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Speaker 1: Here's the latest crude climbing ast. Hey Ron says some
Speaker 1: terms of the ceasefire have been violated. The energy shock
Speaker 1: rippling through the global economy. Joining us now, I'm so
Speaker 1: pleased to say, is OECD chief economist Stefano Scarpetta. Stefano,
Speaker 1: thank you so much forgetting for making some time. How
Speaker 1: much are you looking at a dampening effect on the
Speaker 1: global economy as a result of what's going on in
Speaker 1: the Middle East?
Speaker 3: Of course that there is a lot of uncertainty. We
Speaker 3: just publish our interim Economic Outlook on the twenty sixth
Speaker 3: of November, and basically if on the twenty eighth of February,
Speaker 3: before the war in Iran, would have actually rised upward
Speaker 3: the projection for global GDP growth for twenty six by
Speaker 3: zero point three percentage point. All of that was shaped
Speaker 3: off because of the impact of the war and the
Speaker 3: crisis in the Middle East, and the increase of course
Speaker 3: in energy prices. Now, the recent announcement of the cease fire,
Speaker 3: if it is implemented, if this means of course reopen
Speaker 3: the Strait of Ormont's, and we have seen already in
Speaker 3: the impact on the price of oil, would have sort
Speaker 3: of a sort of effect on the economy. And we
Speaker 3: see already a reduction in the price of oil. But
Speaker 3: of course a lot of ifs here because these have
Speaker 3: to be maintained, the cease fire and we have to
Speaker 3: see exactly vessels getting through the Strait of Ormontes. So
Speaker 3: unfortunately we had to revise a basically our projection by
Speaker 3: all the increase that would have happened if it was
Speaker 3: not because of the world how.
Speaker 1: Much are Europe and Asian nations dispunfortunately affected by the
Speaker 1: fact that oil prices are likely to remain significantly higher,
Speaker 1: even if there is some sort of conclusion at least
Speaker 1: in the north in the near term to this conflict. No.
Speaker 3: Indeed, of course Asia in general and Europe are more
Speaker 3: affected by the highking price of oil and gas, in
Speaker 3: particular the Asian countries, but I think even within the
Speaker 3: Asia region there are significant differences because two countries that
Speaker 3: depend heavily on oil getting through the Strait of Ormos,
Speaker 3: like Korea and Japan, they have large reserves, while other
Speaker 3: countries in the region Indonesia Thailand have much smaller reserves,
Speaker 3: so they are more exposed of the hiking price than
Speaker 3: the other two countries. Europe forces also dependent on gas
Speaker 3: coming from the Strait of Wormos, so is of course
Speaker 3: more exposed. What matters really is the duration of these
Speaker 3: increase in oil prices and gas prices, and of course
Speaker 3: whether or not they have been damaged to the infrastructure
Speaker 3: in the region, in Iran and other neighboring countries, because
Speaker 3: of course repairing the damages may take long, and this
Speaker 3: may actually have an impact on the profile of oil
Speaker 3: and gas prices going forward.
Speaker 4: When a consideration, when do you know you can no
Speaker 4: longer just look through this and actually there's going to
Speaker 4: be structural changes and permanent shifts.
Speaker 3: Well that's a good question, depends again on for how
Speaker 3: long the price will stay high. We have seen short
Speaker 3: term responses in many countries of the UECD, including the
Speaker 3: support to consumer and to firms to face this high
Speaker 3: energy price. We have seen that in Europe basically in
Speaker 3: most of the UCD countries, the early measures that have
Speaker 3: been introduced has been way to basically reduce the increasing
Speaker 3: price at the gas station and for the companies. But
Speaker 3: of course these are very expensive, so they cannot be
Speaker 3: prolonged for too long, and our recommendation is to try
Speaker 3: to move as quickly as possible to more target measure.
Speaker 3: It actually provides support to consumers most affected by the
Speaker 3: increasing energy prices and actually to the firms that depend
Speaker 3: more by energy. So this is I think is our recommendation.
Speaker 3: Then of course there might be some ration, and we
Speaker 3: have learned through the COVID crisis that does some telework
Speaker 3: actually may reduce sort of the consumption of energy. And
Speaker 3: I think these are also implemented by a number of countries.
Speaker 4: Indeed, well, do remember countries have the fiscal capacity to
Speaker 4: fight us.
Speaker 3: That's a very good question, because of course the physical
Speaker 3: capacity is limited, and that's one more reason why we
Speaker 3: are recommended to move into target measure and actually temporary measures,
Speaker 3: because of course what happened in the twenty two energy
Speaker 3: crisis was some of the prices support measures were kept
Speaker 3: for too long and this led of course to significant
Speaker 3: public spending in this area. So there is a need
Speaker 3: to targeting, and there is also a need to already
Speaker 3: introduce sunset closest whereby if the price go down then
Speaker 3: this measure will be removed quickly.
Speaker 2: Stay with us. More PLEMPAC surveillance coming up after this.
Speaker 1: Here's a view from Wall Street this morning. Bob Michael
Speaker 1: of JP Morgan Azset Management, writing, the market is starting
Speaker 1: to unwind the tail risk associated with a global economy
Speaker 1: that would have to live with oil above one hundred
Speaker 1: dollars for a protracted period. Bob joins is now in
Speaker 1: our New York studios, which is a wonderful thing. Bob,
Speaker 1: great to see you.
Speaker 5: Happy to be here.
Speaker 1: Do you think that it's appropriate to remove some of
Speaker 1: the wagers on oil being below one hundred dollars a
Speaker 1: barrel for a protracted period of time.
Speaker 5: Well, that's a complicated question. I think the best answer
Speaker 5: is we can live with oil one hundred dollars a
Speaker 5: barrel for a while. I think what the administration has
Speaker 5: done a good job of doing to us over the
Speaker 5: last year plus is to train us and we look
Speaker 5: for signs of when is the rhetoric at a high,
Speaker 5: but they're starting to look for an exit and we're
Speaker 5: starting to see that now, and I think that's why
Speaker 5: the markets are so optimistic. If we go back to Tariff,
Speaker 5: if we think about Greenland, if we think about Venezuela.
Speaker 5: At some point the rhetoric is very high, but the
Speaker 5: administration finds an off ramp and exits. And I challenge
Speaker 5: you to tell me that all three of those things
Speaker 5: have been buttoned up. They're all still going on in
Speaker 5: the background, and it feels like we're on the same
Speaker 5: kind of off ramp here. That's pretty good for the markets.
Speaker 1: So yesterday we saw people have faith in the idea
Speaker 1: that the escalation in rhetoric at least had peaked and
Speaker 1: we at least are coming.
Speaker 6: To that off ramp.
Speaker 1: It's almost exactly following the timeframe a Liberation Day last year.
Speaker 1: I'm just wondering whether you think it's viable in an
Speaker 1: ongoing fashion, even during some of the question marks around
Speaker 1: how durable.
Speaker 6: The ceasefire really is.
Speaker 5: So we do. Because there's been significant repricing across markets,
Speaker 5: especially in the bond market, investors are caught a little
Speaker 5: bit offside. For an actual off ramp, I don't know
Speaker 5: that you need a cease fire for the entire two
Speaker 5: week period. You probably need one for the back half
Speaker 5: of the next four eight hours, enough time for everyone
Speaker 5: to meet in Islamaba and to iron out details of
Speaker 5: what an off ramp could look like. And then I
Speaker 5: think over the next month, we're going to see this
Speaker 5: in the distant rear view mirror, even if oil stays
Speaker 5: at one hundred dollars a barrel, because it's going to
Speaker 5: take time to get the fiscal oil to where it's needed.
Speaker 4: So you think these Islamban talks are real incredible.
Speaker 5: I think they are. I think they're essential for the administration.
Speaker 5: If they're genuinely looking for an off rep it sounds
Speaker 5: like for the last three weeks they've been looking for that.
Speaker 5: I feel Vance is on his way there, the Israelis
Speaker 5: will be there and something will come out of them.
Speaker 4: But when it comes to this gap between the Iranians
Speaker 4: and the United States, they don't agree on anything, right.
Speaker 5: Now right, everyone, It's classic bargaining. You want this, somebody
Speaker 5: else wants that. You'll find a way to meet in
Speaker 5: the middle. There are lots of things that the US
Speaker 5: can do. Yesterday I listened to General Kine. He declared victory.
Speaker 5: You listen to events, he declared victory. They've already started
Speaker 5: the process of saying, look, the primary mission was to
Speaker 5: mitigate a nuclear threat. We've done that. We'd like the
Speaker 5: straight open We'll see if we can get to that.
Speaker 5: If not, we supply enough of our own oil. We'll
Speaker 5: just move on.
Speaker 1: So with fixed income, what does by the dip mean?
Speaker 1: Because we've seen that certainly in credit, with investor grade
Speaker 1: credit spreads moving down below at one point where they
Speaker 1: were right before the war took place. We just heard
Speaker 1: earlier this morning Keith Lerner talking about how he went
Speaker 1: wholesale into yal bonds because he sees opportunity. Now. Is
Speaker 1: it more the credit risk side, or is it more
Speaker 1: the government bond side. With expectations and inflation will ultimately
Speaker 1: continue on its downward path.
Speaker 5: It's everything. It's just an acceptance that investors are under
Speaker 5: allocated to fixed income. Equities have bubbled higher for them
Speaker 5: over the years, They've allocated a lot to alternatives. They're
Speaker 5: looking for opportunities to get into fixed income. I've been
Speaker 5: in Houston for the last couple of days meeting with clients.
Speaker 5: They don't want to miss this backup in yields. They
Speaker 5: want to get into the bond market. It starts with
Speaker 5: where is fair value? I think the FED is in
Speaker 5: hibernation mode. I like that. I like a three and
Speaker 5: five eighths percent FED funds rate. It's solid. It leaves
Speaker 5: it at about zero on a real basis. If you
Speaker 5: deflate it by headline inflation, that's okay. It also leaves
Speaker 5: yield in the bond market. The two years should be
Speaker 5: within touching distance of that. It's probably about ten, fifteen
Speaker 5: to twenty basis points too high. And the ten year,
Speaker 5: we think with a three and five eighths percent FED
Speaker 5: funds rate either side of four percent, you're a little
Speaker 5: bit over four and a quarter. That looks okay, and
Speaker 5: Keith is right. Credit spreads are attractive. All the problem
Speaker 5: credits had financed themselves in the private credit market is
Speaker 5: that a separate problem. Is that all part of of
Speaker 5: the same credit problem we'll see over the next eighteen months.
Speaker 5: But for now, the bond market looks pretty good. It
Speaker 5: held in phenomenally well over the last six weeks, and
Speaker 5: investors don't want to miss this opportunity the way they
Speaker 5: did last year with Liberation Day.
Speaker 6: Well neither do companies.
Speaker 1: Right, we're seeing a rash of bond deals coming to market,
Speaker 1: a lot of issue ince. We saw the most issuance
Speaker 1: ever globally for corporates in March, and now it seems
Speaker 1: like anytime there's a window.
Speaker 5: And hasn't it gone well?
Speaker 1: It has gone incredibly well, and all of the dead
Speaker 1: sales have been oversubscribed.
Speaker 5: To Yes, I tell you, well, it's also there's money there.
Speaker 5: It tells you that we in the bond market look
Speaker 5: at corporate earnings, we look at profitability, we look at leverage,
Speaker 5: and we're.
Speaker 6: Okay, given that.
Speaker 1: Isn't there a dissonance between the belief that inflation will
Speaker 1: go down over time?
Speaker 6: Will also seeing.
Speaker 1: The animal spirits come back to markets with so much
Speaker 1: money still available and people looking or even one hundred
Speaker 1: dollars a barrel in terms of oil prices, saying consumers
Speaker 1: can withstand that. Listening to Ed Bashion over at Delta
Speaker 1: 're optimistic. We're seeing customers absorb the higher prices. I mean,
Speaker 1: can't you bake in higher inflation? Doesn't have to be
Speaker 1: one or the other animal spirits or potentially a bid
Speaker 1: into duration.
Speaker 5: Well, I think we've crossed that divide. I think we
Speaker 5: in the markets accept that a two percent inflation target
Speaker 5: is a myth. We haven't been there in half a decade.
Speaker 5: It didn't feel comfortable when we try to get there,
Speaker 5: and we were printing one point seven to one point eight.
Speaker 5: It's too low for an economy the size and complexity
Speaker 5: of the US two and a half feels like the
Speaker 5: new two percent. And we're a little bit above that
Speaker 5: because we've got transitory inflation because of the energy shock
Speaker 5: that too may or may not fade. But I look
Speaker 5: at our analysis, I read Mike Faroli stuff a lot.
Speaker 5: Even with where energy is and the probabilities of this
Speaker 5: being extended, we've got inflation if you look at headline
Speaker 5: and core, between three and a half and three percent
Speaker 5: for this year, but we have real GDP at about
Speaker 5: two and a quarter percent. So what we're saying is
Speaker 5: this economy can absorb higher inflation than two percent, even
Speaker 5: inflation around three percent, And the FED probably doesn't do
Speaker 5: anything because they went into the last meeting still a
Speaker 5: little bit concerned about the labor market. Now they're probably
Speaker 5: more balanced, so they're going to sit on their heads.
Speaker 2: Stay with us. Mulblinbeg Savannan's coming.
Speaker 7: Up off to this. We think, thankfully at this point,
Speaker 7: I think have a ceasefire thanks to the leadership of
Speaker 7: the present United States. We have the Iranians promising to
Speaker 7: open the streets of four moves, and we have a
Speaker 7: negotiation that's supposed to start this weekend. That's the truth.
Speaker 7: I think it's a good first step. We're going to
Speaker 7: see if we can make more progress here in the
Speaker 7: day's to come. I'm optimistic that the Iranians are going
Speaker 7: to be smart, that they're going to negotiate in good faith.
Speaker 1: Here's the latest. Vice President Vance gearing up to lead
Speaker 1: direct talks with Iran on Saturday. With fighting in the
Speaker 1: Middle East threatening to derail an already fragile ceasefire, Former
Speaker 1: Deputy National Security Advisor Victoria Coats writing, the odds of
Speaker 1: Iran sticking for the full two weeks is pretty small
Speaker 1: in my book.
Speaker 6: Victoria joins us.
Speaker 1: Now, Victoria, thank you so much for being with us.
Speaker 1: So what are you gleaning so far from a pretty
Speaker 1: uneasy ceasefire, if you could even call it that, for
Speaker 1: twenty four hours, beset by attacks and a lot of
Speaker 1: arguments between both sides.
Speaker 8: Yes, this is a pretty dicey period. And this is
Speaker 8: standard for this kind of arrangement. If you think back
Speaker 8: to the Gaza War, the early ceasefires were extremely delicate.
Speaker 8: There was a lot of pushing at the edges by
Speaker 8: both sides, and it took a long time to get
Speaker 8: to a durable deal under President Trump last fall. So
Speaker 8: I think we're going to see a similar kind of
Speaker 8: jocking for position here. But the interesting thing here is
Speaker 8: that the Ranians really don't have any cards beside the
Speaker 8: Strait of Homoots, And one thing.
Speaker 6: I've noticed is that it's going to be a declining.
Speaker 8: Asset for them because the entire region is talking about
Speaker 8: ways going forward they can circumvent the strait. So Iran's
Speaker 8: going to try to play that card as hard as
Speaker 8: they can right now.
Speaker 6: Get as much as they can out of it.
Speaker 8: But I think their ability to do that going forward
Speaker 8: is going to be quite limited.
Speaker 4: Victoria when it comes to the strait being open as normal,
Speaker 4: but with these strings attached the Iranians basically making sure
Speaker 4: you have to have a payment, whether it's yuan or bitcoin.
Speaker 4: Would that be a success for the United States, Yes,
Speaker 4: there would be more of an uptick of vessels, but
Speaker 4: that means Aron fully controls this key waterway.
Speaker 8: Now, I think that's absolutely what we're going to be
Speaker 8: working on going forward. And what you're seeing the Iranians
Speaker 8: do is essentially a function like a mafia group. They're
Speaker 8: trying to shap down the rest of the world to
Speaker 8: get energy out of the Gulf. And so yes, they
Speaker 8: are demanding crypto payments, which is kind of comical, but
Speaker 8: as I said before, I think their ability to do
Speaker 8: that long term is not going to be there for them.
Speaker 8: And the other thing it shows us is that they
Speaker 8: are desperate for money at this point. They their economy
Speaker 8: is absolutely on the rocks, and they've shut down their
Speaker 8: internet for now thirty five thirty six days. So nobody's
Speaker 8: done that before, and I don't think anyone's really forecasted
Speaker 8: the kind of damage that that's done to that economy.
Speaker 8: And what happens when they open it back up. What
Speaker 8: are the Iranians going to do when suddenly, you know,
Speaker 8: the ATMs are full again, that kind of thing. It's
Speaker 8: really a very difficult situation for them. So I think
Speaker 8: they're thinking very short term right now. They're just thinking,
Speaker 8: how do we get cash out of the strait of
Speaker 8: hormones so we can survive another day.
Speaker 4: This is no leverage that they hold. How do you
Speaker 4: think they're going to use this at the negotiating table
Speaker 4: on Saturday? What would be acceptable to the States?
Speaker 6: Well, that's the thing is this is all they have.
Speaker 6: This is their leverage.
Speaker 8: Otherwise their ability to inflict term on the United States,
Speaker 8: their neighbors on Israel is getting more and more limited.
Speaker 6: That was really the point of Operation etpnic.
Speaker 8: Fury was degrade their ability to inflict that harm and
Speaker 8: also their ability to reconstitute it. And the Secretary of
Speaker 8: War and the Chairman of the Joint Chiefs yesterday laid
Speaker 8: out a very detailed case about how that ability to
Speaker 8: reconstitute their missiles to restart their nuclear program had really
Speaker 8: been destroyed.
Speaker 6: So all they really have is the straight right now.
Speaker 8: And as I said, that's a declining asset for them,
Speaker 8: So they don't have a lot of cards. And I
Speaker 8: think that's the point that the Vice President and the
Speaker 8: special envoys will be making to them.
Speaker 5: Victoria can a post weekend off ramp for the administration
Speaker 5: include leaving the Strait of Hormuz in control of the
Speaker 5: Iranians if they accept US dollars and some conditions about
Speaker 5: how the funds are used.
Speaker 8: In terms of accepting US dollars as tolls, yes, it's toll,
Speaker 8: I mean that is certainly something, although I actually would
Speaker 8: prefer them not to have dollars. I think the economic
Speaker 8: leverage is the other really strong point the Vice President's
Speaker 8: going to have in his pocket. You know, the Iranians
Speaker 8: can't restart their economy without broad sanctions relief.
Speaker 6: I mean, that's just not going to happen.
Speaker 8: I don't see China doing anything material to help them economically,
Speaker 8: and they've alienated countries like Qatar who might have been
Speaker 8: willing to help them in the past past. And I
Speaker 8: think it's notable that Katar went to the United Nations
Speaker 8: yesterday and said they want to hold the Iranians economically
Speaker 8: liable for the damage that was done to their oil
Speaker 8: field during the war. Very interesting development there. So I
Speaker 8: would prefer not to give them dollars. That's that's a
Speaker 8: nice hard currency for them, So I don't I wouldn't
Speaker 8: really see that as a give point for Victoria.
Speaker 1: It was sort of interesting to me that Bob brought
Speaker 1: that up because a lot of people are talking about
Speaker 1: China may be coming closer to Iran and the petro
Speaker 1: dollar becoming the petro yuan. This idea that they could
Speaker 1: enter into the primary relationship considering their role as the
Speaker 1: major buyer right now from the Middle East. Do you
Speaker 1: think that that is exaggerated and that frankly, Iran has
Speaker 1: no friends and that there isn't necessarily any push towards
Speaker 1: China in that kind of material way.
Speaker 8: Well, that's what it has been for the last five
Speaker 8: six years that China has been the primary buyer. They've
Speaker 8: bought in yuan, and then the Iranians can use that
Speaker 8: currency to buy things from the Chinese.
Speaker 6: So it sets up a nice little loop for China,
Speaker 6: and that has been the case.
Speaker 8: It hasn't made a lot of people in Washington happy,
Speaker 8: but it's not that great of a threat to us
Speaker 8: because I don't see anybody else. I don't see the
Speaker 8: Saudis or the Kuwaitis, or the Amortis or the Qatari's
Speaker 8: particularly interested in taking you on for their product.
Speaker 6: So if it's just Iran and.
Speaker 8: That that loop is keeping her on out largely of
Speaker 8: the broader global economy, that doesn't make me all that unhappy.
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