WEBVTT - Surveillance: Raising Rates with Citi's Clark 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.320 with Jonathan Farrell and Lisa Abramowitz. Join us each day 0:00:12.320 --> 0:00:16.800 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.000 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.560 anywhere you get your podcasts, and always I'm Bloomberg dot Com, 0:00:26.600 --> 0:00:30.720 the Bloomberg Terminal, and the Bloomberg Business App. Veronica Clark 0:00:30.800 --> 0:00:33.800 of course at the City Group, Veronica, not only do 0:00:33.880 --> 0:00:37.040 you talk about the place of inflation right now, but 0:00:37.120 --> 0:00:40.080 you say, if anything, you'll be surprised to the upside. 0:00:40.479 --> 0:00:46.640 What parts of American inflation push us to the upside? Yeah, yeah, 0:00:46.680 --> 0:00:48.960 when we do our places and forecasts, Yeah, we really 0:00:49.000 --> 0:00:52.400 do a very detailed bottoms up forecast. And we're still 0:00:52.400 --> 0:00:55.200 seeing strengthen things like shelter prices. I think everyone could 0:00:55.200 --> 0:00:59.200 be maybe overestimating how quickly those still might slow. But 0:00:59.320 --> 0:01:02.280 really it comes down to those core non shelter service prices. 0:01:02.320 --> 0:01:04.920 That's what Powell has focused us on. Those can stay 0:01:04.959 --> 0:01:09.440 persistently strong. Things like medical services, recreation can definitely see 0:01:09.480 --> 0:01:13.200 a lot of upside there. Still, let's focus on medical inflation. 0:01:13.280 --> 0:01:17.000 It's such a large part of the inflation pie. What 0:01:17.200 --> 0:01:20.320 is your year over year forward on medical inflation? Dare 0:01:20.360 --> 0:01:23.400 I say it's double digit. I don't know if we'll 0:01:23.440 --> 0:01:25.920 quite get to double digits, but I think we can 0:01:25.959 --> 0:01:29.720 definitely see that that component picking up, not even necessarily 0:01:29.760 --> 0:01:31.880 in CPI data that we're going to get tomorrow, but 0:01:31.920 --> 0:01:34.679 I would look more for PPI data later in the week. 0:01:34.760 --> 0:01:37.320 That's what will matter for pc inflation. But you can 0:01:37.360 --> 0:01:40.720 definitely see that running consistently at five, you know, maybe 0:01:40.720 --> 0:01:43.440 six percent, you know, getting closer to double digits. Maybe 0:01:43.440 --> 0:01:46.759 not quite there yet, though, Veronica, you think this federal 0:01:46.760 --> 0:01:48.720 reserve can go further? You in a team over a 0:01:48.800 --> 0:01:52.200 city group. The big question at standing is ultimately, to 0:01:52.280 --> 0:01:54.400 what extent the banking stress of the last month is 0:01:54.400 --> 0:01:57.240 a substitute for right hikes? Veronica, Why do you and 0:01:57.320 --> 0:01:59.160 the team think that what we've seen develop in the 0:01:59.240 --> 0:02:02.960 last month is contained, that the worst of it is done. Yeah, 0:02:03.000 --> 0:02:05.760 I think we're seeing things stabilized now. And it's not 0:02:05.840 --> 0:02:09.399 that we wouldn't expect no impact on activity or inflation 0:02:09.560 --> 0:02:12.520 from tightening lending. And this is probably does mean that 0:02:12.600 --> 0:02:15.920 lending standards tighten more and credit pulls back a bit more. 0:02:16.400 --> 0:02:18.400 But we should have already been expecting some of that, 0:02:18.440 --> 0:02:20.680 of course, you know, from from higher rates, and it's 0:02:20.720 --> 0:02:22.600 not that you're going to see it immediately. You know, 0:02:22.639 --> 0:02:24.959 this is much more a second half of the year, 0:02:25.160 --> 0:02:28.120 end of the year type issue for the broader economy 0:02:28.680 --> 0:02:30.160 and then for the Fed that you know, the more 0:02:30.200 --> 0:02:33.560 near term pressing issue is that you'll still have three 0:02:33.600 --> 0:02:37.320 months or so at least of pretty consistently strong inflation prints, 0:02:37.600 --> 0:02:40.160 and it seems hard to see a scenario where they're pausing, 0:02:40.440 --> 0:02:43.560 where we're still running course CPI at point five every month. 0:02:45.040 --> 0:02:47.720 Just to frame the current split the divergence, you're well 0:02:47.760 --> 0:02:50.280 aware that the market is trading well below the FETs 0:02:50.720 --> 0:02:53.079 dolt fe year end for NICA. You're on the other 0:02:53.120 --> 0:02:56.200 side of this, you're well above the dolt for year end. 0:02:56.480 --> 0:02:58.400 Just give me some numbers on that. Why'd you see 0:02:58.400 --> 0:03:01.480 the terminal write still for this federal se Yeah, we 0:03:01.919 --> 0:03:04.200 still have that terminal rate at five and a half 0:03:04.200 --> 0:03:07.240 to five seventy five, So that's twenty five basis point 0:03:07.320 --> 0:03:11.040 hike in May, another in June, another in July. And 0:03:11.080 --> 0:03:13.680 again it comes down to this timing issue. Where it 0:03:13.760 --> 0:03:16.840 will have tomorrow's CPI report before the May meeting. It's 0:03:16.880 --> 0:03:19.239 probably a lower bar for them to hike still in May. 0:03:19.320 --> 0:03:22.320 You know, that's what the dots show. But before the 0:03:22.440 --> 0:03:24.919 June meeting, after the May meeting will have two more 0:03:24.960 --> 0:03:28.440 CPI prints, and those look like they can stay consistently strong. 0:03:28.760 --> 0:03:30.440 And then at the June meeting, you know, we'll have 0:03:30.480 --> 0:03:34.000 an update to projections for inflation growth and the dots, 0:03:34.639 --> 0:03:37.080 and it seems unlikely to us that the Fed will 0:03:37.120 --> 0:03:39.840 have to be revising higher their inflation forecast and then 0:03:39.920 --> 0:03:43.160 not still hiking. I think that that keeps them going 0:03:43.360 --> 0:03:45.760 the markets. Of course, we'll just get their overtime as 0:03:45.760 --> 0:03:50.720 we get consistently strong inflation data. For this is really important. 0:03:50.720 --> 0:03:53.360 What you just said there's stopped the show. You and 0:03:53.360 --> 0:03:58.800 Andrew are reaffirming a set of rate moves higher. So 0:03:58.840 --> 0:04:00.800 when you talk to Keith with I mean, I know 0:04:00.840 --> 0:04:03.800 you're not on speaking terms, but how does your banking 0:04:03.880 --> 0:04:08.520 team at City Group adapt in I guess the crisis 0:04:08.640 --> 0:04:13.200 is over, but adapt to flows in banking giving your 0:04:13.320 --> 0:04:16.560 economic call? How do they adapt to that? Yeah, I 0:04:16.640 --> 0:04:19.240 certainly don't want to speak for them, but I think 0:04:19.279 --> 0:04:21.680 you know the system as a whole. You know, we 0:04:21.760 --> 0:04:24.480 know that there are these issues, but it does seem like, 0:04:24.800 --> 0:04:28.440 you know, the fed's facilities are working to control liquidity 0:04:28.440 --> 0:04:31.400 issues and that if things do stabilize. Well, we know 0:04:31.480 --> 0:04:33.440 that the FED has all of those other tools to 0:04:33.480 --> 0:04:36.039 deal with financial stability, but we do still have this 0:04:36.160 --> 0:04:39.240 price stability problem. And their only tool really deal with 0:04:39.279 --> 0:04:44.040 inflation is rates. So so where does a money market 0:04:44.080 --> 0:04:45.359 fund go? I mean, I don't want you to be 0:04:45.360 --> 0:04:48.200 a rate strategist for City Group, but if I got 0:04:48.200 --> 0:04:52.120 the own horse Clark call, I think I'm looking at 0:04:52.120 --> 0:04:54.880 a money market fund to five and a half or 0:04:54.920 --> 0:04:58.839 even higher percent, right, Yeah, I mean yeah, we certainly 0:04:58.880 --> 0:05:02.479 would have yeah, short term guilds going higher. Again, you 0:05:02.480 --> 0:05:04.880 could see more more deposit outflows, of course, but we 0:05:04.880 --> 0:05:07.920 were that was already happening even even before the banking crisis. 0:05:08.480 --> 0:05:10.120 But that is what needs to happen. You know, you 0:05:10.200 --> 0:05:13.039 need people to stop spending. You know, you need credit 0:05:13.160 --> 0:05:16.000 to contract, and that's what slows the economy and brings 0:05:16.040 --> 0:05:20.599 down inflation. Johnny, you know, I look at this, John, 0:05:20.720 --> 0:05:23.760 and besides, your compliance officer just fell off the chair. 0:05:24.480 --> 0:05:27.680 Listen to that. I mean, if you get a city 0:05:27.760 --> 0:05:31.760 group framework. What does that do to so for Libra 0:05:31.960 --> 0:05:34.760 all the IRA Jersey stuff, what does that do to 0:05:34.920 --> 0:05:38.000 somebody watching this or listening to this, to that money 0:05:38.040 --> 0:05:42.640 market choice five point six five percent, that's not five percent, 0:05:42.880 --> 0:05:45.200 that's a bigger percent with a vengeance. Did you go there, 0:05:45.240 --> 0:05:47.320 so Veronico which you pointed out that would be a 0:05:47.320 --> 0:05:50.039 feature and not a bug of monasty policy. This is 0:05:50.040 --> 0:05:52.479 what they're trying to achieve. But given what we've seen 0:05:52.560 --> 0:05:54.320 develop in the last month, do you not think that 0:05:54.320 --> 0:05:58.400 would contribute to renewed stress in a financial system? Yeah, 0:05:58.760 --> 0:06:01.120 it's that's certainly a risk skin We have seen some 0:06:01.160 --> 0:06:03.320 of those cracks show up at this point. But I 0:06:03.320 --> 0:06:05.000 mean I think that for the FED, at least, you know, 0:06:05.040 --> 0:06:08.120 they would see there all their other tools that they've used, 0:06:08.160 --> 0:06:11.359 you know, the new facility, the discount window as helping 0:06:11.400 --> 0:06:15.479 to control those financial stavility issues. And it is a 0:06:15.520 --> 0:06:17.880 really tough situation. I'm not saying it's a it's an 0:06:17.880 --> 0:06:19.920 easy thing for them. It could be an uncomfortable a 0:06:19.920 --> 0:06:22.680 couple of months here, but you do still unfortunately have 0:06:22.720 --> 0:06:26.240 an inflation issue. Can we talk about what's developed in 0:06:26.279 --> 0:06:29.120 the labor market as well, on Friday, what we saw 0:06:29.240 --> 0:06:33.119 was a really resilient NFPN on fun payrolls print. Once again, 0:06:33.200 --> 0:06:36.600 we've had a year of those just upside surprise, upside surprise, 0:06:36.640 --> 0:06:38.560 but I don't think we've had a downside surprise since 0:06:38.560 --> 0:06:41.560 the March report, which came in early April of last year. 0:06:41.800 --> 0:06:43.600 For because some people look back to the data of 0:06:43.680 --> 0:06:46.479 last week and they're looking for noise versus signal. Was 0:06:46.520 --> 0:06:50.479 the data before the payrolls print the noise or the 0:06:50.520 --> 0:06:53.400 signal because we had a string of misses going into 0:06:53.440 --> 0:06:57.320 that print. Yeah. Yeah, we had some software im readings, 0:06:57.360 --> 0:07:01.680 We had job openings that came down revisions to initial 0:07:01.760 --> 0:07:04.440 and continuing jobs. Claims that maybe those look a lot 0:07:04.520 --> 0:07:08.000 higher now and are trending a bit higher. I would say, 0:07:08.279 --> 0:07:10.160 you know, a lot of this data we should still 0:07:10.200 --> 0:07:13.160 take with somewhat of a grain of salt, especially that 0:07:13.240 --> 0:07:16.360 claims data there looks like to some seasonal pattern that 0:07:16.520 --> 0:07:20.400 didn't get worked out with some seasonal factor revisions. And 0:07:20.440 --> 0:07:22.600 I would say, you know, all of it is consistent 0:07:22.640 --> 0:07:25.160 with you know, an economy that should be slowing but 0:07:25.160 --> 0:07:27.440 but certainly is not you know, headed off a cliff 0:07:27.440 --> 0:07:30.680 into an immediate recession. But we should be expecting, you know, 0:07:30.720 --> 0:07:33.960 ism services in a fifty fifty five rage, we should 0:07:34.040 --> 0:07:37.080 be expecting job openings to be coming down. And I 0:07:37.080 --> 0:07:39.480 think you know the labor market data of course on Friday, 0:07:39.760 --> 0:07:42.320 it is still a very strong labor market. The unemployment 0:07:42.360 --> 0:07:44.800 rate is still very low. It looked a lot like 0:07:44.800 --> 0:07:47.720 a twenty nineteen kind of jobs print. But when you're 0:07:47.800 --> 0:07:51.520 running core inflation that's pretty consistently at five percent, you 0:07:51.600 --> 0:07:53.440 have to be worried that, you know, a tight labor 0:07:53.480 --> 0:07:55.520 market like that will just add to the upside risk 0:07:55.520 --> 0:07:59.600 for inflation. Ironica, this was quite as a white four o'clock. 0:07:59.640 --> 0:08:02.320 Then I've a city working alongside Andrew Holland Hoist with 0:08:02.360 --> 0:08:14.440 a col F effete to take rights to five fifty. 0:08:15.560 --> 0:08:19.520 This is an extremely important conversation because of the number 0:08:19.520 --> 0:08:22.280 of narratives in Washington and all my years of doing this. 0:08:22.640 --> 0:08:25.360 The spring meetings of the IMF and MOROCCO later this 0:08:25.440 --> 0:08:28.480 year in October, there's five six. It's like it's like 0:08:28.520 --> 0:08:31.720 Howard Johnson's years ago. They're twenty eight flavors of narratives 0:08:32.160 --> 0:08:34.760 and where we're heading. A student of this is Douglas 0:08:34.840 --> 0:08:39.720 Rhdicker managing partner International Capital Strategies, but far more and 0:08:39.960 --> 0:08:42.960 a former executive board member of the IMF and affiliated 0:08:43.000 --> 0:08:46.880 with democratic politics in Washington. Doug, thank you so much 0:08:46.880 --> 0:08:49.040 for joining us. You're advass or a million years ago 0:08:49.400 --> 0:08:51.400 and you're sitting there and they go, look, I am F. 0:08:51.559 --> 0:08:54.559 There's two narratives. What happened? Why do we have fourteen 0:08:54.640 --> 0:08:57.800 narratives now? Oh? Look, I don't think you can start 0:08:57.880 --> 0:09:00.240 with the IMF of twenty thirty four years ago. I 0:09:00.240 --> 0:09:03.120 think it's a completely different institution I think right now, 0:09:03.360 --> 0:09:05.560 and it has very little to do in the IMF 0:09:05.559 --> 0:09:07.360 and more to do with the world. So I guess 0:09:07.440 --> 0:09:10.400 we're better off if there's not one overwhelming crisis. If 0:09:10.400 --> 0:09:13.160 you go back to the Greek crisis, the Euro crisis, COVID, 0:09:13.240 --> 0:09:16.559 even in Russia, Ukraine, those were dominant themes that squeezed 0:09:16.600 --> 0:09:18.920 everything else side of the room. I guess, if you 0:09:18.920 --> 0:09:21.240 want to look at this through rose colored glasses, the 0:09:21.280 --> 0:09:24.600 fact that we have multiple different narratives is probably better 0:09:24.640 --> 0:09:27.360 than we're all overwhelmed by a single one. That doesn't 0:09:27.400 --> 0:09:30.040 mean any single one of those is easy to resolve, 0:09:30.160 --> 0:09:31.680 or the week is going to come out with anything 0:09:31.679 --> 0:09:34.280 that is concrete, but at least it's better than one 0:09:34.320 --> 0:09:37.400 thing that everybody's focused on because it's existential. There is 0:09:37.440 --> 0:09:39.680 in the financial times today and I've been searching for 0:09:39.720 --> 0:09:42.640 this for three years, folks, three years. What's the right 0:09:42.760 --> 0:09:46.280 phrase for the attitude we have from the Great Financial 0:09:46.320 --> 0:09:49.640 Crisis and Russia? Sharma X Morgan Stanley at the Rockefeller 0:09:49.720 --> 0:09:55.280 Foundation absolutely nails it this morning, calling it the rescue culture? 0:09:55.520 --> 0:09:58.760 Is that what we're trapped in where every institution goes 0:09:58.880 --> 0:10:00.959 there could be no pain, there could be no anks, 0:10:01.080 --> 0:10:03.800 nobody can go out of business. Every deposit's got to 0:10:03.880 --> 0:10:07.560 be covered. Do we have an international rescue culture? We 0:10:07.600 --> 0:10:10.280 have a domestic international rescue culture. We have an international 0:10:10.320 --> 0:10:14.560 rescue culture, whether it's called rescue culture or an entitlement culture. Yeah, 0:10:14.640 --> 0:10:18.080 I think everybody assumes that there's a put, some form 0:10:18.120 --> 0:10:21.120 of put. Whether that put is a central bank put 0:10:21.360 --> 0:10:24.440 or a fiscal authorities put or an IMF put. Everybody 0:10:24.440 --> 0:10:27.920 feels somewhat entitled. You've got me sounding much more pessimistic 0:10:27.960 --> 0:10:30.240 and negative than I thought I would be. But the 0:10:30.240 --> 0:10:33.360 fact of the matter is, Yes, imagine if Bramo was 0:10:33.440 --> 0:10:38.200 here walking out, do you think that sense of encondlement 0:10:38.320 --> 0:10:42.160 is mispiced. Well, I guess it's well placed if in 0:10:42.240 --> 0:10:46.600 the end those authorities actually blink and write the checks. Right. So, 0:10:46.960 --> 0:10:49.679 if the game is do we want to avoid another Lehman? 0:10:49.880 --> 0:10:55.360 If that's the moral hazard play, then fundamentally, countries believe, countries, companies, 0:10:55.440 --> 0:11:00.320 investors believe that when things get really bad, somebody, thing, 0:11:00.400 --> 0:11:02.840 some institution is going to bail me out of the 0:11:02.880 --> 0:11:07.280 worst consequences. And to date that's been a fairly solid bet. 0:11:07.520 --> 0:11:10.520 I don't think it's sustainable, but you know, not being 0:11:10.559 --> 0:11:13.960 sustainable can be two years, twenty years. I mean there's 0:11:13.960 --> 0:11:15.920 a long time. Right in the long run, we're all dead. 0:11:16.360 --> 0:11:18.520 What did we learn last month with re cost to 0:11:18.600 --> 0:11:22.400 exactly this? Well, so what I think it's too early 0:11:22.480 --> 0:11:27.559 to know what the long term consequences are of SVB, credit, Swiss, etc. 0:11:27.800 --> 0:11:30.000 And by the way, I divide the two into totally 0:11:30.000 --> 0:11:32.360 different camps, but let's lump them together for the purposes 0:11:32.360 --> 0:11:35.920 of this, which is to say yes rather than letting 0:11:36.160 --> 0:11:42.400 unfettered capitalism creative destruction play out. Everything is systemic. You 0:11:42.440 --> 0:11:44.319 want to know what it is? We learned? We learned it. 0:11:44.480 --> 0:11:49.640 Everything is systemic. So when SVB is suddenly systemic. It 0:11:49.679 --> 0:11:52.600 was the sixteenth largest bank in the country. It was 0:11:52.720 --> 0:11:56.440 not systemic by traditional metrics. But suddenly, when it turns 0:11:56.440 --> 0:11:59.000 out that your Zoom call might not happen on Monday 0:11:59.080 --> 0:12:02.400 because Zoom was a big deposit or at SVB, that's systemic. 0:12:02.600 --> 0:12:04.760 I don't know if that's how we contemplated systemic when 0:12:04.800 --> 0:12:07.000 we started there. So if everything is now systemic, is 0:12:07.000 --> 0:12:10.920 it just implied that old deposits are in short? Oh? Look, 0:12:11.080 --> 0:12:14.600 I think that both Secretary Yellen and other authorities have 0:12:14.640 --> 0:12:17.440 gone very far to making sure that they send the 0:12:17.480 --> 0:12:22.320 message that implicitly yes, but explicitly they don't have the 0:12:22.360 --> 0:12:26.240 congressionally mandated authority to say yes. So they're saying yes 0:12:26.240 --> 0:12:29.520 with a caveat, or they're saying no with an asterisk. Yes, 0:12:29.600 --> 0:12:31.720 but we can't say yes. But yeah, go to sleep 0:12:31.720 --> 0:12:35.000 at night thinking and knowing that your deposits are in short. Dog, 0:12:35.080 --> 0:12:39.560 your work is to combine economics with law years ago, 0:12:39.679 --> 0:12:44.360 scotton arps and all that. And then Salomon Brothers is well, 0:12:44.400 --> 0:12:47.959 I am fascinated how you respond to an I am 0:12:48.000 --> 0:12:52.160 F five year call of economic gloom of global GDP 0:12:52.840 --> 0:12:55.560 three percent or less malpass came out at World Bank 0:12:55.880 --> 0:12:58.440 and had a two handle on some form of present 0:12:58.840 --> 0:13:04.520 global growth. That's not Barack Obama's better America or better 0:13:04.600 --> 0:13:07.520 global How do we get so negative, so fast, so 0:13:07.720 --> 0:13:12.560 entrenched in our gloom? So I have high regard for 0:13:12.640 --> 0:13:16.680 the economic teams at the Bank and the Fund, and 0:13:16.800 --> 0:13:19.959 there's a caveat coming. There's a butt. The butt is 0:13:20.440 --> 0:13:23.360 there's a certain amount of group think that trickles into 0:13:23.360 --> 0:13:26.800 a lot of this, and so you have desk economists 0:13:26.840 --> 0:13:31.520 who factor in their individual country projections into the regional, 0:13:31.840 --> 0:13:35.600 into the WO or the GFSR, and what you end 0:13:35.720 --> 0:13:42.600 up with is not necessarily a holistic, strategically oriented five 0:13:42.679 --> 0:13:46.439 year forecast. It's almost bottoms up, to the point where 0:13:46.480 --> 0:13:51.959 it's two bottoms up. That's the single best discussion of that. Ever, 0:13:52.200 --> 0:13:55.839 i'll take it one step too far. Maybe it's the 0:13:56.000 --> 0:13:58.640 space to make the accusation that some of these full 0:13:58.720 --> 0:14:04.040 costa political and not Bison economics. It depends on how 0:14:04.040 --> 0:14:06.720 you define political. And what I mean by that is 0:14:06.880 --> 0:14:09.040 I actually think there's a lot of people who are 0:14:09.160 --> 0:14:12.439 very technocratic, who keep their heads down, who have their 0:14:12.559 --> 0:14:15.319 pencils to their papers or the equivalent, and they are 0:14:15.400 --> 0:14:18.440 making their forecasts based on their best estimates without regard 0:14:18.440 --> 0:14:20.840 to politics. I think there are some other decisions at 0:14:20.840 --> 0:14:26.080 these institutions program lending, certainly policy choices that are highly politicized, 0:14:26.160 --> 0:14:28.520 probably more than ever before, or at least in the 0:14:28.560 --> 0:14:30.960 last several decades. Let's the dog you're being way to 0:14:31.040 --> 0:14:33.800 pullite Kenneth Rogoff, who's got a non equates with the 0:14:33.800 --> 0:14:38.240 International Monetary Fund. Ken's bend borderline scathing that the IMF 0:14:38.240 --> 0:14:41.000 has become the World Bank. Do you agree, Well, it 0:14:41.040 --> 0:14:44.520 hasn't become, but it's certainly trending in that direction. I 0:14:44.600 --> 0:14:47.960 think the current managing director of the ims instincts and 0:14:48.080 --> 0:14:51.320 experience are much more aligned with her experience at the 0:14:51.360 --> 0:14:54.120 World Bank. And I would make the counter argument that 0:14:54.200 --> 0:14:57.400 David Malpass in taking a harder line on lending to 0:14:57.560 --> 0:15:00.400 China or enforcing China to the table to be more 0:15:00.440 --> 0:15:04.960 transparent and more conciliatory towards debt restructure, and has taken 0:15:05.000 --> 0:15:08.280 a more stingy which would traditionally be seen as an 0:15:08.280 --> 0:15:11.440 IMF style approach to some of the emergency lending coming 0:15:11.440 --> 0:15:14.720 out of coaching. Should we make some news? He and 0:15:14.760 --> 0:15:16.600 you suggested that Joe Gavis should be at the World 0:15:16.640 --> 0:15:18.720 Bank and Maupass should be at the IMS. Oh, I 0:15:19.120 --> 0:15:21.720 would never make a suggestion about personnel at that level 0:15:21.720 --> 0:15:24.960 when those decisions have already been taken, whether in fact 0:15:25.240 --> 0:15:28.880 they were the perfect fit for the job under the 0:15:28.960 --> 0:15:32.840 circumstances that we now have. Let's say, I think both 0:15:32.840 --> 0:15:35.960 of them have done an admirable job in their current positions, 0:15:36.040 --> 0:15:38.240 and I wish them the best. They were given a pandemic, 0:15:38.280 --> 0:15:40.960 we got to remember absolutely, and they were they inherited. 0:15:41.040 --> 0:15:43.520 As I say, this China card, which you know, the 0:15:43.520 --> 0:15:45.880 IMAT traditionally spent a lot of time as it should. 0:15:45.880 --> 0:15:49.040 It's it's man they dealing with debt restructuring, debt relief, 0:15:49.400 --> 0:15:53.560 debt issues and emerging markets and frontier markets, and that 0:15:53.840 --> 0:15:56.880 certainly is something that each one of them has handled 0:15:56.880 --> 0:15:59.760 in a different way. Tuck, this was great. Should do 0:15:59.840 --> 0:16:02.160 this more often. We should come down, come down to 0:16:02.240 --> 0:16:04.600 DC just to catch up with Doug Douglas roddicker there 0:16:04.840 --> 0:16:10.560 on the World Bank and the IMF. Let's get straight 0:16:10.600 --> 0:16:12.680 to Mike Schumach at the global head of macro Strategy 0:16:12.880 --> 0:16:14.960 at whilst Fargo. Mike, great to have you with us, 0:16:14.960 --> 0:16:17.760 sir as always good to see Mike. Good morning. Let's 0:16:17.800 --> 0:16:20.000 talk about the call from City. We'll kick things off 0:16:20.040 --> 0:16:23.480 there City Ronica Clark on this program thirty minutes ago 0:16:23.800 --> 0:16:26.480 talking up rates of five fifty to five seventy five 0:16:26.720 --> 0:16:30.240 on FED funds. Mike, are you in that capital. No? 0:16:30.360 --> 0:16:32.440 And at this point, Ian look, the third wants to hike, 0:16:32.640 --> 0:16:35.720 probably wants maybe twice more, but it's really torn because 0:16:35.720 --> 0:16:39.160 it's got these VA's troubles and regional banks get into 0:16:39.280 --> 0:16:42.240 five seventy five seems like a stretch impossible. No, but 0:16:42.280 --> 0:16:45.520 we're not in their camp right now. At the moment, 0:16:45.520 --> 0:16:48.080 the conversation shifted, Mike has gone away from how father 0:16:48.160 --> 0:16:51.400 fed will go to how Father'll have to cut back. Mike. 0:16:51.520 --> 0:16:55.160 The IMF putting out its research it's outlook, suggesting that 0:16:55.640 --> 0:16:59.480 rates will return to pre pandemic levels. Mike, would you 0:16:59.520 --> 0:17:03.120 go that now? I look, the IMF's entitled to make 0:17:03.160 --> 0:17:06.320 forecasts like anybody else. But here's the thing, John, when 0:17:06.359 --> 0:17:08.480 you think about the dynamics over the last six to 0:17:08.520 --> 0:17:12.720 twelve months, complete shift in psychology, Inflation still stubborn in 0:17:12.760 --> 0:17:15.080 a lot of countries. I think that's going to keep 0:17:15.160 --> 0:17:18.680 rates pretty well above pre pandemic levels for a long time, 0:17:18.800 --> 0:17:21.320 so back to twenty nineteen levels, not any time soon, 0:17:21.440 --> 0:17:26.840 many many years. Is your macro strategy, Mike Schumacher based 0:17:26.880 --> 0:17:31.360 around service sector core not coming down? I mean you've 0:17:31.359 --> 0:17:36.080 got a better view on headline core is somewhat persistent here. 0:17:37.000 --> 0:17:43.479 What does service sector core do to the Wells Fargo call? Yeah, frankly, 0:17:43.520 --> 0:17:45.879 time people care a lot about service sector core because J. 0:17:46.040 --> 0:17:48.560 Powell cares about it. So I'm in that camp too, 0:17:48.680 --> 0:17:50.960 Mister Powell's important to you, it's important to me, it's 0:17:50.960 --> 0:17:55.080 important new investors. So we've got core staying pretty stubborn, 0:17:55.200 --> 0:17:59.119 frankly for a while. So yes, you probably see some moderation, 0:17:59.320 --> 0:18:01.399 maybe not much in a couple of days or tomorrow, 0:18:01.440 --> 0:18:04.080 I guess when it comes out, but fairly soon, but 0:18:04.200 --> 0:18:06.520 still well above where the Fed wants it to be. 0:18:06.760 --> 0:18:08.639 So we're all looking at that. We focus on it, 0:18:08.680 --> 0:18:12.480 but not anywhere near the comfort zone yet. So if 0:18:12.480 --> 0:18:14.480 I stay on J. Powell, then look at the three 0:18:14.480 --> 0:18:16.640 month T bill, and then I look at the three 0:18:16.640 --> 0:18:20.919 month T bill guestament out eighteen months this morning, I 0:18:21.040 --> 0:18:25.679 see a very sustained three months yield. Does that drive 0:18:25.880 --> 0:18:30.480 even higher in the coming quarters. Yeah, it's really interesting 0:18:30.520 --> 0:18:33.200 time to think about just how much easing the market's 0:18:33.200 --> 0:18:36.440 priced in. So it's got these two factors out there. 0:18:36.520 --> 0:18:39.760 One inflation bad FED wants to squel chip that implies 0:18:39.800 --> 0:18:44.600 more hikes. Number two financial system angst rickety structure, etc. 0:18:45.000 --> 0:18:47.080 Than apply a lot more cuts. We think there are 0:18:47.080 --> 0:18:49.679 too many cuts priced in, both for this year and 0:18:49.840 --> 0:18:52.040 for next year. The big test is going to come 0:18:52.080 --> 0:18:53.920 in the second part of this month, a lot of 0:18:54.000 --> 0:18:57.480 earnings releases. If the system gets past that, I think 0:18:57.520 --> 0:19:00.000 you'll see the number of cuts priced for twenty three 0:19:00.080 --> 0:19:02.320 and twenty four go down a lot, and that should 0:19:02.320 --> 0:19:05.639 push up things like the two year yield. Bring it 0:19:05.680 --> 0:19:09.600 in close. A managing director of the IMF just emailed 0:19:09.600 --> 0:19:13.280 me and says, ask Schumacher, what we see tomorrow? Mike Schumacher, 0:19:13.720 --> 0:19:17.600 what do we see tomorrow on the inflation report? Yeah, 0:19:17.680 --> 0:19:19.760 focus on Coral. We've got that coming in at point 0:19:19.800 --> 0:19:23.360 four percent, and that's probably not going to shock anybody time. 0:19:23.440 --> 0:19:25.920 But we think about how the market reacts to surprises 0:19:25.960 --> 0:19:28.800 as well. In in our view, it's very skewed. So 0:19:28.880 --> 0:19:31.840 let's say Core comes in hot point five point six. 0:19:32.240 --> 0:19:34.119 We think you get much more of a reaction to 0:19:34.160 --> 0:19:36.480 a hot print than a week one, because again, the 0:19:36.560 --> 0:19:39.760 FED wants to hike, and in our simple calculus, the 0:19:39.840 --> 0:19:43.920 Fed's going to ease only if something breaks. So Core 0:19:44.000 --> 0:19:46.640 coming in at point four point five even point three 0:19:46.800 --> 0:19:49.520 doesn't really change that aspect of the Fed's decision making 0:19:50.200 --> 0:19:54.399 two banks breaking, John, didn't get it, Dog. That's the question, 0:19:54.480 --> 0:19:59.720 isn't it hasn't something broken? Something additional? John, So something 0:20:00.280 --> 0:20:02.040 you've got a huge band aid on it, whether it's 0:20:02.080 --> 0:20:05.280 Credit SWEETE, whether it's SVB, take your pick. And now 0:20:05.280 --> 0:20:07.960 it's the question of, as your last guest pointed out, 0:20:08.359 --> 0:20:10.640 where is the strike on that put? Is that put 0:20:10.720 --> 0:20:14.240 still there? Should investors rationally think it is? Perhaps so? 0:20:14.480 --> 0:20:16.600 But you need to have the least for the FED 0:20:16.600 --> 0:20:19.639 to come in or the ECB or the SNB another 0:20:19.680 --> 0:20:22.800 big debacle out there for the markets to become even 0:20:22.840 --> 0:20:27.080 more unnerved. Well, they immediate concerned with Spilova, Mike. If 0:20:27.119 --> 0:20:29.800 you drawn conclusions on how much Spilova we're going to 0:20:29.840 --> 0:20:34.520 see from those incidents really tough to see and quantify 0:20:34.560 --> 0:20:37.760 at this point, John, SVB, it seems like it's pretty localized. 0:20:37.800 --> 0:20:40.440 When you think about Credit Sweee it's a more challenging, 0:20:40.520 --> 0:20:44.160 difficult unwind. But assuming that deal close is pretty soon, 0:20:44.240 --> 0:20:46.639 probably not a ton of spillover. But I think the 0:20:46.680 --> 0:20:49.200 bigger issue is, in particular in the US, you've got 0:20:49.240 --> 0:20:52.000 thousands of banks in a particular or something like a 0:20:52.119 --> 0:20:55.000 hundred that range between ten billion and one hundred billion 0:20:55.000 --> 0:20:57.199 in assets. We simply don't have a lot of visibility 0:20:57.640 --> 0:21:00.520 into those balance sheets. So structures right now the huge 0:21:01.160 --> 0:21:04.680 but collectively, could there be a problem perhaps what Michael 0:21:04.760 --> 0:21:06.600 keep returning to the question I've returned to them, what 0:21:06.640 --> 0:21:08.960 are the longer variable lacks of a banking shock? And 0:21:09.080 --> 0:21:11.119 is it too soon to draw conclusions? If you the 0:21:11.160 --> 0:21:13.000 Federal Reserve and you sit there on May third, do 0:21:13.040 --> 0:21:15.920 you have the incoming information, the sufficient information you need 0:21:16.240 --> 0:21:19.520 to make that cool? No, you don't know at that point. 0:21:19.600 --> 0:21:21.560 You'll know if you had an immediate problem that's going 0:21:21.600 --> 0:21:23.560 to be evident in the next week or two. But 0:21:23.680 --> 0:21:26.359 there simply is not enough time to know. Is the 0:21:26.440 --> 0:21:29.439 system really on solid footing right now? A lot of 0:21:29.440 --> 0:21:31.920 clients talk about things like commercial real estate, where does 0:21:31.960 --> 0:21:34.439 echo Probably doesn't look that great. Will the fed up 0:21:34.440 --> 0:21:37.000 that information on the third? No, I doubt it. What 0:21:37.119 --> 0:21:40.000 about deposit flight deposit beatas how much does having an 0:21:40.040 --> 0:21:42.960 iPhone and a fancy app change those beatas well? They 0:21:43.000 --> 0:21:45.800