Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business App. Mohammad Allan of Queen's College, Cambridge, Mohammid,
Speaker 2: Good mornagor it's going to see you.
Speaker 1: Good morning, John, Thanks for saying all.
Speaker 2: Just a bunch of happy talk, all these good things,
Speaker 2: good vibes about the US economy.
Speaker 3: It's happy talk, justified on where we've been, but it
Speaker 3: is dangerous looking forward.
Speaker 2: Jamie Diamond sounded like you earlier this week speaking to
Speaker 2: Francine lacro I'm not sure if you've seen the conversation.
Speaker 1: I'll bring you one of the quotes.
Speaker 2: There's a lot of inflationary forces in front of us,
Speaker 2: he said, but it gave us a list of reasons,
Speaker 2: a list of reasons that you've given us before, the green,
Speaker 2: economic remilitarization, infrastructure spending, trade disputes, large fiscal deficits. What
Speaker 2: exactly is this FED a reserve fighting?
Speaker 3: So first of all, Jamie and I have been on
Speaker 3: the same wavelength for a while, so thank you for
Speaker 3: saying that. Look, this is a reactive feed. This is
Speaker 3: a data dependent FED. So when Jamie and others list
Speaker 3: the things look going forward that are inflation in nature,
Speaker 3: that's not something that the FED talks about. The FED
Speaker 3: talks about the latest set of data and that we're
Speaker 3: going to continue having a reactive FED. Because this is
Speaker 3: a FED that loss self confidence back in twenty twenty
Speaker 3: one when they try to be strategic and got the
Speaker 3: call horribly wrong. So what is the safest thing to
Speaker 3: do is to become data dependent and that's where.
Speaker 2: The FED is So no strategic chutcare, which is what
Speaker 2: you've talked about repeatedly, and hypersensitive from data point to
Speaker 2: data point. Ultimately, what does that mean for financial markets?
Speaker 2: Lots of volatility, bit trending higher.
Speaker 3: Yes, as long as these the whiff I want to
Speaker 3: stress it's a whiff of stagflation doesn't turn into something stronger.
Speaker 2: Snackflactory winds, I think is what you've called them.
Speaker 3: Correct, correct, And that's what you have to keep an
Speaker 3: eye on, is that we don't want that to become
Speaker 3: something much stronger.
Speaker 4: When you say the FED is data dependent, how dangerous
Speaker 4: is that when you have revisions like we had this
Speaker 4: week with the PPI report.
Speaker 3: No, it's very dangerous. It's dangerous first because the data
Speaker 3: is very noisy, both in terms of month to month,
Speaker 3: but also in terms of revisions. Is also dangerous because
Speaker 3: the data's backward looking and the tools act with a lag.
Speaker 3: So this is not where you want to be. And
Speaker 3: that articles was another one yesterday where that they're trying
Speaker 3: to encourage the FED to be more self confident and
Speaker 3: look forward and be less data dependent.
Speaker 1: When you talk about potentially stagflationary winds.
Speaker 4: I recently caught up with the former World Bank head
Speaker 4: David Malpass.
Speaker 1: He's been talking about this for a while.
Speaker 4: Where exactly would you see that showing up if we
Speaker 4: were to see stagflation?
Speaker 1: Where exactly would you be looking so?
Speaker 3: And may you talked about it earlier? Listen to the
Speaker 3: corporate calls that telling you that certain segments of the
Speaker 3: consumer base are already having problems. Listen to the previous interview,
Speaker 3: which was a very bullish interview about the economy, but
Speaker 3: there was an admission right there that if anything happens
Speaker 3: to the labor market, we have no buffers, we have
Speaker 3: no spare tires, that balance sheets have really deteriorated. John
Speaker 3: mentioned what happened in the interview where it's every segment
Speaker 3: of the population that's now running much higher balances. So
Speaker 3: we no longer have pandemic savings. We have higher balances
Speaker 3: on credit cards, we have higher interest rates, so we
Speaker 3: totally dependent on wage income. And if anything happens to
Speaker 3: the labor market, which I hope it doesn't, but if
Speaker 3: anything happens, then we are going to slow down really quickly.
Speaker 5: But Muhammed, this is the thing I mean you've hit
Speaker 5: the nail on the head, is that the data is uneven.
Speaker 5: We're seeing a divergence between different types of consumers, except
Speaker 5: perhaps when it comes to some of the.
Speaker 1: Credit card data.
Speaker 5: The data was built a long time ago when we
Speaker 5: didn't have that type of divergence. It was trying to
Speaker 5: capture an American economy that was a monolith do we
Speaker 5: have the right tools to even evaluate the American economy
Speaker 5: at this point.
Speaker 3: So, Danny, that's a really important point. And also it
Speaker 3: explains and Marie's point as to why the person in
Speaker 3: the street doesn't feel as good as the macrodata suggests. Look,
Speaker 3: during the pandemic, we had this wonderful moment where we
Speaker 3: realized that our existing databases were too partial, and we
Speaker 3: moved quickly to high frequency data, and suddenly we were
Speaker 3: living in this world where we were as economists, we
Speaker 3: were much more focused on let's get the best data,
Speaker 3: let's get high frequency data. When we got out of
Speaker 3: the pandemic, we went back to the old world, and
Speaker 3: we don't use the high frequency data enough. Now our
Speaker 3: efforts being made at the NBR and elsewhere to try
Speaker 3: and incorporate that high frequency data. The big problem that
Speaker 3: we don't talk about is that the providers of those
Speaker 3: high frequency data, who used to provide it free, are
Speaker 3: now charging money. So when you charge money, guess what happens.
Speaker 3: The access to that data goes down. So this is
Speaker 3: an issue that's being discussed in the economic profession.
Speaker 2: Do you see mistakes being made this time around being
Speaker 2: the reverse of the mistakes mate. Last time around, coming
Speaker 2: out of the Great Financial Crisis, we were all waiting
Speaker 2: for the economy to go back to what it used
Speaker 2: to look like, and it never did. And it took
Speaker 2: a while for everyone to start agreeing with Larry Summers,
Speaker 2: and they eventually did. And coming out of the pandemic,
Speaker 2: cultually we're waiting for the economy to go back to
Speaker 2: what it used to look like, and maybe it never will.
Speaker 2: And we heard this from Bridgewater this week at the
Speaker 2: Qatar Economic forumpowered by Bloomberg. When Bridgewater is near Bardea said,
Speaker 2: don't use the playbook for the last ten to fifteen
Speaker 2: years for the next ten to fifteen years. So let's
Speaker 2: maybe park next month's data, next quarter's data. What are
Speaker 2: you looking at right now for the next decade or so,
Speaker 2: what do you expecting?
Speaker 3: So first of all, I think the big mistake coming
Speaker 3: out of global financial crisis was to assume the shock
Speaker 3: was cyclical if you like, like a V and not
Speaker 3: too realized it was secular, thus Pinkle's new normal, which
Speaker 3: came early on in two thousand and nine. I think
Speaker 3: the big issue right now is that we as a
Speaker 3: profession and we as a market are too influenced by
Speaker 3: what happened after the global financial crisis. We believe, somehow
Speaker 3: still in the back of our mind that law interest rates,
Speaker 3: very low interest rates are the norm, not the exception.
Speaker 3: We believe that inflation is not an issue. So look
Speaker 3: what has happened to the Fed. The Fed pivoted on
Speaker 3: the basis of data. It was the opposite of the
Speaker 3: pivot they did in December when they pivoted on basis.
Speaker 3: Now they have to do a U turn. As they're
Speaker 3: doing the U turn and say higher for longer, the
Speaker 3: market is going the other way. So you saw what
Speaker 3: happened to the two years, So what happened to.
Speaker 1: The ten year?
Speaker 3: And then there are two really problematic issues that we
Speaker 3: don't talk enough. How sensitive are the stubborn components of
Speaker 3: inflation to interest rates? They're not very sensitive. That's problem
Speaker 3: number one. Problem in number two, what indications are we
Speaker 3: getting off The economy is slowly weakening. So it weighses
Speaker 3: the issue that once again the Fed is going to
Speaker 3: have to pivot, this time not on the basis of
Speaker 3: the inflation numbers, but on the basis of the real
Speaker 3: economy numbers. It will pivot yet again. And then there's
Speaker 3: the big issue that I know no one wants to discuss,
Speaker 3: and I insist stand that fully is the inflation target
Speaker 3: the right target. We all talk about wanting to go
Speaker 3: back to two percent. Every single quote you had this morning, YEP,
Speaker 3: assumes that two percent is the right inflation target. Two
Speaker 3: percent total arbitrary. But I understand why no one wants
Speaker 3: to talk about this. But we should all realize that
Speaker 3: if we are pursuing the wrong inflation target, the risk
Speaker 3: of a mistake, and that mistake would mean sacrificing growth unnecessarily.
Speaker 3: The risk of that mistake is high, especially when the
Speaker 3: low income people are most at risk.
Speaker 2: I know how much criticism you get every time you
Speaker 2: bring this up, because you've been bringing it up with
Speaker 2: me for the best part of twelve months, maybe longer. Now.
Speaker 2: If we go back to the Jackson Hole speech from
Speaker 2: chairm and Powell in August of twenty two, when he
Speaker 2: talked about pain being required to get inflation under control,
Speaker 2: then the experience of the last twelve months where we
Speaker 2: all got seduced by this idea that maybe we don't
Speaker 2: need pain whatsoever to get inflation back under control. Are
Speaker 2: you saying that the pain that's required to go from
Speaker 2: three to two just is not worth a squeeze.
Speaker 1: Correct.
Speaker 3: I'm saying that if you were to establishing an inflation
Speaker 3: target today based on the secular issues, and let's talk
Speaker 3: about it, the domestic paradigm is changing. We're no longer
Speaker 3: in this Washington consensus of deregulation, liberalization, fiscal prudence. We
Speaker 3: are in a world of industrial policy, government intervention, and
Speaker 3: fiscal irresponsibility. Let's talk about the international We're no longer
Speaker 3: talking about ever closer globalization, We're talking about fragmentation. Then
Speaker 3: look at the transitions we have. We have major transitions
Speaker 3: going on, not just generative AI, life sciences and sustainable energy.
Speaker 3: You have things happening in healthcare. You have things happening
Speaker 3: in defense, you have things happening in food security. If
Speaker 3: you put all that together, it is a different inflation environment.
Speaker 3: It's a world that's subject to higher inflation. And we've
Speaker 3: come from a world that was subject to lower inflation.
Speaker 5: But if the world still has that recency bias in
Speaker 5: their mind that we're going to go back to two percent,
Speaker 5: their entire industries that are extending and pretending and hoping
Speaker 5: we're getting back there, think of the private capital world,
Speaker 5: for example. So if you have financial markets that have
Speaker 5: engineered themselves to be used to a low inflation world,
Speaker 5: they've been used to rates getting somewhere to two percent,
Speaker 5: what happens?
Speaker 1: What happens if we don't get there?
Speaker 3: You're absolutely right. And yesterday, the whole news yesterday was
Speaker 3: about commercial real estate whether pot slowed. Right, we have
Speaker 3: recognized and more importantly, investors have recognized that there's evaluation
Speaker 3: issue ahead, and that's that's that's also an issue, is
Speaker 3: you have slower moving segments that we finance in a
Speaker 3: very discrete fashion that we're going to have to deal with.
Speaker 2: Absolutely right, Stocks on pause, with markets at a crossroad,
Speaker 2: Kenny Kaminsky of Out for Simplex right, in this the
Speaker 2: market seems to be polarized between two views, bullish view
Speaker 2: on equities and growth versus worry are the sticky inflation
Speaker 2: and higher for longer As a result, trend signals with
Speaker 2: long equities, with short fixed income, long dollar, and long commodities.
Speaker 2: Katie joins us. Now for more, Katie, let's just sort
Speaker 2: of break it down into its individual paths and start
Speaker 2: with the bond market. Last time we spoke, you said
Speaker 2: there were more reasons to be sure. What's happened in
Speaker 2: between conversations.
Speaker 6: Well, I mean, we've really seen a pullback this month
Speaker 6: based on inflation coming not as hot as people might
Speaker 6: have been worried about, and so I think we're getting
Speaker 6: closer to a point where we might actually see cuts
Speaker 6: this year, and we know the Fed wants to cut.
Speaker 7: I think this trend it's been very confusing.
Speaker 6: Look at bonds, they're trading a lot more like equities
Speaker 6: fall as high and on the year, bonds are down.
Speaker 6: So I think the really big question is going to
Speaker 6: be who wins. Is it the inflation narrative staying longer,
Speaker 6: or is it that equities are right that we can
Speaker 6: sort of smooth in too rate cuts this year. So far,
Speaker 6: signals are still short and fixed income because look at
Speaker 6: the long term trend, it's still there despite the recent pullback.
Speaker 2: So if you can help us go through what your
Speaker 2: positioned for right now bottons versus commodities, and let's throw
Speaker 2: foreign exchange in there too.
Speaker 7: So I'd say, right now, what you see is that the.
Speaker 6: Short bond signals really tell you higher for longer.
Speaker 7: You're also seeing.
Speaker 6: In the commodity markets, and I think that's the thing
Speaker 6: that we're watching the most massive moves and commodities this year.
Speaker 6: Commodity indices are up over ten percent. Take a at
Speaker 6: the preciss metals. Copper in particular has been up tremendously lately.
Speaker 6: So these are signs that are not talking about the consumer,
Speaker 6: but really talking about prices of raw goods. And I
Speaker 6: think you're still seeing that mixed picture where cross asset
Speaker 6: themes suggest higher for longer and concern that it's going
Speaker 6: to take longer to get over the inflation issue and
Speaker 6: get inflation down than people would like. It's very fascinating
Speaker 6: as well that the ECB might cut first. In some sense,
Speaker 6: that'll be a good proof point to see what happens
Speaker 6: when someone actually starts win a large economy like the
Speaker 6: starts cutting.
Speaker 5: Let's go there, then, Katie, what are you looking for?
Speaker 5: What are the risks and potential takeaways from the reaction
Speaker 5: to the bond market to the ECB that you can
Speaker 5: apply to the US.
Speaker 6: Well, if you look at inflation data, it looks steadier
Speaker 6: in the Eurozone, and the Eurozone has definitely seen more
Speaker 6: restrictive effects of policy, and thus they're Like your previous
Speaker 6: guest said, more positioned to kind of have to deal
Speaker 6: with that issue. The US is more confusing because the
Speaker 6: data is just.
Speaker 7: Much more mixed.
Speaker 6: So it'll be interesting to see how the market actually reacts.
Speaker 6: And if indeed we do see a pop up in inflation,
Speaker 6: which is sort of your upside risk in the Eurozone,
Speaker 6: then it's really going to get interesting this summer. So
Speaker 6: there's really a lot of things that can cause markets
Speaker 6: to be very trendy but also very volatile as we
Speaker 6: try and navigate this pivot.
Speaker 5: And that's exactly what we've had, Katie. We've had huge
Speaker 5: amounts of volatility. You and the team have done the
Speaker 5: research that bond volatility is something like fifty percent above
Speaker 5: its pre tw twenty two level. That's great for you
Speaker 5: in the team at Alpha Simplex, who can trade in
Speaker 5: and out of bonds. What about the rest of investors, Katie,
Speaker 5: that view bonds as something that you buy and you hold.
Speaker 5: How does it change things when you see this market
Speaker 5: that's known for being stayed, being more volatile, in some
Speaker 5: cases more than equities and more than FX.
Speaker 6: This is a very good point, and I think it's
Speaker 6: the biggest and most important thing for investors to take
Speaker 6: home when you're thinking about bonds as a risk off asset,
Speaker 6: as a risk free, safe haven asset. That is not
Speaker 6: the case an environment when inflation comes into play. In fact,
Speaker 6: bond stock correlation has been positive for quite some time,
Speaker 6: and bond volatility is higher. Like I said, bonds trade
Speaker 6: a little bit more like equities. This means that investors
Speaker 6: need to look around and find things that actually like
Speaker 6: inflation and like this type of environment, that actually complement
Speaker 6: their portfolios, because you just don't have that flight to
Speaker 6: safety in the traditional sense. When we think about stocks
Speaker 6: going down, we think about bonds being there as are ballast,
Speaker 6: and in fact, when we're dealing with inflation, that ballast
Speaker 6: is just not as good.
Speaker 5: So are there strategies ben Katie that going forward should
Speaker 5: cease to exist that investors shouldn't be looking into anymore.
Speaker 5: I'm thinking of the risk parody, the sixty forties. We've
Speaker 5: talked about the death of them for a long time.
Speaker 5: It hasn't happened.
Speaker 1: Is this it?
Speaker 5: No?
Speaker 6: I would say they still are there as an important
Speaker 6: tool in your portfolio, but you just your portfolio isn't complete.
Speaker 6: You need to start thinking about what assets will benefit
Speaker 6: from changes in inflation. Things like commodity exposure, things like
Speaker 6: assets that have real estate, for example. So really sort
Speaker 6: of diversifying your portfolio to be aware of the potential
Speaker 6: vulnerabilities of fixed cash flows in an inflation environment.
Speaker 2: Hey, Katie, I think you said it at the start
Speaker 2: of the conversation. The risk mitigation characteristics required depends on
Speaker 2: what you think the dominant risk actually is and when
Speaker 2: it goes through your quote again, the market seems to
Speaker 2: be a rise between two views, a bullish few on
Speaker 2: equities and growth versus over sticky inflation and high for longer.
Speaker 2: What are the two ballats you need in the portfolio
Speaker 2: to account for some of the risks out there, given
Speaker 2: how polarized they are at the moment.
Speaker 6: This is a good point because usually we just worry
Speaker 6: about recession.
Speaker 7: We worry about equities going down.
Speaker 6: Right now, we have to worry about the impact of inflation.
Speaker 6: And that's precisely the risk that you saw manifest itself
Speaker 6: in April.
Speaker 7: I know we've already forgotten about it after last.
Speaker 6: Week's this week's big rally, but the truth is, the
Speaker 6: key risks that we're facing is more that inflation is
Speaker 6: really causing stress in our system and thus a risk
Speaker 6: for investors is very different from a pre COVID type
Speaker 6: of risk, where we're thinking about how inflation will affect
Speaker 6: all of the assets that we hold and will cause
Speaker 6: divergence across both monetary policy and also across regions geographically.
Speaker 2: And this takes us to the commodity market, which you've
Speaker 2: already referenced. It's a broad place, a broad space, Katie.
Speaker 2: What would you pick out in a commodity market now?
Speaker 2: Is it bise, metsos, precious metsos, fossil fuels, Where do
Speaker 2: you want to bathe?
Speaker 7: So so far are the things that have really been
Speaker 7: working this year.
Speaker 6: I mean, take a look at copper, cocoa, some of
Speaker 6: these big commodities that have moved. I highlighted that the
Speaker 6: index is up over eleven percent.
Speaker 7: But you're also.
Speaker 6: Seeing, I think the most interesting trend to start watching.
Speaker 6: The one sector that has been disinflationary this year to
Speaker 6: date has been agriculturals. And you've actually seen things like corn, wheat, soy,
Speaker 6: many of the agricultural products actually starting to pivot for
Speaker 6: the first time just as we're talking about cuts. So
Speaker 6: that to me is very interesting. Watch energy, it's continued
Speaker 6: to move up as well. So all of these things
Speaker 6: are definitely putting a headwind against this inflation narrative, and
Speaker 6: they're going to make this more tricky this.
Speaker 1: Summer, Katie. One metal you didn't mention is gold continues
Speaker 1: to rise.
Speaker 4: But there's a lot of different reasons why some strategists
Speaker 4: say it will continue on this trajectory.
Speaker 1: What do you make of gold descent?
Speaker 6: So gold is often seen as a great safe haven
Speaker 6: investment for inflation, and so what was interesting to me
Speaker 6: is just to watch the tremendous acceleration in gold around
Speaker 6: the time where people started to get reconcerned about.
Speaker 7: Inflation, particularly April. But what's even more interesting is that
Speaker 7: it's continued into May.
Speaker 6: So it seems in some sense that people are thinking
Speaker 6: about gold as their safe haven asset instead of bonds,
Speaker 6: given the volatility and the risk off properties dissipating in
Speaker 6: those assets. So I think gold is something to watch
Speaker 6: as a barometer of how people feel about the realities
Speaker 6: of inflation.
Speaker 1: Katy.
Speaker 2: Thank you, Kitty Convinsky that of aphasimplex, FED officials maintaining
Speaker 2: the Central Bank should hold rights higher for longer while
Speaker 2: the ACP gives up to begin counting next month. Jill
Speaker 2: MOWAKAVACSA Group saying this, we are con about the risk
Speaker 2: of an intellectual contagion from the debates in the US.
Speaker 2: The is asymmetric across the Atlantic. Reading Europe with American
Speaker 2: lenses could lead to costly policy mistakes. She'll joined us
Speaker 2: now for more wonderful perspectives.
Speaker 1: Do you see that as a.
Speaker 2: Very real and evident risk right now? In Europe?
Speaker 7: As usual?
Speaker 8: The US market is is the dominant market of the world,
Speaker 8: and there might be a sense in Europe that diverging
Speaker 8: too much from what the Fed is is about to
Speaker 8: do or about not to do, would actually trigger a
Speaker 8: further weakening of our currency, which in turn would trigger
Speaker 8: more imported in inflation and would make our own progress
Speaker 8: towards our inflation target harder to hit. So there is
Speaker 8: this contagent channel which which is pretty traditional in policy
Speaker 8: making in Europe. But what I would venture is that
Speaker 8: first of all, the inflation story in Europe clearer than
Speaker 8: in the US. It's heading down, I think, in a
Speaker 8: more obvious manner than the US. And second, when we
Speaker 8: still have issues with our inflationary process in Europe, it
Speaker 8: does not it doesn't have anything to do with important inflation.
Speaker 8: It's usually about domestic forces, services inflation in particular. So
Speaker 8: even if we had a further degociation of the euro
Speaker 8: in case of a growing divergence with the FED, I
Speaker 8: don't think it would massively change the picture for our
Speaker 8: inflation forecast.
Speaker 2: So you think they should emphasize the importance of the
Speaker 2: effects channel. Is that right?
Speaker 1: Yes?
Speaker 8: And that was something that was very obvious in the
Speaker 8: latest minutes of the the cd Governing Council that clearly
Speaker 8: spent quite a bit of time talking about inflation in
Speaker 8: the US, talking about what it meant for the FED
Speaker 8: uh And and again it's obvious the FED is the biggest,
Speaker 8: the most important central bank of the world. You could
Speaker 8: not completely ignore it. But our inflation story on this
Speaker 8: point is it's very different.
Speaker 2: Danny mentioned what we heard from is about Schnabel in
Speaker 2: the Japanese newspaper Nike saying, based on current data, a
Speaker 2: rakecom in July does not seem warranted. You know, based
Speaker 2: on what you just said, what's your reaction to that
Speaker 2: communication from a key executive board member.
Speaker 8: I think you know, it's interesting on the positive side,
Speaker 8: if you want to, we're in the on the dubbish
Speaker 8: site it's usually my tribe, it's starts. They're already talking
Speaker 8: about the next cut. The June cut seems to be
Speaker 8: completely in the back, which in a way you could
Speaker 8: find reassuring coming from someone like slish Level, who can
Speaker 8: be a hawk. But you can see how the conversation
Speaker 8: is already focusing on, well, we have to be very careful,
Speaker 8: we have to be very very patient, very slow in
Speaker 8: our in our own process, and the risk there is
Speaker 8: that you end up proving actually under shooting your own inflation,
Speaker 8: your own inflation target. And it's not a theoretical issue.
Speaker 8: The Central Bank of Sweden has just had to to
Speaker 8: cut trades without waiting the CD or without waiting for
Speaker 8: the fair and when you look at their own inflection
Speaker 8: forecast are already they already have inflation below two percent
Speaker 8: in the latest forecast we've had from the Bank of England,
Speaker 8: same thing for twenty twenty six. They're clearly concerned that
Speaker 8: inflecation could fall below two percent. So I understand we
Speaker 8: need to be prudent. And as far as I know,
Speaker 8: no one is calling for a weight cut in July. Ascertainly,
Speaker 8: I'm not calling for a weight cut in July. In
Speaker 8: September would be fine after up to June, but it's
Speaker 8: a sign of the ongoing tension within the Governing Council.
Speaker 8: The debate has shifted from should we cut or no,
Speaker 8: that's fine to how quickly? And the fivenessionable is already
Speaker 8: warning against a July cut. I think you know betrays
Speaker 8: this and reflects this. This this internal tension at the
Speaker 8: Governing Council.
Speaker 5: Gee, what I what I can understand is what's even
Speaker 5: the point then of cutting in June? What difference does
Speaker 5: it make if you cut in June and then you
Speaker 5: pause for a while.
Speaker 1: Let's say you go in September.
Speaker 5: We're talking about twenty five basis points here, we're talking
Speaker 5: about only a few months apart.
Speaker 1: Why is this such a vigorous debate?
Speaker 8: It's I think it's it's a vigorous debate because the
Speaker 8: inflection point in your stance is always the most important one.
Speaker 8: Because obviously the CB has been hiking for a while,
Speaker 8: as continued hiking later than the FED that it stopped
Speaker 8: three months before before the ECB. So there's a lot
Speaker 8: of symbolic and policy focus around the infection point when
Speaker 8: do you start cutting? Because everyone knows that once you
Speaker 8: started cutting. Well, it's usually the beginning of a trajectory,
Speaker 8: and it can may come in July, it may come
Speaker 8: in September. It doesn't really matter. You are on the
Speaker 8: downward trend. So the biggest fight, if you want, was
Speaker 8: on should we cut it all. That's now completely in
Speaker 8: the bag. Now we're talking about the trajectory and that.
Speaker 8: I think it's actually less problematic if the CB waits
Speaker 8: for two or three months after having provide this first cut,
Speaker 8: because the entire market will know. Okay, you know, it
Speaker 8: may take a bit of time, but the direction of
Speaker 8: trouble is super clere.
Speaker 5: I get that, But I mean, is it the same
Speaker 5: this time around? I mean, this isn't a classic cutting
Speaker 5: cycle as most of us know it. This isn't a
Speaker 5: recession that the ECB needs to get somewhere in a hurry,
Speaker 5: as you say, They can take their time.
Speaker 1: This is more of a mid cycle tweak.
Speaker 5: So can we really look at it the same way
Speaker 5: that this is as big of an inflection point as
Speaker 5: it usually is when an ECB, when a central bank
Speaker 5: starts to cut.
Speaker 8: I think it's still it really still matters because you
Speaker 8: precisely because we've got this issue of potential divergence with
Speaker 8: the FED. There is in the market a very strongly
Speaker 8: held belief that usually it's the FED which sets the tone.
Speaker 8: So I think that from a symbolic and more than
Speaker 8: a symbolic from a policy point of view, that the
Speaker 8: ECB would in June take the risk of diverging for
Speaker 8: the FED, making its this for itself without necessarily waiting
Speaker 8: for what happens across the Atlantic. I think it's a
Speaker 8: very very strong signal that indeed, monetary policy in Europe
Speaker 8: is decided based on the inflationary process. In Europe we
Speaker 8: cannot entirely ignore whatever comes from the action rate channel,
Speaker 8: whilst ninety percent of our decision making should be based
Speaker 8: on domestic and domestic development. So I agree with you
Speaker 8: there is a recession we need to deal with at
Speaker 8: this moment, but I think the CP needs to send
Speaker 8: this very clear message to the rest of the world
Speaker 8: really and to public opinion in Europe. We make our
Speaker 8: decisions based on what is good for Europe, and the
Speaker 8: fact that the FED is facing currently difficulties with a
Speaker 8: less clear disinflationary process should not stop THECP from making
Speaker 8: the right decisions.
Speaker 2: Jill Enjoy talking about this as always, sir, it's tuite
Speaker 2: to catch up. Joe Marrick. There of access. This is
Speaker 2: the Bloomberg Survenance Podcast, bringing you the best in markets, economics,
Speaker 2: and geopolitics. You can watch the show live on Bloomberg
Speaker 2: TV weekday mornings from six am to nine am Eastern.
Speaker 2: Subscribe to the podcast on Apple, Spotify, or anywhere else
Speaker 2: you listen, and as always, on the Bloomberg Terminal and
Speaker 2: the Bloomberg Business app.