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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,

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Speaker 1: and of course on the Bloomberg terminal. Something We've got

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Speaker 1: to stop with you, m Emmanuel over aviacore the base

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Speaker 1: case with forty eight hundred, it's not forty three. The

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Speaker 1: back case is twenty hundred. That's a lot of downside

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Speaker 1: on that back case for medicot something John and Lisa

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Speaker 1: want to get to that. I just want to do

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Speaker 1: something her internal housekeeping here on Evercore, I s I

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Speaker 1: Julian Emmanuel. How does Ed Hyman's acclaimed granularity and study

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Speaker 1: of the American corporate economy in fact, this new view

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Speaker 1: that you have, Well, what it does, Tom, is it

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Speaker 1: reinforces the idea that our base case continues to be

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Speaker 1: that there isn't going to be a recession. Um, you know,

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Speaker 1: and we've had waves of concern obviously economic hurricanes, maybe

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Speaker 1: offshore so on and so forth. But Ed's granular data

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Speaker 1: says we are not at the point where there is

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Speaker 1: likely to be a recession yield curve or no yield curve.

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Speaker 1: And frankly, what it does, though is when you look

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Speaker 1: at the macro environment around you, it increases the probability

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Speaker 1: of a recession off. Why the change, why the change

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Speaker 1: yesterday evening? Because really, when you look at the move

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Speaker 1: off of the low on May twentie uh and you

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Speaker 1: think about, you know, how these kinds of bottoms form.

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Speaker 1: And to be clear, our our view is that you

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Speaker 1: are in the midst of forming a non recessionary bear

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Speaker 1: market bottom. That's the base view. But what we haven't

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Speaker 1: seen is that fundamental catalyst. And we all know that

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Speaker 1: the biggest fundamental catalyst is falling energy prices, and you know,

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Speaker 1: we look for it every day and it is not happening. Um.

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Speaker 1: But then the other thing is volume. It tends to

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Speaker 1: be when you get bottoms of that nature that you

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Speaker 1: see surges and volume, real concerted buying interest that's lacking

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Speaker 1: in the downside case. The bad case is that the

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Speaker 1: recessionary bad case. And where does the number come from?

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Speaker 1: So basically, if you look at recession bear markets of

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Speaker 1: the left hundred years, the average is down around that

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Speaker 1: gets you to we're not going there unless we get

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Speaker 1: a recession. You talk about oil being the distinguishing feature

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Speaker 1: between that recession, that downside scenario, and not what is

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Speaker 1: the pain point in oil that you're looking for? Well, so, Lisa,

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Speaker 1: I think it's pretty fair to say that when you

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Speaker 1: think about the consumer's psychology, and look, you heard the

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Speaker 1: President address it last night on Late night TV, is

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Speaker 1: that the psychological pain point has already arrived, whether it's

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Speaker 1: five dollars a gallon or whatever you wanted to define

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Speaker 1: that as. But but frankly, when you look at historical data,

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Speaker 1: the longer prices stay elevated at this level, the closer

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Speaker 1: you get to the actual pain. Pry I couldn't believably

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Speaker 1: so what the President said last night on Late night TV.

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Speaker 1: He was very real in trying to address the American people. Julian,

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Speaker 1: you say that you know, it's about how sustained this

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Speaker 1: is what about the bookcase? What has to happen in

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Speaker 1: order to get to forty eight hundred at a time

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Speaker 1: when people want to hear the Barrish case and want

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Speaker 1: to understand how much downside they have, we need to

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Speaker 1: see visibility into the idea that this so called softish

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Speaker 1: landing is really going to crystallize. And our fear here

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Speaker 1: is is that you know, again there's only so much

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Speaker 1: the FED can do to get you know, to put

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Speaker 1: a lid, and not not only of the lid, but

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Speaker 1: take energy prices down, and really they can't do much

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Speaker 1: at all, um and that you know, we've seen more

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Speaker 1: hawkish rhetoric out of global central banks in the last week.

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Speaker 1: We're likely to see that next Wednesday. And the fear

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Speaker 1: is is that you know that it doesn't move inflation

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Speaker 1: materially lower. If you get that break in inflation and

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Speaker 1: you get consumers spending to stay in in you know,

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Speaker 1: hold in there, that's where we get the upside. And

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Speaker 1: that's this attemper pause as well. Ju And do you

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Speaker 1: need to September pause to get that case? Uh? Not necessarily.

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Speaker 1: And frankly, the whole concept of both volatility around the

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Speaker 1: macro and economic volatility, whether driven by inventories or a

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Speaker 1: number of different issues, is it is such a long

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Speaker 1: time between now in September, the picture is likely to

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Speaker 1: look almost entirely different. So we don't know exactly what

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Speaker 1: monetary policy is going to require, but we do know

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Speaker 1: that inflation is going to need to turn down meaningfully

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Speaker 1: without a turn down and growth at Julian, You've got

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Speaker 1: three numbers here, forty three hundred hundred. I'll have a

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Speaker 1: waiter with the ten dollars that the only one you

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Speaker 1: get asked about today is the twenty nine hundred, Judy,

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Speaker 1: and thank you buddy. As always, Jenny Manual there of

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Speaker 1: avocor jumping on the phone forest as he downgrades the

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Speaker 1: auto international economist at Wells Fargo, Nick Bennenbrook, who is

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Speaker 1: hugely qualified to speak on this. I know of no

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Speaker 1: one who has consistently applied fect strategy over his career

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Speaker 1: like Mr Brennenburg. Nick, thrilled to have you with us

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Speaker 1: today in the studio. Does Madame Leguarde you have control

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Speaker 1: of the situation. I think she does. I mean there's

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Speaker 1: both in economic control and also a political control because

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Speaker 1: of all the policymakers on the e CB, and that's

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Speaker 1: where her background as a politician I think is so important.

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Speaker 1: So that medium doing forecast at two percent, that says

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Speaker 1: that you know, the ECB has an inflation problem, but

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Speaker 1: it's not a severe I think as the United States

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Speaker 1: or the UK. This is so important, folks. I'm gonna

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Speaker 1: get this out front. We're gonna blow the brakes here

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Speaker 1: and go right through the eight o'clock hour with Mr Benningbrook.

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Speaker 1: Is that important? We are welcome you all on Bloomberg

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Speaker 1: Radio and Bloomberg Television, particularly in Europe. John. In the

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Speaker 1: event of a nude market fragmentation, Nick, I'll read out

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Speaker 1: this quotes here and you tell me what you think

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Speaker 1: about it related to the pandemic. Pet reinvestments can be

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Speaker 1: adjusted flexibly across time, masset classes and juridicitions at any time.

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Speaker 1: Talk to me about what you think fragmentation actually means

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Speaker 1: and what they're planning trying to do here as they

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Speaker 1: high conterest rates. Well, yes, they are seeing probably more

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Speaker 1: fragmentation than they would really like. As you mentioned the

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Speaker 1: the Italian bonds bridge relative to those in Germany have

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Speaker 1: gone from about one percent percentage point out to two

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Speaker 1: percentage points. But I really think this is about as

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Speaker 1: much as they can do this flexible reinvestment, because it

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Speaker 1: would be difficult for them, for example, to be raising

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Speaker 1: interest rates, which they're going to do some of the options.

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Speaker 1: Other options they had talked about was restarting purchases if

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Speaker 1: there was too much for igmentation or even coming up

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Speaker 1: with a whole new program to help stabilize the markets.

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Speaker 1: But then you'd be sort of tightening monetary policy on

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Speaker 1: the one here in easing monetary policy on the other,

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Speaker 1: and that would be extremely challenging. So I think they

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Speaker 1: will go with this flexible approach for as long as

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Speaker 1: they possibly can, and and certainly that's going to be

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Speaker 1: a very delicate balance they're gonna have to walk. Nick

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Speaker 1: is delicate to walk walk a delicate balance on the

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Speaker 1: ECB Government Council when you've got some loud hawks, and

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Speaker 1: those hawks are so loud at the ECB. They don't

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Speaker 1: want twenty five basis point moves. They want bigger moves

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Speaker 1: than that. And clearly there's this line that's been put

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Speaker 1: in this statement for September that I love your thoughts on.

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Speaker 1: They say this on the September decision, the calibration of

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Speaker 1: this rate increase will depend on the updated medium term

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Speaker 1: inflation outlook. If the medium term inflation outlook persists or deteriorates,

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Speaker 1: a larger increment will be appropriate. At the September meeting.

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Speaker 1: That screams to me an e c B that's trying

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Speaker 1: to please the Hawks and tell them if this carries

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Speaker 1: on through the summer, we'll go fifty. Yes, I mean

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Speaker 1: I think it's certainly, you know, trying to, as you say,

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Speaker 1: allay the concerns of the Hawks. I don't know if

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Speaker 1: we're going to get fifty basis points in September though.

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Speaker 1: I mean, going into today's meeting, the market was pricing

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Speaker 1: thirty six basis points for July, and I think pretty

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Speaker 1: definitively it looks like we're going to get twenty five

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Speaker 1: in July. UM And so coming back to Thomas question,

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Speaker 1: does Madame reglad have control of the situation. I think

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Speaker 1: she does. I think she's managed to get a consensus

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Speaker 1: behind that twenty five basis point move. Looking at our

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Speaker 1: own forecast for for ECB policy, we expect twenty five

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Speaker 1: in July, we expect in September. So if I was

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Speaker 1: a voter on the e c B, I guess I

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Speaker 1: would not be dissenting. I would be going with gradualism

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Speaker 1: at this point. For an exchange traders, I don't think

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Speaker 1: know exactly what to do with this, basically a trading

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Speaker 1: range one oh seven for the euro versus the dollar.

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Speaker 1: Unclear of whether this will be supportive or her detract

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Speaker 1: if it ends up slowing growth even further with more

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Speaker 1: rad hikes down the pike. What's your view on that.

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Speaker 1: Do you think that more rad hikes and more hawkish

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Speaker 1: stance will be positive for the euro or negative? I

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Speaker 1: think if we were to get a more hawkers view

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Speaker 1: than we got today, for example, I think it would

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Speaker 1: be positive for the euro. But you know, looking at

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Speaker 1: the very near term. You know, as I mentioned that today,

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Speaker 1: the question was for July, do we get twenty five

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Speaker 1: or fifty? It looks like we get twenty five. And

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Speaker 1: that's why I think the Euro is selling off just

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Speaker 1: a little bit today. Um, And so really it is

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Speaker 1: going to come down to do we see those high

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Speaker 1: inflation prints, do we see those hawkish comments? And also

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Speaker 1: at the end of the day, I would say this

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Speaker 1: still the Federal Reserve moving a lot quicker for US

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Speaker 1: has a much larger inflation problem. So macroeconomic fundamentals in

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Speaker 1: addition to central bank I still think means uh, you know,

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Speaker 1: trend is probably for a softer euro over time. Nick.

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Speaker 1: Does it matter that a lot of the inflation is

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Speaker 1: driven from the energy market in Europe? I mean, certainly

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Speaker 1: in the US as well, but in Europe even more so,

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Speaker 1: and that really the e CB can't do much about

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Speaker 1: that by raising rates. It matters a little bit, and

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Speaker 1: you know, trying to use sort of the economist trick

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Speaker 1: there on, you know, use both hands. Um. You know,

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Speaker 1: certainly I would say the euro Zone doesn't have as

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Speaker 1: severe an inflation problem when you look at their core

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Speaker 1: inflation of three point eight per cent. You know, typically

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Speaker 1: a central bank would say, well, the underlying inflation trend

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Speaker 1: is not that bad. So you know, in some sense

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Speaker 1: that maybe affixed the pace at which the ECB raises

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Speaker 1: interest rates. But I think there's a huge focus on

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Speaker 1: headline inflation in the Eurozone as well, above eight per cent.

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Speaker 1: And the reason being is even if all of this,

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Speaker 1: you know, inflation is being driven by energy effect, is

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Speaker 1: these oil prices are going to be at a barrel

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Speaker 1: or higher, so we're just gonna have high inflation, even

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Speaker 1: if the broader inflation pressures aren't that bad. Nick, I

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Speaker 1: want to go back to your heritage, and I think

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Speaker 1: it's really important here. Roger Douglas had a New Zealand

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Speaker 1: it was blowing up forty years ago, and he, with

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Speaker 1: his leadership New Zealand codified inflation targeting. Right now, inflation

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Speaker 1: is essentially out of control. The response here is not

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Speaker 1: a rigidity or a formula of targeting like John Taylor

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Speaker 1: of Stanford or what the Bank of New Zealand did.

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Speaker 1: The The issue here is a level of dovish nous

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Speaker 1: versus harkersness. How dovish is our dovish central banks right

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Speaker 1: now if they can't affect New Zealand like targeting, Yeah,

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Speaker 1: I mean, I think you've got a point there. Certainly,

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Speaker 1: you know overall that there is still a lot of devishness,

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Speaker 1: although there is there is an evolution going on, because

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Speaker 1: when you look at a lot of the central banks

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Speaker 1: this yeah, faced with you know, worries about slower growth

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Speaker 1: or this very high inflation, they've been coming down on

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Speaker 1: the side of like, let's raise interstrates, letst try and

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Speaker 1: tackle inflation. But the point you make, I think is

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Speaker 1: a very good one. These real interest rates, the policy

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Speaker 1: rates are still extremely low relative to the rates of inflation,

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Speaker 1: and so at the end of the day, it's certainly

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Speaker 1: not an early nineteen eighties Paul Vulcan kind of a

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Speaker 1: situation that we have in the United States where they're

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Speaker 1: moving aggristonal you to just sort of squeeze inflation out

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Speaker 1: of the system. Nick Bannerbrook of Fargo Neck, thank you

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Speaker 1: right now. Patrick Armstrong where this chief investment officer at

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Speaker 1: Plurimi Wealth manager of Patrick. Can you invest in Europe um?

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Speaker 1: You can invest in europe UM. What I did this

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Speaker 1: morning is actually shorted Italian bonds BTPs. I do own

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Speaker 1: multinational European equities companies like a SML, which has a

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Speaker 1: product which is an incredibly high demand. I own shell UM.

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Speaker 1: You can invest in Europe, but I think you want

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Speaker 1: to think global context. I think Europe falling into a recession.

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Speaker 1: It's got a tightening central bank now for the first

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Speaker 1: time in a very long time. UM. But I don't

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Speaker 1: think the US falls into a recession. I think China

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Speaker 1: is probably going to be enormously stimulative in the second

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Speaker 1: half of this year. So if you do invest in Europe,

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Speaker 1: I want to play growth in other regions, not in Europe.

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Speaker 1: A Patrick, I want to talk to you about the

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Speaker 1: European bond market before we go out too broadly to

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Speaker 1: international equities. Do you think this is achievable addressing eventual fragmentation?

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Speaker 1: If it does materialize with reinvestments of PEB at the

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Speaker 1: same time to raise interest rates in the way that

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Speaker 1: that kind of gets towards this morning of the statement, Yeah,

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Speaker 1: I don't think so. I think that's so small, um

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Speaker 1: a matter at the margin, it's designed to give the

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Speaker 1: market some confidence in the periphery bonds. But I didn't

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Speaker 1: realize I was betting on fragmentation. That's the term I

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Speaker 1: wouldn't have used before when I shorted Italy this morning.

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Speaker 1: But I think that's something done deliberately pointing out they

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Speaker 1: know there is going to be consequences to the periphery

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Speaker 1: as they end their que program on July one. But

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Speaker 1: it's words and reinvestment is very small compared to uh

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Speaker 1: the bombaying bond buying program that is in place right now.

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Speaker 1: So you're short of Italian bonds, when do you start

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Speaker 1: to see value again? Where what is sort of the

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Speaker 1: threshold at which you start to say it's a buying opportunity, um,

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Speaker 1: if it blows out wide versus Germany. I'm actually short

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Speaker 1: boons and I have been short boons all year. Um.

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Speaker 1: I wish I was short of Italy all year as well,

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Speaker 1: but I just put Italy on I think if we

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Speaker 1: see another fifty basis points wider against Germany, I'll probably

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Speaker 1: start to close Italy because I don't think it is

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Speaker 1: going to be a disaster, but I do think the

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Speaker 1: market pushes for some sort of response from the ec

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Speaker 1: BE where they put in something maybe a little bit

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Speaker 1: more meaningful to make sure that the periphery yields don't

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Speaker 1: blow out wider, in other words, a more flexible purchasing

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Speaker 1: program from their path and how much they're going to

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Speaker 1: really dive into this market. Do you think that they

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Speaker 1: can be effective in actually suppressing yields in that region,

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Speaker 1: moving against both the inflation as well as the higher

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Speaker 1: yields in the core. UM. We'll see at the press

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Speaker 1: conference today. It will be very important to drag you

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Speaker 1: with the master at it whatever it takes, using words

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Speaker 1: rather than explicit policy. If le Guard really emphasizes that

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Speaker 1: we're not going to let any widening of perifrey, which

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Speaker 1: can have an impact on inflation, have impact on confidence, UM,

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Speaker 1: if she's really stresses that we we'll do whatever it

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Speaker 1: takes if these kind of things start to happen. In

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Speaker 1: the statement that's out there right now, it doesn't say that,

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Speaker 1: it says she's aware of it, So the rhetoric and

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Speaker 1: the words may have just as much importance as the

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Speaker 1: policy in the coming weeks. And factually, there's been so

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Speaker 1: many doubts about whether the Federal Reserve can deliver on

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Speaker 1: the right high can cycle that a lot of people

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Speaker 1: are pricing. Can you run me through how likely it

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Speaker 1: is that they CCP can deliver on gratio sustained hikes.

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Speaker 1: I was surprised by that because I didn't even think

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Speaker 1: they'd want to commit themselves to that yet. I think

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Speaker 1: the optionality that she's really been keen to create, she's

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Speaker 1: almost given up some of that by saying this is

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Speaker 1: the beginning of a gradual hiking cycle. I thought it

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Speaker 1: was going to be maybe even fifty in July and

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Speaker 1: then see what happens. But yes, she set the groundwork July,

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Speaker 1: maybe even fifty in September, which I think is very unlikely.

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Speaker 1: That's meant to appease the hawks, I suppose, but given

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Speaker 1: where growth is, given the impacts of higher oil prices

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Speaker 1: and energy prices on the European consumers and European manufacturing,

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Speaker 1: I think it's going to be very difficult to get

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Speaker 1: a hiking cycle started in Europe. If it does start,

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Speaker 1: it's great news. Something very good has happened in the economy.

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Speaker 1: I assume you also think then that GDP forecast at

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Speaker 1: two point eight percent for this year is pretty optimistic.

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Speaker 1: Maybe ove least side, I do I think Europes falling

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Speaker 1: into recession. I do believe Germany has committed to moving

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Speaker 1: away from Russian oil and probably the natural gas towards

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Speaker 1: the end of the year, and that's very stag flationary.

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Speaker 1: That's a huge hit to manufacturing, huge hits to jobs

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Speaker 1: and higher prices as well. We're back to that old

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Speaker 1: equity play. But can't we by Europe, but by companies

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Speaker 1: listed in Europe that have international exposure. Is that the

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Speaker 1: plane now, Patrick, That's the play for me, and that's

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Speaker 1: been the play for me for for quite a long time.

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Speaker 1: Europe's facing a lot of issues with growth and prices

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Speaker 1: and for the first time not having negative interest rates,

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Speaker 1: which may even be a positive for the banks. But

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Speaker 1: I still prefer to own the bank bonds rather than

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Speaker 1: the bank equities. With this back drop, Patrick, I'm strong,

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Speaker 1: thank you, sir, as always plurally wealthy. Let's get straight

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Speaker 1: to the conversation with Sema Sha, the chief strategist of

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Speaker 1: Principal Global Investors Seema. An hour ago, we spoke to

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Speaker 1: Sebastian Page of trote Price and he said, normally after

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Speaker 1: a sell off of this magnitude, we'd be buying stocks.

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Speaker 1: This time we're not. What are you doing? We are

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Speaker 1: very much neutral. Um. Look, I think you could see

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Speaker 1: a bear market rally, and I'm going to say that

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Speaker 1: it's a bear market rally rather than a full on rally,

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Speaker 1: and we we have to look for the cattlest one

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Speaker 1: of the things going to change. But once you see

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Speaker 1: some of that economic data, the earning stay to start

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Speaker 1: to roll over, we think that you're going to see

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Speaker 1: a really, really challenging period for ecting markets where it

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Speaker 1: retests the loads that we've seen in the past month

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Speaker 1: or so and probably goes a little bit beyond. People

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Speaker 1: have been conditioned by the last couple of years seem

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Speaker 1: that they always are near term. They look back the

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Speaker 1: last reference point for this early spring, we hit the lows,

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Speaker 1: we started to rally, and we had this conversation, how

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Speaker 1: do you differentiate distinguish between a bear market rally and

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Speaker 1: something more durable? What have we learned from that? Because

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Speaker 1: I think a lot of people looking at this right now,

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Speaker 1: just sitting there itching, thinking, yeah, I want to get

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Speaker 1: in because I was told this last time around it

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Speaker 1: was a bear market rally and this market just ripped.

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Speaker 1: Why is this so different? Oh? You know, I think

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Speaker 1: this circumstance that we're in is is very, very different

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Speaker 1: to anything that we've seen over the last decade. Now,

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Speaker 1: like you said, investors, they've become very accustomed to kind

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Speaker 1: of good returns, low volatility, and always being supported by

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Speaker 1: the FED. With inflation at this level. You know, I

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Speaker 1: pushed back a lot about the idea of FED put

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Speaker 1: any time over the next twelve months or so. So

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Speaker 1: I think in that environment, this is the time where

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Speaker 1: you have to look at the fundamentals. You have to

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Speaker 1: look at the fact that, as you said, energy bills

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Speaker 1: are really weighing on households at globally US You're wherever

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Speaker 1: you look at it, and in that situation, earnings will

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Speaker 1: start to slow down. You're learning school of economics. There

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Speaker 1: is one glorious morning where they study Irving Fisher of Yale, dudes,

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Speaker 1: does inflation follow rates or does rates follow inflation? The

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Speaker 1: big question that rates should work with a six to

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Speaker 1: twenty four month lag. That is the way that we

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Speaker 1: should see it. Now, there's going to be a ton

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Speaker 1: of other pressures working through. We're going to have the

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Speaker 1: economic slowd and already in progress because inflation is going

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Speaker 1: to be pushing down as we set on consumers um

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Speaker 1: and then we also have to think about supply to it.

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Speaker 1: This is such a complicated matter compared to previous periods

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Speaker 1: where you have this additional impact from post covid um

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Speaker 1: as I said, the supply chains, and then of course

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Speaker 1: you've got the Russia Ukraine crisis seema. If you do

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Speaker 1: see the fact that FED putt is not really on

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Speaker 1: the table, what's the argument for a week or dollar.

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Speaker 1: It's a good question. So you know, look, the beginning

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Speaker 1: of this year, we were looking at the valuation factors

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Speaker 1: for the U S dollar and it was flashing red.

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Speaker 1: But as there's always a case, valuations doesn't necessarily mean

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Speaker 1: that things are going to change. You need that catalyst

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Speaker 1: to see things changing. And in the last month, because

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Speaker 1: we have seen market expectations for the FED hikes probably

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Speaker 1: head a peak, and yet at the same time you're

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Speaker 1: seeing expectations for the ECB for other central banks starting

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Speaker 1: to push up they're going to hit a crescendo at

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Speaker 1: some point, but for the time being, that means that

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Speaker 1: there is downward pressure on the US dollar, but we're

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Speaker 1: not seeing it right now, even as we're expecting a

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Speaker 1: pretty harki ish message from the ECB today the likelihood

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Speaker 1: of basis point and even more in July. What more

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Speaker 1: could they say that could be a catalyst to send

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Speaker 1: the euro stronger. So I think we need to have

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Speaker 1: confirmation from Laguard exactly where they're going, you know, from

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Speaker 1: from the stuff that she's been saying. UM, she is

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Speaker 1: indicating that this is a twenty five basis point move

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Speaker 1: on occasional occasional meetings, rather than the fifty basis point

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Speaker 1: move that increasingly the market is pricing in. So I

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Speaker 1: think we need to see some of that to see

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Speaker 1: that additional downreo pressure. But I also want to say

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Speaker 1: that even if we were to see Leguard moving in

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Speaker 1: that fifty basis point hike, that you should be following

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Speaker 1: along with that. UM, I don't think it goes on

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Speaker 1: for too long because we also have an even more

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Speaker 1: negative view for the European economy, So I don't think

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Speaker 1: they can keep moving at these kind of pace of

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Speaker 1: rain hikes for very long. Some of the forecasts a

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Speaker 1: little bit later, this more could be dreadful. Sche Thank

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Speaker 1: you of Principal Global Investors. This is the Bloomberg Surveillance

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Speaker 1: of podcast. Thanks for listening. Join us live weekdays from

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Speaker 1: Tom keene In. This is Bloomberg