1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keene. Along 2 00:00:09,200 --> 00:00:13,200 Speaker 1: with Jonathan Ferrell and Lisa Brownowitz Jaily. We bring you 3 00:00:13,280 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,960 --> 00:00:23,799 Speaker 1: Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg dot Com, 5 00:00:23,920 --> 00:00:29,920 Speaker 1: and of course on the Bloomberg terminal. Jonnis. Right now, 6 00:00:29,960 --> 00:00:31,960 Speaker 1: it's Domini Constant, the head of Macriz Strategy, and a 7 00:00:32,080 --> 00:00:34,800 Speaker 1: Huo America's don't fantasity catch up with you? Say one 8 00:00:34,880 --> 00:00:37,199 Speaker 1: morning for it, Let's just start with yesterday and that 9 00:00:37,280 --> 00:00:41,880 Speaker 1: news conference. Number one takeaway for you, Tom, What was it? Um, Well, 10 00:00:42,640 --> 00:00:44,639 Speaker 1: the main thing I thought so was actually at least 11 00:00:44,680 --> 00:00:48,080 Speaker 1: they started to introduce the idea that the cumulsive effects 12 00:00:48,080 --> 00:00:51,440 Speaker 1: of Monterrey Titan to dates are going to have to 13 00:00:51,440 --> 00:00:55,200 Speaker 1: be considered. So there's some sense of mutual and the 14 00:00:55,320 --> 00:00:59,080 Speaker 1: measure of restrictiveness that's uh in place, and it's going 15 00:00:59,120 --> 00:01:02,000 Speaker 1: to be in place as affords are realized. So I 16 00:01:02,040 --> 00:01:03,480 Speaker 1: mean that was the main thing. There's a there's a 17 00:01:03,480 --> 00:01:06,440 Speaker 1: shift in narrative. I absolutely agree it's important that they 18 00:01:06,520 --> 00:01:10,240 Speaker 1: raised the you know, the peak funds rate versus September dots. 19 00:01:10,720 --> 00:01:12,399 Speaker 1: But you know that that was that's been going on 20 00:01:12,480 --> 00:01:14,600 Speaker 1: for a while anyway. So the main thing for me 21 00:01:14,680 --> 00:01:16,920 Speaker 1: is a new narrative. If you like dominic you know 22 00:01:17,120 --> 00:01:19,759 Speaker 1: yesterday and folks, you can get it from Missoo. There's 23 00:01:19,800 --> 00:01:23,000 Speaker 1: a single classic constant paragraph in there where you say 24 00:01:23,080 --> 00:01:26,679 Speaker 1: this is faith based central banking and they risk a 25 00:01:26,720 --> 00:01:31,240 Speaker 1: textbook type two error something. Laureate Michael Spence talks a 26 00:01:31,280 --> 00:01:35,720 Speaker 1: lot about tell us about the certitude of FED policy 27 00:01:36,280 --> 00:01:41,080 Speaker 1: butterersed up against the potential for error. Well, I mean 28 00:01:41,120 --> 00:01:43,959 Speaker 1: the problem is, um, we don't really know where neutral 29 00:01:44,800 --> 00:01:48,480 Speaker 1: rates are in the sense of producing or being consistent 30 00:01:48,520 --> 00:01:51,840 Speaker 1: with price stability. You only observe that after the event. 31 00:01:52,000 --> 00:01:54,840 Speaker 1: So we can look back at historical data. And because 32 00:01:54,880 --> 00:01:56,640 Speaker 1: we don't even have that much data going an you're 33 00:01:56,640 --> 00:01:59,680 Speaker 1: going back maybe twenty years. Uh. You know, the neutral 34 00:01:59,800 --> 00:02:02,320 Speaker 1: rate you know right now, based on that backward looking thing, 35 00:02:02,360 --> 00:02:04,200 Speaker 1: would be around one percent. But we could be in 36 00:02:04,240 --> 00:02:07,400 Speaker 1: a new regime in which case neutral rates are higher. Uh, 37 00:02:07,440 --> 00:02:10,959 Speaker 1: and so by by those old metrics that the FED 38 00:02:11,080 --> 00:02:14,520 Speaker 1: is definitely super restrictive, but they may not be restrictive enough. 39 00:02:15,320 --> 00:02:17,320 Speaker 1: If you are you know, if the neutral rates is 40 00:02:17,360 --> 00:02:21,480 Speaker 1: in fact higher and understanding why neutral shifts is very important, 41 00:02:21,560 --> 00:02:24,160 Speaker 1: and there are lots of behavioral things that could be 42 00:02:24,200 --> 00:02:26,360 Speaker 1: going on there, their structural things that are going on 43 00:02:26,400 --> 00:02:29,760 Speaker 1: in demographics and globalization that could be shifting neutral. So 44 00:02:29,840 --> 00:02:32,120 Speaker 1: in some sense, you know, the question is what does 45 00:02:32,160 --> 00:02:35,640 Speaker 1: a central bank do in this environment? Uh? And I 46 00:02:35,680 --> 00:02:37,760 Speaker 1: would just suggest they have to be a bit cautious 47 00:02:37,960 --> 00:02:40,320 Speaker 1: at some point when when they know that on old 48 00:02:40,360 --> 00:02:43,680 Speaker 1: metrics they're super restrictive, perhaps they need to sort of 49 00:02:43,720 --> 00:02:46,880 Speaker 1: just take a pause, recalibrate, you know, a way down 50 00:02:46,880 --> 00:02:49,600 Speaker 1: a couple of meetings in the course of four before 51 00:02:49,680 --> 00:02:52,480 Speaker 1: they decide if they need to carry on raising rates. 52 00:02:52,480 --> 00:02:53,880 Speaker 1: So it would be a kind of a pause that 53 00:02:53,960 --> 00:02:57,480 Speaker 1: refreshes a tightening cycle. Or maybe everything will fall into 54 00:02:57,520 --> 00:02:59,799 Speaker 1: place and they'll say a few you know, with think 55 00:02:59,840 --> 00:03:02,839 Speaker 1: good this, We've done enough, and then maybe they've done 56 00:03:02,840 --> 00:03:05,720 Speaker 1: too much and they have to scurry back the other direction. 57 00:03:05,800 --> 00:03:08,080 Speaker 1: So that's the issue Dominic we were talking earlier. At 58 00:03:08,120 --> 00:03:10,119 Speaker 1: the beginning of the show, John asked, is there any 59 00:03:10,120 --> 00:03:12,280 Speaker 1: reason to be bullish right now in equities because you've 60 00:03:12,280 --> 00:03:15,040 Speaker 1: got the FED chair basically coming out and in so 61 00:03:15,120 --> 00:03:18,240 Speaker 1: many words, not being particularly happy at seeing any kind 62 00:03:18,280 --> 00:03:20,160 Speaker 1: of rally in the face of this inflation and the 63 00:03:20,200 --> 00:03:23,720 Speaker 1: need for tighter financial conditions. What's your view on that. 64 00:03:23,840 --> 00:03:27,560 Speaker 1: I mean, where could there be room for bullishness amid 65 00:03:27,760 --> 00:03:32,040 Speaker 1: an absolute rebuttle of any type of devilish pivot well 66 00:03:32,080 --> 00:03:33,840 Speaker 1: as hard as be bullish on anything, to be honest, 67 00:03:34,280 --> 00:03:38,760 Speaker 1: either either bonds or equities. Um. The the issue for equities, 68 00:03:38,800 --> 00:03:41,520 Speaker 1: I think really is down to a hard landing or 69 00:03:41,600 --> 00:03:44,160 Speaker 1: soft landing. If there's a hard landing, you definitely cannot 70 00:03:44,160 --> 00:03:48,119 Speaker 1: be bullish on equities. They have a good downside in earnings, 71 00:03:48,160 --> 00:03:50,440 Speaker 1: and you know, we would suggest at least another sort 72 00:03:50,480 --> 00:03:53,800 Speaker 1: of ten maybe even downside in price on a sort 73 00:03:53,800 --> 00:03:56,520 Speaker 1: of hard landing. The other problem you've got is even 74 00:03:56,520 --> 00:03:59,720 Speaker 1: with a sort of softish landing, that the route to 75 00:04:00,000 --> 00:04:03,280 Speaker 1: to a soft standing, as we've always argued, is anyway 76 00:04:03,320 --> 00:04:06,640 Speaker 1: through margin compression. So it's it's earnings coming down. It's 77 00:04:06,680 --> 00:04:08,200 Speaker 1: just that you don't have to have a massive cost 78 00:04:08,240 --> 00:04:10,640 Speaker 1: reduction on top of it, which would involve you know, 79 00:04:10,720 --> 00:04:14,200 Speaker 1: really sort of shutting down sort of businesses. So it's 80 00:04:14,280 --> 00:04:16,359 Speaker 1: very difficult to be be be bullish. I would just 81 00:04:16,400 --> 00:04:18,760 Speaker 1: say that you could do a weighted average of soft 82 00:04:18,880 --> 00:04:21,640 Speaker 1: versus hard landing outcomes right now, by the way, we're 83 00:04:21,680 --> 00:04:24,320 Speaker 1: not already getting any sense of any landing uh and, 84 00:04:24,640 --> 00:04:26,640 Speaker 1: but you can do a weighted average and you could 85 00:04:26,680 --> 00:04:29,200 Speaker 1: say that, you know, fair value perhaps is around you know, 86 00:04:29,240 --> 00:04:31,400 Speaker 1: thirty six hundred. That's kind of where we've been working 87 00:04:31,440 --> 00:04:34,599 Speaker 1: to uh And and if the if the clouds clear 88 00:04:34,960 --> 00:04:37,640 Speaker 1: and the soft landing looks like it's sort of taking hold, 89 00:04:37,880 --> 00:04:40,039 Speaker 1: then then you've got upside you know, up to around 90 00:04:40,040 --> 00:04:42,159 Speaker 1: four thousand or sew on the SMP. So that's the 91 00:04:42,160 --> 00:04:45,240 Speaker 1: way I approach it. So, yes, it's difficult to be bullish, um. 92 00:04:45,279 --> 00:04:47,479 Speaker 1: But you know, maybe if you're in the soft landing camp, 93 00:04:47,680 --> 00:04:50,800 Speaker 1: you can sort of use some of this weakness to accumulates, 94 00:04:51,120 --> 00:04:54,120 Speaker 1: uh cover some shorts perhaps and maybe sort of look 95 00:04:54,200 --> 00:04:56,919 Speaker 1: for some kind of upside down the road. Certainly difficult 96 00:04:56,920 --> 00:04:59,080 Speaker 1: to be in that camp right now, Dominic custom, thank 97 00:04:59,120 --> 00:05:07,240 Speaker 1: you sir. From the yesterday. Somewhere in the vicinity of 98 00:05:07,240 --> 00:05:09,960 Speaker 1: two thirds of the way through the FED discussion, there 99 00:05:10,000 --> 00:05:12,800 Speaker 1: was a modest note from City Group and they framed 100 00:05:12,800 --> 00:05:16,080 Speaker 1: out a five percent two year yield to discuss that 101 00:05:16,160 --> 00:05:18,839 Speaker 1: when he Caesar joins US now global head of credit 102 00:05:18,839 --> 00:05:23,200 Speaker 1: strategy at credit sites. Why how does your world change 103 00:05:23,800 --> 00:05:26,599 Speaker 1: if the two year yield moves from four point seven 104 00:05:26,680 --> 00:05:31,560 Speaker 1: zero percent to five point zero zero percent? What actually 105 00:05:31,600 --> 00:05:34,240 Speaker 1: are we going to live with a five percent two 106 00:05:34,320 --> 00:05:38,120 Speaker 1: year yield? Well, it's good morning, Tom, thanks for having me. 107 00:05:38,600 --> 00:05:41,719 Speaker 1: I think that the conversation around a five percent yield, 108 00:05:41,800 --> 00:05:43,960 Speaker 1: both in the front end in the two year is 109 00:05:44,040 --> 00:05:47,159 Speaker 1: important as well as in the long end of the 110 00:05:47,320 --> 00:05:49,800 Speaker 1: curve with a ten year, where we've had a lot 111 00:05:49,839 --> 00:05:55,760 Speaker 1: of clients asking whether we're going to I know about helloween? 112 00:05:55,920 --> 00:06:00,840 Speaker 1: Is it like a hell? There we go, only disappointed 113 00:06:00,880 --> 00:06:03,080 Speaker 1: that we could only buy ten thousand dollars worth of 114 00:06:03,120 --> 00:06:07,479 Speaker 1: those ibons for his future savings. He's really set on 115 00:06:07,560 --> 00:06:10,320 Speaker 1: buying a monster truck for himself when he's older, so 116 00:06:10,560 --> 00:06:14,839 Speaker 1: hopefully we get there. But clients have been really focused 117 00:06:15,000 --> 00:06:18,279 Speaker 1: on what happened if we hit these five percent levels, 118 00:06:18,320 --> 00:06:20,360 Speaker 1: both in the front end and in the long end. 119 00:06:20,680 --> 00:06:23,279 Speaker 1: And I think that the two percent ten year yield 120 00:06:23,400 --> 00:06:26,560 Speaker 1: or the five percent to your yield discussion is really 121 00:06:26,600 --> 00:06:31,400 Speaker 1: important from kind of a credit risk perspective, whereas the 122 00:06:31,440 --> 00:06:34,200 Speaker 1: to the five percent ten year yield is really important 123 00:06:34,200 --> 00:06:38,599 Speaker 1: from a duration risk perspective, and the performance and credit 124 00:06:38,600 --> 00:06:42,840 Speaker 1: portfolios this year has been equally negatively impacted by both 125 00:06:42,880 --> 00:06:46,480 Speaker 1: credit and duration risk. So clients are trying to figure out, Okay, 126 00:06:46,560 --> 00:06:49,320 Speaker 1: which bet do I take? Now? Do I say a 127 00:06:49,400 --> 00:06:54,120 Speaker 1: recession is coming, extenduration and things are going to be okay? 128 00:06:54,480 --> 00:06:57,960 Speaker 1: Or alternatively, am I going to just get whipsot again 129 00:06:58,040 --> 00:07:00,760 Speaker 1: with the ten year going to five percent? In your 130 00:07:00,839 --> 00:07:02,840 Speaker 1: world winning? And this is not the world of our 131 00:07:02,839 --> 00:07:05,680 Speaker 1: listeners and viewers. How do you link the two year 132 00:07:05,760 --> 00:07:09,200 Speaker 1: yield move up with what we see in the new library? 133 00:07:09,200 --> 00:07:11,480 Speaker 1: Oh I s the f R A O I s 134 00:07:11,520 --> 00:07:14,960 Speaker 1: through fifty beeps this morning. This is all less of arrant, folks, 135 00:07:15,160 --> 00:07:17,600 Speaker 1: But all you need to know is in Winnie Caesar's world, 136 00:07:17,920 --> 00:07:20,040 Speaker 1: yields up? What does that mean to you? How do 137 00:07:20,120 --> 00:07:23,840 Speaker 1: you link them? So? Yields up has a lot to 138 00:07:24,000 --> 00:07:28,040 Speaker 1: just do with market liquidity functions and really what has 139 00:07:28,080 --> 00:07:34,160 Speaker 1: been happening with depository institutions and less smooth functioning in 140 00:07:34,240 --> 00:07:37,640 Speaker 1: the treasury market. More broadly, we have seen over the 141 00:07:37,640 --> 00:07:40,720 Speaker 1: course of this year as the Fed really started to 142 00:07:40,800 --> 00:07:43,640 Speaker 1: do q q T and then kind of amped up 143 00:07:43,720 --> 00:07:47,640 Speaker 1: its bond roll off, the treasury market liquidity has eroded 144 00:07:47,680 --> 00:07:51,720 Speaker 1: pretty considerably, and this has been particularly true in the 145 00:07:51,800 --> 00:07:54,239 Speaker 1: front end of the curve, which is why we're seeing 146 00:07:54,280 --> 00:07:57,600 Speaker 1: a lot of just really challenging movements on the wide 147 00:07:57,600 --> 00:08:00,200 Speaker 1: work side of things and in just the front end 148 00:08:00,200 --> 00:08:03,280 Speaker 1: of the treasury market. Given the volatility that we've seen 149 00:08:03,360 --> 00:08:06,520 Speaker 1: in benchmark rates. How much can you get behind this 150 00:08:06,560 --> 00:08:09,880 Speaker 1: assertion by JP Morgan's Bob Michael yesterday on Bloomberg TV 151 00:08:09,960 --> 00:08:12,800 Speaker 1: with John when he was saying that investment grade debt 152 00:08:12,880 --> 00:08:15,040 Speaker 1: really is the ballast that sort of come in the 153 00:08:15,120 --> 00:08:20,200 Speaker 1: storm to hang on to despite some of this underlying volatility. Yeah, 154 00:08:20,280 --> 00:08:23,440 Speaker 1: so I really respect that view. We've been very constructive 155 00:08:23,600 --> 00:08:27,360 Speaker 1: on US investment grade debt. With all in yields at 156 00:08:27,520 --> 00:08:31,440 Speaker 1: six percent in US i G. Historically, that's actually a 157 00:08:31,520 --> 00:08:33,880 Speaker 1: level where you can buy high yield and perform pretty 158 00:08:33,880 --> 00:08:38,000 Speaker 1: well in portfolios. So to have a cohort of companies 159 00:08:38,040 --> 00:08:41,920 Speaker 1: that are much stronger fundamentally at a six percent yield 160 00:08:42,040 --> 00:08:44,880 Speaker 1: feels really good. I think that what's really tripping investors 161 00:08:45,000 --> 00:08:48,640 Speaker 1: up is the percentage of spread that contributes to that 162 00:08:48,679 --> 00:08:50,920 Speaker 1: all in yield is much lower than it has been 163 00:08:50,960 --> 00:08:54,160 Speaker 1: for the past ten years, just because government treasury yields 164 00:08:54,200 --> 00:08:56,720 Speaker 1: are so much higher, So investors are really trying to 165 00:08:56,720 --> 00:08:59,640 Speaker 1: wrap their head around how much credit risk can I 166 00:08:59,720 --> 00:09:03,360 Speaker 1: take and feel comfortable with. I love this six percent 167 00:09:03,440 --> 00:09:06,520 Speaker 1: all in yield. And what we're telling investors is the 168 00:09:06,559 --> 00:09:10,280 Speaker 1: I G universe has a lot of flex in their 169 00:09:10,320 --> 00:09:13,680 Speaker 1: liquidity in their balance sheets in order to whether a 170 00:09:13,760 --> 00:09:17,679 Speaker 1: continued economics deceleration. When you've given all of this though, 171 00:09:18,000 --> 00:09:19,160 Speaker 1: how much do you have to look at some of 172 00:09:19,160 --> 00:09:21,720 Speaker 1: the technicals right this question of the l d I 173 00:09:21,840 --> 00:09:24,520 Speaker 1: concerns over in the United Kingdom, perhaps not in the 174 00:09:24,559 --> 00:09:27,760 Speaker 1: same form, but forced selling from some big institutions that 175 00:09:27,800 --> 00:09:30,319 Speaker 1: have been hit with massive losses, some of which and 176 00:09:30,360 --> 00:09:33,080 Speaker 1: I'm talking about the private debt and the private equity 177 00:09:33,120 --> 00:09:36,800 Speaker 1: world might not have been realized yet. Yeah, So the 178 00:09:36,880 --> 00:09:40,319 Speaker 1: liquidity side of the conversation is really interesting, especially because 179 00:09:40,360 --> 00:09:42,560 Speaker 1: one of the top things we heard from investors coming 180 00:09:42,600 --> 00:09:47,240 Speaker 1: into this year was we're reducing our allocation to us 181 00:09:47,320 --> 00:09:50,200 Speaker 1: I G. We're reducing our allocations to USI yield. We 182 00:09:50,280 --> 00:09:53,120 Speaker 1: realize that yields are going highler we realize that policy 183 00:09:53,160 --> 00:09:57,160 Speaker 1: tightening is upon us, and where people were going floating 184 00:09:57,240 --> 00:10:01,960 Speaker 1: rate affort classes, clos leverage, loans, private credit, private equity. 185 00:10:02,000 --> 00:10:05,040 Speaker 1: So there is the potential that we continue to see 186 00:10:05,120 --> 00:10:07,800 Speaker 1: kind of this re rack in terms of asset allocation. 187 00:10:08,080 --> 00:10:10,760 Speaker 1: But the benefit to us I G and high yield 188 00:10:10,920 --> 00:10:14,520 Speaker 1: is a lot of investors started their years underweight those 189 00:10:14,559 --> 00:10:17,240 Speaker 1: asset classes, and so there's a pretty good case to 190 00:10:17,280 --> 00:10:20,920 Speaker 1: be made that they should be rotating into something else. 191 00:10:21,240 --> 00:10:24,160 Speaker 1: The question is how much liquidity do they kind of 192 00:10:24,240 --> 00:10:27,040 Speaker 1: preserve or put on hand at the beginning of the 193 00:10:27,120 --> 00:10:29,280 Speaker 1: year instead of putting all their eggs in the eon 194 00:10:29,400 --> 00:10:33,760 Speaker 1: basket or in the private credit basket. When you when 195 00:10:33,760 --> 00:10:35,920 Speaker 1: we look at short term paper, and I guess we've 196 00:10:35,960 --> 00:10:38,560 Speaker 1: got to look to December as well. Does the FED 197 00:10:38,640 --> 00:10:41,120 Speaker 1: parlor game and the FED speeches that we're gonna get 198 00:10:41,440 --> 00:10:43,200 Speaker 1: I can't imagine what they're gonna be like here in 199 00:10:43,200 --> 00:10:46,320 Speaker 1: the coming days when when we look at the speeches, 200 00:10:46,360 --> 00:10:49,959 Speaker 1: does that actually affect short term yields? Are they now 201 00:10:50,040 --> 00:10:52,959 Speaker 1: just a beast out into two thousand twenty three to 202 00:10:53,080 --> 00:10:58,319 Speaker 1: stay elevated. I do think that what the FED governors 203 00:10:58,440 --> 00:11:01,000 Speaker 1: end up saying over the neck a few weeks is 204 00:11:01,080 --> 00:11:05,600 Speaker 1: going to be important. We've seen why what we've seen 205 00:11:05,640 --> 00:11:09,160 Speaker 1: a lot of volatility in the terminal rate that's priced 206 00:11:09,280 --> 00:11:12,920 Speaker 1: into the Fed funds futures market just in the past 207 00:11:12,920 --> 00:11:16,240 Speaker 1: twelve hours or so now at a terminal rate well 208 00:11:16,280 --> 00:11:20,280 Speaker 1: above five percent, about five point one eight percent. We're 209 00:11:20,320 --> 00:11:24,760 Speaker 1: going to be very focused on the conversation around lag 210 00:11:24,840 --> 00:11:28,280 Speaker 1: effects and kind of the appropriate case of tightening here 211 00:11:28,280 --> 00:11:31,640 Speaker 1: on out. Do you know, I don't mean to interrupt winning, 212 00:11:31,679 --> 00:11:36,319 Speaker 1: but this is just absolutely critical. Do you think various 213 00:11:36,320 --> 00:11:40,200 Speaker 1: and sundry FED speakers will talk back what we heard 214 00:11:40,240 --> 00:11:44,120 Speaker 1: from Chairman Paul yesterday. I think that there is the 215 00:11:44,200 --> 00:11:47,640 Speaker 1: potential that there will be more of a focus on 216 00:11:47,880 --> 00:11:51,280 Speaker 1: the lag effects and a slower pace of rate hikes 217 00:11:51,320 --> 00:11:55,160 Speaker 1: from here on out. Whereas said share Powell was very 218 00:11:55,240 --> 00:11:59,240 Speaker 1: much focused on kind of that overall higher destination in 219 00:11:59,320 --> 00:12:02,440 Speaker 1: terms of Fed funds. I think that the pace and 220 00:12:02,520 --> 00:12:05,240 Speaker 1: kind of the path to get to that destination is 221 00:12:05,280 --> 00:12:08,600 Speaker 1: still highly uncertain. There's still a lot of economics data 222 00:12:08,640 --> 00:12:11,280 Speaker 1: to come from now through the end of the year 223 00:12:11,440 --> 00:12:14,200 Speaker 1: and you know, let alone into next year. So I 224 00:12:14,240 --> 00:12:16,560 Speaker 1: do think that the Fed speakers are going to be 225 00:12:16,640 --> 00:12:21,080 Speaker 1: focused on that lag effects between policy tightening and actual 226 00:12:21,200 --> 00:12:24,439 Speaker 1: economic impact, because when we talk to our analysts that 227 00:12:24,520 --> 00:12:27,679 Speaker 1: credit side to cover all of these companies. They're definitely 228 00:12:27,720 --> 00:12:30,640 Speaker 1: seeing some signs of kind of transition in terms of 229 00:12:30,679 --> 00:12:35,080 Speaker 1: inflationary pressure and also transition in terms of expectations for 230 00:12:35,240 --> 00:12:38,600 Speaker 1: next year, which indicates to me that there is some 231 00:12:38,720 --> 00:12:43,199 Speaker 1: deceleration in inflation. There is a deceleration and growth, and 232 00:12:43,280 --> 00:12:45,960 Speaker 1: the FED kind of needs to acknowledge that, and that 233 00:12:46,040 --> 00:12:50,600 Speaker 1: the pace of tightening needs to be much more reconciled 234 00:12:50,720 --> 00:12:53,720 Speaker 1: with kind of the lagged impact of policy tightening on 235 00:12:53,880 --> 00:12:56,960 Speaker 1: actual economic conditions. When I say thank you, when I 236 00:12:56,960 --> 00:13:09,920 Speaker 1: says with credit science, yea. Now we talked to Jeffrey You, 237 00:13:10,080 --> 00:13:13,560 Speaker 1: senior market strategist b and Y Melon as well. Jeff, 238 00:13:13,640 --> 00:13:16,600 Speaker 1: I don't even know where to begin other than I 239 00:13:16,679 --> 00:13:20,160 Speaker 1: think an emotion of our listeners and viewers is the 240 00:13:20,320 --> 00:13:24,120 Speaker 1: system near breaking? No, it's not in the UK, but 241 00:13:24,240 --> 00:13:26,960 Speaker 1: dare we use that p word unpivoted? There's a key 242 00:13:27,000 --> 00:13:29,280 Speaker 1: line here. There are clear signs of the cost of 243 00:13:29,360 --> 00:13:33,000 Speaker 1: living crisis taking hold on on economic activities, suggesting more 244 00:13:33,000 --> 00:13:38,199 Speaker 1: gradual approach was warranted. An overtightening in policy, right, They 245 00:13:38,200 --> 00:13:41,840 Speaker 1: are worried about overtiping. They're worried about hitting the afterburners. 246 00:13:41,840 --> 00:13:44,640 Speaker 1: At exactly the wrong point in the household cycle. So 247 00:13:45,000 --> 00:13:47,520 Speaker 1: some doubts are creeping in, and I think that's where 248 00:13:47,520 --> 00:13:49,800 Speaker 1: we are. This is really very different from where the 249 00:13:49,800 --> 00:13:52,040 Speaker 1: feed is right now. Actually everyone else is different from 250 00:13:52,080 --> 00:13:54,319 Speaker 1: the feed is right now. You look at lugs earlier 251 00:13:54,360 --> 00:13:56,600 Speaker 1: today and it looks like Europe is starting to put 252 00:13:56,600 --> 00:13:58,880 Speaker 1: it away. We'll rather pull back. Well, that's exactly where 253 00:13:58,880 --> 00:14:00,520 Speaker 1: I wanted to go, Jeff how Am, Which is this 254 00:14:00,600 --> 00:14:03,920 Speaker 1: really representing a sea change among central bankers? The fact 255 00:14:03,960 --> 00:14:07,239 Speaker 1: that one committee member on the Bank of England's committee 256 00:14:07,480 --> 00:14:09,800 Speaker 1: did vote for a fifty basis point high another one 257 00:14:09,840 --> 00:14:12,600 Speaker 1: twenty five basis point how much is that the descent 258 00:14:12,679 --> 00:14:14,920 Speaker 1: that you can increasingly see around the world that will 259 00:14:14,960 --> 00:14:18,600 Speaker 1: eventually filter back to the Fed. So it is only 260 00:14:18,679 --> 00:14:22,000 Speaker 1: going to start to increase some starting in Europe. Again, 261 00:14:22,040 --> 00:14:24,160 Speaker 1: we saw it Norway today. It didn't seem like fifty 262 00:14:24,160 --> 00:14:26,920 Speaker 1: basis points was on the table, even though you know 263 00:14:27,000 --> 00:14:28,880 Speaker 1: that was where the market was. And now we're going 264 00:14:28,920 --> 00:14:32,800 Speaker 1: to start to only see increasing descents of not pursuing 265 00:14:32,800 --> 00:14:36,120 Speaker 1: things as aggressively the Fed. However, um so I think 266 00:14:36,160 --> 00:14:38,920 Speaker 1: you mentioned this early in the program. You know our dollar, 267 00:14:39,240 --> 00:14:41,200 Speaker 1: your problem that is going to take quite a bit 268 00:14:41,200 --> 00:14:44,120 Speaker 1: for them to start to worry about international conditions, because 269 00:14:44,160 --> 00:14:46,600 Speaker 1: from the US's point of view, it's about tightening conditions 270 00:14:46,600 --> 00:14:48,320 Speaker 1: in the U S. U S. Economy is still doing well, 271 00:14:48,400 --> 00:14:50,360 Speaker 1: so there's no obligation for the FED to take into 272 00:14:50,360 --> 00:14:52,840 Speaker 1: account wider conditions. How long can this last, Jeff? How 273 00:14:53,120 --> 00:14:56,040 Speaker 1: long can this divergence where the dollar is the pre 274 00:14:56,080 --> 00:14:59,840 Speaker 1: eminent trade and continues to strengthen. Is that an entire 275 00:15:00,040 --> 00:15:05,200 Speaker 1: kind of trade? So it will last longer than markets expect, 276 00:15:05,280 --> 00:15:07,680 Speaker 1: but more crucially, from from a positioning point of view, 277 00:15:07,760 --> 00:15:10,400 Speaker 1: it will last longer than markets hope. Right, So there 278 00:15:10,440 --> 00:15:13,040 Speaker 1: will still be repeated efforts a pricing of FED pivot 279 00:15:13,040 --> 00:15:15,880 Speaker 1: trade through equities, you know, through bonds, you know, through effex, 280 00:15:15,920 --> 00:15:17,720 Speaker 1: you know, through the dollar and the like. But I 281 00:15:17,800 --> 00:15:20,080 Speaker 1: think there's still a few more rounds of disappointments some 282 00:15:20,240 --> 00:15:22,480 Speaker 1: to come. We look at the where their terminal pricing is, 283 00:15:22,520 --> 00:15:24,400 Speaker 1: you know, right now it's going up, whereas everywhere else 284 00:15:24,440 --> 00:15:26,800 Speaker 1: now it's probably gonna start coming off. Jeff. We've been 285 00:15:26,840 --> 00:15:30,720 Speaker 1: discussing whether you should be trading growth expectations or rates 286 00:15:30,880 --> 00:15:32,720 Speaker 1: when it comes to the Euro. When it comes to 287 00:15:32,760 --> 00:15:34,680 Speaker 1: Sterling at least it's been building on that in this 288 00:15:34,720 --> 00:15:38,200 Speaker 1: conversation too, based on what the bank having has just said, 289 00:15:38,480 --> 00:15:40,840 Speaker 1: it's that positive news for Sterling that they're pushing back 290 00:15:40,880 --> 00:15:44,000 Speaker 1: against the higher terminal rate that would have actually hammered 291 00:15:44,000 --> 00:15:47,120 Speaker 1: growth over the next couple of years. Um. I think 292 00:15:47,160 --> 00:15:50,440 Speaker 1: initially it's not to be frank because the markets still 293 00:15:50,440 --> 00:15:53,240 Speaker 1: working off rate differentials between the b o E and 294 00:15:53,320 --> 00:15:55,840 Speaker 1: the Fed. UM So now that correlation needs to snap 295 00:15:55,880 --> 00:15:58,400 Speaker 1: back right after the mini budget and kind of trashed it. 296 00:15:58,800 --> 00:16:01,360 Speaker 1: So if that correlation and dust stop back now, then 297 00:16:01,480 --> 00:16:03,080 Speaker 1: on a cable point of view, you know, then no 298 00:16:03,160 --> 00:16:05,840 Speaker 1: Sterling is going to struggle. But if you think of 299 00:16:06,000 --> 00:16:08,560 Speaker 1: that not as type policy, if the household is going 300 00:16:08,600 --> 00:16:11,080 Speaker 1: to get some relief and then growth is gonna be 301 00:16:11,080 --> 00:16:13,360 Speaker 1: slightly better in the UK compares the Eurozone compared to 302 00:16:13,360 --> 00:16:16,000 Speaker 1: stand Scandinavia than relative any traits and that that could 303 00:16:16,000 --> 00:16:18,680 Speaker 1: start to come through. We just look at intro European divergence. 304 00:16:18,800 --> 00:16:20,600 Speaker 1: But the dollar is still going to ragn supreme at 305 00:16:20,600 --> 00:16:22,800 Speaker 1: this point. Getting a bonus around Tom with Jeff you 306 00:16:23,320 --> 00:16:27,240 Speaker 1: how case that just stick with Jeff you Bmy manager 307 00:16:31,360 --> 00:16:34,360 Speaker 1: Dan McKee was a force on Wall Street. He went 308 00:16:34,360 --> 00:16:37,320 Speaker 1: off to a gentleman named Corner point seven two and 309 00:16:37,440 --> 00:16:40,080 Speaker 1: is the chief US economist for point seven two, and 310 00:16:40,080 --> 00:16:43,320 Speaker 1: I daresay the New York mets as well. Dr mackie 311 00:16:43,400 --> 00:16:46,760 Speaker 1: joins us this morning. Dan McKie, the Governor of the 312 00:16:46,800 --> 00:16:51,160 Speaker 1: Bank of England, just framed out a two year recession. 313 00:16:51,880 --> 00:16:56,840 Speaker 1: America is different. How different is the United States from 314 00:16:56,880 --> 00:17:03,240 Speaker 1: the turmoil of double digit inflation we see worldwide? The 315 00:17:03,280 --> 00:17:06,199 Speaker 1: main difference, Thomas, there's just a lot more momentum in 316 00:17:06,240 --> 00:17:09,360 Speaker 1: the US economy. You know, Europe and the UK are 317 00:17:09,440 --> 00:17:13,040 Speaker 1: dealing with a much bigger rise and energy prices and there, 318 00:17:13,200 --> 00:17:15,439 Speaker 1: you know, they have a war on their doorstep. The 319 00:17:15,560 --> 00:17:18,600 Speaker 1: US has a lot of momentum, especially in the service sector, 320 00:17:18,920 --> 00:17:21,800 Speaker 1: and we think that's why, you know, jobless claims are 321 00:17:21,840 --> 00:17:24,760 Speaker 1: staying well. We don't think the unemployment rate's gonna rise soon. 322 00:17:25,760 --> 00:17:28,240 Speaker 1: The momentum in the service sector is going to continue. 323 00:17:28,720 --> 00:17:32,400 Speaker 1: The great hikes are slowing things like housing, but it's 324 00:17:32,440 --> 00:17:34,800 Speaker 1: not having an impact on services, and we think it 325 00:17:34,840 --> 00:17:37,240 Speaker 1: will take a long time to happen. Dr mackey, you 326 00:17:37,280 --> 00:17:40,399 Speaker 1: were weaned at Stanford off of John Taylor and other 327 00:17:40,560 --> 00:17:43,720 Speaker 1: elites do their rules work now. Does Oakland's law, the 328 00:17:43,760 --> 00:17:48,719 Speaker 1: beverage curve of Lse that Jerome Powell mentioned yesterday, and 329 00:17:48,760 --> 00:17:53,080 Speaker 1: the Taylor rule of Stanford? Are those operative theories now? 330 00:17:53,400 --> 00:17:57,200 Speaker 1: Or we flying by the seat of our pants? I think, 331 00:17:57,400 --> 00:18:00,879 Speaker 1: you know, those rules can give some guidance, but but 332 00:18:01,119 --> 00:18:05,000 Speaker 1: really the face not having had hasn't dealt with the 333 00:18:05,040 --> 00:18:08,320 Speaker 1: pandemic before in the post pandemic era. So those rules 334 00:18:08,320 --> 00:18:10,800 Speaker 1: can give the FED some idea of where to go, 335 00:18:11,240 --> 00:18:14,240 Speaker 1: but it's really a different environment right now. How do 336 00:18:14,280 --> 00:18:18,000 Speaker 1: you understanding the productivity levels that are not recovering at 337 00:18:18,000 --> 00:18:20,520 Speaker 1: any kind of real pace, and this idea that we 338 00:18:20,560 --> 00:18:24,920 Speaker 1: don't necessarily see any decline in a number of people 339 00:18:24,960 --> 00:18:27,320 Speaker 1: who are getting jobs. How do you understand this at 340 00:18:27,359 --> 00:18:31,480 Speaker 1: a time when we're hearing anecdotically, anecdotally so many companies 341 00:18:31,760 --> 00:18:35,359 Speaker 1: laying people off, reducing some of their workforce through attrition. 342 00:18:37,000 --> 00:18:40,560 Speaker 1: I think what what has happened is that not long 343 00:18:40,560 --> 00:18:44,960 Speaker 1: ago most companies were having trouble finding workers, and especially 344 00:18:44,960 --> 00:18:47,159 Speaker 1: in that service sector, which is seventy one percent of 345 00:18:47,240 --> 00:18:50,480 Speaker 1: US employment. There's no reason they're going to start laying 346 00:18:50,480 --> 00:18:53,880 Speaker 1: people off immediately. Um, you know, they're they're looking at business, 347 00:18:54,080 --> 00:18:57,640 Speaker 1: there's still the ship from goods to services spending happening, uh, 348 00:18:57,680 --> 00:19:01,199 Speaker 1: and that's bolstering a service sector and eployment. UM. The 349 00:19:01,240 --> 00:19:04,160 Speaker 1: productivity numbers I think are also being weighed down by 350 00:19:04,400 --> 00:19:06,639 Speaker 1: what I do think is an understatement of GDP in 351 00:19:06,640 --> 00:19:08,760 Speaker 1: the first half of this year. Um, it doesn't make 352 00:19:08,800 --> 00:19:12,640 Speaker 1: sense that employers are adding five jobs per month while 353 00:19:12,680 --> 00:19:15,520 Speaker 1: the economy was contracting. So I think that's eventually going 354 00:19:15,600 --> 00:19:18,000 Speaker 1: to get revised to something more in line with what 355 00:19:18,280 --> 00:19:22,440 Speaker 1: gross domestic income was was telling us. But in any case, 356 00:19:22,480 --> 00:19:24,719 Speaker 1: productivity is is pretty weak right now. Do you think 357 00:19:24,760 --> 00:19:27,600 Speaker 1: that the labor market is an accurate reflection of some 358 00:19:27,680 --> 00:19:29,480 Speaker 1: of the pain that's being felt to the market. In 359 00:19:29,560 --> 00:19:32,359 Speaker 1: other words, is this really the metric that the Federal 360 00:19:32,359 --> 00:19:35,280 Speaker 1: Reserve should be targeting right now to understand the progress 361 00:19:35,280 --> 00:19:39,480 Speaker 1: that they're making and bringing down inflation. I mean, I 362 00:19:39,520 --> 00:19:41,959 Speaker 1: think the labor market is an important step in the 363 00:19:42,000 --> 00:19:46,000 Speaker 1: process of bringing down inflation. Now. The thing, one thing 364 00:19:46,040 --> 00:19:48,679 Speaker 1: I would mention is that much of the inflation we 365 00:19:48,760 --> 00:19:51,520 Speaker 1: have isn't directly tied to wage of inflation. You know, 366 00:19:51,560 --> 00:19:54,040 Speaker 1: we all know about the supply chain problems, the you know, 367 00:19:54,080 --> 00:19:57,440 Speaker 1: the goods price surge that we saw during the pandemic 368 00:19:57,480 --> 00:20:00,840 Speaker 1: and afterwards. But I do think way growth and the 369 00:20:00,920 --> 00:20:04,480 Speaker 1: labor is high enough and the labor markets tightened enough 370 00:20:04,840 --> 00:20:06,919 Speaker 1: that it is a force on inflation right now. So 371 00:20:06,960 --> 00:20:09,439 Speaker 1: the FED ultimately does need to slow it down, but 372 00:20:09,480 --> 00:20:11,119 Speaker 1: I think it's going to be difficult for them to 373 00:20:11,160 --> 00:20:14,679 Speaker 1: do that. Doan Mackie dominic constum, you know, when you 374 00:20:14,680 --> 00:20:17,760 Speaker 1: are Barkley's and a Deutsche Bank dominique constum says, this 375 00:20:17,840 --> 00:20:22,160 Speaker 1: is a FED that is super restrictive. Do you agree. 376 00:20:22,720 --> 00:20:26,000 Speaker 1: I wouldn't say they're super restrictive right now. Um, you know, 377 00:20:26,040 --> 00:20:28,840 Speaker 1: they are raising rates quite rapidly, so we are getting 378 00:20:28,840 --> 00:20:32,639 Speaker 1: into restrictive territory and you are seeing them having any effect. 379 00:20:32,680 --> 00:20:36,440 Speaker 1: The housing markets clearly clearly contracting at this point, so 380 00:20:36,520 --> 00:20:39,719 Speaker 1: their their policy is working in that sense. But I 381 00:20:39,760 --> 00:20:42,600 Speaker 1: do think that they're dealing with a different environment now, 382 00:20:43,040 --> 00:20:47,240 Speaker 1: where you know, you do have still reopening that's happening 383 00:20:47,240 --> 00:20:49,840 Speaker 1: in the service sector, and that means that you're not 384 00:20:49,880 --> 00:20:53,520 Speaker 1: going to get the service sector contracting in the way 385 00:20:53,520 --> 00:20:55,960 Speaker 1: that it often does during a recession day. We just 386 00:20:56,000 --> 00:20:58,080 Speaker 1: want to know if point seventy two has done any 387 00:20:58,080 --> 00:21:01,360 Speaker 1: modeling on what would happen to the Queen's economy if 388 00:21:01,400 --> 00:21:04,199 Speaker 1: Aaron Judge went to the Mets, if you modeled that 389 00:21:04,240 --> 00:21:07,680 Speaker 1: out yet. I'm working on it, but no I haven't. 390 00:21:07,840 --> 00:21:10,120 Speaker 1: He's working on it. T K. That's a scoop. Jan, 391 00:21:10,240 --> 00:21:13,960 Speaker 1: We got you know, you gotta have Mr. We gotta 392 00:21:14,000 --> 00:21:16,880 Speaker 1: get Steve Cohen and you on the show together. Dean. 393 00:21:16,960 --> 00:21:19,040 Speaker 1: I think you can provide cover for us to talk 394 00:21:19,080 --> 00:21:22,960 Speaker 1: to Mr Cohen about this. I mean Aaron Judge, Texas Rangers, 395 00:21:23,040 --> 00:21:28,000 Speaker 1: Aaron Judge, San Francisco Giants, Aaron jud Dan, Steve Cohen's 396 00:21:28,000 --> 00:21:30,680 Speaker 1: gonna let Judge go to the l A Dodgers. It's 397 00:21:30,720 --> 00:21:39,359 Speaker 1: an American no no comment, point seventy things like ready 398 00:21:39,359 --> 00:21:43,080 Speaker 1: to pull at the back of the LA Honestly, don't 399 00:21:43,080 --> 00:21:48,520 Speaker 1: blame him. Thank you, Dane. This is the Bloomberg Surveillance Podcast. 400 00:21:48,760 --> 00:21:52,119 Speaker 1: Thanks for listening. Join us live weekdays from seven to 401 00:21:52,240 --> 00:21:56,280 Speaker 1: ten AMI Eastern on Bloomberg Radio and on Bloomberg Television 402 00:21:56,640 --> 00:22:00,320 Speaker 1: each day from six to nine AM for in site 403 00:22:00,520 --> 00:22:04,639 Speaker 1: from the best in economics, finance, investment, and international relations. 404 00:22:05,119 --> 00:22:09,800 Speaker 1: And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, 405 00:22:09,960 --> 00:22:13,560 Speaker 1: Bloomberg Dot com and, of course on the terminal. I'm 406 00:22:13,600 --> 00:22:16,280 Speaker 1: Tom keene In. This is Bloomberg.