WEBVTT - Surveillance: Powell Crushes Pivot Hopes, BOE Hikes 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keene. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownowitz Jaily. We bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.799 Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.920 and of course on the Bloomberg terminal. Jonnis. Right now, 0:00:29.960 --> 0:00:31.960 it's Domini Constant, the head of Macriz Strategy, and a 0:00:32.080 --> 0:00:34.800 Huo America's don't fantasity catch up with you? Say one 0:00:34.880 --> 0:00:37.199 morning for it, Let's just start with yesterday and that 0:00:37.280 --> 0:00:41.880 news conference. Number one takeaway for you, Tom, What was it? Um, Well, 0:00:42.640 --> 0:00:44.639 the main thing I thought so was actually at least 0:00:44.680 --> 0:00:48.080 they started to introduce the idea that the cumulsive effects 0:00:48.080 --> 0:00:51.440 of Monterrey Titan to dates are going to have to 0:00:51.440 --> 0:00:55.200 be considered. So there's some sense of mutual and the 0:00:55.320 --> 0:00:59.080 measure of restrictiveness that's uh in place, and it's going 0:00:59.120 --> 0:01:02.000 to be in place as affords are realized. So I 0:01:02.040 --> 0:01:03.480 mean that was the main thing. There's a there's a 0:01:03.480 --> 0:01:06.440 shift in narrative. I absolutely agree it's important that they 0:01:06.520 --> 0:01:10.240 raised the you know, the peak funds rate versus September dots. 0:01:10.720 --> 0:01:12.399 But you know that that was that's been going on 0:01:12.480 --> 0:01:14.600 for a while anyway. So the main thing for me 0:01:14.680 --> 0:01:16.920 is a new narrative. If you like dominic you know 0:01:17.120 --> 0:01:19.759 yesterday and folks, you can get it from Missoo. There's 0:01:19.800 --> 0:01:23.000 a single classic constant paragraph in there where you say 0:01:23.080 --> 0:01:26.679 this is faith based central banking and they risk a 0:01:26.720 --> 0:01:31.240 textbook type two error something. Laureate Michael Spence talks a 0:01:31.280 --> 0:01:35.720 lot about tell us about the certitude of FED policy 0:01:36.280 --> 0:01:41.080 butterersed up against the potential for error. Well, I mean 0:01:41.120 --> 0:01:43.959 the problem is, um, we don't really know where neutral 0:01:44.800 --> 0:01:48.480 rates are in the sense of producing or being consistent 0:01:48.520 --> 0:01:51.840 with price stability. You only observe that after the event. 0:01:52.000 --> 0:01:54.840 So we can look back at historical data. And because 0:01:54.880 --> 0:01:56.640 we don't even have that much data going an you're 0:01:56.640 --> 0:01:59.680 going back maybe twenty years. Uh. You know, the neutral 0:01:59.800 --> 0:02:02.320 rate you know right now, based on that backward looking thing, 0:02:02.360 --> 0:02:04.200 would be around one percent. But we could be in 0:02:04.240 --> 0:02:07.400 a new regime in which case neutral rates are higher. Uh, 0:02:07.440 --> 0:02:10.959 and so by by those old metrics that the FED 0:02:11.080 --> 0:02:14.520 is definitely super restrictive, but they may not be restrictive enough. 0:02:15.320 --> 0:02:17.320 If you are you know, if the neutral rates is 0:02:17.360 --> 0:02:21.480 in fact higher and understanding why neutral shifts is very important, 0:02:21.560 --> 0:02:24.160 and there are lots of behavioral things that could be 0:02:24.200 --> 0:02:26.360 going on there, their structural things that are going on 0:02:26.400 --> 0:02:29.760 in demographics and globalization that could be shifting neutral. So 0:02:29.840 --> 0:02:32.120 in some sense, you know, the question is what does 0:02:32.160 --> 0:02:35.640 a central bank do in this environment? Uh? And I 0:02:35.680 --> 0:02:37.760 would just suggest they have to be a bit cautious 0:02:37.960 --> 0:02:40.320 at some point when when they know that on old 0:02:40.360 --> 0:02:43.680 metrics they're super restrictive, perhaps they need to sort of 0:02:43.720 --> 0:02:46.880 just take a pause, recalibrate, you know, a way down 0:02:46.880 --> 0:02:49.600 a couple of meetings in the course of four before 0:02:49.680 --> 0:02:52.480 they decide if they need to carry on raising rates. 0:02:52.480 --> 0:02:53.880 So it would be a kind of a pause that 0:02:53.960 --> 0:02:57.480 refreshes a tightening cycle. Or maybe everything will fall into 0:02:57.520 --> 0:02:59.799 place and they'll say a few you know, with think 0:02:59.840 --> 0:03:02.839 good this, We've done enough, and then maybe they've done 0:03:02.840 --> 0:03:05.720 too much and they have to scurry back the other direction. 0:03:05.800 --> 0:03:08.080 So that's the issue Dominic we were talking earlier. At 0:03:08.120 --> 0:03:10.119 the beginning of the show, John asked, is there any 0:03:10.120 --> 0:03:12.280 reason to be bullish right now in equities because you've 0:03:12.280 --> 0:03:15.040 got the FED chair basically coming out and in so 0:03:15.120 --> 0:03:18.240 many words, not being particularly happy at seeing any kind 0:03:18.280 --> 0:03:20.160 of rally in the face of this inflation and the 0:03:20.200 --> 0:03:23.720 need for tighter financial conditions. What's your view on that. 0:03:23.840 --> 0:03:27.560 I mean, where could there be room for bullishness amid 0:03:27.760 --> 0:03:32.040 an absolute rebuttle of any type of devilish pivot well 0:03:32.080 --> 0:03:33.840 as hard as be bullish on anything, to be honest, 0:03:34.280 --> 0:03:38.760 either either bonds or equities. Um. The the issue for equities, 0:03:38.800 --> 0:03:41.520 I think really is down to a hard landing or 0:03:41.600 --> 0:03:44.160 soft landing. If there's a hard landing, you definitely cannot 0:03:44.160 --> 0:03:48.119 be bullish on equities. They have a good downside in earnings, 0:03:48.160 --> 0:03:50.440 and you know, we would suggest at least another sort 0:03:50.480 --> 0:03:53.800 of ten maybe even downside in price on a sort 0:03:53.800 --> 0:03:56.520 of hard landing. The other problem you've got is even 0:03:56.520 --> 0:03:59.720 with a sort of softish landing, that the route to 0:04:00.000 --> 0:04:03.280 to a soft standing, as we've always argued, is anyway 0:04:03.320 --> 0:04:06.640 through margin compression. So it's it's earnings coming down. It's 0:04:06.680 --> 0:04:08.200 just that you don't have to have a massive cost 0:04:08.240 --> 0:04:10.640 reduction on top of it, which would involve you know, 0:04:10.720 --> 0:04:14.200 really sort of shutting down sort of businesses. So it's 0:04:14.280 --> 0:04:16.359 very difficult to be be be bullish. I would just 0:04:16.400 --> 0:04:18.760 say that you could do a weighted average of soft 0:04:18.880 --> 0:04:21.640 versus hard landing outcomes right now, by the way, we're 0:04:21.680 --> 0:04:24.320 not already getting any sense of any landing uh and, 0:04:24.640 --> 0:04:26.640 but you can do a weighted average and you could 0:04:26.680 --> 0:04:29.200 say that, you know, fair value perhaps is around you know, 0:04:29.240 --> 0:04:31.400 thirty six hundred. That's kind of where we've been working 0:04:31.440 --> 0:04:34.599 to uh And and if the if the clouds clear 0:04:34.960 --> 0:04:37.640 and the soft landing looks like it's sort of taking hold, 0:04:37.880 --> 0:04:40.039 then then you've got upside you know, up to around 0:04:40.040 --> 0:04:42.159 four thousand or sew on the SMP. So that's the 0:04:42.160 --> 0:04:45.240 way I approach it. So, yes, it's difficult to be bullish, um. 0:04:45.279 --> 0:04:47.479 But you know, maybe if you're in the soft landing camp, 0:04:47.680 --> 0:04:50.800 you can sort of use some of this weakness to accumulates, 0:04:51.120 --> 0:04:54.120 uh cover some shorts perhaps and maybe sort of look 0:04:54.200 --> 0:04:56.919 for some kind of upside down the road. Certainly difficult 0:04:56.920 --> 0:04:59.080 to be in that camp right now, Dominic custom, thank 0:04:59.120 --> 0:05:07.240 you sir. From the yesterday. Somewhere in the vicinity of 0:05:07.240 --> 0:05:09.960 two thirds of the way through the FED discussion, there 0:05:10.000 --> 0:05:12.800 was a modest note from City Group and they framed 0:05:12.800 --> 0:05:16.080 out a five percent two year yield to discuss that 0:05:16.160 --> 0:05:18.839 when he Caesar joins US now global head of credit 0:05:18.839 --> 0:05:23.200 strategy at credit sites. Why how does your world change 0:05:23.800 --> 0:05:26.599 if the two year yield moves from four point seven 0:05:26.680 --> 0:05:31.560 zero percent to five point zero zero percent? What actually 0:05:31.600 --> 0:05:34.240 are we going to live with a five percent two 0:05:34.320 --> 0:05:38.120 year yield? Well, it's good morning, Tom, thanks for having me. 0:05:38.600 --> 0:05:41.719 I think that the conversation around a five percent yield, 0:05:41.800 --> 0:05:43.960 both in the front end in the two year is 0:05:44.040 --> 0:05:47.159 important as well as in the long end of the 0:05:47.320 --> 0:05:49.800 curve with a ten year, where we've had a lot 0:05:49.839 --> 0:05:55.760 of clients asking whether we're going to I know about helloween? 0:05:55.920 --> 0:06:00.840 Is it like a hell? There we go, only disappointed 0:06:00.880 --> 0:06:03.080 that we could only buy ten thousand dollars worth of 0:06:03.120 --> 0:06:07.479 those ibons for his future savings. He's really set on 0:06:07.560 --> 0:06:10.320 buying a monster truck for himself when he's older, so 0:06:10.560 --> 0:06:14.839 hopefully we get there. But clients have been really focused 0:06:15.000 --> 0:06:18.279 on what happened if we hit these five percent levels, 0:06:18.320 --> 0:06:20.360 both in the front end and in the long end. 0:06:20.680 --> 0:06:23.279 And I think that the two percent ten year yield 0:06:23.400 --> 0:06:26.560 or the five percent to your yield discussion is really 0:06:26.600 --> 0:06:31.400 important from kind of a credit risk perspective, whereas the 0:06:31.440 --> 0:06:34.200 to the five percent ten year yield is really important 0:06:34.200 --> 0:06:38.599 from a duration risk perspective, and the performance and credit 0:06:38.600 --> 0:06:42.840 portfolios this year has been equally negatively impacted by both 0:06:42.880 --> 0:06:46.480 credit and duration risk. So clients are trying to figure out, Okay, 0:06:46.560 --> 0:06:49.320 which bet do I take? Now? Do I say a 0:06:49.400 --> 0:06:54.120 recession is coming, extenduration and things are going to be okay? 0:06:54.480 --> 0:06:57.960 Or alternatively, am I going to just get whipsot again 0:06:58.040 --> 0:07:00.760 with the ten year going to five percent? In your 0:07:00.839 --> 0:07:02.840 world winning? And this is not the world of our 0:07:02.839 --> 0:07:05.680 listeners and viewers. How do you link the two year 0:07:05.760 --> 0:07:09.200 yield move up with what we see in the new library? 0:07:09.200 --> 0:07:11.480 Oh I s the f R A O I s 0:07:11.520 --> 0:07:14.960 through fifty beeps this morning. This is all less of arrant, folks, 0:07:15.160 --> 0:07:17.600 But all you need to know is in Winnie Caesar's world, 0:07:17.920 --> 0:07:20.040 yields up? What does that mean to you? How do 0:07:20.120 --> 0:07:23.840 you link them? So? Yields up has a lot to 0:07:24.000 --> 0:07:28.040 just do with market liquidity functions and really what has 0:07:28.080 --> 0:07:34.160 been happening with depository institutions and less smooth functioning in 0:07:34.240 --> 0:07:37.640 the treasury market. More broadly, we have seen over the 0:07:37.640 --> 0:07:40.720 course of this year as the Fed really started to 0:07:40.800 --> 0:07:43.640 do q q T and then kind of amped up 0:07:43.720 --> 0:07:47.640 its bond roll off, the treasury market liquidity has eroded 0:07:47.680 --> 0:07:51.720 pretty considerably, and this has been particularly true in the 0:07:51.800 --> 0:07:54.239 front end of the curve, which is why we're seeing 0:07:54.280 --> 0:07:57.600 a lot of just really challenging movements on the wide 0:07:57.600 --> 0:08:00.200 work side of things and in just the front end 0:08:00.200 --> 0:08:03.280 of the treasury market. Given the volatility that we've seen 0:08:03.360 --> 0:08:06.520 in benchmark rates. How much can you get behind this 0:08:06.560 --> 0:08:09.880 assertion by JP Morgan's Bob Michael yesterday on Bloomberg TV 0:08:09.960 --> 0:08:12.800 with John when he was saying that investment grade debt 0:08:12.880 --> 0:08:15.040 really is the ballast that sort of come in the 0:08:15.120 --> 0:08:20.200 storm to hang on to despite some of this underlying volatility. Yeah, 0:08:20.280 --> 0:08:23.440 so I really respect that view. We've been very constructive 0:08:23.600 --> 0:08:27.360 on US investment grade debt. With all in yields at 0:08:27.520 --> 0:08:31.440 six percent in US i G. Historically, that's actually a 0:08:31.520 --> 0:08:33.880 level where you can buy high yield and perform pretty 0:08:33.880 --> 0:08:38.000 well in portfolios. So to have a cohort of companies 0:08:38.040 --> 0:08:41.920 that are much stronger fundamentally at a six percent yield 0:08:42.040 --> 0:08:44.880 feels really good. I think that what's really tripping investors 0:08:45.000 --> 0:08:48.640 up is the percentage of spread that contributes to that 0:08:48.679 --> 0:08:50.920 all in yield is much lower than it has been 0:08:50.960 --> 0:08:54.160 for the past ten years, just because government treasury yields 0:08:54.200 --> 0:08:56.720 are so much higher, So investors are really trying to 0:08:56.720 --> 0:08:59.640 wrap their head around how much credit risk can I 0:08:59.720 --> 0:09:03.360 take and feel comfortable with. I love this six percent 0:09:03.440 --> 0:09:06.520 all in yield. And what we're telling investors is the 0:09:06.559 --> 0:09:10.280 I G universe has a lot of flex in their 0:09:10.320 --> 0:09:13.680 liquidity in their balance sheets in order to whether a 0:09:13.760 --> 0:09:17.679 continued economics deceleration. When you've given all of this though, 0:09:18.000 --> 0:09:19.160 how much do you have to look at some of 0:09:19.160 --> 0:09:21.720 the technicals right this question of the l d I 0:09:21.840 --> 0:09:24.520 concerns over in the United Kingdom, perhaps not in the 0:09:24.559 --> 0:09:27.760 same form, but forced selling from some big institutions that 0:09:27.800 --> 0:09:30.319 have been hit with massive losses, some of which and 0:09:30.360 --> 0:09:33.080 I'm talking about the private debt and the private equity 0:09:33.120 --> 0:09:36.800 world might not have been realized yet. Yeah, So the 0:09:36.880 --> 0:09:40.319 liquidity side of the conversation is really interesting, especially because 0:09:40.360 --> 0:09:42.560 one of the top things we heard from investors coming 0:09:42.600 --> 0:09:47.240 into this year was we're reducing our allocation to us 0:09:47.320 --> 0:09:50.200 I G. We're reducing our allocations to USI yield. We 0:09:50.280 --> 0:09:53.120 realize that yields are going highler we realize that policy 0:09:53.160 --> 0:09:57.160 tightening is upon us, and where people were going floating 0:09:57.240 --> 0:10:01.960 rate affort classes, clos leverage, loans, private credit, private equity. 0:10:02.000 --> 0:10:05.040 So there is the potential that we continue to see 0:10:05.120 --> 0:10:07.800 kind of this re rack in terms of asset allocation. 0:10:08.080 --> 0:10:10.760 But the benefit to us I G and high yield 0:10:10.920 --> 0:10:14.520 is a lot of investors started their years underweight those 0:10:14.559 --> 0:10:17.240 asset classes, and so there's a pretty good case to 0:10:17.280 --> 0:10:20.920 be made that they should be rotating into something else. 0:10:21.240 --> 0:10:24.160 The question is how much liquidity do they kind of 0:10:24.240 --> 0:10:27.040 preserve or put on hand at the beginning of the 0:10:27.120 --> 0:10:29.280 year instead of putting all their eggs in the eon 0:10:29.400 --> 0:10:33.760 basket or in the private credit basket. When you when 0:10:33.760 --> 0:10:35.920 we look at short term paper, and I guess we've 0:10:35.960 --> 0:10:38.560 got to look to December as well. Does the FED 0:10:38.640 --> 0:10:41.120 parlor game and the FED speeches that we're gonna get 0:10:41.440 --> 0:10:43.200 I can't imagine what they're gonna be like here in 0:10:43.200 --> 0:10:46.320 the coming days when when we look at the speeches, 0:10:46.360 --> 0:10:49.959 does that actually affect short term yields? Are they now 0:10:50.040 --> 0:10:52.959 just a beast out into two thousand twenty three to 0:10:53.080 --> 0:10:58.319 stay elevated. I do think that what the FED governors 0:10:58.440 --> 0:11:01.000 end up saying over the neck a few weeks is 0:11:01.080 --> 0:11:05.600 going to be important. We've seen why what we've seen 0:11:05.640 --> 0:11:09.160 a lot of volatility in the terminal rate that's priced 0:11:09.280 --> 0:11:12.920 into the Fed funds futures market just in the past 0:11:12.920 --> 0:11:16.240 twelve hours or so now at a terminal rate well 0:11:16.280 --> 0:11:20.280 above five percent, about five point one eight percent. We're 0:11:20.320 --> 0:11:24.760 going to be very focused on the conversation around lag 0:11:24.840 --> 0:11:28.280 effects and kind of the appropriate case of tightening here 0:11:28.280 --> 0:11:31.640 on out. Do you know, I don't mean to interrupt winning, 0:11:31.679 --> 0:11:36.319 but this is just absolutely critical. Do you think various 0:11:36.320 --> 0:11:40.200 and sundry FED speakers will talk back what we heard 0:11:40.240 --> 0:11:44.120 from Chairman Paul yesterday. I think that there is the 0:11:44.200 --> 0:11:47.640 potential that there will be more of a focus on 0:11:47.880 --> 0:11:51.280 the lag effects and a slower pace of rate hikes 0:11:51.320 --> 0:11:55.160 from here on out. Whereas said share Powell was very 0:11:55.240 --> 0:11:59.240 much focused on kind of that overall higher destination in 0:11:59.320 --> 0:12:02.440 terms of Fed funds. I think that the pace and 0:12:02.520 --> 0:12:05.240 kind of the path to get to that destination is 0:12:05.280 --> 0:12:08.600 still highly uncertain. There's still a lot of economics data 0:12:08.640 --> 0:12:11.280 to come from now through the end of the year 0:12:11.440 --> 0:12:14.200 and you know, let alone into next year. So I 0:12:14.240 --> 0:12:16.560 do think that the Fed speakers are going to be 0:12:16.640 --> 0:12:21.080 focused on that lag effects between policy tightening and actual 0:12:21.200 --> 0:12:24.439 economic impact, because when we talk to our analysts that 0:12:24.520 --> 0:12:27.679 credit side to cover all of these companies. They're definitely 0:12:27.720 --> 0:12:30.640 seeing some signs of kind of transition in terms of 0:12:30.679 --> 0:12:35.080 inflationary pressure and also transition in terms of expectations for 0:12:35.240 --> 0:12:38.600 next year, which indicates to me that there is some 0:12:38.720 --> 0:12:43.199 deceleration in inflation. There is a deceleration and growth, and 0:12:43.280 --> 0:12:45.960 the FED kind of needs to acknowledge that, and that 0:12:46.040 --> 0:12:50.600 the pace of tightening needs to be much more reconciled 0:12:50.720 --> 0:12:53.720 with kind of the lagged impact of policy tightening on 0:12:53.880 --> 0:12:56.960 actual economic conditions. When I say thank you, when I 0:12:56.960 --> 0:13:09.920 says with credit science, yea. Now we talked to Jeffrey You, 0:13:10.080 --> 0:13:13.560 senior market strategist b and Y Melon as well. Jeff, 0:13:13.640 --> 0:13:16.600 I don't even know where to begin other than I 0:13:16.679 --> 0:13:20.160 think an emotion of our listeners and viewers is the 0:13:20.320 --> 0:13:24.120 system near breaking? No, it's not in the UK, but 0:13:24.240 --> 0:13:26.960 dare we use that p word unpivoted? There's a key 0:13:27.000 --> 0:13:29.280 line here. There are clear signs of the cost of 0:13:29.360 --> 0:13:33.000 living crisis taking hold on on economic activities, suggesting more 0:13:33.000 --> 0:13:38.199 gradual approach was warranted. An overtightening in policy, right, They 0:13:38.200 --> 0:13:41.840 are worried about overtiping. They're worried about hitting the afterburners. 0:13:41.840 --> 0:13:44.640 At exactly the wrong point in the household cycle. So 0:13:45.000 --> 0:13:47.520 some doubts are creeping in, and I think that's where 0:13:47.520 --> 0:13:49.800 we are. This is really very different from where the 0:13:49.800 --> 0:13:52.040 feed is right now. Actually everyone else is different from 0:13:52.080 --> 0:13:54.319 the feed is right now. You look at lugs earlier 0:13:54.360 --> 0:13:56.600 today and it looks like Europe is starting to put 0:13:56.600 --> 0:13:58.880 it away. We'll rather pull back. Well, that's exactly where 0:13:58.880 --> 0:14:00.520 I wanted to go, Jeff how Am, Which is this 0:14:00.600 --> 0:14:03.920 really representing a sea change among central bankers? The fact 0:14:03.960 --> 0:14:07.239 that one committee member on the Bank of England's committee 0:14:07.480 --> 0:14:09.800 did vote for a fifty basis point high another one 0:14:09.840 --> 0:14:12.600 twenty five basis point how much is that the descent 0:14:12.679 --> 0:14:14.920 that you can increasingly see around the world that will 0:14:14.960 --> 0:14:18.600 eventually filter back to the Fed. So it is only 0:14:18.679 --> 0:14:22.000 going to start to increase some starting in Europe. Again, 0:14:22.040 --> 0:14:24.160 we saw it Norway today. It didn't seem like fifty 0:14:24.160 --> 0:14:26.920 basis points was on the table, even though you know 0:14:27.000 --> 0:14:28.880 that was where the market was. And now we're going 0:14:28.920 --> 0:14:32.800 to start to only see increasing descents of not pursuing 0:14:32.800 --> 0:14:36.120 things as aggressively the Fed. However, um so I think 0:14:36.160 --> 0:14:38.920 you mentioned this early in the program. You know our dollar, 0:14:39.240 --> 0:14:41.200 your problem that is going to take quite a bit 0:14:41.200 --> 0:14:44.120 for them to start to worry about international conditions, because 0:14:44.160 --> 0:14:46.600 from the US's point of view, it's about tightening conditions 0:14:46.600 --> 0:14:48.320 in the U S. U S. Economy is still doing well, 0:14:48.400 --> 0:14:50.360 so there's no obligation for the FED to take into 0:14:50.360 --> 0:14:52.840 account wider conditions. How long can this last, Jeff? How 0:14:53.120 --> 0:14:56.040 long can this divergence where the dollar is the pre 0:14:56.080 --> 0:14:59.840 eminent trade and continues to strengthen. Is that an entire 0:15:00.040 --> 0:15:05.200 kind of trade? So it will last longer than markets expect, 0:15:05.280 --> 0:15:07.680 but more crucially, from from a positioning point of view, 0:15:07.760 --> 0:15:10.400 it will last longer than markets hope. Right, So there 0:15:10.440 --> 0:15:13.040 will still be repeated efforts a pricing of FED pivot 0:15:13.040 --> 0:15:15.880 trade through equities, you know, through bonds, you know, through effex, 0:15:15.920 --> 0:15:17.720 you know, through the dollar and the like. But I 0:15:17.800 --> 0:15:20.080 think there's still a few more rounds of disappointments some 0:15:20.240 --> 0:15:22.480 to come. We look at the where their terminal pricing is, 0:15:22.520 --> 0:15:24.400 you know, right now it's going up, whereas everywhere else 0:15:24.440 --> 0:15:26.800 now it's probably gonna start coming off. Jeff. We've been 0:15:26.840 --> 0:15:30.720 discussing whether you should be trading growth expectations or rates 0:15:30.880 --> 0:15:32.720 when it comes to the Euro. When it comes to 0:15:32.760 --> 0:15:34.680 Sterling at least it's been building on that in this 0:15:34.720 --> 0:15:38.200 conversation too, based on what the bank having has just said, 0:15:38.480 --> 0:15:40.840 it's that positive news for Sterling that they're pushing back 0:15:40.880 --> 0:15:44.000 against the higher terminal rate that would have actually hammered 0:15:44.000 --> 0:15:47.120 growth over the next couple of years. Um. I think 0:15:47.160 --> 0:15:50.440 initially it's not to be frank because the markets still 0:15:50.440 --> 0:15:53.240 working off rate differentials between the b o E and 0:15:53.320 --> 0:15:55.840 the Fed. UM So now that correlation needs to snap 0:15:55.880 --> 0:15:58.400 back right after the mini budget and kind of trashed it. 0:15:58.800 --> 0:16:01.360 So if that correlation and dust stop back now, then 0:16:01.480 --> 0:16:03.080 on a cable point of view, you know, then no 0:16:03.160 --> 0:16:05.840 Sterling is going to struggle. But if you think of 0:16:06.000 --> 0:16:08.560 that not as type policy, if the household is going 0:16:08.600 --> 0:16:11.080 to get some relief and then growth is gonna be 0:16:11.080 --> 0:16:13.360 slightly better in the UK compares the Eurozone compared to 0:16:13.360 --> 0:16:16.000 stand Scandinavia than relative any traits and that that could 0:16:16.000 --> 0:16:18.680 start to come through. We just look at intro European divergence. 0:16:18.800 --> 0:16:20.600 But the dollar is still going to ragn supreme at 0:16:20.600 --> 0:16:22.800 this point. Getting a bonus around Tom with Jeff you 0:16:23.320 --> 0:16:27.240 how case that just stick with Jeff you Bmy manager 0:16:31.360 --> 0:16:34.360 Dan McKee was a force on Wall Street. He went 0:16:34.360 --> 0:16:37.320 off to a gentleman named Corner point seven two and 0:16:37.440 --> 0:16:40.080 is the chief US economist for point seven two, and 0:16:40.080 --> 0:16:43.320 I daresay the New York mets as well. Dr mackie 0:16:43.400 --> 0:16:46.760 joins us this morning. Dan McKie, the Governor of the 0:16:46.800 --> 0:16:51.160 Bank of England, just framed out a two year recession. 0:16:51.880 --> 0:16:56.840 America is different. How different is the United States from 0:16:56.880 --> 0:17:03.240 the turmoil of double digit inflation we see worldwide? The 0:17:03.280 --> 0:17:06.199 main difference, Thomas, there's just a lot more momentum in 0:17:06.240 --> 0:17:09.360 the US economy. You know, Europe and the UK are 0:17:09.440 --> 0:17:13.040 dealing with a much bigger rise and energy prices and there, 0:17:13.200 --> 0:17:15.439 you know, they have a war on their doorstep. The 0:17:15.560 --> 0:17:18.600 US has a lot of momentum, especially in the service sector, 0:17:18.920 --> 0:17:21.800 and we think that's why, you know, jobless claims are 0:17:21.840 --> 0:17:24.760 staying well. We don't think the unemployment rate's gonna rise soon. 0:17:25.760 --> 0:17:28.240 The momentum in the service sector is going to continue. 0:17:28.720 --> 0:17:32.400 The great hikes are slowing things like housing, but it's 0:17:32.440 --> 0:17:34.800 not having an impact on services, and we think it 0:17:34.840 --> 0:17:37.240 will take a long time to happen. Dr mackey, you 0:17:37.280 --> 0:17:40.399 were weaned at Stanford off of John Taylor and other 0:17:40.560 --> 0:17:43.720 elites do their rules work now. Does Oakland's law, the 0:17:43.760 --> 0:17:48.719 beverage curve of Lse that Jerome Powell mentioned yesterday, and 0:17:48.760 --> 0:17:53.080 the Taylor rule of Stanford? Are those operative theories now? 0:17:53.400 --> 0:17:57.200 Or we flying by the seat of our pants? I think, 0:17:57.400 --> 0:18:00.879 you know, those rules can give some guidance, but but 0:18:01.119 --> 0:18:05.000 really the face not having had hasn't dealt with the 0:18:05.040 --> 0:18:08.320 pandemic before in the post pandemic era. So those rules 0:18:08.320 --> 0:18:10.800 can give the FED some idea of where to go, 0:18:11.240 --> 0:18:14.240 but it's really a different environment right now. How do 0:18:14.280 --> 0:18:18.000 you understanding the productivity levels that are not recovering at 0:18:18.000 --> 0:18:20.520 any kind of real pace, and this idea that we 0:18:20.560 --> 0:18:24.920 don't necessarily see any decline in a number of people 0:18:24.960 --> 0:18:27.320 who are getting jobs. How do you understand this at 0:18:27.359 --> 0:18:31.480 a time when we're hearing anecdotically, anecdotally so many companies 0:18:31.760 --> 0:18:35.359 laying people off, reducing some of their workforce through attrition. 0:18:37.000 --> 0:18:40.560 I think what what has happened is that not long 0:18:40.560 --> 0:18:44.960 ago most companies were having trouble finding workers, and especially 0:18:44.960 --> 0:18:47.159 in that service sector, which is seventy one percent of 0:18:47.240 --> 0:18:50.480 US employment. There's no reason they're going to start laying 0:18:50.480 --> 0:18:53.880 people off immediately. Um, you know, they're they're looking at business, 0:18:54.080 --> 0:18:57.640 there's still the ship from goods to services spending happening, uh, 0:18:57.680 --> 0:19:01.199 and that's bolstering a service sector and eployment. UM. The 0:19:01.240 --> 0:19:04.160 productivity numbers I think are also being weighed down by 0:19:04.400 --> 0:19:06.639 what I do think is an understatement of GDP in 0:19:06.640 --> 0:19:08.760 the first half of this year. Um, it doesn't make 0:19:08.800 --> 0:19:12.640 sense that employers are adding five jobs per month while 0:19:12.680 --> 0:19:15.520 the economy was contracting. So I think that's eventually going 0:19:15.600 --> 0:19:18.000 to get revised to something more in line with what 0:19:18.280 --> 0:19:22.440 gross domestic income was was telling us. But in any case, 0:19:22.480 --> 0:19:24.719 productivity is is pretty weak right now. Do you think 0:19:24.760 --> 0:19:27.600 that the labor market is an accurate reflection of some 0:19:27.680 --> 0:19:29.480 of the pain that's being felt to the market. In 0:19:29.560 --> 0:19:32.359 other words, is this really the metric that the Federal 0:19:32.359 --> 0:19:35.280 Reserve should be targeting right now to understand the progress 0:19:35.280 --> 0:19:39.480 that they're making and bringing down inflation. I mean, I 0:19:39.520 --> 0:19:41.959 think the labor market is an important step in the 0:19:42.000 --> 0:19:46.000 process of bringing down inflation. Now. The thing, one thing 0:19:46.040 --> 0:19:48.679 I would mention is that much of the inflation we 0:19:48.760 --> 0:19:51.520 have isn't directly tied to wage of inflation. You know, 0:19:51.560 --> 0:19:54.040 we all know about the supply chain problems, the you know, 0:19:54.080 --> 0:19:57.440 the goods price surge that we saw during the pandemic 0:19:57.480 --> 0:20:00.840 and afterwards. But I do think way growth and the 0:20:00.920 --> 0:20:04.480 labor is high enough and the labor markets tightened enough 0:20:04.840 --> 0:20:06.919 that it is a force on inflation right now. So 0:20:06.960 --> 0:20:09.439 the FED ultimately does need to slow it down, but 0:20:09.480 --> 0:20:11.119 I think it's going to be difficult for them to 0:20:11.160 --> 0:20:14.679 do that. Doan Mackie dominic constum, you know, when you 0:20:14.680 --> 0:20:17.760 are Barkley's and a Deutsche Bank dominique constum says, this 0:20:17.840 --> 0:20:22.160 is a FED that is super restrictive. Do you agree. 0:20:22.720 --> 0:20:26.000 I wouldn't say they're super restrictive right now. Um, you know, 0:20:26.040 --> 0:20:28.840 they are raising rates quite rapidly, so we are getting 0:20:28.840 --> 0:20:32.639 into restrictive territory and you are seeing them having any effect. 0:20:32.680 --> 0:20:36.440 The housing markets clearly clearly contracting at this point, so 0:20:36.520 --> 0:20:39.719 their their policy is working in that sense. But I 0:20:39.760 --> 0:20:42.600 do think that they're dealing with a different environment now, 0:20:43.040 --> 0:20:47.240 where you know, you do have still reopening that's happening 0:20:47.240 --> 0:20:49.840 in the service sector, and that means that you're not 0:20:49.880 --> 0:20:53.520 going to get the service sector contracting in the way 0:20:53.520 --> 0:20:55.960 that it often does during a recession day. We just 0:20:56.000 --> 0:20:58.080 want to know if point seventy two has done any 0:20:58.080 --> 0:21:01.360 modeling on what would happen to the Queen's economy if 0:21:01.400 --> 0:21:04.199 Aaron Judge went to the Mets, if you modeled that 0:21:04.240 --> 0:21:07.680 out yet. I'm working on it, but no I haven't. 0:21:07.840 --> 0:21:10.120 He's working on it. T K. That's a scoop. Jan, 0:21:10.240 --> 0:21:13.960 We got you know, you gotta have Mr. We gotta 0:21:14.000 --> 0:21:16.880 get Steve Cohen and you on the show together. Dean. 0:21:16.960 --> 0:21:19.040 I think you can provide cover for us to talk 0:21:19.080 --> 0:21:22.960 to Mr Cohen about this. I mean Aaron Judge, Texas Rangers, 0:21:23.040 --> 0:21:28.000 Aaron Judge, San Francisco Giants, Aaron jud Dan, Steve Cohen's 0:21:28.000 --> 0:21:30.680 gonna let Judge go to the l A Dodgers. It's 0:21:30.720 --> 0:21:39.359 an American no no comment, point seventy things like ready 0:21:39.359 --> 0:21:43.080 to pull at the back of the LA Honestly, don't 0:21:43.080 --> 0:21:48.520 blame him. Thank you, Dane. This is the Bloomberg Surveillance Podcast. 0:21:48.760 --> 0:21:52.119 Thanks for listening. Join us live weekdays from seven to 0:21:52.240 --> 0:21:56.280