Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keene. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownowitz Jaily. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. Jonnis. Right now,
Speaker 1: it's Domini Constant, the head of Macriz Strategy, and a
Speaker 1: Huo America's don't fantasity catch up with you? Say one
Speaker 1: morning for it, Let's just start with yesterday and that
Speaker 1: news conference. Number one takeaway for you, Tom, What was it? Um, Well,
Speaker 1: the main thing I thought so was actually at least
Speaker 1: they started to introduce the idea that the cumulsive effects
Speaker 1: of Monterrey Titan to dates are going to have to
Speaker 1: be considered. So there's some sense of mutual and the
Speaker 1: measure of restrictiveness that's uh in place, and it's going
Speaker 1: to be in place as affords are realized. So I
Speaker 1: mean that was the main thing. There's a there's a
Speaker 1: shift in narrative. I absolutely agree it's important that they
Speaker 1: raised the you know, the peak funds rate versus September dots.
Speaker 1: But you know that that was that's been going on
Speaker 1: for a while anyway. So the main thing for me
Speaker 1: is a new narrative. If you like dominic you know
Speaker 1: yesterday and folks, you can get it from Missoo. There's
Speaker 1: a single classic constant paragraph in there where you say
Speaker 1: this is faith based central banking and they risk a
Speaker 1: textbook type two error something. Laureate Michael Spence talks a
Speaker 1: lot about tell us about the certitude of FED policy
Speaker 1: butterersed up against the potential for error. Well, I mean
Speaker 1: the problem is, um, we don't really know where neutral
Speaker 1: rates are in the sense of producing or being consistent
Speaker 1: with price stability. You only observe that after the event.
Speaker 1: So we can look back at historical data. And because
Speaker 1: we don't even have that much data going an you're
Speaker 1: going back maybe twenty years. Uh. You know, the neutral
Speaker 1: rate you know right now, based on that backward looking thing,
Speaker 1: would be around one percent. But we could be in
Speaker 1: a new regime in which case neutral rates are higher. Uh,
Speaker 1: and so by by those old metrics that the FED
Speaker 1: is definitely super restrictive, but they may not be restrictive enough.
Speaker 1: If you are you know, if the neutral rates is
Speaker 1: in fact higher and understanding why neutral shifts is very important,
Speaker 1: and there are lots of behavioral things that could be
Speaker 1: going on there, their structural things that are going on
Speaker 1: in demographics and globalization that could be shifting neutral. So
Speaker 1: in some sense, you know, the question is what does
Speaker 1: a central bank do in this environment? Uh? And I
Speaker 1: would just suggest they have to be a bit cautious
Speaker 1: at some point when when they know that on old
Speaker 1: metrics they're super restrictive, perhaps they need to sort of
Speaker 1: just take a pause, recalibrate, you know, a way down
Speaker 1: a couple of meetings in the course of four before
Speaker 1: they decide if they need to carry on raising rates.
Speaker 1: So it would be a kind of a pause that
Speaker 1: refreshes a tightening cycle. Or maybe everything will fall into
Speaker 1: place and they'll say a few you know, with think
Speaker 1: good this, We've done enough, and then maybe they've done
Speaker 1: too much and they have to scurry back the other direction.
Speaker 1: So that's the issue Dominic we were talking earlier. At
Speaker 1: the beginning of the show, John asked, is there any
Speaker 1: reason to be bullish right now in equities because you've
Speaker 1: got the FED chair basically coming out and in so
Speaker 1: many words, not being particularly happy at seeing any kind
Speaker 1: of rally in the face of this inflation and the
Speaker 1: need for tighter financial conditions. What's your view on that.
Speaker 1: I mean, where could there be room for bullishness amid
Speaker 1: an absolute rebuttle of any type of devilish pivot well
Speaker 1: as hard as be bullish on anything, to be honest,
Speaker 1: either either bonds or equities. Um. The the issue for equities,
Speaker 1: I think really is down to a hard landing or
Speaker 1: soft landing. If there's a hard landing, you definitely cannot
Speaker 1: be bullish on equities. They have a good downside in earnings,
Speaker 1: and you know, we would suggest at least another sort
Speaker 1: of ten maybe even downside in price on a sort
Speaker 1: of hard landing. The other problem you've got is even
Speaker 1: with a sort of softish landing, that the route to
Speaker 1: to a soft standing, as we've always argued, is anyway
Speaker 1: through margin compression. So it's it's earnings coming down. It's
Speaker 1: just that you don't have to have a massive cost
Speaker 1: reduction on top of it, which would involve you know,
Speaker 1: really sort of shutting down sort of businesses. So it's
Speaker 1: very difficult to be be be bullish. I would just
Speaker 1: say that you could do a weighted average of soft
Speaker 1: versus hard landing outcomes right now, by the way, we're
Speaker 1: not already getting any sense of any landing uh and,
Speaker 1: but you can do a weighted average and you could
Speaker 1: say that, you know, fair value perhaps is around you know,
Speaker 1: thirty six hundred. That's kind of where we've been working
Speaker 1: to uh And and if the if the clouds clear
Speaker 1: and the soft landing looks like it's sort of taking hold,
Speaker 1: then then you've got upside you know, up to around
Speaker 1: four thousand or sew on the SMP. So that's the
Speaker 1: way I approach it. So, yes, it's difficult to be bullish, um.
Speaker 1: But you know, maybe if you're in the soft landing camp,
Speaker 1: you can sort of use some of this weakness to accumulates,
Speaker 1: uh cover some shorts perhaps and maybe sort of look
Speaker 1: for some kind of upside down the road. Certainly difficult
Speaker 1: to be in that camp right now, Dominic custom, thank
Speaker 1: you sir. From the yesterday. Somewhere in the vicinity of
Speaker 1: two thirds of the way through the FED discussion, there
Speaker 1: was a modest note from City Group and they framed
Speaker 1: out a five percent two year yield to discuss that
Speaker 1: when he Caesar joins US now global head of credit
Speaker 1: strategy at credit sites. Why how does your world change
Speaker 1: if the two year yield moves from four point seven
Speaker 1: zero percent to five point zero zero percent? What actually
Speaker 1: are we going to live with a five percent two
Speaker 1: year yield? Well, it's good morning, Tom, thanks for having me.
Speaker 1: I think that the conversation around a five percent yield,
Speaker 1: both in the front end in the two year is
Speaker 1: important as well as in the long end of the
Speaker 1: curve with a ten year, where we've had a lot
Speaker 1: of clients asking whether we're going to I know about helloween?
Speaker 1: Is it like a hell? There we go, only disappointed
Speaker 1: that we could only buy ten thousand dollars worth of
Speaker 1: those ibons for his future savings. He's really set on
Speaker 1: buying a monster truck for himself when he's older, so
Speaker 1: hopefully we get there. But clients have been really focused
Speaker 1: on what happened if we hit these five percent levels,
Speaker 1: both in the front end and in the long end.
Speaker 1: And I think that the two percent ten year yield
Speaker 1: or the five percent to your yield discussion is really
Speaker 1: important from kind of a credit risk perspective, whereas the
Speaker 1: to the five percent ten year yield is really important
Speaker 1: from a duration risk perspective, and the performance and credit
Speaker 1: portfolios this year has been equally negatively impacted by both
Speaker 1: credit and duration risk. So clients are trying to figure out, Okay,
Speaker 1: which bet do I take? Now? Do I say a
Speaker 1: recession is coming, extenduration and things are going to be okay?
Speaker 1: Or alternatively, am I going to just get whipsot again
Speaker 1: with the ten year going to five percent? In your
Speaker 1: world winning? And this is not the world of our
Speaker 1: listeners and viewers. How do you link the two year
Speaker 1: yield move up with what we see in the new library?
Speaker 1: Oh I s the f R A O I s
Speaker 1: through fifty beeps this morning. This is all less of arrant, folks,
Speaker 1: But all you need to know is in Winnie Caesar's world,
Speaker 1: yields up? What does that mean to you? How do
Speaker 1: you link them? So? Yields up has a lot to
Speaker 1: just do with market liquidity functions and really what has
Speaker 1: been happening with depository institutions and less smooth functioning in
Speaker 1: the treasury market. More broadly, we have seen over the
Speaker 1: course of this year as the Fed really started to
Speaker 1: do q q T and then kind of amped up
Speaker 1: its bond roll off, the treasury market liquidity has eroded
Speaker 1: pretty considerably, and this has been particularly true in the
Speaker 1: front end of the curve, which is why we're seeing
Speaker 1: a lot of just really challenging movements on the wide
Speaker 1: work side of things and in just the front end
Speaker 1: of the treasury market. Given the volatility that we've seen
Speaker 1: in benchmark rates. How much can you get behind this
Speaker 1: assertion by JP Morgan's Bob Michael yesterday on Bloomberg TV
Speaker 1: with John when he was saying that investment grade debt
Speaker 1: really is the ballast that sort of come in the
Speaker 1: storm to hang on to despite some of this underlying volatility. Yeah,
Speaker 1: so I really respect that view. We've been very constructive
Speaker 1: on US investment grade debt. With all in yields at
Speaker 1: six percent in US i G. Historically, that's actually a
Speaker 1: level where you can buy high yield and perform pretty
Speaker 1: well in portfolios. So to have a cohort of companies
Speaker 1: that are much stronger fundamentally at a six percent yield
Speaker 1: feels really good. I think that what's really tripping investors
Speaker 1: up is the percentage of spread that contributes to that
Speaker 1: all in yield is much lower than it has been
Speaker 1: for the past ten years, just because government treasury yields
Speaker 1: are so much higher, So investors are really trying to
Speaker 1: wrap their head around how much credit risk can I
Speaker 1: take and feel comfortable with. I love this six percent
Speaker 1: all in yield. And what we're telling investors is the
Speaker 1: I G universe has a lot of flex in their
Speaker 1: liquidity in their balance sheets in order to whether a
Speaker 1: continued economics deceleration. When you've given all of this though,
Speaker 1: how much do you have to look at some of
Speaker 1: the technicals right this question of the l d I
Speaker 1: concerns over in the United Kingdom, perhaps not in the
Speaker 1: same form, but forced selling from some big institutions that
Speaker 1: have been hit with massive losses, some of which and
Speaker 1: I'm talking about the private debt and the private equity
Speaker 1: world might not have been realized yet. Yeah, So the
Speaker 1: liquidity side of the conversation is really interesting, especially because
Speaker 1: one of the top things we heard from investors coming
Speaker 1: into this year was we're reducing our allocation to us
Speaker 1: I G. We're reducing our allocations to USI yield. We
Speaker 1: realize that yields are going highler we realize that policy
Speaker 1: tightening is upon us, and where people were going floating
Speaker 1: rate affort classes, clos leverage, loans, private credit, private equity.
Speaker 1: So there is the potential that we continue to see
Speaker 1: kind of this re rack in terms of asset allocation.
Speaker 1: But the benefit to us I G and high yield
Speaker 1: is a lot of investors started their years underweight those
Speaker 1: asset classes, and so there's a pretty good case to
Speaker 1: be made that they should be rotating into something else.
Speaker 1: The question is how much liquidity do they kind of
Speaker 1: preserve or put on hand at the beginning of the
Speaker 1: year instead of putting all their eggs in the eon
Speaker 1: basket or in the private credit basket. When you when
Speaker 1: we look at short term paper, and I guess we've
Speaker 1: got to look to December as well. Does the FED
Speaker 1: parlor game and the FED speeches that we're gonna get
Speaker 1: I can't imagine what they're gonna be like here in
Speaker 1: the coming days when when we look at the speeches,
Speaker 1: does that actually affect short term yields? Are they now
Speaker 1: just a beast out into two thousand twenty three to
Speaker 1: stay elevated. I do think that what the FED governors
Speaker 1: end up saying over the neck a few weeks is
Speaker 1: going to be important. We've seen why what we've seen
Speaker 1: a lot of volatility in the terminal rate that's priced
Speaker 1: into the Fed funds futures market just in the past
Speaker 1: twelve hours or so now at a terminal rate well
Speaker 1: above five percent, about five point one eight percent. We're
Speaker 1: going to be very focused on the conversation around lag
Speaker 1: effects and kind of the appropriate case of tightening here
Speaker 1: on out. Do you know, I don't mean to interrupt winning,
Speaker 1: but this is just absolutely critical. Do you think various
Speaker 1: and sundry FED speakers will talk back what we heard
Speaker 1: from Chairman Paul yesterday. I think that there is the
Speaker 1: potential that there will be more of a focus on
Speaker 1: the lag effects and a slower pace of rate hikes
Speaker 1: from here on out. Whereas said share Powell was very
Speaker 1: much focused on kind of that overall higher destination in
Speaker 1: terms of Fed funds. I think that the pace and
Speaker 1: kind of the path to get to that destination is
Speaker 1: still highly uncertain. There's still a lot of economics data
Speaker 1: to come from now through the end of the year
Speaker 1: and you know, let alone into next year. So I
Speaker 1: do think that the Fed speakers are going to be
Speaker 1: focused on that lag effects between policy tightening and actual
Speaker 1: economic impact, because when we talk to our analysts that
Speaker 1: credit side to cover all of these companies. They're definitely
Speaker 1: seeing some signs of kind of transition in terms of
Speaker 1: inflationary pressure and also transition in terms of expectations for
Speaker 1: next year, which indicates to me that there is some
Speaker 1: deceleration in inflation. There is a deceleration and growth, and
Speaker 1: the FED kind of needs to acknowledge that, and that
Speaker 1: the pace of tightening needs to be much more reconciled
Speaker 1: with kind of the lagged impact of policy tightening on
Speaker 1: actual economic conditions. When I say thank you, when I
Speaker 1: says with credit science, yea. Now we talked to Jeffrey You,
Speaker 1: senior market strategist b and Y Melon as well. Jeff,
Speaker 1: I don't even know where to begin other than I
Speaker 1: think an emotion of our listeners and viewers is the
Speaker 1: system near breaking? No, it's not in the UK, but
Speaker 1: dare we use that p word unpivoted? There's a key
Speaker 1: line here. There are clear signs of the cost of
Speaker 1: living crisis taking hold on on economic activities, suggesting more
Speaker 1: gradual approach was warranted. An overtightening in policy, right, They
Speaker 1: are worried about overtiping. They're worried about hitting the afterburners.
Speaker 1: At exactly the wrong point in the household cycle. So
Speaker 1: some doubts are creeping in, and I think that's where
Speaker 1: we are. This is really very different from where the
Speaker 1: feed is right now. Actually everyone else is different from
Speaker 1: the feed is right now. You look at lugs earlier
Speaker 1: today and it looks like Europe is starting to put
Speaker 1: it away. We'll rather pull back. Well, that's exactly where
Speaker 1: I wanted to go, Jeff how Am, Which is this
Speaker 1: really representing a sea change among central bankers? The fact
Speaker 1: that one committee member on the Bank of England's committee
Speaker 1: did vote for a fifty basis point high another one
Speaker 1: twenty five basis point how much is that the descent
Speaker 1: that you can increasingly see around the world that will
Speaker 1: eventually filter back to the Fed. So it is only
Speaker 1: going to start to increase some starting in Europe. Again,
Speaker 1: we saw it Norway today. It didn't seem like fifty
Speaker 1: basis points was on the table, even though you know
Speaker 1: that was where the market was. And now we're going
Speaker 1: to start to only see increasing descents of not pursuing
Speaker 1: things as aggressively the Fed. However, um so I think
Speaker 1: you mentioned this early in the program. You know our dollar,
Speaker 1: your problem that is going to take quite a bit
Speaker 1: for them to start to worry about international conditions, because
Speaker 1: from the US's point of view, it's about tightening conditions
Speaker 1: in the U S. U S. Economy is still doing well,
Speaker 1: so there's no obligation for the FED to take into
Speaker 1: account wider conditions. How long can this last, Jeff? How
Speaker 1: long can this divergence where the dollar is the pre
Speaker 1: eminent trade and continues to strengthen. Is that an entire
Speaker 1: kind of trade? So it will last longer than markets expect,
Speaker 1: but more crucially, from from a positioning point of view,
Speaker 1: it will last longer than markets hope. Right, So there
Speaker 1: will still be repeated efforts a pricing of FED pivot
Speaker 1: trade through equities, you know, through bonds, you know, through effex,
Speaker 1: you know, through the dollar and the like. But I
Speaker 1: think there's still a few more rounds of disappointments some
Speaker 1: to come. We look at the where their terminal pricing is,
Speaker 1: you know, right now it's going up, whereas everywhere else
Speaker 1: now it's probably gonna start coming off. Jeff. We've been
Speaker 1: discussing whether you should be trading growth expectations or rates
Speaker 1: when it comes to the Euro. When it comes to
Speaker 1: Sterling at least it's been building on that in this
Speaker 1: conversation too, based on what the bank having has just said,
Speaker 1: it's that positive news for Sterling that they're pushing back
Speaker 1: against the higher terminal rate that would have actually hammered
Speaker 1: growth over the next couple of years. Um. I think
Speaker 1: initially it's not to be frank because the markets still
Speaker 1: working off rate differentials between the b o E and
Speaker 1: the Fed. UM So now that correlation needs to snap
Speaker 1: back right after the mini budget and kind of trashed it.
Speaker 1: So if that correlation and dust stop back now, then
Speaker 1: on a cable point of view, you know, then no
Speaker 1: Sterling is going to struggle. But if you think of
Speaker 1: that not as type policy, if the household is going
Speaker 1: to get some relief and then growth is gonna be
Speaker 1: slightly better in the UK compares the Eurozone compared to
Speaker 1: stand Scandinavia than relative any traits and that that could
Speaker 1: start to come through. We just look at intro European divergence.
Speaker 1: But the dollar is still going to ragn supreme at
Speaker 1: this point. Getting a bonus around Tom with Jeff you
Speaker 1: how case that just stick with Jeff you Bmy manager
Speaker 1: Dan McKee was a force on Wall Street. He went
Speaker 1: off to a gentleman named Corner point seven two and
Speaker 1: is the chief US economist for point seven two, and
Speaker 1: I daresay the New York mets as well. Dr mackie
Speaker 1: joins us this morning. Dan McKie, the Governor of the
Speaker 1: Bank of England, just framed out a two year recession.
Speaker 1: America is different. How different is the United States from
Speaker 1: the turmoil of double digit inflation we see worldwide? The
Speaker 1: main difference, Thomas, there's just a lot more momentum in
Speaker 1: the US economy. You know, Europe and the UK are
Speaker 1: dealing with a much bigger rise and energy prices and there,
Speaker 1: you know, they have a war on their doorstep. The
Speaker 1: US has a lot of momentum, especially in the service sector,
Speaker 1: and we think that's why, you know, jobless claims are
Speaker 1: staying well. We don't think the unemployment rate's gonna rise soon.
Speaker 1: The momentum in the service sector is going to continue.
Speaker 1: The great hikes are slowing things like housing, but it's
Speaker 1: not having an impact on services, and we think it
Speaker 1: will take a long time to happen. Dr mackey, you
Speaker 1: were weaned at Stanford off of John Taylor and other
Speaker 1: elites do their rules work now. Does Oakland's law, the
Speaker 1: beverage curve of Lse that Jerome Powell mentioned yesterday, and
Speaker 1: the Taylor rule of Stanford? Are those operative theories now?
Speaker 1: Or we flying by the seat of our pants? I think,
Speaker 1: you know, those rules can give some guidance, but but
Speaker 1: really the face not having had hasn't dealt with the
Speaker 1: pandemic before in the post pandemic era. So those rules
Speaker 1: can give the FED some idea of where to go,
Speaker 1: but it's really a different environment right now. How do
Speaker 1: you understanding the productivity levels that are not recovering at
Speaker 1: any kind of real pace, and this idea that we
Speaker 1: don't necessarily see any decline in a number of people
Speaker 1: who are getting jobs. How do you understand this at
Speaker 1: a time when we're hearing anecdotically, anecdotally so many companies
Speaker 1: laying people off, reducing some of their workforce through attrition.
Speaker 1: I think what what has happened is that not long
Speaker 1: ago most companies were having trouble finding workers, and especially
Speaker 1: in that service sector, which is seventy one percent of
Speaker 1: US employment. There's no reason they're going to start laying
Speaker 1: people off immediately. Um, you know, they're they're looking at business,
Speaker 1: there's still the ship from goods to services spending happening, uh,
Speaker 1: and that's bolstering a service sector and eployment. UM. The
Speaker 1: productivity numbers I think are also being weighed down by
Speaker 1: what I do think is an understatement of GDP in
Speaker 1: the first half of this year. Um, it doesn't make
Speaker 1: sense that employers are adding five jobs per month while
Speaker 1: the economy was contracting. So I think that's eventually going
Speaker 1: to get revised to something more in line with what
Speaker 1: gross domestic income was was telling us. But in any case,
Speaker 1: productivity is is pretty weak right now. Do you think
Speaker 1: that the labor market is an accurate reflection of some
Speaker 1: of the pain that's being felt to the market. In
Speaker 1: other words, is this really the metric that the Federal
Speaker 1: Reserve should be targeting right now to understand the progress
Speaker 1: that they're making and bringing down inflation. I mean, I
Speaker 1: think the labor market is an important step in the
Speaker 1: process of bringing down inflation. Now. The thing, one thing
Speaker 1: I would mention is that much of the inflation we
Speaker 1: have isn't directly tied to wage of inflation. You know,
Speaker 1: we all know about the supply chain problems, the you know,
Speaker 1: the goods price surge that we saw during the pandemic
Speaker 1: and afterwards. But I do think way growth and the
Speaker 1: labor is high enough and the labor markets tightened enough
Speaker 1: that it is a force on inflation right now. So
Speaker 1: the FED ultimately does need to slow it down, but
Speaker 1: I think it's going to be difficult for them to
Speaker 1: do that. Doan Mackie dominic constum, you know, when you
Speaker 1: are Barkley's and a Deutsche Bank dominique constum says, this
Speaker 1: is a FED that is super restrictive. Do you agree.
Speaker 1: I wouldn't say they're super restrictive right now. Um, you know,
Speaker 1: they are raising rates quite rapidly, so we are getting
Speaker 1: into restrictive territory and you are seeing them having any effect.
Speaker 1: The housing markets clearly clearly contracting at this point, so
Speaker 1: their their policy is working in that sense. But I
Speaker 1: do think that they're dealing with a different environment now,
Speaker 1: where you know, you do have still reopening that's happening
Speaker 1: in the service sector, and that means that you're not
Speaker 1: going to get the service sector contracting in the way
Speaker 1: that it often does during a recession day. We just
Speaker 1: want to know if point seventy two has done any
Speaker 1: modeling on what would happen to the Queen's economy if
Speaker 1: Aaron Judge went to the Mets, if you modeled that
Speaker 1: out yet. I'm working on it, but no I haven't.
Speaker 1: He's working on it. T K. That's a scoop. Jan,
Speaker 1: We got you know, you gotta have Mr. We gotta
Speaker 1: get Steve Cohen and you on the show together. Dean.
Speaker 1: I think you can provide cover for us to talk
Speaker 1: to Mr Cohen about this. I mean Aaron Judge, Texas Rangers,
Speaker 1: Aaron Judge, San Francisco Giants, Aaron jud Dan, Steve Cohen's
Speaker 1: gonna let Judge go to the l A Dodgers. It's
Speaker 1: an American no no comment, point seventy things like ready
Speaker 1: to pull at the back of the LA Honestly, don't
Speaker 1: blame him. Thank you, Dane. This is the Bloomberg Surveillance Podcast.
Speaker 1: Thanks for listening. Join us live weekdays from seven to
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Speaker 1: Tom keene In. This is Bloomberg.