Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: We begin with our top story, the latest CPI print
Speaker 2: boosting expectations for a twenty five basis point come from
Speaker 2: the FED next week. Muhammad al Aeron of Queen's College,
Speaker 2: Cambridge writing on X that he sees a quote ankorless paradigm,
Speaker 2: one that is crying out for the stabilization influence that
Speaker 2: usually comes from a dominant economic narrative rather than the
Speaker 2: current ping pong one and or forward policy guidance as
Speaker 2: opposed to this era of FED excessive data dependency. Muhammad
Speaker 2: has a lot to say, and he's with us for
Speaker 2: the next few hours to say it. Muhammed, good morning
Speaker 2: to you, Good morning John. Fantastically catch up with you, sir,
Speaker 2: particularly your observation yesterday about what's developing in the bond
Speaker 2: market at the front end of the curve, the swings
Speaker 2: we saw on the two year. Can you share your
Speaker 2: observations with our audience right now?
Speaker 3: What was that about?
Speaker 4: So we saw a twenty basis points round trip in
Speaker 4: the two year. Twenty basis points. That's a lot for
Speaker 4: that maturity, and we learned two things. One is that
Speaker 4: we have excessive data point dependence. All that happened yesterday
Speaker 4: in the infation report, as people know, is that monthly
Speaker 4: core came slightly harder than expected. Everything else was aligned,
Speaker 4: and yet we move ten basis points up.
Speaker 3: And then we.
Speaker 4: Discovered a second technical, which is money on the sideline
Speaker 4: being put to work quickly, and that I think is
Speaker 4: our reality, is that we don't have a dominant economic view,
Speaker 4: so we get swung all over. But the stabilizer right
Speaker 4: now is this technical of cash on the sideline. Now,
Speaker 4: financial conditions are good stabilizers with two very important qualifications.
Speaker 4: They are volatile and they have as much perception as reality.
Speaker 4: So we are going to continue with this volatile world
Speaker 4: until we restore either dominant economic paradigm or we saw
Speaker 4: the power forward policy guidance.
Speaker 1: You could argue that even in the face of all
Speaker 1: of this volatility, it shows how strong the economic system
Speaker 1: is that there wasn't some sort of significant disruption. Isn't
Speaker 1: that sort of the ultimate stress test that when the
Speaker 1: benchmark rate swings around by twenty basis points you don't
Speaker 1: see any massive selling, Why is it more pernicious than
Speaker 1: it might seem on the surface.
Speaker 4: So I do think the financial system has been strengthened
Speaker 4: and in particular the banks, and we are in a
Speaker 4: much better place than we were in the past. So
Speaker 4: you don't get the massive balance sheet effects. You don't
Speaker 4: get the sort of virtuous cycles good the cycles good
Speaker 4: or bad that can happen from that. But don't forget
Speaker 4: that we are the benchmark for the rest of the world,
Speaker 4: and we cause quite a few spillovers that the rest
Speaker 4: of the world says, you know what, enough now, we've
Speaker 4: had enough of this, Please get you act together.
Speaker 1: I was surprised at Jackson Hall to your point, there
Speaker 1: wasn't more of a discussion, at least not out loud,
Speaker 1: about what the neutral rate is. Essentially that sort of
Speaker 1: paradigm shift that you're looking for, some sort of real
Speaker 1: discussion of what this Fedure Reserve is willing to accept
Speaker 1: in terms of inflation and a benchmark rate. That's it
Speaker 1: sounds like they just don't agree on once. So how
Speaker 1: can they come up with one if they don't really
Speaker 1: have that certainty. And frankly, if the market can't agree
Speaker 1: on one either, is it better just to have one
Speaker 1: even if it's wrong.
Speaker 4: So, as usual, you're getting me to front run my
Speaker 4: financial times of at.
Speaker 3: Tomorrow, that's what you hear. Film.
Speaker 4: That's so I think, Lisa, you're absolutely right. But it's
Speaker 4: not just that we don't know what the destination is.
Speaker 4: We don't know what the journey is.
Speaker 3: We don't know.
Speaker 4: What risk mitigation mindset actually means operationally. And also there's
Speaker 4: disagreement as how quickly will FED official go from backward
Speaker 4: looking data dependence to forward leaning. So we have these
Speaker 4: disagreement both within the FOMC and also between the market
Speaker 4: and the end what seems to be the consensus if
Speaker 4: there is one on the FED. So this is for me,
Speaker 4: it's a fascinating time, but it is also a very
Speaker 4: confusing time.
Speaker 1: So amongst all those confusion, what do you want to
Speaker 1: hear from Jpowell next week?
Speaker 4: So what I'd like to hear and what I expect
Speaker 4: to hear, is that he's going to cut by twenty
Speaker 4: five basis points. Beyond that, it's more what I'd like
Speaker 4: to hear than what I expect to hear. I'd like
Speaker 4: to get a sense of where he thinks the neutral raders.
Speaker 4: I'd like to get a sense of where he sees
Speaker 4: the balance of risks. The market right now has modeled
Speaker 4: the FED as a single mandate FED maximum employment. FED
Speaker 4: official tell us no, no, no, we're do mandate FED.
Speaker 4: Let's not forget the inflation component. I'd like to know
Speaker 4: where he is on this.
Speaker 3: Do you want to hear more descent within the Fed? Yeah?
Speaker 4: I would like. I mean I admired the Bank of England.
Speaker 4: The last decision was five to four. You had a
Speaker 4: situation where it was six to one. I think that's
Speaker 4: important because that conveys the uncertainty. Yes, they should have
Speaker 4: more descent. I think they viewed dissent as weakness. Most
Speaker 4: of us view dissent as having a really important information
Speaker 4: content that has to be priced into markets.
Speaker 2: I remember a series of votes at the Bank of England,
Speaker 2: maybe a decade or seagam, So you remember this take
Speaker 2: when the committee was out voting King a governor.
Speaker 3: King was leading the central Bank. Think of the time.
Speaker 2: He wanted to win trees QE and you had people
Speaker 2: on the NPC voting against him. Not only that, there
Speaker 2: were more people voting against him than voting with him.
Speaker 2: That's a scenario we don't see at the Federal Reserve.
Speaker 2: You had a warning coming into the September meeting, and
Speaker 2: I remember it at the start of summer. You wanted
Speaker 2: them to reduce interest rates in July, but you acknowledged
Speaker 2: that the difference between going into September versus July wasn't
Speaker 2: that great. But you had one fear if we got
Speaker 2: one hot CPI print, they might get distracted.
Speaker 3: Was that what we got yesterday? How distracted might they be?
Speaker 4: I don't think that much, because it was just one
Speaker 4: element in a broadly consistent data release that certainly was
Speaker 4: very close to consensus forecast. But if we had missed
Speaker 4: on headline, if we had missed on core, if the
Speaker 4: base effects weren't as favorable as they are right now,
Speaker 4: you would have seen a total mess in the marketplace.
Speaker 3: So that was my.
Speaker 4: Concern is that, as much as they don't want to
Speaker 4: admit it, they are not just data depending, their single
Speaker 4: point data dependent, and that's pretty scary for policy setting.
Speaker 2: That's certainly how the market sees it, because it guarded
Speaker 2: the conversation away from fifty and back towards twenty five.
Speaker 2: How do you think they'll look to frame this rate
Speaker 2: cup when they deliver it a week yesterday. Will they
Speaker 2: call it a mid cycle adjustment? Will they say it's
Speaker 2: the beginning of a journey back to neutral, whatever neutral is.
Speaker 3: How do you think they're going to frame this decision?
Speaker 4: I suspect it will be what's called the Dovish twenty
Speaker 4: five base points, which means this is the first of many,
Speaker 4: and we may we may be inclined to go even
Speaker 4: more if the labor market weakens. There was this phrase
Speaker 4: in the Jackson Hall speech that was really important. We
Speaker 4: don't want to see the labor market get any weaker.
Speaker 4: That is a very strong statement from the fair chair.
Speaker 4: Whether everybody else is there, we don't know.
Speaker 1: Let's say they do what you want and they come
Speaker 1: out they see, this is what neutral is, this is
Speaker 1: our journey, this is our mandate, this is what we're
Speaker 1: going to do. And how much have they lost control
Speaker 1: of the plot anyway, just simply because there are other
Speaker 1: factors at play. You think about, for example, fiscal coming
Speaker 1: out and potentially disrupting things, Think about international investment with
Speaker 1: an auction that's necessarily negative, that kind of forces their hand.
Speaker 1: How much do they have ability to set the narrative
Speaker 1: with such a prescriptive tone right now?
Speaker 4: So they certainly should be incorporating fiscal They must be
Speaker 4: doing this. They certainly should be incorporating q QT. I mean,
Speaker 4: we haven't talked about qt QT is ongoing on that.
Speaker 4: They should certainly should be doing that, and that should
Speaker 4: be reflected in what they say. I hope they're doing
Speaker 4: this internally. I just think they got so burnt in
Speaker 4: twenty twenty one because they did take a forward leaning
Speaker 4: view and they were completely wrong. That they don't want
Speaker 4: to make another mistake.
Speaker 1: What if they say this is a victimless crime. We're
Speaker 1: not seeing a problem from this that essentially they're getting
Speaker 1: it right, and the markets are generally you hear traders
Speaker 1: actually say, actually, Powell is doing a pretty good job,
Speaker 1: so why should they change it?
Speaker 4: What would your argument, Well, first we go back to
Speaker 4: the amount of volatility we've had in fixed income.
Speaker 3: It has been unusual, Lisa, I know, I know. I
Speaker 3: watched it every day.
Speaker 1: We were talking yesterday.
Speaker 4: It was crazy, okay, and that has adverse external effects.
Speaker 4: It undermines also the credibility of the US as the
Speaker 4: benchmark for many others, and we are in a world
Speaker 4: in which countries are building little pipes around the US.
Speaker 4: We don't want to enable that process further. That's the
Speaker 4: first issue. The second issue is we have a major
Speaker 4: reconciliation in our future. We have the treasury part of
Speaker 4: the fixed income market that is signaling quite a high
Speaker 4: probability of recession. We have the credit part of the
Speaker 4: fixed income market that is signaling a very high probability
Speaker 4: of a soft lending. Now, if liquidity doesn't reconcile these
Speaker 4: two things, there's going to be even more volatility in
Speaker 4: this marketplace, and at some point volatility spills back to
Speaker 4: the real economy. And the only thing keeping this whe
Speaker 4: economy going right now is the labor market.
Speaker 2: I'm sitting here laughing because we need to kind of
Speaker 2: find what you said. Market participants that think Powell are
Speaker 2: doing a great job. They're the bullish once. Yes, let's
Speaker 2: be very clear about that. Actually are still near all
Speaker 2: time highs. If we weren't there, I think they'd have
Speaker 2: something different to say about where we were.
Speaker 1: Maybe their data point depending as well.
Speaker 2: Yeah, there's data point is the S and P five hundred.
Speaker 2: You mentioned where the bond market is and where markets
Speaker 2: are and how their price they want to pick up
Speaker 2: on the amount of demand we've seen for some issuance.
Speaker 3: We had a Guild issue last week.
Speaker 2: Record order Book had an Italian issue this week record
Speaker 2: order book. We've seen a similar dynamic in US high
Speaker 2: grade corporate debt in America, particularly last week, two very
Speaker 2: busy days, lots of demand. Credit spread said very very tight.
Speaker 2: Can you reconcile what each part of the fixed income
Speaker 2: market is talentis right now and whether you can make
Speaker 2: sense of it?
Speaker 4: And we had yesterday a treasury auction with massive indirect demand.
Speaker 4: I can only reconcile it by the tone of cash
Speaker 4: US on the sideline and the fear that if you
Speaker 4: don't get into and lock industrates now, you will lose
Speaker 4: interest income in the future. So every time we have
Speaker 4: a backup in rates, people rush back in. I mean,
Speaker 4: yesterday's dynamic was fascinating for me, that the speed of
Speaker 4: the round trip was significant.
Speaker 2: We've seen it a few times, and then last week Mohammed,
Speaker 2: We're lucky to have you