Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa Abramoyds. Along
Speaker 1: with Tom Keane and Jonathan Ferrow. Join us each day
Speaker 1: for insight from the best in economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com,
Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Julian Emmanuel
Speaker 1: of Evercore I say calling for the S and P
Speaker 1: five hundred to end next year at drum roll forty
Speaker 1: seven fifty, basically where we are now. He sees a
Speaker 1: pullback in the first half that will take the index
Speaker 1: down to thirty nine seventy and then a rally kicking
Speaker 1: in quote prior to the twenty twenty four election, based
Speaker 1: on received recession trough and inflation falling to the FEDS
Speaker 1: two percent target. Julian, I'm so glad to say is
Speaker 1: joining us now. Julian, you're calling for a pretty big
Speaker 1: draw down. Does that mean that you're really leaning against
Speaker 1: what we're seeing right now?
Speaker 2: Well, actually, in context of typical raw downs, it isn't
Speaker 2: really that big, you know, on the order of fifteen
Speaker 2: sixteen percent, which you tend to see in most years.
Speaker 2: You didn't see it in twenty twenty three, which is
Speaker 2: why the Vicks is at twelve. And we had this,
Speaker 2: you know, incredibly great feeling and obviously we've had a
Speaker 2: lot of momentum in December, and look, the message we
Speaker 2: got from the FED was very much and all clear.
Speaker 2: The markets responded in kind. But frankly, when you think
Speaker 2: about it and you go back to July when we
Speaker 2: had that interim peak at the time of the last hike,
Speaker 2: in fact of the cycle, there was that diminution of
Speaker 2: the wall of worry. The wall of worry doesn't exist
Speaker 2: right now. And so from our point of view, even
Speaker 2: if you manage to skirt around the recession, which is
Speaker 2: certainly possible, and the data doesn't show that we're in
Speaker 2: imminent danger, but even if you do, there is likely
Speaker 2: going to be a growth scare time, just because there's
Speaker 2: so much optimism in the markets right now.
Speaker 1: So that's what you think is going to crack it.
Speaker 1: Bad economic data, that is what you think is going
Speaker 1: to spur the downside. Not any kind of retlacement about
Speaker 1: the idea of a FED pivot.
Speaker 2: No, the FED is not going to unless the inflation
Speaker 2: data surprise to the upside, which again it doesn't feel
Speaker 2: that that's going to be the case, though I would
Speaker 2: observe that. Notably, you know, oil among other things, have
Speaker 2: rallied quite strongly the last couple of days, perhaps in response,
Speaker 2: but no, I think that that based on what we've seen,
Speaker 2: the FED is likely going to try and be as
Speaker 2: quiet as it can for the next several months.
Speaker 3: Does that mean that it drops out as a driver,
Speaker 3: because you think about the equity markets, they've been so
Speaker 3: macro driven for quite a long time. Right now, if
Speaker 3: the FED really is on hold, maybe starts cutting those
Speaker 3: rate cuts already priced in. Do we start paying more
Speaker 3: attention to corporate fundamental.
Speaker 2: Well, look, the FED will never disappear in this cycle
Speaker 2: because this cycle is so unusual. But you know, we'll
Speaker 2: turn the page to January. We will remember that we
Speaker 2: will have a government that will be facing shutdown, we
Speaker 2: will have elections in Taiwan, and we will have fourth
Speaker 2: quarter earnings reporting season. You know, from our view it's
Speaker 2: not that big a deal, but bottoms up consensus is
Speaker 2: a bit too high in terms of earning expectations. Those
Speaker 2: will be walked back and then, as has been the
Speaker 2: case this entire year, the most important thing is not
Speaker 2: going to be what the news is itself, but the
Speaker 2: price reaction to the news. And if you think about it,
Speaker 2: all the volatility this entire year has been almost exclusively
Speaker 2: the purview of the bond markets. It's been relatively quiet
Speaker 2: in terms of credit, in terms of equity. We think
Speaker 2: that's going to change a little bit next year.
Speaker 4: So Julia, let's say I agree with you, and I
Speaker 4: do believe the time now is to get defensive, given
Speaker 4: where the market is right, what's the best way to
Speaker 4: do it? Do I want to be rotating into some
Speaker 4: of those classic defensive sectors like staples, healthcare, et cetera,
Speaker 4: utilities maybe? Or do I want to be using options?
Speaker 4: Put your options had on for me? Do I want
Speaker 4: to be buying puts? I want to be selling calls?
Speaker 3: Here?
Speaker 4: How do I protect?
Speaker 2: So the beauty of what we've had the last number
Speaker 2: of months is that some of the more classically defensive
Speaker 2: areas haven't actually been the beneficiary of interest rates coming
Speaker 2: down and inflation coming down, a lot of other noise,
Speaker 2: you know, in areas like consumer staples and healthcare there's
Speaker 2: been a lot of confusion and a lot of fear frankly,
Speaker 2: around the GLP one phenomenon, and so people have stayed
Speaker 2: away from there. But now all of a sudden, we're
Speaker 2: in a place where, particularly when you think about inflation,
Speaker 2: input costs into those sectors are moderating, wage gains are
Speaker 2: starting to moderate, they are going to benefit, and frankly,
Speaker 2: the work that we've done shows that the defensive sectors,
Speaker 2: as you said, staples and healthcare and particularly the ones
Speaker 2: we like, tend to outperform on average from the time
Speaker 2: of the last FED hike to the time of the
Speaker 2: first cut. So it's really a way to play offense
Speaker 2: with defense.
Speaker 3: Well, to get to the second part of Damien's question,
Speaker 3: beyond just buying maybe defensive type sectors, are you looking
Speaker 3: to hedge here?
Speaker 2: So it is something where particularly if and we say
Speaker 2: this very much in terms of the retail investor's mindset,
Speaker 2: is that what you want to do is envision yourself
Speaker 2: as a buyer down call it's fifteen percent an average
Speaker 2: type of yearly drawdown. And if you don't see yourself
Speaker 2: as a buyer, because buying the dips has been a
Speaker 2: strategy that's worked our entire investment lifetimes. We don't see
Speaker 2: that changing. Then you want to take advantage of the
Speaker 2: fact that options are incredibly inexpensive.
Speaker 1: Are bond yield's going to go a lot lower in
Speaker 1: the scenario that you put out?
Speaker 2: So I think the bond fields are sort of maybe
Speaker 2: getting to some sort of stasis because obviously, look, if
Speaker 2: we do have an economic turndown or at least a
Speaker 2: growth scare, clearly that's more downward pressure on yields. But
Speaker 2: on the other hand, there's this idea that there's a
Speaker 2: secular change in international investors appetite for fixed income and oh,
Speaker 2: by the way, the Feds still doing QT, so that
Speaker 2: limits any downside in bond yields.
Speaker 1: Just to give you a victory lap, you did call
Speaker 1: the turn in small caps it's been a rip roaring
Speaker 1: rally over the past six weeks. Is it time to
Speaker 1: get out ahead of some concerns about growth?
Speaker 2: We don't think it is. And actually it's fascinating because
Speaker 2: this has never happened for before. In twenty twenty three,
Speaker 2: you undercut your bear market low in small caps just
Speaker 2: at that October low, and then less than a month
Speaker 2: later you had a new fifty two week high in
Speaker 2: the Nasdaq. That kind of divergence has never been seen
Speaker 2: before in the entirety of a calendar year, let alone
Speaker 2: one month. And so if you think about it, even
Speaker 2: if you do get a recession, small caps have for
Speaker 2: the most part already been through their recession in terms
Speaker 2: of share price performance. And again, similar to consumer staples
Speaker 2: and healthcare, they're going to benefit from a labor market
Speaker 2: that's easing. And yes, the consumer still does have excess savings,
Speaker 2: which we think cushions the severity of any downturn.
Speaker 1: Julina Emmanuel of Evercore ISI, thank you so much. Right now,
Speaker 1: we are seeing in the market a little bit of
Speaker 1: a lift to basically beyond the year end target that
Speaker 1: Julian has a forty seven eighty five, up a quarter
Speaker 1: of a percent. Julian, how much do you think though,
Speaker 1: that there is enough fear that could get brought in
Speaker 1: from any weakness to give a drawdown Given that there
Speaker 1: is so much cash it's going to be pushed out
Speaker 1: of money market funds as yields go in.
Speaker 2: Well, it's definitely going to cushion the blow. But again
Speaker 2: going back to this idea, yes, we've more or less
Speaker 2: been promised three rate cuts, but in fact, if inflation
Speaker 2: does not continue that you know very you know marked
Speaker 2: at this point downward path, you're still going to have
Speaker 2: cash yields north of four percent four and a half percent,
Speaker 2: and again within the context of the last fifteen years,
Speaker 2: that's still quite attractive.
Speaker 1: Join em Manuel, thank you so much. We've been talking
Speaker 1: so much about the Israel Hamas war that we have
Speaker 1: lost focus of another war that's been raging, which is Ukraine,
Speaker 1: and we've been focused all week with respect to whether
Speaker 1: they can get aid from the US but also from
Speaker 1: the European Union. Let's get straight to it. This is
Speaker 1: a really important conversation. John Lieber, Managing director at the
Speaker 1: Eurasia Group and former policy advisor to Senator Mitch Baccaddel
Speaker 1: joining us right now. And I do want to start there, John,
Speaker 1: considering the fact that it wasn't just the US that
Speaker 1: failed to pass aid after of lot of Roslenski came
Speaker 1: to Washington, d C. But overnight the EU as well,
Speaker 1: also failing to get anything through before the year of
Speaker 1: the before the end of the year.
Speaker 5: Yeah, I mean, but a lot of veto points in it,
Speaker 5: and it makes it hard to get anything done. But
Speaker 5: in the US, you know, this is less of an
Speaker 5: urgent issue that is in the EU, which of course
Speaker 5: also has a lot of veto points because any one
Speaker 5: country can stop the aid come flowing for now. Ultimately,
Speaker 5: you know, this is a much higher stakes issue in
Speaker 5: Europe than it is for the United States, and probably
Speaker 5: the Europeans are going to be potentially more reliable partners
Speaker 5: than the United States is. But it looks right now
Speaker 5: like the US is set to punt on this issue,
Speaker 5: perhaps into January of next year, when further funding for
Speaker 5: Ukraine will be tied up not only in the Congress's
Speaker 5: ability to negotiate border funds, but also in their ability
Speaker 5: to avoid a government shutdown. So this is a really
Speaker 5: messy ootiation right now, and the outlook does not look
Speaker 5: great for the continued major flow of weapons and support
Speaker 5: that we've seen to Ukraine so far.
Speaker 3: Well, John, that's what I wanted to talk about, the
Speaker 3: point that you made that this is a higher priority,
Speaker 3: a bigger issue with more urgency when it comes to
Speaker 3: the EU. You take a look at what's happening in
Speaker 3: the US Congress that debate between more usaid for Ukraine,
Speaker 3: whereas the Republicans pushing for more border security. Who do
Speaker 3: you think, what does the compromise look like there, and
Speaker 3: how does this evolve in January.
Speaker 5: I think the Republicans have the upper hand in the
Speaker 5: debate right now because they have the ability to veto
Speaker 5: any additional aid, because Speaker Mike Johnson can just say
Speaker 5: thanks for your effort to the Senate, I'm not putting
Speaker 5: your bill on the floor unless I like it. There's
Speaker 5: almost certainly enough votes in both the House and the
Speaker 5: Senate to pass more Ukraine aid plus more border funds.
Speaker 5: The Republicans are using this as a leverage point to
Speaker 5: hold out for everything they want on the southern border,
Speaker 5: changing the asylumn rules, creating more ability for the government
Speaker 5: to deport legal immigrants, and the Democrats are saying, no,
Speaker 5: we aren't gonna do that. They think this is inhumane
Speaker 5: and they don't want to treat migrants on the southern
Speaker 5: border that way, and they're at an impasse. So I
Speaker 5: think ultimately the compromise is going to be something like
Speaker 5: what Biden proposed, which is a tens of billions of
Speaker 5: dollars in additional aid for Ukraine but the whole a
Speaker 5: plus the border but the whole thing could fall apart
Speaker 5: because the two sides just are not close to agree
Speaker 5: on this border issue, which right now is the lynchpin
Speaker 5: towards getting a deal.
Speaker 4: John, I'd like to shift back to Europe here. I'd
Speaker 4: like to talk about Hungary. I'd like to talk about
Speaker 4: Victor Orbon, the Fidez party. I mean, what is going
Speaker 4: on there? I mean, does Victor Orbon represent the belief
Speaker 4: of the Hungarian people? I mean, they are holding up
Speaker 4: the fifty billion odd in funds to Ukraine at this point,
Speaker 4: they're the only EU member doing that. What comes next?
Speaker 5: Yeah, they're holding up the money. But oddly they did
Speaker 5: let they walked out of the room when it came
Speaker 5: to the Ukraine ascension talks. So it seems like they're playing.
Speaker 5: What kind of game he's playing is really unclear right now. Obviously,
Speaker 5: Orbon's trying to flex some muscle inside the EU and
Speaker 5: make sure the Hungary's influence is felt, and they're going
Speaker 5: to revisit this next year as well. I think that
Speaker 5: for both of these bodies, this debate is far from
Speaker 5: over and there's still some more negotiating and horse trading
Speaker 5: that can happen both within the EU and the United States.
Speaker 5: But it's hard to say exactly why Orbon's doing things
Speaker 5: this way. It looks like he's just trying to increase
Speaker 5: some leverage over the EU for Hungary.
Speaker 4: Well, John, Hungary is generally viewed as, you know, the
Speaker 4: closest ally to China within the EU. I wonder can
Speaker 4: we read anything into that is China, you know, kind
Speaker 4: of pulling the strings behind the scenes.
Speaker 5: A little difficult to say, especially at this point. I
Speaker 5: think the outcome yesterday was a little unexpected, particularly on
Speaker 5: the fact they let the Ukraine ascension go forward. I
Speaker 5: think that's a sign. You know, that's a long term process.
Speaker 5: It is going to take many years probably for Ukraine
Speaker 5: to qualify for EU membership. And it's really difficult to
Speaker 5: say what China benefits from the EU not funding this war.
Speaker 5: I think what China wants is probably an end of
Speaker 5: the war as quickly as possible, but not necessarily on
Speaker 5: Russia's terms, which is where all of this is going
Speaker 5: to end up. If the Ukraine can't get more aid
Speaker 5: out of its Western partners.
Speaker 1: Just to sort of put a bow tie on that,
Speaker 1: are you basically saying that Russia will win if Ukraine
Speaker 1: doesn't get more aid.
Speaker 5: If Ukraine doesn't get more aid, Russia has the upper hand.
Speaker 5: They've got the manufacturing capabilities and the patients in long
Speaker 5: term timeframe to wear down the West. So Ukraine really
Speaker 5: needs the West to step up here, and if they don't,
Speaker 5: they will win this war.
Speaker 1: In the meantime, we all also are dealing with the
Speaker 1: Hamas Israel war that keeps going on. But there seems
Speaker 1: to be a real tone shift from this administration really
Speaker 1: warning Israel against more kind of indiscriminate air strikes or
Speaker 1: more broad based military action and more sort of surgical
Speaker 1: types of procedures going forward. How big of a deal
Speaker 1: do you think this is?
Speaker 5: Yeah, I think as the kind of horrors of what
Speaker 5: happened on October seventh fade in the public's imagination, the
Speaker 5: political liability for Biden of the Israeli response in Gaza
Speaker 5: is growing, and Biden, you know, there's a lot of
Speaker 5: damage that's already been done for him domestically among the
Speaker 5: progressive left and young voters, which are both important parts
Speaker 5: of his coalition. And I think that the humanitarian situation
Speaker 5: in Gaza is becoming untenable for the United States to
Speaker 5: support now of course, Biden's only shifting his tone. The
Speaker 5: US is still supporting the Israeli militarily and will continue
Speaker 5: to do so for the foreseeable future. There is a
Speaker 5: broad consensus among in the United States Congress that Israel
Speaker 5: has a right to defend itself and it will continue
Speaker 5: to do so with US support. But for Biden, this
Speaker 5: is becoming a political liability, and I think that they're
Speaker 5: going to start putting more and more pressure on Israel
Speaker 5: privately and publicly to be more tactical than what they
Speaker 5: want to do in how they approach this. But that
Speaker 5: doesn't mean the Israel is going to stop, and it
Speaker 5: doesn't mean that the is going to stop supporting now.
Speaker 5: It just what the US wants to see is that
Speaker 5: hasten hastening to the next stage of this war, where
Speaker 5: you know, Hamas is removed and then you can move
Speaker 5: to a kind of post war period and rebuilding.
Speaker 3: Well, John, to your point on political pressure, we're talking
Speaker 3: about how the Biden administration is handling this, but let's
Speaker 3: talk about Joe Biden, the presidential candidate. Of course, for
Speaker 3: what eleven odd months out from the presidential election, you
Speaker 3: think about these hot wars happening in other parts of
Speaker 3: the world. How is the American voting public ranking that
Speaker 3: when they're heading to the polls.
Speaker 5: I think the wars are bad for Biden because it
Speaker 5: gives this narrative to Trump that the world's on fire,
Speaker 5: and Trump, you know, ignoring COVID, can is go to say,
Speaker 5: when I was president, we had peace, we had prosperity,
Speaker 5: we had growing real incomes, there was no inflation, and
Speaker 5: you didn't have all these wars around the globe that
Speaker 5: are He's going to attribute to President Biden's withdrawal from Afghanistan.
Speaker 5: So as a political matter, the wars are going to
Speaker 5: play in a pretty major way in the narrative of
Speaker 5: the US election next year, even though foreign policy is
Speaker 5: typically not a top issue for American voters, and I
Speaker 5: think that very much works to Trump's benefit. There's nothing
Speaker 5: Biden can do about it. He is committed to funning
Speaker 5: Ukraine if you can, if you can get the money,
Speaker 5: and he's committed to defend allowing Israel to defend itself.
Speaker 5: So this isn't Biden's choice, but it's going to be
Speaker 5: a problem for him next year if these wars are
Speaker 5: both still raging in the middle of the US campaign.
Speaker 1: John Leeb, thank you so much for being with us
Speaker 1: of Eurasia. We appreciate the insights joining us around the table.
Speaker 1: Greg Daco, Chief economist at EY. Do you think that
Speaker 1: hopes and dreams of immaculate disinflation have gotten overblown and
Speaker 1: that there is this concern about a slowdown that's steeper
Speaker 1: than people are pricing.
Speaker 6: In well, I think we have to be nuanced when
Speaker 6: we analyze the economic landscape. We are in an environment
Speaker 6: where we are seeing slower economic activity. I think there's
Speaker 6: no denying that, whether it's on the consumer side or
Speaker 6: on the business side, we have seen a slowdown in
Speaker 6: terms of the pace of growth, so it's not immaculate disinflation.
Speaker 6: We've seen the supply come back online. That's helped with
Speaker 6: the supply the inflationary picture, and we're seeing moderating demand
Speaker 6: which is also putting downward pressure on inflation. So it's
Speaker 6: not immaculate and I think as we look into next year,
Speaker 6: that's going to be continuing to drive inflation lower, whether
Speaker 6: it's rent disinflation, slower momentum in terms of growth activity,
Speaker 6: even wage growth compression, and the fact, let's not forget
Speaker 6: that the FED is still maintaining a restrictive monetary policy stance.
Speaker 6: Combine all of those and you have all the right
Speaker 6: ingredients for a disinflationary environment.
Speaker 3: Let's talk about sentiment a little bit, because we've been
Speaker 3: talking about this morning, the fact that you think about
Speaker 3: the US consumer and you take a look at these
Speaker 3: sentiment surveys and it has just been grim out there
Speaker 3: for years now, and when do you think about inflation. Yes,
Speaker 3: we're in this disinflationary environment, but the outright level of
Speaker 3: prices is still much higher than it was. Do we
Speaker 3: need to see actual deflation to see some of those
Speaker 3: sentiment numbers that.
Speaker 6: You're alluding to the most important point when it comes
Speaker 6: to the inflationary dynamics. Because we talk about inflation, economists,
Speaker 6: policy makers, we all talk about inflation, But what matters
Speaker 6: for the average person, whether it's the consumer or the
Speaker 6: business leader, is the cost level. The cost fatigue phenomenon
Speaker 6: is very real. The cost of everything is much higher
Speaker 6: than it was pre pandemic, whether it's goods, services, labor, inventory,
Speaker 6: even interest rates. Everything is much higher, costs much more.
Speaker 6: That is leading to business decisions being pulled back and
Speaker 6: being more scrutinous about how much to invest. It's leading
Speaker 6: consumers to be more careful about how many goods, how
Speaker 6: many services they buy, even though they're spending a little
Speaker 6: bit less. And I think that's the very important narrative
Speaker 6: that's going to be really underlying the pace of growth
Speaker 6: next year is how sensitive people are to this higher
Speaker 6: cost cost of everything environment and how the labor market reacts.
Speaker 6: Let's not forget the labor market is the key pillar
Speaker 6: to economic activity.
Speaker 4: Greg the dot Pot's calling for seventy five of cuts.
Speaker 4: I think the market's priced inn one hundred and forty
Speaker 4: PIFs of cuts. It's pretty big divergence there. You know.
Speaker 4: Talk to me about the why is disinflation enough of
Speaker 4: a reason for the Fed the cut rates in twenty
Speaker 4: twenty four?
Speaker 6: Well, yeah, I think the key reason why the Fed
Speaker 6: will be adjusting rates is because it sees less inflation.
Speaker 6: Last time I was on the show, I was talking
Speaker 6: about the fact that we have the holy grail of
Speaker 6: non inflationary growth in front of us. We have an
Speaker 6: economy that's still moving forward, but inflation that is moderating.
Speaker 6: That is what the Fed wants. The Fed does not
Speaker 6: want a recession. It wants to see inflation come back
Speaker 6: down to two percent and become a non issue, a
Speaker 6: non topic, something that we don't talk about every day
Speaker 6: on this show or on other platforms. This is really
Speaker 6: what the FED is aiming for. So whether it comes
Speaker 6: to the fed's forecast being realized or the market expectations
Speaker 6: being realized, I think the truth in the end will
Speaker 6: lie somewhere in between, probably one hundred and twenty five
Speaker 6: bases points of rate cuts by the end of the
Speaker 6: next year, with an environment where inflation is gradually slowing
Speaker 6: and we don't enter recession. If we enter a recession,
Speaker 6: the picture in the game is going to be quite different.
Speaker 4: Greg off the year, Lisa and I always like to
Speaker 4: talk about real yields. She likes the five year. I
Speaker 4: like the ten year. Personally ten year real yield one
Speaker 4: point eighty eight percent, down sixty basis points since October.
Speaker 4: How low can real yields go well?
Speaker 6: I think that's the key question for next year is
Speaker 6: going to be what happens in terms of growth momentum,
Speaker 6: what happens in terms of inflation momentum, and how rapidly
Speaker 6: does is a FED ease monetary palsy. That is what
Speaker 6: fetch your Powell and the rest of the FED officials
Speaker 6: are going to be focused on They're going to be
Speaker 6: focused on ensuring that real yields don't rise. Dude, do
Speaker 6: you not want to be tightening in the face of
Speaker 6: a slowdown in final demand, in the face of a
Speaker 6: slowdown in inflation. So they're going to be recalibrating monetary
Speaker 6: palsy gradually. I think the March rate cut calls right
Speaker 6: now are a bit extreme. They're going to be making
Speaker 6: sure that inflation is really sustainably on this trajectory of
Speaker 6: lower inflation, and then recalibrate to the downside gradually with
Speaker 6: twenty five basis point increments to start with.
Speaker 1: I mean, well, I do want to just bring this
Speaker 1: to you. New York Fed chair John Williams has been speaking,
Speaker 1: and he said that the market is reacting maybe more
Speaker 1: strongly than forecasts show, and also said we aren't really
Speaker 1: talking about rate cuts right now, as Neil Data over
Speaker 1: at Renaissance just commented, sorry, but you can't put that
Speaker 1: toothpaste back in the tube. There is, however, a market response.
Speaker 1: We are seeing bond yields rise to year yields rising
Speaker 1: to about four point four six percent ten year yields
Speaker 1: spiking upward to about three point nine six percent. This
Speaker 1: raises a question, Greg, do you think that they are
Speaker 1: getting concerned about the easing and financial conditions beyond what
Speaker 1: Jaypowill seemed to indicate yesterday. I think when.
Speaker 6: People say that the easing of financial conditions is going
Speaker 6: to reignite growth and reignite inflationary pressures, I tend to
Speaker 6: be a little bit more cautious. First of all, as
Speaker 6: we were just talking, we have to factor in the
Speaker 6: fact that maybe market expectations are a bit too strong.
Speaker 6: FED policy communication is going to recalibrate that market perspective.
Speaker 6: Number two, it's not for get as we just talked
Speaker 6: about cost fatigue and labor market developments are going to
Speaker 6: be the key drivers of economic activity, not so much rates.
Speaker 6: And then number three, and this is very important. We
Speaker 6: are in an environment where there is less rate sensitivity.
Speaker 6: There was much less rate sensitivity on the upside. We
Speaker 6: should expect to be a little bit less rate sensitivity
Speaker 6: on the downside as well. All three factors mean that
Speaker 6: we have to be a little bit more nuanced when
Speaker 6: it comes to the economic picture.
Speaker 1: Greg Daco wonderful as always to catch up with you.
Speaker 6: Happy hollog always a pleasure, Happiologist Greg Daco of.
Speaker 3: E Y, Let's welcome in Meghan swib Or. She is
Speaker 3: director of US rate Strategy over at Bank of America.
Speaker 3: And this feels how it usually goes. Of course, you
Speaker 3: have your own pale come out at these FED meetings
Speaker 3: and then FED speak happens and tend to walk it back.
Speaker 2: Yeah.
Speaker 7: I think that's exactly right, Katie. We had just such
Speaker 7: a prominent rates market response to Powell's very dubvish comments here,
Speaker 7: and so we were actually flagging some of this in
Speaker 7: our recent publication. It seems like the market's in for
Speaker 7: a bit of a consolidation here, and I think that
Speaker 7: William's comments really endorse that. One of the things, though,
Speaker 7: that we see born out in a lot of the
Speaker 7: indicators that we look at though, is we had positioning
Speaker 7: largely long coming into some of these moves that we
Speaker 7: got so in rates in particular, that's an area where
Speaker 7: we can see investors covering profit taking alongside some of
Speaker 7: these recent moves as well.
Speaker 4: Well. I mean, Katie says that I never like to
Speaker 4: not talk about currencies, and we're talking about currencies here
Speaker 4: because you talk about currencies. We're talking about dollar yen here.
Speaker 4: I mean, that's one of your trades, right, you do
Speaker 4: believe that there's more downside to dollar yenna current levels.
Speaker 4: But I look at rate differentials and I say, wow,
Speaker 4: look at those rate differentials. To put that trade on,
Speaker 4: My goodness, you're going to be bleeding on a P
Speaker 4: and L basis. How do you put that type of
Speaker 4: trade on? How do you play that in the market.
Speaker 7: So this is actually something that we're seeing a lot
Speaker 7: in the FX and rate sentiment survey that we conduct
Speaker 7: at at b of A. Generally, investors are short dollar,
Speaker 7: and the way that they're kind of playing this, of
Speaker 7: course verses against the yen, and we think that positioning
Speaker 7: is really quite stretched right now. So ahead of some
Speaker 7: of these adjustments that we see coming from the BOJ,
Speaker 7: we think that the preferred way to do this is
Speaker 7: as in short jgbs rather than play this in the
Speaker 7: currency market because of some of that stretched positioning that
Speaker 7: we see.
Speaker 4: No, no, I don't disagree, but then you also have
Speaker 4: I mean, look, I forget about dollar yen. You've got mespacogin, right,
Speaker 4: I mean, look at mexpaeso. It's one of the few
Speaker 4: currencies that's really been kind of off relative to the
Speaker 4: whole of every other currency with the dollar, you know,
Speaker 4: because it kind of tracks the dollar. You know, talk
Speaker 4: to us about that dynamic, you know the fact that
Speaker 4: you know, you've got currencies like the Mexican pay so
Speaker 4: that's tend to track the dollar in certain environments, currencies
Speaker 4: like the Japanese and that tend to track the dollar
Speaker 4: and risk off environments. How do you kind of manage
Speaker 4: through that when you're a fixed income investor?
Speaker 7: So I think that what the real impetus that we
Speaker 7: see for a lot of this divergence in positioning is
Speaker 7: just that conviction about the said path, which is actually
Speaker 7: another thing that we see born out in the survey,
Speaker 7: is that investors are long rates and short dollar. But
Speaker 7: ultimately alongside that, there is some skepticism around how which
Speaker 7: is the Fed ultimately going to cut investors generally thinking
Speaker 7: that if there's one central bank that can surprise a
Speaker 7: little bit more so to the hawker side versus expectations,
Speaker 7: it could indeed be the FED. And I think that
Speaker 7: it really comes down to this message that they've been delivering,
Speaker 7: which is data dependence. The market understands their reaction function
Speaker 7: now that they want to be cutting alongside this progress
Speaker 7: in PCE inflation, and so that's why we've gotten this
Speaker 7: such sharp recalibration. But the Fed has really done such
Speaker 7: a heel turn on this that there's risks that they
Speaker 7: can do that again.
Speaker 3: Well, let's talk about the dispersion of potential outcomes here,
Speaker 3: because you have the dot plot penciling in what seventy
Speaker 3: five basis points of cuts next year, then you have
Speaker 3: the market at one hundred and fifty basis points. Where
Speaker 3: do you fall in between that?
Speaker 7: So we've been long coming into this this most recent
Speaker 7: rate rally. I want to say the year because we
Speaker 7: wrote our year aheads in November, but it really has
Speaker 7: been almost a year and in a month in terms
Speaker 7: of some of this price action. So we had been
Speaker 7: recommending investors trade long trade on the five year sector
Speaker 7: in particular, because that's the point in the curve that
Speaker 7: cannot just be sensitive to just what the timing is
Speaker 7: of cuts near term, but also this trough of the
Speaker 7: FED cutting cycle. So when we look at market pricing
Speaker 7: versus the dot plot, what we see is the market
Speaker 7: is certainly overpricing the extent of cuts versus what the
Speaker 7: Fed is endorsed. But what we see also on the
Speaker 7: flip side is that the market's pricing a higher trough
Speaker 7: of the FED cutting cycle than ultimately what the Fed
Speaker 7: is telling us. Right, we look at the dot plot
Speaker 7: suggesting that the Fed is going to get to below
Speaker 7: three percent, that's where they think neutral is, But the
Speaker 7: market's still very reluctant to price that, and I think
Speaker 7: it really is driven by some of the uncertainty that
Speaker 7: we still see in the inflation market and the fact
Speaker 7: that we were not really seeing broad based weakness elsewhere
Speaker 7: and trying to get a better sense of what is
Speaker 7: it that's going to cause the Fed to really cut
Speaker 7: more aggressively and bring rates back down to something that
Speaker 7: they think is that neutral rate. So we've been long,
Speaker 7: we've taken that position largely off because of the the
Speaker 7: very sharp performance that we've observed, and now we're being
Speaker 7: a little bit more tactical, you know, managing some of
Speaker 7: the opportunities that we see headed into next year, but
Speaker 7: are roughly neutral at this point.
Speaker 3: All right, Megan, great to check in with you, especially
Speaker 3: to get your live reaction to these comments from John
Speaker 3: Williams that are moving the markets right now. That is
Speaker 3: Megan Swiber of Bank of America.
Speaker 1: Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and
Speaker 1: anywhere else you get your podcasts. Listen live every weekday,
Speaker 1: starting at seven am Eastern on Bloomberg dot Com, the
Speaker 1: iHeartRadio app tune In, and the Bloomberg Business app. You
Speaker 1: can watch us live on Bloomberg Television and always on
Speaker 1: the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz, and
Speaker 1: this is Bloomberg