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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
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Speaker 3: We've got a problem in the UK.
Speaker 2: Political uncertainty in the country pushing guilt yields to their
Speaker 2: highest levels in decades. According to the Times of London.
Speaker 2: Just moments ago, a rival to UK Prime Minister Kirs
Speaker 2: Stamer preparing to trigger a leadership contest. Kit jukes of
Speaker 2: self gen right in the following Increased spending and higher
Speaker 2: taxes are a given layer that, on top of rising
Speaker 2: energy costs and falling growth forecast, there isn't much to
Speaker 2: make anyone feel good about the pound. Kit joins us
Speaker 2: now for more. Kit Welcome to the program. Lisa said
Speaker 2: it yesterday, said it again this morning. Is this the
Speaker 2: new normal for UK assets?
Speaker 4: It's been the normal for a little while.
Speaker 5: Now.
Speaker 4: We are stuck in a world of governments that don't
Speaker 4: focus enough on growth and have lots of other things
Speaker 4: that are more interested in the result of that is
Speaker 4: you either have you are constrained on spending or you
Speaker 4: have to raise taxes and you're probably going to be
Speaker 4: on popular somewhere in the middle of it. And around
Speaker 4: we go and the adults in the room is the
Speaker 4: bond market or the referee is the bond market because
Speaker 4: funding this requires a country with a massive current account
Speaker 4: deficit dependent on foreign investors to come in and buy
Speaker 4: guilt guilt yield spike and the and the government does
Speaker 4: or doesn't fall and doesn't or doesn't respect the bond
Speaker 4: market and get its act together. And we've done this
Speaker 4: a few times and we don't look like escaping this
Speaker 4: until someone comes in and says we need more growth.
Speaker 3: Okay.
Speaker 2: Outside of the UK, investors might not be familiar with
Speaker 2: names like West Street inc. Anti Burnham, Anti Burnham of
Speaker 2: course the mayor of Manchester West Street in the House Secretary.
Speaker 2: There was a moment ago, about ten to fifteen minutes
Speaker 2: ago we had a report from the Times of London
Speaker 2: suggesting that maybe the House Secretary might consider triggering a
Speaker 2: leadership election, a leadership contest and ultimately quit the government
Speaker 2: in the next twenty four hours. Kid what could come next?
Speaker 2: Can you help people understand what the next government, the
Speaker 2: next leadership might look like.
Speaker 4: So it depends on where we go. So we have
Speaker 4: factions that he's not part of the biggest faction, that's
Speaker 4: the Burnham faction, but it represents certainly a shift to
Speaker 4: the left politically. And then if he were to win
Speaker 4: a vote for example, which is possible but at this
Speaker 4: point unlikely, you would have a messy kind of situation
Speaker 4: going forwards from there, where you see what you can do.
Speaker 4: If it gets to one candidate turns into lots of candidates,
Speaker 4: then we see the Mayor of Manchester has to has
Speaker 4: to find himself a seat in Parliament and that'll take time.
Speaker 4: And the last round of voting that we saw in
Speaker 4: the local elections didn't suggest that a lot of people
Speaker 4: are voting labor at the moment, so that's quite messy.
Speaker 4: So it's all going to be quite drawn out. And
Speaker 4: if we got to an end conclusion, we would still
Speaker 4: have a labor government, and we would still have a
Speaker 4: labor government that at the moment is fixated on lots
Speaker 4: of things that don't include growing the economy more quickly
Speaker 4: and increasing tax revenues through that method to includes highest
Speaker 4: taxation or reduced spending, depending on where you sit. So
Speaker 4: the problem doesn't go away.
Speaker 6: How much is this a specifically a UK problem and
Speaker 6: how much is this a broader representation of the issue
Speaker 6: facing all of Europe and frankly on the margins the
Speaker 6: United States with debt levels at a very high level
Speaker 6: relative to growth and a potential pushback in an inflationary
Speaker 6: environment from pond investors.
Speaker 4: Well, so firstly, we're at the I guess we're at
Speaker 4: the pointy end of the problem. So the problem starts
Speaker 4: if the United States is higher yields because people are
Speaker 4: concerned about the inflation fighting credibility of the federal reserve
Speaker 4: and are concerned about the size of the deficit, spending
Speaker 4: on the war and anything else. If we get ourselves
Speaker 4: into that, then you get treasury yields if you like
Speaker 4: wandering up to four and we wanted ours up to five,
Speaker 4: and we can add some numbers.
Speaker 3: To each of those.
Speaker 4: We have a bigger current account deficit presented of GDP
Speaker 4: than pretty much anybody else. So we're dependent on foreign
Speaker 4: investment coming in. We have slow growth and the only
Speaker 4: thing that keeps our currency stable is having interest rates
Speaker 4: that are high or higher than the rest of Europe.
Speaker 4: That doesn't get our growth story at So yeah, if
Speaker 4: ten youre noteyilds were at two and a half percent
Speaker 4: in the US, the world would be a much easier place. Unfortunately,
Speaker 4: because it isn't. We're the kind of the We're the
Speaker 4: place where the pain starts being felt, and it's on
Speaker 4: the UK government. Given where we are, the size of
Speaker 4: our deficit, the size of our current account deficit to
Speaker 4: be responsible. The only advantage we have over the United
Speaker 4: States is we have a very credible central bank, an
Speaker 4: inflation targeting central bank whose independence isn't in question at all.
Speaker 4: But but that on that on its own isn't going
Speaker 4: to be enough to finance the deficits to come.
Speaker 6: What would it take kit for you to get bullish
Speaker 6: on the pound?
Speaker 4: On the pound, I'm only slowly, but that the support
Speaker 4: the pound has is that everybody's bearished, So it doesn't
Speaker 4: take me much good news to make me optimistic but
Speaker 4: I would like a government with a clear and coherent
Speaker 4: plan for growth, and then I probably would be barished
Speaker 4: because at that margin, if I thought that, you know,
Speaker 4: that we could put in a program that would have
Speaker 4: the UK growing one percent faster perannum than the rest
Speaker 4: of Europe, which isn't which isn't a very big bar
Speaker 4: to get over, then then the pound, I think, could.
Speaker 3: Could start getting stronger.
Speaker 4: But its value in real terms is going is being
Speaker 4: eroded because we're consistently running higher inflation in the rest
Speaker 4: of Europe, so it's getting more expensive every day, and
Speaker 4: that's why nominal terms, the currency is going to have
Speaker 4: to weaken at some point if we don't turn that around.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this.
Speaker 2: Seth competenter of Morgan Stanley writing disinflation resumes in the
Speaker 2: second half of the year, allowing the Fed to cut
Speaker 2: rights twice in the first half of twenty seven. Seth
Speaker 2: joins us now for more. Seth welcome goes be over.
Speaker 2: Chicago thinks we've got an inflation problem. Do you disagree?
Speaker 2: I don't disagree.
Speaker 5: You know, our baseline forecast, as you just showed, is
Speaker 5: that inflation should start to trend down. We do think
Speaker 5: we're around pete tariff effects on core goods inflation, and
Speaker 5: that should start to come off. I think we got
Speaker 5: a sign of that from the CPI data just just yesterday.
Speaker 5: The way you just had the clip with Kevin Hassett
Speaker 5: pointing out that historically energy price shocks like this have
Speaker 5: gone through the headline but not to core and then
Speaker 5: it ends up being temporary. So if everything goes according
Speaker 5: to that baseline plan, then then the inflation problem isn't
Speaker 5: as bad as it might otherwise. Look, however, and this
Speaker 5: is I think a really important however, we're in a
Speaker 5: really really unusual situation here. The FED has missed its
Speaker 5: inflation target for over five years. To the upside, we're
Speaker 5: still about a percentage point above target. That longevity of
Speaker 5: the inflation myss. At some point, I don't know when,
Speaker 5: probably starts to affect the psychology of consumers in terms
Speaker 5: of what they expect and what they accept for prices.
Speaker 5: It probably starts to affect businesses as they're setting prices
Speaker 5: trying to understand how much they can or can't pass
Speaker 5: through costs.
Speaker 7: We don't think we're at a tipping point, but I.
Speaker 5: Do believe that the risks now are heightened relative to history.
Speaker 5: This energy shock has proved to be very difficult to forecast,
Speaker 5: and I think it's an open question right now how
Speaker 5: temporary is the energy shock. Our baseline assumption when we
Speaker 5: did our forecast was that we would get some resolution,
Speaker 5: We would get oil prices down to call it ninety
Speaker 5: dollars a barrel at the end of the year. So
Speaker 5: coming off the peak coming down, we could easily be
Speaker 5: wrong there, and just the headlight headlines overnight show that
Speaker 5: there's all sorts of risks that there's prices stay elevated.
Speaker 7: Seth.
Speaker 2: I's the inflation data we've had so far within the
Speaker 2: report of yesterday, are the elements within that that do
Speaker 2: give you pause that maybe you think could become a
Speaker 2: bigger headwind to your base case.
Speaker 5: So you know, we saw, for example, in core, we
Speaker 5: saw a rebound in shelter inflation.
Speaker 7: We were expecting that.
Speaker 5: I think a lot of people were expecting that that
Speaker 5: looked like there was noisy tick down in that category.
Speaker 5: And so the tick back up makes a lot of
Speaker 5: sense as long as that's all it is, is sort
Speaker 5: of a bump in the road along the same trajectory
Speaker 5: we were on before. It's fine, but you really have
Speaker 5: to start to wonder is there something else going on
Speaker 5: in core at the fundamentals of the economy are actually
Speaker 5: pretty solid.
Speaker 7: We've got an unemployment rate that's pretty low.
Speaker 5: The last jobs report showed that the weakness in hiring
Speaker 5: we had very much seen last year has probably bottomed
Speaker 5: out and start to pick up. So I think we
Speaker 5: have to be on heightened alert. But I wouldn't say
Speaker 5: there's any single component that's sort of standing out.
Speaker 6: Is this truly an oil price shock if we stay
Speaker 6: where we are based on inflation adjusted fuel prices over.
Speaker 5: History, Well, I mean, I think that's that's a good question.
Speaker 5: If you compare where we are now to say, twenty
Speaker 5: twenty one twenty twenty two, where we ended up following
Speaker 5: the Russian invasion of Ukraine, nominal prices of oil are
Speaker 5: not as high right now as they were then, And
Speaker 5: then if you compare it to the average price level,
Speaker 5: so the CPI index, it makes it seem like less
Speaker 5: of a of a price shock now than it was then.
Speaker 5: So in that sense, you know, it's a bit more mild.
Speaker 5: And that's the reason why we maintain our constructive baseline view.
Speaker 5: I think the challenge here and the risk is what
Speaker 5: happens a week from now, what happens a month from now,
Speaker 5: what happens two months from now. My colleague Martin rats
Speaker 5: Over in London, who's our commodities and energy specialist, has
Speaker 5: great charts about what's going going on with US exports,
Speaker 5: and US exports of distilled products like gasoline. Inventories are
Speaker 5: coming down being shipped away just as we're about to.
Speaker 7: Get to prime driving season.
Speaker 5: So if there's no resolution, if we still see this
Speaker 5: shortfall in terms of supply flowing to the global market
Speaker 5: in a month or two, could we see physical shortages
Speaker 5: where things are just running dry. I think that's a
Speaker 5: real risk that everyone should consider.
Speaker 7: SETH.
Speaker 6: We also are looking, as John pointed out earlier, to
Speaker 6: cheer economy, where you've got the AI trade and you've
Speaker 6: got everything else in The AI trade seems somewhat independent
Speaker 6: of some fundamental macroeconomics and is fueling a wealth effect
Speaker 6: that keeps consumers spending. At what point has the traditional
Speaker 6: channel of disinflation broken down because of the AI cycle
Speaker 6: that's been super imposed.
Speaker 3: On top of it.
Speaker 7: I think that's a great question.
Speaker 5: And as we wrote our Midjiar outlook and we were
Speaker 5: thinking about various scenarios, those are the two themes that
Speaker 5: we matter. What's going on with the energy shock and
Speaker 5: then what's going on with AI. I think there's no
Speaker 5: two ways about it. In the short run, AI boosts
Speaker 5: aggregate demand, boost aggregate demand for investment spending, for construction,
Speaker 5: and then the wealth effect that you're talking about is
Speaker 5: absolutely critical to keep upper income, upper income and higher
Speaker 5: wealth household spending, and they're the real drivers of what's
Speaker 5: been going on. Will that lead to more fundamental underlying
Speaker 5: inflation you know, so far not clear, but I think
Speaker 5: there's another risk. And so what we try to illustrate
Speaker 5: is what happens if we are you optimistic but not
Speaker 5: sufficiently optimistic, and consumer spending actually picks up from here
Speaker 5: because of the wealth effects and because broader hiring seems
Speaker 5: like it's stabilizing. What if that spending, along with the
Speaker 5: AI spending, allows businesses across the economy to start to
Speaker 5: engage in cappex spending.
Speaker 7: So far it's only been essentially AI capax. What if it's.
Speaker 5: Broader that kind of aggregate demand scenario where things really
Speaker 5: pick up from here, that's the scenario you need to
Speaker 5: really see the FED shift gears start to think about
Speaker 5: hiking interest rates, and as you pointed out, I think
Speaker 5: earlierly the market starting to put some probability on that outcome.
Speaker 5: I really do think we want to pay a lot
Speaker 5: of attention to where that generalized demand in the economy
Speaker 5: is going, because it could lead to that scenario of
Speaker 5: the FED hiking.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this.
Speaker 2: Here's the take from Terry Weisman of Macquarie Rights in
Speaker 2: the following There seems to be a divergence between a
Speaker 2: high year end inflation outlook and a FED that is
Speaker 2: expected to keep the policy rate on hold through year end.
Speaker 2: Terry Johns snappermore Terry good Mornic. How do we reconcile
Speaker 2: resolve that tension?
Speaker 3: Well, it's going to have to be with a policy move.
Speaker 1: I suspect the Federal Reserve, unfortunately, is going to meet
Speaker 1: in June, and that feels like such a long time
Speaker 1: from now, given how much inflation data, how bad the
Speaker 1: data has been in the last two days. But ultimately
Speaker 1: it's going to have to be with some recognition that
Speaker 1: a certainly an easing bias is the wrong thing to do.
Speaker 1: I'm shocked that they haven't removed that already. In the
Speaker 1: April meeting, J. Powell hinted that they would, But even
Speaker 1: that doesn't feel like enough right at this point. What's
Speaker 1: enough enough is probably moving towards a right high and
Speaker 1: being explicit here and even signaling that through a tightening
Speaker 1: bias at the next meeting.
Speaker 3: I think that's appropriate.
Speaker 1: Look, I think at the heart of the matter here
Speaker 1: is that all wars are inflationary. You can go back
Speaker 1: to the US Civil War, you can look at World
Speaker 1: War Two, you can look at World War One. You
Speaker 1: can probably even look at the Spanish American War. I haven't,
Speaker 1: but I'm guessing that it was inflationary. The Vietnam War
Speaker 1: certainly was. Why are we shocked that we have a
Speaker 1: war and we have inflation?
Speaker 6: If this FED does not move to a tightening bias,
Speaker 6: what is the market response likely to be?
Speaker 1: Well, I think we're already seeing it. It's the long
Speaker 1: end of the curve. It's the presumption that they don't
Speaker 1: do something soon, they're going to have to do a
Speaker 1: lot more later, that they have to nip it in
Speaker 1: the butt.
Speaker 3: The longer they wait.
Speaker 1: The longer, we're going to see the long end of
Speaker 1: the curve they yields, and the long end of the
Speaker 1: curve move up and the curve effectively steepen. That will
Speaker 1: not be good for housing, let's say, it will not
Speaker 1: be good for other sectors in the economy that are
Speaker 1: sensitive to the long end of the curve.
Speaker 3: But that's exactly why the FED needs to start moving.
Speaker 1: I think by signaling that they will high rates, you
Speaker 1: will stabilize, effectively stabilize the long end of the curve
Speaker 1: they yield at the long end of the curve, because
Speaker 1: you'll be singing to the market, to the market that
Speaker 1: we're dealing with this issue, that we're not going to
Speaker 1: delay it and ultimately have to raise rates a lot
Speaker 1: more in the future.
Speaker 6: Arkably, some people would say that typically these price increases
Speaker 6: are transitory. They don't want to curtail the slowdown that
Speaker 6: you're seeing in certain sectors of the economy. Do you
Speaker 6: think that it would become more of a liability if
Speaker 6: they signaled at least staying on hold for a longer
Speaker 6: period of time. Do you think that you would see
Speaker 6: a dramatic weakening in the dollar. Do you think that
Speaker 6: you would see the bond vigilantes come back, Yes.
Speaker 3: I do.
Speaker 1: I mean, it depends on the tone that they use
Speaker 1: when they submit that they're going to keep it on
Speaker 1: hold for a very long time.
Speaker 3: I don't think.
Speaker 1: But that in itself is a commitment, right, that's the
Speaker 1: problem to say that you're going to keep it on hold,
Speaker 1: and definitely is a commitment to keep it on hold.
Speaker 1: And if the market continues to show us that inflation
Speaker 1: is going to be high, that is not going to
Speaker 1: seem like enough. I'd rather they err on the side
Speaker 1: of doing a little bit too much at this point.
Speaker 3: And I'll tell you why.
Speaker 1: If you look at the if you look at the
Speaker 1: inflation swap curve right now, it is not predicting that
Speaker 1: inflation is going to come back down to even three
Speaker 1: percent by the end of the year.
Speaker 3: In fact, I suspected after the numbers this morning it's
Speaker 3: higher than that.
Speaker 1: It is also predicting that in April that's already in
Speaker 1: the main inflation print, we're going to get something on
Speaker 1: the order of four point three percent for CPI year
Speaker 1: every year, very high. So the market is already very
Speaker 1: doubtful that the Fed can get this under control by
Speaker 1: effectively pricing in a forward curve for inflation, that this
Speaker 1: is not converging back down to anything.
Speaker 3: Near the target by the end of this year.
Speaker 2: What does that confidence that we do converge to taka?
Speaker 2: Where does that confidence come from after they've missed it
Speaker 2: for five years?
Speaker 3: What does that confidence come from?
Speaker 1: Well, it's going to have to come from a much
Speaker 1: more explicit commitment on the part of the FED to
Speaker 1: tighten if they need to to put a priority on
Speaker 1: priced ability. Problem John, of course, is that we don't
Speaker 1: have a FED share incoming FED cheer who has made
Speaker 1: that sort of commitment in the past. This is part
Speaker 1: of the problem. And by the way, this is this
Speaker 1: is part of the reason why we might not have
Speaker 1: seen a.
Speaker 3: Neutral bias in the April meeting.
Speaker 1: It might be that too many members of the FOMC
Speaker 1: were too deferential to the incoming chair and not as
Speaker 1: opposed to the opposite. That's very possible, and I suspect
Speaker 1: that Kevin Warts is going to have a problem, certainly
Speaker 1: a bigger problem now he needs if he's going to
Speaker 1: try to convince the rest of the members of the
Speaker 1: FOMC to keep rates on hold. I think some of
Speaker 1: them are going to want to move that bias towards Titan.
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