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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferroll and Lisa Brownwitz Jay Leye. We bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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Speaker 1: international relations. Find Bloomberg Surveillance, an Apple Podcast, Suncloud, Bloomberg

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Speaker 1: dot Com, and of course, on the Bloomberg Terminal. Johnny

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Speaker 1: us now is David Kelly, the chief global strategist at

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Speaker 1: JP Morkan Asset Management. David, this quote from Morgan Standiy

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Speaker 1: and Mike Wilson on a spike in energy prices. Quote

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Speaker 1: would destroy demantain off you and perhaps tips several economies

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Speaker 1: into an outright recession, the polar vortex. David, you are great,

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Speaker 1: none of us, just none of us. Just the energy prices.

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Speaker 1: I mean there is a risk, of course, uh, if

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Speaker 1: we get in and all out worn Ukraine. I mean,

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Speaker 1: we don't know how far that goes in the the

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Speaker 1: long term implication, it could be significant. But if it's

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Speaker 1: just tensions higher oil prices, it's not enough. I mean,

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Speaker 1: there's a lot of momentum in the U S economies,

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Speaker 1: a momentum in global economies as we come out of

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Speaker 1: the pandemic there's a lot of pent up demand. So

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Speaker 1: I think the world can handle oil at night you

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Speaker 1: or oil at hundred UM. If it has to handle

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Speaker 1: that and a big war and all the uncertainty that

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Speaker 1: comes with that, it's a different matter. David Kelly. If

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Speaker 1: we assume buoyant nominal GDP whatever the makeup, is a

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Speaker 1: real g d P in the inflation dynamic as well,

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Speaker 1: how do we fair given buoyant nominal g d P. Well,

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Speaker 1: it helps corporate profits, um, and you know it is

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Speaker 1: it is kind of what it is. I mean, you know,

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Speaker 1: there's a lot of talk about FED policy and the

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Speaker 1: FED being more aggressive, but that's gonna have an impact

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Speaker 1: in later this year, in twenty three. Right now, the

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Speaker 1: economy is it's gonna be slow in Q one. Those

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Speaker 1: are still gonna be low numbers for Q one GDP.

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Speaker 1: Then it's gonna boom in Q two, and then it's

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Speaker 1: gonna slow as the year goes on. I think that's

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Speaker 1: true for um, you know, inflation is obviously high in

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Speaker 1: Q one, but I think inflation will also fading this

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Speaker 1: year goes on. So that that that's what we've got,

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Speaker 1: and I think the FED needs to just take it easy.

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Speaker 1: Here um in normalizing policy, and don't try to don't

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Speaker 1: think that they can actually fix all of this at

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Speaker 1: one sitting. Well, do you think that the message from

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Speaker 1: the yield curve is basically saying just that? And it's

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Speaker 1: an important and instructive tool right now for why you

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Speaker 1: think the FED should not move perhaps as aggressively as

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Speaker 1: people are pricing in, Yeah, because I think the yield

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Speaker 1: curve is telling us that the FED is going to

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Speaker 1: overreact and then pull back. Um. And that's exactly what

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Speaker 1: the FED should not do. The FED should do, is

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Speaker 1: what Mary Daily was saying over the weekend. Be patient,

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Speaker 1: be gradual, twenty five basis points per meeting, next four meetings,

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Speaker 1: get going in the balance, you know, over the summer,

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Speaker 1: but just keep at it um, you know, don't get

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Speaker 1: still get scooped and try to get back to normal rates.

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Speaker 1: But the yield curve saying no, they do. They go

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Speaker 1: aggressive and then they have to pull back when something

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Speaker 1: goes wrong with the market of the economy. It's kelly,

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Speaker 1: this idea of engineering soft landing. Just how wide open

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Speaker 1: is that window still to do so well? It's bumpy anyway,

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Speaker 1: It's it's kind of like a plane coming in with

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Speaker 1: the wings flap on all over the place. You're wondering,

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Speaker 1: you know, stually have the option going around trying it again. Um,

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Speaker 1: it's it is bumpy because we've got very low growth

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Speaker 1: in the first quarter, booming inflation. But again there's not

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Speaker 1: much we can do about it. A lot of this

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Speaker 1: has to do with just the waves of distortion caused

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Speaker 1: by the pandemic itself, and I think you just have

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Speaker 1: to sort of play it out. But you know, could

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Speaker 1: we achieve itself landing? Yeah, I mean the economy does

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Speaker 1: seem to have a natural tendency to put out sort

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Speaker 1: of two percent growth per year and two percent inflation

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Speaker 1: per year. There are a lot of years which look

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Speaker 1: kind of like that, and I think we can get

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Speaker 1: back to that. But it's it is looking a little

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Speaker 1: bumpy and challenging right now. Demie Kelly, thank you, sir,

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Speaker 1: as always of JP Morgan as in management. Let's get

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Speaker 1: to the bond market store. We can do that with

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Speaker 1: about a jamp at the heead of US right strategy

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Speaker 1: at sulk gen so Pantra. I don't expect to have

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Speaker 1: a crystal ball on things associated with geopolitics, risk and

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Speaker 1: military exercises. What I'd like to do with you is

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Speaker 1: try and understand how negative developments inside Ukraine would influence

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Speaker 1: central bank in central banking policy. From your perspective, how

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Speaker 1: do you think it would. I think it does play

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Speaker 1: a factor because of the fact that you don't want

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Speaker 1: to be seen as aggressively hawkish or raising rates too

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Speaker 1: fast at a time when geopolitics is a key concern.

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Speaker 1: I mean, to me, really the key indicator is the

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Speaker 1: two stands part of the curve that's at our body

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Speaker 1: basis points. So so really, any sort of more hawkish rhetoric,

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Speaker 1: if anything, it's going to flatten the curve because you're

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Speaker 1: going to see this sort of flight to quality, um,

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Speaker 1: you know, bid on the tenure. So again, I've said

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Speaker 1: this many times before. I think the last thing the

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Speaker 1: Fed wants to do is to raise policy rates too aggressively,

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Speaker 1: flatten out the curve and lead to a recession. I

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Speaker 1: think there's a lot of there's a lot already big

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Speaker 1: into the into the bond market right now. We're pricing

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Speaker 1: in six rate hikes by the end of the year,

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Speaker 1: five of which are delivered before September. So that's a

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Speaker 1: very aggressive policy path. Already, So I just don't think

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Speaker 1: you're gonna get much more of a hawk is shown

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Speaker 1: from the FED. They're gonna be very very cautious, especially

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Speaker 1: with the Ukraine situation. It's evangel what happens in Ukraine

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Speaker 1: will influence the decision of the e CP in a

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Speaker 1: different way. The spill over to the European economy will

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Speaker 1: be very different compared to site the US. How would

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Speaker 1: you expect the yield curves inside Germany and Italy to

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Speaker 1: develop off the back of those stories? So so far

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Speaker 1: we've seen sort of a steepening of the of the

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Speaker 1: yield curve in in Europe because of you FED hike, sorry,

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Speaker 1: ECB hike expectations getting priced into the into the market. UM.

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Speaker 1: I think that they're in a very tough situation with

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Speaker 1: with oil being a key issue and Ukraine you know,

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Speaker 1: in their backyard. Um, you're gonna see some of the

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Speaker 1: you know, the rate hikes getting priced out of the market.

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Speaker 1: I would think if the Ukraine situation gets worse, because

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Speaker 1: you know, natural gas is a very important, you know

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Speaker 1: issue for them. You know, energy prices have gone up

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Speaker 1: quite meaningfully again, you don't, you know, the ECB again

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Speaker 1: doesn't want to be punitive and sound very hawkish at

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Speaker 1: a time when geopolitics is is front and center, especially

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Speaker 1: because of the fact that I think higher oil prices

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Speaker 1: are going to eat into consumer spending, not just in

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Speaker 1: in Europe but also in the US. So I think

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Speaker 1: central backs are very aware of that. What is your

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Speaker 1: view of this distinction between a flat curve two s

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Speaker 1: tends equal yield or maybe you know, ten basis points

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Speaker 1: spread whatever, and an inverted curve. What is the difference

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Speaker 1: between those two for markets? Well, there isn't really much

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Speaker 1: of a difference per se, right if at these levels

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Speaker 1: your forty basis points away from being being close to

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Speaker 1: zero or inverted. So we're really watching the curve very

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Speaker 1: very closely to see what signals we're getting. Typically, a

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Speaker 1: flattish curve and an inverted curve is going to leave

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Speaker 1: to slow down and growth in about a year's time

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Speaker 1: or or two years time. In past Federate high cycles,

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Speaker 1: you tend to see that the FED hikes rates you know,

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Speaker 1: well passed inversion. You know, in the last two cycles

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Speaker 1: in the as well as in two thousand and five,

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Speaker 1: the high grades by you know, one and a quarter

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Speaker 1: to one and a half percent after the curve adverted.

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Speaker 1: This time around, I think they're gonna be very very cautious.

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Speaker 1: They're looking at the signals from the Yeld curve to

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Speaker 1: make sure that they don't tighten policy too fast and

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Speaker 1: slow down the economy, especially since we're the recovery is

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Speaker 1: still very fragile. Looking at the first quarter, where growth

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Speaker 1: is going to be quite meaningfully slower, you're looking at

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Speaker 1: perhaps a weaker retail sales number because of the Homicron variant.

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Speaker 1: So under those circumstances, I think the FED is going

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Speaker 1: to be, you know, very cautious when it comes to policy,

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Speaker 1: and policy is going to be very measured. Is this environment, however,

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Speaker 1: so bad we're getting more concerning for credit? Yeah, definitely.

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Speaker 1: I think you're starting to see credit spreads start to widen.

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Speaker 1: You're seeing, you know, the fact that the FED is

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Speaker 1: going to be stepping away from the market, especially acid purchases.

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Speaker 1: It's going to be less supportive for industrates in general.

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Speaker 1: And the talk is that, you know, there's going to

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Speaker 1: be a pretty decent rapid unwind or the balance sheet,

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Speaker 1: you know, sometimes starting in June or July of this year,

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Speaker 1: by the middle of next year. So again, you know,

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Speaker 1: the policy being accommodation being removed from acid purchases is

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Speaker 1: going to impact both you know, tragedies as well as

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Speaker 1: credit products. Broadly speaking, Spandra, thank you as always Sabantra

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Speaker 1: Sampi of sulk Jan on a flat up perhaps maybe

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Speaker 1: even inverted yield further down the road. In Alex Bordeaux,

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Speaker 1: we are thrilled to have with this practice at at

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Speaker 1: Eurasia Group for so much of the continent of Europe,

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Speaker 1: in Eastern Europe as well. Truly an authority, Alex. What

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Speaker 1: is the diplomatic construction if we choose to contain laddiber

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Speaker 1: and Putin, and if we choose to allow him some

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Speaker 1: form of saving face in the coming hours and the

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Speaker 1: coming days, what does the West need to do well?

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Speaker 1: I think that the package of diplomatic effort has to

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Speaker 1: include addressing a number of the issues that that Putin

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Speaker 1: has brought forward, and that includes some really tough issues

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Speaker 1: like Ukraine's membership in NATO. I think the comments from

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Speaker 1: Foreign Minister love Robin and Putin's ascent today are a

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Speaker 1: good sign that negotiations can continue. But it's been pretty clear,

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Speaker 1: especially in the last week, that there's really been not

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Speaker 1: much change for Putin on what issues really matter, and

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Speaker 1: it's this NATO Ukraine dynamic that I think is still

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Speaker 1: going to be very important. So ultimately they have to

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Speaker 1: come to some sort of agreement or understanding on that,

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Speaker 1: and that's really hard to do in this circumstances. I think,

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Speaker 1: you know, the the chances of a real diplomatic breakthrough

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Speaker 1: have actually gone down just in the last a few days.

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Speaker 1: If we stagger from Yalta to the history of SAE

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Speaker 1: and then to now a new affirmation of what NATO

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Speaker 1: will be, what do you and I and Bremer perceive

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Speaker 1: the new NATO will look like? Well, what are the

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Speaker 1: interesting aspects of what's happened so far is that, in fact,

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Speaker 1: because of the military threat post to you craigbly seen

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Speaker 1: more cohesion and unity in NATO than we've really seen

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Speaker 1: in a long time, and a lot of that has

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Speaker 1: been directed at countering what is has been coming from

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Speaker 1: the Russian government. I think the diplomatic efforts of the

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Speaker 1: US have have has made towards European countries and NATO

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Speaker 1: allied members has been notable and actually has gone fairly

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Speaker 1: well so far. So we're seeing a fairly dynamic response there,

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Speaker 1: and I think the question is really it does that

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Speaker 1: pressure then lead to some level of concession on the

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Speaker 1: part of Moscow. The problem in the last few weeks

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Speaker 1: is that we really haven't seen that coming from Putin.

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Speaker 1: Alex won't have to has achieved so far over the

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Speaker 1: last few weeks. Well, they brought the West to the

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Speaker 1: table on some issues that clearly have mattered a lot

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Speaker 1: to Putin over the years. And this includes Ukraine's foreign

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Speaker 1: policy orientation, and it includes this issue of NATO's presence

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Speaker 1: on Russia's western border. Uh. And Putin himself has kind of,

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Speaker 1: you know, noted that that he thinks that the pressure

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Speaker 1: that's been brought to Barrassons November has actually led to

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Speaker 1: that result. Um. I think for Putin, he's still looking

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Speaker 1: for some type of diplomatic win here. Uh, and that's

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Speaker 1: probably going to involve something more than just getting everybody

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Speaker 1: to the table. Is going to going to involve some

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Speaker 1: level of concession. And that's where the problem is in

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Speaker 1: the diplomacy. What's his main motivation. I'm talking about Vladimer

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Speaker 1: Putin's domestic agenda versus in his international agenda. I think

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Speaker 1: that there are a number of security concerns that Putin

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Speaker 1: really perceives need to be addressed. Now, I would question

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Speaker 1: some of the you know, some of the underlying motivations

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Speaker 1: for some of that. We've heard of some of it

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Speaker 1: in his press ofference with Makron last week. Um And

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Speaker 1: but I think that he does think that Russia faces

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Speaker 1: a direct security threat coming from NATO and that he

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Speaker 1: is trying to address that, and Ukraine is kind of

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Speaker 1: a focal point for that. I certainly he has talked

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Speaker 1: a lot about his views of Ukraine and his links

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Speaker 1: to Russia, but I think the security matters have really

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Speaker 1: come through in the last couple of months in his

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Speaker 1: rhetoric Alex just finally before we let you go. Of course,

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Speaker 1: there is a lot of diplomacy still to take place

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Speaker 1: through the next twenty four hours. What are the kind

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Speaker 1: of words language that you're looking for that would indicate

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Speaker 1: de escalation or perhaps the opposite from Chancellor Shelves or

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Speaker 1: rather anyone else for that matter, through the next day

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Speaker 1: or so. I think one of the words that we've

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Speaker 1: heard a lot, especially coming from the Russian side, is

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Speaker 1: the basis, Is there a basis for having a significant

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Speaker 1: concrete discussion on European security, and if we start to

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Speaker 1: get signals like that, I think that that would be

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Speaker 1: a good sign. Unfortunately, in recent days the indications have

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Speaker 1: been that that's not where we are. Alex, thank you

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Speaker 1: sir if he writes agree, particularly for that final comment.

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Speaker 1: Right now, Lindsay pag and joins us our first briefing

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Speaker 1: of the week. The chief economist at Stephen were thrilled

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Speaker 1: that she could join us. Uh this morning, Lindsey, let's

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Speaker 1: just get back to the recalculation. I'm sure you did

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Speaker 1: over guacamole last night on the couch, And that is

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Speaker 1: the terminal rate of inflation, whether it's the near rate

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Speaker 1: out say one year, or a rate farther out. What

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Speaker 1: is the trend that we're heading towards on inflation. Well,

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Speaker 1: right now it seems as if inflation has nowhere to

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Speaker 1: go but up. But as demand a pent up demands

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Speaker 1: excuse me, it is satisfied. And as we start to

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Speaker 1: see somebody's supply chain disruption smooth and balance is restored,

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Speaker 1: we would expect to at least see that second derivative

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Speaker 1: decline or a slower pace of positive price increase set

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Speaker 1: in by the second half of the year. Giving us

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Speaker 1: a nice downward trajectory that is we head into. And

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Speaker 1: this is really what the FED is baking on. The

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Speaker 1: FED is very much convinced that inflation is near or

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Speaker 1: at peak levels. Do you agree with this? I mean

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Speaker 1: the arch research, not this weekend. This is a two

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Speaker 1: or three percent? Is a statistic? Or is it four

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Speaker 1: or five percent? What is the path we're going to?

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Speaker 1: Even with FED hopes and dreams, I think we could

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Speaker 1: easily see four and a half percent by the end

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Speaker 1: of the year, and it continued downward trajectory as we

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Speaker 1: go into three. So when we put that in perspective

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Speaker 1: to the FEDS target of two percent, the takeaways that

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Speaker 1: were likely to be well above that target level for

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Speaker 1: quite some time. But again for the FED, for the market,

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Speaker 1: it's the trajectory of inflation that's really going to set

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Speaker 1: the tone for the expectation of a change in monetary

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Speaker 1: policy over the next twelve to twenty four months. Lindsay,

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Speaker 1: how do you push back against the assertion that inflation

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Speaker 1: is becoming more entrenched? And you can see this in

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Speaker 1: rent prices. You could see this in the fact that

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Speaker 1: cp I came in that much hotter than expectations. That

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Speaker 1: already were for a pretty hot inflationary environment. Well, remember

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Speaker 1: there's two types of inflation. There's the demand side and

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Speaker 1: then there's the supply side. On the supply side, production

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Speaker 1: costs moved up quickly because of these supply chain disruptions, distortions,

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Speaker 1: and imbalances. That's the component that the FED was very

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Speaker 1: much focused on, the transitory component, if you remember that language,

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Speaker 1: And we do expect that to ease in the medium

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Speaker 1: term again as balance is restored a clause across the

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Speaker 1: global marketplace, and we're already starting to see a little

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Speaker 1: bit of price pressures ease looking at the p p

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Speaker 1: I with this week's report expected to ease further. On

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Speaker 1: the other side, you do have the demand pressures, and

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Speaker 1: that's where the entrenchment, the concern of this wage price

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Speaker 1: spiral is really setting in, and that's going to be

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Speaker 1: the component more difficult for the FED to control going

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Speaker 1: forward if in fact, we do see this more entrenched

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Speaker 1: as prices rise across nearly every sector of the economy.

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Speaker 1: So do you see a wage price spiral at this point,

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Speaker 1: given the fact that real wages are still deeply negative

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Speaker 1: for for some measures, the most negatives is two thousand seven. Well,

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Speaker 1: they certainly are still negative. When we talk about that

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Speaker 1: five to six percent wage increase, it's certainly less impressive

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Speaker 1: against the backdrop of seven percent inflation. But we're still

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Speaker 1: seeing that cycle set in higher prices leading to higher

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Speaker 1: wages leading to higher prices. So the wage price spiral,

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Speaker 1: although still inefficient for workers, has very much set in

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Speaker 1: at least over the previous I would say about six

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Speaker 1: month period. Lindsay, let's look for to retail sales. We've

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Speaker 1: got a few distractions on a Monday morning, but the

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Speaker 1: key distraction of the week is this measurement of the

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Speaker 1: American consumer is a good math worth focusing on. Absolutely.

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Speaker 1: It tells us the health of the consumer. It tells

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Speaker 1: us the comfortability of the consumer to move back into

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Speaker 1: the marketplace. Now, if you look back to the third

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Speaker 1: quarter and the end of the fourth, excuse me be

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Speaker 1: the beginning of the fourth quarter, we had sort of

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Speaker 1: this buy now mentality, the fear that inflation was going

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Speaker 1: to continue to rise, so we needed to buy what

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Speaker 1: we needed today because tomorrow it was going to cost

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Speaker 1: more if it was available at all. So what we

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Speaker 1: really saw it was a lot of these metrics pulling

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Speaker 1: forward traditional end of the year holiday spending. These these measures, though,

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Speaker 1: this momentum is likely to weigh as we look further

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Speaker 1: out into the first quarter. And we already saw that

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Speaker 1: weakness in December retail sales. So if in fact we

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Speaker 1: do see this weakness carry forward into the first part

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Speaker 1: of the first quarter, I think this reinforces the notion

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Speaker 1: that pent up demand is already being satisfied. Savings through

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Speaker 1: the pandemic are already being drawn down, that trillions and

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Speaker 1: savings has depleted markedly, and this is going to lead

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Speaker 1: to a much more modest pace of growth for the

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Speaker 1: longer run. In the domestic economy. Well, what is your

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Speaker 1: real and inflation call for this year that gets you

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Speaker 1: to nominal GDP. Give us those three statistics that you

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Speaker 1: see real g d P, the inflation out to the

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Speaker 1: end of the year, and the total nominal GDP statistic. Well,

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Speaker 1: I think real GDP slows to a range of two

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Speaker 1: to three percent, You factor on about a four percent

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Speaker 1: inflation figure at the end of the year, and you

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Speaker 1: have a nominal GDP rate around six percent. All right,

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Speaker 1: Lindsay pigs. One thing a lot of people are talking

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Speaker 1: about this morning is how oil prices might change the

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Speaker 1: equation pretty dramatically and actually could eliminate quite a bit

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Speaker 1: from GDP. How do you factor that in? What's the

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Speaker 1: choke point for oil prices? I think the fastest way

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Speaker 1: to derail the consumer in the American economy is raising

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Speaker 1: gas prices, is sustained elevated gas prices, and we're already

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Speaker 1: seeing that with double digit gains across the country, with

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Speaker 1: some of the highest prices of course being felt out

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Speaker 1: on the West coast. And so when we look at

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Speaker 1: the consumer, when we look at the health of the consumer,

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Speaker 1: and we talk about businesses being able to pass on

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Speaker 1: these cost increases, well, if the consumer is already absorbing

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Speaker 1: sizeable price increases and some of these very key categories

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Speaker 1: I eat, energy and groceries, businesses are going to have

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Speaker 1: an increasingly difficult time passing on further price increases if

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Speaker 1: the household ballot sheet, the majority of the household balance

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Speaker 1: sheet is being allocated to those two categories. So, lindsay,

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Speaker 1: do you have a level of choke point level? And

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Speaker 1: I wonder because I heard some people say a hundred

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Speaker 1: and fifteen dollars in barrel, some people saying it has

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Speaker 1: to get back to a hundred and fifty dollars in

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Speaker 1: barrel simply because of inflation. Oh, I think the consumer

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Speaker 1: is a much more fragile footing than that. I think

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Speaker 1: the choke point would be a lot lower between nine

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Speaker 1: hundred dollars. So we're rapidly approaching or even teetering into

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Speaker 1: that category already. So I'm just wondering, lindsay just quickly

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Speaker 1: to follow up here this idea of nine hundred dollars

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Speaker 1: of barrel. We're there. Are you saying that at this point,

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Speaker 1: if oil prices are sustained where they are, the US

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Speaker 1: will not be able to avoid some sort of downturn.

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Speaker 1: I think it's very clear that as the economy continues

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Speaker 1: to recalibrate to a new normal level, we are already

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Speaker 1: set to slow markedly from that four and a half

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Speaker 1: percent range in the second half of last year. I

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Speaker 1: do expect GDP to remain positive, but slow to a

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Speaker 1: range nearer two to three percent, which, if you remember,

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Speaker 1: is very much in line with pre pandemic growth. We

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Speaker 1: tend to romanticize where we were prior to the crisis,

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Speaker 1: but growth was already slowing from three percent in twenty

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Speaker 1: eight down to two percent in twenty nineteen, and with

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Speaker 1: a moderate consumer, with elevated inflation and rapidly rising energy costs,

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Speaker 1: I think it's a very clear trajectory back to that

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Speaker 1: pre pandemic growth rate of near two to gdp. Lindsay,

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Speaker 1: Thank you Lindsay of Stay Fold. This is the Bloomberg

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Speaker 1: Surveillance Podcast. Thanks for listening. Join us live weekdays from

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Speaker 1: Tom keene In. This is Bloomberg.