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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Terminal and the Bloomberg Business Airly I'm happy to say
Speaker 2: is with us now where I want to go straight
Speaker 2: to that inflation call and go back to what you
Speaker 2: told us at the stand of the year, where essentially
Speaker 2: what you were looking for was inflation to come down
Speaker 2: a little bit more then pick back up towards the
Speaker 2: end of the year. Are we seeing that pickup? Maybe
Speaker 2: ahead of schedule?
Speaker 1: That's possible, But I would note that the true consecutive
Speaker 1: month of inflation upside surprises came on different sources. So
Speaker 1: the general Bunker print was mostly because of course service,
Speaker 1: and the February print was driven by quarter than expected goods.
Speaker 1: Inflationary pressure so I think the jury is still out
Speaker 1: there in terms of if we are seeing the twelve
Speaker 1: of this inflation roller coaster. Our view is that actually
Speaker 1: there is room for goods deflation to bring inflation down further.
Speaker 1: But when that runs its course, which is more likely
Speaker 1: later this year rather than now, service starts to dominate,
Speaker 1: and that's when wage pressure pushes inflation higher, and ultimately
Speaker 1: we're looking at the trend settling around three percent rather
Speaker 1: than two percent. But that roller coaster is for later
Speaker 1: this year rather than right now, and right now, I
Speaker 1: think the bar is pretty high for markets to abandon
Speaker 1: this narrative of immaculate this inflation, which is why we'll
Speaker 1: positive on risk sentiment and what both them on us appuy.
Speaker 2: That is moment before we get deeper into recording markets. Way,
Speaker 2: how do you think that's going to influence the thinking
Speaker 2: of chairman Power in today's news conference.
Speaker 1: Well, it's likely going to be a very balanced press
Speaker 1: conference and very balanced pot and C. They will emphasize
Speaker 1: data dependency, They will try to strike a balanced tone.
Speaker 1: You know, the last meeting they talked about a sticky
Speaker 1: last mile. So I am very curious in terms of
Speaker 1: how they speak to the recent outside surprises in inflation prints.
Speaker 1: I'm also curious in terms of if they're going to
Speaker 1: revise growth higher, inflation higher, they're going to start discussing
Speaker 1: the balance sheet round off, maybe trimming that a little bit.
Speaker 1: So lots of things at play, but more broadly speaking,
Speaker 1: we are expecting dot median to stay at three cards
Speaker 1: for this year, which is in line with our expectation
Speaker 1: at the beginning of the year. So now markets finally
Speaker 1: will being closer to that.
Speaker 3: Before shifting the stocks, what duration of bonds do you
Speaker 3: feels most vulnerable given what pricing is and give and
Speaker 3: you expect to transpire with inflation later this year.
Speaker 1: While we have a preference for short end of the
Speaker 1: curve and also the value of the curve, so implicitly
Speaker 1: there is a stiffening view over the longer term, and
Speaker 1: that is more over a fiscal story, right, So if
Speaker 1: you look at the fiscal deficits in the US late
Speaker 1: twenty twenty two, we're looking at three point five percent
Speaker 1: and now we're getting to eight percent, and that servicing
Speaker 1: cost is increasing, expected to increase even more the higher
Speaker 1: rates for longer and turn premium needing to come back.
Speaker 1: So all of that points to higher rates, especially for
Speaker 1: long end of the curve. But when that kicks in,
Speaker 1: when that repricing because of concern around fiscal dynamics, and
Speaker 1: that's servisibility, that's key, which is why our conviction on
Speaker 1: the long end of the curve yields moving higher is more.
Speaker 1: It's stronger over a strategic horizon than over a tactical
Speaker 1: horizon of six six to twelve one.
Speaker 3: Are stocks vulnerable to a hawkish surprise from the FED
Speaker 3: or are they operating according to a different set of
Speaker 3: rules that really hinge on very different factors than FED
Speaker 3: set rates.
Speaker 1: But you ask the question Javis Jensen's, I think that's
Speaker 1: what stock markets are trying to figure out as well.
Speaker 1: But if year today is anything to go by, we
Speaker 1: have had hawkish repricing of the FED like seven cuts
Speaker 1: at the beginning of the year to now just three cuts,
Speaker 1: and yet markets are very resilient. SMP is up close
Speaker 1: to nine percent, equal way to the SMP close to
Speaker 1: five percent, right, So this is not a market that
Speaker 1: are caving in under hokish repricing pressure. And the bridging factor,
Speaker 1: the reconciliatory factor here is the strong earnings and a
Speaker 1: lot of the earnings are being heavy lifted by the AI,
Speaker 1: which is why we are positive on USM market because
Speaker 1: erniers are coming in strong and stronger, beating expectation, and
Speaker 1: we lean into AI because that's where actually most of
Speaker 1: the earnings momentum is coming from.
Speaker 3: Given that way, do you think that calls for some
Speaker 3: sort of broadening out in the rally are premature just
Speaker 3: simply because the games still are concentrated, not just with
Speaker 3: Magnificent four three or two or whatever people have got
Speaker 3: whittled it down to, but also only the companies that
Speaker 3: are most leveraged to immediate benefits from some of this technology.
Speaker 1: Well, I think there is room for SMP to broaden
Speaker 1: out from the very concentrated leadership that we saw foremost
Speaker 1: part of last year, but that can also be thanks
Speaker 1: to AI. So as we think about sectors like healthcare,
Speaker 1: sectors like industrials starting to adopt AI to a greater scale,
Speaker 1: the leaders within those sets likely able to broaden the
Speaker 1: gap versus the rest of the piers within the sceptor
Speaker 1: because they have economy of scale, they have a lot
Speaker 1: of data to play with, so we can see actually
Speaker 1: AI driving broadening out of the rally. Concentrated intact so far.
Speaker 1: So that's one way that it can broaden out. Another
Speaker 1: way that it can broaden out can be a wild
Speaker 1: swing of rate repricing. Right, so we're talking about three
Speaker 1: cuts now, and remember at the peak hawkish moment of October,
Speaker 1: markets were still looking at two cuts. But we have
Speaker 1: really single wide range of rate repricing, which is also
Speaker 1: evidence in the very high elevated rate volutility the move index.
Speaker 1: So there's no telling if we could see swim back
Speaker 1: of this rate repricing, and when that kind of tactical
Speaker 1: momentum plays out, that could benefit the broader market beyond
Speaker 1: the AI concentrated in But that's so short term. Because
Speaker 1: we have seen wild swing within short periods of time,
Speaker 1: that's not something that we're positioning our investment views around.
Speaker 1: But we acknowledged that this can swing within this short
Speaker 1: period of time.
Speaker 2: So wait, I know you're overweight US secularies, but also
Speaker 2: a sprinkle of Japanese stocks.
Speaker 4: Can we finish there?
Speaker 2: The NIKT twenty five is up by almost twenty percent
Speaker 2: yere today. It's been quite a run. Can you tell
Speaker 2: me how the Bank of Japan in any way, shape
Speaker 2: or form is relevant to that decision.
Speaker 1: Well, it's the prerequisite on which the micro story can
Speaker 1: play out, which is our expectation and rationale behind our
Speaker 1: Japanese agriplet. So we upgraded Japan twice last year, and
Speaker 1: we continue to like it at this juncture, even as
Speaker 1: it crossed the all time I last made in nineteen
Speaker 1: eighty nine. So yesterday was a key was a key
Speaker 1: event was to watch. So if they are very kind
Speaker 1: of pokushed viewing inflation as a problem, I would be
Speaker 1: and what concerned with our Japan call. But frankly, yes,
Speaker 1: they hide rates for the first time in seventeen years,
Speaker 1: but they hiked it in the most dovish way possible. Right,
Speaker 1: So for example, they normally dropped the yield curve control,
Speaker 1: but they're still saying in case of a rapid rise
Speaker 1: in long term youths, they would make nimble responses adjustments.
Speaker 1: So if that's not the definition of YCC, I don't
Speaker 1: know what is. So they really kind of verre is
Speaker 1: the body of an accommodated still and that paves the
Speaker 1: way for micro positive developments to continue to be reflected
Speaker 1: in Japanese applet price.
Speaker 2: Well, that trade is working out a black rock white,
Speaker 2: Thank you, State Major. So let's round a table State
Speaker 2: good monitor. Well and John, can we start with that
Speaker 2: mildly bullish story for treasuries. Why mildly bullish in the
Speaker 2: face of a bit of a set off we've seen
Speaker 2: so far this year.
Speaker 4: Well, Maldi, polish is not all in. All in is
Speaker 4: full on bullish.
Speaker 5: And that's why Europe is ranked above the US in
Speaker 5: terms of possible easing and performance from duration. But we
Speaker 5: can't let go of this view that yields are going
Speaker 5: to be lower, not higher by year end. And I
Speaker 5: get they've been sliding up the last week or so,
Speaker 5: and I mean the context is important. We've come a
Speaker 5: long way from the peak in yields in October. The
Speaker 5: inflation peaked in June twenty twenty two, the market changed
Speaker 5: its directional viewer rates in October twenty three, the Fed
Speaker 5: pivoted a couple of months later.
Speaker 4: It seems to me that they're not going to change
Speaker 4: their mind.
Speaker 5: The next move is down, and in the meantime we
Speaker 5: know it's either unchanged or down for policy rates.
Speaker 4: And therefore the trade is sit in the belly of
Speaker 4: the curve.
Speaker 5: If not treasuries, you take ig credit and if you
Speaker 5: can't take those, then you what's it called and chill?
Speaker 4: Is that what they say over that's bills and chill.
Speaker 4: I've been here long enough now to go.
Speaker 2: Let's go further right along the curve, get away from
Speaker 2: the belly, and go out to the ten years. Say yeah,
Speaker 2: what backs up this call at the moment? That years
Speaker 2: at the end of the year will be love and
Speaker 2: not higher.
Speaker 5: So if you took the most hawkish individual in the
Speaker 5: December dot plot, you get a longer run equilibrium rate
Speaker 5: just below four and you get very little rate cuts
Speaker 5: in the next year or so. So if you just
Speaker 5: took that as a path for rates, it's difficult to
Speaker 5: get the ten year yield much above four and a
Speaker 5: half on our calculation, and you'd be really going some
Speaker 5: to get to five.
Speaker 4: So, just knowing that that right hand tale of.
Speaker 5: The distribution is sort of in at four and a
Speaker 5: half and change, I quite like the idea of being
Speaker 5: long now. It's very difficult to time this, and that's
Speaker 5: why the best trade, which I think everyone seems to
Speaker 5: be doing, is owning the corporates, taking all the new
Speaker 5: issues they can, and complementing a position in ig credit
Speaker 5: with tea bills that generates a total yield of between
Speaker 5: five and six that competes with equities, and on a
Speaker 5: risk adjusted basis, it's superb So I think that's what's
Speaker 5: going on. If you're in T bulls and they're maturing,
Speaker 5: you've got the option to roll them again or go
Speaker 5: and buy something else. Now, the thing is, we're buying
Speaker 5: the ten year treasury. You drop one hundred basis points
Speaker 5: in yield, but at least if you go to IG
Speaker 5: credit you can sit and wait. And I think that
Speaker 5: explains the type credit spreads. I don't think we can
Speaker 5: infer too much reason in the credit spread as to
Speaker 5: say something about default probability. I think it's all in
Speaker 5: yield that people like they can't get enough.
Speaker 3: I was so very excited to speak with you today
Speaker 3: because for so many years I remember all of the
Speaker 3: people who are calling for some huge sell off and treasuries,
Speaker 3: and I'd get the major letter and it would come
Speaker 3: out and say, you're all wrong. Yield are going lower
Speaker 3: because basically we're looking at a low inflation, low growth
Speaker 3: reality that was before the pandemic. A little bit after
Speaker 3: the pandemic. It sounds like you're thinking has shifted somewhat
Speaker 3: given the fact that you're not aggressively bullish in treasuries.
Speaker 3: Has it has the neutral rate shifted? Has something about
Speaker 3: your view of the world changed.
Speaker 5: The quote that John lifted is for our march asset allocation,
Speaker 5: so it's the monthly right, so that the view hasn't changed.
Speaker 5: Our year end forecast is three point zero. That seems
Speaker 5: a long way from here, but believe me, once they
Speaker 5: start cutting, the market's going to move quickly. And this
Speaker 5: is the issue that people have is that it's very
Speaker 5: dangerous to be short of treasuries.
Speaker 4: Here. You've got to have a.
Speaker 5: Very interesting narrative to justify being being short of treasuries.
Speaker 5: So the minimum you can be is neutral and small.
Speaker 5: Long I think that the growth narrative has been the
Speaker 5: biggest challenged. And if I put together what explains us exceptionalism,
Speaker 5: it's the fiscal population growth, maybe even some productivity, who knows.
Speaker 5: But the thing is that explains what's happened in the
Speaker 5: last year or so. It doesn't tell you the next
Speaker 5: the next ten The ten year treasury yield should reflect
Speaker 5: the average over that period. Does anyone really think that
Speaker 5: three percent real GDP is going to be the case
Speaker 5: for the next ten years, because it looks to me
Speaker 5: that that's very unlikely.
Speaker 4: But maybe not.
Speaker 3: Maybe the growth story isn't going to be there, but
Speaker 3: there is an argument for the inflation story to be there,
Speaker 3: especially given the election, especially given more protectionist policies, especially
Speaker 3: given some of the issues that are not going away
Speaker 3: with respect to wages and just the fiscal money that
Speaker 3: has been procyclical, which is sort of counterintuitive.
Speaker 4: How do you dismiss all of that.
Speaker 5: I don't want to dismiss it, And you're right, the
Speaker 5: last bit on inflation has been sticky, but the big
Speaker 5: picture where we've come from since June twenty twenty two,
Speaker 5: it looks like a symmetrical reversal.
Speaker 4: So it went up and it came down.
Speaker 5: We're not quite on the target rates yet, but they
Speaker 5: don't have to arrive at the target before they cut
Speaker 5: rates that they would be almost irresponsible to wait until
Speaker 5: after they've hit the target.
Speaker 4: I can't dismiss what you're saying.
Speaker 5: I don't dismiss it because to me, it's about abilities
Speaker 5: and scenarios. So there's sort of no landing scenario whereby
Speaker 5: inflation stays sticky and high growth ticks along that says
Speaker 5: there's no rate cuts this year, in which case two
Speaker 5: year yields should be five and a quarter five and
Speaker 5: a half, I get it. Ten should be four and
Speaker 5: a half four seventy five. That that's sort of where
Speaker 5: they would land with no landing. But soft landing is
Speaker 5: where we are today, and we've got this risk on
Speaker 5: the left hand side of the distribution here of a
Speaker 5: hard landing. Has it really gone away? This time last
Speaker 5: year people were canceling meetings, canceling meetings with me.
Speaker 4: That's an easy thing to do anyway, but.
Speaker 5: Because it was the regional bank stress and people say
Speaker 5: to me, what does a hard landing look like? Well,
Speaker 5: the first thing is this interview doesn't happen, So it's
Speaker 5: people have forgotten.
Speaker 4: A year ago.
Speaker 5: For a good few weeks we had the smell and
Speaker 5: the look of a hard landing. Two year yields were
Speaker 5: screaming down towards three percent, right, So not saying that
Speaker 5: I know anything that's going to bring that back, but
Speaker 5: it's just about probabilities. It seems to me that we're
Speaker 5: leaning a bit towards no landing, soft landing stagflation, that's
Speaker 5: what it's all leaning towards, and to me, bonds protect
Speaker 5: you in case that's wrong when you go back the
Speaker 5: other way.
Speaker 4: So that's the explanation leads.
Speaker 5: I can't let go of the fact that I think
Speaker 5: rates are going to be coming down, and when they
Speaker 5: come down, the market with price more and that's how
Speaker 5: the bondis get down to a lower level.
Speaker 2: So that was Q one last year. Agan, it's Q two,
Speaker 2: and then Q three we printed something like five percent
Speaker 2: on GDP stateside, which is kind of wild. And then
Speaker 2: we were seeing the heighs of the year on a
Speaker 2: ten year and on the two year in October of
Speaker 2: last year, as you mentioned, and I remember something you
Speaker 2: said about supply and some reflections you had at the
Speaker 2: time about whether supply matters or not. And now the
Speaker 2: answer is it depends. Can we talk about what it
Speaker 2: depends on? And the fact of the matter, at Lisa's point,
Speaker 2: that we've got this sort of pro cyclical fiscal policy
Speaker 2: in the US now where definits a massive with unemployments
Speaker 2: south the four percent does that matter to the old call.
Speaker 5: I was here this time last year and we discussed it,
Speaker 5: and yields were pushing towards five for the tense and
Speaker 5: it was on the supply demand imbalance. Looking back with hindsight,
Speaker 5: maybe the Treasury made a misstep with the amount of
Speaker 5: coupons issued at that time, given the GDP, the downgrade,
Speaker 5: the inverted curve. I mean, it's easy for me to
Speaker 5: sit here and say so afterwards, but it looked like
Speaker 5: that was a misstep and it was addressed in the
Speaker 5: November refunding. Now I think that on the whole, supply
Speaker 5: should not matter to your yield forecast. It can matter
Speaker 5: to your near term tactical view if there's an auction
Speaker 5: coming up or there's some kind of thing, but you know,
Speaker 5: the supply impacts term premium when there's a surprise and
Speaker 5: there's an imbalance. In the longer run, I think the
Speaker 5: stock of debt the huge stock, and let's remember it's
Speaker 5: virtually doubled in the last two administrations. Under both of
Speaker 5: the last two presidents worked close to twenty seven trillion
Speaker 5: dollars of marketable securities. That's double early twenty sixteen, So
Speaker 5: that weighs on future growth, pause the r star down
Speaker 5: everything else. The way that happens is through debt servicing.
Speaker 5: So the way that bonds supply deficits feed into the
Speaker 5: way the bond market behaves.
Speaker 4: It's two different things.
Speaker 5: There's the imbalance, which can hit the term premium lifted
Speaker 5: up short term, and there's the longer term what it
Speaker 5: does to the equilibrium policy rate. And I think there's
Speaker 5: an unambiguous evidence that the stock of debt weighs down,
Speaker 5: so it opposes the positivity of the population growth and
Speaker 5: the near term impulses that might come from.
Speaker 4: AI, etc. But there's the debt stock weighs the other way.
Speaker 3: Yesterday, just to put a bow on all this, Marc
Speaker 3: Obanner of Bank of America was saying that maybe bonds
Speaker 3: should take a message from stocks that keep flying, and
Speaker 3: that it shouldn't be stocks taking a message from bonds.
Speaker 4: What do you push back?
Speaker 3: Do you saying that actually starts seem to be listening
Speaker 3: to a risk that's getting baked into bonds, which is
Speaker 3: why yields are not even higher.
Speaker 5: So that's a great debate. It's an interesting insight.
Speaker 4: Why not.
Speaker 5: We'll always looking at new ways of valuing bonds. But
Speaker 5: it seems to me that the yield on the two
Speaker 5: year treasury you can see quite robustly and justify it
Speaker 5: based on the path of the short rate and So
Speaker 5: if it's four seventy ish, it's reflecting a FED that
Speaker 5: cuts a couple or three times this year, continues next year.
Speaker 4: That's basically what it's part.
Speaker 5: Now that's an important number because it affects the fives
Speaker 5: and it affects the tens. Now, I think equities seem
Speaker 5: to be taking the positivity from what the bonds are
Speaker 5: telling them, so that rates are coming down. I think
Speaker 5: bonds are purely priced off of the short rate and
Speaker 5: its path, So I don't think that they're priced due
Speaker 5: to equities at all. But it's an interesting debate. I mean,
Speaker 5: I'd like to see how we could use equity risk
Speaker 5: premium to influence our evaluation on bonds.
Speaker 4: I don't think we can.
Speaker 5: It strikes me that goes the other way unambiguously, it's
Speaker 5: bonds to equities.
Speaker 2: I think on further hike, Steve Major's with US at HSBC,
Speaker 2: with US here in New York State, we've got to
Speaker 2: talk about this first move from the boj first hike
Speaker 2: since seven and proven not to be so consequential. The
Speaker 2: yen moving in the other direction, how do you read
Speaker 2: in developments in Japan?
Speaker 5: Maybe it is consequential because maybe it opens the door
Speaker 5: up for the next step, the next move, because if
Speaker 5: you if you were scenario playing, your role playing before
Speaker 5: this event, you would have said, imagine a scenario where
Speaker 5: they went all in, where they'd rate hikes and the
Speaker 5: your curve control and this and the other really hawkish
Speaker 5: and dollar.
Speaker 4: Yen went up.
Speaker 5: And actually that seems to be what's happened. So to me,
Speaker 5: the totality of the decision and the outcome in the
Speaker 5: asset markets is the measure of is the measure of success.
Speaker 5: So you have to look at all the different details
Speaker 5: in what they did and then how all the asset
Speaker 5: markets play out. And they're watching this closely, I would
Speaker 5: say that net net, it looks like there's room maybe
Speaker 5: to do some more of something. Now from a JGB perspective,
Speaker 5: maybe it means yields can keep going a bit higher.
Speaker 5: Dollar yen is that's probably not what they want to see.
Speaker 2: Sort of designed success. I need to understand whatere the
Speaker 2: object diff was. Yeah, it's shure if the objective wasn't
Speaker 2: to see a weaker Japanese Yet off the back of this, the.
Speaker 5: Key performance indicators for this one would be not to
Speaker 5: break anything or make any mess It's like any big
Speaker 5: decision from any central bank. First first, first stop is
Speaker 5: don't make a mess of anything. So in that regard,
Speaker 5: it's okay, But it just seems to me that it's
Speaker 5: not really over. There's much more that could be done.
Speaker 5: The fair value for jgb's with this rate move and
Speaker 5: the changes on the YD curve control could be nearer
Speaker 5: to one hundred.
Speaker 4: And it's interesting that it's the currency that moves, and that.
Speaker 5: Tells you that maybe investors are putting their their views
Speaker 5: through the FX markets more than they are through the
Speaker 5: bonds at the moment.
Speaker 3: So a lot of people are saying that the Bank
Speaker 3: of Japan is not going to be bothered necessarily by
Speaker 3: this move in the end, do you disagree?
Speaker 5: I think they'll be delighted just to have got rid
Speaker 5: of negative rates, So in that in that sense, I
Speaker 5: totally agree they're not bothered at all, because they if
Speaker 5: their objective was to get the rate up without making
Speaker 5: an anything, than they've achieved it. But I think it's
Speaker 5: the totality of the asset class response that matters, and
Speaker 5: that takes time to look through. It's taken them how
Speaker 5: many years, seventeen years to get the thing to get here,
Speaker 5: and it's step by step, so I think it's conditionally
Speaker 5: so I think that their analysis will'll be ongoing and
Speaker 5: they'll be looking at what's happened to dolli en and
Speaker 5: to the equity market and to bonds, and that will
Speaker 5: help frame what they do next.
Speaker 3: What was interesting to me is a lot of people
Speaker 3: were saying that maybe if the Bank of Japan ended
Speaker 3: negative rate policies and actually tightened more significantly, all of
Speaker 3: the Japanese investors who had been pouring their cash into
Speaker 3: US credit markets, into European markets would come home and
Speaker 3: that buyer base would not be there in the same level.
Speaker 3: Do you see that as a potential likelihood? Is what
Speaker 3: we're seeing. What we're getting, which is essentially the dynamic
Speaker 3: is kind of the same.
Speaker 5: I think that the Japanese investors are still very happy
Speaker 5: to hold dollars and there's such a big yield gap
Speaker 5: between the two that that's the thing for there to
Speaker 5: be a change in the direction of the end. Clearly
Speaker 5: more has to happen. If you told me today that
Speaker 5: policy was being shifted in a way that dollar yen
Speaker 5: would head back towards one forty, then that changes everything.
Speaker 5: It changes all the hedging strategies, and but obviously they
Speaker 5: haven't done enough to change the direction. So I'm not
Speaker 5: saying this for sure, but it strikes me that the
Speaker 5: outcome of this could be that there might be more
Speaker 5: moves and more iterative steps, especially on the on the
Speaker 5: JGB side.
Speaker 3: Which is this question about the threshold for today's third
Speaker 3: meeting and how harksh for SG power would have to
Speaker 3: be before you see a move in the end that
Speaker 3: would actually cause the Bank of Japan to say, wait
Speaker 3: a second, maybe we need a second step.
Speaker 5: Yeah, I think that that's unlikely. But given what we've
Speaker 5: just seen, why not though, if we sat head, if
Speaker 5: we'd set if we'd sat here last week and called
Speaker 5: higher dollary and on the on the basis of what
Speaker 5: we've just seeing, it would have been an outlier.
Speaker 4: So why not let's go with it?
Speaker 3: Right?
Speaker 4: So Chairpoe goes hawkish again and says it was a
Speaker 4: mistake what I said before. He's not going to say
Speaker 4: that one thing you can say for sure you know
Speaker 4: that was capable. He's not going to say not like that.
Speaker 4: We can we can guarantee that's not going to be said.
Speaker 2: Right, could reflect on the previous decade or so in
Speaker 2: this fixed income market. I was in Europe, we were
Speaker 2: there together. We have to talk about negative bond yields
Speaker 2: and Lisa, what do we get up to twenty trillion,
Speaker 2: some ridiculous number of negative yielding assets? What was that period?
Speaker 2: How would you describe that period? And for those that
Speaker 2: maybe have just joining the industry and weren't living it,
Speaker 2: how would you describe that period to them?
Speaker 5: Well, it was an experiment in monetary policy, and it
Speaker 5: was obviously a scary time because the policies were there
Speaker 5: to address the risk of deflation, the counterfactuals. We don't
Speaker 5: know what would have happened without some of these policies.
Speaker 5: I think I think they get a bad rap negative rates.
Speaker 5: Not saying I'm a fan or anything, but it's just
Speaker 5: that they get a bad rap. And what else were
Speaker 5: central bank's supposed to do?
Speaker 4: Honestly, So I look back at that.
Speaker 5: And I think it was an experiment and it might
Speaker 5: have had some quite serious unintended consequences, because it shouldn't
Speaker 5: have been a surprise that asset prices went up so
Speaker 5: much on the back of this.
Speaker 2: Would you judge the success though of them?
Speaker 3: Well?
Speaker 5: As I say, it's the counterfactuals, So how many people
Speaker 5: would have lost their jobs without this? And there's been
Speaker 5: analysis on this from the Bundesbank and from parts of
Speaker 5: the dc B.
Speaker 4: I mean, this is the thing.
Speaker 5: Did negative rates actually keep the unemployment rate lower than
Speaker 5: it would have been otherwise? And that's a really important thing.
Speaker 5: You can't measure just how important it is for society.
Speaker 5: So if we used to just look at negative rates
Speaker 5: and say, oh, look what they did. They created all
Speaker 5: of this asset price bubble and all this that that's
Speaker 5: not the food analysis is going to look at the
Speaker 5: real economy and especially employment.
Speaker 2: And how much worse it could have been. Steve, Yeah, exactly,
Speaker 2: fantastic to see you. It's going to catch up st HSBC.
Speaker 2: Just remind me that price target tenure yield. It's the
Speaker 2: yield target year end on a tenure. Okay, it looks
Speaker 2: slightly impain you're going to join us before year end.
Speaker 4: I'm going to if you'll have me. Of course, always.
Speaker 2: Jan Hatzius and the team at Goldman Sachs falling in
Speaker 2: live with the broad consensus expecting three FED rate cuts
Speaker 2: this year. Hatsiest right in this inflation has been firmer
Speaker 2: in recent months, but we think it is still on
Speaker 2: track to fall enough by the June meeting for a
Speaker 2: first cut. This has become less obvious, though, and our
Speaker 2: inflation path for the rest of the year is now
Speaker 2: at a range where small surprises could have large consequences.
Speaker 2: And Police of Sai in a studio in New York, Yanke,
Speaker 2: good morning to you. Great to be here, fantastically catch
Speaker 2: up with you, sir. I remember the outlook to start
Speaker 2: this year, and we talked about it a lot on
Speaker 2: this program. The hard part was over. It's almost easy
Speaker 2: from here. Do you still think that's the case based
Speaker 2: on the days we've had so far this year.
Speaker 6: Yeah, it's more of a question because of the stronger
Speaker 6: inflation numbers, but I think if you look at the trends,
Speaker 6: we're still on track to get down to the two
Speaker 6: point four percent range or so for core PC inflation.
Speaker 4: By the fourth quarter.
Speaker 6: And now at the start of the year, we thought
Speaker 6: that was going to be two point two percent, so
Speaker 6: that's been a little bit higher. We've basically gone back
Speaker 6: to the forecast that we had last fall, but two
Speaker 6: point four percent is still pretty good progress, and by
Speaker 6: twenty twenty five, I think will be at two. If
Speaker 6: you look at the drivers of inflation, whether it's on
Speaker 6: the good side or on the rent side, or in
Speaker 6: the labor market, I think the trends there still look encouraging,
Speaker 6: but of course the prints have been higher, so there's
Speaker 6: more of a debate about it, and the FED is
Speaker 6: going to be responsive to kind of near drums and prizes.
Speaker 2: Well, let's talk about how responsive they might be today.
Speaker 2: As we know, clear and obvious risk factor is in
Speaker 2: the dot plot, whether that medium dots shifts from three cuts,
Speaker 2: say to two, and as we all know, it only
Speaker 2: takes two officials to move in that direction. Do you
Speaker 2: think that's something that happens today. Is that a base
Speaker 2: case in today's meeting.
Speaker 6: It's not a base case for me, but it certainly
Speaker 6: is a possibility because not that much has to change
Speaker 6: in terms of the projections. If you go back to
Speaker 6: two weeks ago when Shair Powell testified in Congress, he
Speaker 6: said they were pretty close to having enough confidence, So
Speaker 6: that sounded like a cut no later than June if
Speaker 6: you take the statements there. We've had higher inflation numbers
Speaker 6: in the past week, So all the question is has
Speaker 6: that changed this view, my expectation is null, but we'll
Speaker 6: find out two PM.
Speaker 3: All things being equal, it seems to have changed your
Speaker 3: view on the margins. You shifted down to three rate
Speaker 3: cuts expected for this year from four earlier in a
Speaker 3: report in the past couple of weeks, and you'd said
Speaker 3: this line that John noted small surprises could have large consequences.
Speaker 6: What do you mean, Well, if you have a few
Speaker 6: additional tenths of inflation by the end of the year,
Speaker 6: even if it doesn't really change the overall trend in
Speaker 6: twenty twenty four is still lower than twenty twenty three,
Speaker 6: but they would deliver less cuts. So in that sense, yeah,
Speaker 6: I think it'd be a continuation of what we've seen
Speaker 6: in the last several months, where in the early part
Speaker 6: of the year, with an expectation of inflation coming down
Speaker 6: to very close to two, you know, I think they
Speaker 6: would have done more. But now it seems like the
Speaker 6: December dot plot and the December inflation forecast looks pretty
Speaker 6: reasonable to us.
Speaker 3: It seems like people are split on their views based
Speaker 3: on whether they think that the neutral rate hit shifted
Speaker 3: materially or not. You believe that the neutral rate is
Speaker 3: still going to be around your previous projections at three
Speaker 3: and a quarter to three and a half percent. How
Speaker 3: do you push back against people who say it's actually
Speaker 3: four percent or higher, like Elslinus of RBC Capital.
Speaker 6: I think we don't know, and I would certainly I
Speaker 6: wouldn't push back very hard because the confidence interval around
Speaker 6: any of these estimates is quite high. Four percent, though,
Speaker 6: is still well south of five and three eighths. And
Speaker 6: I am pretty confident that at current levels we're in
Speaker 6: restrictive territory by a significant amount. But whether the right number,
Speaker 6: you know, is four or three and a half or
Speaker 6: three you know, that's harder to know. I do think
Speaker 6: that the FMC projection two and a half percent, if
Speaker 6: you take the median, that looks pretty stale, and I
Speaker 6: think that is going to drift up over time, probably
Speaker 6: by a little bit today, although we've been waiting for
Speaker 6: this for a while and so far it hasn't happened
Speaker 6: as far as the medium it's concerned.
Speaker 2: You're a precise man and very careful with your words
Speaker 2: when you say we're in restrictive and significantly so what
Speaker 2: guides that? Where does that come from?
Speaker 6: I think all models of neutral rates and they're all
Speaker 6: pretty imprecise.
Speaker 4: This is not precise.
Speaker 6: There are many different models, each of them has a
Speaker 6: significant amount of error. But you're going to be hard
Speaker 6: pressed finding a model that says three percent plus on
Speaker 6: the real rate on the real funds rate is neutral.
Speaker 6: So it's really guided by a variety of different models,
Speaker 6: some developed at the FED, some developed elsewhere. That's say,
Speaker 6: we're right now, we're outside that range of uncertainty.
Speaker 4: Can I ask you this question then?
Speaker 2: If I was a first year intern at government Sachs,
Speaker 2: I'd create a model really quickly and I'd say, yeah,
Speaker 2: unemployment sat to four percent, equities real time highs, and
Speaker 2: credits threads are super tight. Why is that a bad
Speaker 2: model to sit here and say that, maybe we're not
Speaker 2: restrictive at all.
Speaker 6: Well, in the so this kind of short run and
Speaker 6: long run So I don't think that the current level
Speaker 6: is very problematic in terms of meia term growth. And
Speaker 6: as you know, all forecast on growth is well above
Speaker 6: the consensus and you know continues to be. But over time,
Speaker 6: once the kind of short term moves in financial conditions,
Speaker 6: short term moves in fiscal policy, and other forces play
Speaker 6: themselves out, I think it's pretty clear that the current
Speaker 6: level is above normal kind of neutral levels, and so
Speaker 6: over the medium term, it's very likely that we will
Speaker 6: see declines and rates, but the time path is going
Speaker 6: to be hided by the data.
Speaker 3: So you don't think it'll be important for j. Powell
Speaker 3: to push back against some of the record highs on
Speaker 3: stocks and some of the tightening and credit spreads.
Speaker 6: Well, you would never comment on, you know, near to
Speaker 6: our market moves, of course.
Speaker 2: So you say that, But actually I remember that meeting
Speaker 2: where that journalist and this an honest mistake said to
Speaker 2: Power that markets were rallying, and I remember his response
Speaker 2: to it in the news conference, and we'll talk to
Speaker 2: I think it was Jim Bianco Pianca Research that called
Speaker 2: it POW's hawkish hits. He just came out, and the
Speaker 2: hawkish tone that he used once he thought that markets
Speaker 2: were going against what the Federal Reserve was trying to
Speaker 2: guide them to. I think it was pretty stark, strong,
Speaker 2: maybe profound. Why isn't that an option he could take
Speaker 2: today in the face of CPR is coming in pretty hot,
Speaker 2: we've taken out cuts and this market's off to the
Speaker 2: racist Why wouldn't that be something he'd be concerned by I.
Speaker 6: Don't think it's the problem because he's not. I don't
Speaker 6: think he's trying to slough things slow things down significantly.
Speaker 6: I mean, the unemployment rate has drifted up somewhat. You know,
Speaker 6: we're still seeing rebalancing and job openings. The quits rates
Speaker 6: coming down in FLEA is going down the Yeah, the
Speaker 6: sequential numbers have been a little higher, but the year
Speaker 6: on year rate has continued to come down. I don't
Speaker 6: think he's going to be particularly worried about having to
Speaker 6: squeeze the economy. He can respond to surprise us by
Speaker 6: delivering cuts a little bit later, delivering cuts a little
Speaker 6: bit earlier. But I don't think he's he's it's in
Speaker 6: a very different situation from where we were a year ago.
Speaker 2: Certain identified too, and it's implicit in your forecast. And
Speaker 2: you're right to point out that your growth forecasts have
Speaker 2: been above the street ever since you came out with
Speaker 2: your round. Look, strong growth doesn't appear to be a
Speaker 2: problem to the Federal Reserve.
Speaker 4: Why is that?
Speaker 2: What is different about this moment?
Speaker 6: Well, because I think inflation is much lower and it's
Speaker 6: heading down, and the year on year rate is still
Speaker 6: heading down. The labor market is much closer to balance.
Speaker 6: So the you know, inflation expectations have continued.
Speaker 4: To come down. They've now originally normalized.
Speaker 6: So all the things that fed officials who were very
Speaker 6: worried about a year and a half ago that you'd
Speaker 6: get un anchoring up inflation expectations, you'd get a wage
Speaker 6: price spiral. I think a lot of those things have
Speaker 6: moved into the rearview mirror, and so therefore they are
Speaker 6: much less concerned about easier financial conditions. They'll still be
Speaker 6: relevant for setting policy, but they're going to be much
Speaker 6: less of a concern than maybe in this episode that
Speaker 6: you mentioned.
Speaker 2: Yeah, and this was great, So it's fantastic catch up.
Speaker 2: So it's been too long. It's going to see you.
Speaker 4: Thank you.
Speaker 2: Jan Haasis there of government sex, breaking down his outlook
Speaker 2: for the Federal Reserve, and this economy. This is the
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