Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordernt. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business app. Let's get to the
Speaker 2: view on Wall Street this morning. Russ Coastrick of Black
Speaker 2: Rock right in the following. While our base case is
Speaker 2: no recession, the energy shock suggests a moderation in near
Speaker 2: term growth expectations. Russ joins us now for more. Russ,
Speaker 2: welcome to the program. You and a team have been
Speaker 2: de risking where and what.
Speaker 3: In Good morning, Jonathan, we've been to you risking across
Speaker 3: the board. We've really been getting most of the benchmark
Speaker 3: in our equity positions, benchmarkt duration. We've been bringing down
Speaker 3: some of the factor risks and the portfolio and there
Speaker 3: are a couple of reasons for that. The obvious one
Speaker 3: is we don't know how long this is going.
Speaker 2: To go to continue.
Speaker 3: I think you used exactly the right word a few
Speaker 3: moments ago, persistence, and the longer this persists, the greater
Speaker 3: the risk to inflation the economy. But the other reason
Speaker 3: for de risking is that there really aren't any hedges
Speaker 3: in this context. In twenty two, the dollar actually was
Speaker 3: an effective hedge against the.
Speaker 1: Sell off inequities.
Speaker 3: Last decade, treasuries were providing some downside when they're concerns
Speaker 3: about growth. In other circumstances, gold has been working. Nothing
Speaker 3: is working right now, So really the only thing you
Speaker 3: can do within a portfolio, other than making some adjustments
Speaker 3: at the stock level, is to bring the risks down.
Speaker 2: I often say in moments like this, the bonds don't work,
Speaker 2: They make things worse. Yields right now up again by
Speaker 2: four basis points for US tens at four forty five
Speaker 2: twos of four percent LEASA and I yes that I
Speaker 2: spent a lot of time on a week two year oction,
Speaker 2: a week five year oction followed by a week seven
Speaker 2: year oaction as well.
Speaker 1: Russ.
Speaker 2: What is happening that? What's behind those moves.
Speaker 3: This to me is actually maybe even a bit more interesting.
Speaker 3: It's going on in equity market, so it's very easy
Speaker 3: to understand. You have an oil shock, higher inflation, hit
Speaker 3: to growth, and what's happening with stocks. The bottom market,
Speaker 3: I think is more nuanced. Obviously, the bottom market is
Speaker 3: reacting to what will be an increase in headline inflation.
Speaker 3: That said, as you point out, I think most people
Speaker 3: realize higher energy, not just oil, but natural gas, higher
Speaker 3: food prices, higher fer fertilizer prices, all of which leads
Speaker 3: to an increase in headline inflation. But the problem is
Speaker 3: one that doesn't necessarily flow into core, and two, it
Speaker 3: is also a drag on growth. And there's happening at a
Speaker 3: time when the labor market has already a bit solved.
Speaker 3: So the notion that you just want to keep selling
Speaker 3: bonds into this, to me, that's less obvious.
Speaker 2: And I do think at some point.
Speaker 3: If the concerns about growth continue to build, if we
Speaker 3: do have one hundred dollars or higher oil for prolonged
Speaker 3: period of time, there is a question about at what
Speaker 3: points you want to start bringing bonds back into your
Speaker 3: portfolio as a hedge against weaker growth. Which is going
Speaker 3: to be another risk we're going to contend with.
Speaker 4: Part of the reason why it's been so hard for
Speaker 4: us to get a handle on when that point is
Speaker 4: when people should step in and by duration? Is it's
Speaker 4: unclear exactly what's behind the sellof Is it technical? Is
Speaker 4: it a question of central banks that are selling what
Speaker 4: they can to raise money for possible fiscal stimulus. Is
Speaker 4: it a potential concern for a fiscal response to any
Speaker 4: kind of slowdown in the future.
Speaker 1: What's your take on this. I think it's a great question.
Speaker 1: To my mind.
Speaker 3: One of the things that's clearly going on is a
Speaker 3: pricing out.
Speaker 1: Of what would have been a number of.
Speaker 3: Rate cuts from the FED and pricing in a greater
Speaker 3: possibility of hikes, particularly from the So is the front
Speaker 3: end of the curve is adjusting. You're seeing that movement
Speaker 3: throughout all of the yield curve. But again, if we're
Speaker 3: going to be an environment where hunderdollar oil persists, and
Speaker 3: I think you all raised a good point a few
Speaker 3: moments ago, it's not as if oil is going to
Speaker 3: go back to sixty five the second the shooting stops.
Speaker 3: There's been damage to infrastructure, there are questions about how
Speaker 3: long it takes to open the straits of horror moves,
Speaker 3: there is likely to be a war premium or a
Speaker 3: risk premium embedded in oil for many, many months. So
Speaker 3: if you're going to have that period of prolonged higher
Speaker 3: energy and all the knock on effects, you've got to
Speaker 3: start to bring down your growth expectations, most of which
Speaker 3: we're high coming into the year, and at some point
Speaker 3: that probably does suggest bring you to ration up further, which.
Speaker 4: Is something that I know others, including JP Morgan, has
Speaker 4: been thinking of doing this doing given all of this
Speaker 4: and given what we know in terms of the prolonged conflict,
Speaker 4: do you think that right now we're facing a market
Speaker 4: that is over complacent when it comes to the growth
Speaker 4: shock that's coming down the pike.
Speaker 3: I don't think it's overly complacent, because they do think
Speaker 3: you've already seen a fairly significant adjustment.
Speaker 2: I also believe that at least in the US, I think.
Speaker 3: The situation in Europe is certainly more serious, giving their
Speaker 3: exposure to higher energy prices.
Speaker 2: I think the US can probably.
Speaker 3: Survive eighty or ninety oil still have a year when
Speaker 3: growth is positive. Of course, the difference is going to
Speaker 3: be that we're not going to get, or we're much
Speaker 3: more less likely to get the type of above trend
Speaker 3: growth that investors were expecting just a few months ago.
Speaker 3: And if you look, what the equity market has been
Speaker 3: doing is actually responding to that. The rotation that dominated
Speaker 3: back in late twenty five early twenty six was all
Speaker 3: about the broadening out. You bought cyclicals, you bought value,
Speaker 3: you bought international stocks, you bought small caps.
Speaker 2: To my mind, those trades.
Speaker 3: Were predicated on above trend growth. As you start to
Speaker 3: price that growth out, you're seeing a reversal of many
Speaker 3: those trends. Investors have been looking for more defensive parks
Speaker 3: in the market, and interestingly enough, they've also been looking
Speaker 3: at tech, at least on a relative basis, is holding
Speaker 3: up better in a world which economic growth is.
Speaker 2: Not as much of a tailment. Stay with us more
Speaker 2: Bloomberg surveillance coming up after this. Let's talk about europe
Speaker 2: Global central banks facing the thread of higher inflation as
Speaker 2: energy prices saw the ECP navigating mixed signals, with some
Speaker 2: policymakers ready to act fast, others urging caution. Join us
Speaker 2: now to discuss as an ECB Governing Council member, and
Speaker 2: the National Bank of Beolgium. Governor Pierre Funch, Governor, Welcome
Speaker 2: to the program, sir. Let's just start with the nature
Speaker 2: of this shark. From your perspective, Is this the kind
Speaker 2: of shark that a central bank should look through?
Speaker 1: Well, that's of course the big question, and we know
Speaker 1: the textbookcase is for looking for if you're confronted with
Speaker 1: the supply shock. Now, in the meantime, we have the
Speaker 1: episode of twenty two, and in twenty two we were
Speaker 1: a little bit late and reacting. We had team transitory.
Speaker 1: We're not alone. I was maybe one of the first
Speaker 1: governors to be concerned about the fact that inflation might
Speaker 1: might go up further than what we had in our models.
Speaker 1: So now we're there, we have again a supply shock,
Speaker 1: and we have to decide how to react to it.
Speaker 1: We should not overreact. I think so far we were able,
Speaker 1: I think to communicate the fact that we would react
Speaker 1: if need be, but that we were not going to
Speaker 1: rush to do anything that would would be looking like overreaction.
Speaker 1: But anyway, I mean, we have to Twenty two is different.
Speaker 1: We have the textbook and we find we need to
Speaker 1: find a middle way between what we have in the textbook,
Speaker 1: which is we don't react, and the experience we had
Speaker 1: in twenty two. But in twenty two, of course, there
Speaker 1: were a lot of bottlenecks in the system, very tight
Speaker 1: labor markets, you had a lot of fiscal support coming
Speaker 1: out of the COVID crisis, and that's not the situation
Speaker 1: we're in today. The labor market is a bit weaker
Speaker 1: in Europe. So we will have to find a good
Speaker 1: balance between the textbook situation and again what we experienced
Speaker 1: twenty two.
Speaker 2: The governor, does that give you more time? Does that
Speaker 2: give you more time? And it's April too soon to
Speaker 2: know what kind of shock this is to understand if
Speaker 2: you should look through it or react to it.
Speaker 1: Well, if the conflict is mainly over by April, then
Speaker 1: I guess we will be closer to what we have
Speaker 1: in our baseline. We just made some projections over the
Speaker 1: during the last weeking of the Governing Council. I think
Speaker 1: the base case that we produced was still relatively benign.
Speaker 1: Inflation was moving to a peak of three percent but
Speaker 1: not only yearly basis, and then going down quite quickly
Speaker 1: to two percent. On the basis of that, it's not
Speaker 1: clear that the reaction would be warranted. Of course, we
Speaker 1: were doing the projection on the basis of two hikes
Speaker 1: that were priced by the market. But I would say,
Speaker 1: you know, if we're if we are still close to
Speaker 1: the baseline, that it's not clear we have to react.
Speaker 1: If we move to what we call the adverse or
Speaker 1: the CV scenario, then we have higher inflation and certainly
Speaker 1: more persistent in the case of the cvere, and then
Speaker 1: my guess would be that we have to do we
Speaker 1: would have to do something. But even then I think
Speaker 1: we need to make a distinction between reacting so that
Speaker 1: real rates remain stable or reacting and increasing real rates.
Speaker 1: So if you believe that core inflation is going to
Speaker 1: go up for a period over a year, you may
Speaker 1: want to react, and the first tike might just be
Speaker 1: adjusting to this higher core inflation. And then there is
Speaker 1: a stage if the shock is bigger and you have
Speaker 1: significant second round effects, which is of course a big
Speaker 1: part of the uncertainty, where you might have to to
Speaker 1: tighten as such, And I would still make this different
Speaker 1: hiking as such, if core inflation is going up, might
Speaker 1: not be tightening. And I'm not talking about you know,
Speaker 1: a spot real rates, but say, over a period of
Speaker 1: one or two years, depending on what's our review of
Speaker 1: the world is.
Speaker 4: Governor, it sounds like your more patient, potentially than some
Speaker 4: other members on the ECB. I'm thinking, for example, of
Speaker 4: a recent interview that President ECB President Christine Leaguard did
Speaker 4: with The Economist yesterday, saying that the ECB would have
Speaker 4: to respond in a force flow persistent way if inflation
Speaker 4: looks set to sit well above it's two percent target
Speaker 4: for an exodent period, most people would agree, but she
Speaker 4: said even a more modest overshoot could call for a
Speaker 4: measured rate move. Do you agree with that that if
Speaker 4: inflation does not look like it is poised to go
Speaker 4: down to two percent, say by the end of this year,
Speaker 4: that it makes sense to signal to markets that you're
Speaker 4: serious about containing inflation by making a hike.
Speaker 1: Well, if I gave the impression that was not aligned
Speaker 1: with Christine Lagad, I'm sorry for that, because we are
Speaker 1: completely aligned, or I'm aligned to her with her you,
Speaker 1: but I was just discussing the case where by the
Speaker 1: meeting of April the conflict would be over and then honestly,
Speaker 1: it's still something that is relatively probably relatively benign and
Speaker 1: we might have to react or not, but that's not,
Speaker 1: you know, a difficult situation probably to deal with. My
Speaker 1: concern is, of course, and the concern of many people
Speaker 1: and of the market, is that it would not be
Speaker 1: over by by April, or maybe not even over by June.
Speaker 1: What I would like to have is a better mapping
Speaker 1: of the scenarios that we are making to actually the
Speaker 1: conflict lasting until April or until June, that we have
Speaker 1: a better mapping of our scenarios and basically the meetings
Speaker 1: of the Governing Council. But it's moving fast. So one
Speaker 1: meeting is April, another meeting is June. If the conflict
Speaker 1: is not over by June, then we are, you know,
Speaker 1: most probably way above our baseline and that would probably
Speaker 1: warrant some some kind of react.
Speaker 4: Governor, do you think that the ECB is hamstrung by
Speaker 4: the fact that it is a single mandate FED dealing
Speaker 4: with an inflationary shock The FED looks like it's currently
Speaker 4: prepared to look through given that there is a serious
Speaker 4: growth hit on the other side that is potentially going
Speaker 4: to transpire.
Speaker 1: Well, in a way, it makes it easier because if
Speaker 1: you have only one objective, you only look at one target,
Speaker 1: but we always insist that we have an objective over
Speaker 1: a medium term horizon. So we do integrate the impacts
Speaker 1: of the shock on growth, and to the extent that
Speaker 1: the impact of the shock on growth would be to
Speaker 1: some extent deflationary, I don't think that's the base case,
Speaker 1: but of course we would have to take that into account.
Speaker 1: But it's taking into account the impact of the shock
Speaker 1: on the real economy and then the repercussion in terms
Speaker 1: of whether we're going to be faced with second rounds
Speaker 1: effects or not. If the economy weakens fast, then the
Speaker 1: second round effects might be limited, which might warrant less
Speaker 1: of a move. And the big uncertainty is, of course
Speaker 1: the labor markets and the economy is less tight than
Speaker 1: it was in twenty two coming out of the COVID crisis,
Speaker 1: with all these bottlenecks in the system. But the economic
Speaker 1: agents were surprised by the pickup in inflation. We had
Speaker 1: known a period of low inflation for a long, very
Speaker 1: long time, so people reacted as much as we did
Speaker 1: in a way slowly to the inflation developments. The big
Speaker 1: thing now we have to monitor is whether economic agents,
Speaker 1: firms and then workers will adapt more quickly this time
Speaker 1: to the shock. If this is the case, it might
Speaker 1: lead to second round effects that will be quote in
Speaker 1: quote higher ketrist paribus compared to the level of the shock.
Speaker 1: If because of weaknesses in the economy in the labor market,
Speaker 1: firms and then workers don't react fast and basically take
Speaker 1: the hit, then the case for reacting is less strong.
Speaker 2: Final question, listening to you to recap what I hear
Speaker 2: is patients the prospect of two different scenarios with different responses.
Speaker 2: What I see in markets, though, is tied to financial conditions.
Speaker 2: The market doing the work for you already high yields
Speaker 2: on government bonds, pricing in the prospect of hikes from
Speaker 2: the Central Bank over the next year or so. When
Speaker 2: you look at that, do you consider that an unwarranted
Speaker 2: timeing of financial conditions given the patients that you've pledged
Speaker 2: this morning already?
Speaker 1: Well, I'm you know, I'm patient today, But in April,
Speaker 1: if we're still there, I might not be patient. So
Speaker 1: I don't want to convey the message that we are
Speaker 1: not ready to act. But I'm comfortable with what I
Speaker 1: see in the market. But given the uncertainty, the uncertainty
Speaker 1: is huge, So you know making any judgment today or
Speaker 1: what we could do in April or June. Given the
Speaker 1: uncertainty the market signals or reaction will be different next
Speaker 1: week and the week after next. We have to monitor that.
Speaker 1: We have to at least, I mean we should not overreact.
Speaker 1: I mean, we are not going to control the first
Speaker 1: round effects of this shock, so we should not even
Speaker 1: try to control the first round effects. So in this
Speaker 1: sense we have time to react react adequately depending on
Speaker 1: what is our perception of what the second round effects
Speaker 1: will be. But you know, April is not out of
Speaker 1: the question. If if by April we have solid evidence
Speaker 1: that the shock will be lasting and will lead to
Speaker 1: a big hike in inflation that is likely to have
Speaker 1: some degree of persistence, then we might have to do something.
Speaker 1: But you know, we still have some time before the
Speaker 1: April meeting, and I don't want to take any any
Speaker 1: bed in one or the other direction.
Speaker 2: Stay with us. More Blandberg surveillance coming up after this.
Speaker 2: So here's the laces. This morning, the President, continuing his
Speaker 2: post for our interest rates is the confirmation of French
Speaker 2: chan nominee Kevin Walsh remains on pause. Sona desire Franklin
Speaker 2: Templeton writing, even before the current shark, I was not
Speaker 2: expecting any more cuts, but it is too early to
Speaker 2: forecast rate high. Sonal joins us now for more, Sonal,
Speaker 2: welcome to the program. I know so many people in
Speaker 2: fixed income itching to get long duration because yields have
Speaker 2: backed up, but they're nervous. What are you advocating for?
Speaker 5: So you know, we came in Thanks for having me on, Jonathan,
Speaker 5: but we came into this year actually a little bit short,
Speaker 5: and we are moving slowly towards neutral, but I am
Speaker 5: not tempted to go a long yet. This is essentially
Speaker 5: when we talk about the two, it's either bimobile distribution
Speaker 5: or more accurately, there are two tail risks, and we
Speaker 5: certainly can't predict which of those tail risks comes to
Speaker 5: fruition if either either one.
Speaker 2: Of them i e.
Speaker 5: A very protracted conflict or a very short conflict. I
Speaker 5: mean you can't, you can't actually position your portfolio to
Speaker 5: either one of those two tail risks.
Speaker 4: Son Now, forgive me. I keep harping on this one topic.
Speaker 4: Why are long end body yields rising right now? And
Speaker 4: I look at inflation expectations and the break even rates
Speaker 4: market long term inflation is not taking up, If anything,
Speaker 4: it's going down. This is a real rate move at
Speaker 4: a time when people are looking out to the potential
Speaker 4: of a decline in growth. Can you explain what's going
Speaker 4: on currently in a long end of the yeld curve?
Speaker 5: To me, actually, what the market is doing is really rational.
Speaker 5: It is anticipating that, yes, there may well be a
Speaker 5: decline in growth, and the response to that decline in
Speaker 5: growth is going to be massive physcal eating. You know
Speaker 5: your prior guest from the ECB, he only spoke about
Speaker 5: monetary policy. He didn't mention what the probable fiscal response
Speaker 5: would be if this were to be a protracted conflict.
Speaker 5: There isn't a government in the developed world which will
Speaker 5: probably not react by trying to accommodate some of that
Speaker 5: weakening through a greater fiscal push. So I think that
Speaker 5: bond markets are actually behaving pretty rationally right now.
Speaker 4: Do we think that we're pushing up against the limits
Speaker 4: of using a fiscal lever to offset weakness based on
Speaker 4: the pushback that we're seeing right now from the bond market.
Speaker 5: So it depends, Well, that's a useful statement. I don't
Speaker 5: think we're getting to a limit. Okay, because here's the thing.
Speaker 5: There is an enormous amount of liquidity floating around globally.
Speaker 5: There is the ability to finance more bonds. However, at
Speaker 5: this point, clearly the market is not accepting that the
Speaker 5: yield is an adequate compensation for the prospect of higher
Speaker 5: inflation and higher bond supply. But you do find a
Speaker 5: market clearing point, So how much can fiscal do. Even
Speaker 5: automatic stabilizers by themselves will lead to widening fhyscal deficits.
Speaker 5: So you know the fact that unemployment goes up to
Speaker 5: unemployment benefits go up, and so you will have a
Speaker 5: widening the event of a significant slowdown. And I think
Speaker 5: there's a big difference between what's happening in Europe as
Speaker 5: I think I think you've mentioned yourself, versus what's happening
Speaker 5: in the US. But in the US, for a whole
Speaker 5: host of other reasons, we're looking at physcal profligacy as
Speaker 5: we've never seen before. For the last five years, we've
Speaker 5: seen it, and I see no indications that this is
Speaker 5: going to go away anytime soon.
Speaker 2: So, now what you just said there on FISCO, I
Speaker 2: think it's really important for multiple reasons. Here's one. Do
Speaker 2: you think it increases the odds that we'll see second
Speaker 2: order effects if governments step in and try and support
Speaker 2: consumers in this moment.
Speaker 5: Oh, in terms of inflation. Yeah, yeah, because actually it
Speaker 5: was the opposite way around. If you think back to
Speaker 5: the famous transitory period of twenty twenty one, what was
Speaker 5: really going on in twenty twenty one. We did have
Speaker 5: very easy monetary policy, but the reality is we had
Speaker 5: an enormous fiscal splurge in the first quarter of twenty
Speaker 5: twenty one as a new administration came in. It was
Speaker 5: absolutely enormous, and so back in those back at that time,
Speaker 5: to me, it appeared absolutely self evident as you were
Speaker 5: going to get demand push inflation, which the FED kept
Speaker 5: saying was a supply side impact, and eventually, of course,
Speaker 5: we got the results we got. If you do get
Speaker 5: that physical accommodation of a shock of this nature, you
Speaker 5: will get second right of it. Ultimately, let's take an
Speaker 5: extreme scenario. Let's suppose that we really are hitting and
Speaker 5: taking out not just twenty percent, but oil facilities, say
Speaker 5: in other parts of the Gulf, which is responsible for
Speaker 5: thirty percent of global oil supply. Supposing you actually do
Speaker 5: something much more terrible, which leads to a several year contraction.
Speaker 5: You can't accommodate it because ultimately you need demand destruction,
Speaker 5: which translates into slower growth.
Speaker 2: This is the Bloomberg's Events podcast, bringing you the best
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