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Speaker 1: This is Bloomberg surveillance. In order to engage in the

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Speaker 1: acquisition of a company, you have to have a view

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Speaker 1: on the future. M and A is a conviction market.

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Speaker 1: It is the last stop in long term planning. We

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Speaker 1: will continue to see those wage games pick up, and

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Speaker 1: I continue to believe that on a planet rate is

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Speaker 1: going to follow a lot faster than others believe. Overall,

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Speaker 1: the US financial conditions determined pretty much the dynamics of

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Speaker 1: what happens seen emerging economis Bloomberg surveillance. Your link to

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Speaker 1: the world of economics, Cliinance and investment on Bloomberg Radio.

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Speaker 1: Good morning, it is seven. I am on Wall Street.

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Speaker 1: It is nowton in London where the Brexit vote looms

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Speaker 1: and the polls are confused. What we can tell you

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Speaker 1: is the betting markets show a tightening with remain now

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Speaker 1: down to Brexit fears and general concern about the state

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Speaker 1: of the global economy have us firmly in risk off

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Speaker 1: mode this morning, I might com McKee along with Tom Keene.

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Speaker 1: Shanghai closed down three point two percent overnight, the knee

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Speaker 1: k off by three and a half percent, and that

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Speaker 1: moods carried over into European trading. The stock six hundred

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Speaker 1: right now, down by six points one point seven percent.

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Speaker 1: The docks is trading lower by a hundred and thirty

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Speaker 1: nine points one point four percent. In London, the foot

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Speaker 1: see the locus of the Brexit concerns off by forty

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Speaker 1: seven percent right now eight tenths of a percent. The

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Speaker 1: pound going for one sixties, down seven tenths on the day.

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Speaker 1: Here in the US, futures are lower, pointing to a

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Speaker 1: lower open. The SMP evenis are off by eight points

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Speaker 1: four tents of eight percent. DOWI mean, he's down sixty

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Speaker 1: six four tents. It's a half percent. To client. For

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Speaker 1: naztac one, he's twenty one points. The vix at eighteen

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Speaker 1: forty one is up eight percent so far this morning.

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Speaker 1: The Euro trading at one twelve sixty nine, up by

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Speaker 1: two tents. The Japanese yen continues to strengthen one oh

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Speaker 1: six up by uh nine tenths of eight point of

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Speaker 1: percent this morning. Speaking of bonds here in the US

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Speaker 1: tenure note yield at one point six two percent, the

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Speaker 1: five year at one point one three and the two

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Speaker 1: year at seventy one basis points. We're watching yields, of course,

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Speaker 1: plunge around the world. The German tenure note yield is

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Speaker 1: at just over one basis point rounded off to two,

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Speaker 1: but it is significantly lower this morning, and we're watching

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Speaker 1: the Japanese UH negative tenure note yield at a negative

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Speaker 1: eighteen basis points at one point this morning. Michael Pond

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Speaker 1: is Barkley's head of Global Inflation Link Research, and Michael

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Speaker 1: kind of the question that comes to my mind is

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Speaker 1: how much of this is in your area, how much

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Speaker 1: of this is disinflation deflation fears, and how much of

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Speaker 1: it is just we don't know what's going to happen

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Speaker 1: in the world, so let's just buy bonds and and wait.

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Speaker 1: I mean pretty clearly, the move over the past several days,

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Speaker 1: even the past couple of weeks, has been about UM,

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Speaker 1: about fear, about fear of breakfit about another concern that

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Speaker 1: China might might slow down, and that brings global growth

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Speaker 1: UH down along with it. UM. I don't think it's

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Speaker 1: it's directly about deflation or I think it's definitely fear related,

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Speaker 1: but not on the on the deflation side, has anything

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Speaker 1: changed in the inflation trade. I'm looking at five year

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Speaker 1: forwards UH the inflation implied in inflation break even one

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Speaker 1: point six four percent, but that's nowhere near as low

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Speaker 1: as we got down to in February at the height

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Speaker 1: of the fear uh plunge. Then that's right. So so

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Speaker 1: inflation has priced by the market has come down a

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Speaker 1: bit inflation expectations but not nearly as as much, so

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Speaker 1: it's not a true risk off from a deflation standpoint,

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Speaker 1: but there are certainly some concerns. So you saw in

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Speaker 1: the University of Michigan Consumer Senate that survey on Friday,

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Speaker 1: that data showed that consumers have the lowest longer term

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Speaker 1: expectation of inflation ever on that survey, down to two

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Speaker 1: point three percent. So this is certainly the something that

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Speaker 1: the FED should be concerned about. Well, that's interesting, Tom,

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Speaker 1: because you wonder what drives that, Michael. Is it? Is it, uh,

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Speaker 1: the fact that people just are getting used to lower

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Speaker 1: gasoline prices. Well, yeah, so consumers often developed their inflation

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Speaker 1: inquotations based on their recent experience of price moves, and

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Speaker 1: with gasoline coming down, even longer term inflation exquotations have

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Speaker 1: come down with it. But there's also a true sense

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Speaker 1: of well, inflation spend low for not just the past

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Speaker 1: six months, but for quite some time. UM, and that

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Speaker 1: starts to embed in people's psychics, um psyche. Here the

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Speaker 1: oddities of the morning Mike mentioned futures negative nine have

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Speaker 1: come back a little bit, a little bit of a

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Speaker 1: bid to what I'm gonna call a saggy tape. Um

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Speaker 1: this smart blomebrick surveillance this Monday, watch you buy Investo

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Speaker 1: looking for investment views Investco's high conviction portfolio managers. Just

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Speaker 1: to click away, go to investco dot com, slash us

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Speaker 1: to subscribe to the investco blog and follow at investco

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Speaker 1: us out on Twitter. We are thrilled to bring a

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Speaker 1: Michael Pond. We're sitting on Friday. What was me? The

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Speaker 1: markets are strange? Who should we talk to? And there

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Speaker 1: was this roar from a surveillance team. Get Michael Pond.

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Speaker 1: We're thrilled um to have you here. What do you

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Speaker 1: say two institutional managers who hold our retirement money, people

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Speaker 1: with an actuarial assumption of like wicked short term seven

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Speaker 1: years or adult twelve years, or the idea of matching

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Speaker 1: twenty year liabilities. It's impossible, right, It's just flat out

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Speaker 1: impossible today. Well, the expectation near term expectation of returns

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Speaker 1: in in the low teens just just shouldn't be there.

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Speaker 1: Even the the high ones eight eight nine percent expected

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Speaker 1: returns year and year out maybe shouldn't be there under

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Speaker 1: a world of lower potential GDP. So returns should be

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Speaker 1: associated with potential GDP. And if if real rates are

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Speaker 1: are lower, the long term neutral row rate is lower,

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Speaker 1: show should long term return I get it. What is

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Speaker 1: the level of panic among adult institutional managers when they

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Speaker 1: see this rate structure? Forget about full faith and credit

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Speaker 1: when they look at corporates priced to brexit perfection, it's

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Speaker 1: it's definitely a concern as well as the recent low volatility.

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Speaker 1: So you know, because again investment managers, so professionals, even

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Speaker 1: if rates are low but moving around, uh you can

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Speaker 1: you can try to profit from that. You can try

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Speaker 1: to make some some money by positioning around rate moves.

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Speaker 1: But the ten year rate has been stuck in a

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Speaker 1: relatively low rains so uh not, it hasn't just been

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Speaker 1: moving moving up and being able to collect the yield.

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Speaker 1: But we haven't had a lot of volatility either, right

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Speaker 1: Mike got no gold up thirteen dollars a backstory, but nevertheless,

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Speaker 1: there it is. How how worried. Are you that, Um,

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Speaker 1: the bond market has gotten over extended here because I

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Speaker 1: suppose we wake up a week from Friday with a

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Speaker 1: solid remain vote for the Brits and you know it

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Speaker 1: evaporates and everybody wants to get to the exit it

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Speaker 1: Once again, We're not here just because of of Brexit.

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Speaker 1: UM data has come in week as well. The thirty

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Speaker 1: eight thousand on payrolls that we got earlier this this

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Speaker 1: month was the weakest in quite some time, and we

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Speaker 1: had nearly sixty thousand UH downward revision to two prior months.

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Speaker 1: So the so the economy itself is not is not

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Speaker 1: necessarily in great shape. That the the Paeril numbers at

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Speaker 1: cause our economists to increase their expectations of a recession

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Speaker 1: twelve months out to thirty percent from a normal average

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Speaker 1: year around. So it's not just near term risks that

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Speaker 1: have rates low. Mike, I know you want to jump

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Speaker 1: in here with Michael Pond just the idea of the

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Speaker 1: two year yield US two year zero point. I mean,

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Speaker 1: there's things in the screen I'm only getting to right now.

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Speaker 1: There's so many things moving around. Yeah, I'm just curious,

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Speaker 1: my go. Um, sure, the jobs report was bad, there

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Speaker 1: were things that weren't so terrible, including wages, and then

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Speaker 1: this Thursday we get the CPI and the forecast is

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Speaker 1: that the core on a year over your basis goes

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Speaker 1: up to two point two percent. Uh, you know, is

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Speaker 1: that another risk flash point? In other words, if if

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Speaker 1: the jobs report is a head fake, then how worried

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Speaker 1: should we be? Well, that's the interesting thing here, Mike,

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Speaker 1: because you look at the six month analyzed trend on

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Speaker 1: on core, and again core is expected to come in

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Speaker 1: at point too. So keeping that six month annualized trend

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Speaker 1: alive at two point four percent, that's a normal level.

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Speaker 1: So by by that measure anyway, the Fed has done

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Speaker 1: its job and gotten inflation exactly where they want it

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Speaker 1: to be on a trend basis. As long as energy

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Speaker 1: stabilizes here, you'll get year year numbers there as well.

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Speaker 1: But the jobs data probably stays their hand. And so

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Speaker 1: we think that's actually a very good environment for the

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Speaker 1: tips market where the Fed isn't coming out and and

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Speaker 1: crushing in inflation infectations, but inflation expectation, but inflation itself

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Speaker 1: is moving a bit higher here. So we think the

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Speaker 1: market is quite cheap at around one point five percent

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Speaker 1: on a ten year break even versus we think the

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Speaker 1: trend is around two point four. Disinflation is overdone. Michael

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Speaker 1: Pond with this bark place. Now we'll continue this dis

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Speaker 1: gosh and we need to do a day to check here, Michael. Equities, bonds,

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Speaker 1: currencies come out of these futures negative eight down futures

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Speaker 1: a negative sixty three yields are ye, not as bad

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Speaker 1: as an hour ago or even two hours ago, but

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Speaker 1: nevertheless two basis points on the tenure one point six

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Speaker 1: two percent. I mentioned gold earlier, now up thirteen dollars

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Speaker 1: twelve eighty nine ounce oil weaker, don't want to make

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Speaker 1: too much of it, West Texas eighth the barrel again.

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Speaker 1: We've had a one oh five handle through some of

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Speaker 1: the morning. Now exactly one of six point zero zero

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Speaker 1: Euro dollar one twelve seventy six, with euro yen showing

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Speaker 1: significantly stronger yen versus the euro sterling one seventy Michael

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Speaker 1: McKee and next week from London, This hour of surveillance

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Speaker 1: is brought to you by Vaulbo Cars White Planes. Visit

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Speaker 1: Vouldo Cars White Planes dot Com. Here's Michael Barr with

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Speaker 1: news headline. Thank you very much. New Yorker has gathered

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Speaker 1: in Manhattan at a historic Greenwich Village bar to grieve

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Speaker 1: the depths of at least fifty people into Florida. Gay

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Speaker 1: night club people began assembling at the Stonewall In yesterday.

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Speaker 1: Stonewall In became a national symbol of gay ryots after

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Speaker 1: a nineteen sixty nine police raid led to violent street riots. Sunday,

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Speaker 1: suspected gunman Omarma Team was shot to death by a

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Speaker 1: police at the Pulse night club in Orlando, Florida, after

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Speaker 1: holding hostages four hours. How Speaker Paul Ryan says he

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Speaker 1: does not support some of the campaign promises made by

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Speaker 1: Donald Trump that include a vow to the port millions

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Speaker 1: of undocumented immigrants. Ryan says that he still stands by

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Speaker 1: his endorsement of the presumptive Republican presidential nominee. Hamilton's won

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Speaker 1: eleven Toni's last night just one shy of the record

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Speaker 1: set by the producers at twelve Global News twenty four

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Speaker 1: hours a day, powered by our twenty four hundred journalists.

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Speaker 1: I'm Michael Barr, Mike Town, Michael, thank you so much.

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Speaker 1: A FED meeting. We will do that. June fifteen, Michael

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Speaker 1: McKee and I was special coverage and then we moved

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Speaker 1: to London with Francine Quad next week. This is Bloomberg surveillance.

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Speaker 1: Interesting questions. Suppose they gave a FED meeting and nobody cared.

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Speaker 1: Drew Madness of Ubs joins us later on Bloomberg Surveillance,

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Speaker 1: the FED meeting with a zero percent chance anything happens.

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Speaker 1: Global Business News twenty four hours a day at Bloomberg

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Speaker 1: dot com, the Radio Plus mobile app, and on your radio.

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Speaker 1: This is a Bloomberg Business Flash and the Bloomberg Business

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Speaker 1: Flash being brought to you by e t F Exchange

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Speaker 1: sixteen B and Y Melon's annually E t F Symposium

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Speaker 1: September nineteen to twenty one in Dana Point, California. This

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Speaker 1: is essential comforts is complementary for r I A S,

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Speaker 1: but space is limited. Registered out at bon Y Melon

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Speaker 1: dot com slash E t F well a definite risk

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Speaker 1: of feeling to the markets. Today Treasuries, they're dancing for

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Speaker 1: a fifth day and this is the longest winning run

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Speaker 1: since FED. Right has the chances of an interest rate

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Speaker 1: increase in the Federal reserved this year receded. I've been

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Speaker 1: slowing econob growth and the looming UK referendum on its

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Speaker 1: membership in the European Union. Futures right now ahead of

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Speaker 1: the market open on Wall Street they are lower. That

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Speaker 1: OWN futures down eight, down fifty three, the SMP futures

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Speaker 1: eight points lower. That's down four tens. The VANS Detict

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Speaker 1: futures nineteen points lower. That is down four tenths of

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Speaker 1: a percent, zero one twelve sixty eight of about the

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Speaker 1: strength and just a bit of up about the tenth

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Speaker 1: and one of the safe haven currencies, the yen one

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Speaker 1: oh six oh eight, that is up about nine tenths

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Speaker 1: of a percent. Spot gold twelve eighty five tan that's

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Speaker 1: up eleven dollars twenty six cents uh ounce and nine

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Speaker 1: nex screwed right now down fifty cents at forty eight

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Speaker 1: fifty seven a barrel. But check the markets for you

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Speaker 1: every fifteen, Ministry the trading day right here on Boomberg

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Speaker 1: Radio in John Tucker, Michael John thinks so much, Mike,

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Speaker 1: is you know the last number of days we almost

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Speaker 1: can't keep up with what we see on the Bloomberg screen.

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Speaker 1: I missed German yields until Francine mentioned it to me

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Speaker 1: two hours ago. I completely missed European banks UniCredit in

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Speaker 1: Deutsche Bank had had three miserable days. Deutsche Bank in

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Speaker 1: Euros are thirteen point seven seven. That's a shocking deterioration

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Speaker 1: in two or three days. There's no other way to

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Speaker 1: put it. A lot of concern about what happens um

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Speaker 1: to and to banking in a Brexit situation, and therefore

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Speaker 1: to banking banks in the stock now one nine this

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Speaker 1: morning helping drive that index much lower. Michael Ponds, Barclay's Michael,

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Speaker 1: I don't want to get you in trouble with your

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Speaker 1: general counsel at Barclays with a discussion of banking. But

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Speaker 1: if I look at the I S curve, the real

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Speaker 1: economy curve within the classic architecture, interest rates are in there.

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Speaker 1: How can we link what the what all this mumble

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Speaker 1: jumble we're talking about with what banks will do? I

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Speaker 1: don't get I mean, I think I get it in

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Speaker 1: the US. I think I sort of get it in

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Speaker 1: a doing better United Kingdom. How do European banks get

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Speaker 1: business done in this rate environment? Well, banks in general

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Speaker 1: need to be able to earn an earn a spread,

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Speaker 1: so low rates necessarily aren't uh you know, a stopping

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Speaker 1: point for banks to be able to earn that earn

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Speaker 1: that spread if they can lend UH to two profitable

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Speaker 1: UM institutions UM and and try to make money that

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Speaker 1: way UM. But with in a low potential GDP environment,

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Speaker 1: that becomes that becomes difficult. So you need structural reform

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Speaker 1: from the fiscal side to really get potential GDP, to

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Speaker 1: get productivity up, and then the lending channel can can

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Speaker 1: really open up from there. I get that, we've heard

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Speaker 1: that eighteen times that we need fiscal support. Let's assume

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Speaker 1: we're not going to get it. If we're not gonna

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Speaker 1: get it, how do banks clear their system Besides what

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Speaker 1: we saw in that FT article last week of Commerce

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Speaker 1: bank with a jillions of I don't know dollars or

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Speaker 1: marks or ponds whatever they were putting in their vaults

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Speaker 1: where it's almost like the Wild West. It's like Mike

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Speaker 1: Butch casting the Sundance Kid that bank in Bolivia where

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Speaker 1: there's just cash in the vaults. We're not used to that.

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Speaker 1: That's where we're heading, right, I mean, I don't have

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Speaker 1: a great answer to that question. Did you see that

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Speaker 1: that was a general council answer I've ever heard it

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Speaker 1: It certainly brings up the issue of unintended consequences of

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Speaker 1: monetary policy though, and that's why authorities need to tread

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Speaker 1: carefully here as they use uh tools in their toolkit

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Speaker 1: that are are fairly untested. It makes it makes for

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Speaker 1: quite a difficult situation for monetary policy authorities. Let me

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Speaker 1: give you a headline here, Um that is quite interesting. Uh,

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Speaker 1: different subject, but NATO, according to the Associated Press, NATO

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Speaker 1: will agree this week to deploy four valiant battalions to

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Speaker 1: the ball Take States and Poland is going to bolster

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Speaker 1: its defenses against Russia. That should rattle markets a little

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Speaker 1: bit and certainly will increase tensions with the Russians. Has

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Speaker 1: been talked about for a while, but we wanted to

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Speaker 1: bring that two people. Uh now just breaking from uh

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Speaker 1: the Associated Press, Uh Michael Bond. Uh. We're talking about

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Speaker 1: what's going on in Europe and certainly they have more

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Speaker 1: of a disinflation problem than we do. How do you

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Speaker 1: hedge them? Uh? You know, there's not a euro bond?

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Speaker 1: Can you can you pick different countries that you would

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Speaker 1: want to uh get an inflation hedge in place? Or

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Speaker 1: you know, what, what do you do? Well, there's a

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Speaker 1: solid inflation market in Europe as there is in the

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Speaker 1: in the US, most of the inflation products they're price

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Speaker 1: off of European inflation rather than country specific inflation. Markets

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Speaker 1: are although there's there's some of that now. Now we

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Speaker 1: expect that core UH inflation in your will continue to

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Speaker 1: run below one per cent, so well below the ECB's

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Speaker 1: target of just below two percent um as, and they

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Speaker 1: they'll likely continue to to try to find new ways

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Speaker 1: to stimulate the economy. Markets are priced for that low inflation,

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Speaker 1: though so unlike in the U S where markets are

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Speaker 1: priced for very low inflation and we think inflation has

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Speaker 1: largely normalized in the US UH, European markets are priced

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Speaker 1: for that low inflation that we expect. Unit credit is

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Speaker 1: within three Sun teams. What's the hundreds of a euro?

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Speaker 1: Michael pun is it Sun teams French? There three hundreds

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Speaker 1: of a year since? Yeah, Sun teams since whatever? Then

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Speaker 1: it was an early two thousand and twelve breaking down

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Speaker 1: to new lows. Michael, here in a PDF file from

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Speaker 1: a school, you know, basic macro one on one since

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Speaker 1: a fall and interest rates increases investment spending. We didn't

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Speaker 1: see that, have we? I mean, what what the kids

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Speaker 1: are being taught and I slm Analis isn't happening right now,

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Speaker 1: is it? And that that was my point about banks

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Speaker 1: earning earning a spread off those low interest rates, the

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Speaker 1: extensive investment picks up UM and the lending channel really

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Speaker 1: opens up UH that that can boost growth uh and

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Speaker 1: and really get the economy going again. But that's not

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Speaker 1: not what really is happening here. Monetary policy has worked

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Speaker 1: through essentially the portfolio reallocation channel, where they're trying to

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Speaker 1: push investors out the risk curve rather than the rather

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Speaker 1: than actually increasing investment here. And that has happened to

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Speaker 1: some extent. If you look at global equities uh US

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Speaker 1: market for example, is is near highs despite all the

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Speaker 1: risks out there. So so that portfolio relocation channel has worked,

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Speaker 1: but it's not worked enough to really still me at

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Speaker 1: the economy. Michael Pont, thank you so much. Get back

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Speaker 1: to your clients at Barclay's. Busy morning coming up for

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Speaker 1: Mr Race Prices, So features of negative seven Bloomberg's valance

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