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Speaker 1: Joining us native recap the week Muhammad Aaron of Quen's College, Cambridge.

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Speaker 1: Muhammed's so much that you and I need to discuss

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Speaker 1: this bond market move China Jackson Hole next week. Let's

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Speaker 1: start with this bond market move, Muhammed. From your perspective,

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Speaker 1: what's behind this month'ster move, not just of the last week,

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Speaker 1: but the last month.

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Speaker 2: In order of importance, John's supply first and foremost, followed

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Speaker 2: by a revisiting of the growth prospects to stronger growth,

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Speaker 2: followed by a recognition that inflation may be sticky over

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Speaker 2: the longer term. And then finally, people are keeping an

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Speaker 2: eye on what's happening in Japan. So you've had these

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Speaker 2: four things come together. Supply has been the main drivers,

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Speaker 2: and the others have contributed, Muhammed.

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Speaker 1: Given the reasons you offer, are there also reasons to

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Speaker 1: believe then that these kind of levels are sustainable?

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Speaker 2: Yes, John, But a lot will depend on what chair

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Speaker 2: Pal decides to do next Friday, and he has a

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Speaker 2: range of choices. He can talk about short term monetary prospects,

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Speaker 2: you can talk about longer term monetary prospect or he

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Speaker 2: can punt both and focus on some of the challenging

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Speaker 2: economic issues facing the US economy, but what he says

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Speaker 2: is going to be critical in terms of what it

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Speaker 2: does to the bond market. The other thing to keep

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Speaker 2: an eye on, and you've mentioned it, is China. I

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Speaker 2: don't think people recognize enough that you've had two long

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Speaker 2: standing problems coming together, first pockets of debt and leverage

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Speaker 2: becoming systemic, and second in inability to generate high and

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Speaker 2: genuine economic growth. And suddenly these two things are merging

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Speaker 2: and risking financial instability other Chinese and that's something to

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Speaker 2: keep an eyeon as well.

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Speaker 1: Well, let's break down those two things that we can

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Speaker 1: start with China, and then we'll work our way back

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Speaker 1: to Jackson Holle and share Pal's address about a week

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Speaker 1: from now ten o five Eastern time for those if

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Speaker 1: you're not familiar with the time. That release came out

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Speaker 1: just yesterday afternoon for the Better Reserve. China has done

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Speaker 1: a range of things this week, Muhammad, I'll go through

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Speaker 1: a few of them. China has delivered the strongest pushback

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Speaker 1: in the FX market with a really strong fix for

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Speaker 1: the currency overnight. We know the requested state owned banks

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Speaker 1: to escalate intervention support the currency based on our reporting.

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Speaker 1: We also know that mainland exchanges have asked some investment

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Speaker 1: funds to avoid net selling of equities. They've even asked

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Speaker 1: some companies to buy backstock Mohammed, it seems like it's

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Speaker 1: all insufficient. What do they need to do to draw

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Speaker 1: a line under all of that?

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Speaker 2: So what they're trying to do, John, is to stop

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Speaker 2: these problems to debt overhang and the growth issues becoming

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Speaker 2: financial problems. So everything you've cited is an attempt to

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Speaker 2: source circuit to financial stability. But that's not going to

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Speaker 2: work unless they address the two fundamental issues. And you

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Speaker 2: and I have been talking about this. On the growth

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Speaker 2: side than the model middle, they're not sure whether they

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Speaker 2: want to do more of the traditional stimulus, which ultimately

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Speaker 2: will not work, or do they focus on the reforms

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Speaker 2: which pushes down the growth drivers, something that politically is

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Speaker 2: difficult for them. On the other side, on the dead side,

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Speaker 2: they haven't dealt with the fundamental restructuring of the debt,

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Speaker 2: so these small problems are becoming systemic in nature. So

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Speaker 2: unless they address these other two issues, all the things

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Speaker 2: that you've mentioned, I'm not going to prove sufficient to

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Speaker 2: avert financial stability. Already we're seeing outflows out of China,

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Speaker 2: and that for them is a big issue.

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Speaker 1: Ben Laser of Itzzorro wrote a line yesterday, Muhammad, and

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Speaker 1: he said something like, it's an economic giant, it's a

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Speaker 1: financial market Minno. Is this an economic giant we need

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Speaker 1: to pay attention to or a financial market minow that

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Speaker 1: we can ignore. And what I'm getting at here, Mohammad,

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Speaker 1: is whether this is a contagion issue, whether there is

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Speaker 1: a prospect that this bleeds out into border markets worldwide

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Speaker 1: or not.

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Speaker 2: So it won't bleed out through the financial channel. So

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Speaker 2: because financially than not as big as they are economically.

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Speaker 2: But keeping out on the economics, you know now the

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Speaker 2: global economy is almost wholly dependent on the US economy.

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Speaker 2: The US economy is a bright spot. The US economy

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Speaker 2: is an economy that is growing and growing in a

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Speaker 2: genuine fashion. Europe is having difficulties, the UK is having difficulties.

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Speaker 2: China now is decelerating. So it is all about global

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Speaker 2: economic growth and how much of the burden can do

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Speaker 2: US continue to shoulder because China is now a detractor

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Speaker 2: to global growth.

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Speaker 1: You just said, Mohammad, the global economy is highly dependent

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Speaker 1: on the US economy. Can we flip that and I'll

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Speaker 1: ask a question, how dependent is the US economy on

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Speaker 1: the global economy? Can we continue to see strength like

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Speaker 1: this in the US with weakness elsewhere to the places

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Speaker 1: you pointed to.

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Speaker 2: We could. The US has the privilege of being a large,

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Speaker 2: relatively closed economy, well diversified, entrepreneurial, So yes we could.

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Speaker 2: It's harder because exports do contribute to economic growth. It

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Speaker 2: is harder, but yes, absolutely we could. And that has

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Speaker 2: been the story of this year, is that the US

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Speaker 2: has continued to do well and it's accelerating even though

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Speaker 2: the rest of the world has been very sluggish.

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Speaker 1: So the title next week, as you know, structural shifts

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Speaker 1: in the global economy, which takes us to point too

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Speaker 1: and Jackson Howell and Chairman Powell is a central banker

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Speaker 1: to the world. To borrow a question from my good

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Speaker 1: friend Tom Kane. Do you think he is this way? Muhammed,

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Speaker 1: it's the next week.

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Speaker 2: The FED has always been central banker to the world.

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Speaker 2: We issue a reserve currency, we manage other people's savings

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Speaker 2: because we have the most lit deepest, and most liquid

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Speaker 2: financial markets. So yes, the US FED has enormous influence

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Speaker 2: on the rest of the world. Look, John, you're going

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Speaker 2: to make me fun to run yet again. An FT

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Speaker 2: article coming out on Monday. But Chair Poal has three choices,

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Speaker 2: and it's not clear to me what he will opt for.

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Speaker 2: What we know is he has lots and lots of topics.

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Speaker 2: He can cover, short term topics, longer term part topics,

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Speaker 2: tactical ones, sector one, structural ones. He has a lot

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Speaker 2: to choose from. Ultimately, it's not clear to me what

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Speaker 2: he will do.

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Speaker 1: If he picked out the structural reasons, Muhammed, if we

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Speaker 1: pick those out, are the structural reasons to make the

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Speaker 1: argument the race can be higher for longer than we

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Speaker 1: have truly broken out of that pre pandemic post GFC

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Speaker 1: regime that we were in for the best part of

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Speaker 1: a decade.

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Speaker 2: Oh absolutely, And you've heard me say this. This is

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Speaker 2: a different global economy. This is no longer an economy

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Speaker 2: where aggregate demand is deficient. This is an economy with

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Speaker 2: a insufficient argate supply. We feel it in the labor market,

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Speaker 2: we feel it in terms of the supply chains being rewired,

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Speaker 2: we feel it in terms of the energy transit, and

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Speaker 2: the list goes on. So yes, this is structurally a

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Speaker 2: very different global economy, and that's a problem because that

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Speaker 2: framework is directed at an economy with insufficient arrogate demand.

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Speaker 2: The inflation target, as you've heard me say, may be

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Speaker 2: too low for this world. So yes, there's lots of

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Speaker 2: reasons to argue that this is a fundamentally different economy,

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Speaker 2: but it raigses critical aspects in terms of monetary policy.

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Speaker 1: Well, let's talk about the Monetary Policy code for September,

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Speaker 1: which sounds boring compared to what we've just discussed. Is

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Speaker 1: it too early to make a call as to what

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Speaker 1: they may or may not do a month from now,

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Speaker 1: given we still have one more CPR report and another

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Speaker 1: payroll report around the corner.

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Speaker 2: I think it is. They've told us over and over

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Speaker 2: again that they are highly data dependent and we have

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Speaker 2: to respect that. So we have to see what the

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Speaker 2: jobs report and what the CPR Inflation report is going

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Speaker 2: to say.

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Speaker 1: CPI September thirteen. For those following early September, you get

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Speaker 1: the payroll report, Mahammed. If we can finish on the market,

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Speaker 1: I think we should e could down about half of

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Speaker 1: one percent off the highs of July by about five

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Speaker 1: percent on a SMP five hundred on the nastat by

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Speaker 1: a highield spread still incredibly tight. What do you think

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Speaker 1: explains that, Mohammed? Given the challenge we see developing in

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Speaker 1: the bond market with rates of five percent of the

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Speaker 1: front end close to four fifty down the longer end

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Speaker 1: of the curve just yesterday, isn't that a challenge to

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Speaker 1: this risk appetite inequities in credit?

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Speaker 2: It is a challenge. Well, I think we have to

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Speaker 2: put into context, John. You know, when we were talking

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Speaker 2: back in July, that was a sense of the market

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Speaker 2: overdoing the romance with the soft landing narrative, and it

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Speaker 2: went too far, both on the bond side and on

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Speaker 2: the equity side. So I see this as a give

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Speaker 2: back after a month of excesses, excessive romance with the

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Speaker 2: soft landing step back. John. If I had told you

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Speaker 2: in the beginning of the year that the SMP would

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Speaker 2: be up fourteen percent, that the NASDAK would be up

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Speaker 2: twenty seven percent, I think you would have said that

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Speaker 2: most investors would have taken that. So, you know, it's

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Speaker 2: important to keep a perspective on this. I think what

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Speaker 2: you're seeing here is people are realizing that it's not

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Speaker 2: going to be as simple as the soft lending narrative

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Speaker 2: that the market fell in love with back in July.

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Speaker 1: An excessive romance. Mohammed is going to see you. It

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Speaker 1: always is, Mohammed. Thank you, sir,