Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Ley. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. So
Speaker 1: coming up, then, big week ahead the Federal Reserves Annual
Speaker 1: Policy Symposium kicking off this Friday in Jackson Hall, Wyoming,
Speaker 1: with FED Chair and J. Powell set to deliver the
Speaker 1: speech of the week. Joining us to discuss is Thanos
Speaker 1: van vakilis, head of g T and FX Strategy, Bank
Speaker 1: of America Merrill Lynch, and he joins us out of London.
Speaker 1: Good morning to your Thanos, Good morning for the Federal Reserve.
Speaker 1: Then and chare jpow speech? What are you looking out for?
Speaker 1: What's important? Well, the FETE has been not large in policies,
Speaker 1: has been hiking this year. The message has been consistent
Speaker 1: from power. So from this point of view, I think
Speaker 1: what will come out this week will be consistent with
Speaker 1: the normalization, but we will be looking for a more
Speaker 1: color how far the FED can go, how the balance
Speaker 1: the good data in the US we are seeing with
Speaker 1: global risks and trade tensions, and also about the side
Speaker 1: effects of the policy normalization and the tightening cycle on
Speaker 1: the rest of the world, particularly on emerging markets. How
Speaker 1: how the balance all these risks in order to have
Speaker 1: a better understanding of the policy reaction function will be important.
Speaker 1: So thant Us was reading through some of your recent
Speaker 1: research and I was struck by the idea that you
Speaker 1: saw a little further upside left for the euro US
Speaker 1: dollar cross, and yet you also think that the dollar
Speaker 1: could strengthen more. So, where is the dollar going to
Speaker 1: strengthen more if it's not against the era? I mean
Speaker 1: the short term, we do see the dollar appreciating further,
Speaker 1: even with respect to the euro or projects for September
Speaker 1: is one twelve, but we're not far from this level,
Speaker 1: and we have already seen a strong dollar rally since
Speaker 1: the mid April. The data are still supportive of the dollar,
Speaker 1: and at the end of the day, the fat is
Speaker 1: still hiking. Looking, however, more beyond the next few weeks,
Speaker 1: we believe that and looking particularly into next year, we
Speaker 1: believe that we're gonna see a gradual weakending of the dollar,
Speaker 1: including with respect to the euro. Uh the impact of
Speaker 1: the US physical stimulus is likely to start weekending some
Speaker 1: time and next year, uh, the c B will stop
Speaker 1: que and they will start hiking at some point next year,
Speaker 1: before or after the summer. The market also is long.
Speaker 1: The dollar these states is not stretched, but is long,
Speaker 1: and the dollars over valued by about ten percent. So
Speaker 1: from this point of view, we're waiting for one more
Speaker 1: leg higher to the dollar, and we'll be looking for
Speaker 1: an opportunity to buy the euro dollar deep and US.
Speaker 1: When you say the US dollars over price by ten percent,
Speaker 1: what does that mean? Any made a calculation? I mean
Speaker 1: you can use a number of models. Usually we just
Speaker 1: use an econometic model, which will look at different determinants
Speaker 1: of exchange rates such as the current account balance rate
Speaker 1: differentials in terms of trade, and we look based on
Speaker 1: historical evidence to what extent these variables justify the level
Speaker 1: of the dollar. Or you can just use a much
Speaker 1: similar approach. You can just look at the deviation of
Speaker 1: the trade weighted dollar from historical average. No matter what
Speaker 1: you lose, you come up with close to the estimates.
Speaker 1: For example, for euro dollar the long term, making liberty
Speaker 1: somewhere between one to one. Again, we're not that far
Speaker 1: from this level, but this is where we will expect
Speaker 1: the euro dollar to convert in the medium term to
Speaker 1: long term. So I want to take a step back
Speaker 1: here because really the drama this year has not been
Speaker 1: in the euro dollar cross. It has been in emerging
Speaker 1: markets and what the strengthening dollar has done to developing worlds.
Speaker 1: And I want to get your perspective and how you
Speaker 1: viewed what we've seen so far. I mean, we've seen
Speaker 1: the Turkish lar lot of bed certainly in the Argentinian pace.
Speaker 1: So but going forward, do you expect more rough spots
Speaker 1: like this, more sort of sort of air holes with
Speaker 1: emerging market currencies falling through them, or do you think
Speaker 1: that we're gonna gonna reach a more stable point there.
Speaker 1: I mean, you're absolutely right to a lot of extent.
Speaker 1: This year he has been about emerging markets. We started
Speaker 1: the year with the market being long a very stretched position.
Speaker 1: The trade tensions, the FED hikes all have been affecting
Speaker 1: emerging markets negatively and also had local risks in different regions,
Speaker 1: in different emerging markets Argentina, Morrisson, Turkey, So all these
Speaker 1: factors have affected looking forward, I think one will have
Speaker 1: to be more selective position. He has definitely adjust. It
Speaker 1: is clean. The market is not short emerging markets, but
Speaker 1: definitely is not long anymore. One will still have to
Speaker 1: be careful on cases like a Turkey where things could
Speaker 1: become before getting better. But I think beyond that, assuming
Speaker 1: that we are not going to a full blown trade war,
Speaker 1: emerging markets could offer opportunities in the months ahead. They
Speaker 1: are definitely a very attractive valuations and in some cases
Speaker 1: the data has been good. Hold on one second, are
Speaker 1: the specific emerging markets that look really good and like
Speaker 1: opportunities here, For instance, Korea is an interesting case assuming
Speaker 1: we don't get the trade war between China and UH
Speaker 1: in the US. Mexico is another case where we are
Speaker 1: quite optimistic on having enough to deal UH in the
Speaker 1: months ahead before the end of of of of the year.
Speaker 1: So again, to a large extent, the emerging market trade
Speaker 1: is just waiting for more clarity on the trade tensions.
Speaker 1: If the worses avoided, then we can see emerging markets rallying.
Speaker 1: Senos Vambacatis great. I can't champ with the joinings from London.
Speaker 1: They had Jeets and Effect Strategy and Bank America Merrill Lynch.
Speaker 1: One thing that we are going to be watching this
Speaker 1: week other than going back to school for a select
Speaker 1: group of kids, will be that Jackson Whole symposia where
Speaker 1: we're going to hear from central bankers around the world.
Speaker 1: But most importantly, probably for most people watching, we're gonna
Speaker 1: be hearing from j Powell, the head of the FED,
Speaker 1: joining US now Tim Quinlin Wells Fargo Security senior economists
Speaker 1: to talk about this. And Tim, what's your take? What
Speaker 1: are you expecting to hear today or not today Friday?
Speaker 1: I guess I'm trying to jump ahead because it's Yeah,
Speaker 1: I guess you know. What we're trying to see here
Speaker 1: is UM you know, broad outlook for the FED and
Speaker 1: no UM, you know, influence from any perceived political pressure
Speaker 1: in one way or another. I mean the UM. I
Speaker 1: expect Powell to reaffirm that they're looking at UM an
Speaker 1: objective to maintain full and full employment and price stability,
Speaker 1: and and they're more or less on track with both
Speaker 1: of those objectives at this point. Is there any chance
Speaker 1: as that it's going to be really exciting and that
Speaker 1: he could pull a Ben bernanke back ahead of the
Speaker 1: taper tantrum in two thousan Yeah, I mean, it wasn't
Speaker 1: just then either. I mean it was sort of like
Speaker 1: the uh, this was Bernanke's big stage to announce major
Speaker 1: inflection points and FED policy, and um, it became sort
Speaker 1: of the uh, you know, woodstock for central bankers to
Speaker 1: some extent. But UM, I don't think that you're gonna
Speaker 1: get into those kind of fireworks this week. I expect
Speaker 1: um Powell to just sort of stay on script and
Speaker 1: and continue the forward guidance that they've been maintaining throughout
Speaker 1: the last couple of years. Sam, there are some investors
Speaker 1: out there that think we might be approaching an inflection
Speaker 1: point in monetary policy, not over rate, but perhaps with
Speaker 1: the balance sheet. How do you anticipate the balance sheet
Speaker 1: policy is going to evolve over the coming months, coming quarters.
Speaker 1: I think that's really gonna be a tricky question for
Speaker 1: the said because when I think about that, there's there's
Speaker 1: two major things that can influence longer term rates. One is, Um,
Speaker 1: you know, we're gonna be running much bigger budget deficits
Speaker 1: over a trillion dollars by twenty That means Treasury is
Speaker 1: gonna have a lot of new issuance, which was going
Speaker 1: to put a lot of supply out there. Now you've
Speaker 1: got the saied not only not soaking up that new supply,
Speaker 1: but potentially allowing things to mature and roll off their
Speaker 1: balance sheet. So, you know, it's the extent that that
Speaker 1: happens and the influence that that could have on the
Speaker 1: shape of the curve the FED is gonna have to be,
Speaker 1: you know, pretty pretty deliberate and careful about, you know,
Speaker 1: how it allows this stuff to wind off. I think
Speaker 1: maybe the interesting thing to say in that context is
Speaker 1: if you think back to, you know, maybe where we
Speaker 1: were in prior cycles with the Greenspan conundrum, where you've
Speaker 1: got this problem where the FED can't raise rates again
Speaker 1: without taking short term rates above longer term rates. To
Speaker 1: an extent, the size of the balance sheet gives them
Speaker 1: a little bit of flexibility in that regard and allowing
Speaker 1: them to shape the curve a little further out. So, Jim,
Speaker 1: I want to follow on with that, which is what
Speaker 1: is the outstanding amount of securities on the Fed's balance
Speaker 1: sheet when they're done with this runoff? And I'm looking
Speaker 1: right now at but at a balance sheet that's four
Speaker 1: point two trillion dollars, I'm wondering, are we going back
Speaker 1: down to two trillion dollars three and a half. So
Speaker 1: pre crisis we were like eight billion, which seems almost laughable.
Speaker 1: Now there's there's no way we go back to normal. Um,
Speaker 1: you know, I I you know, to too is probably
Speaker 1: a reasonable starting point. I mean, they've said they're gonna
Speaker 1: you know, kind of the terminal rate for FED funds
Speaker 1: in this cycle will be at around three percent, So um,
Speaker 1: you know, once they've more or less achieved that, their
Speaker 1: only real influence on policy will be the shape of
Speaker 1: the composition of the balance sheet and um, the extent
Speaker 1: that they allow treasuries or mortgage backed securities to wind
Speaker 1: off and in what ratio, And I think, um, that
Speaker 1: will be you know, one, the FED looking at its
Speaker 1: objectives and how is it doing in terms of inflation
Speaker 1: and labor. And then too, you know, what is the
Speaker 1: shape of the yield curve and what are they what
Speaker 1: are they trying to achieve there? So I think that
Speaker 1: that will add an interesting level of complexity, will go
Speaker 1: into these FED meetings talking more about the balance sheet
Speaker 1: than we are about you know, the actual FED funds
Speaker 1: rate itself. To what extent is this just sort of
Speaker 1: holding your finger up in the air and guessing where
Speaker 1: the balance sheet will end them where it should end.
Speaker 1: And to what extent? Is there actually a methodology for
Speaker 1: thinking about this? How do we get to two trillion
Speaker 1: two and half trillion? I mean, there's a couple of
Speaker 1: ways you can think about it. The only rational methodology
Speaker 1: that I can apply is what's the fays normal share
Speaker 1: of the treasury market? And over time that's around fourteen
Speaker 1: or fifteen percent or so, so you know, by the
Speaker 1: time it gets back there, it'll be you know, about
Speaker 1: two and a half trillion. So that's that's one kind
Speaker 1: of dead reckoning way of doing it. Now you might think, well,
Speaker 1: how can that be if we if they've if they've
Speaker 1: gone from billion to four and a half trillion UM,
Speaker 1: it's because there was so much more issuance in this
Speaker 1: cycle too. You know, when we had one point four
Speaker 1: trillion dollar budget deficits, treasury is issuing a lot of
Speaker 1: this stuff. So the although the said was buying a lot,
Speaker 1: but the overall share grew a lot in that time. So, um,
Speaker 1: do you have to make adjustments for that form the
Speaker 1: fact that there's been a lot more issuance. I don't
Speaker 1: know if we're gonna be running trillion dollar budget deficits
Speaker 1: going forward. Maybe maybe not. Maybe that's kind of the
Speaker 1: new speed limit for the rate of issuance. And on
Speaker 1: that basis, UM two trillions a rational. It's really interesting
Speaker 1: that the biggest cries for to stop, for the balance
Speaker 1: sheet process to slow down, it's coming from abroad, tip,
Speaker 1: it's coming from international, it's coming from emerging market central
Speaker 1: bank governors. I don't hear much domestically. What's the domestic
Speaker 1: russianale to slow down? Well, you know, I mean when
Speaker 1: you look at who's been buying this stuff. Um, you know,
Speaker 1: the foreign central banks had a much bigger interest in
Speaker 1: this stuff earlier in this cycle. So when you know,
Speaker 1: the sovereign debt crisis was at its high water mark
Speaker 1: back in eleven, when there's worries about China slowing down.
Speaker 1: In more recently though, um, there hasn't been as much
Speaker 1: foreign appetite for a lot of this issuance. And UM,
Speaker 1: I think that that contributes, at least to the margin
Speaker 1: to some of that. Well, I guess that to follow
Speaker 1: on with John's question, there's a question of how good
Speaker 1: the U s economy is right now. Are we seeing
Speaker 1: a peak or are we seeing just momentum building and
Speaker 1: i'd love your since just based on the economic data
Speaker 1: that we've seen recently. Yeah, I mean, we're certainly closer
Speaker 1: to the end than we are at the beginning of
Speaker 1: the cycle, There's no doubt about that. But um, I
Speaker 1: think when the FED looks at this, they're they're not
Speaker 1: thinking so much of where we are in the economic cycle.
Speaker 1: Of course they have to consider that, but I think
Speaker 1: they're their primary thing is to look at um inflation
Speaker 1: in the jobs market, and the job market, by any
Speaker 1: reckoning is white hot right now. And when you look
Speaker 1: at not just a low unemployment rate, but you know,
Speaker 1: quits being near all time highs UM the initial jobless
Speaker 1: claims for week moving average of that hitting levels not
Speaker 1: seen since the nineteen sixties. So um, the labor markets
Speaker 1: certainly there. And the inflation side of things is you know,
Speaker 1: for you know, nine years in this expansion, we couldn't
Speaker 1: buy two percent inflation and we're kind of there now.
Speaker 1: So um, is it late in the cycle. Most assuredly
Speaker 1: it is. But from the Fed's perspective, it's it's mandates
Speaker 1: is it's it's firing right online with where it needs
Speaker 1: to be. Tim great to catch out with you ahead
Speaker 1: of Jackson, rewhoming. Tim mc quindon wast Fogga security scene,
Speaker 1: mcconomist joining us right here, Blomberg Surveillance. A ton of
Speaker 1: housing data coming through, sort of bleeding through, drip feeding
Speaker 1: us through the week on the update of the U
Speaker 1: s housing sector. John, I think that the housing market
Speaker 1: has not gotten quite enough attention, especially because homebuilders as
Speaker 1: a sector are down nearly eighteen percent so far this year.
Speaker 1: And this comes as there's broad strength across the board
Speaker 1: and almost every other sector. Um So there's a big question,
Speaker 1: you know, how healthy is the US housing market? And
Speaker 1: maybe someone can answer that. Maybe that person is Ken Simonson.
Speaker 1: He is Associated General Contractors Chief economist. He also is
Speaker 1: a survey analyst for the National Association for Business Economics. Ken,
Speaker 1: thank you so much for being with us. I want
Speaker 1: to start with the housing market, and I was struck
Speaker 1: by the University of Michigan survey that came out last
Speaker 1: week that showed the smallest proportion of people that they
Speaker 1: talked to saying that it was a good time to
Speaker 1: buy a home since two thousand and eight. What do
Speaker 1: you make of that, Well, it's a pretty striking data point.
Speaker 1: I'm never confident though, that the confidence surveys capture what
Speaker 1: people are actually going to do. They may say it's
Speaker 1: not a good time, but it takes a fairly small
Speaker 1: percentage of people to actually go out and buy, to
Speaker 1: move the needle on home sales. So I'm more interested
Speaker 1: in seeing what those hard data indicate about what's happened
Speaker 1: in the latest month. So what do you expect this
Speaker 1: Wednesday and this Friday. Well, again, that's a series that's
Speaker 1: quite volatile, but um, I think the trend has been
Speaker 1: pretty flat so far. Clearly people are having a hard
Speaker 1: time find finding houses at the right price point. And
Speaker 1: then there's also a lot of reluctance among millennials in
Speaker 1: particular to commit. I know people have been saying for years, Oh,
Speaker 1: as the monials get older, they're going to do the
Speaker 1: same thing as their parents did. Uh. Surveys about intentions
Speaker 1: to buy at some point indicate that. And yet people
Speaker 1: are still waiting longer to get married, longer to have kids.
Speaker 1: They're having fewer kids than even when they're doing uh
Speaker 1: having those kids. Many of them now are in the
Speaker 1: cities or older suburbs where UH they find the school
Speaker 1: systems have adequate choices and they're not fleeing to ever
Speaker 1: further out suburbs. So I think we're gonna see very
Speaker 1: slow growth and single family home growing home buying. What's
Speaker 1: been interesting to me is that the multi family that
Speaker 1: appeared to have been overbuilt for a while as actually
Speaker 1: showing some strength. John, do you like that millennials just
Speaker 1: have commitment problems? What are you trying to say? I'm
Speaker 1: just saying that that's maybe that's what you try to
Speaker 1: trying to personalize the segment alright, So ken Im not
Speaker 1: going to get into commitment problems. But you have to
Speaker 1: wonder how much this has to do with sort of
Speaker 1: oh millennials these days, and how much this has to
Speaker 1: do with higher interest rates in the fact that price
Speaker 1: the prices of homes have gotten so high. And I
Speaker 1: guess I'm just wondering, we are we reaching a tipping points?
Speaker 1: You have seen declines in a lot of major markets,
Speaker 1: and are you seeing sort of ongoing dips sort of
Speaker 1: for telling a larger and longer slowdown in the US
Speaker 1: housing market. Well, again, it's the interesting I think there
Speaker 1: was widespread assumption with the uh FED ratcheting up short
Speaker 1: term rates and that the long term rates would also
Speaker 1: move up steadily. But instead we've seen that third year
Speaker 1: and the fifteen year mortgage rates really fluctuated around pretty
Speaker 1: moderate levels. So I don't think people are being panicked
Speaker 1: into going out and buying now before interest rates get
Speaker 1: much higher. I think people may think, yes, there is
Speaker 1: going to be a long term upward trend, but I
Speaker 1: think that may have more effect on those who have
Speaker 1: houses available to sell. They're saying, wait a minute, if
Speaker 1: I sell and want to buy another one, I'm going
Speaker 1: to be trading in a super low mortgage for one
Speaker 1: that's higher. People who haven't yet thought they're saying, I
Speaker 1: can afford to wait a while longer. Interest rates are
Speaker 1: not shooting through the roof, all right, So Ken, I
Speaker 1: want to shift gears a little bit because, aside from
Speaker 1: wearing a housing hat, you also are one of the
Speaker 1: uh survey analysts for this National Association from Business Economic Study.
Speaker 1: And I'm wondering you were looking at tariffs right, Yes,
Speaker 1: and this was a survey of two and fifty one
Speaker 1: members of the National Association for Business Economics, the professional
Speaker 1: organization for folks who use economics in the workplace. I
Speaker 1: guess you guys should be members too. All right, that
Speaker 1: was a good pitch. Would you find real quick that
Speaker 1: overwhelmingly they believe that terrorists are harmful to the economy,
Speaker 1: even if they may do some short term good, that uh,
Speaker 1: they're likely to do more harm than good. Well, I
Speaker 1: shouldn't come as too much of a surprise considering the
Speaker 1: fact that right now we're seeing that across the board,
Speaker 1: and of course this morning we saw that MARIKSK, the
Speaker 1: biggest shipping company in the world, that the CEO is
Speaker 1: saying that he expects the trade the trade potential attentions
Speaker 1: having a bigger effect on the US than the rest
Speaker 1: of the world. Ken Simonson, thank you so much for
Speaker 1: being with us. A pleasure speaking with you about the
Speaker 1: housing market and also the fact that economists think that
Speaker 1: tariffs are bad. Ken Simonson is Associated General Contractors chief economist.
Speaker 1: We've had a fewer question coming through the Bloomberg terminal.
Speaker 1: We love questions from you, guys, We love hearing from you.
Speaker 1: So just I'll go in to the Bloomberg terminal, go
Speaker 1: onto GTV go and then click well click underneath the
Speaker 1: video screen. So this is another question from inal Patel.
Speaker 1: It says sanctions risk facing Russia have resurfaced again. And
Speaker 1: so given we know that you said you probably like
Speaker 1: Rubal longer term, what are the chances of it more
Speaker 1: sanctions hurting the economy there? Yeah, I mean, I think
Speaker 1: and that's an important question because obviously we like the
Speaker 1: fundamentals of Russia and the economic story there, but as
Speaker 1: we've seen with other countries, sanctions are now posing a
Speaker 1: risk UM. And what's becoming concerning is that the US
Speaker 1: administration almost using it like a policy tool in order
Speaker 1: to ahead of sort of the midterm elections in November
Speaker 1: to UM, to advance their their position a little bit
Speaker 1: more UM. And if we think about some of the
Speaker 1: sanctions and tarrits that have come through with regards to
Speaker 1: to China and Turkey, every time hes are coming through,
Speaker 1: Trump's approval state ratings with his base is starting to
Speaker 1: increase even further. So ahead of the midterm elections, there
Speaker 1: is always that risk and that chance that you do
Speaker 1: see those sanctions sanctions being broadening out to other countries
Speaker 1: UM and Russia is one of those that post is
Speaker 1: that risk, But ultimately we're sticking to the course story
Speaker 1: of the fundamental long term, medium term story with Russia.
Speaker 1: But obviously sanctions could sort of sort of disrupt that
Speaker 1: story a little bit in the nit term. You know,
Speaker 1: if there's a you know, duopolitic exploring up again like
Speaker 1: we saw a couple of months ago, do you go
Speaker 1: to cash UM. I don't think you need to necessarily
Speaker 1: go to cash UM. I think that's a lot of
Speaker 1: people would probably think that it's the right place to go.
Speaker 1: But no, you do see volatility and markets and and ultimately,
Speaker 1: if you if you think back to sort of last year,
Speaker 1: volatility has been a lot lower than where historically we
Speaker 1: would have expected it to be. So these types of
Speaker 1: things coming through are not unusual when it comes to
Speaker 1: how markets perform um. So it always pays to stay
Speaker 1: invested in markets. I don't think you should flood back
Speaker 1: into casha completely, but you might want to rebalance slightly
Speaker 1: and and sort of change that balance of equity exposure
Speaker 1: or put some protection strategies in place regards regards to
Speaker 1: your risk exposure. But ultimately, I don't think you necessarily
Speaker 1: to move everything into cash. Just going into the Russia question,
Speaker 1: the big disteing Russia and a lot of other markets
Speaker 1: emerging mark It's not a lot, but but many is
Speaker 1: that it's it's an oil story, yeah, and that's a
Speaker 1: big difference between it in Turkey. I had to come
Speaker 1: back to our previous question with Crescent. If oil stays
Speaker 1: in those kinds of ranges, Russia is looking like a
Speaker 1: pretty is going to benefit from there exactly. And I
Speaker 1: think those fundamentals are really important. Is that the global
Speaker 1: growth story, the baseline is that we should see a
Speaker 1: continuation of that, and that should help to support the
Speaker 1: oil market. We should. You know, we're looking at an
Speaker 1: average of this year sixty seven dollars dollars pervarily for
Speaker 1: the year UM and that should take you to around
Speaker 1: sort of seventy dollars for the remaining part of this year.
Speaker 1: The DEMANDUS supply balance is still very tight, and that
Speaker 1: is supportive of oil, and that, to your point, is
Speaker 1: very good for Russias and the economy. We know. Thank
Speaker 1: you so much for joining us for the Arab Hotel
Speaker 1: there of dpmorgan. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on Apple Podcasts, so Cloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keene Before the podcast, you can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio