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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa Abramoyds. Along

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Speaker 1: with Tom Keane and Jonathan Ferrow. Join us each day

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Speaker 1: for insight from the best in economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Julian Emmanuel

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Speaker 1: of Evercore I say calling for the S and P

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Speaker 1: five hundred to end next year at drum roll forty

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Speaker 1: seven fifty, basically where we are now. He sees a

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Speaker 1: pullback in the first half that will take the index

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Speaker 1: down to thirty nine seventy and then a rally kicking

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Speaker 1: in quote prior to the twenty twenty four election, based

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Speaker 1: on received recession trough and inflation falling to the FEDS

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Speaker 1: two percent target. Julian, I'm so glad to say is

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Speaker 1: joining us now. Julian, you're calling for a pretty big

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Speaker 1: draw down. Does that mean that you're really leaning against

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Speaker 1: what we're seeing right now?

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Speaker 2: Well, actually, in context of typical raw downs, it isn't

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Speaker 2: really that big, you know, on the order of fifteen

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Speaker 2: sixteen percent, which you tend to see in most years.

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Speaker 2: You didn't see it in twenty twenty three, which is

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Speaker 2: why the Vicks is at twelve. And we had this,

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Speaker 2: you know, incredibly great feeling and obviously we've had a

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Speaker 2: lot of momentum in December, and look, the message we

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Speaker 2: got from the FED was very much and all clear.

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Speaker 2: The markets responded in kind. But frankly, when you think

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Speaker 2: about it and you go back to July when we

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Speaker 2: had that interim peak at the time of the last hike,

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Speaker 2: in fact of the cycle, there was that diminution of

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Speaker 2: the wall of worry. The wall of worry doesn't exist

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Speaker 2: right now. And so from our point of view, even

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Speaker 2: if you manage to skirt around the recession, which is

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Speaker 2: certainly possible, and the data doesn't show that we're in

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Speaker 2: imminent danger, but even if you do, there is likely

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Speaker 2: going to be a growth scare time, just because there's

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Speaker 2: so much optimism in the markets right now.

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Speaker 1: So that's what you think is going to crack it.

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Speaker 1: Bad economic data, that is what you think is going

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Speaker 1: to spur the downside. Not any kind of retlacement about

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Speaker 1: the idea of a FED pivot.

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Speaker 2: No, the FED is not going to unless the inflation

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Speaker 2: data surprise to the upside, which again it doesn't feel

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Speaker 2: that that's going to be the case, though I would

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Speaker 2: observe that. Notably, you know, oil among other things, have

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Speaker 2: rallied quite strongly the last couple of days, perhaps in response,

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Speaker 2: but no, I think that that based on what we've seen,

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Speaker 2: the FED is likely going to try and be as

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Speaker 2: quiet as it can for the next several months.

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Speaker 3: Does that mean that it drops out as a driver,

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Speaker 3: because you think about the equity markets, they've been so

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Speaker 3: macro driven for quite a long time. Right now, if

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Speaker 3: the FED really is on hold, maybe starts cutting those

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Speaker 3: rate cuts already priced in. Do we start paying more

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Speaker 3: attention to corporate fundamental.

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Speaker 2: Well, look, the FED will never disappear in this cycle

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Speaker 2: because this cycle is so unusual. But you know, we'll

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Speaker 2: turn the page to January. We will remember that we

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Speaker 2: will have a government that will be facing shutdown, we

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Speaker 2: will have elections in Taiwan, and we will have fourth

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Speaker 2: quarter earnings reporting season. You know, from our view it's

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Speaker 2: not that big a deal, but bottoms up consensus is

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Speaker 2: a bit too high in terms of earning expectations. Those

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Speaker 2: will be walked back and then, as has been the

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Speaker 2: case this entire year, the most important thing is not

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Speaker 2: going to be what the news is itself, but the

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Speaker 2: price reaction to the news. And if you think about it,

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Speaker 2: all the volatility this entire year has been almost exclusively

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Speaker 2: the purview of the bond markets. It's been relatively quiet

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Speaker 2: in terms of credit, in terms of equity. We think

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Speaker 2: that's going to change a little bit next year.

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Speaker 4: So Julia, let's say I agree with you, and I

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Speaker 4: do believe the time now is to get defensive, given

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Speaker 4: where the market is right, what's the best way to

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Speaker 4: do it? Do I want to be rotating into some

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Speaker 4: of those classic defensive sectors like staples, healthcare, et cetera,

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Speaker 4: utilities maybe? Or do I want to be using options?

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Speaker 4: Put your options had on for me? Do I want

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Speaker 4: to be buying puts? I want to be selling calls?

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Speaker 3: Here?

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Speaker 4: How do I protect?

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Speaker 2: So the beauty of what we've had the last number

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Speaker 2: of months is that some of the more classically defensive

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Speaker 2: areas haven't actually been the beneficiary of interest rates coming

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Speaker 2: down and inflation coming down, a lot of other noise,

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Speaker 2: you know, in areas like consumer staples and healthcare there's

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Speaker 2: been a lot of confusion and a lot of fear frankly,

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Speaker 2: around the GLP one phenomenon, and so people have stayed

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Speaker 2: away from there. But now all of a sudden, we're

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Speaker 2: in a place where, particularly when you think about inflation,

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Speaker 2: input costs into those sectors are moderating, wage gains are

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Speaker 2: starting to moderate, they are going to benefit, and frankly,

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Speaker 2: the work that we've done shows that the defensive sectors,

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Speaker 2: as you said, staples and healthcare and particularly the ones

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Speaker 2: we like, tend to outperform on average from the time

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Speaker 2: of the last FED hike to the time of the

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Speaker 2: first cut. So it's really a way to play offense

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Speaker 2: with defense.

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Speaker 3: Well, to get to the second part of Damien's question,

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Speaker 3: beyond just buying maybe defensive type sectors, are you looking

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Speaker 3: to hedge here?

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Speaker 2: So it is something where particularly if and we say

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Speaker 2: this very much in terms of the retail investor's mindset,

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Speaker 2: is that what you want to do is envision yourself

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Speaker 2: as a buyer down call it's fifteen percent an average

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Speaker 2: type of yearly drawdown. And if you don't see yourself

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Speaker 2: as a buyer, because buying the dips has been a

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Speaker 2: strategy that's worked our entire investment lifetimes. We don't see

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Speaker 2: that changing. Then you want to take advantage of the

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Speaker 2: fact that options are incredibly inexpensive.

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Speaker 1: Are bond yield's going to go a lot lower in

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Speaker 1: the scenario that you put out?

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Speaker 2: So I think the bond fields are sort of maybe

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Speaker 2: getting to some sort of stasis because obviously, look, if

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Speaker 2: we do have an economic turndown or at least a

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Speaker 2: growth scare, clearly that's more downward pressure on yields. But

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Speaker 2: on the other hand, there's this idea that there's a

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Speaker 2: secular change in international investors appetite for fixed income and oh,

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Speaker 2: by the way, the Feds still doing QT, so that

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Speaker 2: limits any downside in bond yields.

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Speaker 1: Just to give you a victory lap, you did call

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Speaker 1: the turn in small caps it's been a rip roaring

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Speaker 1: rally over the past six weeks. Is it time to

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Speaker 1: get out ahead of some concerns about growth?

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Speaker 2: We don't think it is. And actually it's fascinating because

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Speaker 2: this has never happened for before. In twenty twenty three,

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Speaker 2: you undercut your bear market low in small caps just

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Speaker 2: at that October low, and then less than a month

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Speaker 2: later you had a new fifty two week high in

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Speaker 2: the Nasdaq. That kind of divergence has never been seen

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Speaker 2: before in the entirety of a calendar year, let alone

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Speaker 2: one month. And so if you think about it, even

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Speaker 2: if you do get a recession, small caps have for

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Speaker 2: the most part already been through their recession in terms

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Speaker 2: of share price performance. And again, similar to consumer staples

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Speaker 2: and healthcare, they're going to benefit from a labor market

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Speaker 2: that's easing. And yes, the consumer still does have excess savings,

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Speaker 2: which we think cushions the severity of any downturn.

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Speaker 1: Julina Emmanuel of Evercore ISI, thank you so much. Right now,

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Speaker 1: we are seeing in the market a little bit of

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Speaker 1: a lift to basically beyond the year end target that

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Speaker 1: Julian has a forty seven eighty five, up a quarter

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Speaker 1: of a percent. Julian, how much do you think though,

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Speaker 1: that there is enough fear that could get brought in

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Speaker 1: from any weakness to give a drawdown Given that there

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Speaker 1: is so much cash it's going to be pushed out

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Speaker 1: of money market funds as yields go in.

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Speaker 2: Well, it's definitely going to cushion the blow. But again

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Speaker 2: going back to this idea, yes, we've more or less

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Speaker 2: been promised three rate cuts, but in fact, if inflation

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Speaker 2: does not continue that you know very you know marked

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Speaker 2: at this point downward path, you're still going to have

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Speaker 2: cash yields north of four percent four and a half percent,

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Speaker 2: and again within the context of the last fifteen years,

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Speaker 2: that's still quite attractive.

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Speaker 1: Join em Manuel, thank you so much. We've been talking

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Speaker 1: so much about the Israel Hamas war that we have

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Speaker 1: lost focus of another war that's been raging, which is Ukraine,

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Speaker 1: and we've been focused all week with respect to whether

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Speaker 1: they can get aid from the US but also from

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Speaker 1: the European Union. Let's get straight to it. This is

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Speaker 1: a really important conversation. John Lieber, Managing director at the

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Speaker 1: Eurasia Group and former policy advisor to Senator Mitch Baccaddel

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Speaker 1: joining us right now. And I do want to start there, John,

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Speaker 1: considering the fact that it wasn't just the US that

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Speaker 1: failed to pass aid after of lot of Roslenski came

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Speaker 1: to Washington, d C. But overnight the EU as well,

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Speaker 1: also failing to get anything through before the year of

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Speaker 1: the before the end of the year.

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Speaker 5: Yeah, I mean, but a lot of veto points in it,

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Speaker 5: and it makes it hard to get anything done. But

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Speaker 5: in the US, you know, this is less of an

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Speaker 5: urgent issue that is in the EU, which of course

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Speaker 5: also has a lot of veto points because any one

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Speaker 5: country can stop the aid come flowing for now. Ultimately,

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Speaker 5: you know, this is a much higher stakes issue in

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Speaker 5: Europe than it is for the United States, and probably

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Speaker 5: the Europeans are going to be potentially more reliable partners

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Speaker 5: than the United States is. But it looks right now

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Speaker 5: like the US is set to punt on this issue,

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Speaker 5: perhaps into January of next year, when further funding for

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Speaker 5: Ukraine will be tied up not only in the Congress's

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Speaker 5: ability to negotiate border funds, but also in their ability

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Speaker 5: to avoid a government shutdown. So this is a really

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Speaker 5: messy ootiation right now, and the outlook does not look

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Speaker 5: great for the continued major flow of weapons and support

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Speaker 5: that we've seen to Ukraine so far.

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Speaker 3: Well, John, that's what I wanted to talk about, the

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Speaker 3: point that you made that this is a higher priority,

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Speaker 3: a bigger issue with more urgency when it comes to

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Speaker 3: the EU. You take a look at what's happening in

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Speaker 3: the US Congress that debate between more usaid for Ukraine,

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Speaker 3: whereas the Republicans pushing for more border security. Who do

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Speaker 3: you think, what does the compromise look like there, and

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Speaker 3: how does this evolve in January.

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Speaker 5: I think the Republicans have the upper hand in the

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Speaker 5: debate right now because they have the ability to veto

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Speaker 5: any additional aid, because Speaker Mike Johnson can just say

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Speaker 5: thanks for your effort to the Senate, I'm not putting

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Speaker 5: your bill on the floor unless I like it. There's

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Speaker 5: almost certainly enough votes in both the House and the

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Speaker 5: Senate to pass more Ukraine aid plus more border funds.

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Speaker 5: The Republicans are using this as a leverage point to

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Speaker 5: hold out for everything they want on the southern border,

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Speaker 5: changing the asylumn rules, creating more ability for the government

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Speaker 5: to deport legal immigrants, and the Democrats are saying, no,

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Speaker 5: we aren't gonna do that. They think this is inhumane

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Speaker 5: and they don't want to treat migrants on the southern

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Speaker 5: border that way, and they're at an impasse. So I

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Speaker 5: think ultimately the compromise is going to be something like

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Speaker 5: what Biden proposed, which is a tens of billions of

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Speaker 5: dollars in additional aid for Ukraine but the whole a

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Speaker 5: plus the border but the whole thing could fall apart

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Speaker 5: because the two sides just are not close to agree

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Speaker 5: on this border issue, which right now is the lynchpin

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Speaker 5: towards getting a deal.

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Speaker 4: John, I'd like to shift back to Europe here. I'd

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Speaker 4: like to talk about Hungary. I'd like to talk about

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Speaker 4: Victor Orbon, the Fidez party. I mean, what is going

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Speaker 4: on there? I mean, does Victor Orbon represent the belief

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Speaker 4: of the Hungarian people? I mean, they are holding up

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Speaker 4: the fifty billion odd in funds to Ukraine at this point,

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Speaker 4: they're the only EU member doing that. What comes next?

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Speaker 5: Yeah, they're holding up the money. But oddly they did

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Speaker 5: let they walked out of the room when it came

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Speaker 5: to the Ukraine ascension talks. So it seems like they're playing.

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Speaker 5: What kind of game he's playing is really unclear right now. Obviously,

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Speaker 5: Orbon's trying to flex some muscle inside the EU and

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Speaker 5: make sure the Hungary's influence is felt, and they're going

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Speaker 5: to revisit this next year as well. I think that

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Speaker 5: for both of these bodies, this debate is far from

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Speaker 5: over and there's still some more negotiating and horse trading

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Speaker 5: that can happen both within the EU and the United States.

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Speaker 5: But it's hard to say exactly why Orbon's doing things

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Speaker 5: this way. It looks like he's just trying to increase

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Speaker 5: some leverage over the EU for Hungary.

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Speaker 4: Well, John, Hungary is generally viewed as, you know, the

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Speaker 4: closest ally to China within the EU. I wonder can

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Speaker 4: we read anything into that is China, you know, kind

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Speaker 4: of pulling the strings behind the scenes.

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Speaker 5: A little difficult to say, especially at this point. I

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Speaker 5: think the outcome yesterday was a little unexpected, particularly on

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Speaker 5: the fact they let the Ukraine ascension go forward. I

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Speaker 5: think that's a sign. You know, that's a long term process.

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Speaker 5: It is going to take many years probably for Ukraine

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Speaker 5: to qualify for EU membership. And it's really difficult to

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Speaker 5: say what China benefits from the EU not funding this war.

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Speaker 5: I think what China wants is probably an end of

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Speaker 5: the war as quickly as possible, but not necessarily on

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Speaker 5: Russia's terms, which is where all of this is going

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Speaker 5: to end up. If the Ukraine can't get more aid

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Speaker 5: out of its Western partners.

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Speaker 1: Just to sort of put a bow tie on that,

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Speaker 1: are you basically saying that Russia will win if Ukraine

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Speaker 1: doesn't get more aid.

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Speaker 5: If Ukraine doesn't get more aid, Russia has the upper hand.

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Speaker 5: They've got the manufacturing capabilities and the patients in long

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Speaker 5: term timeframe to wear down the West. So Ukraine really

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Speaker 5: needs the West to step up here, and if they don't,

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Speaker 5: they will win this war.

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Speaker 1: In the meantime, we all also are dealing with the

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Speaker 1: Hamas Israel war that keeps going on. But there seems

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Speaker 1: to be a real tone shift from this administration really

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Speaker 1: warning Israel against more kind of indiscriminate air strikes or

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Speaker 1: more broad based military action and more sort of surgical

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Speaker 1: types of procedures going forward. How big of a deal

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Speaker 1: do you think this is?

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Speaker 5: Yeah, I think as the kind of horrors of what

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Speaker 5: happened on October seventh fade in the public's imagination, the

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Speaker 5: political liability for Biden of the Israeli response in Gaza

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Speaker 5: is growing, and Biden, you know, there's a lot of

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Speaker 5: damage that's already been done for him domestically among the

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Speaker 5: progressive left and young voters, which are both important parts

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Speaker 5: of his coalition. And I think that the humanitarian situation

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Speaker 5: in Gaza is becoming untenable for the United States to

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Speaker 5: support now of course, Biden's only shifting his tone. The

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Speaker 5: US is still supporting the Israeli militarily and will continue

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Speaker 5: to do so for the foreseeable future. There is a

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Speaker 5: broad consensus among in the United States Congress that Israel

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Speaker 5: has a right to defend itself and it will continue

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Speaker 5: to do so with US support. But for Biden, this

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Speaker 5: is becoming a political liability, and I think that they're

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Speaker 5: going to start putting more and more pressure on Israel

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Speaker 5: privately and publicly to be more tactical than what they

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Speaker 5: want to do in how they approach this. But that

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Speaker 5: doesn't mean the Israel is going to stop, and it

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Speaker 5: doesn't mean that the is going to stop supporting now.

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Speaker 5: It just what the US wants to see is that

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Speaker 5: hasten hastening to the next stage of this war, where

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Speaker 5: you know, Hamas is removed and then you can move

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Speaker 5: to a kind of post war period and rebuilding.

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Speaker 3: Well, John, to your point on political pressure, we're talking

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Speaker 3: about how the Biden administration is handling this, but let's

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Speaker 3: talk about Joe Biden, the presidential candidate. Of course, for

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Speaker 3: what eleven odd months out from the presidential election, you

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Speaker 3: think about these hot wars happening in other parts of

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Speaker 3: the world. How is the American voting public ranking that

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Speaker 3: when they're heading to the polls.

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Speaker 5: I think the wars are bad for Biden because it

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Speaker 5: gives this narrative to Trump that the world's on fire,

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Speaker 5: and Trump, you know, ignoring COVID, can is go to say,

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Speaker 5: when I was president, we had peace, we had prosperity,

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Speaker 5: we had growing real incomes, there was no inflation, and

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Speaker 5: you didn't have all these wars around the globe that

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Speaker 5: are He's going to attribute to President Biden's withdrawal from Afghanistan.

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Speaker 5: So as a political matter, the wars are going to

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Speaker 5: play in a pretty major way in the narrative of

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Speaker 5: the US election next year, even though foreign policy is

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Speaker 5: typically not a top issue for American voters, and I

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Speaker 5: think that very much works to Trump's benefit. There's nothing

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Speaker 5: Biden can do about it. He is committed to funning

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Speaker 5: Ukraine if you can, if you can get the money,

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Speaker 5: and he's committed to defend allowing Israel to defend itself.

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Speaker 5: So this isn't Biden's choice, but it's going to be

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Speaker 5: a problem for him next year if these wars are

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Speaker 5: both still raging in the middle of the US campaign.

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Speaker 1: John Leeb, thank you so much for being with us

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Speaker 1: of Eurasia. We appreciate the insights joining us around the table.

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Speaker 1: Greg Daco, Chief economist at EY. Do you think that

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Speaker 1: hopes and dreams of immaculate disinflation have gotten overblown and

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Speaker 1: that there is this concern about a slowdown that's steeper

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Speaker 1: than people are pricing.

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Speaker 6: In well, I think we have to be nuanced when

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Speaker 6: we analyze the economic landscape. We are in an environment

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Speaker 6: where we are seeing slower economic activity. I think there's

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Speaker 6: no denying that, whether it's on the consumer side or

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Speaker 6: on the business side, we have seen a slowdown in

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Speaker 6: terms of the pace of growth, so it's not immaculate disinflation.

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Speaker 6: We've seen the supply come back online. That's helped with

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Speaker 6: the supply the inflationary picture, and we're seeing moderating demand

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Speaker 6: which is also putting downward pressure on inflation. So it's

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Speaker 6: not immaculate and I think as we look into next year,

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Speaker 6: that's going to be continuing to drive inflation lower, whether

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Speaker 6: it's rent disinflation, slower momentum in terms of growth activity,

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Speaker 6: even wage growth compression, and the fact, let's not forget

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Speaker 6: that the FED is still maintaining a restrictive monetary policy stance.

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Speaker 6: Combine all of those and you have all the right

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Speaker 6: ingredients for a disinflationary environment.

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Speaker 3: Let's talk about sentiment a little bit, because we've been

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Speaker 3: talking about this morning, the fact that you think about

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Speaker 3: the US consumer and you take a look at these

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Speaker 3: sentiment surveys and it has just been grim out there

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Speaker 3: for years now, and when do you think about inflation. Yes,

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Speaker 3: we're in this disinflationary environment, but the outright level of

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Speaker 3: prices is still much higher than it was. Do we

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Speaker 3: need to see actual deflation to see some of those

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Speaker 3: sentiment numbers that.

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Speaker 6: You're alluding to the most important point when it comes

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Speaker 6: to the inflationary dynamics. Because we talk about inflation, economists,

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Speaker 6: policy makers, we all talk about inflation, But what matters

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Speaker 6: for the average person, whether it's the consumer or the

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Speaker 6: business leader, is the cost level. The cost fatigue phenomenon

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Speaker 6: is very real. The cost of everything is much higher

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Speaker 6: than it was pre pandemic, whether it's goods, services, labor, inventory,

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Speaker 6: even interest rates. Everything is much higher, costs much more.

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Speaker 6: That is leading to business decisions being pulled back and

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Speaker 6: being more scrutinous about how much to invest. It's leading

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Speaker 6: consumers to be more careful about how many goods, how

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Speaker 6: many services they buy, even though they're spending a little

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Speaker 6: bit less. And I think that's the very important narrative

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Speaker 6: that's going to be really underlying the pace of growth

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Speaker 6: next year is how sensitive people are to this higher

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Speaker 6: cost cost of everything environment and how the labor market reacts.

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Speaker 6: Let's not forget the labor market is the key pillar

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Speaker 6: to economic activity.

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Speaker 4: Greg the dot Pot's calling for seventy five of cuts.

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Speaker 4: I think the market's priced inn one hundred and forty

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Speaker 4: PIFs of cuts. It's pretty big divergence there. You know.

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Speaker 4: Talk to me about the why is disinflation enough of

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Speaker 4: a reason for the Fed the cut rates in twenty

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Speaker 4: twenty four?

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Speaker 6: Well, yeah, I think the key reason why the Fed

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Speaker 6: will be adjusting rates is because it sees less inflation.

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Speaker 6: Last time I was on the show, I was talking

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Speaker 6: about the fact that we have the holy grail of

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Speaker 6: non inflationary growth in front of us. We have an

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Speaker 6: economy that's still moving forward, but inflation that is moderating.

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Speaker 6: That is what the Fed wants. The Fed does not

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Speaker 6: want a recession. It wants to see inflation come back

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Speaker 6: down to two percent and become a non issue, a

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Speaker 6: non topic, something that we don't talk about every day

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Speaker 6: on this show or on other platforms. This is really

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Speaker 6: what the FED is aiming for. So whether it comes

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Speaker 6: to the fed's forecast being realized or the market expectations

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Speaker 6: being realized, I think the truth in the end will

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Speaker 6: lie somewhere in between, probably one hundred and twenty five

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Speaker 6: bases points of rate cuts by the end of the

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Speaker 6: next year, with an environment where inflation is gradually slowing

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Speaker 6: and we don't enter recession. If we enter a recession,

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Speaker 6: the picture in the game is going to be quite different.

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Speaker 4: Greg off the year, Lisa and I always like to

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Speaker 4: talk about real yields. She likes the five year. I

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Speaker 4: like the ten year. Personally ten year real yield one

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Speaker 4: point eighty eight percent, down sixty basis points since October.

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Speaker 4: How low can real yields go well?

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Speaker 6: I think that's the key question for next year is

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Speaker 6: going to be what happens in terms of growth momentum,

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Speaker 6: what happens in terms of inflation momentum, and how rapidly

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Speaker 6: does is a FED ease monetary palsy. That is what

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Speaker 6: fetch your Powell and the rest of the FED officials

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Speaker 6: are going to be focused on They're going to be

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Speaker 6: focused on ensuring that real yields don't rise. Dude, do

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Speaker 6: you not want to be tightening in the face of

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Speaker 6: a slowdown in final demand, in the face of a

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Speaker 6: slowdown in inflation. So they're going to be recalibrating monetary

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Speaker 6: palsy gradually. I think the March rate cut calls right

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Speaker 6: now are a bit extreme. They're going to be making

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Speaker 6: sure that inflation is really sustainably on this trajectory of

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Speaker 6: lower inflation, and then recalibrate to the downside gradually with

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Speaker 6: twenty five basis point increments to start with.

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Speaker 1: I mean, well, I do want to just bring this

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Speaker 1: to you. New York Fed chair John Williams has been speaking,

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Speaker 1: and he said that the market is reacting maybe more

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Speaker 1: strongly than forecasts show, and also said we aren't really

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Speaker 1: talking about rate cuts right now, as Neil Data over

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Speaker 1: at Renaissance just commented, sorry, but you can't put that

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Speaker 1: toothpaste back in the tube. There is, however, a market response.

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Speaker 1: We are seeing bond yields rise to year yields rising

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Speaker 1: to about four point four six percent ten year yields

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Speaker 1: spiking upward to about three point nine six percent. This

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Speaker 1: raises a question, Greg, do you think that they are

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Speaker 1: getting concerned about the easing and financial conditions beyond what

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Speaker 1: Jaypowill seemed to indicate yesterday. I think when.

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Speaker 6: People say that the easing of financial conditions is going

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Speaker 6: to reignite growth and reignite inflationary pressures, I tend to

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Speaker 6: be a little bit more cautious. First of all, as

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Speaker 6: we were just talking, we have to factor in the

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Speaker 6: fact that maybe market expectations are a bit too strong.

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Speaker 6: FED policy communication is going to recalibrate that market perspective.

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Speaker 6: Number two, it's not for get as we just talked

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Speaker 6: about cost fatigue and labor market developments are going to

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Speaker 6: be the key drivers of economic activity, not so much rates.

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Speaker 6: And then number three, and this is very important. We

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Speaker 6: are in an environment where there is less rate sensitivity.

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Speaker 6: There was much less rate sensitivity on the upside. We

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Speaker 6: should expect to be a little bit less rate sensitivity

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Speaker 6: on the downside as well. All three factors mean that

437
00:22:23,080 --> 00:22:24,760
Speaker 6: we have to be a little bit more nuanced when

438
00:22:24,760 --> 00:22:26,040
Speaker 6: it comes to the economic picture.

439
00:22:26,160 --> 00:22:28,119
Speaker 1: Greg Daco wonderful as always to catch up with you.

440
00:22:28,119 --> 00:22:30,720
Speaker 6: Happy hollog always a pleasure, Happiologist Greg Daco of.

441
00:22:30,680 --> 00:22:44,200
Speaker 3: E Y, Let's welcome in Meghan swib Or. She is

442
00:22:44,280 --> 00:22:47,199
Speaker 3: director of US rate Strategy over at Bank of America.

443
00:22:47,760 --> 00:22:50,480
Speaker 3: And this feels how it usually goes. Of course, you

444
00:22:50,520 --> 00:22:53,400
Speaker 3: have your own pale come out at these FED meetings

445
00:22:53,400 --> 00:22:56,720
Speaker 3: and then FED speak happens and tend to walk it back.

446
00:22:57,240 --> 00:22:57,480
Speaker 2: Yeah.

447
00:22:57,480 --> 00:22:59,800
Speaker 7: I think that's exactly right, Katie. We had just such

448
00:22:59,840 --> 00:23:03,760
Speaker 7: a prominent rates market response to Powell's very dubvish comments here,

449
00:23:04,160 --> 00:23:06,159
Speaker 7: and so we were actually flagging some of this in

450
00:23:06,880 --> 00:23:09,159
Speaker 7: our recent publication. It seems like the market's in for

451
00:23:09,200 --> 00:23:11,600
Speaker 7: a bit of a consolidation here, and I think that

452
00:23:11,640 --> 00:23:14,720
Speaker 7: William's comments really endorse that. One of the things, though,

453
00:23:14,720 --> 00:23:16,480
Speaker 7: that we see born out in a lot of the

454
00:23:16,480 --> 00:23:19,399
Speaker 7: indicators that we look at though, is we had positioning

455
00:23:19,680 --> 00:23:21,960
Speaker 7: largely long coming into some of these moves that we

456
00:23:22,040 --> 00:23:24,920
Speaker 7: got so in rates in particular, that's an area where

457
00:23:24,920 --> 00:23:28,639
Speaker 7: we can see investors covering profit taking alongside some of

458
00:23:28,640 --> 00:23:29,800
Speaker 7: these recent moves as well.

459
00:23:30,000 --> 00:23:32,320
Speaker 4: Well. I mean, Katie says that I never like to

460
00:23:32,320 --> 00:23:34,360
Speaker 4: not talk about currencies, and we're talking about currencies here

461
00:23:34,359 --> 00:23:36,800
Speaker 4: because you talk about currencies. We're talking about dollar yen here.

462
00:23:36,800 --> 00:23:38,359
Speaker 4: I mean, that's one of your trades, right, you do

463
00:23:38,440 --> 00:23:41,160
Speaker 4: believe that there's more downside to dollar yenna current levels.

464
00:23:41,200 --> 00:23:43,440
Speaker 4: But I look at rate differentials and I say, wow,

465
00:23:43,480 --> 00:23:45,600
Speaker 4: look at those rate differentials. To put that trade on,

466
00:23:45,680 --> 00:23:47,240
Speaker 4: My goodness, you're going to be bleeding on a P

467
00:23:47,359 --> 00:23:49,119
Speaker 4: and L basis. How do you put that type of

468
00:23:49,119 --> 00:23:50,440
Speaker 4: trade on? How do you play that in the market.

469
00:23:50,520 --> 00:23:52,560
Speaker 7: So this is actually something that we're seeing a lot

470
00:23:52,560 --> 00:23:54,879
Speaker 7: in the FX and rate sentiment survey that we conduct

471
00:23:54,960 --> 00:23:58,120
Speaker 7: at at b of A. Generally, investors are short dollar,

472
00:23:58,200 --> 00:23:59,760
Speaker 7: and the way that they're kind of playing this, of

473
00:23:59,800 --> 00:24:03,200
Speaker 7: course verses against the yen, and we think that positioning

474
00:24:03,240 --> 00:24:05,600
Speaker 7: is really quite stretched right now. So ahead of some

475
00:24:05,640 --> 00:24:07,959
Speaker 7: of these adjustments that we see coming from the BOJ,

476
00:24:08,440 --> 00:24:10,239
Speaker 7: we think that the preferred way to do this is

477
00:24:10,440 --> 00:24:13,879
Speaker 7: as in short jgbs rather than play this in the

478
00:24:13,920 --> 00:24:16,399
Speaker 7: currency market because of some of that stretched positioning that

479
00:24:16,440 --> 00:24:16,800
Speaker 7: we see.

480
00:24:16,840 --> 00:24:18,560
Speaker 4: No, no, I don't disagree, but then you also have

481
00:24:18,680 --> 00:24:21,919
Speaker 4: I mean, look, I forget about dollar yen. You've got mespacogin, right,

482
00:24:21,920 --> 00:24:23,360
Speaker 4: I mean, look at mexpaeso. It's one of the few

483
00:24:23,359 --> 00:24:25,879
Speaker 4: currencies that's really been kind of off relative to the

484
00:24:25,880 --> 00:24:27,600
Speaker 4: whole of every other currency with the dollar, you know,

485
00:24:27,600 --> 00:24:29,240
Speaker 4: because it kind of tracks the dollar. You know, talk

486
00:24:29,240 --> 00:24:31,120
Speaker 4: to us about that dynamic, you know the fact that

487
00:24:31,240 --> 00:24:33,240
Speaker 4: you know, you've got currencies like the Mexican pay so

488
00:24:33,359 --> 00:24:36,160
Speaker 4: that's tend to track the dollar in certain environments, currencies

489
00:24:36,200 --> 00:24:38,120
Speaker 4: like the Japanese and that tend to track the dollar

490
00:24:38,160 --> 00:24:40,280
Speaker 4: and risk off environments. How do you kind of manage

491
00:24:40,320 --> 00:24:42,400
Speaker 4: through that when you're a fixed income investor?

492
00:24:42,680 --> 00:24:45,520
Speaker 7: So I think that what the real impetus that we

493
00:24:45,560 --> 00:24:48,159
Speaker 7: see for a lot of this divergence in positioning is

494
00:24:48,240 --> 00:24:51,080
Speaker 7: just that conviction about the said path, which is actually

495
00:24:51,080 --> 00:24:53,400
Speaker 7: another thing that we see born out in the survey,

496
00:24:53,440 --> 00:24:56,639
Speaker 7: is that investors are long rates and short dollar. But

497
00:24:56,840 --> 00:25:00,240
Speaker 7: ultimately alongside that, there is some skepticism around how which

498
00:25:00,240 --> 00:25:04,000
Speaker 7: is the Fed ultimately going to cut investors generally thinking

499
00:25:04,000 --> 00:25:06,119
Speaker 7: that if there's one central bank that can surprise a

500
00:25:06,119 --> 00:25:08,960
Speaker 7: little bit more so to the hawker side versus expectations,

501
00:25:09,240 --> 00:25:11,919
Speaker 7: it could indeed be the FED. And I think that

502
00:25:12,000 --> 00:25:14,440
Speaker 7: it really comes down to this message that they've been delivering,

503
00:25:14,480 --> 00:25:18,240
Speaker 7: which is data dependence. The market understands their reaction function

504
00:25:18,280 --> 00:25:20,760
Speaker 7: now that they want to be cutting alongside this progress

505
00:25:20,800 --> 00:25:24,679
Speaker 7: in PCE inflation, and so that's why we've gotten this

506
00:25:24,720 --> 00:25:28,040
Speaker 7: such sharp recalibration. But the Fed has really done such

507
00:25:28,080 --> 00:25:30,840
Speaker 7: a heel turn on this that there's risks that they

508
00:25:30,880 --> 00:25:31,560
Speaker 7: can do that again.

509
00:25:31,720 --> 00:25:34,560
Speaker 3: Well, let's talk about the dispersion of potential outcomes here,

510
00:25:34,600 --> 00:25:37,240
Speaker 3: because you have the dot plot penciling in what seventy

511
00:25:37,240 --> 00:25:39,280
Speaker 3: five basis points of cuts next year, then you have

512
00:25:39,359 --> 00:25:42,960
Speaker 3: the market at one hundred and fifty basis points. Where

513
00:25:42,960 --> 00:25:44,159
Speaker 3: do you fall in between that?

514
00:25:44,640 --> 00:25:48,800
Speaker 7: So we've been long coming into this this most recent

515
00:25:48,920 --> 00:25:50,679
Speaker 7: rate rally. I want to say the year because we

516
00:25:50,720 --> 00:25:53,280
Speaker 7: wrote our year aheads in November, but it really has

517
00:25:53,359 --> 00:25:55,720
Speaker 7: been almost a year and in a month in terms

518
00:25:55,720 --> 00:25:57,840
Speaker 7: of some of this price action. So we had been

519
00:25:57,880 --> 00:26:01,399
Speaker 7: recommending investors trade long trade on the five year sector

520
00:26:01,400 --> 00:26:03,840
Speaker 7: in particular, because that's the point in the curve that

521
00:26:03,880 --> 00:26:06,560
Speaker 7: cannot just be sensitive to just what the timing is

522
00:26:06,560 --> 00:26:09,399
Speaker 7: of cuts near term, but also this trough of the

523
00:26:09,440 --> 00:26:12,200
Speaker 7: FED cutting cycle. So when we look at market pricing

524
00:26:12,280 --> 00:26:15,040
Speaker 7: versus the dot plot, what we see is the market

525
00:26:15,080 --> 00:26:18,199
Speaker 7: is certainly overpricing the extent of cuts versus what the

526
00:26:18,240 --> 00:26:21,480
Speaker 7: Fed is endorsed. But what we see also on the

527
00:26:21,520 --> 00:26:24,639
Speaker 7: flip side is that the market's pricing a higher trough

528
00:26:24,760 --> 00:26:27,400
Speaker 7: of the FED cutting cycle than ultimately what the Fed

529
00:26:27,440 --> 00:26:29,040
Speaker 7: is telling us. Right, we look at the dot plot

530
00:26:29,080 --> 00:26:31,240
Speaker 7: suggesting that the Fed is going to get to below

531
00:26:31,320 --> 00:26:34,600
Speaker 7: three percent, that's where they think neutral is, But the

532
00:26:34,640 --> 00:26:37,240
Speaker 7: market's still very reluctant to price that, and I think

533
00:26:37,359 --> 00:26:39,679
Speaker 7: it really is driven by some of the uncertainty that

534
00:26:39,720 --> 00:26:42,359
Speaker 7: we still see in the inflation market and the fact

535
00:26:42,440 --> 00:26:46,440
Speaker 7: that we were not really seeing broad based weakness elsewhere

536
00:26:46,840 --> 00:26:48,720
Speaker 7: and trying to get a better sense of what is

537
00:26:48,760 --> 00:26:50,919
Speaker 7: it that's going to cause the Fed to really cut

538
00:26:50,960 --> 00:26:54,119
Speaker 7: more aggressively and bring rates back down to something that

539
00:26:54,160 --> 00:26:57,160
Speaker 7: they think is that neutral rate. So we've been long,

540
00:26:57,200 --> 00:27:00,119
Speaker 7: we've taken that position largely off because of the the

541
00:27:00,200 --> 00:27:02,880
Speaker 7: very sharp performance that we've observed, and now we're being

542
00:27:02,880 --> 00:27:05,000
Speaker 7: a little bit more tactical, you know, managing some of

543
00:27:05,000 --> 00:27:07,679
Speaker 7: the opportunities that we see headed into next year, but

544
00:27:07,880 --> 00:27:09,520
Speaker 7: are roughly neutral at this point.

545
00:27:09,720 --> 00:27:12,080
Speaker 3: All right, Megan, great to check in with you, especially

546
00:27:12,080 --> 00:27:14,400
Speaker 3: to get your live reaction to these comments from John

547
00:27:14,400 --> 00:27:17,399
Speaker 3: Williams that are moving the markets right now. That is

548
00:27:17,440 --> 00:27:19,840
Speaker 3: Megan Swiber of Bank of America.

549
00:27:20,320 --> 00:27:23,760
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550
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551
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554
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555
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