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Speaker 1: Welcome to the Bloombergs Surveillance Podcast. I'm Tom Keane, along

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Speaker 1: with Jonathan Ferrell and Lisa Brownowitz Jaily. We bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,

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Speaker 1: and of course on the Bloomberg terminal. Right now, I

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Speaker 1: am so pleased to say we can head over to

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Speaker 1: the New York Fed Bloombergs Kathleen Hayes there with one

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Speaker 1: of the leadership members of the Federal Reserve of New

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Speaker 1: York FED, President John Williams, to answer some of those questions. Kathleen, Lisa,

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Speaker 1: thank you, President Williams, thank you for joining us this

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Speaker 1: morning on Blombrig Television. So happy to have you here.

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Speaker 1: We are in the New York Fed Museum in a

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Speaker 1: year when the Fed has been making a lot of history.

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Speaker 1: So let's start with the meeting this week and what

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Speaker 1: came out of it. Because we got the you know,

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Speaker 1: the move up in the to the restrictive rate that

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Speaker 1: was even more restrictive than people thought, and inflation has

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Speaker 1: stayed high. It's hard to get down, probably harder than

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Speaker 1: you thought it would just a few months ago with

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Speaker 1: these dots, with this position, Now, do you think you

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Speaker 1: finally caught up to where you need to be? Well,

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Speaker 1: I think we're well on our way there. And I

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Speaker 1: think when you look at the kind of the central

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Speaker 1: tendency of the dots, Uh, my colleagues expect the Fed

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Speaker 1: funds rate to get to say five to five and

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Speaker 1: a half percent next year. I think that's a that

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Speaker 1: gets us into that hopefully sufficiently restrictive stance of policy

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Speaker 1: that we'll bring inflation back to two percent. So I

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Speaker 1: am getting increasingly confident that we're getting closer to that point.

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Speaker 1: But obviously we have to watch the data. The inflation

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Speaker 1: and other data have surprised this and we need to

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Speaker 1: be on the lookout for that. But I do feel

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Speaker 1: we're getting to a better place now. Just about two

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Speaker 1: weeks ago, you said that the dead funds rate has

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Speaker 1: to get above the inflation rate to bring down inflation.

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Speaker 1: How far above inflation does it have to get? Well,

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Speaker 1: that that's the question, right, And why we talk about

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Speaker 1: this is in terms of sufficiently restrictive to bring inflation

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Speaker 1: back to two percent. So to me, it's really about

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Speaker 1: getting in high enough and of course keeping it high

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Speaker 1: for a while, for enough time to really see clear

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Speaker 1: science inflation is moving back down on on the way

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Speaker 1: to two percent. You know. My view is you have

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Speaker 1: to think about real interest rates. As you said, if

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Speaker 1: you look at again the median dots, if you will,

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Speaker 1: in the in the economic projections we just put out,

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Speaker 1: you see the real Fed funds right, say, the Fed

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Speaker 1: funds right minus the core pc inflation around one and

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Speaker 1: a half percent. I think that's a reasonable view restrictive. Again,

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Speaker 1: whether it's sufficiently restrictive, we'll have to watch the data

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Speaker 1: and see. But I think that's to me basically where

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Speaker 1: where I'm thinking right now, there's many top economist, former

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Speaker 1: Fed officials even who are saying, you're look, it's looking

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Speaker 1: more and more like you are going to have to

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Speaker 1: go higher even than where you are now, maybe something

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Speaker 1: like six maybe something heading towards seven percent. Uh, can

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Speaker 1: you see the happening and what what circumstances, what would

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Speaker 1: be happening for that? Do you have to go ahead

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Speaker 1: like that? Well, that's definitely not my baseline, is I

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Speaker 1: just indicated. I don't think we'll need to get real

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Speaker 1: interest rates that high, But of course things could happen

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Speaker 1: differently than than we expect and would have to especially

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Speaker 1: around inflation, but also how how strong is the economy

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Speaker 1: even with higher interest rates? Does he do we still

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Speaker 1: have these imbalances between supply and demand right now, I

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Speaker 1: mean PC inflation is six percent or less twelve months,

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Speaker 1: and we have clear science and demand exceeds supply in

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Speaker 1: our economy and our labor markets. So to me, the

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Speaker 1: question of how high we have to get to is

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Speaker 1: really get to pend on what we see in inflation

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Speaker 1: and the supply demand in balance, and in my base cases,

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Speaker 1: we don't have to get that high. I think we

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Speaker 1: have some favorable developments underway, things that we've been talking

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Speaker 1: about for a long time. Supply chains definitely are getting

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Speaker 1: better around the world. We're seeing that in a lot

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Speaker 1: of different data. And we're also seeing, you know, some

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Speaker 1: of the goods prices and import prices come down, a

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Speaker 1: reversal of some of those of pandemic era thing that

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Speaker 1: pushed up inflation. So we've got a few factors. I

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Speaker 1: think you're gonna bring inflation down to three to three

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Speaker 1: and a half percent next year, um. But then the

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Speaker 1: real issue is how do we get it all the

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Speaker 1: way too, of course is but right there though, is

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Speaker 1: the message from Wednesday that and and this ties in

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Speaker 1: with you maybe if you we might have to go higher.

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Speaker 1: Is the message that if it's not coming down as

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Speaker 1: we expect, then we are clearly open to going higher.

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Speaker 1: Taking the next step, well, we're gonna have to do

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Speaker 1: what's necessary against sufficiently restrictive to bring inflation down to

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Speaker 1: two percent, and it could be higher than what we've

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Speaker 1: written down. And we have had to increase our interest

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Speaker 1: rate projections as the data come in. The inflation has

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Speaker 1: been stubbornly highest, you know, many people have said, and

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Speaker 1: we've seen the economy remain very resilient to higher interest rates. Remember,

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Speaker 1: the unemployment rate is three point seven. Some signs are

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Speaker 1: slowing demand for labor, but still a very very strong

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Speaker 1: uh imbalance between supply and demand right now. You know,

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Speaker 1: there were two surprisingly good CPI reports going in to

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Speaker 1: this meeting, and so a lot of people thought, well,

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Speaker 1: that good news for the Fed. You know, maybe they're

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Speaker 1: not going to be quite as aggressive. Um. But at

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Speaker 1: the same time, what happened inflation forecast boom goes up.

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Speaker 1: How did this happen? What's guiding your view on inflation. Again,

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Speaker 1: two good surprises on CPI and yet the the PC

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Speaker 1: core core and PC overall still can expected a rise

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Speaker 1: right and again relative to say or earlier projections in September.

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Speaker 1: The you know, I think that you really have to

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Speaker 1: think about what's happening in the inflation data. So we

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Speaker 1: are seeing good news. I like good news on inflation reports.

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Speaker 1: A lot of that's in the goods areas and some

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Speaker 1: of the areas we've been long expecting those inflation rates

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Speaker 1: to come down, so that wasn't so, you know, that's

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Speaker 1: something that we've been expecting to see as part of

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Speaker 1: the baseline forecast. Where inflation is still high is in

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Speaker 1: these core services areas, the areas that you know are

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Speaker 1: probably going to be more persistent and really reflect the

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Speaker 1: imbalance between supplying demand in the labor market in our

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Speaker 1: overall economy. So sure, we're are seeing some good signs

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Speaker 1: on goods and some other categories. I'm also seeing some

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Speaker 1: good signs in the in the rents for new leases

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Speaker 1: of apartments and houses, So you know that inflation should

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Speaker 1: eventually start coming down later in the latter part next year.

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Speaker 1: But again in these other core services that inflation rate

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Speaker 1: is still high, and that really gets to how strong

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Speaker 1: the labor market is. So sure, some good news, but

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Speaker 1: the underlying issue of core core services inflation is still

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Speaker 1: very much there. Well, you know your your forecast for

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Speaker 1: unemployment next year is a big jump, right, you see

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Speaker 1: it much much weaker, up to almost full percentage point

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Speaker 1: from what you're looking at September to four point six percent.

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Speaker 1: You're looking for GDP to be much weaker than you

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Speaker 1: thought three months ago, down to zero point five percent um.

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Speaker 1: So is this the kind of forecast that is consistent

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Speaker 1: with UH a soft landing. Is it a consistent with

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Speaker 1: something maybe not quite that good? Well, I think it is.

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Speaker 1: It's an economy that's continue to grow. As you pointed out,

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Speaker 1: the median dot is a half her percent growth for

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Speaker 1: this year and for next year. So as economy that's growing, UH,

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Speaker 1: it's an economy where the unemployment rate is is rising somewhat.

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Speaker 1: As you mentioned, the meeting will be at four point

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Speaker 1: six percent of the end of next year. So I

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Speaker 1: don't see this as a recession. We're clearly not a

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Speaker 1: recession right now based on the data. It is an

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Speaker 1: economy that is growing only modestly, and I think it's

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Speaker 1: an economy that's really seen. Uh, the imbalance eats between

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Speaker 1: supplying demand diminishing inflation coming down. Is the retail sales.

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Speaker 1: We're weak across the board pretty much. Uh. Is this

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Speaker 1: a canary in the cold mine for where the economy

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Speaker 1: is heading and a part of the colom you want

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Speaker 1: to get filed demand down? Is this maybe an early

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Speaker 1: sign that you're succeeding. But we have to look at

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Speaker 1: all the data on that. And obviously where we're seeing

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Speaker 1: the science of the economy slowing is in the housing

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Speaker 1: sector and now in manufacturing. Consumer spanning has been kind

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Speaker 1: of jumping around a bit months and months and months

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Speaker 1: quarter to quarter. It's actually been more up until this

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Speaker 1: latest data, more resilient perhaps, and I was expecting. So

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Speaker 1: we just have to, you know, go through all that

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Speaker 1: data and really the kind of the underlying strength in

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Speaker 1: the economy. That data doesn't change my basic view that

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Speaker 1: we're going to have an economy growing modestly over the

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Speaker 1: next year. You know, you're talking about the services ex

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Speaker 1: housing right course, services X housing is that it seems

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Speaker 1: like it's the key indicator. Now we have to see

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Speaker 1: that coming down for the pad to be convinced that

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Speaker 1: inflation is moving in the right direction. Well, I think

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Speaker 1: that is it is most closely related in many ways

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Speaker 1: to the state of the labor market into domestic price pressures.

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Speaker 1: Some of these other categories, which of course are part

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Speaker 1: of the inflation index. We don't ignore any of them,

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Speaker 1: but they really are about the special factors our prices

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Speaker 1: that skyrocketed, transportation costs and things like that. And then

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Speaker 1: I think the housing market, we're always seeing some good

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Speaker 1: indicators eventually of that coming down. So this is the

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Speaker 1: area that that's not coming down, and we definitely needed

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Speaker 1: to see it coming down to get to that two

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Speaker 1: percent inflation goal. So a lot of focus on labor

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Speaker 1: and wages in that part of it, right, That's that's

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Speaker 1: what's important. That's what Pow pointed out this week. So, uh,

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Speaker 1: do you think that there are signs of a wage

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Speaker 1: price spiral right now? Is that one of your concerns again?

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Speaker 1: And when you look at cp C guys coming down,

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Speaker 1: that's good news, but boy oh boy, that the trend

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Speaker 1: is still too much up for us. So I don't

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Speaker 1: see any signs of a wage price spiral of the

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Speaker 1: kind that we saw in the seventies. A couple data

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Speaker 1: points at point to one is UH inflation expectations have

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Speaker 1: been coming down. They've been really well anchored for longer

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Speaker 1: run expectations. But we've also seen in New York Fed

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Speaker 1: survey and in the Michigan survey shorter term inflation expectations

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Speaker 1: coming down. So I think that we're not seeing that

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Speaker 1: kind of dynamic kicking of people expecting higher inflation demanding

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Speaker 1: higher wage increases because of that. The other is, you know,

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Speaker 1: I really see wages is kind of the barometer, one

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Speaker 1: of the barometers of the strength of the labor market

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Speaker 1: about demand and supply. I think wage growth has been

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Speaker 1: very high because labor demand has been really strong relative

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Speaker 1: available available supply. Is labor demand and supply get better

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Speaker 1: and better balance, I think, you know, the wage gains

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Speaker 1: will be more inconsistent with will be more consisting and

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Speaker 1: with longer term trans and or two percent. What do

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Speaker 1: you make of the the Southwest Airlines contract? It was

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Speaker 1: just signed. They're going to get increase in wages over

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Speaker 1: the next when is it five years? Four years? Excuse me? Uh?

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Speaker 1: Is that a concern? Well, you know, we're seeing a

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Speaker 1: lot of adjustment and wages for around the country. I'm

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Speaker 1: not going to point to any specific one. I mean again,

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Speaker 1: wage increases right now, given to where inflation has been,

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Speaker 1: given where the labor market is are, are still quite

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Speaker 1: high um, and so we're watching those indicators. To me,

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Speaker 1: it's really what tracking how the economy does over the

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Speaker 1: next year labor demands, supplying wages, not focus on financial conditions.

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Speaker 1: Chairpile noting that the markets and the feder seemed be

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Speaker 1: working at cross purposes all the time lately. Are you

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Speaker 1: concerned about this push pull between the FED and where

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Speaker 1: it's trying to lead and h where the markets want

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Speaker 1: to go? Well, I, you know, I think we need

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Speaker 1: to be and we are being clear on what we're

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Speaker 1: trying to, what we're going to achieve, uh, and how

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Speaker 1: we're going to achieve it. I think that you know,

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Speaker 1: the economic projections and the dot plot we put out

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Speaker 1: provided a nice roadmap of how we're seeing the economy

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Speaker 1: and Monte policy over the next couple of years. UH.

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Speaker 1: And obviously financial conditions depend on a lot of other

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Speaker 1: things than just Monterey policy. So I always look at

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Speaker 1: a broad set of Monte Poulse sorry financial conditions understand

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Speaker 1: how that feeds into our outlook right now. I know

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Speaker 1: that you know a lot of some market participants clearly

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Speaker 1: are more optimistic about inflation coming down. I look at

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Speaker 1: the real interest rates implied by that. I think pretty

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Speaker 1: much everyone understands that real interest rates need to get

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Speaker 1: restrictive and stay there. Is that an issue for the

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Speaker 1: Fed though, when you're trying to um you're trying to

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Speaker 1: move policy in a certain direction, right, you want to

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Speaker 1: tighten and if the market's rally and then findtional financial

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Speaker 1: conditions softened for whatever interpretation the markets are taking, is

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Speaker 1: that an issue. Does that make the job harder? Doesn't

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Speaker 1: make the job hard harder. But it's just another one

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Speaker 1: of those factors like that. You know, what's happening in

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Speaker 1: the global economy, a lot of things that have to

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Speaker 1: feed into our view of where the economy is going

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Speaker 1: and then what we need to do. Clearly, to the

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Speaker 1: extent that you know, financial conditions have tightened quite a bit,

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Speaker 1: consisting the past year, consistent with our moving to towards

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Speaker 1: the restrictives or to a restrictive stance of policy. That's

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Speaker 1: an important part of the transmission of Monterey policy of

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Speaker 1: the economy. In keeping with that, I want to ask

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Speaker 1: you one last question, because there's this We're hearing this

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Speaker 1: a lot, that the FED let inflation get out of

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Speaker 1: control for whatever reason, and that this may have eroded

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Speaker 1: the credibility that fed with the market. So how do

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Speaker 1: you respond to that. Well, we're absolutely committed to getting

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Speaker 1: inflation back to our two percent goal, UH, and we're

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Speaker 1: acting in that way. I think we're communicating in that way.

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Speaker 1: So I don't think we've lost the credibility, of course

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Speaker 1: at all. I do think that, you know, we are

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Speaker 1: completely united in our focus on getting inflation back to

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Speaker 1: two percent. We've taken extraordinarily strong UH policy actions over

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Speaker 1: the past year, and as we've shown, we're going to

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Speaker 1: continue to take the actions are needed to get inflation

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Speaker 1: back to two percent. Price stability is absolutely essential for

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Speaker 1: a strong economy in the long run. We need to

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Speaker 1: get that done and we will. All Right, Well, here

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Speaker 1: it comes President John Williams. Thank you so much for

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Speaker 1: joining us today. Thank you, Okay, Lisa, back to you.

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Speaker 1: Great Where Kathleen Hayes with John Williams of the New

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Speaker 1: York Federal Reserve. Ye're joining us now. Embody Rodman Co

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Speaker 1: Chief investment strategist that John Hancock Investment Management. Embody fantastic

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Speaker 1: to catch up with you, always is. I just want

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Speaker 1: to pick up on a theme that I know you're

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Speaker 1: dridding down on the equity bond performance this week. Emily,

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Speaker 1: you've picked up on it as well. What's it telling you?

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Speaker 1: It's actually pretty refreshing to see the diversification is working again.

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Speaker 1: You have stocks down on the week, bonds up on

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Speaker 1: the week, and that's the type of reaction that makes

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Speaker 1: sense to us. Markets have almost been in this state

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Speaker 1: of being comfortably numb, given the fact that central banks

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Speaker 1: are implementing the most tightening that we've seen in the generation.

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Speaker 1: The economic data are suggesting that the global recession is

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Speaker 1: likely into three. The yield curve is wildly inverted to

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Speaker 1: the tune of seventy eight basis points, and earnings are

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Speaker 1: starting to come off. Those are all things to us

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Speaker 1: suggested a recession is likely, and we've seen cyclical areas

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Speaker 1: of the market showing leadership. We've seen European equities having

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Speaker 1: their best quarter. They're they're one of their best quarters

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Speaker 1: in years, and a lot of that cross asset performance

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Speaker 1: to us just hadn't been driving with the macroeconomic backdrops.

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Speaker 1: And we're starting to feel a little bit better that

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Speaker 1: things are working as they should. But Emily, this goes

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Speaker 1: against this idea that perhaps we have to have a

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Speaker 1: different playbook this time around. And this is what we've

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Speaker 1: been talking about for a number of weeks now that

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Speaker 1: we're not necessarily going back to the pre pandemic investment

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Speaker 1: thesis where if something goes wrong, central banks lower rates

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Speaker 1: and that fuels a risk rally. So does it make

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Speaker 1: sense to you that the relationship between stocks and bonds

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Speaker 1: is reverting back to something that has been traditionally at

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Speaker 1: a time when nothing about this moment is traditional. Yeah,

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Speaker 1: I mean we think that the playbook is really you know,

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Speaker 1: you can't be that are still rely on history here,

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Speaker 1: and we do think that given the fact that the

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Speaker 1: economy is likely to contract next year, central banks ultimately

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Speaker 1: will be cutting in the back half of next year,

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Speaker 1: so we want to be positioned for that. We want

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Speaker 1: to lean into bonds here. We like the idea that

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Speaker 1: bonds are working in a portfolio. And you know, Matt

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Speaker 1: MSK and I have been talking a lot about the

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Speaker 1: fact that income is very attractive and very competitive versus

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Speaker 1: other parts of the market. So we do think that

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Speaker 1: that playbook comes through again into next year, but it's

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Speaker 1: gonna take some time. The FED has been incredibly just

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Speaker 1: dogmatic in their approach to fighting inflation. We've heard it

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Speaker 1: time and time again, but we know that the FED

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Speaker 1: is looking at lagging economic data, employment inflation, especially services inflation.

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Speaker 1: Many of your guests have talked about the fact that

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Speaker 1: it's very, very sticky, and it's probably going to be

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Speaker 1: too late for the FED to really sort of reverse

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Speaker 1: course quickly into next year. They're going to cause this

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Speaker 1: economic slowdown and then they're going to have to cut

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Speaker 1: so soft the supermaan and this is something that John

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Speaker 1: has been talking about really pointed out that there still

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Speaker 1: is this feeling that if that is the playbook, then

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Speaker 1: go into big tech, and that's what so many people

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Speaker 1: are doing. And she pushes back against that and says

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Speaker 1: that doesn't necessarily seem like the prudent play Where do

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Speaker 1: you feel on the leadership on which are the stocks

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Speaker 1: that can continue to drive upward some of the equity

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Speaker 1: performance at a time. If we're reverting back to a

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Speaker 1: playbook that's familiar, Yeah, I would agree the playbook from

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Speaker 1: a cross asset perspective within equities might be a little

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Speaker 1: bit different this time. It was always that, you know,

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Speaker 1: we look to growth stocks. We wanted companies that were

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Speaker 1: able to you know, produce that organic growth in a

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Speaker 1: slowing backdrop. And now we're not really seeing that. A

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Speaker 1: lot of the growth in technology stocks was pulled forward

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Speaker 1: during the height of the pandemic. Think about all this

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Speaker 1: stuff that we bought, whether it was online shopping or

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Speaker 1: you know, conferencing tools or laptops for the kids. A

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Speaker 1: lot of that growth in demand was pulled forward. And

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Speaker 1: so we're seeing this period in which the batta on

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Speaker 1: is being handed over to the old economy. You know,

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Speaker 1: we look at the value side of the house, which

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Speaker 1: is showing some resilience here. So we want to be

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Speaker 1: thoughtful about where we're going in growth. Where we're going

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Speaker 1: in value areas like healthcare one of our favorite sectors,

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Speaker 1: very high quality, great balance sheets, cash on their balance sheets,

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Speaker 1: organic growth drivers. But we also like your kind of

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Speaker 1: classic S and P five hundred tech companies, ones with

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Speaker 1: a lot of cash. We don't want to own companies

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Speaker 1: that need to tap the capital markets in order to grow.

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Speaker 1: We don't want to own unprofitable technology companies In this environment.

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Speaker 1: But but some areas, carefully selected areas of the technology

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Speaker 1: complex to us still makes sense paired with value. So Emily,

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Speaker 1: one thing that you've said is that for the most part,

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Speaker 1: equities are not acting like a recession is coming. Can

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Speaker 1: I ask you where you would look for that and

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Speaker 1: why you think we are further along in the adjustment process,

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Speaker 1: perhaps relative to other parts of the equity market. Yeah,

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Speaker 1: it is so amazing to see this rerating in stocks

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Speaker 1: that began at the beginning of the quarter. We saw, Uh,

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Speaker 1: the SMP five hundred started fifteen times forward earnings and

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Speaker 1: now we're trading it around seventeen and a half, which

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Speaker 1: is means that stocks are now more expensive than their

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Speaker 1: twenty year average. So we've seen this big rerating, especially

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Speaker 1: in more cyclical economically sensitive areas of the market. Energy

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Speaker 1: stocks doing better even with oil prices coming down a bit,

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Speaker 1: pretty notable dynamic here. So we would look to find

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Speaker 1: areas that are already price for a recession. There aren't many.

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Speaker 1: We Matt and I have used the analogy of there's

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Speaker 1: an equity store and a bond store for your for

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Speaker 1: your Christmas shopping, and you know the equity store, there's

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Speaker 1: not very much on sale areas like MidCap value stocks,

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Speaker 1: we like they're treating at a steep discount already at

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Speaker 1: two thousand and eight two thousand nine levels. But the

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Speaker 1: fixed income store, there's where a lot of the opportunity

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Speaker 1: where a lot of the bargains are. You look at

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Speaker 1: investment grade corporate bonds seeing this big price decline similar

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Speaker 1: to a weight oh nine levels, we like that. We

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Speaker 1: like the income there, the total return potential. So and

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Speaker 1: favoring the bond store over the equity store during this

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Speaker 1: holiday shopping. When you were a kid and your parents

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Speaker 1: would say, you can't get anything from there, and that's

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Speaker 1: where you wanted to shop. It was the toys, they're expensive,

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Speaker 1: and then your parents came along and said, you've got

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Speaker 1: to get that. You need a new coat. I feel

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Speaker 1: like that's what Emny Rolands telling me right now. It's like,

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Speaker 1: don't look his stocks, go to the bond store. Who

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Speaker 1: wants to shop at the bond store? No one's wanted

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Speaker 1: to shop there for ten years. What was the most

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Speaker 1: disappointing gift you've ever gotten? When I was a kid,

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Speaker 1: I didn't like getting clothes. It's very against clothes. And

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Speaker 1: I remember my Nan turning around to me and saying, John,

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Speaker 1: in twenty years time, this is all you want. You

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Speaker 1: just want nice clothes. You won't want toys. And it's like, yeah,

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Speaker 1: but I'm not, you know, but I'm still. This is clothes.

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Speaker 1: God bless her. So please, if you're listening, clothes, clothes now,

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Speaker 1: love clothes. And although I was thinking the other day,

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Speaker 1: you know what, I'd love a toy car for this Christmas,

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Speaker 1: just a remote controlled one. I'd love that. I'm thinking about.

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Speaker 1: I'm thinking about for the apartment. You're absolutely serious. I'm

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Speaker 1: thinking about buying one for the heartman, I want like

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Speaker 1: a toy Ferrari, like a Formula one car with a

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Speaker 1: remote control you build like a little set. Because when

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Speaker 1: I was a kid and I had a toy car

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Speaker 1: had that cable attached to it, remember that you have

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Speaker 1: to look sort of follow it because it wasn't. I

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Speaker 1: want a proper one, like a really fast one. I'm

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Speaker 1: going to go into Central Part with Tom and play

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Speaker 1: with it. We never said thanks to Emily. Emily, thank

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Speaker 1: you have a wonderful Christmas. Let's get to Savantra Jappa.

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Speaker 1: How do us rate strategy at so Jen Sapatra? Your

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Speaker 1: quote from your piece last night, Can I say it

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Speaker 1: was great by the way, I had good read of it.

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Speaker 1: Pal stuck to his script of higher for longer after

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Speaker 1: delivering a fifty basis point hiker hawk is shifting the

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Speaker 1: dop plot failed to nudge yield higher. You went on

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Speaker 1: to say, though, and I think this is real pushback

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Speaker 1: from the consensus for you going into twenty three, we

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Speaker 1: expect a modest rise in yields in Q one as

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Speaker 1: central banks deliver more hikes. Sapantra, can we start there?

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Speaker 1: What do you think other people are missing going into

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Speaker 1: next year? Well, I think the price right now is

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Speaker 1: not reflective of what we should expect next year. You're

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Speaker 1: getting into the r en. Liquidity is very poor. People

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Speaker 1: are paring bad positions. But you're looking at you know,

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Speaker 1: the Bank of England, your poister deliver another fifty basis

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Speaker 1: point rate high. The e c BS, you know, perhaps

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Speaker 1: gonna deliver another fifty basis point rate high. So global

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Speaker 1: center backs broadly speaking, are still going to remain somewhat

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Speaker 1: hawkish for at least the first quarter to first half

431
00:21:25,119 --> 00:21:28,480
Speaker 1: of next year. So under those circumstances, I don't see

432
00:21:28,480 --> 00:21:31,879
Speaker 1: why we know yields can't adjust modestly here. I'm not

433
00:21:31,960 --> 00:21:34,399
Speaker 1: calling for a significantly higher yields, but I think if

434
00:21:34,400 --> 00:21:36,919
Speaker 1: you get towards maybe three seventy five or four percent,

435
00:21:37,440 --> 00:21:41,280
Speaker 1: that's not, you know, necessarily out of the realm of reason.

436
00:21:41,359 --> 00:21:43,919
Speaker 1: I feel like the market is, especially tenny years are

437
00:21:44,000 --> 00:21:46,560
Speaker 1: very rich as they stand right now at three fifty.

438
00:21:46,640 --> 00:21:48,000
Speaker 1: So can we talk about the front end as well?

439
00:21:48,040 --> 00:21:49,320
Speaker 1: It's just so I can get a better idea of

440
00:21:49,359 --> 00:21:51,040
Speaker 1: where you think the curve is going to be, how

441
00:21:51,080 --> 00:21:53,600
Speaker 1: you think that's going to evolve next year two? Right now?

442
00:21:54,240 --> 00:21:57,600
Speaker 1: How are you thinking about that? Spatra, Well, I don't

443
00:21:57,600 --> 00:21:59,359
Speaker 1: think the front end has a lot more room to

444
00:21:59,520 --> 00:22:05,520
Speaker 1: rise unless we expect um the FED to hike beyond

445
00:22:05,560 --> 00:22:08,080
Speaker 1: five and a quarter percent. But on the long end,

446
00:22:08,119 --> 00:22:10,119
Speaker 1: the dynamics are very different. You're going to see a

447
00:22:10,200 --> 00:22:13,040
Speaker 1: lot of corporate issuants come into the market. You're going

448
00:22:13,119 --> 00:22:16,960
Speaker 1: to see perhaps you know, more EMN treasury issuance. Typically

449
00:22:17,040 --> 00:22:19,720
Speaker 1: those tend to at least support a little bit of

450
00:22:19,760 --> 00:22:22,359
Speaker 1: a bearish momentum to that. Add add the fact that

451
00:22:22,400 --> 00:22:25,240
Speaker 1: I think burns have more yields, so bond yields have

452
00:22:25,359 --> 00:22:28,080
Speaker 1: more room to rise. I think that Tenney yields could

453
00:22:28,240 --> 00:22:30,840
Speaker 1: see a push higher at least in the first quarter

454
00:22:30,920 --> 00:22:33,840
Speaker 1: before we start seeing yields decline in the second half.

455
00:22:35,080 --> 00:22:37,720
Speaker 1: I completely by what you're saying, So does the Federal Reserve.

456
00:22:37,800 --> 00:22:40,199
Speaker 1: This is what the Fed is basically telling the market

457
00:22:40,320 --> 00:22:43,639
Speaker 1: is going to happen. Why are so many people pushing back?

458
00:22:45,440 --> 00:22:49,280
Speaker 1: I think there's a concern about a recession in the US.

459
00:22:49,320 --> 00:22:53,000
Speaker 1: To me, those concerns are a little bit premature. At SATAN,

460
00:22:53,200 --> 00:22:55,040
Speaker 1: we have a little bit of an out of consensus

461
00:22:55,119 --> 00:22:58,120
Speaker 1: view the recession of the US. We think that's early

462
00:22:59,240 --> 00:23:02,960
Speaker 1: and then it's not a event. So my real concern

463
00:23:03,080 --> 00:23:05,400
Speaker 1: is that the market is not fully appreciating the fact

464
00:23:05,440 --> 00:23:09,160
Speaker 1: that come middle of next year, if the unemployment rate

465
00:23:09,240 --> 00:23:12,080
Speaker 1: is not heading towards four percent, we're still stuck at

466
00:23:12,080 --> 00:23:14,879
Speaker 1: say three point seven three point eight, and wages are

467
00:23:14,880 --> 00:23:17,520
Speaker 1: still pretty strong, the Fed might have to go beyond

468
00:23:17,600 --> 00:23:19,280
Speaker 1: five and a quarter. I'm not saying that that's our

469
00:23:19,600 --> 00:23:21,960
Speaker 1: base case scenario, but that's a risk scenario that the

470
00:23:22,040 --> 00:23:25,440
Speaker 1: market is not fully appreciating. What's your base scenarios to

471
00:23:25,560 --> 00:23:27,680
Speaker 1: Badger of how long it will take to get back

472
00:23:27,680 --> 00:23:30,400
Speaker 1: to two percent inflation? Given with the FED is already signaled.

473
00:23:31,600 --> 00:23:33,760
Speaker 1: I mean, we've got the summary of economic projections from

474
00:23:33,760 --> 00:23:36,919
Speaker 1: the from the Fed. The FED doesn't expect inflation to

475
00:23:36,960 --> 00:23:40,960
Speaker 1: get to two percent. So you're looking at, you know,

476
00:23:41,359 --> 00:23:46,280
Speaker 1: a very strong trajectory towards you know, inflation remaining sticky

477
00:23:46,320 --> 00:23:49,440
Speaker 1: after that initial descent. Now we're rejoicing the initial descent.

478
00:23:49,680 --> 00:23:52,040
Speaker 1: But what if we get to maybe three percent or

479
00:23:52,080 --> 00:23:54,440
Speaker 1: three and a half percent and then inflation stays there

480
00:23:54,720 --> 00:23:57,320
Speaker 1: and it's sticky at that level. At that point, I

481
00:23:57,359 --> 00:24:00,359
Speaker 1: think the FED is still going to remain somewhat how cash,

482
00:24:00,640 --> 00:24:03,439
Speaker 1: if the employment picture is relatively strong. And there's a

483
00:24:03,440 --> 00:24:06,480
Speaker 1: good chance of the employment picture remains relatively strong given

484
00:24:06,520 --> 00:24:08,200
Speaker 1: the fact that we have such a mismatch in the

485
00:24:08,280 --> 00:24:12,760
Speaker 1: labor market between job openings and an available employee employees

486
00:24:12,840 --> 00:24:15,000
Speaker 1: to fill those jobs. So I'm not saying that the

487
00:24:15,040 --> 00:24:17,000
Speaker 1: labor market is gonna be asked tight as it is

488
00:24:17,080 --> 00:24:19,560
Speaker 1: right now next year, but I think it's good could

489
00:24:19,560 --> 00:24:22,240
Speaker 1: potentially take a lot longer for the employment picture to

490
00:24:22,359 --> 00:24:25,400
Speaker 1: weaken meaningfully from here on. Emily Rowland was speaking earlier

491
00:24:25,480 --> 00:24:27,720
Speaker 1: about the fixing income shop. There's a fixing coome shop,

492
00:24:28,080 --> 00:24:30,240
Speaker 1: and then there's the stock shop, and that the fixing

493
00:24:30,280 --> 00:24:31,680
Speaker 1: cocome shop has a lot of good things in it,

494
00:24:31,760 --> 00:24:34,400
Speaker 1: including investment grade debt because of how much it has

495
00:24:34,400 --> 00:24:36,680
Speaker 1: been sold off. That has been on rate story, though

496
00:24:36,800 --> 00:24:40,400
Speaker 1: not necessarily the credit side of things. Given your projection

497
00:24:40,440 --> 00:24:42,920
Speaker 1: that we might not get back down a two inflation

498
00:24:42,960 --> 00:24:45,239
Speaker 1: based on what the FED is looking at themselves by,

499
00:24:46,560 --> 00:24:50,280
Speaker 1: does that default rate kind of expectation, does that premium

500
00:24:50,320 --> 00:24:52,520
Speaker 1: have to rise substantially from where we are right now?

501
00:24:53,880 --> 00:24:56,400
Speaker 1: You know, our corporate strategies don't think the default rates

502
00:24:56,520 --> 00:24:58,240
Speaker 1: rise in this cycle. I think we're in a very

503
00:24:58,320 --> 00:25:02,240
Speaker 1: different environment, you know, relative to the two thousand and

504
00:25:02,280 --> 00:25:06,120
Speaker 1: eight time frame or the Great Financial Crisis. I think

505
00:25:06,160 --> 00:25:08,280
Speaker 1: companies are in a very good spot. You know, one

506
00:25:08,359 --> 00:25:11,399
Speaker 1: metric that we look at for recessions is corporate profit

507
00:25:11,440 --> 00:25:14,400
Speaker 1: margins called for profit margins are still very, very healthy.

508
00:25:14,480 --> 00:25:17,480
Speaker 1: So for the most part, under the circumstances, it's really

509
00:25:17,480 --> 00:25:20,480
Speaker 1: hard to envision a scenario whether the default rates are

510
00:25:20,480 --> 00:25:23,160
Speaker 1: going to rise meaningfully from here on. So I think

511
00:25:23,160 --> 00:25:26,000
Speaker 1: the corporate sectors, you know, relatory robots, if we get

512
00:25:26,000 --> 00:25:28,400
Speaker 1: a lot of supply next year, we're expecting a decent

513
00:25:28,400 --> 00:25:31,639
Speaker 1: amount of demand from a variety of investors because the

514
00:25:31,760 --> 00:25:36,280
Speaker 1: yield you get for holding US bonds is quite you know,

515
00:25:36,520 --> 00:25:40,359
Speaker 1: quite substantial relative to yields in other regions. So I

516
00:25:40,400 --> 00:25:42,040
Speaker 1: think for the most part, this is going to be

517
00:25:42,080 --> 00:25:44,520
Speaker 1: a bond story next year, and it's going to be

518
00:25:44,640 --> 00:25:47,720
Speaker 1: for for yield and return. So bat just one final question,

519
00:25:48,119 --> 00:25:50,560
Speaker 1: what pivot? This was the title that came from the

520
00:25:50,560 --> 00:25:52,679
Speaker 1: team of Sokin the jump out right hikes Rova. But

521
00:25:52,720 --> 00:25:55,280
Speaker 1: we are far away from a monetary policy pivot. Can

522
00:25:55,320 --> 00:25:57,800
Speaker 1: we just end on where you see terminal rights? Just

523
00:25:57,880 --> 00:25:59,359
Speaker 1: around this? I think that's a headline for a lot

524
00:25:59,400 --> 00:26:02,280
Speaker 1: of people. Where's the terminal? Right? The Fed? Where's the

525
00:26:02,359 --> 00:26:04,520
Speaker 1: terminal right? The e CP is it basically in line

526
00:26:04,520 --> 00:26:08,280
Speaker 1: with what's being priced right now? So for the for

527
00:26:08,320 --> 00:26:10,040
Speaker 1: the Fed, I think the market and the Fed are

528
00:26:10,760 --> 00:26:13,119
Speaker 1: well aligned. I mean, I think the market expects the

529
00:26:13,200 --> 00:26:15,879
Speaker 1: terminal FED funds rate maybe around five five and a

530
00:26:15,960 --> 00:26:19,080
Speaker 1: quarter percent. Maybe it's a little bit under priced right

531
00:26:19,119 --> 00:26:22,720
Speaker 1: now for next year, but not by a lot. For

532
00:26:22,760 --> 00:26:24,320
Speaker 1: the e c B, I think there's still a lot

533
00:26:24,359 --> 00:26:27,200
Speaker 1: more room for, you know, for the market pricing to

534
00:26:27,320 --> 00:26:31,480
Speaker 1: rise higher. Our economists in Europe, you know, now expect

535
00:26:31,480 --> 00:26:33,560
Speaker 1: the e c B two raise rates the three point

536
00:26:33,640 --> 00:26:36,760
Speaker 1: seven five percent, I don't think that that's fully uh

537
00:26:36,800 --> 00:26:41,960
Speaker 1: you know, priced into uh into into into the European

538
00:26:42,200 --> 00:26:45,960
Speaker 1: bound markets. So that's why we see more potential for

539
00:26:46,040 --> 00:26:48,560
Speaker 1: the treasury bond spread to narrow. I mean it's, you know,

540
00:26:48,560 --> 00:26:50,800
Speaker 1: when we put out our outlook we have the tenant

541
00:26:50,800 --> 00:26:54,159
Speaker 1: treasury bond spread around one, we were calling for it

542
00:26:54,200 --> 00:26:56,880
Speaker 1: to come to our one fifteen. Guess what this morning,

543
00:26:56,880 --> 00:26:59,400
Speaker 1: we're already in one thirty, and we still see more

544
00:26:59,480 --> 00:27:03,040
Speaker 1: room for that tragedy bon spread to narrow. So I

545
00:27:03,080 --> 00:27:06,000
Speaker 1: think that that it's it's it's quite you know, harkish

546
00:27:06,119 --> 00:27:09,120
Speaker 1: for the easyb We see more room for bunnios ries

547
00:27:09,160 --> 00:27:12,040
Speaker 1: relative to treasury. I just never ever thought they'd go

548
00:27:12,160 --> 00:27:15,040
Speaker 1: this far, no way, not even nine months ago, six

549
00:27:15,080 --> 00:27:17,439
Speaker 1: months ago. I never thought they'd go this fast. Patrick,

550
00:27:17,520 --> 00:27:19,919
Speaker 1: thank you wonderful summary of the last week or so.

551
00:27:19,960 --> 00:27:22,320
Speaker 1: Looking ahead to twenty three as well, So Batra Shaper

552
00:27:22,320 --> 00:27:35,640
Speaker 1: of sock Jen, there's a lot of people bunched around

553
00:27:35,680 --> 00:27:38,040
Speaker 1: four k, So be thankful that our next guest is

554
00:27:38,040 --> 00:27:41,600
Speaker 1: saying something a little bit different. Seventy five. It's Sam

555
00:27:41,640 --> 00:27:45,000
Speaker 1: Stovall A's cfr Ray, So Sam walked me through why

556
00:27:45,119 --> 00:27:48,119
Speaker 1: Ultimately you're a lot more bullish than the bulk of

557
00:27:48,160 --> 00:27:52,879
Speaker 1: the street going into twenty three. Hey, Jonathan and Lisa, Well,

558
00:27:52,920 --> 00:27:55,560
Speaker 1: I guess some could accuse me of being a Pollyanna.

559
00:27:56,320 --> 00:27:58,280
Speaker 1: I like to say that when life gives me lemons,

560
00:27:58,320 --> 00:28:01,280
Speaker 1: I try to make whiskey sours. What I'm looking at

561
00:28:01,520 --> 00:28:04,640
Speaker 1: is the expectation that we are likely to fall into

562
00:28:04,720 --> 00:28:07,359
Speaker 1: a recession. I mean, I'm saying right now that like

563
00:28:07,440 --> 00:28:11,560
Speaker 1: a deflating holiday lawn ornament, the Powell press conference and

564
00:28:11,640 --> 00:28:15,840
Speaker 1: today's Goldman news have drained investor hopes of avoiding a recession.

565
00:28:16,119 --> 00:28:18,720
Speaker 1: But I think it's going to be a mild recession.

566
00:28:19,000 --> 00:28:21,440
Speaker 1: I do think the Fed will continue to raise rates

567
00:28:21,440 --> 00:28:24,359
Speaker 1: through the first quarter, but then I'm reminded of history

568
00:28:24,440 --> 00:28:27,440
Speaker 1: saying that on average, eight and a half months after

569
00:28:27,520 --> 00:28:30,639
Speaker 1: the last rate hike, we see the Feds starting to

570
00:28:30,720 --> 00:28:33,320
Speaker 1: cut rates. So if we do end up seeing this

571
00:28:33,480 --> 00:28:38,440
Speaker 1: economy getting weaker than is expected now by the street,

572
00:28:38,480 --> 00:28:42,320
Speaker 1: and also seeing what the Fed responds to, I think

573
00:28:42,360 --> 00:28:46,120
Speaker 1: investors will be looking across the valley into the second

574
00:28:46,160 --> 00:28:49,800
Speaker 1: half of three and that's where we end up seeing

575
00:28:49,800 --> 00:28:53,840
Speaker 1: an upward movement, and the real year end target also

576
00:28:53,960 --> 00:28:58,120
Speaker 1: depends on whether we simply retest the thirty low on

577
00:28:58,160 --> 00:29:01,120
Speaker 1: October twelve or we set and even lower low. So

578
00:29:01,160 --> 00:29:04,960
Speaker 1: what is your down side in the first half UM downside?

579
00:29:05,000 --> 00:29:07,880
Speaker 1: I'm thinking thirty five hundred for the SMP five hundred,

580
00:29:07,920 --> 00:29:11,280
Speaker 1: that is the UM October twelfth low. It is a

581
00:29:11,320 --> 00:29:16,800
Speaker 1: Fibonacci retreacement level of the prior UM bullmarket move UM.

582
00:29:16,840 --> 00:29:19,280
Speaker 1: And also I think that that was an area of

583
00:29:19,640 --> 00:29:24,080
Speaker 1: significant support. Uh. And so that is my first level. So, Sam,

584
00:29:24,120 --> 00:29:26,880
Speaker 1: if we got down to thirty and you're saying the

585
00:29:26,880 --> 00:29:29,480
Speaker 1: recession is only short and shallow, why do you think

586
00:29:29,520 --> 00:29:32,520
Speaker 1: the recovery in the equity market is as severe as

587
00:29:32,520 --> 00:29:34,680
Speaker 1: the one that you're calling for in the second half?

588
00:29:34,680 --> 00:29:37,680
Speaker 1: What does that come from? What drives it? Well, I'm

589
00:29:37,680 --> 00:29:39,840
Speaker 1: a big believer in history. You know, history is a

590
00:29:39,840 --> 00:29:43,560
Speaker 1: great guide. That's certainly not gospel. However, when you look

591
00:29:43,600 --> 00:29:46,400
Speaker 1: to all of the bear markets since World War Two

592
00:29:46,440 --> 00:29:51,040
Speaker 1: that were accompanied by recession, we ended up coming back

593
00:29:51,040 --> 00:29:54,760
Speaker 1: into a new bull market, meaning rising in an average

594
00:29:54,760 --> 00:29:57,800
Speaker 1: of only three months, and in five of those nine

595
00:29:57,840 --> 00:30:00,760
Speaker 1: times we ended up in a new bullmark after only

596
00:30:00,880 --> 00:30:04,040
Speaker 1: one month. Also, what we found is that twelve months

597
00:30:04,080 --> 00:30:08,120
Speaker 1: after the market was higher by forty seven percent on average,

598
00:30:08,320 --> 00:30:12,400
Speaker 1: with a low water mark being So basically it all

599
00:30:12,480 --> 00:30:16,040
Speaker 1: depends on when that actual bottom takes place. Uh. And

600
00:30:16,120 --> 00:30:18,160
Speaker 1: my feeling is that we are like that and then

601
00:30:18,240 --> 00:30:22,760
Speaker 1: see this vacuum of valuations be taken advantage of. Sam.

602
00:30:22,760 --> 00:30:24,880
Speaker 1: When you talk about history and you talk about post

603
00:30:24,920 --> 00:30:28,000
Speaker 1: World War two, have you ever gone back to? Right?

604
00:30:28,040 --> 00:30:30,040
Speaker 1: I mean, is it a playbook that perhaps goes to

605
00:30:30,080 --> 00:30:33,880
Speaker 1: another era of pandemics and then conflict as well in

606
00:30:33,920 --> 00:30:35,800
Speaker 1: World War One and everything that was going on. Then

607
00:30:35,880 --> 00:30:38,520
Speaker 1: is that a better kind of measure of where we

608
00:30:38,560 --> 00:30:41,880
Speaker 1: could be and this sort of difficulty getting out of

609
00:30:42,000 --> 00:30:44,400
Speaker 1: some of the issues that are facing not only the

610
00:30:44,440 --> 00:30:50,000
Speaker 1: market but also just generally geopolitical piece No, uh, And

611
00:30:50,040 --> 00:30:54,040
Speaker 1: I say that because, like the valuing of crypto today,

612
00:30:54,640 --> 00:30:59,400
Speaker 1: we didn't really have the required earnings information for individual

613
00:30:59,400 --> 00:31:04,600
Speaker 1: investors to make decisions back prior to the nineteen thirties. Also,

614
00:31:04,640 --> 00:31:08,680
Speaker 1: we never had government supplied economic data since the late

615
00:31:08,760 --> 00:31:12,560
Speaker 1: nineteen so really you should be looking at data only

616
00:31:12,600 --> 00:31:15,240
Speaker 1: since nineteen fifty or so. But I go back to

617
00:31:15,280 --> 00:31:18,520
Speaker 1: World War two some because that's sort of a dividing line.

618
00:31:18,560 --> 00:31:21,200
Speaker 1: So I would say the reason I don't go back

619
00:31:21,280 --> 00:31:25,240
Speaker 1: to the nineteen teens is because it really was more

620
00:31:25,280 --> 00:31:28,520
Speaker 1: of a gambling situation because you did not have the

621
00:31:28,600 --> 00:31:32,720
Speaker 1: free flow of financial or government economic data. It's China

622
00:31:32,760 --> 00:31:36,320
Speaker 1: reopening SAM a headwind or a tailwind tier call. I

623
00:31:36,360 --> 00:31:40,600
Speaker 1: think it's going to be a tailwind globally. Expectations at

624
00:31:40,600 --> 00:31:43,600
Speaker 1: the beginning of two were that we were going to

625
00:31:43,680 --> 00:31:47,640
Speaker 1: see a four point six percent gain in global GDP.

626
00:31:48,120 --> 00:31:52,360
Speaker 1: That estimate now is below three the only and then

627
00:31:52,360 --> 00:31:54,640
Speaker 1: when you look to two thousand and twenty three, it's

628
00:31:54,680 --> 00:31:58,600
Speaker 1: even weaker. But if you look to China, that's really

629
00:31:58,720 --> 00:32:02,160
Speaker 1: the only country that is expected to show an improvement

630
00:32:02,200 --> 00:32:06,800
Speaker 1: in GDP in three UM. To a broader extent, the

631
00:32:07,160 --> 00:32:10,840
Speaker 1: emerging markets are likely to show and improvement in GDP

632
00:32:11,080 --> 00:32:15,040
Speaker 1: next next year, whereas the advanced economies are predicted to

633
00:32:15,080 --> 00:32:17,760
Speaker 1: show a slowdown. So I would think it's going to

634
00:32:17,840 --> 00:32:20,720
Speaker 1: actually be a tail wind for the global economy. It

635
00:32:20,760 --> 00:32:22,320
Speaker 1: was so much easier when we used to talk about

636
00:32:22,320 --> 00:32:24,840
Speaker 1: synchronized global growth to remember that everything over at the

637
00:32:24,880 --> 00:32:27,240
Speaker 1: same time. Now looking at the twenty three is so

638
00:32:27,240 --> 00:32:31,440
Speaker 1: so different. You're at recession, US recession chann to reopening

639
00:32:31,600 --> 00:32:35,240
Speaker 1: those two things comminding. This is the Bloomberg Surveillance Podcast.

640
00:32:35,480 --> 00:32:38,840
Speaker 1: Thanks for listening. Join us live weekdays from seven to

641
00:32:38,920 --> 00:32:42,400
Speaker 1: ten a m. Eastern on Bloomberg Radio and on Bloomberg

642
00:32:42,440 --> 00:32:46,920
Speaker 1: Television each day from six to nine am for insight

643
00:32:47,200 --> 00:32:51,400
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644
00:32:51,880 --> 00:32:56,520
Speaker 1: And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

645
00:32:56,680 --> 00:33:00,280
Speaker 1: Bloomberg dot com, and of course on the terminal. I'm

646
00:33:00,320 --> 00:33:02,880
Speaker 1: Tom keene In. This is Bloomer