WEBVTT - Surveillance: How Low Can Rates Go, Foley Asks 0:00:09.840 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm m keene Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.920 Bloomberg dot Com, and of course on the Bloomberg Let's 0:00:27.920 --> 0:00:30.160 bring Nick Bannenbrook Show. Wes found our Securities head of 0:00:30.200 --> 0:00:32.159 Currency Strategy could montage in the great to have you 0:00:32.200 --> 0:00:34.599 with us the morning the price and sensitive bias. This 0:00:34.640 --> 0:00:37.200 is such a distorted bond market, and if you try 0:00:37.200 --> 0:00:39.960 and rationalize what's happening with buns based on fundamentals alone, 0:00:39.960 --> 0:00:41.920 I just think you're wasting your time. I mean, you 0:00:42.000 --> 0:00:43.640 know what's going to happen in the secondary market. It 0:00:43.680 --> 0:00:46.160 doesn't matter what price these things are at, there's gonna 0:00:46.200 --> 0:00:48.600 be a buyer. Well, I do agree with Lisa. I 0:00:48.960 --> 0:00:51.680 think it was interesting just you know how little demand 0:00:51.720 --> 0:00:53.880 there was in this particular auction. But to your point, 0:00:53.920 --> 0:00:55.560 I think Mario is going to keep on buying both 0:00:55.600 --> 0:00:58.720 Lemonade plus these German bonds as well as some others. 0:00:59.040 --> 0:01:01.280 I think perhaps one of the interesting things, or maybe 0:01:01.320 --> 0:01:03.160 one of the reasons this auction didn't go quite so 0:01:03.200 --> 0:01:05.840 well as there's you know, there's now a lot more 0:01:05.840 --> 0:01:09.559 discussion about German stimulus possibly down coming down the pike, 0:01:10.000 --> 0:01:12.720 and so maybe there's some investors out there thinking they 0:01:12.800 --> 0:01:15.240 might get you know, a little bit cheaper if they 0:01:15.360 --> 0:01:17.680 just hold out for a little bit. So maybe there's 0:01:17.840 --> 0:01:19.960 a bit of buying opportunity just down the line. Well, 0:01:20.000 --> 0:01:22.319 but but this, really, John Ry, is a really good point. 0:01:22.520 --> 0:01:24.600 Is this a tipping point or is this just a 0:01:24.680 --> 0:01:28.760 typical auction where they can't sell everything and there isn't 0:01:28.959 --> 0:01:32.000 huge bit discovery issue I think to be fear and 0:01:32.120 --> 0:01:34.080 I don't follow the sort of the German bond actions 0:01:34.120 --> 0:01:36.200 as closely as as the US bond options. I don't 0:01:36.200 --> 0:01:37.840 think it is a tipping point. I mean, certainly, I 0:01:37.840 --> 0:01:40.360 don't think the ECB is changing their tune rates. Yield 0:01:40.360 --> 0:01:42.400 are going to remain very low, So I think this 0:01:42.480 --> 0:01:45.440 is more likely to be a one off. I suspect 0:01:45.440 --> 0:01:46.960 if they had another auction it we'd go a little 0:01:47.000 --> 0:01:49.760 bit better. But I certainly don't think it's a sea change. 0:01:50.000 --> 0:01:53.640 Do you think that there is an underestimation of inflation 0:01:53.680 --> 0:01:57.680 at this point? Um No, I don't think so. You know, 0:01:57.800 --> 0:02:00.000 getting a little bit of inflation here in the United States. 0:02:00.800 --> 0:02:03.160 The surprising thing when we had sort of just the 0:02:03.240 --> 0:02:05.560 mess of expansion of balance sheets and the printing of 0:02:05.600 --> 0:02:07.640 money from all of the central banks was that you 0:02:07.640 --> 0:02:10.120 didn't get any inflation at all, And that I think 0:02:10.160 --> 0:02:13.600 reflected just the sort of the massive sort of balance 0:02:13.639 --> 0:02:16.200 sheet recession that we had. And I think, you know, 0:02:16.240 --> 0:02:18.880 having now gone a whole decade and that inflation hasn't 0:02:18.880 --> 0:02:21.600 showed up. I don't think there is an underestimate exture 0:02:21.800 --> 0:02:23.440 of inflation at this point, wouldn't it just to build 0:02:23.440 --> 0:02:24.960 on the question of least So I just wonder whether 0:02:24.960 --> 0:02:28.000 the boat has loaded too much to the one side, 0:02:28.360 --> 0:02:31.960 just in terms of pessimism around growth, of pessimism around inflation. 0:02:32.280 --> 0:02:36.640 Have we gone too far too quickly to the one side? Um, 0:02:36.680 --> 0:02:39.560 that's a reasonable point. I think if I was going 0:02:39.600 --> 0:02:41.840 to say, you know, is there too much pisima pissimism 0:02:41.880 --> 0:02:44.840 on inflation, I'd be more balanced on that. But I 0:02:44.880 --> 0:02:48.600 certainly would argue that on the growth side, arguably, I 0:02:48.639 --> 0:02:51.840 think people are a little pessimistic. Sure, a lot of 0:02:51.880 --> 0:02:54.359 the central banks are largely out of room, but there 0:02:54.440 --> 0:02:56.639 is still a few, you know, governments out there with 0:02:56.680 --> 0:02:58.760 a little bit of fiscal space. I mean, I think 0:02:58.760 --> 0:03:01.239 if the monetary authority on the fiscal authorities were to 0:03:01.280 --> 0:03:04.160 work together a little bit more cooperatively, that we could, 0:03:04.200 --> 0:03:05.400 you know, see a bit of a bounce back and 0:03:05.400 --> 0:03:07.119 growth at a time. John, I love that you picked 0:03:07.200 --> 0:03:09.640 up exactly where I was going. My concern as I 0:03:09.639 --> 0:03:12.600 look at the markets is, especially given Norways throwing in 0:03:12.639 --> 0:03:15.200 the towel on beds on the higher rates, that there 0:03:15.200 --> 0:03:18.960 seems to be capitulation and a strong consensus building. And 0:03:18.960 --> 0:03:21.800 whenever there's a strong consensus building, there can be a 0:03:21.840 --> 0:03:26.040 widowmaker trade just sitting there waiting to happen. And I 0:03:26.080 --> 0:03:28.880 just have to wonder, you know, the strong consensus right now, 0:03:28.960 --> 0:03:33.959 rates lower, inflation, more abound, the ECB, Morrow draggy continuing 0:03:34.000 --> 0:03:36.760 to buy that lemonade untill he you know, turns blue. 0:03:36.960 --> 0:03:40.800 I'm just wondering, you know, is there any argument against that? 0:03:40.880 --> 0:03:42.840 And are we getting to the point where we could 0:03:42.840 --> 0:03:46.040 see a pretty violent reversal on very small news simply 0:03:46.080 --> 0:03:50.160 because there is the strong consensus. I think that there 0:03:50.280 --> 0:03:52.400 is a chance that you see, you know, a reaction 0:03:52.480 --> 0:03:55.400 to small news. The problem or the issue, I think 0:03:55.400 --> 0:03:57.600 is that that the chance of that sort of news 0:03:57.600 --> 0:04:00.760 occurring is quite low and sort of going back into 0:04:00.760 --> 0:04:03.000 the past, I can think of the Taper tantrum back 0:04:03.000 --> 0:04:05.480 in two thousand and thirteen. I think it was when 0:04:05.520 --> 0:04:07.400 Banankee started to prepare the markets for the end of 0:04:07.440 --> 0:04:09.840 the uh FEDS bombuying, and you can go all the 0:04:09.880 --> 0:04:13.400 way back to where there was that like massive, you know, 0:04:13.520 --> 0:04:15.840 very sharp tightening cycle. But I think if you look 0:04:15.840 --> 0:04:18.720 around all the central bankers, if anything, they're more likely 0:04:18.800 --> 0:04:22.039 to surprise us on the downside as they're not. No 0:04:22.080 --> 0:04:24.360 one seems to be turning around and talking about tightening, 0:04:24.400 --> 0:04:27.080 so that that that surprise that you're talking about, I 0:04:27.120 --> 0:04:29.120 think it's a very low probability. So without in mind, 0:04:29.160 --> 0:04:31.240 neck got to get your currency kill in G ten 0:04:31.440 --> 0:04:34.120 Right now, the dollar, a lot of people were looking 0:04:34.120 --> 0:04:36.240 for a week of dollar. It hasn't materialized in the 0:04:36.279 --> 0:04:39.039 way that people thought it would. What's your base case 0:04:39.080 --> 0:04:41.600 at the moment, we were looking for a week of 0:04:41.640 --> 0:04:43.520 dollar and as you say, it hasn't materialized, so a 0:04:43.560 --> 0:04:46.839 little disappointing for us. But for right now we're looking 0:04:46.920 --> 0:04:49.640 for more range trading. So for the euro, you know 0:04:49.720 --> 0:04:51.600 one ten to one twelve through most of the year, 0:04:51.839 --> 0:04:53.960 Here's here's the thing. If you look at all of 0:04:53.960 --> 0:04:56.280 the central banks, they're all they're all using the all 0:04:56.279 --> 0:05:00.240 cutting rates in New Zealand, Australia Fiddle Reserve ECB. They're 0:05:00.240 --> 0:05:02.839 also not cutting rates as much as everybody wants to. 0:05:02.880 --> 0:05:04.560 If you look at the market pricing, everybody's out of 0:05:04.560 --> 0:05:07.719 head of these central banks. So we'd sort of go 0:05:07.800 --> 0:05:09.919 back a good decade or so and think about the 0:05:09.920 --> 0:05:11.960 carry trade. You know, everyone's going down. I don't think 0:05:11.960 --> 0:05:13.960 the currencies are going to move that fast, So be 0:05:14.040 --> 0:05:16.720 short the low yielding currencies and and be long that 0:05:16.760 --> 0:05:19.240 the high yorlding currencies. That suggests selling the Euro, the 0:05:19.279 --> 0:05:22.800 Aussy and the Qui all against the US dollar stronger 0:05:22.920 --> 0:05:25.920 US dollarvan Yeah, I think I think in the near 0:05:25.960 --> 0:05:29.000 to him rangey. But yes, if you're going to see 0:05:29.000 --> 0:05:31.480 any move, it's going to be dollar stronger and particularly 0:05:31.520 --> 0:05:34.760 against you know, the growth inside of currencies, so Ozzy 0:05:34.880 --> 0:05:37.400 Kiwi and and a lot of the emerging markets. What 0:05:37.400 --> 0:05:40.240 about of virgin markets currencies. Um, you know, we've seen 0:05:40.320 --> 0:05:43.359 some excitement there, quite a lot of excitement to the 0:05:43.360 --> 0:05:48.640 downside or the upside. Argentina, Turkey, so excitement to excitement 0:05:48.640 --> 0:05:52.159 to the downside, Brazil hasn't been doing quite so well recently. Um. 0:05:52.360 --> 0:05:55.760 For for for now, I think that probably in the 0:05:55.800 --> 0:05:58.640 next probably the next few months, we'd probably see a 0:05:58.680 --> 0:06:01.640 little more downside for um, you know, for some of 0:06:01.640 --> 0:06:03.520 these emerging currencies. Although you know, if we get to 0:06:03.560 --> 0:06:06.440 a point where where yields which are already incredibly low, 0:06:06.640 --> 0:06:09.880 go even lower, um, maybe some of these emerging currencies 0:06:09.920 --> 0:06:12.719 do bitter later on. It's great to catch up, Nick Bannenbrook. 0:06:12.720 --> 0:06:14.560 They're dropping by the studio here in New York. Last 0:06:14.560 --> 0:06:32.840 FARNGA Securities head of Currency Strategy, join us now, Ralph 0:06:32.880 --> 0:06:36.320 Price A Bank America Merrill Lynch International Global head of 0:06:36.440 --> 0:06:39.400 Rage Strategy. Ralph, walk me through what you're looking for 0:06:39.600 --> 0:06:43.000 over the next couple of days. It's the events that 0:06:43.080 --> 0:06:45.480 you've highlighted, I guess from my perspective sitting in London. 0:06:45.560 --> 0:06:47.200 The one thing I would add that you didn't mention 0:06:47.240 --> 0:06:50.159 as the CB accounts, because we do also have a 0:06:50.200 --> 0:06:52.920 lot of question marks about what the European Central Bank 0:06:52.920 --> 0:06:55.320 will be doing in a light of much more evidence 0:06:55.320 --> 0:06:57.200 of a slowdown in Europe compared to what the setters 0:06:57.240 --> 0:06:59.560 had to deal with so far. But that's exactly it. 0:06:59.720 --> 0:07:01.960 It's a question mark over whether or not the said 0:07:02.120 --> 0:07:05.080 cast to qualify what the market clearly took us a 0:07:05.160 --> 0:07:09.400 very disappointing right cut in July UM and whether UM 0:07:09.640 --> 0:07:12.760 German Power follows that up with any more elucidating comments 0:07:12.800 --> 0:07:15.200 in Jackson Hall itself. Are we asking for too much 0:07:15.240 --> 0:07:17.400 to see that in the minutes later this afternoon, Ralph, 0:07:17.440 --> 0:07:19.440 Because as we know, it looks like a very divided 0:07:19.520 --> 0:07:22.480 f m C, and that division could grow a little 0:07:22.480 --> 0:07:24.760 bit louder when you sift through these minutes a little 0:07:24.760 --> 0:07:28.480 bit later. Yeah, I would be surprised that the minutes 0:07:28.520 --> 0:07:31.720 I used to pre signal anything meaningful, given that the 0:07:31.800 --> 0:07:33.800 chair is going to be speaking later on, and that 0:07:33.880 --> 0:07:38.400 the that Jackson Hall will provide maybe a more nuanced 0:07:39.200 --> 0:07:42.239 explanation of what what the debate is actually well about 0:07:42.240 --> 0:07:44.640 within the firm, c Ralph. Are you worried at all 0:07:44.680 --> 0:07:47.480 about positioning right now in rates? The fact that there 0:07:47.480 --> 0:07:50.120 seems to be capitulation that rates are going to stay 0:07:50.120 --> 0:07:55.120 where they are or go lower. I'm always worried about positioning. UM. 0:07:55.280 --> 0:07:57.440 It's one of the things we do is status, but 0:07:57.440 --> 0:08:00.440 the absolutely right positioning on our So this has been 0:08:00.440 --> 0:08:02.720 flagging as being near extremes in particularly for the US 0:08:02.800 --> 0:08:06.080 for some time. UM. But the when you when you 0:08:06.080 --> 0:08:07.840 sift through the numbers in a bit more detail, the 0:08:07.880 --> 0:08:11.760 reason why people are long is because they're looking for hedges. Um. 0:08:11.800 --> 0:08:16.240 You know, the equity market remains near their highs. Tenure 0:08:16.280 --> 0:08:18.960 Treasury notes are regularly flagged as being the most efficient 0:08:19.040 --> 0:08:21.880 risk of hedge and in our surveys, So that is 0:08:21.920 --> 0:08:23.840 one big reason why people are long. It's not that 0:08:23.880 --> 0:08:27.400 they necessarily actually expect the FED to follow through and 0:08:27.480 --> 0:08:29.760 all the weight cuts that are currently priced, but they 0:08:29.760 --> 0:08:33.240 need an instrument to protect them against something going horribly 0:08:33.240 --> 0:08:35.520 wrong further down the line and ten your notes are 0:08:35.600 --> 0:08:39.360 providing that hedge at least for now that perspective, sorry, 0:08:39.720 --> 0:08:41.240 but you said at least for now. And that's actually 0:08:41.280 --> 0:08:43.360 what I wanted to pick up on, which is, at 0:08:43.400 --> 0:08:46.680 what point are yield so low and it's positioning so 0:08:46.800 --> 0:08:53.040 extreme the treasuries don't provide that hedge. I think we're 0:08:53.120 --> 0:08:55.800 quite a bit away from that, um in the sense 0:08:55.840 --> 0:08:59.120 that if you look at what the market pricing for 0:08:59.160 --> 0:09:01.600 the said Actually it's so if you ask in detail, 0:09:02.120 --> 0:09:03.839 you know, what is it you actually expect the FED 0:09:03.920 --> 0:09:06.520 to do what you see is a fairly bimodal distribution. 0:09:06.600 --> 0:09:10.480 So there's a few, well, the majority of arrestors around 0:09:10.840 --> 0:09:13.280 actually expect the FED to do what they said that 0:09:13.320 --> 0:09:15.360 it would do, which is that mid cycle adjustment. But 0:09:15.400 --> 0:09:18.920 then there's a very significant minority of investors who fear 0:09:19.000 --> 0:09:20.880 that the said may have to revisit the zero lower 0:09:20.880 --> 0:09:23.040 bound than expect great cuts of a Hunland fifty based 0:09:23.040 --> 0:09:25.440 points or more. When you're face to that kind of 0:09:25.440 --> 0:09:28.400 bimodal distribution, interpreting what the market is pricing is actually 0:09:28.480 --> 0:09:31.120 quite difficult because it is essentially just putting a line 0:09:31.160 --> 0:09:33.800 through those way two extremes. You know, the world might 0:09:33.800 --> 0:09:36.480 be okay, it might not um but the fact of 0:09:36.520 --> 0:09:38.760 the matter remains that if you worry about the FAT 0:09:38.800 --> 0:09:41.199 having to revisit the zero lower bound, then then you 0:09:41.280 --> 0:09:44.160 knowes do provide a lot of upside. Europe, I think 0:09:44.240 --> 0:09:46.520 is a very different matter. And and to your question 0:09:46.520 --> 0:09:48.800 about at what point do we run out of out 0:09:48.800 --> 0:09:52.200 of hedges, well, the thirty auction this morning in Germany 0:09:52.679 --> 0:09:56.320 clearly was a signal that there isn't actually that much 0:09:56.520 --> 0:09:59.920 end demand from investors when you're asking them to pay 0:10:00.120 --> 0:10:02.040 up for someone else to look after their money for 0:10:02.080 --> 0:10:04.320 them for the next thirty years. Rough you thought on 0:10:04.360 --> 0:10:07.600 how the yield curve is responding to the easing that 0:10:07.760 --> 0:10:09.360 is set to come from the e c B and 0:10:09.480 --> 0:10:12.200 is coming from the Federal Reserve. Typically, what we'd expect 0:10:12.280 --> 0:10:14.280 to happen is a ball statement to start to come 0:10:14.280 --> 0:10:16.959 through the curve in treasuries as the Fed starts to 0:10:16.960 --> 0:10:19.840 cut interest rates. It's not happening, Ralph. Why is it 0:10:19.880 --> 0:10:23.959 not happening? Um, It's not happening for a variety of reasons. 0:10:23.960 --> 0:10:26.200 So UM in the U S. I think what what 0:10:26.400 --> 0:10:28.440 is interesting about the inversion is not the fact that 0:10:28.480 --> 0:10:30.320 has happened, but the fact that it took so long. 0:10:30.920 --> 0:10:33.240 It is very, very unusual for the yield curve to 0:10:33.320 --> 0:10:36.520 start inverting after the beginning of the easing cycle, which 0:10:36.559 --> 0:10:39.120 is what we faced last week. What that is is 0:10:39.160 --> 0:10:41.360 a very clear signal that the market leaves that the 0:10:41.360 --> 0:10:46.240 Fed is somewhat behind the curve. UM. So, the the 0:10:46.320 --> 0:10:48.600 issue we have is that this is not a normal 0:10:48.720 --> 0:10:53.600 rate cut cycle where the Fed actually deliberately raised rates 0:10:53.600 --> 0:10:57.080 to meaningfully above neutral, thereby slowing down an economy that 0:10:57.120 --> 0:11:00.280 would otherwise have been overheating. No, this is any nomy 0:11:00.400 --> 0:11:04.920 that was basically recovering, you know, somewhat above trend. Who 0:11:05.640 --> 0:11:10.320 Um is being tripped up by a global manufacturing cycle 0:11:10.360 --> 0:11:14.840 that has slowed very materially and therefore is facing meaningful 0:11:14.880 --> 0:11:17.240 storm clouds on the horizon without actually an awful lot 0:11:17.280 --> 0:11:20.199 of evidence of weakness in the domestic economy so far, 0:11:20.240 --> 0:11:23.160 and that results in this you know, very wide distribution 0:11:23.200 --> 0:11:26.160 of possible outcomes that is being priced in. But the 0:11:26.200 --> 0:11:29.400 clearest reflection of that and that hedge demand is basically 0:11:29.559 --> 0:11:32.960 a yield curve that inverts after the beginning of the 0:11:32.960 --> 0:11:37.400 easing cycle. Europe is a very different cattle of fish 0:11:37.480 --> 0:11:41.240 because they'll be dealing with a policy talk kit that 0:11:41.400 --> 0:11:44.480 is considerably more constrained than the central bank that has 0:11:44.679 --> 0:11:47.719 buying large run out of ammunition. If we're honest of 0:11:47.760 --> 0:11:51.080 a perspective, the path of these diosistance is lower and flatter. 0:11:51.400 --> 0:11:53.440 So Ralph John has been trying to put me on 0:11:53.440 --> 0:11:56.600 this spot all morning with respect to that German thirty 0:11:56.679 --> 0:11:59.800 year auction, and I've been dodging it, I think pretty effectively. 0:12:00.000 --> 0:12:02.160 But I want to put you on the spot instead. Uh, 0:12:02.360 --> 0:12:04.680 And you know, basically is it an inflection point. You 0:12:04.720 --> 0:12:06.880 were saying that the pushback, the lack of demand that 0:12:06.920 --> 0:12:11.360 we saw seems to be some resistance to accepting losses, 0:12:11.440 --> 0:12:14.200 essentially to lend money. Um do you think that we 0:12:14.280 --> 0:12:19.079 have reached an inflection point in German burns now? I don't, 0:12:19.320 --> 0:12:23.199 um So. We actually see bundeals lower into your end 0:12:23.520 --> 0:12:27.360 um and there's a few key UM differences that would 0:12:27.360 --> 0:12:29.800 tease out relative to where we were in twenty fifteen, 0:12:29.920 --> 0:12:32.880 where a porten You auction kind of marked the beginning 0:12:32.880 --> 0:12:34.800 of the end of the bund valley before the bund 0:12:34.840 --> 0:12:38.120 Tantrum kicked off in Earnest. In April um number one 0:12:38.240 --> 0:12:42.640 economic surprises actually continued to be very negative, whereas in 0:12:43.080 --> 0:12:46.080 fifteen we were looking back at at a fairly meaningful 0:12:46.600 --> 0:12:50.920 turnaround in UM. In the data flow equally, pms remain 0:12:51.000 --> 0:12:54.920 at much weaker levels. The economic risks also much more 0:12:54.920 --> 0:12:58.680 clear and present in the sense of Brexit, in the 0:12:58.679 --> 0:13:01.960 sense of the threat of water town US, the weakness 0:13:01.960 --> 0:13:04.000 in Chinese data that has yet to be reflected in 0:13:04.280 --> 0:13:08.160 European data, and so on and so forth. Relative value 0:13:08.200 --> 0:13:11.920 is also another key issue, um SO. From the perspective 0:13:12.000 --> 0:13:14.720 of an f X hedge investor UM. So if I 0:13:14.720 --> 0:13:16.480 put myself in the shoes as someone sitting in the 0:13:16.559 --> 0:13:19.240 US running an f X hedge benchmark, they're looking at 0:13:19.280 --> 0:13:21.959 ten y yields in in buns, not as minus you know, 0:13:22.080 --> 0:13:25.439 sixty seventy basis points, but actually as you know, plus 0:13:25.480 --> 0:13:28.360 one point nine percent plus one point eight percent, providing 0:13:28.400 --> 0:13:31.719 meaningful pickup relative to tenure notes because of the the 0:13:32.559 --> 0:13:35.240 pickup that is implicit in the in the FX hedge, 0:13:35.240 --> 0:13:38.199 whereas back in on that metric, bonds are actually a 0:13:38.240 --> 0:13:41.199 hundred basis points of rich relative to treasuries. So from 0:13:41.200 --> 0:13:43.960 that perspective, I think it's very very difficult to um 0:13:44.080 --> 0:13:46.480 make the case for a tantrum. I think what would 0:13:46.559 --> 0:13:49.600 cause a tantrum in buns and and create that big 0:13:49.640 --> 0:13:53.360 turning point for bund yields is a change in the 0:13:53.440 --> 0:13:56.560 native So if the trade will ends tomorrow, then yeah, 0:13:56.720 --> 0:13:59.640 we can sell off obviously, but it has to end 0:13:59.679 --> 0:14:02.920 credit the um. If you get a fiscal policy impulse 0:14:03.040 --> 0:14:05.280 out of Germany, and but that I don't mean what 0:14:05.400 --> 0:14:08.959 the current constitutional rules allow for, but actually something that 0:14:09.080 --> 0:14:11.920 most people would understand a fiscal impulse and is something 0:14:11.960 --> 0:14:14.800 that is big and meaningful, then that obviously could provide 0:14:14.800 --> 0:14:18.440 a very different backdrop. If the Chinese were to start 0:14:18.440 --> 0:14:20.840 stimulating in a way that actually creates positives below the 0:14:20.880 --> 0:14:24.280 effects for the rest of the world, so infrastructure investment 0:14:24.320 --> 0:14:28.000 as opposed to monetary policy using and currency deppreciation, then 0:14:28.000 --> 0:14:30.560 that could potentially also change the narrative. But I think 0:14:30.560 --> 0:14:32.320 we're a long way away from seeing any of those 0:14:32.360 --> 0:14:36.360 things material is anytime soon. So from that perspective, um, 0:14:36.400 --> 0:14:40.640 you know, you are faced with the risk of unanchored 0:14:40.640 --> 0:14:44.080 inflation expectations becoming ever more intentioned in Europe, and that's 0:14:44.120 --> 0:14:46.680 not going to provide a big upsite for for the 0:14:46.720 --> 0:14:49.840 long end of the curve. Really smart final thoughts there, 0:14:49.920 --> 0:14:52.560 Ralph Price of their Banks of American mardal Inch, International 0:14:52.560 --> 0:15:08.560 Global head of Race Strategy. The narrative just running away 0:15:08.560 --> 0:15:10.960 with it south that Germany is somehow putting together a 0:15:11.000 --> 0:15:13.760 package and will preemptively tackle some of the problems in 0:15:13.760 --> 0:15:15.880 Germany and Europe. At the moment, I don't see it's 0:15:15.880 --> 0:15:18.840 not happening. I hope it does. The optics are certainly encouraging. 0:15:19.080 --> 0:15:21.080 It's positive that this is part of the discussion. I 0:15:21.080 --> 0:15:24.080 hope it happens, But just realistically speaking, I don't see 0:15:24.120 --> 0:15:26.440 it happening right now. Let's find out what Jane fully 0:15:26.480 --> 0:15:28.840 thinks that Jane Folly Rubber, big head of Effect Strategy, 0:15:28.920 --> 0:15:31.400 joining us now from London. Jane, Let's get started with 0:15:31.440 --> 0:15:37.200 the German fiscal stimulus. This idea that potentially, maybe perhaps 0:15:37.520 --> 0:15:41.840 in a downturn, they could abandon their balanced budget policies. 0:15:42.040 --> 0:15:44.400 How realistic is it that Germany would actually engage in 0:15:44.400 --> 0:15:47.320 a meaningful fiscal stimulus early enough to stave off a 0:15:47.360 --> 0:15:51.480 downturn that is really painful? Well, I mean, you can 0:15:51.520 --> 0:15:53.400 see from the outside looking in that they would appear 0:15:53.480 --> 0:15:56.400 to be a certain logic. Germany's budget position, for instance, 0:15:56.760 --> 0:15:59.720 looks more healthy than it's another large country, So from 0:15:59.760 --> 0:16:02.880 that spectives you can see the logic building up. The 0:16:02.960 --> 0:16:05.520 reality in Germany, however, is that a lot of the 0:16:05.560 --> 0:16:09.880 fiscal power is localized um and that means that from 0:16:09.880 --> 0:16:14.120 a practical perspective, it may not be that it may 0:16:14.160 --> 0:16:17.560 not be very straightforward or simple to actually make the 0:16:17.600 --> 0:16:20.880 decisions that bring forward a lot of fiscal stimulus. So 0:16:20.960 --> 0:16:25.000 it could actually be quite a difficult proposition to actually 0:16:25.040 --> 0:16:29.320 see through. So there will be more pressure. We've seen Germany, 0:16:29.360 --> 0:16:32.520 of course, printer and negative GDP growth q and key 0:16:32.560 --> 0:16:35.880 growth for for the second quarter. If we see another 0:16:35.960 --> 0:16:39.520 negative print for the third quarter IU technical recession, then 0:16:39.600 --> 0:16:42.520 clearly that pressure will build up and therefore there will 0:16:42.560 --> 0:16:46.600 be increased pressure and perhaps more momentum within Germany to 0:16:46.600 --> 0:16:51.000 to to ease those fiscal uh per strings. But um, 0:16:51.320 --> 0:16:56.120 it's not necessarily the foregone conclusion that some of the 0:16:56.120 --> 0:16:59.240 the commentary in the markets in the last few days, 0:16:59.240 --> 0:17:03.560 few weeks would lead to believe. I think I'm struggling 0:17:03.600 --> 0:17:06.480 to understand as we look at the interest rate picture 0:17:06.520 --> 0:17:08.200 and as we look at what central banks are doing. 0:17:08.359 --> 0:17:10.320 Certainly the e c B is preparing another round of 0:17:10.320 --> 0:17:12.800 stimulus on there, and given the fact that Germany is 0:17:12.840 --> 0:17:15.359 unlikely to come out with fiscal stimulus, I'm trying to 0:17:15.400 --> 0:17:20.399 understand the relationship between the monetary policy and the f 0:17:20.800 --> 0:17:24.359 X rates where where things are actually trading. I mean, 0:17:24.400 --> 0:17:29.280 at what point do central banks lose power over currency 0:17:29.400 --> 0:17:34.400 exchange rates? Well, of course, um, it's for an exchange 0:17:34.440 --> 0:17:37.600 is not just driven by by effects rates. There is 0:17:37.600 --> 0:17:40.159 a cause, an awful lot of political influence, and I 0:17:40.160 --> 0:17:42.439 think this is very much the case in the detail 0:17:42.520 --> 0:17:44.680 in the in the trance sort of Brexit sort of era. 0:17:44.760 --> 0:17:47.240 There's a lot of political risk there. Now. You could 0:17:47.240 --> 0:17:51.480 take in the Eurozone, you could take the Italian situation 0:17:51.520 --> 0:17:53.359 now and ask the question, well, you know, is that 0:17:53.920 --> 0:17:56.840 a negative euro fractor? Well, you know the answer to 0:17:56.840 --> 0:18:00.320 that is, well, potentially it is. I mean today perhaps 0:18:00.359 --> 0:18:04.080 because we've seen the markets reactor quite well to the 0:18:04.119 --> 0:18:08.040 most recent news from Italy, and that's the assumption that 0:18:08.080 --> 0:18:10.040 there may not be a snap election in the next 0:18:10.080 --> 0:18:12.760 couple of months, that might be delayed until next year. 0:18:12.760 --> 0:18:14.600 And therefore, if we're not having a snap election in 0:18:14.640 --> 0:18:17.679 the next couple of months, we don't therefore have a 0:18:17.720 --> 0:18:21.359 big budgetary conflict right now between Italy and the EU. 0:18:21.440 --> 0:18:24.680 That's potentially further down the road. But it is all 0:18:24.720 --> 0:18:27.880 about politics, i would say, as well as the economy, 0:18:27.920 --> 0:18:30.760 as well as infra distrect differentials. But the central banks 0:18:31.119 --> 0:18:34.440 certainly have a big part to pay play in foreign exchange. 0:18:34.440 --> 0:18:37.120 And what we have now is of cause a big 0:18:37.160 --> 0:18:40.520 emphasis on the September ECB policy meeting and a lot 0:18:40.560 --> 0:18:44.240 of speculation that the the ECB will use and a 0:18:44.280 --> 0:18:46.600 word that was used in the President in the last 0:18:46.640 --> 0:18:49.280 week of the Zooker that they could do something quite significant. 0:18:49.320 --> 0:18:51.320 And I think that one of the reasons that the 0:18:51.359 --> 0:18:54.600 euro has been under pressure quite lately is this perception 0:18:54.640 --> 0:18:57.280 that this isn't all about how much interestrate caps are 0:18:57.320 --> 0:18:59.600 said can do over the next year or so, so 0:18:59.640 --> 0:19:02.520 actually about where else and who else could be doing 0:19:02.560 --> 0:19:05.400 these interest rate moves, And certainly I think the ECB 0:19:05.560 --> 0:19:08.680 is right up there in the market's consciousness in the 0:19:08.760 --> 0:19:11.199 next few weeks. Well, Jane, if they moved to tearing 0:19:11.280 --> 0:19:13.240 on the deposit rate, it opens a new range of 0:19:13.280 --> 0:19:15.800 possibilities up for just how low interest rates could go 0:19:15.880 --> 0:19:18.040 at the u c B. Have you got a base 0:19:18.119 --> 0:19:19.840 case for that, Jane, on how low things could go 0:19:20.440 --> 0:19:24.760 for ECB deposit rates. It's it's very difficult to make 0:19:24.800 --> 0:19:28.720 that judgment right now, clearly, because it's difficult to know 0:19:29.400 --> 0:19:32.040 how bad the global economy can be and at a 0:19:32.119 --> 0:19:33.720 time make those sorts of assumptions. You've got to try 0:19:33.720 --> 0:19:36.840 and make a prediction on how far can tradeables go, 0:19:37.760 --> 0:19:41.960 how far can the relationship deteriorate between China and the 0:19:42.119 --> 0:19:45.880 US overall, so there's an awful lot of what if, which, 0:19:46.000 --> 0:19:49.760 of course it always are in forecasting, but it does 0:19:50.160 --> 0:19:54.320 the ECB don't want to use tearing immediately, but certainly 0:19:54.359 --> 0:19:57.920 I think if conditions did worsen, they may have to. 0:19:58.400 --> 0:20:01.960 You have a situation um where we are talking about 0:20:02.000 --> 0:20:05.000 the potential of quantity division in Australia, where they're talking 0:20:05.040 --> 0:20:09.040 about in September the Swiss National Bank cutting its interest 0:20:09.119 --> 0:20:11.840 rates below where they already are and that's minus not 0:20:11.960 --> 0:20:15.920 point seven five percent. So you have, um the the 0:20:16.200 --> 0:20:19.879 discussion about world countries such as Sweden or Denmark have 0:20:20.000 --> 0:20:24.119 to pass on negative rates to to retail deposits for instance, 0:20:24.119 --> 0:20:28.320 So that there's there's a there's an enormous argument and 0:20:28.600 --> 0:20:32.920 debate about how low can this really go and and 0:20:33.200 --> 0:20:36.359 how effective can these sorts of policies be and what 0:20:36.480 --> 0:20:38.639 sort of damage can they do in terms of the 0:20:38.720 --> 0:20:42.840 damage to the models for banks in Europe and and 0:20:42.960 --> 0:20:46.119 also for inequalities, weld in equalities, etceters. So there's a 0:20:46.320 --> 0:20:50.080 there's a huge debate um and certainly you know tearing 0:20:50.600 --> 0:20:53.520