WEBVTT - Bloomberg Surveillance TV: March 20, 2024 0:00:00.120 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio news. 0:00:11.640 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.680 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.720 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.440 --> 0:00:24.920 from our global headquarters in New York City. We are 0:00:24.920 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.240 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:36.560 Terminal and the Bloomberg Business Airly I'm happy to say 0:00:36.880 --> 0:00:38.520 is with us now where I want to go straight 0:00:38.520 --> 0:00:40.479 to that inflation call and go back to what you 0:00:40.520 --> 0:00:42.519 told us at the stand of the year, where essentially 0:00:42.520 --> 0:00:44.479 what you were looking for was inflation to come down 0:00:44.479 --> 0:00:47.199 a little bit more then pick back up towards the 0:00:47.280 --> 0:00:49.479 end of the year. Are we seeing that pickup? Maybe 0:00:49.600 --> 0:00:50.440 ahead of schedule? 0:00:52.720 --> 0:00:56.640 That's possible, But I would note that the true consecutive 0:00:56.720 --> 0:01:01.520 month of inflation upside surprises came on different sources. So 0:01:01.560 --> 0:01:04.759 the general Bunker print was mostly because of course service, 0:01:04.959 --> 0:01:09.959 and the February print was driven by quarter than expected goods. 0:01:10.440 --> 0:01:13.960 Inflationary pressure so I think the jury is still out 0:01:13.959 --> 0:01:16.720 there in terms of if we are seeing the twelve 0:01:17.040 --> 0:01:21.000 of this inflation roller coaster. Our view is that actually 0:01:21.280 --> 0:01:26.720 there is room for goods deflation to bring inflation down further. 0:01:26.920 --> 0:01:29.920 But when that runs its course, which is more likely 0:01:30.280 --> 0:01:35.240 later this year rather than now, service starts to dominate, 0:01:35.600 --> 0:01:40.520 and that's when wage pressure pushes inflation higher, and ultimately 0:01:40.560 --> 0:01:44.360 we're looking at the trend settling around three percent rather 0:01:44.400 --> 0:01:47.119 than two percent. But that roller coaster is for later 0:01:47.200 --> 0:01:49.520 this year rather than right now, and right now, I 0:01:49.520 --> 0:01:52.600 think the bar is pretty high for markets to abandon 0:01:52.720 --> 0:01:56.120 this narrative of immaculate this inflation, which is why we'll 0:01:56.320 --> 0:01:59.440 positive on risk sentiment and what both them on us appuy. 0:01:59.520 --> 0:02:02.240 That is moment before we get deeper into recording markets. Way, 0:02:02.280 --> 0:02:04.040 how do you think that's going to influence the thinking 0:02:04.440 --> 0:02:06.800 of chairman Power in today's news conference. 0:02:07.600 --> 0:02:10.959 Well, it's likely going to be a very balanced press 0:02:11.000 --> 0:02:14.600 conference and very balanced pot and C. They will emphasize 0:02:14.680 --> 0:02:18.480 data dependency, They will try to strike a balanced tone. 0:02:18.520 --> 0:02:20.960 You know, the last meeting they talked about a sticky 0:02:21.639 --> 0:02:24.280 last mile. So I am very curious in terms of 0:02:24.320 --> 0:02:29.400 how they speak to the recent outside surprises in inflation prints. 0:02:29.560 --> 0:02:32.000 I'm also curious in terms of if they're going to 0:02:32.040 --> 0:02:35.960 revise growth higher, inflation higher, they're going to start discussing 0:02:36.000 --> 0:02:40.320 the balance sheet round off, maybe trimming that a little bit. 0:02:40.440 --> 0:02:43.120 So lots of things at play, but more broadly speaking, 0:02:43.360 --> 0:02:47.360 we are expecting dot median to stay at three cards 0:02:47.360 --> 0:02:49.840 for this year, which is in line with our expectation 0:02:49.919 --> 0:02:52.320 at the beginning of the year. So now markets finally 0:02:52.639 --> 0:02:54.000 will being closer to that. 0:02:54.520 --> 0:02:56.880 Before shifting the stocks, what duration of bonds do you 0:02:56.919 --> 0:03:00.120 feels most vulnerable given what pricing is and give and 0:03:00.240 --> 0:03:02.640 you expect to transpire with inflation later this year. 0:03:04.480 --> 0:03:07.920 While we have a preference for short end of the 0:03:07.960 --> 0:03:11.320 curve and also the value of the curve, so implicitly 0:03:11.400 --> 0:03:16.160 there is a stiffening view over the longer term, and 0:03:16.240 --> 0:03:19.160 that is more over a fiscal story, right, So if 0:03:19.200 --> 0:03:23.000 you look at the fiscal deficits in the US late 0:03:23.080 --> 0:03:26.280 twenty twenty two, we're looking at three point five percent 0:03:26.400 --> 0:03:30.040 and now we're getting to eight percent, and that servicing 0:03:30.160 --> 0:03:34.480 cost is increasing, expected to increase even more the higher 0:03:34.560 --> 0:03:38.280 rates for longer and turn premium needing to come back. 0:03:38.320 --> 0:03:43.400 So all of that points to higher rates, especially for 0:03:43.520 --> 0:03:45.800 long end of the curve. But when that kicks in, 0:03:46.200 --> 0:03:51.960 when that repricing because of concern around fiscal dynamics, and 0:03:52.000 --> 0:03:56.280 that's servisibility, that's key, which is why our conviction on 0:03:56.320 --> 0:03:59.840 the long end of the curve yields moving higher is more. 0:04:00.080 --> 0:04:04.160 It's stronger over a strategic horizon than over a tactical 0:04:04.160 --> 0:04:06.520 horizon of six six to twelve one. 0:04:06.920 --> 0:04:10.400 Are stocks vulnerable to a hawkish surprise from the FED 0:04:10.560 --> 0:04:13.480 or are they operating according to a different set of 0:04:13.600 --> 0:04:16.880 rules that really hinge on very different factors than FED 0:04:16.920 --> 0:04:17.760 set rates. 0:04:18.839 --> 0:04:21.960 But you ask the question Javis Jensen's, I think that's 0:04:22.000 --> 0:04:24.279 what stock markets are trying to figure out as well. 0:04:24.279 --> 0:04:26.840 But if year today is anything to go by, we 0:04:27.000 --> 0:04:31.080 have had hawkish repricing of the FED like seven cuts 0:04:31.080 --> 0:04:33.839 at the beginning of the year to now just three cuts, 0:04:33.920 --> 0:04:39.599 and yet markets are very resilient. SMP is up close 0:04:39.640 --> 0:04:42.520 to nine percent, equal way to the SMP close to 0:04:42.600 --> 0:04:45.400 five percent, right, So this is not a market that 0:04:45.480 --> 0:04:51.799 are caving in under hokish repricing pressure. And the bridging factor, 0:04:51.920 --> 0:04:56.279 the reconciliatory factor here is the strong earnings and a 0:04:56.279 --> 0:04:59.680 lot of the earnings are being heavy lifted by the AI, 0:05:00.560 --> 0:05:05.280 which is why we are positive on USM market because 0:05:05.400 --> 0:05:09.520 erniers are coming in strong and stronger, beating expectation, and 0:05:09.560 --> 0:05:12.400 we lean into AI because that's where actually most of 0:05:12.440 --> 0:05:15.360 the earnings momentum is coming from. 0:05:15.600 --> 0:05:17.920 Given that way, do you think that calls for some 0:05:18.080 --> 0:05:21.480 sort of broadening out in the rally are premature just 0:05:21.520 --> 0:05:24.760 simply because the games still are concentrated, not just with 0:05:24.920 --> 0:05:28.320 Magnificent four three or two or whatever people have got 0:05:28.360 --> 0:05:31.680 whittled it down to, but also only the companies that 0:05:31.839 --> 0:05:35.720 are most leveraged to immediate benefits from some of this technology. 0:05:37.279 --> 0:05:42.239 Well, I think there is room for SMP to broaden 0:05:42.320 --> 0:05:45.800 out from the very concentrated leadership that we saw foremost 0:05:45.839 --> 0:05:48.800 part of last year, but that can also be thanks 0:05:48.839 --> 0:05:52.080 to AI. So as we think about sectors like healthcare, 0:05:52.240 --> 0:05:57.520 sectors like industrials starting to adopt AI to a greater scale, 0:05:58.279 --> 0:06:02.720 the leaders within those sets likely able to broaden the 0:06:02.880 --> 0:06:06.640 gap versus the rest of the piers within the sceptor 0:06:06.720 --> 0:06:09.520 because they have economy of scale, they have a lot 0:06:09.560 --> 0:06:12.920 of data to play with, so we can see actually 0:06:13.080 --> 0:06:20.200 AI driving broadening out of the rally. Concentrated intact so far. 0:06:20.360 --> 0:06:22.880 So that's one way that it can broaden out. Another 0:06:22.960 --> 0:06:25.400 way that it can broaden out can be a wild 0:06:25.560 --> 0:06:28.840 swing of rate repricing. Right, so we're talking about three 0:06:28.920 --> 0:06:32.799 cuts now, and remember at the peak hawkish moment of October, 0:06:33.440 --> 0:06:35.600 markets were still looking at two cuts. But we have 0:06:35.760 --> 0:06:40.239 really single wide range of rate repricing, which is also 0:06:40.839 --> 0:06:45.599 evidence in the very high elevated rate volutility the move index. 0:06:45.760 --> 0:06:49.719 So there's no telling if we could see swim back 0:06:49.880 --> 0:06:52.839 of this rate repricing, and when that kind of tactical 0:06:52.920 --> 0:06:58.400 momentum plays out, that could benefit the broader market beyond 0:06:58.520 --> 0:07:02.760 the AI concentrated in But that's so short term. Because 0:07:02.760 --> 0:07:05.240 we have seen wild swing within short periods of time, 0:07:05.279 --> 0:07:08.400 that's not something that we're positioning our investment views around. 0:07:08.440 --> 0:07:12.520 But we acknowledged that this can swing within this short 0:07:12.560 --> 0:07:13.200 period of time. 0:07:13.360 --> 0:07:15.680 So wait, I know you're overweight US secularies, but also 0:07:15.840 --> 0:07:17.480 a sprinkle of Japanese stocks. 0:07:17.480 --> 0:07:18.240 Can we finish there? 0:07:18.440 --> 0:07:21.080 The NIKT twenty five is up by almost twenty percent 0:07:21.360 --> 0:07:23.480 yere today. It's been quite a run. Can you tell 0:07:23.560 --> 0:07:25.640 me how the Bank of Japan in any way, shape 0:07:25.680 --> 0:07:27.440 or form is relevant to that decision. 0:07:29.000 --> 0:07:33.720 Well, it's the prerequisite on which the micro story can 0:07:33.840 --> 0:07:37.560 play out, which is our expectation and rationale behind our 0:07:37.680 --> 0:07:41.560 Japanese agriplet. So we upgraded Japan twice last year, and 0:07:41.640 --> 0:07:44.520 we continue to like it at this juncture, even as 0:07:44.720 --> 0:07:48.600 it crossed the all time I last made in nineteen 0:07:49.120 --> 0:07:52.440 eighty nine. So yesterday was a key was a key 0:07:52.640 --> 0:07:55.720 event was to watch. So if they are very kind 0:07:55.720 --> 0:07:59.640 of pokushed viewing inflation as a problem, I would be 0:08:00.040 --> 0:08:03.080 and what concerned with our Japan call. But frankly, yes, 0:08:03.160 --> 0:08:06.520 they hide rates for the first time in seventeen years, 0:08:06.880 --> 0:08:10.200 but they hiked it in the most dovish way possible. Right, 0:08:10.280 --> 0:08:14.280 So for example, they normally dropped the yield curve control, 0:08:14.560 --> 0:08:17.560 but they're still saying in case of a rapid rise 0:08:17.680 --> 0:08:22.960 in long term youths, they would make nimble responses adjustments. 0:08:23.120 --> 0:08:25.800 So if that's not the definition of YCC, I don't 0:08:25.840 --> 0:08:28.880 know what is. So they really kind of verre is 0:08:28.960 --> 0:08:32.679 the body of an accommodated still and that paves the 0:08:32.760 --> 0:08:36.920 way for micro positive developments to continue to be reflected 0:08:36.960 --> 0:08:38.320 in Japanese applet price. 0:08:38.600 --> 0:08:40.920 Well, that trade is working out a black rock white, 0:08:40.960 --> 0:08:54.360 Thank you, State Major. So let's round a table State 0:08:54.400 --> 0:08:56.559 good monitor. Well and John, can we start with that 0:08:56.720 --> 0:08:59.760 mildly bullish story for treasuries. Why mildly bullish in the 0:08:59.800 --> 0:09:01.480 face of a bit of a set off we've seen 0:09:01.559 --> 0:09:02.520 so far this year. 0:09:02.760 --> 0:09:05.520 Well, Maldi, polish is not all in. All in is 0:09:05.880 --> 0:09:06.800 full on bullish. 0:09:06.960 --> 0:09:10.360 And that's why Europe is ranked above the US in 0:09:10.520 --> 0:09:14.760 terms of possible easing and performance from duration. But we 0:09:14.880 --> 0:09:17.800 can't let go of this view that yields are going 0:09:17.880 --> 0:09:20.400 to be lower, not higher by year end. And I 0:09:20.520 --> 0:09:23.040 get they've been sliding up the last week or so, 0:09:23.360 --> 0:09:26.559 and I mean the context is important. We've come a 0:09:26.600 --> 0:09:29.760 long way from the peak in yields in October. The 0:09:29.960 --> 0:09:35.240 inflation peaked in June twenty twenty two, the market changed 0:09:35.320 --> 0:09:38.280 its directional viewer rates in October twenty three, the Fed 0:09:38.400 --> 0:09:39.680 pivoted a couple of months later. 0:09:40.240 --> 0:09:42.800 It seems to me that they're not going to change 0:09:42.840 --> 0:09:43.240 their mind. 0:09:43.280 --> 0:09:46.040 The next move is down, and in the meantime we 0:09:46.160 --> 0:09:49.440 know it's either unchanged or down for policy rates. 0:09:49.760 --> 0:09:52.640 And therefore the trade is sit in the belly of 0:09:52.720 --> 0:09:53.120 the curve. 0:09:53.440 --> 0:09:57.040 If not treasuries, you take ig credit and if you 0:09:57.120 --> 0:10:00.640 can't take those, then you what's it called and chill? 0:10:00.920 --> 0:10:04.120 Is that what they say over that's bills and chill. 0:10:04.160 --> 0:10:06.079 I've been here long enough now to go. 0:10:06.600 --> 0:10:08.319 Let's go further right along the curve, get away from 0:10:08.320 --> 0:10:10.600 the belly, and go out to the ten years. Say yeah, 0:10:11.160 --> 0:10:13.319 what backs up this call at the moment? That years 0:10:13.360 --> 0:10:14.439 at the end of the year will be love and 0:10:14.520 --> 0:10:14.840 not higher. 0:10:14.960 --> 0:10:17.920 So if you took the most hawkish individual in the 0:10:18.480 --> 0:10:23.040 December dot plot, you get a longer run equilibrium rate 0:10:23.200 --> 0:10:26.120 just below four and you get very little rate cuts 0:10:26.160 --> 0:10:27.559 in the next year or so. So if you just 0:10:27.679 --> 0:10:30.480 took that as a path for rates, it's difficult to 0:10:30.520 --> 0:10:32.439 get the ten year yield much above four and a 0:10:32.520 --> 0:10:35.599 half on our calculation, and you'd be really going some 0:10:35.840 --> 0:10:36.440 to get to five. 0:10:36.600 --> 0:10:39.280 So, just knowing that that right hand tale of. 0:10:39.360 --> 0:10:42.079 The distribution is sort of in at four and a 0:10:42.120 --> 0:10:45.600 half and change, I quite like the idea of being 0:10:45.720 --> 0:10:48.640 long now. It's very difficult to time this, and that's 0:10:48.679 --> 0:10:51.319 why the best trade, which I think everyone seems to 0:10:51.360 --> 0:10:54.240 be doing, is owning the corporates, taking all the new 0:10:54.320 --> 0:10:58.520 issues they can, and complementing a position in ig credit 0:10:58.640 --> 0:11:02.120 with tea bills that generates a total yield of between 0:11:02.200 --> 0:11:06.480 five and six that competes with equities, and on a 0:11:06.559 --> 0:11:09.520 risk adjusted basis, it's superb So I think that's what's 0:11:09.600 --> 0:11:12.439 going on. If you're in T bulls and they're maturing, 0:11:13.240 --> 0:11:16.599 you've got the option to roll them again or go 0:11:16.720 --> 0:11:18.560 and buy something else. Now, the thing is, we're buying 0:11:18.600 --> 0:11:21.120 the ten year treasury. You drop one hundred basis points 0:11:21.160 --> 0:11:23.000 in yield, but at least if you go to IG 0:11:23.200 --> 0:11:25.079 credit you can sit and wait. And I think that 0:11:25.200 --> 0:11:27.679 explains the type credit spreads. I don't think we can 0:11:27.800 --> 0:11:30.839 infer too much reason in the credit spread as to 0:11:30.880 --> 0:11:33.480 say something about default probability. I think it's all in 0:11:33.600 --> 0:11:35.839 yield that people like they can't get enough. 0:11:36.600 --> 0:11:38.240 I was so very excited to speak with you today 0:11:38.240 --> 0:11:40.280 because for so many years I remember all of the 0:11:40.320 --> 0:11:42.840 people who are calling for some huge sell off and treasuries, 0:11:42.840 --> 0:11:45.240 and I'd get the major letter and it would come 0:11:45.280 --> 0:11:47.720 out and say, you're all wrong. Yield are going lower 0:11:47.920 --> 0:11:51.400 because basically we're looking at a low inflation, low growth 0:11:51.480 --> 0:11:54.439 reality that was before the pandemic. A little bit after 0:11:54.520 --> 0:11:57.720 the pandemic. It sounds like you're thinking has shifted somewhat 0:11:57.760 --> 0:12:00.679 given the fact that you're not aggressively bullish in treasuries. 0:12:00.760 --> 0:12:03.120 Has it has the neutral rate shifted? Has something about 0:12:03.200 --> 0:12:05.880 your view of the world changed. 0:12:06.280 --> 0:12:09.640 The quote that John lifted is for our march asset allocation, 0:12:09.760 --> 0:12:12.559 so it's the monthly right, so that the view hasn't changed. 0:12:12.600 --> 0:12:15.800 Our year end forecast is three point zero. That seems 0:12:15.840 --> 0:12:18.840 a long way from here, but believe me, once they 0:12:18.920 --> 0:12:21.920 start cutting, the market's going to move quickly. And this 0:12:22.320 --> 0:12:26.880 is the issue that people have is that it's very 0:12:26.960 --> 0:12:28.760 dangerous to be short of treasuries. 0:12:28.800 --> 0:12:30.760 Here. You've got to have a. 0:12:30.840 --> 0:12:34.320 Very interesting narrative to justify being being short of treasuries. 0:12:34.360 --> 0:12:36.600 So the minimum you can be is neutral and small. 0:12:36.679 --> 0:12:40.000 Long I think that the growth narrative has been the 0:12:40.040 --> 0:12:45.000 biggest challenged. And if I put together what explains us exceptionalism, 0:12:45.360 --> 0:12:50.400 it's the fiscal population growth, maybe even some productivity, who knows. 0:12:50.800 --> 0:12:53.000 But the thing is that explains what's happened in the 0:12:53.080 --> 0:12:55.000 last year or so. It doesn't tell you the next 0:12:55.360 --> 0:12:58.559 the next ten The ten year treasury yield should reflect 0:12:58.600 --> 0:13:01.599 the average over that period. Does anyone really think that 0:13:01.760 --> 0:13:05.000 three percent real GDP is going to be the case 0:13:05.080 --> 0:13:07.199 for the next ten years, because it looks to me 0:13:07.280 --> 0:13:08.520 that that's very unlikely. 0:13:10.160 --> 0:13:11.040 But maybe not. 0:13:11.360 --> 0:13:12.920 Maybe the growth story isn't going to be there, but 0:13:13.040 --> 0:13:16.000 there is an argument for the inflation story to be there, 0:13:16.120 --> 0:13:20.320 especially given the election, especially given more protectionist policies, especially 0:13:20.480 --> 0:13:24.840 given some of the issues that are not going away 0:13:24.880 --> 0:13:27.599 with respect to wages and just the fiscal money that 0:13:27.679 --> 0:13:30.920 has been procyclical, which is sort of counterintuitive. 0:13:31.080 --> 0:13:32.079 How do you dismiss all of that. 0:13:32.720 --> 0:13:35.439 I don't want to dismiss it, And you're right, the 0:13:35.559 --> 0:13:37.640 last bit on inflation has been sticky, but the big 0:13:37.760 --> 0:13:40.560 picture where we've come from since June twenty twenty two, 0:13:40.559 --> 0:13:42.360 it looks like a symmetrical reversal. 0:13:42.679 --> 0:13:44.079 So it went up and it came down. 0:13:44.480 --> 0:13:46.760 We're not quite on the target rates yet, but they 0:13:46.800 --> 0:13:49.040 don't have to arrive at the target before they cut 0:13:49.120 --> 0:13:52.760 rates that they would be almost irresponsible to wait until 0:13:53.160 --> 0:13:54.920 after they've hit the target. 0:13:55.280 --> 0:13:57.120 I can't dismiss what you're saying. 0:13:57.360 --> 0:14:00.400 I don't dismiss it because to me, it's about abilities 0:14:00.440 --> 0:14:04.720 and scenarios. So there's sort of no landing scenario whereby 0:14:04.800 --> 0:14:09.200 inflation stays sticky and high growth ticks along that says 0:14:09.200 --> 0:14:12.160 there's no rate cuts this year, in which case two 0:14:12.240 --> 0:14:14.599 year yields should be five and a quarter five and 0:14:14.679 --> 0:14:17.199 a half, I get it. Ten should be four and 0:14:17.240 --> 0:14:19.400 a half four seventy five. That that's sort of where 0:14:19.400 --> 0:14:22.200 they would land with no landing. But soft landing is 0:14:22.240 --> 0:14:25.040 where we are today, and we've got this risk on 0:14:25.120 --> 0:14:27.600 the left hand side of the distribution here of a 0:14:27.680 --> 0:14:31.280 hard landing. Has it really gone away? This time last 0:14:31.360 --> 0:14:35.840 year people were canceling meetings, canceling meetings with me. 0:14:36.000 --> 0:14:37.800 That's an easy thing to do anyway, but. 0:14:39.960 --> 0:14:42.920 Because it was the regional bank stress and people say 0:14:42.920 --> 0:14:44.800 to me, what does a hard landing look like? Well, 0:14:44.880 --> 0:14:48.760 the first thing is this interview doesn't happen, So it's 0:14:49.240 --> 0:14:50.000 people have forgotten. 0:14:50.040 --> 0:14:50.560 A year ago. 0:14:51.120 --> 0:14:54.120 For a good few weeks we had the smell and 0:14:54.240 --> 0:14:56.720 the look of a hard landing. Two year yields were 0:14:56.760 --> 0:15:00.680 screaming down towards three percent, right, So not saying that 0:15:00.720 --> 0:15:02.760 I know anything that's going to bring that back, but 0:15:02.840 --> 0:15:05.160 it's just about probabilities. It seems to me that we're 0:15:05.240 --> 0:15:08.800 leaning a bit towards no landing, soft landing stagflation, that's 0:15:08.800 --> 0:15:11.840 what it's all leaning towards, and to me, bonds protect 0:15:11.920 --> 0:15:14.000 you in case that's wrong when you go back the 0:15:14.080 --> 0:15:14.920 other way. 0:15:15.280 --> 0:15:17.520 So that's the explanation leads. 0:15:17.680 --> 0:15:19.280 I can't let go of the fact that I think 0:15:19.360 --> 0:15:21.840 rates are going to be coming down, and when they 0:15:21.920 --> 0:15:24.120 come down, the market with price more and that's how 0:15:24.160 --> 0:15:26.200 the bondis get down to a lower level. 0:15:26.400 --> 0:15:28.240 So that was Q one last year. Agan, it's Q two, 0:15:28.440 --> 0:15:30.880 and then Q three we printed something like five percent 0:15:31.160 --> 0:15:33.880 on GDP stateside, which is kind of wild. And then 0:15:33.920 --> 0:15:36.120 we were seeing the heighs of the year on a 0:15:36.200 --> 0:15:38.160 ten year and on the two year in October of 0:15:38.240 --> 0:15:40.720 last year, as you mentioned, and I remember something you 0:15:40.800 --> 0:15:43.440 said about supply and some reflections you had at the 0:15:43.480 --> 0:15:45.480 time about whether supply matters or not. And now the 0:15:45.560 --> 0:15:48.000 answer is it depends. Can we talk about what it 0:15:48.120 --> 0:15:50.640 depends on? And the fact of the matter, at Lisa's point, 0:15:51.040 --> 0:15:53.440 that we've got this sort of pro cyclical fiscal policy 0:15:53.800 --> 0:15:56.320 in the US now where definits a massive with unemployments 0:15:56.320 --> 0:15:59.280 south the four percent does that matter to the old call. 0:15:59.440 --> 0:16:01.640 I was here this time last year and we discussed it, 0:16:01.800 --> 0:16:04.440 and yields were pushing towards five for the tense and 0:16:04.520 --> 0:16:08.160 it was on the supply demand imbalance. Looking back with hindsight, 0:16:08.280 --> 0:16:11.040 maybe the Treasury made a misstep with the amount of 0:16:11.080 --> 0:16:15.320 coupons issued at that time, given the GDP, the downgrade, 0:16:15.680 --> 0:16:17.760 the inverted curve. I mean, it's easy for me to 0:16:17.760 --> 0:16:19.720 sit here and say so afterwards, but it looked like 0:16:19.880 --> 0:16:22.680 that was a misstep and it was addressed in the 0:16:22.760 --> 0:16:26.240 November refunding. Now I think that on the whole, supply 0:16:26.360 --> 0:16:29.560 should not matter to your yield forecast. It can matter 0:16:29.680 --> 0:16:32.720 to your near term tactical view if there's an auction 0:16:32.920 --> 0:16:35.000 coming up or there's some kind of thing, but you know, 0:16:35.280 --> 0:16:38.880 the supply impacts term premium when there's a surprise and 0:16:38.960 --> 0:16:42.400 there's an imbalance. In the longer run, I think the 0:16:42.480 --> 0:16:45.200 stock of debt the huge stock, and let's remember it's 0:16:45.240 --> 0:16:48.840 virtually doubled in the last two administrations. Under both of 0:16:49.080 --> 0:16:52.520 the last two presidents worked close to twenty seven trillion 0:16:52.560 --> 0:16:56.560 dollars of marketable securities. That's double early twenty sixteen, So 0:16:57.400 --> 0:17:01.840 that weighs on future growth, pause the r star down 0:17:02.120 --> 0:17:04.840 everything else. The way that happens is through debt servicing. 0:17:04.960 --> 0:17:07.879 So the way that bonds supply deficits feed into the 0:17:07.880 --> 0:17:08.960 way the bond market behaves. 0:17:09.000 --> 0:17:09.920 It's two different things. 0:17:10.000 --> 0:17:12.879 There's the imbalance, which can hit the term premium lifted 0:17:13.000 --> 0:17:15.920 up short term, and there's the longer term what it 0:17:15.960 --> 0:17:18.520 does to the equilibrium policy rate. And I think there's 0:17:18.520 --> 0:17:21.600 an unambiguous evidence that the stock of debt weighs down, 0:17:22.119 --> 0:17:26.760 so it opposes the positivity of the population growth and 0:17:26.880 --> 0:17:29.160 the near term impulses that might come from. 0:17:29.119 --> 0:17:33.160 AI, etc. But there's the debt stock weighs the other way. 0:17:33.680 --> 0:17:35.440 Yesterday, just to put a bow on all this, Marc 0:17:35.480 --> 0:17:39.200 Obanner of Bank of America was saying that maybe bonds 0:17:39.200 --> 0:17:42.320 should take a message from stocks that keep flying, and 0:17:42.400 --> 0:17:45.200 that it shouldn't be stocks taking a message from bonds. 0:17:46.080 --> 0:17:47.000 What do you push back? 0:17:47.080 --> 0:17:49.080 Do you saying that actually starts seem to be listening 0:17:49.119 --> 0:17:52.240 to a risk that's getting baked into bonds, which is 0:17:52.280 --> 0:17:53.560 why yields are not even higher. 0:17:53.800 --> 0:17:57.280 So that's a great debate. It's an interesting insight. 0:17:57.400 --> 0:17:57.639 Why not. 0:17:57.720 --> 0:18:00.760 We'll always looking at new ways of valuing bonds. But 0:18:00.880 --> 0:18:03.800 it seems to me that the yield on the two 0:18:03.880 --> 0:18:06.879 year treasury you can see quite robustly and justify it 0:18:06.960 --> 0:18:09.119 based on the path of the short rate and So 0:18:09.640 --> 0:18:12.760 if it's four seventy ish, it's reflecting a FED that 0:18:13.040 --> 0:18:16.239 cuts a couple or three times this year, continues next year. 0:18:16.280 --> 0:18:17.480 That's basically what it's part. 0:18:17.760 --> 0:18:20.520 Now that's an important number because it affects the fives 0:18:20.520 --> 0:18:23.120 and it affects the tens. Now, I think equities seem 0:18:23.200 --> 0:18:26.919 to be taking the positivity from what the bonds are 0:18:26.960 --> 0:18:29.840 telling them, so that rates are coming down. I think 0:18:29.960 --> 0:18:32.680 bonds are purely priced off of the short rate and 0:18:32.760 --> 0:18:34.680 its path, So I don't think that they're priced due 0:18:34.720 --> 0:18:37.199 to equities at all. But it's an interesting debate. I mean, 0:18:37.240 --> 0:18:39.520 I'd like to see how we could use equity risk 0:18:39.600 --> 0:18:43.000 premium to influence our evaluation on bonds. 0:18:43.000 --> 0:18:43.679 I don't think we can. 0:18:44.040 --> 0:18:47.280 It strikes me that goes the other way unambiguously, it's 0:18:47.359 --> 0:18:48.320 bonds to equities. 0:18:48.640 --> 0:18:51.880 I think on further hike, Steve Major's with US at HSBC, 0:18:52.040 --> 0:18:53.320 with US here in New York State, we've got to 0:18:53.359 --> 0:18:56.080 talk about this first move from the boj first hike 0:18:56.160 --> 0:18:59.359 since seven and proven not to be so consequential. The 0:18:59.440 --> 0:19:01.200 yen moving in the other direction, how do you read 0:19:01.200 --> 0:19:02.359 in developments in Japan? 0:19:02.800 --> 0:19:05.840 Maybe it is consequential because maybe it opens the door 0:19:05.960 --> 0:19:08.840 up for the next step, the next move, because if 0:19:08.920 --> 0:19:12.800 you if you were scenario playing, your role playing before 0:19:12.880 --> 0:19:15.640 this event, you would have said, imagine a scenario where 0:19:15.680 --> 0:19:17.920 they went all in, where they'd rate hikes and the 0:19:18.000 --> 0:19:20.600 your curve control and this and the other really hawkish 0:19:20.880 --> 0:19:21.520 and dollar. 0:19:21.359 --> 0:19:22.000 Yen went up. 0:19:23.160 --> 0:19:27.680 And actually that seems to be what's happened. So to me, 0:19:28.160 --> 0:19:31.280 the totality of the decision and the outcome in the 0:19:31.359 --> 0:19:34.680 asset markets is the measure of is the measure of success. 0:19:34.760 --> 0:19:36.640 So you have to look at all the different details 0:19:36.680 --> 0:19:38.480 in what they did and then how all the asset 0:19:38.600 --> 0:19:41.200 markets play out. And they're watching this closely, I would 0:19:41.200 --> 0:19:43.280 say that net net, it looks like there's room maybe 0:19:43.359 --> 0:19:47.480 to do some more of something. Now from a JGB perspective, 0:19:47.640 --> 0:19:50.520 maybe it means yields can keep going a bit higher. 0:19:51.640 --> 0:19:55.240 Dollar yen is that's probably not what they want to see. 0:19:57.520 --> 0:19:59.680 Sort of designed success. I need to understand whatere the 0:19:59.680 --> 0:20:02.120 object diff was. Yeah, it's shure if the objective wasn't 0:20:02.160 --> 0:20:04.960 to see a weaker Japanese Yet off the back of this, the. 0:20:05.240 --> 0:20:09.240 Key performance indicators for this one would be not to 0:20:09.920 --> 0:20:12.840 break anything or make any mess It's like any big 0:20:12.960 --> 0:20:15.600 decision from any central bank. First first, first stop is 0:20:15.640 --> 0:20:18.560 don't make a mess of anything. So in that regard, 0:20:18.680 --> 0:20:21.520 it's okay, But it just seems to me that it's 0:20:21.680 --> 0:20:24.000 not really over. There's much more that could be done. 0:20:24.160 --> 0:20:27.320 The fair value for jgb's with this rate move and 0:20:27.560 --> 0:20:29.960 the changes on the YD curve control could be nearer 0:20:30.040 --> 0:20:30.800 to one hundred. 0:20:31.320 --> 0:20:34.159 And it's interesting that it's the currency that moves, and that. 0:20:34.280 --> 0:20:38.040 Tells you that maybe investors are putting their their views 0:20:38.080 --> 0:20:41.080 through the FX markets more than they are through the 0:20:41.160 --> 0:20:41.920 bonds at the moment. 0:20:42.080 --> 0:20:43.320 So a lot of people are saying that the Bank 0:20:43.359 --> 0:20:45.800