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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 3: George Conkalvis of MUFG writing, inflation concerns have been misplaced
Speaker 3: and rates may have seen the high prints for twenty six.
Speaker 3: That plus worsh talking hikes off the table is about
Speaker 3: to unleash a bond rally. George joins us here this morning. George,
Speaker 3: great to see you. Happy happy day if you celebrate
Speaker 3: a real question about how much this bond market can
Speaker 3: rally given some of the inflationary pressures.
Speaker 1: That yes are tied to oil, but all of some
Speaker 1: other issues as well.
Speaker 4: Yeah.
Speaker 5: Look, I think we are entering a summer of the
Speaker 5: bond market. I think we probably have seen the high
Speaker 5: prints for rates for a whole host of reasons. Look,
Speaker 5: oil prices, even in the midst of like literally a
Speaker 5: billion plus barrels of less production getting through the straight upfomoves,
Speaker 5: managed to stay contained. Right, So, like this idea that
Speaker 5: you're going to see like a second wave of higher
Speaker 5: oil prices, I don't buy that.
Speaker 6: We don't buy that. We've been skeptical of the move
Speaker 6: in general.
Speaker 5: And inflation has largely come from the inflation from the
Speaker 5: oil shock, and then some second order around the effects
Speaker 5: around some sort of pricing search charges that were added
Speaker 5: to core prices. But in general, there's not a really
Speaker 5: an inflation problem. Look at wages, Look at the way
Speaker 5: that the jobs markets behaving. It's still low paying jobs.
Speaker 5: You're not seeing the sort of impulse of inflation. We
Speaker 5: think that we've kind of seen the high end rates.
Speaker 3: So we'll get to the economic discussion later, because there's
Speaker 3: a lot of divergence even within pros and about exactly
Speaker 3: whether all of that is true in terms of wages
Speaker 3: and some other aspects. Do you think that Kevin Warresh
Speaker 3: truly can unleash the summer of bonds given the fact
Speaker 3: that ultimately he's really squaring off against credibility on one
Speaker 3: hand and the overhang of what could be coming from
Speaker 3: the White House and the other.
Speaker 6: Look, I think.
Speaker 5: Everyone has to temper their enthusiasm, including myself, because we
Speaker 5: have Let's see what happens with the MU and if
Speaker 5: that gets gets done, is a done deal by tomorrow?
Speaker 6: I think? Right, So, like let's see a men or
Speaker 6: of Friday, Let's see what happens there. But I think
Speaker 6: you know we're gonna.
Speaker 5: Start off at two o'clock into two thirty, right two o'clock,
Speaker 5: We're going to see did a Kevin Woies participate in
Speaker 5: the dot plot submission process? Like that's gonna be a
Speaker 5: big deal. Uh, And like what are the dots telling us?
Speaker 5: Is there going to be like a removal of the
Speaker 5: easing bias at the first first blush? I think this
Speaker 5: is going to be a kind of gradual toe in
Speaker 5: to becoming more like a change at the FED. But
Speaker 5: we don't see a drastic change of the FED starting
Speaker 5: off today. But we do think that you know, this
Speaker 5: is gonna He's just start pivoting the FED differently, and
Speaker 5: that's gonna rearrange the focus and less forward guidance and
Speaker 5: a shift from focusing on other policies towards rate policy.
Speaker 5: I think that if inflation truly has peaked, if oil
Speaker 5: is peaked, if rates have peaked, then you're going to
Speaker 5: see you can open up a window to cut rates
Speaker 5: at the end of the year.
Speaker 1: Does the labor market need to weaken further?
Speaker 7: I mean, it's not weak now, but does it need
Speaker 7: to weaken for him to be able to cut interest rates?
Speaker 5: I mean, I think we have to realize we have
Speaker 5: to look back and see if the labor data actually
Speaker 5: is honest, and we've had two years in a row
Speaker 5: of massive revisions every single year. The later we get
Speaker 5: in the year, we'll get more clarity on the true
Speaker 5: health of the jobs market. So it doesn't have to
Speaker 5: necessarily weaken it. I think it just has to be
Speaker 5: a combination of it's not strong as people think it is,
Speaker 5: and to the inflation story probably has peaked. It gives
Speaker 5: a window for the Fed to cut but.
Speaker 7: They're not going to get back to the two percent
Speaker 7: target this year. So what is going to the catalyst
Speaker 7: for them to really have that confidence? Given the fact
Speaker 7: that there are a lot of members on the committee
Speaker 7: that are concerned that basically inflation is prices are still
Speaker 7: too high and the labor market's not weak enough to
Speaker 7: have this bias.
Speaker 6: Look, there's a whole host that thing.
Speaker 5: I mean it depending on how you look at the
Speaker 5: data and you look at real pure cores, you can
Speaker 5: get down towards you know, mid mid twes by the
Speaker 5: end of the year, and into projecting into twenty twenty seven,
Speaker 5: you can start to get into the twos. So I
Speaker 5: think it's not about and plus, by the way, we
Speaker 5: defences eased the last two years with inflation well above
Speaker 5: their target, right, So it's more about what's your understanding
Speaker 5: of neutral? And that's why I think today's a we
Speaker 5: get to dop plot most likely how the dop plot
Speaker 5: looks like, and then what is the glide path from
Speaker 5: this year, which we think they're going to remove the
Speaker 5: one potential cut that was in the last forecast or projections,
Speaker 5: and what is the path towards neutral, Because like they've
Speaker 5: been very gingerly moving up neutral rate abound three and
Speaker 5: one eighth, are they going to move that up now
Speaker 5: at Kevin Warsh's first meeting, that would make no sense.
Speaker 5: So like they had to get down to neutral or
Speaker 5: redefine what neutral is.
Speaker 3: Well, that's something people are looking for. What is inflation?
Speaker 3: If you could choose your inflation, is it an inflation
Speaker 3: target that we're going to care more about?
Speaker 1: I'll choose one inflation target.
Speaker 3: How about anyone who's invested either Incursor or SpaceX and
Speaker 3: the new billionaires that have been minted.
Speaker 1: There's some inflation there. Given the fact that.
Speaker 3: Markets have absolutely been on a tear, how does that
Speaker 3: factor into the Fed's assessment of current conditions?
Speaker 5: I mean, look, the going is great when it's going.
Speaker 5: The question is how does it look like at the
Speaker 5: end of the year. We've had moments where we have
Speaker 5: these massive u fourth moves like we're in right now,
Speaker 5: and then they peter out and they burn out. So
Speaker 5: the question is is if the momentum continues and stocks
Speaker 5: continue to make new highs, yes, then you're building in
Speaker 5: financial conditions easing, which takes pressure off the FEN to
Speaker 5: do anything, or like, at least in their calculus, it
Speaker 5: would be less of a need to ease. But that's
Speaker 5: really a judgment call on where you think markets are
Speaker 5: going to be at.
Speaker 6: The end of the year.
Speaker 3: If you put this another way, is the summer of
Speaker 3: the bond going to be also the summer of the
Speaker 3: stock Because we've seen correlations between stocks and box bonds
Speaker 3: essentially good at one right, they've been directly correlated rather
Speaker 3: than diversely correlated as they have been historically. Why wouldn't
Speaker 3: any additional bond rally just continue to fuel and even
Speaker 3: bigger remove in the equity market.
Speaker 5: I mean, for like the long duration type sectors like technology,
Speaker 5: it probably would, right, I mean, until something breaks that
Speaker 5: correlation down completely, it probably would have kind of a
Speaker 5: self reinforcing mechanism. But you know, I do think that,
Speaker 5: you know, as we get towards the end of the
Speaker 5: year and we realize that our more optimistic collectively the
Speaker 5: market's more optimistic view.
Speaker 6: On the macro is proven wrong.
Speaker 5: You're going to see the bomb market end up winning
Speaker 5: out versus the stock market.
Speaker 2: Stay with us, multilintex Divanan's counting.
Speaker 3: Up off to this, Stephen Cook of the Council on
Speaker 3: Foreign Relations writing, clearly the President was done and grabbed
Speaker 3: the deal before him. He is going to spin it
Speaker 3: as a victory, but it heavily favors Roan. This raises
Speaker 3: the question why do we even.
Speaker 2: Go to war?
Speaker 3: Stephen joins us Now for more, Stephen why do you
Speaker 3: say that this is giving a win to a run
Speaker 3: given that we don't really know all the details yet.
Speaker 8: Well, we have a fairly good sense of what is
Speaker 8: going to be in this deal based on what's been
Speaker 8: leaking out to Bloomberg to be English and a variety
Speaker 8: of other news outlets, and what we've seen so far
Speaker 8: would suggest that the Iranians will retain their right to
Speaker 8: enrich uranium, They'll be able to export oil immediately, the
Speaker 8: blockade will be lifted, although the Iranians are saying that
Speaker 8: there will be freedom of navigation through the straight up
Speaker 8: worm moves, but only for sixty days and then they
Speaker 8: will levy a surcharge on transit through that waterway. Then,
Speaker 8: of course, there's nothing in the document about dismantling proxies. Yes,
Speaker 8: giving up the highly enricheranium, but if they can enricheranium,
Speaker 8: they can replace that stock of highly enricheranium. Basically, the
Speaker 8: United States walks away from this with a lot of
Speaker 8: tactical battlefield achievements, but what can only be described as
Speaker 8: a strategic defeat.
Speaker 7: Stephen I also noticed that there is no language when
Speaker 7: it comes to Iron's ballistic missile program. Has the Trump
Speaker 7: administration given up their three red lines, which has always
Speaker 7: been for years, nuclear ballistic missiles, and money to proxies.
Speaker 8: Yes, indeed they have given it up. There is nothing
Speaker 8: that we know of regarding ballistic missiles. The United States
Speaker 8: and the Israelis did a lot of damage to the
Speaker 8: ballistic missile program. But the fear is is that all
Speaker 8: of these resources that can flow into Iran, including the
Speaker 8: revenue from immediately exporting oil, can be devoted to reconstructing
Speaker 8: their capacity to build ballistic missiles. And it is one
Speaker 8: of the biggest ballistic missile programs in the world.
Speaker 1: So the first point and Tyler brought this up.
Speaker 7: According to the text Bloomberg has its hand on when
Speaker 7: it comes to the MoU means that this would include
Speaker 7: a permanent end to the war on all fronts quote
Speaker 7: including Lebanon.
Speaker 1: Is israel An agreement.
Speaker 4: With this absolutely not.
Speaker 8: The Israelis maintained that they will not give to run
Speaker 8: a veto over their security. But the Israelis are in
Speaker 8: a very difficult position if his belaw attacks and the
Speaker 8: Israelis respond. In a neighborhood of bear Root, for example,
Speaker 8: the Iranians will threaten to close the Straight of removes
Speaker 8: once again putting tremendous pressure on the global economy as
Speaker 8: we've seen over the course of this war. But Israelis
Speaker 8: are in an election season and Prime Minister Nitaio is
Speaker 8: not going to give up the fight in Lebanon, which
Speaker 8: is actually quite popular among Israelis. As President Trump's popularity
Speaker 8: among Israelis has dropped precipitously.
Speaker 3: In recent weeks, there is a sense right now that
Speaker 3: everyone's buying time.
Speaker 1: It seems like the Iranian regime is.
Speaker 3: Buying time to try to survive, and it seems like
Speaker 3: some Middle Eastern nations are buying time to create alternative
Speaker 3: roots from the Strait of Removes to export some of
Speaker 3: their supplies. The UAE this morning saying that they're planning
Speaker 3: to cut the dependency on the Strait of Hermoves to zero,
Speaker 3: saying that even if the Strait of Removes does reopen,
Speaker 3: nothing will change that plan. How much is this going
Speaker 3: to be an interim type deal for months, maybe years,
Speaker 3: trying to get enough through well nations in the region
Speaker 3: figure out workarounds.
Speaker 4: Yeah, I think that's a very important point.
Speaker 8: The Emordis and the Saudis certainly have options to build
Speaker 8: their way out of the Strait of Removes. The cut
Speaker 8: there is the Kuwaitis, the Bahrains absolutely do not have
Speaker 8: the ability to do with the Saudis and the Amorantis,
Speaker 8: so just by geography, so there'll be some countries that
Speaker 8: will be able to see this as an interim deal,
Speaker 8: and there are others of the pressure on it in
Speaker 8: order to see through so that they can navigate through
Speaker 8: the Strait of Removes. Their economies are absolutely dependent upon it.
Speaker 8: There is a big question though, whether we will get
Speaker 8: beyond this sixty day period of the MoU There's lots
Speaker 8: to be worked out here, especially on the nuclear front
Speaker 8: that took the Obama administration a couple of years. The
Speaker 8: President is suggesting that this is going to happen in
Speaker 8: sixty days, But overall, I think you're quite right, Lisa.
Speaker 8: The straight up remouves is something that is now seen
Speaker 8: as a problem for countries in the region, and they're
Speaker 8: going to do everything possible they can to ease their
Speaker 8: reliance on it.
Speaker 7: Twenty months, JCPOA took twenty months. Stephen, how long do
Speaker 7: you think this could take?
Speaker 8: Well, I think it can take quite some time unless
Speaker 8: the President really goes back on his red lines, there's
Speaker 8: every indication to suggest that he will, and the US
Speaker 8: intelligence community has warned the president that their Iranians are
Speaker 8: unlikely to give up their nuclear program.
Speaker 2: Stay with US, Multlinpex Savannah's coming up.
Speaker 3: After this, and former Boston FED President Eric Rosengren expecting
Speaker 3: no forward guidance from Warsha's statement, writing the new chair
Speaker 3: is likely to want to emphasize at this meeting a new,
Speaker 3: less transparent communication style.
Speaker 1: Eric joins us now for more. Eric, great to see you,
Speaker 1: Thank you for being with us. Can we take anything
Speaker 1: from Kevin Worsh's first.
Speaker 3: Appearance on the board of the FMC back in two
Speaker 3: thousand and six to twenty eleven that we can pull
Speaker 3: forward to today as guidance over how he will really
Speaker 3: preside over this Central Bank.
Speaker 9: Well, I think he's made pretty clear that he thinks
Speaker 9: that previous fmcs have over communicated and that it's been
Speaker 9: a bit confusing, with a number of voices sometimes giving
Speaker 9: discordant opinions. So I think he's going to try to
Speaker 9: slow down the amount of speeches made by members. He's
Speaker 9: probably going to redraft the statement so that it's very
Speaker 9: factual and doesn't provide any forward guidance, and this is
Speaker 9: normally a meeting where the Summary of Economic Projections has provided,
Speaker 9: which includes a dot plot that gives the participants expectations
Speaker 9: off where interest rates will go. It will be in
Speaker 9: how he handles if they go through with that. It'll
Speaker 9: be interesting to see how he handles that, because even
Speaker 9: if there's no forward guidance in the statement, if they
Speaker 9: put the dot plot out, it's going to give some
Speaker 9: indication that many members of the FMC think the next
Speaker 9: move ought to be.
Speaker 4: Up not down.
Speaker 3: You said, if they put the dot plot out, do
Speaker 3: you think that there's a chance that they won't.
Speaker 9: I mean, at the first meeting he said there's going
Speaker 9: to be a regime change. I expect this meeting is
Speaker 9: mostly going to be about communications. Communications within the committee,
Speaker 9: communications about the statement, communications with the press conference, and
Speaker 9: at a very minimum, I think he's probably going to
Speaker 9: seek to de emphasize the Summary of Economic Projections and
Speaker 9: the dot plot with the hope that eventually it goes away.
Speaker 9: But when you talk about regime change sometimes is fairly quick.
Speaker 9: So it will be interesting to see what happens at
Speaker 9: the press conference and what actually is released publicly.
Speaker 7: Eric you also said he's going to try to slow
Speaker 7: down the number of speeches. How does he do that
Speaker 7: while also making sure he's gaining consensus amongst his new colleagues.
Speaker 9: I mean, I think it is a challenge, particularly given
Speaker 9: the president that many presidents probably have quite a lot
Speaker 9: of speeches that they've already agreed to give, as well
Speaker 9: as some of the governors. But I think he's just
Speaker 9: going to emphasize that he doesn't want to see forward
Speaker 9: guidance in any of the speeches, and that the forward
Speaker 9: guidance has often been misleading and misdirect at the market,
Speaker 9: and he thinks that both in statements and speeches, people
Speaker 9: should stick to the facts and explaining the policy that
Speaker 9: was just taken well.
Speaker 7: Is Warsh himself also going to speak less? And if
Speaker 7: that's the case, and Jonathan Farroh has brought up this
Speaker 7: point a lot, doesn't he just outsource how he's thinking
Speaker 7: to other members of the committee and then they will
Speaker 7: define him.
Speaker 9: I mean, he's indicated he thinks that the chair as
Speaker 9: well as everybody should speak less. We'll see how difficult
Speaker 9: that is, particularly if they're expecting to make significant changes.
Speaker 9: But I think if he does that, it's going to
Speaker 9: be in the context of the entire committee speaking less
Speaker 9: frequently and less.
Speaker 4: With less forward guidance than they have in the past.
Speaker 3: It seems like a lot of people have moved past
Speaker 3: forward guidance anyway, at least in markets, they've been looking
Speaker 3: at other metrics in terms of inflation, in terms of
Speaker 3: understanding exactly how tight the label market is. Do you
Speaker 3: expect any guidance for at least how the FED measures
Speaker 3: inflation Given the criticisms in the past that Fed Shair
Speaker 3: Kevin worsh has had about the exact metric.
Speaker 9: Used, the chair may talk about that in this comments.
Speaker 9: Usually those kind of discussions takes several meetings. The staff
Speaker 9: usually provides briefings, and there are a lot of economists
Speaker 9: that would work on the issue of what are the
Speaker 9: best measures of inflation, what's the best way to forecast inflation?
Speaker 9: So I would be surprised if that came out at
Speaker 9: this meet I think that probably will take several meetings
Speaker 9: before he would introduce anything different there.
Speaker 1: Do you think it's bad for the FED to communicate.
Speaker 4: Less It wouldn't be my first choice. I think that.
Speaker 9: During a period of regime change, if there really is
Speaker 9: regime change, then you need to explain what you're doing
Speaker 9: and why you're doing it, particularly if it's different than what.
Speaker 4: The previous two or three chairs have been doing.
Speaker 3: Do you think that the interpretation will be some sort
Speaker 3: of overly dubvish position. Do you think the implication will
Speaker 3: be sort of political or do you think the implication
Speaker 3: will just be more uncertainty, potentially having the opposite effect
Speaker 3: more volatility and leading to tighter financial conditions.
Speaker 9: I mean, Kevin has in the past talked about wanting
Speaker 9: to go back to the day where there's a little
Speaker 9: more mystique to monetary policy and not being quite as
Speaker 9: transparent in general. I think the challenge with that is
Speaker 9: both the public and investors are now very well informed
Speaker 9: about what the FED does and how the that effects
Speaker 9: the economy. So I don't think we can go back
Speaker 9: to where we were under green Span or Paul Volger,
Speaker 9: and I think that Kevin's thinking may evolve on this
Speaker 9: over time.
Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best
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