Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa Brownwitz Jay Leye. We bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance, an Apple Podcast, Suncloud, Bloomberg
Speaker 1: dot Com, and of course, on the Bloomberg Terminal. Johnny
Speaker 1: us now is David Kelly, the chief global strategist at
Speaker 1: JP Morkan Asset Management. David, this quote from Morgan Standiy
Speaker 1: and Mike Wilson on a spike in energy prices. Quote
Speaker 1: would destroy demantain off you and perhaps tips several economies
Speaker 1: into an outright recession, the polar vortex. David, you are great,
Speaker 1: none of us, just none of us. Just the energy prices.
Speaker 1: I mean there is a risk, of course, uh, if
Speaker 1: we get in and all out worn Ukraine. I mean,
Speaker 1: we don't know how far that goes in the the
Speaker 1: long term implication, it could be significant. But if it's
Speaker 1: just tensions higher oil prices, it's not enough. I mean,
Speaker 1: there's a lot of momentum in the U S economies,
Speaker 1: a momentum in global economies as we come out of
Speaker 1: the pandemic there's a lot of pent up demand. So
Speaker 1: I think the world can handle oil at night you
Speaker 1: or oil at hundred UM. If it has to handle
Speaker 1: that and a big war and all the uncertainty that
Speaker 1: comes with that, it's a different matter. David Kelly. If
Speaker 1: we assume buoyant nominal GDP whatever the makeup, is a
Speaker 1: real g d P in the inflation dynamic as well,
Speaker 1: how do we fair given buoyant nominal g d P. Well,
Speaker 1: it helps corporate profits, um, and you know it is
Speaker 1: it is kind of what it is. I mean, you know,
Speaker 1: there's a lot of talk about FED policy and the
Speaker 1: FED being more aggressive, but that's gonna have an impact
Speaker 1: in later this year, in twenty three. Right now, the
Speaker 1: economy is it's gonna be slow in Q one. Those
Speaker 1: are still gonna be low numbers for Q one GDP.
Speaker 1: Then it's gonna boom in Q two, and then it's
Speaker 1: gonna slow as the year goes on. I think that's
Speaker 1: true for um, you know, inflation is obviously high in
Speaker 1: Q one, but I think inflation will also fading this
Speaker 1: year goes on. So that that that's what we've got,
Speaker 1: and I think the FED needs to just take it easy.
Speaker 1: Here um in normalizing policy, and don't try to don't
Speaker 1: think that they can actually fix all of this at
Speaker 1: one sitting. Well, do you think that the message from
Speaker 1: the yield curve is basically saying just that? And it's
Speaker 1: an important and instructive tool right now for why you
Speaker 1: think the FED should not move perhaps as aggressively as
Speaker 1: people are pricing in, Yeah, because I think the yield
Speaker 1: curve is telling us that the FED is going to
Speaker 1: overreact and then pull back. Um. And that's exactly what
Speaker 1: the FED should not do. The FED should do, is
Speaker 1: what Mary Daily was saying over the weekend. Be patient,
Speaker 1: be gradual, twenty five basis points per meeting, next four meetings,
Speaker 1: get going in the balance, you know, over the summer,
Speaker 1: but just keep at it um, you know, don't get
Speaker 1: still get scooped and try to get back to normal rates.
Speaker 1: But the yield curve saying no, they do. They go
Speaker 1: aggressive and then they have to pull back when something
Speaker 1: goes wrong with the market of the economy. It's kelly,
Speaker 1: this idea of engineering soft landing. Just how wide open
Speaker 1: is that window still to do so well? It's bumpy anyway,
Speaker 1: It's it's kind of like a plane coming in with
Speaker 1: the wings flap on all over the place. You're wondering,
Speaker 1: you know, stually have the option going around trying it again. Um,
Speaker 1: it's it is bumpy because we've got very low growth
Speaker 1: in the first quarter, booming inflation. But again there's not
Speaker 1: much we can do about it. A lot of this
Speaker 1: has to do with just the waves of distortion caused
Speaker 1: by the pandemic itself, and I think you just have
Speaker 1: to sort of play it out. But you know, could
Speaker 1: we achieve itself landing? Yeah, I mean the economy does
Speaker 1: seem to have a natural tendency to put out sort
Speaker 1: of two percent growth per year and two percent inflation
Speaker 1: per year. There are a lot of years which look
Speaker 1: kind of like that, and I think we can get
Speaker 1: back to that. But it's it is looking a little
Speaker 1: bumpy and challenging right now. Demie Kelly, thank you, sir,
Speaker 1: as always of JP Morgan as in management. Let's get
Speaker 1: to the bond market store. We can do that with
Speaker 1: about a jamp at the heead of US right strategy
Speaker 1: at sulk gen so Pantra. I don't expect to have
Speaker 1: a crystal ball on things associated with geopolitics, risk and
Speaker 1: military exercises. What I'd like to do with you is
Speaker 1: try and understand how negative developments inside Ukraine would influence
Speaker 1: central bank in central banking policy. From your perspective, how
Speaker 1: do you think it would. I think it does play
Speaker 1: a factor because of the fact that you don't want
Speaker 1: to be seen as aggressively hawkish or raising rates too
Speaker 1: fast at a time when geopolitics is a key concern.
Speaker 1: I mean, to me, really the key indicator is the
Speaker 1: two stands part of the curve that's at our body
Speaker 1: basis points. So so really, any sort of more hawkish rhetoric,
Speaker 1: if anything, it's going to flatten the curve because you're
Speaker 1: going to see this sort of flight to quality, um,
Speaker 1: you know, bid on the tenure. So again, I've said
Speaker 1: this many times before. I think the last thing the
Speaker 1: Fed wants to do is to raise policy rates too aggressively,
Speaker 1: flatten out the curve and lead to a recession. I
Speaker 1: think there's a lot of there's a lot already big
Speaker 1: into the into the bond market right now. We're pricing
Speaker 1: in six rate hikes by the end of the year,
Speaker 1: five of which are delivered before September. So that's a
Speaker 1: very aggressive policy path. Already, So I just don't think
Speaker 1: you're gonna get much more of a hawk is shown
Speaker 1: from the FED. They're gonna be very very cautious, especially
Speaker 1: with the Ukraine situation. It's evangel what happens in Ukraine
Speaker 1: will influence the decision of the e CP in a
Speaker 1: different way. The spill over to the European economy will
Speaker 1: be very different compared to site the US. How would
Speaker 1: you expect the yield curves inside Germany and Italy to
Speaker 1: develop off the back of those stories? So so far
Speaker 1: we've seen sort of a steepening of the of the
Speaker 1: yield curve in in Europe because of you FED hike, sorry,
Speaker 1: ECB hike expectations getting priced into the into the market. UM.
Speaker 1: I think that they're in a very tough situation with
Speaker 1: with oil being a key issue and Ukraine you know,
Speaker 1: in their backyard. Um, you're gonna see some of the
Speaker 1: you know, the rate hikes getting priced out of the market.
Speaker 1: I would think if the Ukraine situation gets worse, because
Speaker 1: you know, natural gas is a very important, you know
Speaker 1: issue for them. You know, energy prices have gone up
Speaker 1: quite meaningfully again, you don't, you know, the ECB again
Speaker 1: doesn't want to be punitive and sound very hawkish at
Speaker 1: a time when geopolitics is is front and center, especially
Speaker 1: because of the fact that I think higher oil prices
Speaker 1: are going to eat into consumer spending, not just in
Speaker 1: in Europe but also in the US. So I think
Speaker 1: central backs are very aware of that. What is your
Speaker 1: view of this distinction between a flat curve two s
Speaker 1: tends equal yield or maybe you know, ten basis points
Speaker 1: spread whatever, and an inverted curve. What is the difference
Speaker 1: between those two for markets? Well, there isn't really much
Speaker 1: of a difference per se, right if at these levels
Speaker 1: your forty basis points away from being being close to
Speaker 1: zero or inverted. So we're really watching the curve very
Speaker 1: very closely to see what signals we're getting. Typically, a
Speaker 1: flattish curve and an inverted curve is going to leave
Speaker 1: to slow down and growth in about a year's time
Speaker 1: or or two years time. In past Federate high cycles,
Speaker 1: you tend to see that the FED hikes rates you know,
Speaker 1: well passed inversion. You know, in the last two cycles
Speaker 1: in the as well as in two thousand and five,
Speaker 1: the high grades by you know, one and a quarter
Speaker 1: to one and a half percent after the curve adverted.
Speaker 1: This time around, I think they're gonna be very very cautious.
Speaker 1: They're looking at the signals from the Yeld curve to
Speaker 1: make sure that they don't tighten policy too fast and
Speaker 1: slow down the economy, especially since we're the recovery is
Speaker 1: still very fragile. Looking at the first quarter, where growth
Speaker 1: is going to be quite meaningfully slower, you're looking at
Speaker 1: perhaps a weaker retail sales number because of the Homicron variant.
Speaker 1: So under those circumstances, I think the FED is going
Speaker 1: to be, you know, very cautious when it comes to policy,
Speaker 1: and policy is going to be very measured. Is this environment, however,
Speaker 1: so bad we're getting more concerning for credit? Yeah, definitely.
Speaker 1: I think you're starting to see credit spreads start to widen.
Speaker 1: You're seeing, you know, the fact that the FED is
Speaker 1: going to be stepping away from the market, especially acid purchases.
Speaker 1: It's going to be less supportive for industrates in general.
Speaker 1: And the talk is that, you know, there's going to
Speaker 1: be a pretty decent rapid unwind or the balance sheet,
Speaker 1: you know, sometimes starting in June or July of this year,
Speaker 1: by the middle of next year. So again, you know,
Speaker 1: the policy being accommodation being removed from acid purchases is
Speaker 1: going to impact both you know, tragedies as well as
Speaker 1: credit products. Broadly speaking, Spandra, thank you as always Sabantra
Speaker 1: Sampi of sulk Jan on a flat up perhaps maybe
Speaker 1: even inverted yield further down the road. In Alex Bordeaux,
Speaker 1: we are thrilled to have with this practice at at
Speaker 1: Eurasia Group for so much of the continent of Europe,
Speaker 1: in Eastern Europe as well. Truly an authority, Alex. What
Speaker 1: is the diplomatic construction if we choose to contain laddiber
Speaker 1: and Putin, and if we choose to allow him some
Speaker 1: form of saving face in the coming hours and the
Speaker 1: coming days, what does the West need to do well?
Speaker 1: I think that the package of diplomatic effort has to
Speaker 1: include addressing a number of the issues that that Putin
Speaker 1: has brought forward, and that includes some really tough issues
Speaker 1: like Ukraine's membership in NATO. I think the comments from
Speaker 1: Foreign Minister love Robin and Putin's ascent today are a
Speaker 1: good sign that negotiations can continue. But it's been pretty clear,
Speaker 1: especially in the last week, that there's really been not
Speaker 1: much change for Putin on what issues really matter, and
Speaker 1: it's this NATO Ukraine dynamic that I think is still
Speaker 1: going to be very important. So ultimately they have to
Speaker 1: come to some sort of agreement or understanding on that,
Speaker 1: and that's really hard to do in this circumstances. I think,
Speaker 1: you know, the the chances of a real diplomatic breakthrough
Speaker 1: have actually gone down just in the last a few days.
Speaker 1: If we stagger from Yalta to the history of SAE
Speaker 1: and then to now a new affirmation of what NATO
Speaker 1: will be, what do you and I and Bremer perceive
Speaker 1: the new NATO will look like? Well, what are the
Speaker 1: interesting aspects of what's happened so far is that, in fact,
Speaker 1: because of the military threat post to you craigbly seen
Speaker 1: more cohesion and unity in NATO than we've really seen
Speaker 1: in a long time, and a lot of that has
Speaker 1: been directed at countering what is has been coming from
Speaker 1: the Russian government. I think the diplomatic efforts of the
Speaker 1: US have have has made towards European countries and NATO
Speaker 1: allied members has been notable and actually has gone fairly
Speaker 1: well so far. So we're seeing a fairly dynamic response there,
Speaker 1: and I think the question is really it does that
Speaker 1: pressure then lead to some level of concession on the
Speaker 1: part of Moscow. The problem in the last few weeks
Speaker 1: is that we really haven't seen that coming from Putin.
Speaker 1: Alex won't have to has achieved so far over the
Speaker 1: last few weeks. Well, they brought the West to the
Speaker 1: table on some issues that clearly have mattered a lot
Speaker 1: to Putin over the years. And this includes Ukraine's foreign
Speaker 1: policy orientation, and it includes this issue of NATO's presence
Speaker 1: on Russia's western border. Uh. And Putin himself has kind of,
Speaker 1: you know, noted that that he thinks that the pressure
Speaker 1: that's been brought to Barrassons November has actually led to
Speaker 1: that result. Um. I think for Putin, he's still looking
Speaker 1: for some type of diplomatic win here. Uh, and that's
Speaker 1: probably going to involve something more than just getting everybody
Speaker 1: to the table. Is going to going to involve some
Speaker 1: level of concession. And that's where the problem is in
Speaker 1: the diplomacy. What's his main motivation. I'm talking about Vladimer
Speaker 1: Putin's domestic agenda versus in his international agenda. I think
Speaker 1: that there are a number of security concerns that Putin
Speaker 1: really perceives need to be addressed. Now, I would question
Speaker 1: some of the you know, some of the underlying motivations
Speaker 1: for some of that. We've heard of some of it
Speaker 1: in his press ofference with Makron last week. Um And
Speaker 1: but I think that he does think that Russia faces
Speaker 1: a direct security threat coming from NATO and that he
Speaker 1: is trying to address that, and Ukraine is kind of
Speaker 1: a focal point for that. I certainly he has talked
Speaker 1: a lot about his views of Ukraine and his links
Speaker 1: to Russia, but I think the security matters have really
Speaker 1: come through in the last couple of months in his
Speaker 1: rhetoric Alex just finally before we let you go. Of course,
Speaker 1: there is a lot of diplomacy still to take place
Speaker 1: through the next twenty four hours. What are the kind
Speaker 1: of words language that you're looking for that would indicate
Speaker 1: de escalation or perhaps the opposite from Chancellor Shelves or
Speaker 1: rather anyone else for that matter, through the next day
Speaker 1: or so. I think one of the words that we've
Speaker 1: heard a lot, especially coming from the Russian side, is
Speaker 1: the basis, Is there a basis for having a significant
Speaker 1: concrete discussion on European security, and if we start to
Speaker 1: get signals like that, I think that that would be
Speaker 1: a good sign. Unfortunately, in recent days the indications have
Speaker 1: been that that's not where we are. Alex, thank you
Speaker 1: sir if he writes agree, particularly for that final comment.
Speaker 1: Right now, Lindsay pag and joins us our first briefing
Speaker 1: of the week. The chief economist at Stephen were thrilled
Speaker 1: that she could join us. Uh this morning, Lindsey, let's
Speaker 1: just get back to the recalculation. I'm sure you did
Speaker 1: over guacamole last night on the couch, And that is
Speaker 1: the terminal rate of inflation, whether it's the near rate
Speaker 1: out say one year, or a rate farther out. What
Speaker 1: is the trend that we're heading towards on inflation. Well,
Speaker 1: right now it seems as if inflation has nowhere to
Speaker 1: go but up. But as demand a pent up demands
Speaker 1: excuse me, it is satisfied. And as we start to
Speaker 1: see somebody's supply chain disruption smooth and balance is restored,
Speaker 1: we would expect to at least see that second derivative
Speaker 1: decline or a slower pace of positive price increase set
Speaker 1: in by the second half of the year. Giving us
Speaker 1: a nice downward trajectory that is we head into. And
Speaker 1: this is really what the FED is baking on. The
Speaker 1: FED is very much convinced that inflation is near or
Speaker 1: at peak levels. Do you agree with this? I mean
Speaker 1: the arch research, not this weekend. This is a two
Speaker 1: or three percent? Is a statistic? Or is it four
Speaker 1: or five percent? What is the path we're going to?
Speaker 1: Even with FED hopes and dreams, I think we could
Speaker 1: easily see four and a half percent by the end
Speaker 1: of the year, and it continued downward trajectory as we
Speaker 1: go into three. So when we put that in perspective
Speaker 1: to the FEDS target of two percent, the takeaways that
Speaker 1: were likely to be well above that target level for
Speaker 1: quite some time. But again for the FED, for the market,
Speaker 1: it's the trajectory of inflation that's really going to set
Speaker 1: the tone for the expectation of a change in monetary
Speaker 1: policy over the next twelve to twenty four months. Lindsay,
Speaker 1: how do you push back against the assertion that inflation
Speaker 1: is becoming more entrenched? And you can see this in
Speaker 1: rent prices. You could see this in the fact that
Speaker 1: cp I came in that much hotter than expectations. That
Speaker 1: already were for a pretty hot inflationary environment. Well, remember
Speaker 1: there's two types of inflation. There's the demand side and
Speaker 1: then there's the supply side. On the supply side, production
Speaker 1: costs moved up quickly because of these supply chain disruptions, distortions,
Speaker 1: and imbalances. That's the component that the FED was very
Speaker 1: much focused on, the transitory component, if you remember that language,
Speaker 1: And we do expect that to ease in the medium
Speaker 1: term again as balance is restored a clause across the
Speaker 1: global marketplace, and we're already starting to see a little
Speaker 1: bit of price pressures ease looking at the p p
Speaker 1: I with this week's report expected to ease further. On
Speaker 1: the other side, you do have the demand pressures, and
Speaker 1: that's where the entrenchment, the concern of this wage price
Speaker 1: spiral is really setting in, and that's going to be
Speaker 1: the component more difficult for the FED to control going
Speaker 1: forward if in fact, we do see this more entrenched
Speaker 1: as prices rise across nearly every sector of the economy.
Speaker 1: So do you see a wage price spiral at this point,
Speaker 1: given the fact that real wages are still deeply negative
Speaker 1: for for some measures, the most negatives is two thousand seven. Well,
Speaker 1: they certainly are still negative. When we talk about that
Speaker 1: five to six percent wage increase, it's certainly less impressive
Speaker 1: against the backdrop of seven percent inflation. But we're still
Speaker 1: seeing that cycle set in higher prices leading to higher
Speaker 1: wages leading to higher prices. So the wage price spiral,
Speaker 1: although still inefficient for workers, has very much set in
Speaker 1: at least over the previous I would say about six
Speaker 1: month period. Lindsay, let's look for to retail sales. We've
Speaker 1: got a few distractions on a Monday morning, but the
Speaker 1: key distraction of the week is this measurement of the
Speaker 1: American consumer is a good math worth focusing on. Absolutely.
Speaker 1: It tells us the health of the consumer. It tells
Speaker 1: us the comfortability of the consumer to move back into
Speaker 1: the marketplace. Now, if you look back to the third
Speaker 1: quarter and the end of the fourth, excuse me be
Speaker 1: the beginning of the fourth quarter, we had sort of
Speaker 1: this buy now mentality, the fear that inflation was going
Speaker 1: to continue to rise, so we needed to buy what
Speaker 1: we needed today because tomorrow it was going to cost
Speaker 1: more if it was available at all. So what we
Speaker 1: really saw it was a lot of these metrics pulling
Speaker 1: forward traditional end of the year holiday spending. These these measures, though,
Speaker 1: this momentum is likely to weigh as we look further
Speaker 1: out into the first quarter. And we already saw that
Speaker 1: weakness in December retail sales. So if in fact we
Speaker 1: do see this weakness carry forward into the first part
Speaker 1: of the first quarter, I think this reinforces the notion
Speaker 1: that pent up demand is already being satisfied. Savings through
Speaker 1: the pandemic are already being drawn down, that trillions and
Speaker 1: savings has depleted markedly, and this is going to lead
Speaker 1: to a much more modest pace of growth for the
Speaker 1: longer run. In the domestic economy. Well, what is your
Speaker 1: real and inflation call for this year that gets you
Speaker 1: to nominal GDP. Give us those three statistics that you
Speaker 1: see real g d P, the inflation out to the
Speaker 1: end of the year, and the total nominal GDP statistic. Well,
Speaker 1: I think real GDP slows to a range of two
Speaker 1: to three percent, You factor on about a four percent
Speaker 1: inflation figure at the end of the year, and you
Speaker 1: have a nominal GDP rate around six percent. All right,
Speaker 1: Lindsay pigs. One thing a lot of people are talking
Speaker 1: about this morning is how oil prices might change the
Speaker 1: equation pretty dramatically and actually could eliminate quite a bit
Speaker 1: from GDP. How do you factor that in? What's the
Speaker 1: choke point for oil prices? I think the fastest way
Speaker 1: to derail the consumer in the American economy is raising
Speaker 1: gas prices, is sustained elevated gas prices, and we're already
Speaker 1: seeing that with double digit gains across the country, with
Speaker 1: some of the highest prices of course being felt out
Speaker 1: on the West coast. And so when we look at
Speaker 1: the consumer, when we look at the health of the consumer,
Speaker 1: and we talk about businesses being able to pass on
Speaker 1: these cost increases, well, if the consumer is already absorbing
Speaker 1: sizeable price increases and some of these very key categories
Speaker 1: I eat, energy and groceries, businesses are going to have
Speaker 1: an increasingly difficult time passing on further price increases if
Speaker 1: the household ballot sheet, the majority of the household balance
Speaker 1: sheet is being allocated to those two categories. So, lindsay,
Speaker 1: do you have a level of choke point level? And
Speaker 1: I wonder because I heard some people say a hundred
Speaker 1: and fifteen dollars in barrel, some people saying it has
Speaker 1: to get back to a hundred and fifty dollars in
Speaker 1: barrel simply because of inflation. Oh, I think the consumer
Speaker 1: is a much more fragile footing than that. I think
Speaker 1: the choke point would be a lot lower between nine
Speaker 1: hundred dollars. So we're rapidly approaching or even teetering into
Speaker 1: that category already. So I'm just wondering, lindsay just quickly
Speaker 1: to follow up here this idea of nine hundred dollars
Speaker 1: of barrel. We're there. Are you saying that at this point,
Speaker 1: if oil prices are sustained where they are, the US
Speaker 1: will not be able to avoid some sort of downturn.
Speaker 1: I think it's very clear that as the economy continues
Speaker 1: to recalibrate to a new normal level, we are already
Speaker 1: set to slow markedly from that four and a half
Speaker 1: percent range in the second half of last year. I
Speaker 1: do expect GDP to remain positive, but slow to a
Speaker 1: range nearer two to three percent, which, if you remember,
Speaker 1: is very much in line with pre pandemic growth. We
Speaker 1: tend to romanticize where we were prior to the crisis,
Speaker 1: but growth was already slowing from three percent in twenty
Speaker 1: eight down to two percent in twenty nineteen, and with
Speaker 1: a moderate consumer, with elevated inflation and rapidly rising energy costs,
Speaker 1: I think it's a very clear trajectory back to that
Speaker 1: pre pandemic growth rate of near two to gdp. Lindsay,
Speaker 1: Thank you Lindsay of Stay Fold. This is the Bloomberg
Speaker 1: Surveillance Podcast. Thanks for listening. Join us live weekdays from
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Speaker 1: Tom keene In. This is Bloomberg.