasized yesterday and we and others have been 0:15:50.320 --> 0:15:54.000 picking up on more, what is the big miss really 0:15:54.120 --> 0:15:56.520 this year has not come on inflation. It's come in 0:15:56.560 --> 0:16:00.560 the labor market, where the labor force has rebounded dreamly 0:16:00.680 --> 0:16:05.240 rapidly this year. Last year, the shortfall in the labor 0:16:05.280 --> 0:16:08.080 force from kind of pre COVID projections was as high 0:16:08.080 --> 0:16:11.440 as two million in not falling. By our estimate, its 0:16:11.480 --> 0:16:14.400 down to about four hundred thousand. Now that means the 0:16:15.240 --> 0:16:19.120 probability of a softer landing or mild recession is higher, 0:16:19.440 --> 0:16:21.560 and the Fed doesn't have to lean on the labor 0:16:21.600 --> 0:16:24.520 market as much perhaps to bring inflation down. So it's 0:16:24.560 --> 0:16:28.000 that labor force rebound. From my perspective, that puts the 0:16:28.000 --> 0:16:30.680 FED in a very different spot today than it was 0:16:30.720 --> 0:16:32.760 thinking it was in maybe six to nine months ago. 0:16:33.120 --> 0:16:36.320 Michael, How does FED Chair J Powell draw this distinction 0:16:36.360 --> 0:16:39.840 at a time when his compatriots over across the Atlantic 0:16:39.920 --> 0:16:43.560 are moving in the opposite direction and are facing resurgent 0:16:43.640 --> 0:16:46.400 inflation exactly what they didn't want to see in a 0:16:46.440 --> 0:16:48.880 Burns like kind of the situation. 0:16:50.920 --> 0:16:51.600 I think this is. 0:16:51.560 --> 0:16:54.240 Where one time you fall back on the US is 0:16:54.280 --> 0:16:58.080 a large, relatively closed economy, were less affected by global 0:16:58.160 --> 0:17:01.200 trends than is the case elsewhere, and we'll make the 0:17:01.240 --> 0:17:04.560 decisions on our policy outlook based on where the domestic 0:17:04.600 --> 0:17:08.240 economy is. The upside risk on inflation in the US 0:17:08.520 --> 0:17:11.680 will come out of US labor markets and whether there's 0:17:11.760 --> 0:17:16.119 persistent tightness in the labor market that keeps services inflation elevated. 0:17:16.160 --> 0:17:18.280 So I think you just kind of fall back on 0:17:18.880 --> 0:17:21.760 the historical tendencies of the US to be much more 0:17:21.880 --> 0:17:25.880 domestically focused, services driven, and therefore we're going to set 0:17:25.880 --> 0:17:27.960 our policy based on that evolution. 0:17:28.320 --> 0:17:30.560 The other aspect of the conversation is the fiscal side 0:17:30.640 --> 0:17:34.080 versus the monetary policy side, and people are talking a 0:17:34.080 --> 0:17:37.359 lot about the fiscal impulse of having to repay student 0:17:37.400 --> 0:17:40.760 loans again starting in October. We've been debating this for 0:17:40.800 --> 0:17:42.840 a couple of days and trying to figure out whether 0:17:42.880 --> 0:17:45.560 this is an overplayed risk or an underplayed risk. Do 0:17:45.600 --> 0:17:49.160 you think that the reinstatement of having to pay back 0:17:49.280 --> 0:17:52.280 your student debt after three years of a moratorium is 0:17:52.320 --> 0:17:54.359 going to have a material impact on both growth and 0:17:54.400 --> 0:17:56.240 inflation in the United States later this year. 0:17:58.000 --> 0:17:58.520 I think we. 0:17:58.480 --> 0:18:01.840 Would come down on the side that from a macro perspective, 0:18:01.840 --> 0:18:05.240 it's unlikely to have a material effect. It should probably 0:18:05.560 --> 0:18:09.240 dent the strength of spending in say September or October, 0:18:09.280 --> 0:18:13.359 but the magnitude of interest payments is maybe about two 0:18:13.440 --> 0:18:16.200 tenths of one percent of personal income. If you fold 0:18:16.200 --> 0:18:19.560 in principal payments, that's closer to maybe half of one percent. 0:18:19.960 --> 0:18:22.879 So from the macro perspective, we doubt it has a 0:18:22.920 --> 0:18:27.080 material impact, although certainly at the individual level it may 0:18:27.080 --> 0:18:30.359 affect behavior quite a lot. It just doesn't We don't 0:18:30.359 --> 0:18:34.600 think it adds up to something macro systemic, if you will, 0:18:34.640 --> 0:18:38.200 So it's probably more about credit markets and the behavior 0:18:38.240 --> 0:18:41.520 of those as opposed to the macroeconomy. 0:18:41.520 --> 0:18:44.760 More broadly, what is a Bank of America? C Michael 0:18:44.800 --> 0:18:48.760 Gabin in your immense ability to tap knowledge on the 0:18:48.800 --> 0:18:52.359 American consumer, and I want to get granually here through 0:18:52.440 --> 0:18:56.160 the month of June. Is any indication of a slowdown 0:18:56.200 --> 0:18:57.480 of the American consumer? 0:18:59.160 --> 0:19:03.080 Yeah, there is, Tom, there is our BAA card data 0:19:03.080 --> 0:19:06.919 would suggest that consumer spending continues to slow, but at 0:19:06.960 --> 0:19:09.719 a moderate pace. And when we dig into those details, 0:19:10.240 --> 0:19:14.200 we do find that some of the revenge spending categories 0:19:14.240 --> 0:19:18.640 are starting to show softness, so airlines and lodging, which 0:19:18.680 --> 0:19:23.120 were really strong last year, those things have started to moderate, 0:19:23.400 --> 0:19:27.080 but spending on entertainment and recreation that is still strong. 0:19:27.480 --> 0:19:29.920 It maps into what we're seeing in the labor market, 0:19:30.000 --> 0:19:33.480 where two thirds of your gains and private sector employment 0:19:33.680 --> 0:19:36.399 are still coming from areas like leisure and hospitality and 0:19:36.520 --> 0:19:39.640 education and health. So there's still some catch up spending 0:19:39.840 --> 0:19:43.040 leading probably to follow through and hiring. But on the margin, 0:19:43.359 --> 0:19:47.720 it does suggest that spending is moderating. It's about flat 0:19:48.560 --> 0:19:51.359 on a year on year basis, and in some categories 0:19:51.400 --> 0:19:52.480 moving slightly negative. 0:19:52.600 --> 0:19:54.280 Michael, I have to say I'm hearing all of the 0:19:54.320 --> 0:19:56.480 noise behind you, and I'm thinking to myself, a lot 0:19:56.480 --> 0:19:58.480 of people are back in the office, and how different 0:19:58.520 --> 0:20:01.159 this is than what we have heard for so many years. 0:20:01.240 --> 0:20:03.840 Is that your experience that this has actually been this 0:20:03.920 --> 0:20:06.560 sort of sea change of reversion and the whole work 0:20:06.600 --> 0:20:10.760 from home trend has kind of died out. 0:20:10.440 --> 0:20:14.320 I mean, I think that's very industry specific and probably 0:20:14.400 --> 0:20:17.720 job requirements specific, where you know, I'm in at least 0:20:17.760 --> 0:20:21.439 four days a week sales and trading here is in 0:20:21.560 --> 0:20:25.080 five days a week. So certain roles are definitely back 0:20:25.119 --> 0:20:28.120 in the office. I see it on my regular commute 0:20:28.480 --> 0:20:33.479 as well. So and certainly Monday, Tuesday, and Wednesday or sorry, Tuesday, 0:20:33.480 --> 0:20:36.160 Wednesday and Thursday are your big peak days. So yeah, 0:20:36.200 --> 0:20:38.200 there's kind of three out of the five days it's 0:20:38.240 --> 0:20:41.640 feeling quote normal, and then it kind of tapers off. 0:20:41.920 --> 0:20:44.720 Week goes on, you know, Friday at Bank of America, 0:20:44.840 --> 0:20:47.240 moinning hands out at the summer place, gaping's in with 0:20:47.280 --> 0:20:53.359 shorts and flip flops. That's a celebration, like scary thought, 0:20:53.680 --> 0:20:59.080 Michael Gap and thank you so much as Bank of America. 0:21:00.240 --> 0:21:04.560 Everyone I talked to there is only one destination, and 0:21:04.640 --> 0:21:08.399 it is Paris. It is stunning anecdotally to see the 0:21:08.480 --> 0:21:12.600 number of people migrating to France. Leading the way is 0:21:12.640 --> 0:21:15.840 Francine Lacroix from London at an important conference of mister 0:21:15.920 --> 0:21:19.920 mccroum on climate and on the funding for poorer nations. 0:21:20.240 --> 0:21:24.160 She is in conversation with a tour director for Paris. 0:21:24.200 --> 0:21:27.480 He's on the bus telling us about the highlights Bruno 0:21:27.600 --> 0:21:29.520