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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordernt. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app. Let's get to view

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Speaker 2: on Wall Street this morning, Joe Cancarves and MUFG writing

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Speaker 2: the impact from the war will likely turn out to

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Speaker 2: be even more damaging than the tariff shark, especially considering

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Speaker 2: that the US jobs market and consumers are already on shaky ground.

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Speaker 2: George joins us now for more. George, good monic, Good morning.

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Speaker 2: Let's start with Lisa's world the auction soff two year, soft,

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Speaker 2: five year, seven year auction coming up a little bit later.

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Speaker 2: What do you think is behind the weakness and demand

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Speaker 2: for US government debt right now?

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Speaker 3: Look, I think it's a repricing that's happened globally on

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Speaker 3: the rate side, the US treasury market really lagged everything else,

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Speaker 3: and this, you know, this sort of concern around like

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Speaker 3: what is the new steady state for interest rates and

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Speaker 3: heading into the end of the month, end of the

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Speaker 3: quarter type environment. These auctions usually do well, and the

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Speaker 3: fact that they're you know, under pressure, does kind of

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Speaker 3: show that there's been some sort of kind of buyer

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Speaker 3: pull back.

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Speaker 2: Mohamad al Adim wrote in the FT earlier this week

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Speaker 2: about goal flows and the importance of the golf is

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Speaker 2: a source of capital, not just a source of energy.

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Speaker 2: It's something happening with those goal flows in respect to

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Speaker 2: what we've seen so far in the auctions looks.

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Speaker 3: It's hard to tell with public data and just you

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Speaker 3: know where we stand things right now. In general, fire

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Speaker 3: and flows could be impacted, you know, the longer this persists,

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Speaker 3: and that's that's really the big issue here.

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Speaker 1: Is there also a question around institutional credibility. What kind

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Speaker 1: of fiscal response there's going to be to this. I've

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Speaker 1: noticed that a lot of the increase in benchmark rates

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Speaker 1: in the US have come from really not at all

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Speaker 1: from inflation expectations. What's the read through in terms of

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Speaker 1: what the appetite for dead is internationally.

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Speaker 3: Yeah, absolutely so, Yeah, that's a great point. The fact

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Speaker 3: that we've seen real rates, especially out beyond the five

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Speaker 3: year point in the curve, so the ten year in

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Speaker 3: the thirty year has largely been a real rate move,

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Speaker 3: you potentially capturing this sort of fiscal concern. We've been

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Speaker 3: here before. We've seen this before in the times past.

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Speaker 3: When there's a risk of more supply coming down the pike,

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Speaker 3: you know, the bomb market does discount it. But we've

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Speaker 3: also seen the two yearself a decent amount, so we've

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Speaker 3: seen a level shift higher that's also infiltrated out the curve.

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Speaker 3: I think it's early days, but yes, I am conservative

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Speaker 3: fiscal outlook in general, and I'm usually more of a

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Speaker 3: fiscal hawk than and more of a central bank above.

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Speaker 3: But I do think that it's more inflation and then

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Speaker 3: the fear that we're going to have to address this

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Speaker 3: with more supply down the road.

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Speaker 1: The reason why we're focusing on the auctions is because

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Speaker 1: it's the front lines of real concern that we're seeing

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Speaker 1: that hasn't really been represented through broader markets. There hasn't

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Speaker 1: been this sort of capitulation to the fear that we

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Speaker 1: can represent on any given days, we try to extrapolate

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Speaker 1: out story. Why do you think there hasn't been that

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Speaker 1: sort of fear trade, that sort of wash out that

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Speaker 1: so many people have been talking about.

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Speaker 3: I mean the two years going from three point four

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Speaker 3: to close to four percent, I mean, that's pretty much

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Speaker 3: I think as qualifies as a wash how you know,

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Speaker 3: I think that's a pretty big move and really repricing,

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Speaker 3: realigning positioning, if you're if your motus operandi from this point,

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Speaker 3: for until we get some sort of conclusion on this

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Speaker 3: conflict is to trade small and to be very tactical.

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Speaker 3: It's hard to really come in with conviction.

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Speaker 2: Committing capital in this market. It's almost impossible. I think

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Speaker 2: that's been a feature of this week, not just around

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Speaker 2: this table, but a lot of people in this market, Bramo,

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Speaker 2: after what we saw earlier this week, particularly on Monday morning,

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Speaker 2: this is a really difficult moment for a lot of people.

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Speaker 2: Not just the economic bankdrop. That's shaky enough things are

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Speaker 2: French out at the moment, but going get into the

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Speaker 2: weekend not knowing which way this can go when the

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Speaker 2: risk on either side is so large, I'm not sure

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Speaker 2: what you're meant to do in this moment.

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Speaker 1: You're meant to sit on your hands and try to

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Speaker 1: take long term positions, which is the reason why you

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Speaker 1: see people not have conviction. Right now you're talking about

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Speaker 1: two risk. There also is no way to get an

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Speaker 1: edge the whole idea. And this is why I say

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Speaker 1: it's playing blackjack or it's playing slot machines. It's not

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Speaker 1: playing poker where you can kind of gauge and calibrate

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Speaker 1: the potential probabilities. How do you have any sense of that,

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Speaker 1: especially if you think maybe the other guy has better

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Speaker 1: edge than you do.

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Speaker 2: Have you ever seen it like this before? George, you're

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Speaker 2: an experience guy. You've seen many markets, many market Rejames.

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Speaker 2: What's this one?

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Speaker 1: Yeah?

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Speaker 3: I mean it's unique. It has a lot of different

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Speaker 3: elements to it. I've always thought, you know, down the line,

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Speaker 3: after years of accumulating all the death that we've had,

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Speaker 3: after really kind of relying on governments to be like

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Speaker 3: the real backstop of everything, that ultimately would come down

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Speaker 3: to something like this, it becomes geopolitical, where you know,

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Speaker 3: like this is the new chess game that we're playing.

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Speaker 2: This is different though central banks don't seem to have

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Speaker 2: a role in this moment. We're used to that, and

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Speaker 2: that's why I think what Jeff Curry of Carlile said

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Speaker 2: on this show just last week is so important. You

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Speaker 2: can't print miracles, molecules, you can't print barrels. The central

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Speaker 2: bank bank stop, the anchor isn't there for this market.

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Speaker 2: This is different though, No, clearly, I.

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Speaker 3: Mean, like we don't even know the full extent of

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Speaker 3: the show. Waves are still coming down the pike from

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Speaker 3: this the closure of the straight up formulas, right, I

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Speaker 3: mean like that, I think that's the unusual optimism that

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Speaker 3: somehow it's all going to turn around with this. We

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Speaker 3: can't just turn on a light switch.

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Speaker 2: Stay with us, multple impex. Savannah's coming up off to this.

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Speaker 4: Let me have another threat, another warning from the White

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Speaker 4: House this morning, the President on truth social saying that

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Speaker 4: Iran needs to make a deal, make it fast, or

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Speaker 4: it will not be pretty. He says, before it is

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Speaker 4: too late, because once that happens, there is no turning back. Yesterday,

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Speaker 4: Jonathan I was with the President covering him part of

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Speaker 4: the press pool. He called what was going on with

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Speaker 4: this war an excursion into hell. Clearly he is weighing

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Speaker 4: his options this morning to try to understand exactly what

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Speaker 4: is going on in the political ramifications as well domestically.

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Speaker 4: John Lieber joined us, of course from the Eurasia Group. John,

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Speaker 4: thank you so much for your time this morning. I'd

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Speaker 4: love to just get your reaction to early this morning

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Speaker 4: before the market's open. There in it with this latest

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Speaker 4: threat to the Iranians, they better get serious before it's

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Speaker 4: two eight.

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Speaker 5: I think he wants this war to stop, and he's

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Speaker 5: recognizing that he's in a bit of a challenge. So

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Speaker 5: gas presses are headed over four dollars a gallon, and

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Speaker 5: his approval rating is headed to below forty points, and

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Speaker 5: that's not a good place for the president to be.

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Speaker 5: So he knows he needs to get out of this war,

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Speaker 5: and he knows that he can't get out of it alone,

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Speaker 5: because even if the US stops bombing, if he's in

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Speaker 5: a situation where the Iranians are the only ones who

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Speaker 5: are able to get oil or other products out of

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Speaker 5: the straight of horror moves, that's a bad outcome for

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Speaker 5: the world economy. So he's got to do something to

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Speaker 5: change the game right now to get the Iranians to

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Speaker 5: open up the straight and these threats I think are

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Speaker 5: his way of trying to do that, because I don't

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Speaker 5: think the Iranians are in a mood and negotiate right now.

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Speaker 4: Do you think the talk of diplomacy potentially reports of

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Speaker 4: the Vice President jd Vance going to Islamabad to maybe

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Speaker 4: meet with Iranian negotiators, is that real or do you

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Speaker 4: think that's just a distraction while the President and the

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Speaker 4: DoD get their personnel on the ground.

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Speaker 5: Don't I mean, I think it is real in the

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Speaker 5: sense that there are people who are trying to set

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Speaker 5: up talks and mediate talks. The Pakistanis are involved. Steve

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Speaker 5: Wikoff has been involved in talking to the Iranians, but

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Speaker 5: I don't know if these are going to go anywhere,

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Speaker 5: and I don't know if the Iranians right now have

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Speaker 5: the incentive that they need in order to show up

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Speaker 5: at these talks and make a good faith effort. He

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Speaker 5: also got to remember that the Iranians of zero reason

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Speaker 5: to trust the United States. Here they got attacked from

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Speaker 5: their perspective, they got attacked by America while they were

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Speaker 5: in the middle of negotiating a nuclear deal. And what

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Speaker 5: guarantees do they have that the US and Israel is

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Speaker 5: not attack them again while they're negotiating a peace deal.

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Speaker 4: It is a metron election here. You mentioned gas price,

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Speaker 4: is also the fact that there doesn't seem to be

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Speaker 4: an appetite for boots on the ground in Congress. What

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Speaker 4: kind of pushback do you think we could see You

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Speaker 4: were an advisor to Senator Mitch McConnell. What kind of

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Speaker 4: pushback do you think we could see, not from Democrats

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Speaker 4: but from his own party.

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Speaker 5: Yeah, I think the pushback to putting American troops at

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Speaker 5: risk here is going to be enormous. And if that's

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Speaker 5: what it takes for Trump to de escalate this war,

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Speaker 5: is to get troops on the ground, seize the Iranian oil,

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Speaker 5: seize some Iranian territory, and potentially expose thousands of Marines

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Speaker 5: to hostile fire from the Iranians who have lots of

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Speaker 5: drones and missiles that they can turn away from the

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Speaker 5: UAE in Saudi and focus on American forces, which the Iranians,

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Speaker 5: of course would be happy to do. I think that's

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Speaker 5: a huge problem for President Trump, and I don't think

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Speaker 5: that's really a viable option for him right now. Maybe

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Speaker 5: in a few weeks he sees that as the only

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Speaker 5: path out of it here, but there's going to be

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Speaker 5: a lot of blowback on Capitol Hill and from the

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Speaker 5: American public to committing these troops, and so it just

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Speaker 5: doesn't leave him with great choices.

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Speaker 4: Where does that leave the two hundred billion dollars the

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Speaker 4: Pentagon is asking Congress to sign up for.

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Speaker 5: The Democrats are treating that two hundred billion dollars like

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Speaker 5: the authorization for use of force in the Iraq War,

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Speaker 5: which they later came to regret because that authorization of

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Speaker 5: the use of force had been used to create these

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Speaker 5: forever wars that cost trillions of dollars and got America

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Speaker 5: bogged down for two decades, and so the Democrats don't

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Speaker 5: want to vote for it. I think that's a tall

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Speaker 5: order to get that two hundred billion right now. It'll

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Speaker 5: happen probably eventually, maybe at the end of the year

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Speaker 5: when they have to do appropriations bills, but I don't

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Speaker 5: or Republicans have the option, of course, of doing a

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Speaker 5: party line reconciliation bill, which introduces a whole other bunch

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Speaker 5: of complexities, because you're going to have people that want

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Speaker 5: to do tax You're going to have people that want

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Speaker 5: to cut spending, and I think that's ultimately going to

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Speaker 5: be a huge problem for Trump.

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Speaker 4: If the President decides to take this action. Axios outlined

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Speaker 4: what potentially some of the strategic goals of that would

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Speaker 4: be this quote final blow. Wouldn't the Iranians just tell

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Speaker 4: the Houthies we need to create more chaos for the Americans.

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Speaker 4: We need to drive up oil prices higher. While they're

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Speaker 4: now engrossed with the Strait of Hormuz, the huthiechannew close

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Speaker 4: bob El Mundeb and close the Red Sea.

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Speaker 5: They could try it. The Iranian influence in the region

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Speaker 5: is waning. I think all the proxy groups are seeing that.

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Speaker 5: Right now, Iran's not what they used to be. I mean,

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Speaker 5: Iran does have a lot of money coming in their coffers.

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Speaker 5: But our understanding is that the Huthis are asking for

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Speaker 5: money from the Saudis to stay out of this war,

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Speaker 5: and the Saudis are happy to pay that for right now.

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Speaker 5: That could change over time. The Iranians could make them

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Speaker 5: an offer they can't refuse. But I think the Huthis

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Speaker 5: right now, we think stay out of this war because

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Speaker 5: they it's in their interests to not attack their neighbor.

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Speaker 4: Speaking of the midterm elections, speaking of the present waying

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Speaker 4: his options the Wall Street Journal this morning, so that

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Speaker 4: Trump is telling close associates he wants to avoid a

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Speaker 4: protracted war in Iran if he takes this decision to

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Speaker 4: send in troops to potentially seize an island or make

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Speaker 4: sure the military is there to try to clean the

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Speaker 4: Straight of Hormoves, some more vessels can go through a

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Speaker 4: mind sweepers and the likes Won't that mean we are

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Speaker 4: now running the Straight of Hormuz and this becomes a

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Speaker 4: protractive environment. Absolutely.

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Speaker 5: I don't think there's any easy way to get out

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Speaker 5: of this war right now. If the US de escalates unilaterally.

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Speaker 5: The your audience have proven that they control the straight

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Speaker 5: and they can let friends and family through, and they

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Speaker 5: can let shipments that are going to the United States

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Speaker 5: or from its.

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Speaker 4: Allies friends of family for two million dollars, you know, whatever.

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Speaker 5: The discount is. Yeah, you get a nice little rate

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Speaker 5: on your ship that's going through. But I think that

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Speaker 5: this is a there's just no way out of this,

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Speaker 5: So you can take it by force, but then you're

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Speaker 5: committing yourself to probably months or longer of US presence

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Speaker 5: in the region and again exposing a lot of American

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Speaker 5: troops to missile fire, which is not going to be popular.

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Speaker 4: Here, we're four dollars a gallon of gasoline. What does

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Speaker 4: he do with we at five?

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Speaker 5: I think he pauses. I think he's got to say

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Speaker 5: I'm done. You know, I expect the Iranians open the

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Speaker 5: straight and that's the easiest action for him to take.

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Speaker 5: It's the least risky action. It's a long run strategic

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Speaker 5: loss for the United States, and it puts a stronger

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Speaker 5: position than when they started this more. But I don't

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Speaker 5: see what choice he.

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Speaker 2: Has stay with US Multbleinberg surveillance coming up after this

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Speaker 2: energy price shocks fueling snackflation FIS. We'll move on the

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Speaker 2: OECD predicting average G twenty inflation will jump to four

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Speaker 2: percent while anticipating lower than expected global growth. The organization

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Speaker 2: releasing a new outlook this morning, writing persistent disruptions to

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Speaker 2: exports from the Middle East could trigger more extensive repricing

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Speaker 2: in financial marks THEE see the secondary General Mattias Coman

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Speaker 2: joins us now for Morematis, thanks for making some time

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Speaker 2: for us this morning. Can we just start with how

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Speaker 2: difficult it might have been to be put together a

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Speaker 2: forecast in a moment like this, How complex was it

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Speaker 2: for you and the team?

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Speaker 6: Well, you know, obviously the level of uncertainty is extremely high,

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Speaker 6: and so what we do in these circumstances is use

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Speaker 6: technical assumptions. I mean, you know, the key factor of

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Speaker 6: course here, you know, relates to the energy supply and

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Speaker 6: the energy price shock. So you know, the technical assumption

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Speaker 6: that we have used as the basis for our projections

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Speaker 6: is essentially aligned with the future markets pricings as I

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Speaker 6: stood on twenty March. Now, the truth is we can't

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Speaker 6: predict how much longer the conflict will last or how

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Speaker 6: much worse it could get. So I mean, we really

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Speaker 6: don't have much choice but to use a baseline scenario.

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Speaker 6: And of course, but we've also included a worst guise

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Speaker 6: scenario in our report today. There clearly is a level

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Speaker 6: of quite a significant level of downside risk to ourtlook.

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Speaker 2: Today, Mattias. The inflation component of this is the piece

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Speaker 2: that we can focus on now, and then we can

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Speaker 2: turn to growth. There are some people who believe the

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Speaker 2: potential for second order effects is low because the economies

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Speaker 2: aren't as strong as they were, and maybe balance sheets

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Speaker 2: for consumers aren't as well built resilient right now as

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Speaker 2: they were coming out of the pandemic. Mattias, where do

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Speaker 2: you stand on that? I remember the first time we met,

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Speaker 2: you were part of the Australian government. You know these things, well,

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Speaker 2: how to run a treasury? Do these governments have the

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Speaker 2: fiscal space to respond to this energy shock and provide

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Speaker 2: the fiscal support the consumers might be looking for.

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Speaker 6: Well, I mean that levels across the world are elevated

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Speaker 6: and including because of some of the fiscal responses in

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Speaker 6: the wake of the COVID pandemic, but also you know,

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Speaker 6: structural pressures on spending around the world. But you know,

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Speaker 6: in terms of the inflation story now, I mean the

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Speaker 6: story really is different in different parts of the world.

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Speaker 6: And I mean in terms of the impact of the

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Speaker 6: energy price shock and the flow and that hasn't I mean,

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Speaker 6: you know, some are more directly exposed than others. I

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Speaker 6: mean here the direct exposure you know, is probably more

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Speaker 6: into the Asian markets and to the Asia Pacific. But

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Speaker 6: you know, in other areas like Europe, you know, for example,

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Speaker 6: I mean, the effect, the price effect is more indirect.

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Speaker 6: But I mean there is an impact on global prices.

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Speaker 6: When we look at the United States. I mean, in

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Speaker 6: the United States, the reason we say what we're saying

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Speaker 6: about inflation is there. I mean, we do actually see

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Speaker 6: that the liber market remains relatively tight, and you know,

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Speaker 6: in the context of now this energy this global energy

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Speaker 6: price shock, and also the delight effects still of some

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Speaker 6: of the tariff price effects, but also the impact on

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Speaker 6: the liber market of slowing net migration. I mean, we

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Speaker 6: do think that there is a combination of factors there

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Speaker 6: that is likely to have a bearing on the inflation

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Speaker 6: outlook the United States.

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Speaker 1: Mitias, We've been trying to wrap our heads around the

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Speaker 1: idea that the ECB and the Bank of England are

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Speaker 1: now expected to hike rates several times, even potentially this

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Speaker 1: year in response to inflationary pressures at the same time

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Speaker 1: that you and many others are down growthing, their downgrading

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Speaker 1: their growth prospects. At what point do you see the

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Speaker 1: necessity to hike rates as torpedoing any potential growth going forward,

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Speaker 1: forcing you to lower expectations further on growth.

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Speaker 6: Well, look, I mean there's obviously now different factors impacting

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Speaker 6: the inflation outlook, and that is going to have a

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Speaker 6: bearing on the response of central banks. I mean, it

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Speaker 6: is it is it is you know, of course true.

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Speaker 6: I mean, our current expectation is that the energy price

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Speaker 6: effect will be temporary and as such, I mean, you know,

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Speaker 6: central banks of course would be able to tag that

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Speaker 6: into account. And there is a softening in liber markets

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Speaker 6: and an economic outlook in some economies around the world.

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Speaker 6: But I mean, in the end, but we are signed

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Speaker 6: to central banks, is that I need to continue to focus,

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Speaker 6: you know, very closely on the data as it evolves,

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Speaker 6: and be very prudent to ensure that, you know, inflation

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Speaker 6: expectations are well anchored and that the inflation outlook you know,

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Speaker 6: is as they would want it to be.

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Speaker 1: Do you see Matias a real concern about runaway inflation globally?

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Speaker 1: I mean, this ultimately is the real question. Do you

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Speaker 1: think that this shock is similar to what we saw

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Speaker 1: in twenty twenty one, twenty twenty two, especially because inflation

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Speaker 1: has been above the targets for quite a while.

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Speaker 6: But I mean, inflation prior to this, you know, lightest

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Speaker 6: shock was on a downward path, and you know, we

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Speaker 6: were certainly expecting that in most G twenty economies, you know,

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Speaker 6: inflation was going to get back within the central bank

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Speaker 6: target range by the end of this year sometime next year.

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Speaker 6: But you know this, this now you know clearly is

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Speaker 6: having a material impact. I mean we are expecting or

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Speaker 6: we have upgraded our inflation o woutlook for this year

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Speaker 6: about globally by one point two percent, looking across the

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Speaker 6: G twenty economies. I should say, now you know, it

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Speaker 6: remains to be seen. As we've said at the beginning

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Speaker 6: of this conversation, we don't know what we don't know.

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Speaker 6: I mean, we don't know how much longer this conflict

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Speaker 6: we last. We don't know how much worse it could get.

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Speaker 6: And I mean there's there's significant downside risk, but there's

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Speaker 6: also upside risk or upseide opportunity. I mean, things could

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Speaker 6: turn out better than what we're fearing.

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