Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. Let's break it down
Speaker 1: a little bit. We'll get some experts in here, get
Speaker 1: some smart people in the studio. As John Tucker walks out, well,
Speaker 1: it's about I wanted to beat him to it. Ira Jersey,
Speaker 1: chief US interest rate Strategists with Bloomberg Intelligence. He's based
Speaker 1: down there in that Princeton area. Michael McKee and or
Speaker 1: Bloomberg Interactive Broker Studio covered all things economics for Bloomberg Editorial,
Speaker 1: So we appreciate getting these folks on the do a
Speaker 1: little bit of a roundtable here. Let's start with you here.
Speaker 1: I don't know inversion, biggest inversion since nineteen eighty one.
Speaker 1: I mean that was a good year for me, nineteen
Speaker 1: eighty one, by the way, But you know, what does
Speaker 1: that What does that mean to you? Um? It means
Speaker 1: that maybe Blondie's going to come back, Um, Bell bottoms
Speaker 1: and uh and plaid UM. But you know, the the
Speaker 1: inversion is not a huge surprise because at some point, UM,
Speaker 1: we're going to have a significant slowdown in economic activity
Speaker 1: and inflation is going to slow. The question is when,
Speaker 1: um number one and then number two? UM. And this
Speaker 1: is where you know yesterday was important, and I think
Speaker 1: today's reiteration by Chair Powell that there's a possibility that
Speaker 1: they can go fifty basis points in March and certainly
Speaker 1: go higher than what we were expecting prior to his
Speaker 1: testimony yesterday. UM, is it's reasonable to think that we
Speaker 1: could even invert further because the more that the Fed hikes,
Speaker 1: and I've been of this opinion for quite some time
Speaker 1: that the more that the Fed hikes, the the harder
Speaker 1: the ultimate landing will be. UM. You know that the
Speaker 1: timing of when that landing is I think it's more
Speaker 1: in doubt as opposed to whether or not we'll have
Speaker 1: a hard landing. It's just a matter of when. And
Speaker 1: that's why you can get the yield curve inverted by
Speaker 1: one hundred and ten basis points now and maybe one
Speaker 1: hundred and twenty five hundred and fifty basis points ultimately
Speaker 1: in the future. So Mike hop on in here, Michael mckear,
Speaker 1: International Economics and Policy corresponded, to get your title right.
Speaker 1: Fancies fancy that guy? Yeah, that the guy who knows
Speaker 1: the stuff. Well, did we really hear anything new here?
Speaker 1: I mean in today's session or did it was yesterday?
Speaker 1: Really kind of the testimony that took the cake. Almost
Speaker 1: everything that we've heard today has been essentially a repeat. However,
Speaker 1: he did throw in an important line or two when
Speaker 1: he was reading his testimony that they have made no
Speaker 1: decision about twenty five or fifty. That they're going to
Speaker 1: be monitoring the incoming data. The totality of the data
Speaker 1: includes the Job's report, he said, the CPI report. They'll
Speaker 1: be looking at those, they'll be looking at jolts. They're
Speaker 1: going to look at everything that they've got between now
Speaker 1: and then and then make a decision. So I think
Speaker 1: it is probably premature to lock in a bet on
Speaker 1: fifty basis points because the numbers could obviously change that.
Speaker 1: If we get strong numbers, then the Fed is probably
Speaker 1: going to do fifty because he's opened the door for that.
Speaker 1: So Michael, just in terms of the economy, it seemed
Speaker 1: like the recession talk. But I think I was asking
Speaker 1: this question maybe it's recently as two weeks ago. Is
Speaker 1: the recession talk? Is that off the table now? Boy,
Speaker 1: that seems like a long time ago, because now it
Speaker 1: feels like it's right back on their front and center. Yeah,
Speaker 1: if you're looking at the eeel curve, it's right back
Speaker 1: on their front and center. My question was, and I
Speaker 1: was talking about this earlier on Bloomberg Surveillance, if you
Speaker 1: look at a chart of the two year, ten year,
Speaker 1: just to pick one, and you put down the dates
Speaker 1: that we saw the job the FED meaning the Jobs report,
Speaker 1: the CPI report, the retail sales report, and then don't
Speaker 1: forget Laurdemester and Jim Bullard coming out and saying well
Speaker 1: we could have done fifty. You look at all those things,
Speaker 1: and what happened with the yield curve. When those things happened,
Speaker 1: it just traded sideways. It wasn't until yesterday really, until
Speaker 1: Jay Powell came out and said, well, we're going to
Speaker 1: have to do what the yield curve is telling us,
Speaker 1: and you we should be doing. So. I wonder why
Speaker 1: all of a sudden people have decided that this is
Speaker 1: a real thing that we have to react so tremendously too,
Speaker 1: when the data has been pointing in this direction for
Speaker 1: a long time. Well, Irah, you do this for a living.
Speaker 1: Tell us, why why are we looking at a yielding
Speaker 1: version here of one oh eight? What is that really
Speaker 1: telling us? Well, it's all about expectations. So I was
Speaker 1: just just for fun. I was looking at the one
Speaker 1: year forward rates and what the market was implying where
Speaker 1: one year rates would be on a forward basis. And
Speaker 1: when you look at something like one year where the
Speaker 1: one year rate is expected to be three years from now,
Speaker 1: what you realize is, hey, the market's expecting, um, the
Speaker 1: one year rate to be at three point six percent, right,
Speaker 1: so we're talking about, um, you know, one hundred and
Speaker 1: fifty basis points lower than where it is now. So
Speaker 1: all that the market is telling you when it's inverted
Speaker 1: like this, is that the market expects interest rates to
Speaker 1: be lower in the future than they are today. Um.
Speaker 1: And and because of that, you know, And the reason
Speaker 1: is why why does it think that? Well, it thinks
Speaker 1: that because of what I mentioned earlier, is that at
Speaker 1: some point we're going to have a recession. We're going
Speaker 1: to see lower interest rates, We're going to see lower
Speaker 1: inflation UM, and what the market's saying right now is
Speaker 1: that that that's not going to probably start till twenty
Speaker 1: twenty four at this point. So so we're in a
Speaker 1: situation where the FED is going to hike more and
Speaker 1: and the Fed's going to keep rates high. That's what
Speaker 1: the market's uh indicating right now. That's saying that one
Speaker 1: year rates a year from now, we're still going to
Speaker 1: be five percent UM, and that means that you know,
Speaker 1: we're we're probably just going to have a harder landing
Speaker 1: and um and ultimately have a recession. It's just you know,
Speaker 1: these long lags, like like there's not like a set
Speaker 1: time when you say, okay, when two stents inverts, when
Speaker 1: three tens and birds that you're going to get a
Speaker 1: recession right there. There's all these models that the FED
Speaker 1: has and all the economists have, but the thing is
Speaker 1: is that there's a massively wide range as to how
Speaker 1: long that takes. And obviously this cycle is significantly different
Speaker 1: from demos others, in particular because of how tight the
Speaker 1: labor market is. If the labor market wasn't nearly as
Speaker 1: sized as it is, we'd probably already be in a recession.
Speaker 1: We're very darn close to one. But but the fact
Speaker 1: is is that we have changing paradigm in the labor
Speaker 1: market since the end of the pandemic. That's I think
Speaker 1: caused the economy to be more robust than almost anyone
Speaker 1: had expected it to be six months ago or even
Speaker 1: three months ago. Hey, Mike, you know Irish just mentioning
Speaker 1: the Jolts number, and again it's surprised to the upside.
Speaker 1: I guess ten point eight two million job openings versus
Speaker 1: the consensus it's had ten point five five And then
Speaker 1: Bloomer's got a fascinating story that I was talking about earlier.
Speaker 1: Restaurant people are going back to the restaurants like crazy
Speaker 1: despite the inflation, and restaurants are like Gray will up
Speaker 1: up more stores, but they can't find people to work
Speaker 1: in them. What has changed fundamentally about the US labor force?
Speaker 1: Are people really just leaving their incoming back? There are
Speaker 1: fewer people in the labor I mean, the good news
Speaker 1: is you guys are doing a morning show here where
Speaker 1: so you can go out and get a restaurant job
Speaker 1: to not out here on the side. Yeah, exactly. We
Speaker 1: have seen a definite shrinking in the labor force that
Speaker 1: has come about for a number of reasons. We've had
Speaker 1: a long term drop in labor force participation by older
Speaker 1: workers because the baby boomers are hitting sixty five and
Speaker 1: they are starting to retire, and a lot of them
Speaker 1: just up and retired during the pandemic because they couldn't
Speaker 1: go to work anyway, and they say, oh, might as well,
Speaker 1: you know, get that social Security check um. And then
Speaker 1: we saw a lot of people, as they do go
Speaker 1: back to school during that period, took off some of
Speaker 1: the young people. Uh. And then we had and I
Speaker 1: should throw in, of course, the childcare issues that we
Speaker 1: had in schools out that we had basically a lot
Speaker 1: of people who were looking at the jobs in restaurants
Speaker 1: and saying, well, there's a lot of jobs open that
Speaker 1: won't require me to walk around on my feet for
Speaker 1: eight hours a day and struggle for tips. And so
Speaker 1: people went into other fields of work. So it's been
Speaker 1: a while. The jobs that are have been growing the
Speaker 1: fastest now our restaurant jobs, because they're finally getting around
Speaker 1: to people who are willing to take the jobs again
Speaker 1: and they are getting paid a little bit more now.
Speaker 1: So it's it's been a combination of factors, but it's
Speaker 1: been an issue and one that's gonna likely remain. We're
Speaker 1: not going to see a big increase in the labor force,
Speaker 1: it looks like, and I guess that I just a
Speaker 1: little bit of follow the immigration that's got to play
Speaker 1: a part in it. I mean, immigration became so much
Speaker 1: tougher over the last several years, and especially for some
Speaker 1: of these lower end jobs. If you're an immigrant who
Speaker 1: doesn't speaking, it's gonna be hard to get a restaurant
Speaker 1: or or at least in front of the house restaurant
Speaker 1: or bar job. But other lower paid jobs, it's been
Speaker 1: hard to fill them because they can't find people who
Speaker 1: who want to work for those wages, and immigrants played
Speaker 1: a big role in filling that in the past. Well,
Speaker 1: Ira Hot back in here because we talked a little
Speaker 1: bit about the labor market. Of course, the payrolls report,
Speaker 1: I think, what is it ten ten positive or beat
Speaker 1: or hot reports or something like that is a statistic
Speaker 1: I saw that's on Friday. Then you've got CPI on Tuesday,
Speaker 1: with inflation expected to drop again, um by some margin.
Speaker 1: What is the trade on Monday sandwich between the two
Speaker 1: data points. Um, well, I'm not sure Monday will be
Speaker 1: because obviously Friday is going to be the big one.
Speaker 1: And and we actually did some work on, you know,
Speaker 1: how how big moves tend to be in the bond
Speaker 1: market based on the different data points. And even though
Speaker 1: CPI and inflation is, you know, the hot topic and
Speaker 1: the reason why the Fed's hiking some ch and the
Speaker 1: reason why markets moving the way they are, the market
Speaker 1: still tends to move the most on the payrolls report,
Speaker 1: on the employment number and it's not necessarily the employment
Speaker 1: number itself, although obviously that's critically important, but it's really
Speaker 1: it's also the wage data, right, So the wage numbers
Speaker 1: that come out because like Mike was talking about, with
Speaker 1: a lot of the changes in the job market, Um,
Speaker 1: you know, services jobs and services inflation tend to be
Speaker 1: influenced most heavily by them by the wages of services workers.
Speaker 1: So if restaurant employees are making more money, that's going
Speaker 1: to be passed on at least to some degree to
Speaker 1: their consumer. Right that either that or the margins for
Speaker 1: those businesses have to contract. So so the the job
Speaker 1: number is going to be critically important, and I think
Speaker 1: the CPI report maybe a little bit less so interestingly,
Speaker 1: and I think this is um kind of with in
Speaker 1: our analysis of the market moves versus the data released,
Speaker 1: retail sales actually is the second most important and with
Speaker 1: CPI as a third. So so retail sales is still
Speaker 1: which makes sense, right, So if there's more demand and
Speaker 1: sales remain strong, then clearly prices will probably be stickier
Speaker 1: than they would be if if sales started to either
Speaker 1: decline or didn't grow as quickly as they had men So,
Speaker 1: so really it's still retail sales and jobs still are
Speaker 1: the key elements of what the market is looking at
Speaker 1: in terms of in terms of the future moves. All right, ire,
Speaker 1: let's fast forward to March twenty second, what is your
Speaker 1: federal reserve going to do? Twenty five, fifty or maybe other? Yeah,
Speaker 1: so you know, it's it's hard to gauge right now
Speaker 1: because I do think that they are incredibly data dependent.
Speaker 1: So if the data comes out as strong as the
Speaker 1: market's expecting, then I would not be surprised to see
Speaker 1: a fifty basis point move again, I think seventy five
Speaker 1: like so that other you know, there has been some
Speaker 1: talk about that. But I don't see the FED jumping
Speaker 1: from twenty five basis point moves to seventy five, you know,
Speaker 1: incrementally that though they could move back to a fifty
Speaker 1: basis point move, particularly if the data is very hot,
Speaker 1: it's that stepped down versus step up approach. It feels
Speaker 1: like if we go fifty, Mike, how scary is that?
Speaker 1: Did that? Then put on the table perhaps seventy five
Speaker 1: for the next meeting? No, UM, want to make it
Speaker 1: that way. Remember where we are, not where we were.
Speaker 1: I mean we're at four seven five. Now, if you
Speaker 1: did fifty, you'd be at twenty five, So seventy five
Speaker 1: would put you over six at that point? Why why
Speaker 1: you wouldn't need to go that fat far that fast?
Speaker 1: And the feed isn't sure that it needs to go
Speaker 1: to six yet we haven't even seen their SEP So
Speaker 1: I think that it doesn't put seventy five on the table.
Speaker 1: But what it does do is raises the question of
Speaker 1: were they behind the curve? And I think what what
Speaker 1: to be honest if everybody were honest about it, is
Speaker 1: everybody's behind the curve. And if we get this data
Speaker 1: that comes in strong and they're doing the market's going
Speaker 1: to be essentially giving them permission to do it, saying,
Speaker 1: you know, this is uh, this is scaring us too.
Speaker 1: And so the FED would do probably fifty, as Iris says,
Speaker 1: to catch up. But I don't think they need to
Speaker 1: go beyond that, I mean not in one move. Put
Speaker 1: it that way, all right. I'm looking at the World
Speaker 1: interest rate probability function on the Bloomberg turb Terminal WARP
Speaker 1: wi RP, and it shows me it's kind of got.
Speaker 1: I don't know. FED fund rates peaking maybe September ish
Speaker 1: around five point six percent. Is that enough because I've
Speaker 1: been hearing talk about a six percent number, maybe even
Speaker 1: six and a quarter. Is the market still not buying it? Well?
Speaker 1: I think the markets, you know, when we look at
Speaker 1: something like w IRP, we're looking at a linear probability.
Speaker 1: So we're saying, okay, the the average, right, So so
Speaker 1: the average, the weight at average thinks that we're going
Speaker 1: to hike to around five point seventy five percent at
Speaker 1: this point, right, which is gets you too. And that's
Speaker 1: on the upper bounds. That's a five point six percent,
Speaker 1: which is it looks like the market is pricing that
Speaker 1: for four July. But keep in mind, is that some
Speaker 1: of that is six percent, and then built into that
Speaker 1: also is only five and a half. So you know,
Speaker 1: when you think about the probabilities that are being built in,
Speaker 1: that's just the kind of the the median probability or
Speaker 1: the mean probability of that distribution. So, I, you know,
Speaker 1: it's very unclear right now, and I think that the
Speaker 1: Federal Reserve is still in calibration mode, and they've been
Speaker 1: in calibration mode for the last you know, basically since
Speaker 1: the December meeting. But you know, is that calibration going
Speaker 1: to be that we're only hiking to five and a
Speaker 1: half or is it that we have to hike to
Speaker 1: six because the data is not not cooperating the way
Speaker 1: that we had hoped, and it's possible that they could
Speaker 1: go more. Right like, look, right now, we're all data
Speaker 1: dependent and almost everyone's forecast from the beginning of the year.
Speaker 1: If you go back to December and you look at
Speaker 1: what everyone was thinking the path of the economy and
Speaker 1: inflation was going to be in in twenty twenty three,
Speaker 1: the January data blew those up. And because of that,
Speaker 1: we're now to say, okay, is the market going to
Speaker 1: follow what the economy is doing. And if the economy
Speaker 1: is hot, that means we're going to have higher interest
Speaker 1: rates in the front and that means we're going to
Speaker 1: get a more inverted yield curve. And that's just the
Speaker 1: way that I think this year is going to shape
Speaker 1: up is that we just have to look at each
Speaker 1: data point as it comes in, and the Fed is
Speaker 1: going to be reactive to all of those. I're at
Speaker 1: thirty seconds, yere, I'm gonna put you on the spot
Speaker 1: and looking at a two year yield at five oz
Speaker 1: two for talking about six percent, do we also see
Speaker 1: six percent on the two year yield this year? Now,
Speaker 1: the two year yield will would probably get up to
Speaker 1: like five twenty five, five forty, because that really depends
Speaker 1: on when they start to cut and which the market
Speaker 1: is still going too price for twenty twenty four cuts
Speaker 1: at some point, So the question is how fast and
Speaker 1: when do they start those cuts. So you'll never have
Speaker 1: the two year yield up to the Fed funds rate,
Speaker 1: but it'll be it'll still go in the same direction,
Speaker 1: just with a lower data All right, good stuff, I Jersey,
Speaker 1: thank you so much for joining us. Our Jersey chief
Speaker 1: US interest Rate strategist for Bloomer Intelligence, joining us from
Speaker 1: Lovely Princeton, New Jersey. Michael mcke here in the Bloomberg
Speaker 1: inter Actor Broker Studio, International Economics and Policy reporter for
Speaker 1: Bloomberg TV and Radio, just kind of breaking down what
Speaker 1: we have been hearing from this feder Reserve, what we
Speaker 1: were likely to see from the Federal Reserve, kind of
Speaker 1: in the context of a lot of data coming out
Speaker 1: over the next several days. It seems like there always
Speaker 1: is data, but this is a really important because, as
Speaker 1: Mike mckehon and our Jersey were suggesting, this is a
Speaker 1: federal reserve that is data dependent. So the day we'll
Speaker 1: be looking at, you know, the job's number on Friday,
Speaker 1: the CPI number next week, retail sales as well, so
Speaker 1: we'll be following that as well. Alice Andrea Joyan says
Speaker 1: she's US Interest Rates and Foreign Exchange reporter for Bloomberg News. Alice,
Speaker 1: I'd love to get your perspective on kind of how
Speaker 1: you've interpreted FED Chairman Pal's test menu over the past
Speaker 1: couple of days. Well, you know, he really had an
Speaker 1: opportunity to walk it back today and take back a
Speaker 1: little bit of that hawkishness that he brought out yesterday,
Speaker 1: and he just didn't you know, we settled September fed
Speaker 1: swaps around five to sixty three yesterday and they're five
Speaker 1: sixty four today, So you know, he knew where these were,
Speaker 1: and he knew that the market was pricing in potentially
Speaker 1: a bigger hike coming up at this March meeting, and
Speaker 1: he didn't take it as an opportunity to say no,
Speaker 1: no, no no, we're going to do twenty five. So you
Speaker 1: know what's happening in the treasury market is there. They've
Speaker 1: obviously flattened the curve quite a bit. We did see
Speaker 1: some historic tights today down to about minus one hundred
Speaker 1: and ten on two tents, and investors are putting some
Speaker 1: money behind this for sure. What we're seeing here is
Speaker 1: that the thematic trades that are going through is we're
Speaker 1: seeing very very strong real money buying in the back
Speaker 1: end of the curve. Now, real money buyer would be
Speaker 1: something like an end user or something like an asset
Speaker 1: manager and ensure and a pension fund, and we are
Speaker 1: seeing those types of accounts buying in the five year sector,
Speaker 1: ten year sector, and ultra ten years spector, mostly in
Speaker 1: the future's curve, and traders there are telling me that
Speaker 1: also there's been some big option plays that are targeting
Speaker 1: three sixty on tens that's about thirty four basis points
Speaker 1: below where we are now. So we're getting some real
Speaker 1: money investing in the back end of the curve looking
Speaker 1: for lower rates. So, Alice, you have cut your teeth
Speaker 1: on Wall Street as a tried and true professional bond trader.
Speaker 1: What's the trade here? Well, I have to say that
Speaker 1: people have been in flatners for a very long time. Sure,
Speaker 1: a flatner is something where you might want to sell
Speaker 1: the front end of the treasury curve and buy the
Speaker 1: back end. So we're seeing the buying in the back
Speaker 1: end today as I telegraphed earlier, and so you'd want
Speaker 1: to sell the front end buy the back end, and
Speaker 1: that the spread between these two instruments would then flatten out.
Speaker 1: And at the current pace, we're seeing that spread inverted,
Speaker 1: meaning that it's negative. So two year yields yielding one
Speaker 1: hundred and ten basis points over a ten year treasury
Speaker 1: and economists Alice have told me, and I'm an equity person,
Speaker 1: so I don't know, but they told me. When that
Speaker 1: happens to this degree. Again, we haven't seen that inversion
Speaker 1: since nineteen eighty one. I think, what does that tell you? Well,
Speaker 1: to me, it tells me that the consumer is very strong,
Speaker 1: that people think that this will continue, that we will
Speaker 1: continue to see more inflation. And the problem with the
Speaker 1: two tenths curve right now is that it's really in
Speaker 1: no man's lands. Right we hit that triple digit target
Speaker 1: that we've been really eyeing since November. We got to
Speaker 1: that one hundred level and it really splids fast down
Speaker 1: to one hundred and ten. Problem is, right now it's
Speaker 1: in a little bit of no man's land. There's no
Speaker 1: support until two hundred basis points. I think that that's
Speaker 1: like an outlier. I don't think that we're going to
Speaker 1: get there. But at this point, what you have to
Speaker 1: watch for is like the round targets. Now, today we
Speaker 1: slipped another ten basis points, so minus one hundred and ten.
Speaker 1: The next one might be a one hundred and twenty
Speaker 1: five basis points. So we need to test these levels
Speaker 1: to see and you know, until we can finally pick
Speaker 1: a bottom it. I will mention that treasury yields at
Speaker 1: the back end would be even lower if it had
Speaker 1: not been for some supply coming in in the mortgage market.
Speaker 1: We've had about two and a half billion in mortgage
Speaker 1: origination in the last three days. That's a lot. That's
Speaker 1: a way lot. And what that's telling me is that
Speaker 1: consumers again are being very stabby. They're seeing these yields
Speaker 1: fall at the back end of the curve and they're saying,
Speaker 1: this is an opportunity for me to get this mortgage
Speaker 1: by this house. It's becoming more affordable to me. And
Speaker 1: you know when you see people buying houses and the
Speaker 1: housing market elevating, all that means to me is more
Speaker 1: consumer demand, more inflation. Well, Alice, then walk us through
Speaker 1: kind of what could be the game changers here. You
Speaker 1: talked about flattners that we're seeing in the inversion that
Speaker 1: we've really been talking about all morning, negative one ten
Speaker 1: on the twos tens. But that is actually not the
Speaker 1: preferred kind of pair that I believe the Fellow Reserve
Speaker 1: looks at. It's like three months, ten year, I think, so,
Speaker 1: what are you seeing in other parts of the curve. Well, actually,
Speaker 1: I'm not really seeing this big selling in the very
Speaker 1: very front end of the curve. I have heard that
Speaker 1: in treasury bills there's been a fair amount of short covering,
Speaker 1: so people taking some profits there. I would say that
Speaker 1: the you know, obviously the big game changer will be Friday, right,
Speaker 1: There's this a whole lot of volatility that's going to
Speaker 1: be sorted out on Friday. The other thing I would
Speaker 1: mention is that on Friday at midnight, so Saturday morning,
Speaker 1: the sect goes into blackouts. So if anybody wants to
Speaker 1: say anything about jobs, they're going to have to hurry
Speaker 1: up and say it Friday. But you know, I think
Speaker 1: that actually Pale has kind of laid the groundwork. He said,
Speaker 1: you know, we've made no decision, and you know, maybe
Speaker 1: some of those FED officials that it said we're looking
Speaker 1: at doing twenty five, you know, maybe they're not going
Speaker 1: to be speaking, and maybe them not speaking actually speaks volumes. Alice,
Speaker 1: you mentioned earlier that you've been seeing some real money
Speaker 1: come into the back end of the curve. Tells us
Speaker 1: about just the liquidity in the treasury market these days.
Speaker 1: If I want to go in there and put a
Speaker 1: big trade on, yeah, is it out there? Liquidity out there?
Speaker 1: It's much better, Thank goodness, you know, um I and
Speaker 1: I know that because I'm getting flows. You know, before
Speaker 1: I would say, hey, you know, markets moving around, what's
Speaker 1: going on? And they're like, there's no flows, and that's
Speaker 1: when you would see, you know, yield spike or collapse
Speaker 1: really really fast. But you know, the market seems to
Speaker 1: be um much more orderly, you know, and I think
Speaker 1: that we're seeing that too, because you know, you're not
Speaker 1: seeing yields, you know, with these you know, fifteen twenty
Speaker 1: basis point rises and decline. You know, we are seeing
Speaker 1: big ones, but they're a little more modest. But I
Speaker 1: definitely think liquidity is back in the market. Players are
Speaker 1: in their trading, they're providing liquidity, and I would say
Speaker 1: that overall trading flows are much better. In liquidity is
Speaker 1: much improved. Alice thirty seconds here? What change? What change?
Speaker 1: In terms? How did you recover? How does what recover?
Speaker 1: How did the liquidity recover? Oh? How did it look? Okay?
Speaker 1: You know what? I think that finally when we have
Speaker 1: the yield higher, I mean people wanted them. Yeah, we're
Speaker 1: going to have a big auction coming up here at
Speaker 1: a ten year auction coming up at one o'clock. And
Speaker 1: I have no doubt that that thing's going to go
Speaker 1: just fine. People want these high yields. Yeah, absolutely, I
Speaker 1: mean I can sit there at the two year get
Speaker 1: five zero five point zero five percent, just extraordinary. Alice,
Speaker 1: thanks so much for joining us. Really appreciate getting your perspective.
Speaker 1: And you're reporting, Alice Ander, I'm sorry. Alice Andrey, us
Speaker 1: interest rates and foreign exchange reporter for Bloomberg News. She's
Speaker 1: in Chicago. She's a former floor clerk at bear Sterns,
Speaker 1: so she gives you a good trader's perspectives market and
Speaker 1: all that kind of stuff. So pretty good stuff. But again,
Speaker 1: this is a federal reserve that has said it is
Speaker 1: data dependent, and boy, are they gonna get a lot
Speaker 1: of data to digest over the next several days. Let's
Speaker 1: get down to Washington, DC, because there's a lot of
Speaker 1: work being done in the halls of Congress. A lot
Speaker 1: going on down there. President Biden just announced his budget.
Speaker 1: We've got apparently some talk I got to keep the
Speaker 1: government funded or something like that. I think that's important.
Speaker 1: It's nice to have funds the account. I want to
Speaker 1: start there. You do that with Steve Dennis. He's a
Speaker 1: congressional reporter for Bloomberg News. Steve, let's start there with
Speaker 1: the debt ceiling here, could you lay out, for simple terms,
Speaker 1: kind of what it is where we are and what
Speaker 1: kind of has to happen, do you think? Yeah? I mean,
Speaker 1: right now, both sides are basically still you know, putting
Speaker 1: out their sort of talking points. The way I look
Speaker 1: at a president's budget, it's sort of like the kickoff,
Speaker 1: and it's like, this is basically in my dream scenario,
Speaker 1: this is what I would like, and it's a it's
Speaker 1: a PR document, but Congress is going to drop kick
Speaker 1: it into the sun and then then the real negotiations
Speaker 1: presumably can start. I mean they he met once, was
Speaker 1: Speaker Kevin McCarthy. They really haven't gotten anywhere on what
Speaker 1: is ultimately going to be a deal to raise a
Speaker 1: dead limit, probably this summer and have some kind of
Speaker 1: spending deal at least for the next two years that's
Speaker 1: probably gonna cap discretionary spending. The idea that there's gonna
Speaker 1: be a big, sweeping budget deal that would have long
Speaker 1: term implications. The expectations for that are very low. But
Speaker 1: you know, there's still you know, there's still people talking
Speaker 1: on both sides about doing stuff like that. It's just
Speaker 1: you know, the appetite from the White House or anything
Speaker 1: that would touch entitlements zilch. And they just want to
Speaker 1: tax people making more than four hundred thousand dollars a
Speaker 1: year to sort of raise a couple of trillion dollars
Speaker 1: over the next ten years. That's going nowhere with the
Speaker 1: republicands And you've got guys in the middle like Joe Manchin,
Speaker 1: who has to decide whether to run for reelection next year,
Speaker 1: has flirted with running for president and has been attacking
Speaker 1: the White House on a whole host of issues, basically saying, look,
Speaker 1: why don't we cap just start with capping some discretionary
Speaker 1: spending to try to reverse this trajectory on debt. Well,
Speaker 1: Steve talked to us a little bit about the money situation.
Speaker 1: For lack of a better term, I really want to
Speaker 1: talk about the defense budget specifically because it feels like,
Speaker 1: just from a Marcus perspective of markets, Gal, after all,
Speaker 1: you saw a lot of these defense stocks really outperform
Speaker 1: after the war Ukraine. Now we're talking about the Chinese
Speaker 1: rivalry as well. How much momentum does defense really have
Speaker 1: under kind of a democratic administration. Yeah, I think that
Speaker 1: this is something where you know, the stars are kind
Speaker 1: of aligning for more defense spending. You've got Mitch McConnell
Speaker 1: sort of been He's been pounding the table now for
Speaker 1: two years to ramp up defense spending, not just to
Speaker 1: deal with Ukraine but also to counter China and the Pacific.
Speaker 1: And you know, he secured that big deal in December,
Speaker 1: the Omnibus package with a ten percent defense increase. He
Speaker 1: wants another big increase is summer. I suspect that whatever
Speaker 1: Biden's number ultimately comes in at, and we're expecting it
Speaker 1: to be pretty robust, McConnell will want more. I think
Speaker 1: the the open question is what happens in the House
Speaker 1: where there are a lot of defense spending hawks in leadership.
Speaker 1: You know, Kevin McCarthy also has to deal with folks
Speaker 1: who don't support of spending on Ukraine and and aren't
Speaker 1: necessarily is enamored with spending in general. So I think
Speaker 1: there's also a question of dealing with progressive Democrats who
Speaker 1: don't like spending more on defense and are going to
Speaker 1: be unhappy if any budget deal Biden signs onto caps
Speaker 1: the spending that they like the the best discretionary spending,
Speaker 1: but doesn't cap the defense spending. So you know, I
Speaker 1: think that's going to be you know, an open you know,
Speaker 1: skirmish in the halls of Congress. Is you know, if
Speaker 1: we end up with a big defense increase, it's going
Speaker 1: to be hard to have Biden's left lank happy. How
Speaker 1: about the tax situation here, I think, you know, President
Speaker 1: Biden and a fairly characteristic I guess Democratic move is
Speaker 1: talking down, you know, tax hike on folks over earning
Speaker 1: over one a thousand dollars, what's the whole tax The
Speaker 1: appetite in Washington to do anything on the tax code, yeah,
Speaker 1: I mean every once in a while somebody brings up
Speaker 1: there some expiring business tax breaks on research and development,
Speaker 1: some other things on the side that you could come
Speaker 1: up with some kind of a smaller tax deal. But
Speaker 1: you know, I think everybody's kind of looking ahead to
Speaker 1: the election, and certainly Biden is sort of trying to
Speaker 1: portray the Republicans as beholden to the rich and the
Speaker 1: wealthy and sort of playing the populist card, and you
Speaker 1: know that's just not going to you know, there's just
Speaker 1: no appetite amoute for that among Republicans on Capitol Hill.
Speaker 1: And so I think this is something that ends up
Speaker 1: getting taken to the election, assuming Biden is the nominee
Speaker 1: and and runs, you know, which you know he still
Speaker 1: hasn't a officially announced, and you know, we'll see what
Speaker 1: goes what comes out of the election. Really, I mean,
Speaker 1: the next big thing that happens on taxes, as far
Speaker 1: as like a big thing is when the Trump tax
Speaker 1: cuts expire in a few years. That's gonna prompt a
Speaker 1: big bipartisan discussion on things like the salt tax break,
Speaker 1: which I don't know a lot of our listeners, Uh,
Speaker 1: you know that saltcap goes away unless Congress keeps it
Speaker 1: in place. So you know, there's that's gonna be a
Speaker 1: huge fight in a couple of years, you know, after
Speaker 1: the next presidential election. In all likelihoods, Steve, can we
Speaker 1: fold in the Federal Reserve here? I think yesterday's testimony
Speaker 1: was a bit more juicy than perhaps today's is. But
Speaker 1: I think the fiery exchange between Elizabeth Warren and Jerome
Speaker 1: Powell really caught a lot of people's attention. Talked to
Speaker 1: us a little bit about how Congress and all these
Speaker 1: congressional representatives are really viewing what's going on at the
Speaker 1: Federal Reserve. Yeah, I mean, it's a very diverse stead
Speaker 1: of views on the Fed right now, which you can
Speaker 1: expect when they're making such big moves and so much
Speaker 1: as at stake. This is not like you know, the
Speaker 1: past decade where it was like tiny moves. These are
Speaker 1: major moves. Millions of people's jobs hang in the balance.
Speaker 1: That was the point that Warren's been making. You know,
Speaker 1: I've talked to her many times. I wrote about a
Speaker 1: few days ago about how she's pushing Biden to name
Speaker 1: a vice chair who would counter Powell on these rate hikes,
Speaker 1: because she, as she laid out yesterday to Pow and
Speaker 1: challenged him, you know, you're gambling with millions of people's lives,
Speaker 1: and you know your essential plan is to have the
Speaker 1: unemployment rate go up to four point six percent, which
Speaker 1: puts two million people out of work, and presumably people
Speaker 1: would then be willing to work for less money, and
Speaker 1: therefore you'd have less labor inflation. Well, her worry is
Speaker 1: that every other time the Fed's gone on this kind
Speaker 1: of raising unemployment rate to bring down labor inflation, we've
Speaker 1: had a big recession, and we've never had a recession
Speaker 1: where you end up with only a couple million losing
Speaker 1: your jobs, you end up with a recession sort of
Speaker 1: getting out of hand. Yeah, and you could end up
Speaker 1: with five or six million losing your jobs. And if
Speaker 1: you think about it heading into next year, that could
Speaker 1: be a total disaster for Democrats. So that's something that
Speaker 1: you know, I think when Biden ultimately makes this vice
Speaker 1: chair pick, you know, he could be signaling to the
Speaker 1: Fed does he want a dove? Does he want to hawk?
Speaker 1: And certainly there are people, yeah, the Republican side who
Speaker 1: want hawks, and people like Warrant who want doves. Yeah.
Speaker 1: The politics I think really crucial for the entre policy
Speaker 1: and for international audience. It's worth kind of saying that
Speaker 1: Charon Powell's rebuttal to Elizabeth Warren's argument that Steve just
Speaker 1: so beautifully laid out was simply that, Okay, well, what's
Speaker 1: worse here inflation for lower income households. Then that hits
Speaker 1: five six percent, but is higher for longer, because that's
Speaker 1: really what they're trying to find it again, So two
Speaker 1: certainly different perspectives. But Steve, it sounds like though chairmen Powell,
Speaker 1: he's no stranger to political pressure at all, and m
Speaker 1: kind of referencing here the political pressure during the Trump administration.
Speaker 1: Do you foresee a similar political pressure this time for
Speaker 1: the Biden administration? So far, a Biden administration sort of
Speaker 1: kept their distance, you know, and part I think the
Speaker 1: Biden administration even they wanted to criticize the FED, which
Speaker 1: you know, I'm not sure they do. Uh, you know,
Speaker 1: this is his FED. He renominated Powell over Warren's objections.
Speaker 1: He named most of the FED board members, so it's
Speaker 1: kind of hard for him to turn around and then say, ooops,
Speaker 1: I messed up, right, So yeah, I think I think
Speaker 1: that's that's part of the issue here. But I would
Speaker 1: say I've talked to a lot of Democrats on this,
Speaker 1: and while Warren is out there pounding the table on this,
Speaker 1: Powell still has many many lies on the Democratic side
Speaker 1: who have complimented him. Right before Warren asked her questions,
Speaker 1: Mark Warner was basically schuring him on and saying, I
Speaker 1: think so far you've gotten it right basic. Yeah, all right,
Speaker 1: we did a Democrats, that's right. Steve Dennis, thanks so
Speaker 1: much for joining us. Steve Dennis, he's a congressional reporter
Speaker 1: for Bloomberg News down to Washington, DC. Given the latest
Speaker 1: on some of the I guess budget moves, the debt ceiling,
Speaker 1: lots of work for our friends in Washington tending get going.
Speaker 1: The eco data that got my attention today was that
Speaker 1: Jolt's job openings thing. Consensus was ten point five million,
Speaker 1: came to ten point eight two million. I went back
Speaker 1: and looked at it over the last twenty years or
Speaker 1: whatever it was. I mean, you know, prior to the pandemic,
Speaker 1: it was like six four or five six. I mean,
Speaker 1: you know, now it's up at ten and it's been
Speaker 1: up there for a long time. So where do all
Speaker 1: those people go? But let's check him with the Ana Wong,
Speaker 1: chief US economists for Bloomberg Economics. So, and I'm just
Speaker 1: kind of thinking that that Jolts number. We're gonna get
Speaker 1: the jobs data on farm payrolls Friday. We have a
Speaker 1: tight labor market, and can you have a recession if
Speaker 1: you have a labor market that's this strong. Well, I
Speaker 1: think that all the data that we are getting, the
Speaker 1: Jolts data we just saw on this Friday's report won't
Speaker 1: fully reflect the softening that had already taken place in
Speaker 1: the labor market. So we looked at this very deeply.
Speaker 1: So we looked at you know these notices that employers
Speaker 1: need to give their employeesburg layoffs, which usually is lagged
Speaker 1: announcements by two months. And so we are expecting that
Speaker 1: the JOLTS data in March or April will show that
Speaker 1: the layoff rates would have climbed to slightly just above
Speaker 1: the you know, the twenty nineteen level, the average of
Speaker 1: twenty ten to twenty nineteen. So I would say the
Speaker 1: signs of softening will only really show up in a
Speaker 1: data by the time that the FED meets in May
Speaker 1: or June. So I think right now the picture that
Speaker 1: we are seeing from the data might be just a
Speaker 1: little bit lagged, all right, So what do you think
Speaker 1: is again, we're gonna get a payroll data point on Friday,
Speaker 1: We're gonna get the CPI print on next Tuesday. What
Speaker 1: are you looking for? What would surprise you? What would
Speaker 1: scare you? Maybe nothing scares me? Good, But okay, here
Speaker 1: here's what I think. So I think the fifty BIPs
Speaker 1: that in March is not set in stone yet. Our
Speaker 1: baseline is still for the FED to to go twenty
Speaker 1: five basis point. So if the data, if the non
Speaker 1: farm payroll actually exceed three hundred k, this Friday, and
Speaker 1: the CPI core print exceeds, you know, as zero point
Speaker 1: five percent or more next Tuesday, then I think for
Speaker 1: sure we will be expecting a fifty BIPs high. Okay.
Speaker 1: But if there's the gray area of what if the
Speaker 1: payroll is about two hundred k and CPI is like
Speaker 1: zero point four percent, that is unclear. But whereas if
Speaker 1: if non farm payroll comes in below two hundred k
Speaker 1: and core pis point three, then for sure twenty five
Speaker 1: days this point. Okay. So that's where we are at all, right,
Speaker 1: And just to summarize, on that non farm payroll data
Speaker 1: point that comes in Friday, the consensus is for two
Speaker 1: hundred and fifteen thousand, down from four or forty three
Speaker 1: thousand the prior month. So and I mean, boy, you know,
Speaker 1: we had a guest in earlier that was painting a
Speaker 1: really barished picture that this FED really runs the risk
Speaker 1: of pushing this economy into a more meaningful and perhaps
Speaker 1: longer recession than investors are discounting. How real is that
Speaker 1: risk in your mind? So, you know, I think part
Speaker 1: of the reason why Powell is, you know, has suddenly
Speaker 1: did a one eighty yesterday is there's a stream of
Speaker 1: research says that the lack of monetary policy is actually shorter.
Speaker 1: In fact, it's only three months long. And if you
Speaker 1: believe that kind of results, you would have think, oh,
Speaker 1: all the effect of the tight most of the effects
Speaker 1: of the tightening had already shown up, and that would
Speaker 1: make the you know you think, well, we definitely need
Speaker 1: to push the peak rates higher. However, that would also
Speaker 1: tell you that, well, it's not that bad. After If
Speaker 1: the peak effects of you know, getting rates to five
Speaker 1: percent is still this really strong economy, it means that
Speaker 1: the economy can handle it. However, I think the more
Speaker 1: potent part of monetary policy is the higher for longer
Speaker 1: part of monetary policy. Imagine if rates are at six
Speaker 1: percent until the end of twenty twenty four, and everybody,
Speaker 1: like the mom and pops on the street are like, well,
Speaker 1: I can get a risk Cree return on my cash
Speaker 1: for six percent. I'm not going to put my money
Speaker 1: in bonds or stocks. That by itself, without the FED
Speaker 1: doing anything more, would cause a lot of financial tightening
Speaker 1: as all these money and liquidity were sucked out of
Speaker 1: bonds and equities. Well, and you know, a reader pinged
Speaker 1: me earlier in the day and say you know, you
Speaker 1: go to a restaurant these days, you pay through the
Speaker 1: nose if you can even get a waiter. But so
Speaker 1: some of the inflation out there the FED really can't impact.
Speaker 1: I mean, it just seems like the FED is trying
Speaker 1: to fight a battle that really it's it doesn't have
Speaker 1: the tools to fight. I e. Sixty to seventy percent
Speaker 1: of our you know, GDP is a consumer. What can
Speaker 1: the FED really do there? Do you again, do you
Speaker 1: think the Fed is maybe going too far too quickly?
Speaker 1: The Fed, Powell acknowledged themselves that monetary policy as a
Speaker 1: very blunt tool. However, they have to do something. So
Speaker 1: I think the most likely you're right that the monetary
Speaker 1: policy is not really suitable for the type of inflation,
Speaker 1: for example, the transition to green you know, with higher
Speaker 1: car prices. However, the FED will have to do something
Speaker 1: about it because their men date is inflation. So I
Speaker 1: think the likely outcome of that is that it increases
Speaker 1: the chance of this very barish thing, a scenario that
Speaker 1: you said your previous guests, right, you know. Another question
Speaker 1: is that I have is this this two percent inflation
Speaker 1: target that the FED has? Why is it two percent?
Speaker 1: Why is that so special. Why is it not two
Speaker 1: point five or one point what's so great about two percent? Well,
Speaker 1: I think it's just an approximation, but it definitely is
Speaker 1: a two percent right now because you cannot the FETE
Speaker 1: cannot afford to change it. When they were unable to
Speaker 1: get to that target. They can think about whether two
Speaker 1: point five or three it's more appropriate after this whole
Speaker 1: ordeal inflation ordeal is over, but right now, if they
Speaker 1: do anything to change it, it will bring make it
Speaker 1: harder for them to control inflation. What do you say
Speaker 1: to people who say the FED is still behind the
Speaker 1: curve and dealing with inflation? Is that still a valid critique?
Speaker 1: You know, I think it's a FED is totally you know,
Speaker 1: trying to achieve one objective, which is brain down inflation.
Speaker 1: They would have rates rates to six or seven percent
Speaker 1: by now, but they have dual mandates. And it's clear
Speaker 1: that Powell still hold out hopes that he could achieve
Speaker 1: a soft landing, and that is what caused what's causing
Speaker 1: this feet dragging and bringing up rates. So I think,
Speaker 1: you know, I think I think that yeah, they're they're
Speaker 1: running very closely behind the curve. That's my opinion. All right,
Speaker 1: and thank you so much for joining us, as I
Speaker 1: always always appreciate getting your perspective again, folks, Anna Wong,
Speaker 1: like nine twelve months ago she Bloomer Economics team, Man,
Speaker 1: were they ahead of the curve. They were calling for
Speaker 1: higher rates for longer. They first ones I read talk
Speaker 1: about a five percent rate. Here we are there now
Speaker 1: people are talking about six percent. So Anna Wong uder
Speaker 1: team doing great work there at Bloomberg Economics and as
Speaker 1: the chief of the US Economist here. Thanks for listening
Speaker 1: to the Bloomberg Markets podcast. You can subscribe and listen
Speaker 1: to interviews with Apple Podcasts or whatever podcast platform you prefer.
Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller nineteen
Speaker 1: seventy three. And I'm fall Sweeney. I'm on Twitter at
Speaker 1: pt Sweeney. Before the podcast, you can always catch us
Speaker 1: worldwide at Bloomberg Radio