Speaker 1: Welcome to the Bloombergs Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa Brownowitz Jaily. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. Right now, I
Speaker 1: am so pleased to say we can head over to
Speaker 1: the New York Fed Bloombergs Kathleen Hayes there with one
Speaker 1: of the leadership members of the Federal Reserve of New
Speaker 1: York FED, President John Williams, to answer some of those questions. Kathleen, Lisa,
Speaker 1: thank you, President Williams, thank you for joining us this
Speaker 1: morning on Blombrig Television. So happy to have you here.
Speaker 1: We are in the New York Fed Museum in a
Speaker 1: year when the Fed has been making a lot of history.
Speaker 1: So let's start with the meeting this week and what
Speaker 1: came out of it. Because we got the you know,
Speaker 1: the move up in the to the restrictive rate that
Speaker 1: was even more restrictive than people thought, and inflation has
Speaker 1: stayed high. It's hard to get down, probably harder than
Speaker 1: you thought it would just a few months ago with
Speaker 1: these dots, with this position, Now, do you think you
Speaker 1: finally caught up to where you need to be? Well,
Speaker 1: I think we're well on our way there. And I
Speaker 1: think when you look at the kind of the central
Speaker 1: tendency of the dots, Uh, my colleagues expect the Fed
Speaker 1: funds rate to get to say five to five and
Speaker 1: a half percent next year. I think that's a that
Speaker 1: gets us into that hopefully sufficiently restrictive stance of policy
Speaker 1: that we'll bring inflation back to two percent. So I
Speaker 1: am getting increasingly confident that we're getting closer to that point.
Speaker 1: But obviously we have to watch the data. The inflation
Speaker 1: and other data have surprised this and we need to
Speaker 1: be on the lookout for that. But I do feel
Speaker 1: we're getting to a better place now. Just about two
Speaker 1: weeks ago, you said that the dead funds rate has
Speaker 1: to get above the inflation rate to bring down inflation.
Speaker 1: How far above inflation does it have to get? Well,
Speaker 1: that that's the question, right, And why we talk about
Speaker 1: this is in terms of sufficiently restrictive to bring inflation
Speaker 1: back to two percent. So to me, it's really about
Speaker 1: getting in high enough and of course keeping it high
Speaker 1: for a while, for enough time to really see clear
Speaker 1: science inflation is moving back down on on the way
Speaker 1: to two percent. You know. My view is you have
Speaker 1: to think about real interest rates. As you said, if
Speaker 1: you look at again the median dots, if you will,
Speaker 1: in the in the economic projections we just put out,
Speaker 1: you see the real Fed funds right, say, the Fed
Speaker 1: funds right minus the core pc inflation around one and
Speaker 1: a half percent. I think that's a reasonable view restrictive. Again,
Speaker 1: whether it's sufficiently restrictive, we'll have to watch the data
Speaker 1: and see. But I think that's to me basically where
Speaker 1: where I'm thinking right now, there's many top economist, former
Speaker 1: Fed officials even who are saying, you're look, it's looking
Speaker 1: more and more like you are going to have to
Speaker 1: go higher even than where you are now, maybe something
Speaker 1: like six maybe something heading towards seven percent. Uh, can
Speaker 1: you see the happening and what what circumstances, what would
Speaker 1: be happening for that? Do you have to go ahead
Speaker 1: like that? Well, that's definitely not my baseline, is I
Speaker 1: just indicated. I don't think we'll need to get real
Speaker 1: interest rates that high, But of course things could happen
Speaker 1: differently than than we expect and would have to especially
Speaker 1: around inflation, but also how how strong is the economy
Speaker 1: even with higher interest rates? Does he do we still
Speaker 1: have these imbalances between supply and demand right now, I
Speaker 1: mean PC inflation is six percent or less twelve months,
Speaker 1: and we have clear science and demand exceeds supply in
Speaker 1: our economy and our labor markets. So to me, the
Speaker 1: question of how high we have to get to is
Speaker 1: really get to pend on what we see in inflation
Speaker 1: and the supply demand in balance, and in my base cases,
Speaker 1: we don't have to get that high. I think we
Speaker 1: have some favorable developments underway, things that we've been talking
Speaker 1: about for a long time. Supply chains definitely are getting
Speaker 1: better around the world. We're seeing that in a lot
Speaker 1: of different data. And we're also seeing, you know, some
Speaker 1: of the goods prices and import prices come down, a
Speaker 1: reversal of some of those of pandemic era thing that
Speaker 1: pushed up inflation. So we've got a few factors. I
Speaker 1: think you're gonna bring inflation down to three to three
Speaker 1: and a half percent next year, um. But then the
Speaker 1: real issue is how do we get it all the
Speaker 1: way too, of course is but right there though, is
Speaker 1: the message from Wednesday that and and this ties in
Speaker 1: with you maybe if you we might have to go higher.
Speaker 1: Is the message that if it's not coming down as
Speaker 1: we expect, then we are clearly open to going higher.
Speaker 1: Taking the next step, well, we're gonna have to do
Speaker 1: what's necessary against sufficiently restrictive to bring inflation down to
Speaker 1: two percent, and it could be higher than what we've
Speaker 1: written down. And we have had to increase our interest
Speaker 1: rate projections as the data come in. The inflation has
Speaker 1: been stubbornly highest, you know, many people have said, and
Speaker 1: we've seen the economy remain very resilient to higher interest rates. Remember,
Speaker 1: the unemployment rate is three point seven. Some signs are
Speaker 1: slowing demand for labor, but still a very very strong
Speaker 1: uh imbalance between supply and demand right now. You know,
Speaker 1: there were two surprisingly good CPI reports going in to
Speaker 1: this meeting, and so a lot of people thought, well,
Speaker 1: that good news for the Fed. You know, maybe they're
Speaker 1: not going to be quite as aggressive. Um. But at
Speaker 1: the same time, what happened inflation forecast boom goes up.
Speaker 1: How did this happen? What's guiding your view on inflation. Again,
Speaker 1: two good surprises on CPI and yet the the PC
Speaker 1: core core and PC overall still can expected a rise
Speaker 1: right and again relative to say or earlier projections in September.
Speaker 1: The you know, I think that you really have to
Speaker 1: think about what's happening in the inflation data. So we
Speaker 1: are seeing good news. I like good news on inflation reports.
Speaker 1: A lot of that's in the goods areas and some
Speaker 1: of the areas we've been long expecting those inflation rates
Speaker 1: to come down, so that wasn't so, you know, that's
Speaker 1: something that we've been expecting to see as part of
Speaker 1: the baseline forecast. Where inflation is still high is in
Speaker 1: these core services areas, the areas that you know are
Speaker 1: probably going to be more persistent and really reflect the
Speaker 1: imbalance between supplying demand in the labor market in our
Speaker 1: overall economy. So sure, we're are seeing some good signs
Speaker 1: on goods and some other categories. I'm also seeing some
Speaker 1: good signs in the in the rents for new leases
Speaker 1: of apartments and houses, So you know that inflation should
Speaker 1: eventually start coming down later in the latter part next year.
Speaker 1: But again in these other core services that inflation rate
Speaker 1: is still high, and that really gets to how strong
Speaker 1: the labor market is. So sure, some good news, but
Speaker 1: the underlying issue of core core services inflation is still
Speaker 1: very much there. Well, you know your your forecast for
Speaker 1: unemployment next year is a big jump, right, you see
Speaker 1: it much much weaker, up to almost full percentage point
Speaker 1: from what you're looking at September to four point six percent.
Speaker 1: You're looking for GDP to be much weaker than you
Speaker 1: thought three months ago, down to zero point five percent um.
Speaker 1: So is this the kind of forecast that is consistent
Speaker 1: with UH a soft landing. Is it a consistent with
Speaker 1: something maybe not quite that good? Well, I think it is.
Speaker 1: It's an economy that's continue to grow. As you pointed out,
Speaker 1: the median dot is a half her percent growth for
Speaker 1: this year and for next year. So as economy that's growing, UH,
Speaker 1: it's an economy where the unemployment rate is is rising somewhat.
Speaker 1: As you mentioned, the meeting will be at four point
Speaker 1: six percent of the end of next year. So I
Speaker 1: don't see this as a recession. We're clearly not a
Speaker 1: recession right now based on the data. It is an
Speaker 1: economy that is growing only modestly, and I think it's
Speaker 1: an economy that's really seen. Uh, the imbalance eats between
Speaker 1: supplying demand diminishing inflation coming down. Is the retail sales.
Speaker 1: We're weak across the board pretty much. Uh. Is this
Speaker 1: a canary in the cold mine for where the economy
Speaker 1: is heading and a part of the colom you want
Speaker 1: to get filed demand down? Is this maybe an early
Speaker 1: sign that you're succeeding. But we have to look at
Speaker 1: all the data on that. And obviously where we're seeing
Speaker 1: the science of the economy slowing is in the housing
Speaker 1: sector and now in manufacturing. Consumer spanning has been kind
Speaker 1: of jumping around a bit months and months and months
Speaker 1: quarter to quarter. It's actually been more up until this
Speaker 1: latest data, more resilient perhaps, and I was expecting. So
Speaker 1: we just have to, you know, go through all that
Speaker 1: data and really the kind of the underlying strength in
Speaker 1: the economy. That data doesn't change my basic view that
Speaker 1: we're going to have an economy growing modestly over the
Speaker 1: next year. You know, you're talking about the services ex
Speaker 1: housing right course, services X housing is that it seems
Speaker 1: like it's the key indicator. Now we have to see
Speaker 1: that coming down for the pad to be convinced that
Speaker 1: inflation is moving in the right direction. Well, I think
Speaker 1: that is it is most closely related in many ways
Speaker 1: to the state of the labor market into domestic price pressures.
Speaker 1: Some of these other categories, which of course are part
Speaker 1: of the inflation index. We don't ignore any of them,
Speaker 1: but they really are about the special factors our prices
Speaker 1: that skyrocketed, transportation costs and things like that. And then
Speaker 1: I think the housing market, we're always seeing some good
Speaker 1: indicators eventually of that coming down. So this is the
Speaker 1: area that that's not coming down, and we definitely needed
Speaker 1: to see it coming down to get to that two
Speaker 1: percent inflation goal. So a lot of focus on labor
Speaker 1: and wages in that part of it, right, That's that's
Speaker 1: what's important. That's what Pow pointed out this week. So, uh,
Speaker 1: do you think that there are signs of a wage
Speaker 1: price spiral right now? Is that one of your concerns again?
Speaker 1: And when you look at cp C guys coming down,
Speaker 1: that's good news, but boy oh boy, that the trend
Speaker 1: is still too much up for us. So I don't
Speaker 1: see any signs of a wage price spiral of the
Speaker 1: kind that we saw in the seventies. A couple data
Speaker 1: points at point to one is UH inflation expectations have
Speaker 1: been coming down. They've been really well anchored for longer
Speaker 1: run expectations. But we've also seen in New York Fed
Speaker 1: survey and in the Michigan survey shorter term inflation expectations
Speaker 1: coming down. So I think that we're not seeing that
Speaker 1: kind of dynamic kicking of people expecting higher inflation demanding
Speaker 1: higher wage increases because of that. The other is, you know,
Speaker 1: I really see wages is kind of the barometer, one
Speaker 1: of the barometers of the strength of the labor market
Speaker 1: about demand and supply. I think wage growth has been
Speaker 1: very high because labor demand has been really strong relative
Speaker 1: available available supply. Is labor demand and supply get better
Speaker 1: and better balance, I think, you know, the wage gains
Speaker 1: will be more inconsistent with will be more consisting and
Speaker 1: with longer term trans and or two percent. What do
Speaker 1: you make of the the Southwest Airlines contract? It was
Speaker 1: just signed. They're going to get increase in wages over
Speaker 1: the next when is it five years? Four years? Excuse me? Uh?
Speaker 1: Is that a concern? Well, you know, we're seeing a
Speaker 1: lot of adjustment and wages for around the country. I'm
Speaker 1: not going to point to any specific one. I mean again,
Speaker 1: wage increases right now, given to where inflation has been,
Speaker 1: given where the labor market is are, are still quite
Speaker 1: high um, and so we're watching those indicators. To me,
Speaker 1: it's really what tracking how the economy does over the
Speaker 1: next year labor demands, supplying wages, not focus on financial conditions.
Speaker 1: Chairpile noting that the markets and the feder seemed be
Speaker 1: working at cross purposes all the time lately. Are you
Speaker 1: concerned about this push pull between the FED and where
Speaker 1: it's trying to lead and h where the markets want
Speaker 1: to go? Well, I, you know, I think we need
Speaker 1: to be and we are being clear on what we're
Speaker 1: trying to, what we're going to achieve, uh, and how
Speaker 1: we're going to achieve it. I think that you know,
Speaker 1: the economic projections and the dot plot we put out
Speaker 1: provided a nice roadmap of how we're seeing the economy
Speaker 1: and Monte policy over the next couple of years. UH.
Speaker 1: And obviously financial conditions depend on a lot of other
Speaker 1: things than just Monterey policy. So I always look at
Speaker 1: a broad set of Monte Poulse sorry financial conditions understand
Speaker 1: how that feeds into our outlook right now. I know
Speaker 1: that you know a lot of some market participants clearly
Speaker 1: are more optimistic about inflation coming down. I look at
Speaker 1: the real interest rates implied by that. I think pretty
Speaker 1: much everyone understands that real interest rates need to get
Speaker 1: restrictive and stay there. Is that an issue for the
Speaker 1: Fed though, when you're trying to um you're trying to
Speaker 1: move policy in a certain direction, right, you want to
Speaker 1: tighten and if the market's rally and then findtional financial
Speaker 1: conditions softened for whatever interpretation the markets are taking, is
Speaker 1: that an issue. Does that make the job harder? Doesn't
Speaker 1: make the job hard harder. But it's just another one
Speaker 1: of those factors like that. You know, what's happening in
Speaker 1: the global economy, a lot of things that have to
Speaker 1: feed into our view of where the economy is going
Speaker 1: and then what we need to do. Clearly, to the
Speaker 1: extent that you know, financial conditions have tightened quite a bit,
Speaker 1: consisting the past year, consistent with our moving to towards
Speaker 1: the restrictives or to a restrictive stance of policy. That's
Speaker 1: an important part of the transmission of Monterey policy of
Speaker 1: the economy. In keeping with that, I want to ask
Speaker 1: you one last question, because there's this We're hearing this
Speaker 1: a lot, that the FED let inflation get out of
Speaker 1: control for whatever reason, and that this may have eroded
Speaker 1: the credibility that fed with the market. So how do
Speaker 1: you respond to that. Well, we're absolutely committed to getting
Speaker 1: inflation back to our two percent goal, UH, and we're
Speaker 1: acting in that way. I think we're communicating in that way.
Speaker 1: So I don't think we've lost the credibility, of course
Speaker 1: at all. I do think that, you know, we are
Speaker 1: completely united in our focus on getting inflation back to
Speaker 1: two percent. We've taken extraordinarily strong UH policy actions over
Speaker 1: the past year, and as we've shown, we're going to
Speaker 1: continue to take the actions are needed to get inflation
Speaker 1: back to two percent. Price stability is absolutely essential for
Speaker 1: a strong economy in the long run. We need to
Speaker 1: get that done and we will. All Right, Well, here
Speaker 1: it comes President John Williams. Thank you so much for
Speaker 1: joining us today. Thank you, Okay, Lisa, back to you.
Speaker 1: Great Where Kathleen Hayes with John Williams of the New
Speaker 1: York Federal Reserve. Ye're joining us now. Embody Rodman Co
Speaker 1: Chief investment strategist that John Hancock Investment Management. Embody fantastic
Speaker 1: to catch up with you, always is. I just want
Speaker 1: to pick up on a theme that I know you're
Speaker 1: dridding down on the equity bond performance this week. Emily,
Speaker 1: you've picked up on it as well. What's it telling you?
Speaker 1: It's actually pretty refreshing to see the diversification is working again.
Speaker 1: You have stocks down on the week, bonds up on
Speaker 1: the week, and that's the type of reaction that makes
Speaker 1: sense to us. Markets have almost been in this state
Speaker 1: of being comfortably numb, given the fact that central banks
Speaker 1: are implementing the most tightening that we've seen in the generation.
Speaker 1: The economic data are suggesting that the global recession is
Speaker 1: likely into three. The yield curve is wildly inverted to
Speaker 1: the tune of seventy eight basis points, and earnings are
Speaker 1: starting to come off. Those are all things to us
Speaker 1: suggested a recession is likely, and we've seen cyclical areas
Speaker 1: of the market showing leadership. We've seen European equities having
Speaker 1: their best quarter. They're they're one of their best quarters
Speaker 1: in years, and a lot of that cross asset performance
Speaker 1: to us just hadn't been driving with the macroeconomic backdrops.
Speaker 1: And we're starting to feel a little bit better that
Speaker 1: things are working as they should. But Emily, this goes
Speaker 1: against this idea that perhaps we have to have a
Speaker 1: different playbook this time around. And this is what we've
Speaker 1: been talking about for a number of weeks now that
Speaker 1: we're not necessarily going back to the pre pandemic investment
Speaker 1: thesis where if something goes wrong, central banks lower rates
Speaker 1: and that fuels a risk rally. So does it make
Speaker 1: sense to you that the relationship between stocks and bonds
Speaker 1: is reverting back to something that has been traditionally at
Speaker 1: a time when nothing about this moment is traditional. Yeah,
Speaker 1: I mean we think that the playbook is really you know,
Speaker 1: you can't be that are still rely on history here,
Speaker 1: and we do think that given the fact that the
Speaker 1: economy is likely to contract next year, central banks ultimately
Speaker 1: will be cutting in the back half of next year,
Speaker 1: so we want to be positioned for that. We want
Speaker 1: to lean into bonds here. We like the idea that
Speaker 1: bonds are working in a portfolio. And you know, Matt
Speaker 1: MSK and I have been talking a lot about the
Speaker 1: fact that income is very attractive and very competitive versus
Speaker 1: other parts of the market. So we do think that
Speaker 1: that playbook comes through again into next year, but it's
Speaker 1: gonna take some time. The FED has been incredibly just
Speaker 1: dogmatic in their approach to fighting inflation. We've heard it
Speaker 1: time and time again, but we know that the FED
Speaker 1: is looking at lagging economic data, employment inflation, especially services inflation.
Speaker 1: Many of your guests have talked about the fact that
Speaker 1: it's very, very sticky, and it's probably going to be
Speaker 1: too late for the FED to really sort of reverse
Speaker 1: course quickly into next year. They're going to cause this
Speaker 1: economic slowdown and then they're going to have to cut
Speaker 1: so soft the supermaan and this is something that John
Speaker 1: has been talking about really pointed out that there still
Speaker 1: is this feeling that if that is the playbook, then
Speaker 1: go into big tech, and that's what so many people
Speaker 1: are doing. And she pushes back against that and says
Speaker 1: that doesn't necessarily seem like the prudent play Where do
Speaker 1: you feel on the leadership on which are the stocks
Speaker 1: that can continue to drive upward some of the equity
Speaker 1: performance at a time. If we're reverting back to a
Speaker 1: playbook that's familiar, Yeah, I would agree the playbook from
Speaker 1: a cross asset perspective within equities might be a little
Speaker 1: bit different this time. It was always that, you know,
Speaker 1: we look to growth stocks. We wanted companies that were
Speaker 1: able to you know, produce that organic growth in a
Speaker 1: slowing backdrop. And now we're not really seeing that. A
Speaker 1: lot of the growth in technology stocks was pulled forward
Speaker 1: during the height of the pandemic. Think about all this
Speaker 1: stuff that we bought, whether it was online shopping or
Speaker 1: you know, conferencing tools or laptops for the kids. A
Speaker 1: lot of that growth in demand was pulled forward. And
Speaker 1: so we're seeing this period in which the batta on
Speaker 1: is being handed over to the old economy. You know,
Speaker 1: we look at the value side of the house, which
Speaker 1: is showing some resilience here. So we want to be
Speaker 1: thoughtful about where we're going in growth. Where we're going
Speaker 1: in value areas like healthcare one of our favorite sectors,
Speaker 1: very high quality, great balance sheets, cash on their balance sheets,
Speaker 1: organic growth drivers. But we also like your kind of
Speaker 1: classic S and P five hundred tech companies, ones with
Speaker 1: a lot of cash. We don't want to own companies
Speaker 1: that need to tap the capital markets in order to grow.
Speaker 1: We don't want to own unprofitable technology companies In this environment.
Speaker 1: But but some areas, carefully selected areas of the technology
Speaker 1: complex to us still makes sense paired with value. So Emily,
Speaker 1: one thing that you've said is that for the most part,
Speaker 1: equities are not acting like a recession is coming. Can
Speaker 1: I ask you where you would look for that and
Speaker 1: why you think we are further along in the adjustment process,
Speaker 1: perhaps relative to other parts of the equity market. Yeah,
Speaker 1: it is so amazing to see this rerating in stocks
Speaker 1: that began at the beginning of the quarter. We saw, Uh,
Speaker 1: the SMP five hundred started fifteen times forward earnings and
Speaker 1: now we're trading it around seventeen and a half, which
Speaker 1: is means that stocks are now more expensive than their
Speaker 1: twenty year average. So we've seen this big rerating, especially
Speaker 1: in more cyclical economically sensitive areas of the market. Energy
Speaker 1: stocks doing better even with oil prices coming down a bit,
Speaker 1: pretty notable dynamic here. So we would look to find
Speaker 1: areas that are already price for a recession. There aren't many.
Speaker 1: We Matt and I have used the analogy of there's
Speaker 1: an equity store and a bond store for your for
Speaker 1: your Christmas shopping, and you know the equity store, there's
Speaker 1: not very much on sale areas like MidCap value stocks,
Speaker 1: we like they're treating at a steep discount already at
Speaker 1: two thousand and eight two thousand nine levels. But the
Speaker 1: fixed income store, there's where a lot of the opportunity
Speaker 1: where a lot of the bargains are. You look at
Speaker 1: investment grade corporate bonds seeing this big price decline similar
Speaker 1: to a weight oh nine levels, we like that. We
Speaker 1: like the income there, the total return potential. So and
Speaker 1: favoring the bond store over the equity store during this
Speaker 1: holiday shopping. When you were a kid and your parents
Speaker 1: would say, you can't get anything from there, and that's
Speaker 1: where you wanted to shop. It was the toys, they're expensive,
Speaker 1: and then your parents came along and said, you've got
Speaker 1: to get that. You need a new coat. I feel
Speaker 1: like that's what Emny Rolands telling me right now. It's like,
Speaker 1: don't look his stocks, go to the bond store. Who
Speaker 1: wants to shop at the bond store? No one's wanted
Speaker 1: to shop there for ten years. What was the most
Speaker 1: disappointing gift you've ever gotten? When I was a kid,
Speaker 1: I didn't like getting clothes. It's very against clothes. And
Speaker 1: I remember my Nan turning around to me and saying, John,
Speaker 1: in twenty years time, this is all you want. You
Speaker 1: just want nice clothes. You won't want toys. And it's like, yeah,
Speaker 1: but I'm not, you know, but I'm still. This is clothes.
Speaker 1: God bless her. So please, if you're listening, clothes, clothes now,
Speaker 1: love clothes. And although I was thinking the other day,
Speaker 1: you know what, I'd love a toy car for this Christmas,
Speaker 1: just a remote controlled one. I'd love that. I'm thinking about.
Speaker 1: I'm thinking about for the apartment. You're absolutely serious. I'm
Speaker 1: thinking about buying one for the heartman, I want like
Speaker 1: a toy Ferrari, like a Formula one car with a
Speaker 1: remote control you build like a little set. Because when
Speaker 1: I was a kid and I had a toy car
Speaker 1: had that cable attached to it, remember that you have
Speaker 1: to look sort of follow it because it wasn't. I
Speaker 1: want a proper one, like a really fast one. I'm
Speaker 1: going to go into Central Part with Tom and play
Speaker 1: with it. We never said thanks to Emily. Emily, thank
Speaker 1: you have a wonderful Christmas. Let's get to Savantra Jappa.
Speaker 1: How do us rate strategy at so Jen Sapatra? Your
Speaker 1: quote from your piece last night, Can I say it
Speaker 1: was great by the way, I had good read of it.
Speaker 1: Pal stuck to his script of higher for longer after
Speaker 1: delivering a fifty basis point hiker hawk is shifting the
Speaker 1: dop plot failed to nudge yield higher. You went on
Speaker 1: to say, though, and I think this is real pushback
Speaker 1: from the consensus for you going into twenty three, we
Speaker 1: expect a modest rise in yields in Q one as
Speaker 1: central banks deliver more hikes. Sapantra, can we start there?
Speaker 1: What do you think other people are missing going into
Speaker 1: next year? Well, I think the price right now is
Speaker 1: not reflective of what we should expect next year. You're
Speaker 1: getting into the r en. Liquidity is very poor. People
Speaker 1: are paring bad positions. But you're looking at you know,
Speaker 1: the Bank of England, your poister deliver another fifty basis
Speaker 1: point rate high. The e c BS, you know, perhaps
Speaker 1: gonna deliver another fifty basis point rate high. So global
Speaker 1: center backs broadly speaking, are still going to remain somewhat
Speaker 1: hawkish for at least the first quarter to first half
Speaker 1: of next year. So under those circumstances, I don't see
Speaker 1: why we know yields can't adjust modestly here. I'm not
Speaker 1: calling for a significantly higher yields, but I think if
Speaker 1: you get towards maybe three seventy five or four percent,
Speaker 1: that's not, you know, necessarily out of the realm of reason.
Speaker 1: I feel like the market is, especially tenny years are
Speaker 1: very rich as they stand right now at three fifty.
Speaker 1: So can we talk about the front end as well?
Speaker 1: It's just so I can get a better idea of
Speaker 1: where you think the curve is going to be, how
Speaker 1: you think that's going to evolve next year two? Right now?
Speaker 1: How are you thinking about that? Spatra, Well, I don't
Speaker 1: think the front end has a lot more room to
Speaker 1: rise unless we expect um the FED to hike beyond
Speaker 1: five and a quarter percent. But on the long end,
Speaker 1: the dynamics are very different. You're going to see a
Speaker 1: lot of corporate issuants come into the market. You're going
Speaker 1: to see perhaps you know, more EMN treasury issuance. Typically
Speaker 1: those tend to at least support a little bit of
Speaker 1: a bearish momentum to that. Add add the fact that
Speaker 1: I think burns have more yields, so bond yields have
Speaker 1: more room to rise. I think that Tenney yields could
Speaker 1: see a push higher at least in the first quarter
Speaker 1: before we start seeing yields decline in the second half.
Speaker 1: I completely by what you're saying, So does the Federal Reserve.
Speaker 1: This is what the Fed is basically telling the market
Speaker 1: is going to happen. Why are so many people pushing back?
Speaker 1: I think there's a concern about a recession in the US.
Speaker 1: To me, those concerns are a little bit premature. At SATAN,
Speaker 1: we have a little bit of an out of consensus
Speaker 1: view the recession of the US. We think that's early
Speaker 1: and then it's not a event. So my real concern
Speaker 1: is that the market is not fully appreciating the fact
Speaker 1: that come middle of next year, if the unemployment rate
Speaker 1: is not heading towards four percent, we're still stuck at
Speaker 1: say three point seven three point eight, and wages are
Speaker 1: still pretty strong, the Fed might have to go beyond
Speaker 1: five and a quarter. I'm not saying that that's our
Speaker 1: base case scenario, but that's a risk scenario that the
Speaker 1: market is not fully appreciating. What's your base scenarios to
Speaker 1: Badger of how long it will take to get back
Speaker 1: to two percent inflation? Given with the FED is already signaled.
Speaker 1: I mean, we've got the summary of economic projections from
Speaker 1: the from the Fed. The FED doesn't expect inflation to
Speaker 1: get to two percent. So you're looking at, you know,
Speaker 1: a very strong trajectory towards you know, inflation remaining sticky
Speaker 1: after that initial descent. Now we're rejoicing the initial descent.
Speaker 1: But what if we get to maybe three percent or
Speaker 1: three and a half percent and then inflation stays there
Speaker 1: and it's sticky at that level. At that point, I
Speaker 1: think the FED is still going to remain somewhat how cash,
Speaker 1: if the employment picture is relatively strong. And there's a
Speaker 1: good chance of the employment picture remains relatively strong given
Speaker 1: the fact that we have such a mismatch in the
Speaker 1: labor market between job openings and an available employee employees
Speaker 1: to fill those jobs. So I'm not saying that the
Speaker 1: labor market is gonna be asked tight as it is
Speaker 1: right now next year, but I think it's good could
Speaker 1: potentially take a lot longer for the employment picture to
Speaker 1: weaken meaningfully from here on. Emily Rowland was speaking earlier
Speaker 1: about the fixing income shop. There's a fixing coome shop,
Speaker 1: and then there's the stock shop, and that the fixing
Speaker 1: cocome shop has a lot of good things in it,
Speaker 1: including investment grade debt because of how much it has
Speaker 1: been sold off. That has been on rate story, though
Speaker 1: not necessarily the credit side of things. Given your projection
Speaker 1: that we might not get back down a two inflation
Speaker 1: based on what the FED is looking at themselves by,
Speaker 1: does that default rate kind of expectation, does that premium
Speaker 1: have to rise substantially from where we are right now?
Speaker 1: You know, our corporate strategies don't think the default rates
Speaker 1: rise in this cycle. I think we're in a very
Speaker 1: different environment, you know, relative to the two thousand and
Speaker 1: eight time frame or the Great Financial Crisis. I think
Speaker 1: companies are in a very good spot. You know, one
Speaker 1: metric that we look at for recessions is corporate profit
Speaker 1: margins called for profit margins are still very, very healthy.
Speaker 1: So for the most part, under the circumstances, it's really
Speaker 1: hard to envision a scenario whether the default rates are
Speaker 1: going to rise meaningfully from here on. So I think
Speaker 1: the corporate sectors, you know, relatory robots, if we get
Speaker 1: a lot of supply next year, we're expecting a decent
Speaker 1: amount of demand from a variety of investors because the
Speaker 1: yield you get for holding US bonds is quite you know,
Speaker 1: quite substantial relative to yields in other regions. So I
Speaker 1: think for the most part, this is going to be
Speaker 1: a bond story next year, and it's going to be
Speaker 1: for for yield and return. So bat just one final question,
Speaker 1: what pivot? This was the title that came from the
Speaker 1: team of Sokin the jump out right hikes Rova. But
Speaker 1: we are far away from a monetary policy pivot. Can
Speaker 1: we just end on where you see terminal rights? Just
Speaker 1: around this? I think that's a headline for a lot
Speaker 1: of people. Where's the terminal? Right? The Fed? Where's the
Speaker 1: terminal right? The e CP is it basically in line
Speaker 1: with what's being priced right now? So for the for
Speaker 1: the Fed, I think the market and the Fed are
Speaker 1: well aligned. I mean, I think the market expects the
Speaker 1: terminal FED funds rate maybe around five five and a
Speaker 1: quarter percent. Maybe it's a little bit under priced right
Speaker 1: now for next year, but not by a lot. For
Speaker 1: the e c B, I think there's still a lot
Speaker 1: more room for, you know, for the market pricing to
Speaker 1: rise higher. Our economists in Europe, you know, now expect
Speaker 1: the e c B two raise rates the three point
Speaker 1: seven five percent, I don't think that that's fully uh
Speaker 1: you know, priced into uh into into into the European
Speaker 1: bound markets. So that's why we see more potential for
Speaker 1: the treasury bond spread to narrow. I mean it's, you know,
Speaker 1: when we put out our outlook we have the tenant
Speaker 1: treasury bond spread around one, we were calling for it
Speaker 1: to come to our one fifteen. Guess what this morning,
Speaker 1: we're already in one thirty, and we still see more
Speaker 1: room for that tragedy bon spread to narrow. So I
Speaker 1: think that that it's it's it's quite you know, harkish
Speaker 1: for the easyb We see more room for bunnios ries
Speaker 1: relative to treasury. I just never ever thought they'd go
Speaker 1: this far, no way, not even nine months ago, six
Speaker 1: months ago. I never thought they'd go this fast. Patrick,
Speaker 1: thank you wonderful summary of the last week or so.
Speaker 1: Looking ahead to twenty three as well, So Batra Shaper
Speaker 1: of sock Jen, there's a lot of people bunched around
Speaker 1: four k, So be thankful that our next guest is
Speaker 1: saying something a little bit different. Seventy five. It's Sam
Speaker 1: Stovall A's cfr Ray, So Sam walked me through why
Speaker 1: Ultimately you're a lot more bullish than the bulk of
Speaker 1: the street going into twenty three. Hey, Jonathan and Lisa, Well,
Speaker 1: I guess some could accuse me of being a Pollyanna.
Speaker 1: I like to say that when life gives me lemons,
Speaker 1: I try to make whiskey sours. What I'm looking at
Speaker 1: is the expectation that we are likely to fall into
Speaker 1: a recession. I mean, I'm saying right now that like
Speaker 1: a deflating holiday lawn ornament, the Powell press conference and
Speaker 1: today's Goldman news have drained investor hopes of avoiding a recession.
Speaker 1: But I think it's going to be a mild recession.
Speaker 1: I do think the Fed will continue to raise rates
Speaker 1: through the first quarter, but then I'm reminded of history
Speaker 1: saying that on average, eight and a half months after
Speaker 1: the last rate hike, we see the Feds starting to
Speaker 1: cut rates. So if we do end up seeing this
Speaker 1: economy getting weaker than is expected now by the street,
Speaker 1: and also seeing what the Fed responds to, I think
Speaker 1: investors will be looking across the valley into the second
Speaker 1: half of three and that's where we end up seeing
Speaker 1: an upward movement, and the real year end target also
Speaker 1: depends on whether we simply retest the thirty low on
Speaker 1: October twelve or we set and even lower low. So
Speaker 1: what is your down side in the first half UM downside?
Speaker 1: I'm thinking thirty five hundred for the SMP five hundred,
Speaker 1: that is the UM October twelfth low. It is a
Speaker 1: Fibonacci retreacement level of the prior UM bullmarket move UM.
Speaker 1: And also I think that that was an area of
Speaker 1: significant support. Uh. And so that is my first level. So, Sam,
Speaker 1: if we got down to thirty and you're saying the
Speaker 1: recession is only short and shallow, why do you think
Speaker 1: the recovery in the equity market is as severe as
Speaker 1: the one that you're calling for in the second half?
Speaker 1: What does that come from? What drives it? Well, I'm
Speaker 1: a big believer in history. You know, history is a
Speaker 1: great guide. That's certainly not gospel. However, when you look
Speaker 1: to all of the bear markets since World War Two
Speaker 1: that were accompanied by recession, we ended up coming back
Speaker 1: into a new bull market, meaning rising in an average
Speaker 1: of only three months, and in five of those nine
Speaker 1: times we ended up in a new bullmark after only
Speaker 1: one month. Also, what we found is that twelve months
Speaker 1: after the market was higher by forty seven percent on average,
Speaker 1: with a low water mark being So basically it all
Speaker 1: depends on when that actual bottom takes place. Uh. And
Speaker 1: my feeling is that we are like that and then
Speaker 1: see this vacuum of valuations be taken advantage of. Sam.
Speaker 1: When you talk about history and you talk about post
Speaker 1: World War two, have you ever gone back to? Right?
Speaker 1: I mean, is it a playbook that perhaps goes to
Speaker 1: another era of pandemics and then conflict as well in
Speaker 1: World War One and everything that was going on. Then
Speaker 1: is that a better kind of measure of where we
Speaker 1: could be and this sort of difficulty getting out of
Speaker 1: some of the issues that are facing not only the
Speaker 1: market but also just generally geopolitical piece No, uh, And
Speaker 1: I say that because, like the valuing of crypto today,
Speaker 1: we didn't really have the required earnings information for individual
Speaker 1: investors to make decisions back prior to the nineteen thirties. Also,
Speaker 1: we never had government supplied economic data since the late
Speaker 1: nineteen so really you should be looking at data only
Speaker 1: since nineteen fifty or so. But I go back to
Speaker 1: World War two some because that's sort of a dividing line.
Speaker 1: So I would say the reason I don't go back
Speaker 1: to the nineteen teens is because it really was more
Speaker 1: of a gambling situation because you did not have the
Speaker 1: free flow of financial or government economic data. It's China
Speaker 1: reopening SAM a headwind or a tailwind tier call. I
Speaker 1: think it's going to be a tailwind globally. Expectations at
Speaker 1: the beginning of two were that we were going to
Speaker 1: see a four point six percent gain in global GDP.
Speaker 1: That estimate now is below three the only and then
Speaker 1: when you look to two thousand and twenty three, it's
Speaker 1: even weaker. But if you look to China, that's really
Speaker 1: the only country that is expected to show an improvement
Speaker 1: in GDP in three UM. To a broader extent, the
Speaker 1: emerging markets are likely to show and improvement in GDP
Speaker 1: next next year, whereas the advanced economies are predicted to
Speaker 1: show a slowdown. So I would think it's going to
Speaker 1: actually be a tail wind for the global economy. It
Speaker 1: was so much easier when we used to talk about
Speaker 1: synchronized global growth to remember that everything over at the
Speaker 1: same time. Now looking at the twenty three is so
Speaker 1: so different. You're at recession, US recession chann to reopening
Speaker 1: those two things comminding. This is the Bloomberg Surveillance Podcast.
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Speaker 1: Tom keene In. This is Bloomer