Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best an economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com,
Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App.
Speaker 2: Joining us now is someone that makes you lean forward.
Speaker 1: It is a multi asset strategy, but mostly his senior
Speaker 1: vice president courage to stay in the market at the
Speaker 1: Hong Kong and Shanghai Banking Corporation, Max Kapner darkets the
Speaker 1: London door today.
Speaker 2: What is your new outlook? What is the.
Speaker 1: Nuance of the last few weeks as you look forward
Speaker 1: into twenty twenty four?
Speaker 3: Yeah?
Speaker 4: Thanks, Some of the news is you've gus we'll talk
Speaker 4: about already right as oil prices, energy prices, perhaps that
Speaker 4: changes a little bit of the narrative, right paps Inflation
Speaker 4: does pick up a bit more in the US right
Speaker 4: towards Q four, So that's not particularly great news for
Speaker 4: a Goldilock scenario. I think the nuances is also going
Speaker 4: into Q four, what can destroy that goldilocks picture? Because
Speaker 4: we're all talking about all these horrible things, right, like,
Speaker 4: you know, things like student loan repayments and are we
Speaker 4: hitting you know, are we hitting recession and all these things,
Speaker 4: and then we look at high yield spreads and they
Speaker 4: just going towards three fifty and yeah, it's for everyone, right, great,
Speaker 4: So I think the nuances are sort of trying to
Speaker 4: find out when is what what could potentially break all this?
Speaker 1: Right?
Speaker 4: What could potentially break that that sort of goldilocks?
Speaker 5: And it's ninety five dollar crude. It's you don't think
Speaker 5: that a breakfast.
Speaker 4: I don't think it's one nuance. I think it's one
Speaker 4: of those where to be fair, if I was the fair,
Speaker 4: if I was the SEBIA or the Bank of England,
Speaker 4: which you know, lucky for everyone that I'm not, but
Speaker 4: you know, if I were, I'd be basically saying, well,
Speaker 4: what should I do about that?
Speaker 6: Right?
Speaker 4: What can I do about I mean, I'm not an
Speaker 4: oil producer, so I can't really do anything, and I
Speaker 4: can sort of use it as saying, look, this is
Speaker 4: just energy prices. It's something transitory. It will be going
Speaker 4: away out of the calculation. When a couple of months,
Speaker 4: don't worry, right all the other rests, you know, excluding
Speaker 4: fifteen components from our preferred inflation baskets, then everything looks fine.
Speaker 4: So I think that's the worry that I have, right
Speaker 4: that if we start looking at these inflation baskets that
Speaker 4: sort of exclude everything that we need for the everyday life,
Speaker 4: that they is starting to pack up again. And to
Speaker 4: be fair, if you look at things like super core inflation, right,
Speaker 4: the action components, the broad based nature of it hasn't
Speaker 4: really dramatically changed over the last twelve eighteen months, So
Speaker 4: that is perhaps something towards Q four where perhaps inflation
Speaker 4: does pick up beyond just energy prices, not a new
Speaker 4: inflation wave, but basically an interruption from that. Okay, inflation
Speaker 4: has gone down in one straight line now to actually
Speaker 4: now we're getting sort of this bumpy bumpy road ahead,
Speaker 4: right an inflation Well, we've got to play those turning
Speaker 4: points in it.
Speaker 2: Max.
Speaker 5: The question everyone wants us to ask. Still in a
Speaker 5: window where you think equities can do well, oh yeah,
Speaker 5: one hundred percent, until when how big is that win?
Speaker 4: Look to be perfectly honest, if we think about it,
Speaker 4: and I know it sounds stupid, but imagine if yields
Speaker 4: go up, imagine the tenure goes to four and a half.
Speaker 4: What's the reality of the reality is it's probably going
Speaker 4: to do it because growth is better, right, and because
Speaker 4: once again growth expectations actually turn out to be too pessimistic. Right.
Speaker 4: If you look at Q four US growth expectations, it's
Speaker 4: sort of the Q one next year is also close
Speaker 4: to zero, so the bar to be just relatively low.
Speaker 4: So if you get yields moving higher, that's probably in
Speaker 4: response to growth doing better, So you buy equities. If
Speaker 4: yields go down, right, then probably rates of all goes down,
Speaker 4: and then you buy the nastak so to be fair, Yeah, great,
Speaker 4: I'll just buy equities.
Speaker 7: Can big tech still lead though? And we've seen a
Speaker 7: recent kind of weakening in the tech profile and an
Speaker 7: underperformance there. Some people are saying this is the beginning
Speaker 7: of the end of the tech trade? Are you on
Speaker 7: that train?
Speaker 4: Well, we've heard that for I think sixteen years, fifteen years,
Speaker 4: so you know, it's been a lot of beginnings of
Speaker 4: the end. Now, look, I don't know, I want to
Speaker 4: be too cynical for it, but.
Speaker 5: Last year was pretty brutal for the text, right, just
Speaker 5: be clear.
Speaker 4: So, but to be perfect, you're honest, I think TEX
Speaker 4: still has a bit of a room to go. In
Speaker 4: the next couple of weeks. There is probably a window
Speaker 4: around Q four where I'd been moving more towards really
Speaker 4: the value side of things, right, tactically, right, if we
Speaker 4: get that bump and inflation, particularly in the US, even higher,
Speaker 4: you know, you want to probably prefer then for a
Speaker 4: couple of months, things like bands energy over tech. But
Speaker 4: for now, I think energy still has or text still
Speaker 4: has a way to go.
Speaker 7: You mentioned all of the dark clouds, including people repaying
Speaker 7: their debts, and also this question around a government shutdown,
Speaker 7: which seems like an increasing inevitability in the US amid
Speaker 7: this backdrop of strikes. In a question of just general
Speaker 7: just discsatisfaction, which of those kinds of things do you
Speaker 7: care most about could actually have the most impact on
Speaker 7: your call.
Speaker 4: Look, I think the government shot down not really right,
Speaker 4: because we kind of got used to every other quarter.
Speaker 4: So from an equity perspective, you know, I know it
Speaker 4: sounds depressing, but if for hous right, it was a
Speaker 4: shock twelve years ago, it's not particularly a shock anymore.
Speaker 2: Right.
Speaker 4: So from an equity perspective, from a risk acid perspective,
Speaker 4: that's not the main worry. The student loan repayments also
Speaker 4: not particularly worried about it, because you can also make
Speaker 4: a positive spin out of right. Right. You can also say, look, actually,
Speaker 4: from the end of July up until now, repayments have
Speaker 4: shot higher because actually economic agents I eat, normal people
Speaker 4: like us, they're acting completely rationally, right, They're seeing that, Okay,
Speaker 4: this is starting to kick in. So instead of starting
Speaker 4: to or having to start to actually pay interest on
Speaker 4: it again, I'm going to repay it early and guess what,
Speaker 4: I have the money, so let me repay as much
Speaker 4: as I can. So actually, you can also make a
Speaker 4: positive spin out of it, right and say, look, people
Speaker 4: apparently still have the money to do that, right, They
Speaker 4: still have sufficient money to do these pretty chunky repayments early.
Speaker 4: So all of that doesn't really really keep me that much.
Speaker 1: Quick questionaire, can you figme out SPX five thousand? I
Speaker 1: gotta make some news today. I got to justify the
Speaker 1: trip to London. Can you give me five thousand SPX?
Speaker 4: I think you know, if we think about next year,
Speaker 4: to be fair, it's not an awful lot of weight, right,
Speaker 4: it's twelve twelve percent awaight, Right, but if we're still
Speaker 4: in a fairly high ish inflation environment, right, and earnings
Speaker 4: growth is still relatively fine. Yeah.
Speaker 1: When Old Quinn's all longer today, he's doing something with
Speaker 1: the United Nations. I'm not sure what it is. Nold
Speaker 1: Quinn listens to Max Katner. HSBC is a prism to
Speaker 1: Asia like.
Speaker 2: No one else.
Speaker 1: I personally witnessed it across that little Hong Kong trolley
Speaker 1: in Asia. How do you link China trauma, in particularly
Speaker 1: domestic trauma into all the toxic.
Speaker 2: Brew of gloom in the West.
Speaker 1: How do you link Hong Kong and Shanghai over to
Speaker 1: London in New York.
Speaker 4: Look, I think what's what's very clear with regards to
Speaker 4: Europe and with regards to China and now a little
Speaker 4: bit less in the US is like you've said, there's
Speaker 4: all this doom and gloom, right, there's all these expectations
Speaker 4: around doom and gloom. I don't think you guys have
Speaker 4: had any guests on probably for weeks who are saying, look,
Speaker 4: you know what, twenty twenty three has been better than expected.
Speaker 4: We were a bitter wrong right on Europe and in
Speaker 4: the US. But guess what, twenty twenty four is going
Speaker 4: to be even better? Right, So I can't I just
Speaker 4: genuinely cannot see how we're gonna get, you know, start
Speaker 4: to think about twenty twenty four, how we're actually going
Speaker 4: to see twenty twenty four. It looks where people say, look,
Speaker 4: you know what, China's going to do great, Europe's gonna
Speaker 4: be even better, and US is going to shoot the lighter.
Speaker 4: I just cannot see anyone doing that.
Speaker 5: So do you want to take the other side of that?
Speaker 4: I want to take that side, yeah, because knowing the
Speaker 4: thing is right, So you're giving us a twenty four
Speaker 4: call right now? No, Look, the one thing that I
Speaker 4: am not asked at all about and for months is
Speaker 4: what could actually go right? What can guy right actually
Speaker 4: in the next six twelve months three? What's actually one
Speaker 4: thing where we could be saying, hey, you know what,
Speaker 4: maybe I'm asking So the answer, the answer to me is,
Speaker 4: as long as we still have these really low growth expectations,
Speaker 4: you have a low bar to be and you keep
Speaker 4: rolling goldilocks and goldilocks and goldilocks, and.
Speaker 5: It's great goldilocks forever into twenty four yeah, okay.
Speaker 2: I think it is a lonely car. I mean, we're
Speaker 2: but it's a really I'm.
Speaker 1: Wrong, cool charter to you bank, Max Curtener, HSBC. There's
Speaker 1: a couple others out there.
Speaker 5: You know, Max has been right. I think we should
Speaker 5: put that out there first. You've been right all year.
Speaker 4: Max.
Speaker 5: We'll see about twenty twenty four. That's quite cool. Max
Speaker 5: Kenada of HSBC. Joining us now is Ed j R. Denny,
Speaker 5: President of the Danny Research Ed wonderful to have you
Speaker 5: with us on the show We call it with Max
Speaker 5: Kettener of HSBC in the previous hour, and he said
Speaker 5: we need to focus on what could go right in
Speaker 5: twenty two twenty four? Are you more focused on what
Speaker 5: could go right or what could go wrong?
Speaker 8: My view of twenty twenty four is that that could
Speaker 8: be a better year than certainly twenty twenty two was,
Speaker 8: or even twenty twenty three. Not that twenty twenty three
Speaker 8: is turning out to be a very bad year. As
Speaker 8: we know, the third quarter is turning out to be
Speaker 8: remarkably strong. So all in all, I think that we'll
Speaker 8: get through a lot of these challenges and twenty twenty
Speaker 8: four should be a better year for earnings with the
Speaker 8: market doing better too.
Speaker 1: Danny, you and real Franko for have been way out
Speaker 1: front of this on the October rally, and we've talked
Speaker 1: about a second leg of a bullmarkt As John mentions,
Speaker 1: mister Cuttner of HSBC shares your enthusiasm. The arch pullback
Speaker 1: of this is the great moderation over? Is the great
Speaker 1: moderation over? And does that mean you can't make money
Speaker 1: in stocks?
Speaker 8: Well, I've been really debating in my commentaries about whether
Speaker 8: it's going to be the Great Inflation of the nineteen
Speaker 8: seventies or it might very well turn out to be
Speaker 8: the Roaring twenty twenties. And I've been inclined to believe
Speaker 8: that on a longer term basis, we will see that
Speaker 8: the twenty twenties will be a period of tremendous progress
Speaker 8: and productivity. And I was making that point before the pandemic,
Speaker 8: and the pandemic sort of gotten the way because it
Speaker 8: really messed up the productivity story big time as people
Speaker 8: quit left and right. But I think we're making a comeback.
Speaker 8: I think productivity bottom actually in twenty and twenty fifteen
Speaker 8: in terms of its growth rate, it was only zero
Speaker 8: point five percent on a twenty quarter trailing basis. I
Speaker 8: think it's going up to four percent by the end
Speaker 8: of the decade, which sounds delusional, sounds for our fetched,
Speaker 8: I'll admit, but those are the kind of peaks we've
Speaker 8: had in previous growth cycles in productivity, and I think
Speaker 8: that's where we're heading.
Speaker 1: Does a real rate, and some would say a higher
Speaker 1: real rate and an inflation adjusted rate, does that impinge
Speaker 1: on your enthusiasm?
Speaker 2: Not really. I think we're going back to normal.
Speaker 8: The new abnormal was the period between the Great Financial
Speaker 8: Crisis and the Great Virus Crisis, and back then interest
Speaker 8: rates were at record lows. I think we're going back
Speaker 8: to the environment just prior to the Great Financial Crisis,
Speaker 8: where the tip shield was around two percent for the
Speaker 8: ten uere and the inflation premium was around two to
Speaker 8: two and a half percent. So four to four and
Speaker 8: a half percent is kind of where the bond yield
Speaker 8: should be in a return to the old normal, and
Speaker 8: I think that's what we're doing. I think the economy
Speaker 8: and the stock market have already demonstrated that they can
Speaker 8: both live with these kind of levels of interest rates.
Speaker 7: So you and Max Kettner seemed to be on the
Speaker 7: same page, and Max came on the show early and said,
Speaker 7: you guys all worry too much. No one asks me
Speaker 7: what can go right, how good things can be, and
Speaker 7: as they should be asking. But it is my job
Speaker 7: to worry.
Speaker 4: That is true what I do.
Speaker 7: So I'm curious, from your vantage point, where does oil
Speaker 7: fit into this at a time where it's risen thirty
Speaker 7: percent since June.
Speaker 8: Yeah, well, I didn't expect it. I don't think anybody
Speaker 8: really expected it. I think the widespread perception was, oh, yeah, yeah,
Speaker 8: the Saudi's are going to cut production, and the Russians
Speaker 8: of cut production. But China's week, Europe's week, the US
Speaker 8: is sort of muddling along. And that means that oil
Speaker 8: prices aren't going to go up as the Saudis would like.
Speaker 2: But they've been right so far.
Speaker 8: And so that's a new variable that I've had to
Speaker 8: incorporate into my thinking. And so just recently the past
Speaker 8: few days, I just to demonstrate that I am realistic
Speaker 8: and I'm looking at the world.
Speaker 2: As it is, not as I'd like it to be.
Speaker 8: I did raise my outlook for a recession risk from
Speaker 8: fifteen percent to twenty five percent and unfortunately there is
Speaker 8: a certain the sense of dejav all over again. We
Speaker 8: had two oil spikes back in the nineteen seventies. So far,
Speaker 8: the first oil spike we had last year hasn't caused
Speaker 8: a recession and hasn't been anywhere near but we had
Speaker 8: back in the seventies, and I don't think this one's
Speaker 8: going to be.
Speaker 2: A major oil spike either.
Speaker 8: I think we are going to find that the demand
Speaker 8: responds pretty quickly to these price hikes and it slows
Speaker 8: down and oil prices come back down, not dramatically, but
Speaker 8: at least they stop going up.
Speaker 7: What's the break point in terms of when prices of
Speaker 7: oil really do create a serious headwind and increase the
Speaker 7: chance of recession.
Speaker 8: Well, I think they're already starting to impact demand. You know,
Speaker 8: it's clearly getting a tremendous amount of visibility in the press,
Speaker 8: and of course, the price of gasoline is the most
Speaker 8: visible price of them all. We all go driving around
Speaker 8: filling up our tanks, and everybody's seeing that the price
Speaker 8: of oil gasoline is going up dramatically.
Speaker 2: So I think we're at the point where.
Speaker 8: It doesn't cause a recession, but it causes some demand destruction.
Speaker 8: For gasoline and for other energy products, and that being
Speaker 8: the case, that could bring the price back down. I
Speaker 8: don't think it's going to cause a recession, but I think,
Speaker 8: you know, if we sustainably, if we see at the
Speaker 8: price of oil staates sustainably at one hundred, one hundred
Speaker 8: and ten dollars a barrel, in the price of gasoline
Speaker 8: four and a half to five dollars a gallon, I
Speaker 8: think that could certainly risk a much greater slowdown on
Speaker 8: the economy than I've been thinking.
Speaker 5: Certainly going to case some paine at Danny, thank you
Speaker 5: if any race.
Speaker 1: She is Jane Foley of Robbo Bank, and the heritage
Speaker 1: of Robbo Bank is commodities in the foreign exchange, and
Speaker 1: Jane Foley, I want to look out three years and
Speaker 1: five years to the climate change effect, Sugar to the moon,
Speaker 1: cocoa to the moon, a few other things, even cattles
Speaker 1: up and up here as well. How is the Rabobank
Speaker 1: world going to change with climate change and what appear
Speaker 1: to be surging commodity prices.
Speaker 3: It's going to be tough now. Of course, in the
Speaker 3: short term, we don't necessarily have surging food prices because
Speaker 3: prices were high last year there was lots of planting.
Speaker 3: But I think we can all agree that over the
Speaker 3: longer term, you have climate issues. You have issues that
Speaker 3: could create inflationary surprises in the form of food prices
Speaker 3: over the next few years. And it was at the
Speaker 3: supply so, I mean, look what's happened in the Panama Canal.
Speaker 3: You know, shortages of water, restrictions on shipping that can
Speaker 3: go through impacts to the supply chain. So we know
Speaker 3: that climate change can bring us inflationary shucks. We know
Speaker 3: that it can have a detrimental impact on growth. We
Speaker 3: know that it could potentially make interest rates higher. So
Speaker 3: the environment that that suggests is not particularly.
Speaker 1: This is critical, and that all the focus in the
Speaker 1: financial media is how to make a speculative return on euro,
Speaker 1: yen or whatever. And there's a whole other world out
Speaker 1: there of hedging commodity transactions.
Speaker 5: Okay, so interesting question chain for you. Climate can lead
Speaker 5: to inflationary outcomes. Can the policy changes to address climate
Speaker 5: change also lead to inflationary outcomes? Is this lose lose
Speaker 5: on the front.
Speaker 3: You know, I think this is a really really interesting
Speaker 3: question because we have so many elections next year. So
Speaker 3: next year I saw a statistic recently that said countries
Speaker 3: with a collective population of four billions, that's over half
Speaker 3: the world's population go to the polls next year. So
Speaker 3: we've got the US, we've got the EU, we've got India,
Speaker 3: we've got Russia, we've got Mexico and various other countries. Now,
Speaker 3: amongst those issues that people are going to be talking
Speaker 3: about is of course the impact of climate change, but
Speaker 3: also the green transition. And what we've been seen is people,
Speaker 3: because of the cost of living, because of the energy crisis,
Speaker 3: because of you know, the impact of inflation, are losing
Speaker 3: patients with the politician that the push towards the green transition.
Speaker 3: And we're really seeing this in Europe. Support for so
Speaker 3: the Germany's Green Party really gone down, support for the
Speaker 3: far right really gone out. And this is fairly uniform
Speaker 3: because people are saying, we can't afford to lose our
Speaker 3: jobs because of the green transition, because in Germany, for instance,
Speaker 3: lots of jobs in the supply chain for car manufacturers
Speaker 3: will go and people are saying, you know, we can't
Speaker 3: afford to buy these electric cars. We cannot afford necessarily
Speaker 3: the green transition, and that's a real problem.
Speaker 7: How do you price that into a foreign exchange car.
Speaker 7: I mean, and had to be too base here, but
Speaker 7: there's really a question of who's doing the best job
Speaker 7: in counteracting some of the inflationary forces in this swirling
Speaker 7: brew of uncertainty of how you're going to deal with this.
Speaker 7: I mean, this is what we're dealing with the UAW
Speaker 7: and the US.
Speaker 4: In some respects.
Speaker 3: I think the answer is quite easy, because when you
Speaker 3: are really confused, when you don't know what's going on,
Speaker 3: people tend to buy the dollar. It is that you
Speaker 3: know that the safe haven. And I think for an
Speaker 3: awful lot of these political challenges, they're going to be
Speaker 3: felt on both sides of the Atlantic. But I think
Speaker 3: it's a Euro that will feel the impact of these
Speaker 3: political crisis a lot more relative to the dollar, because
Speaker 3: the dollar, of course is the currency of the global
Speaker 3: payment system, and people need dollars in terms of crisis,
Speaker 3: and therefore the dollar in a way gets protected even
Speaker 3: its own fundamentals look a little bit questionable.
Speaker 7: And we've seen this dollar strength and it really has
Speaker 7: upended a lot of people who thought that the ECB
Speaker 7: would do way more and that the Euro would gain
Speaker 7: against the dollar, possibly even being in a better situation
Speaker 7: next year than the US. How much do you think
Speaker 7: the dollar has to run here if you do see
Speaker 7: this uncertainty pushing people toward the world's currency and you
Speaker 7: also see a stronger than expected outcome in the economy.
Speaker 3: There, yeah, well you have it. You have this much
Speaker 3: more resilience in the US economy. You have Germany in recession.
Speaker 3: You have the ECB bringing down its grawthfuecasts for the
Speaker 3: Eurozone last week, and in fact they still look optimistic
Speaker 3: compared with our forecast for next year. So you have
Speaker 3: all of these issues. You've got the e elections in June.
Speaker 3: You're going to have to see concessions made towards the
Speaker 3: far right. And when I say the far right, there
Speaker 3: is a little bit of a difference here because many
Speaker 3: of these what we would say far right in Europe.
Speaker 3: Yes they might be anti immigration, yes they may be
Speaker 3: really nationalistic when it comes to cultural concerns, but actually
Speaker 3: they have often little left wing tendencies in their fiscal policy.
Speaker 3: So then you get concerns about the debt out. You've
Speaker 3: got German, sorry, Italy and Spain's debt rising already through
Speaker 3: some of the parameters that the EU would prefer. Does
Speaker 3: that mean there's going to be a debt crisis? Well no,
Speaker 3: But does it mean to say that people are going
Speaker 3: to start wondering about the debt and being concerned about
Speaker 3: that debt?
Speaker 4: Well yes.
Speaker 3: So I think there's lots of economic factors really facing
Speaker 3: the Eurozone in the next you know, which are going
Speaker 3: to come to the fore in the next twelve months,
Speaker 3: and I think the euro is going to be in
Speaker 3: the backfoot a.
Speaker 5: Great pace on the Italian budget coming up very soon
Speaker 5: in the Financial Times this morning worth a read if
Speaker 5: you can get hold of a paper or the online edition. Bradmo,
Speaker 5: I think I've said it a million times already over
Speaker 5: the last two days since we've been here. Europe. What
Speaker 5: a tough spot for the Europeans soun pretty much every
Speaker 5: single topic we're talking about right now, including.
Speaker 7: This one, and this to me is really going to
Speaker 7: be a question going forward of how you unify a
Speaker 7: place with all of these very idiosyncratic stories, including in Italy.
Speaker 1: Twenty seconds, what's your ural call? Then let's go from
Speaker 1: high minded climate analysis three years, give me a euro
Speaker 1: call us six months.
Speaker 3: We need to revise it because our forecast for now
Speaker 3: was one of six and we're nearly there. So you know,
Speaker 3: I haven't got around.
Speaker 4: To our last year.
Speaker 3: I would say parity next year will be being talked about.
Speaker 5: Thank you here, Jane Filey back to parents. It's tradable,
Speaker 5: Jane Fully of Rather Bank.
Speaker 2: We follow under.
Speaker 1: Other central bank discussions, Simon French Chief economist Palmer Gordon
Speaker 1: has been just wonderful with his experience in the British
Speaker 1: government of framing out a governor of the Bank of
Speaker 1: England who said, well, we're not going to declare victory.
Speaker 2: And boys the news come down the pipeline.
Speaker 1: Since since Bailey said that what are the ramifications of
Speaker 1: higher interest rates in the United States?
Speaker 6: In the United Kingdom, we think there's about sixty percent
Speaker 6: of the five hundred and fifteen basis points delivered by
Speaker 6: the Bank of England still to crystallize, principally for household
Speaker 6: sector in the UK. And that lagged defect is an
Speaker 6: elongated lag from previous economic cycles where the structure of
Speaker 6: the UK housing market, secured debt market was very different.
Speaker 6: And that is why I think Andrew Bailey has a
Speaker 6: really difficult task on his hands later in the week,
Speaker 6: because all the indicators I'm seeing is with that long
Speaker 6: lead in time and the majority the impulse still to come,
Speaker 6: we're seeing quite a rapid slow down in payroll wage inflation.
Speaker 6: We're seeing a slow down in core inflation. With the
Speaker 6: eighteen month two year lag whatever frame, we think it'll
Speaker 6: peak around Q four, twenty twenty four. In terms of
Speaker 6: the tightening of financial conditions of the households. He knows
Speaker 6: that he sees the inflation picture coming down, and yet
Speaker 6: he's allowed market to guide the policy expectations rather than
Speaker 6: lead them.
Speaker 1: The Durham you were steeped in the economic history of
Speaker 1: all this. How close is the United Kingdom Bailey analog
Speaker 1: to the United States Powell analog? How separate are those discussions?
Speaker 6: I think they're really separate, actually, And I think last
Speaker 6: time I was on the show, I talked about the
Speaker 6: biggest decoupling of the policy environment in Europe from the
Speaker 6: United States. But it's not just the pathway, it's also
Speaker 6: the management of market expectations.
Speaker 4: Here.
Speaker 6: We've had some speeches from the MPC, the Munty Policy Committee,
Speaker 6: from the Chief economist que Pill in South Africa about
Speaker 6: ten days ago talking about a potential plateau, but the
Speaker 6: market basically didn't believe that and sees the likelihod of
Speaker 6: a twenty five base AP pointed eighty percent. As I
Speaker 6: left my terminal earlier. That is not where the Bank
Speaker 6: of England wants to be if it's going to carve
Speaker 6: out a narrative base on the latest data points, which
Speaker 6: is still quite a rapid sharpening of economic momentum and
Speaker 6: also price setting behavior in the UK.
Speaker 5: I won't allow the point you're making to get lost.
Speaker 5: This is so important. I landed here over the weekend.
Speaker 5: I read the recent communication from the Bank of England.
Speaker 5: Then I looked at all the economics economists expectations and
Speaker 5: they were saying hike, and the Bank of England was
Speaker 5: basically saying we're not hiking. And I couldn't make sense
Speaker 5: of it. Are you saying the threat needle straight as
Speaker 5: a massive credibility problem at the moment and basically the
Speaker 5: markets are in charge?
Speaker 6: Yes, I am. I think they're getting the wrong sort
Speaker 6: of criticism. They're getting criticism for being too slow in
Speaker 6: terms of take off from the policy path. But actually
Speaker 6: they moved earlier than the FED, they moved earlier than
Speaker 6: the ECB. Actually it has been the communications through this
Speaker 6: cycle part of it's been quite cumbersome in terms of,
Speaker 6: you know, getting into the wage bard beginning negotiation, the
Speaker 6: profit margin negotiation with corporates, with the household sector. That's
Speaker 6: not the role as I see it, of central banks.
Speaker 6: Central banks, if you see a dislocation between the way
Speaker 6: the market is pricing your optimal path monetary policy for
Speaker 6: financial conditions, you intervene and it can be quite close
Speaker 6: to a policy meeting, which is to Tom's question about
Speaker 6: the decoupling between the Bailey led Bank of England and
Speaker 6: the FED. The Power led Fed, they've been reactive, not
Speaker 6: proactive in terms of managing expectations for this meeting, and
Speaker 6: it's been a regular pattern, unfortunately over the last eighteen months.
Speaker 5: So even though you don't think they should, do you
Speaker 5: think they will hike on Thursday.
Speaker 6: It's difficult, isn't it. I remember very clear that my
Speaker 6: reading of the data, and look, I don't want to
Speaker 6: sit here and pretend that you know, I have a
Speaker 6: better reading than the nine members of the Mounted Policy Committee,
Speaker 6: but I do think that the market has allowed itself
Speaker 6: to get expectations of a RATAG that I think the
Speaker 6: Managing Policy Committee probably look at the latest and the
Speaker 6: most timely indicator of core inflation and wages, which they
Speaker 6: set out their August Manety Policy Report with their key
Speaker 6: data points. Those have slowed in July, those have slowed
Speaker 6: in August. That's the new data that's come into the marketplace.
Speaker 6: Taking account of that, there's time. There's only six weeks
Speaker 6: till the next policy meeting when they'll have a new
Speaker 6: set of economic forecasts. You can pause that one out.
Speaker 6: You can say we're aligning ourselves with the potential pause
Speaker 6: in the US and in the Eurozone and not be
Speaker 6: an outlier. You don't want to be a monetary policy
Speaker 6: outlier in the UK.
Speaker 7: There is a question though, about a reacceleration inflation, especially
Speaker 7: on the heels of oil prices that have been climbing.
Speaker 7: We just got news from Canada that inflation came in
Speaker 7: at four percent year over year in August versus a
Speaker 7: three point eight percent estimate. We have seen this again
Speaker 7: and again. What's to say that there isn't something underpinning
Speaker 7: those inflation figures that will reaccelerate that does warrant what
Speaker 7: we heard from Jennifer McEwan, which is a fifty basis
Speaker 7: point rate hike at Thursday's meeting.
Speaker 6: You speak to exactly why in extra six weeks is
Speaker 6: most valuable, because those oil price assumptions were seeing similar
Speaker 6: turbulence in soft commodity markets are leading indicator of food
Speaker 6: price inflation. The bank having redes its forecasts in the
Speaker 6: first week of November, in fact it does it in
Speaker 6: late October, it will have at its disposal for the
Speaker 6: MPC the type of impulse that will come through from
Speaker 6: those higher prices in terms of headline inflation and the
Speaker 6: potential second order effects in terms of core price setting.
Speaker 6: Why would you not give yourself the optionality of an
Speaker 6: extra six weeks to appraise those leading indicators but also
Speaker 6: model the impact of those core inputs.
Speaker 7: If what you said earlier, though, is true that this
Speaker 7: is a central bank that has lost credibility and lost
Speaker 7: the plot, then wouldn't you see a pound that just
Speaker 7: weakens dramatically if they were to do that, if they
Speaker 7: were to pause, even in the face of people saying
Speaker 7: you need to hike, and you need to hike more aggressively.
Speaker 6: But my reading of the way people are trading sterling,
Speaker 6: it's not based on a spread of central bank policy rates.
Speaker 6: It's spread of credibility. If you do a credible pause,
Speaker 6: you enhance your credibility. I'd expect Sterling to strengthen against
Speaker 6: its major pairs. Against that backdrop, if you deliver a
Speaker 6: message that says, we understand how this economy is evolving.
Speaker 6: We're in front of the data. We're guiding the market
Speaker 6: rather than being reactive to each each bit of pricing
Speaker 6: that they're seeing.
Speaker 1: We've got a bunch of thugs asking questions at your
Speaker 1: own power here tomorrow?
Speaker 2: What question would you ask your own power?
Speaker 6: Well, I'd be fascinated to see what themc come out
Speaker 6: in terms of long term our star. I think for
Speaker 6: me that's the key data point in the summary of
Speaker 6: economic projections we get. Do they believe it's still in
Speaker 6: that two and a half to three and a half
Speaker 6: percent range? Given all the way out to two years
Speaker 6: we're seeing potential FED funds raided north of five. Have
Speaker 6: we reached a situation where actually the FMC have got
Speaker 6: to throw in the towel in terms of long and
Speaker 6: the repricing that that would have across equity markets, fixed
Speaker 6: income markets.
Speaker 4: That's WoT do you think they're ready to do that?
Speaker 6: Ask the question you might get you might be surprised
Speaker 6: by their propensity.
Speaker 5: Just didn't seem wanted to go there in Jackson hole
Speaker 5: in the speech, he's.
Speaker 6: The skill of the Bloomberg team better yes than I am.
Speaker 5: Williams will go there? The New York Fed President. What's
Speaker 5: the guy that you would take from a man like
Speaker 5: that on where this might be going?
Speaker 6: Uh influence. So the degree with which a debate you're
Speaker 6: right almost certainly, you know j Power is far too
Speaker 6: good an operator to to even get tempted into that debate.
Speaker 6: The degree to which other members of the f MC
Speaker 6: can start to frame that debate and say, actually, part
Speaker 6: of and we've seen financial conditions loosened quite appreciably in
Speaker 6: the US economy. Part of keeper yeah, part of keeping
Speaker 6: those elevated actually is to have that debate in public
Speaker 6: such the markets can understand what that pathway is for
Speaker 6: long term master in the economy, because at the moment,
Speaker 6: the summary of economic projections do not tell you that story.
Speaker 1: Lazayne Sanders was brilliant on this yesterday, John looking at
Speaker 1: the Bloomberg financial conditions as next it's screaming accommodation right now.
Speaker 5: This speaks to a phrase that Lisa used reacceleration, and
Speaker 5: I think we're talking about the UK at the time
Speaker 5: in that conversation, and that part of this conversation the
Speaker 5: prospect of reacceleration in the US. Something that we've heard
Speaker 5: a few times from various guests is this current disinflationary
Speaker 5: trend is transitory? Would you go that far?
Speaker 6: All the dangers of using that word. Look, there is
Speaker 6: no doubt. I mean, if we're talking in the context
Speaker 6: of the US economy, the oil price is more significant.
Speaker 6: Actually domestically in the UK, the gas price is more significant,
Speaker 6: which hasn't taken place and hasn't moved up in the
Speaker 6: same way. Would I Look, central banks have carved out
Speaker 6: in the last six to nine months of focus on
Speaker 6: core inflation, and therefore are we now going to sort
Speaker 6: of pivot back to focusing on headline inflation and give
Speaker 6: them the impulse seems to be through the oil and
Speaker 6: commodity markets. It's going to be the first order impact
Speaker 6: and pushing headline it means like you it feels like
Speaker 6: you're moving the target every single time the data doesn't
Speaker 6: conform to your narrative. That's a very we're talking about
Speaker 6: credibility to about the credibility of central banks. You've got
Speaker 6: to be consistent through the cycle, not just to fit
Speaker 6: your narrative.
Speaker 5: If I could put you in a press conference right
Speaker 5: and now, it wouldn't be the FEDS, it would be
Speaker 5: the next Bank of England. Yeah, decision in a couple
Speaker 5: of months time. That decision is it November? The November
Speaker 5: one with the news conference that is going to be
Speaker 5: what are those forecasts going to look like for inflation?
Speaker 4: Do you think?
Speaker 1: Well?
Speaker 6: In terms of that, this is why it's the opportunity
Speaker 6: to talk about how the relevance of gas, wholesale gas
Speaker 6: in the UK economy being the more relevant one. Actually,
Speaker 6: I suspect the expectations for inflation will actually be lower
Speaker 6: for twenty twenty four that we saw last week from
Speaker 6: the ECB. Remember what spooked the markets in terms of
Speaker 6: a north of three percent inflation print in the Eurozone
Speaker 6: in twenty twenty four we go from the OECD to
Speaker 6: day two point nine percent in the UK. I think
Speaker 6: the bank will back into that forecast, a sub three
Speaker 6: percent forecast for CPI because of the relevance of gas,
Speaker 6: which on the two year curve is about eighty percent
Speaker 6: lower than it was in the summer of twenty twenty two,
Speaker 6: when UK macro became the front page story. We had
Speaker 6: Yellen talking about it. We told Larry Summers talking about
Speaker 6: it because the mini budget. But it was not just
Speaker 6: the mini budget. It was the dislocation of gas prices
Speaker 6: and how impact that is on reel incomes in the UK.
Speaker 1: You're talking natural gas, natural gas. In America we would
Speaker 1: say petrol.
Speaker 2: I mean petrol.
Speaker 5: We confuse that we see gasoline.
Speaker 6: And I allow you to translate my narrative, Tom and
Speaker 6: keep up with In London, I did the.
Speaker 2: Leader of Gas two hours ago.
Speaker 1: We were talking about where does it hurt in the
Speaker 1: United Kingdom, like where will it actually affect Bank of
Speaker 1: England There it is John seven fifty two dollars per lease.
Speaker 5: So I also company, I spell leader. It's the one
Speaker 5: year anniversary of the mini budget, isn't it? It's Saturday?
Speaker 5: It is Simon, thank you. Always a pleasure. I always
Speaker 5: learned something Simon French. There of panroa Ordan.
Speaker 1: Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and
Speaker 1: anywhere else you get your podcasts. Listen live every weekday
Speaker 1: starting at seven am Easter. I'm Bloomberg dot Com, the
Speaker 1: iHeartRadio app tune In.
Speaker 2: And the Bloomberg Business app.
Speaker 1: You can watch us live on Bloomberg Television and always
Speaker 1: I'm the Bloomberg Terminal.
Speaker 2: Thanks for listening.
Speaker 1: I'm Tom Keen, and this is Bloomberg