Speaker 1: Scrap on your parachute. It's time for What Goes Up. Hello,
Speaker 1: and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: I'm Mike Reagan, a senior editor at Bloomberg, and this
Speaker 1: week on the show, we're gonna talk about the reinflation
Speaker 1: report that was heard around the world. In a shocking surprise,
Speaker 1: the U S reported that consumer prices rose four point
Speaker 1: two on a year over year basis in April. That's
Speaker 1: the fastest in almost thirteen years, and if you exclude
Speaker 1: food and energy, the month over month jump in core
Speaker 1: cp I was the biggest since stock market duly freaked
Speaker 1: out about it. It worried that it's a sign that
Speaker 1: the Federal Reserve will have to tighten monetary policy sooner
Speaker 1: than later. We're gonna get into it with a macro
Speaker 1: strategist from a big bank this week, But first, Charlie Pellett,
Speaker 1: let's introduce this week's mystery cohost. This week's mystery co
Speaker 1: host is Joanna awesome erp. Joanna is on Bloomberg's cross
Speaker 1: Aset team in Singapore. She has visited all fifty States,
Speaker 1: has met Gerald Ford and Jimmy Carter, and once bumped
Speaker 1: into Alec Baldwin twice in three days. She loves to travel,
Speaker 1: and she says, for fun, she visits the stock exchanges
Speaker 1: in whatever country she's in, And then it has Reagan
Speaker 1: wondering if she actually knows the definition of the word fun. Joanna.
Speaker 1: Usually Charlie's insult comedy is aimed at me, but I
Speaker 1: guess he knows we we know each other well enough
Speaker 1: that he could give you a dig there with that one.
Speaker 1: But I have to ask, what is the most interesting
Speaker 1: stock exchange you you visited. I enjoyed the Warsaw one
Speaker 1: partially because they had a tank of Piranha's outside the
Speaker 1: c e o S office, and I remember the PR
Speaker 1: person talking about how, oh yeah, sometimes they just kind
Speaker 1: of all gang up and eat one, and it kind
Speaker 1: of seemed like a nice reflection of capitalism in general.
Speaker 1: But I have to say I also loved uh seeing
Speaker 1: c boat with Bill Brodsky, who had this huge collection
Speaker 1: of images of exchanges from around the world historically, from
Speaker 1: centuries past and everything, and gave me this huge tour
Speaker 1: of it. It was that was amazing for an exchange junkie.
Speaker 1: But um, but there are a lot of really interesting
Speaker 1: ones and their beautiful buildings and everything. So yeah, it's
Speaker 1: definitely fun. I promise you know I'm changing my tune
Speaker 1: here that is that does sound pretty fun. The problem
Speaker 1: I did not know about the pranhas. We've got a
Speaker 1: lot of fish tanks at Bloomberg. Maybe we could slip
Speaker 1: a pewn into one of them. I'm kidding. I'm kidding.
Speaker 1: Don't fire me over over that. But but anyway, and
Speaker 1: you know, I'm setting a theme with you, Joanna with
Speaker 1: predatory sea life here. You just returned from Baby Shark
Speaker 1: Live with your two kids. How was that? It was
Speaker 1: kind of horrible for the adults. The kids loved it,
Speaker 1: and of course that's why you go, right, but the
Speaker 1: plot is pretty vapid, and um, I was actually falling
Speaker 1: asleep and the kids were away. But I guess, yeah,
Speaker 1: at least we're able to go now, right. But yeah,
Speaker 1: it's one of those you buy the tickets and you're like, oh,
Speaker 1: this is great, and then it gets to it and
Speaker 1: you say, wait, why did I do this? And then,
Speaker 1: by the way, Joanna is joining us from Singapore, so
Speaker 1: that's kind of an interesting little bit of color on
Speaker 1: the economy. And Singapore reopened enough that you can go
Speaker 1: see a show like that, it's pretty good. Yeah, it's
Speaker 1: been doing okay, although actually they've tightened back a little
Speaker 1: bit because they've had more local cases than they've wanted recently,
Speaker 1: so and they're staying that's stubbornly high. So we'll see
Speaker 1: how things go in the next couple of weeks, because
Speaker 1: they've said it's kind of a it could go either way.
Speaker 1: But yes, for the past year or so, it's been um, well,
Speaker 1: I guess maybe ten months, it's been a little bit open.
Speaker 1: But yeah, masks are mandatory in public and with the
Speaker 1: threat of finds or imprisonment, and um, you definitely have
Speaker 1: to play by the rules here, right right, absolutely, as
Speaker 1: in all things, not just the virus. I guess it's
Speaker 1: exactly reputation goes Let's bring in someone who I think
Speaker 1: plays by the rules. I don't know, we'll find out,
Speaker 1: but we'll get get to that. Market's chat now and
Speaker 1: this guy's by now kind of a frequent flyer on
Speaker 1: the What Goes Up? Show, and we're really happy to
Speaker 1: have him back. It's a good week to have him
Speaker 1: with the FED, with interest rates and inflation all coming
Speaker 1: into focus. He is a macro strategist at Wells, Fargo.
Speaker 1: His name is Zach Griffith's Zach. Welcome back to the show.
Speaker 1: Thanks for having me. Always good to join you guys. Yeah,
Speaker 1: and Zach, you know this inflation print this week, you know, obviously,
Speaker 1: I think it's been interesting how vague the Fed has
Speaker 1: been intentionally vague on exactly how hot they will let
Speaker 1: inflation run above there at least what was a previous
Speaker 1: target of two um, and for how long they'll let
Speaker 1: it run. You know, the the duration of transitory, I
Speaker 1: think is is very much open for debate. You know,
Speaker 1: they've they've said they believe this popping inflation will be transitory.
Speaker 1: I'm not sure how long anyone thinks that is. And
Speaker 1: I'm not sure you know, when we thought of inflation
Speaker 1: running hot, boy a CPI that's more than twice that
Speaker 1: two percent target um, although they target pc but close enough.
Speaker 1: I think it's a shocker for a lot of people.
Speaker 1: But I'm wondering, from your perspective, has it really moved
Speaker 1: the needle at all on you know, when we can
Speaker 1: expect that, you know, the quote unquote punch bowl to
Speaker 1: be drained either, you know, the start of tapering of
Speaker 1: asset purchases or the eventual UH normalization of of interest rates.
Speaker 1: Anything changed from this print in your mind as far
Speaker 1: as what how you're thinking about the FED, I'd say
Speaker 1: that's the million dollar quite sin, and our answer is
Speaker 1: not just yet. I think it was well understood that
Speaker 1: at least on a year over year basis, the c
Speaker 1: p I print would be huge. Now I would point
Speaker 1: to the month over month over month figures, which were
Speaker 1: also very impressive zero eight percent on the headline and
Speaker 1: zero point nine percent on the core, So you can't
Speaker 1: really say that this was all driven by base effects
Speaker 1: are all driven by the volatile food and energy components,
Speaker 1: with core pc I U zero point nine percent. So
Speaker 1: I think it's something that the FED will take into account,
Speaker 1: certainly looking at some of these underlying pressures that are
Speaker 1: not necessarily driven by the reopening of the economy or
Speaker 1: driven by supply pressures, and we saw some of that
Speaker 1: in the subcomponents, so I think it it's something they're
Speaker 1: looking at. But they've really set the stage to dismiss
Speaker 1: at least this print and maybe one more as transitory,
Speaker 1: and from there, I think that's when it gets really
Speaker 1: interesting and the FED is going to have to determine
Speaker 1: if these factors are going to be persistent or if
Speaker 1: inflation does come back, call it in June and July
Speaker 1: and they're able to to stay patient. We think that
Speaker 1: with the shift in their longer run framework, they're going
Speaker 1: to remain patient for much longer than they have in
Speaker 1: the past, and they've at least attempted to make that
Speaker 1: very clear with their communication. So we haven't changed our
Speaker 1: view yet. We think that tapering is likely to be
Speaker 1: announced later this year to commence in early two. That
Speaker 1: could change, but this one print does not change your
Speaker 1: mind at least not not yet. Hey, Zach, so wondering
Speaker 1: if there's a specific factor that you're looking at, like
Speaker 1: are you looking at supply chains to see what what
Speaker 1: the direction of inflation might be, or are you looking
Speaker 1: at wages? Are there are there certain things that you
Speaker 1: think of as a tell for you know whether this
Speaker 1: will be something more So, one of the key measures
Speaker 1: that we've kept an eye on for a long time
Speaker 1: and is really a bell weather for where underlying trend
Speaker 1: inflation is going in our view as shelter costs, and
Speaker 1: you did see shelter costs tick up this past month
Speaker 1: with the overall index rising zero point percent, but that
Speaker 1: was really driven by a big jump in hotel and
Speaker 1: motel lodging, and you know, that's kind of a smaller subcomponent.
Speaker 1: But when you look at owners of equivalent rents, which
Speaker 1: we considered to be a better underlying gauge of shelter costs,
Speaker 1: it was still at zero point two percent, which prior
Speaker 1: to the pandemic, it was really ticking along around zero
Speaker 1: point three percent, which doesn't sound like a huge difference,
Speaker 1: but when gauging these underlying trends, it is something that
Speaker 1: we keep an eye on, and if we don't see
Speaker 1: those types of pressures, then perhaps you see inflation pull
Speaker 1: back and call it June and July and the FEDS
Speaker 1: able to keep this patient mantra. But that remains to
Speaker 1: be seen. And you know, our economists have revised up
Speaker 1: their inflation forecast for quarters further out than just Q
Speaker 1: two and Q three of this year, so I think,
Speaker 1: you know, we are seeing real inflation. But as far
Speaker 1: as this one print goes, it's it's not going to
Speaker 1: change the FEDS outlook or communications in our view, and
Speaker 1: it's going to get increasingly difficult, especially later this summer.
Speaker 1: If inflation remains well above that two percent target. But
Speaker 1: we think that they've really set the stage to wait
Speaker 1: and see and even if we have expectations rising and
Speaker 1: remaining very high, they want to see realized data and
Speaker 1: they've made that very clear recently. Yeah, that rent UH
Speaker 1: or owner's equivalent rent I guess it is in CPI
Speaker 1: is such a such an important thing, you know, big
Speaker 1: waiting in cp I. We had a guest on the
Speaker 1: show last week, vincin Delaware, talking also about how the
Speaker 1: you know, I guess every data set has basically been
Speaker 1: ruined by COVID. You know, it's hard to hard to
Speaker 1: make heads or tails out of any of it. But
Speaker 1: with that eviction moratorium, surely must be playing some kind
Speaker 1: of role in in rent. So I wonder if that's
Speaker 1: something to watch going forward to as well as that,
Speaker 1: you know, on Thursday, after the CPI report, we got
Speaker 1: producer prices the pp I induct core pp I up
Speaker 1: four point six percent. I mean, is it, you know,
Speaker 1: is it possible we haven't even seen the peak of
Speaker 1: inflation yet for this year? Do you think? Yeah, that's
Speaker 1: a great point, especially when you consider what's going on
Speaker 1: with commodity prices, whether it be energy or food. It
Speaker 1: seems like everything is rising. Lumber, that's that's been a
Speaker 1: huge one. So when you look at this pp I print,
Speaker 1: which again well above consensus expectations, that would suggest that
Speaker 1: price pressures, consumer price pressures could remain very high further
Speaker 1: down the road. And again that's that's going to be
Speaker 1: what we think shifts the FEDS at last rhetoric or
Speaker 1: perhaps policy if if you do get that later this year.
Speaker 1: So I think that's definitely something to keep an eye on.
Speaker 1: And you make a good point, Mike. I mean, if
Speaker 1: you talk about the non farm payrolls report for April
Speaker 1: that fell below all economists expectations, We had a one
Speaker 1: point four million job range on economists forecast, we were
Speaker 1: below all of those and as far as cp I,
Speaker 1: and I can't say for sure, but I think pp
Speaker 1: I probably came above all of those expectations. So we've
Speaker 1: been really pointing out that economic data is extremely difficult
Speaker 1: to predict at this point, and the market reactions have
Speaker 1: also not really been consistent with what you'd expect, either
Speaker 1: on the downside or upside, at least looking at treasury yields.
Speaker 1: And I think you can make that our argument for
Speaker 1: equities as well. So it's it's interesting. There's a lot
Speaker 1: to keep an eye on. It's very difficult to predict,
Speaker 1: and not only are the numbers themselves difficult to predict,
Speaker 1: but the market reaction also seems to be out of
Speaker 1: whack with what would be considered historical norms. Yeah, so, Zach, Actually,
Speaker 1: since you brought up the payrolls report, it seems like
Speaker 1: a lot of strategists are really looking at you know,
Speaker 1: they're kind of revising what they thought of it. You know,
Speaker 1: there was the initial take on Friday, and people are
Speaker 1: still chewing it over because it was just so surprising
Speaker 1: and complicated. So at this point, what's your take on it?
Speaker 1: Do you what do you think about it? Just kind
Speaker 1: of a big picture. Yeah, our economists have done some
Speaker 1: great work on this, and I think the big takeaway
Speaker 1: is that the issue is on the supply side and
Speaker 1: not on the demand side. And what I mean by
Speaker 1: that is, you know, you have the is unemployment benefits
Speaker 1: that are set to expire not for another three or
Speaker 1: four months down the road from from the latest COVID
Speaker 1: relief package, and you have job openings at at record high,
Speaker 1: so we don't see the you know, it's not a
Speaker 1: demand problem, um the supply of labor. We think people
Speaker 1: are probably on the sidelines more as a result of
Speaker 1: of the fiscal backdrop, and and maybe that that changes.
Speaker 1: But I guess as far as the outlook for the
Speaker 1: economy goes, it's it's not overly concerning in the sense
Speaker 1: that the economy has all of a sudden slowing down
Speaker 1: and doesn't need to hire more workers. I think it's
Speaker 1: really just the opposite. It will be interesting to see
Speaker 1: how that very low data point is smoothed over in
Speaker 1: the next month and months ahead, as expectations are for
Speaker 1: job gains of a million per month for the next
Speaker 1: several months, and if we have a big paybacks, you know,
Speaker 1: something like closer to two million and in May than
Speaker 1: I think, you know, it kind of washes out and
Speaker 1: the trend is still what was expected prior to the
Speaker 1: print in April. You know, Zack, I'm still uh. My
Speaker 1: background UH is as a stock market reporter and editor.
Speaker 1: You know it think of me is like the equities
Speaker 1: in Dallas, type of type of knuckle head uh, equities
Speaker 1: in the touch of New Jersey. I guess in this
Speaker 1: in this case, like the Dallas of New Jersey. I guess,
Speaker 1: but I gotta say whatever. I try to wrap my
Speaker 1: head around the narrative that's moving the dollar at any
Speaker 1: given time, I my head just starts spinning, and I'm
Speaker 1: I I get so confused about what the main drivers.
Speaker 1: I think you touched a little bit on this in
Speaker 1: UH in a note recently after the c P. I
Speaker 1: you know that initially we saw this dollar strength. Now
Speaker 1: to me, when I think of high super high inflation
Speaker 1: or higher than expected inflation, I think, okay, weaker dollar
Speaker 1: is is sort of the knee jerk response. But then
Speaker 1: you you think, well, is it going to cause higher
Speaker 1: interest rates? Okay, stronger dollar in that sense? How do
Speaker 1: you view the balance between those two sort of classic
Speaker 1: dollar catalysts here, um, especially in light of I mean,
Speaker 1: so many people have died on the hill of being
Speaker 1: barished the dollar uh in recent years. UH, this point
Speaker 1: in time being where you do want to stick out
Speaker 1: of position on that hill and be a dollar bear,
Speaker 1: I would think, But I'm just curious how you're walking
Speaker 1: through the cross currents of the of the currency markets. UH.
Speaker 1: You know which is more important to the dollar right now?
Speaker 1: Is it this high inflation or is it the prospect
Speaker 1: of higher yields. Yeah, there's a lot to balance there,
Speaker 1: and we've recently changed our view on the dollar to
Speaker 1: to bearish, and that's a near term view. And the
Speaker 1: big thing that we're focused on, or a few things
Speaker 1: that we're focused on, are sort of the US exceptionalism
Speaker 1: theme is is waning, we think, and that comes from
Speaker 1: both economic data but also vaccination. I think early on
Speaker 1: the UK and the US we're really leading the or
Speaker 1: major nations in Europe and Canada and that gap has closed,
Speaker 1: So we think that's going to be a key driver.
Speaker 1: And when you think about this inflation report, we're seeing
Speaker 1: big wage pressures, big price pressures for consumers. That's that's
Speaker 1: dollar negative in our view. And I think the other
Speaker 1: key component that comes into play here is the FED
Speaker 1: has been resolutely more dubbish than even some other major
Speaker 1: central banks such as the Bank of Canada and the
Speaker 1: Bank of England that have started tapering. The Nords Bank
Speaker 1: could be raising rates by the end of this year.
Speaker 1: So I think that last component, with the FED remaining dubbish,
Speaker 1: remaining patient even in the face of higher inflation, is
Speaker 1: what really shifted our view on the dollar to to barish.
Speaker 1: Over the next one to two months or so. So, Zack,
Speaker 1: since you're talking about the central banks that have gotten
Speaker 1: a little less of it, do you think that bodes
Speaker 1: well for other central banks, like the FED, to be
Speaker 1: able to rein it in or is this sort of
Speaker 1: like the FED is really just as long as the
Speaker 1: FED is out there providing the stimulus that it doesn't
Speaker 1: really matter say what the Bank of Canada does. And
Speaker 1: I apologize to any Canadians about that question. Yeah, that's
Speaker 1: a great question. I think that perhaps it does give
Speaker 1: the FED some room to shift, but I don't think
Speaker 1: any of these other major central banks have had this
Speaker 1: codified shift in their long run framework that we got
Speaker 1: from the FED in August of last year. So they've
Speaker 1: really went beyond just saying that they're going to be
Speaker 1: more patients. They're going to focus on shortfalls from maximum
Speaker 1: employment instead of deviations from maximum employment and this flexible
Speaker 1: average inflation targeting. So I think the FED is is
Speaker 1: kind of on its own. And while I'm sure they
Speaker 1: will take into account what's going on in the rest
Speaker 1: of the world, what other central banks are doing, they
Speaker 1: have a clear mandate of pray stability and maximum employment,
Speaker 1: and I think that the big shift and focus on
Speaker 1: maximum employment is what they've been saying for almost a
Speaker 1: year now and what they've been focusing on, and that
Speaker 1: gives them the headroom to remain more patient and not
Speaker 1: necessarily feel pressure from these other central banks to change
Speaker 1: tax just because they have you know, z that It's
Speaker 1: interesting you bring up the the vaccination rates. Europe is
Speaker 1: catching up with you with us, um. They seem to me, like,
Speaker 1: you know, we've all become obsessed with all data related
Speaker 1: to the pandemic. You know, first it was the number
Speaker 1: of cases, number of hospitalizations, number of deaths, that sort
Speaker 1: of thing. Now it's really the focus on is on vaccination.
Speaker 1: I feel like we're getting close to a point where
Speaker 1: all of that is is not gonna matter anymore. We're
Speaker 1: gonna sort of move back to, you know, the real
Speaker 1: fundamentals of national economies. And I'm kind of fascinated with
Speaker 1: with Europe right now. I mean that German tenure yield
Speaker 1: that everyone watches. It's almost back in a positive territory.
Speaker 1: Who would have ever thought we'd see positive fields in
Speaker 1: Germany in our lifetime. Craziest thing I've seen in this week.
Speaker 1: But I'm curious how you're thinking about Europe because to me,
Speaker 1: you know, once we get through this fixation on the
Speaker 1: case rates and and the vaccination rates, and I kind
Speaker 1: of feeling like we're getting close to the light at
Speaker 1: the end of that tunnel where Okay, enough people are
Speaker 1: gonna be vaccinated, and all all the developed economies, that
Speaker 1: sort of advantage of who's doing better in that is
Speaker 1: not gonna matter, say maybe by the end of the year,
Speaker 1: even by the end of the summer, I would guess,
Speaker 1: And then you know, we start thinking about the old
Speaker 1: all the old issues in Europe that we had before
Speaker 1: the pandemic. I'm just curious what Europe is gonna look
Speaker 1: like at the other side of this. I mean, is
Speaker 1: that notion of European austerity that had really played such
Speaker 1: a big role in markets, is that is that notion dead?
Speaker 1: I mean, the pandemic basically kill the the European fixation
Speaker 1: on austerity and all the sub a point repples that
Speaker 1: has in markets. I'd say it seems to have at
Speaker 1: least pushed it to the back burner, and that's probably
Speaker 1: going to remain the case for a while. I think
Speaker 1: you're right that we are starting to approach a point
Speaker 1: where maybe the focus shifts back more to traditional economic
Speaker 1: data and after a couple of months from now, perhaps
Speaker 1: you're getting a more true reading on what the underlying
Speaker 1: economy is doing here in the US and in Europe.
Speaker 1: I think you started to see some more encouraging signs
Speaker 1: there finally in some of the more recent data. I think,
Speaker 1: you know, Q one as a whole was was not great,
Speaker 1: so they have a ways to go. But I do
Speaker 1: think that the austerity focus and obsession has probably taken
Speaker 1: a hit, and it's going to be a longer term one.
Speaker 1: You know, defining longer term might be difficult, just because
Speaker 1: we really are there's still plenty of uncertainty and things
Speaker 1: are looking up, but you know, you can't dismiss a
Speaker 1: step in the wrong direction with a particularly virulent strain,
Speaker 1: or you know, you're reminded of how things can go
Speaker 1: in places like India where it's it's been really unfortunate,
Speaker 1: seemed like they had things well under control and you
Speaker 1: sort of take your foot off the gas of of
Speaker 1: taking precautionary measures, and very bad things can still happen.
Speaker 1: So I think to your point, yes, it's taken a
Speaker 1: hit and probably moved to the back burner. Whether or
Speaker 1: not it comes back into focus down the line remains
Speaker 1: to be seen, but I think it's it's going to
Speaker 1: be a while until focus can shift back to that
Speaker 1: austerity that that was really a huge focus part of
Speaker 1: the pandemic. Okay, and Zac sins. We're starting to talk
Speaker 1: about the rest of the world a little bit, and
Speaker 1: you mentioned you think US out performance may be fading.
Speaker 1: Where do you think the next out performance will come from?
Speaker 1: Just regionally, I think it could come from the UK,
Speaker 1: which has has done fairly well with with vaccination and
Speaker 1: seems to be moving perhaps a bit more briskly through
Speaker 1: a to a broad reopening. And I think I recall
Speaker 1: correctly early June is when Prime Minister Johnson had targeted
Speaker 1: for a big reopening. So I think that that kind
Speaker 1: of sets up a decent backdrop for for economic growth
Speaker 1: in the UK. And as I know it earlier, starting
Speaker 1: to see in some of these more high frequency monthly
Speaker 1: prints for for Eurozone as a whole. As you know,
Speaker 1: that's a decent proxy for for what's going on, you know,
Speaker 1: whether it be the p M I S or otherwise.
Speaker 1: So you're seeing some encouraging signs there. So I think,
Speaker 1: you know, both in in the U k and and
Speaker 1: the EU are are possible. And you know, the Bank
Speaker 1: of Canada has has moved to to tapering asset purchases,
Speaker 1: so clearly there's been some strong economic growth there. So
Speaker 1: I think you're you're getting it from a lot of
Speaker 1: different places where the US is not going to be
Speaker 1: as much of a standout relative to sort of a
Speaker 1: broader swath of of major economies than uh going forward.
Speaker 1: So the basic trade I guess there would be by
Speaker 1: British and europe risk assets like stocks, by the currencies,
Speaker 1: and and sell the bonds. I mean, that's the that's
Speaker 1: the traditional approach. But you know, as far as we're
Speaker 1: concerned from the perspective of, you know, relative value between
Speaker 1: the US and other nations, we I mean, if you
Speaker 1: look at yields in the US, they're they're still more
Speaker 1: attractive than anywhere else. And when we consider where things
Speaker 1: are going from here, we do expect US yields to
Speaker 1: to continue to rise, but perhaps that takes government bond
Speaker 1: yields across developed nations with it, and that's kind of
Speaker 1: been a big story. We think yields will rise. There's
Speaker 1: a huge supply story treasury supply story in the US,
Speaker 1: but you're seeing that elsewhere and having a globally coordinated
Speaker 1: economic reopening is not something that we've seen in recent history.
Speaker 1: So yeah, we we think yields will rise, and if
Speaker 1: you do get this globally coordinated reopening, it should should
Speaker 1: be more positive for risk assets, and to the extent
Speaker 1: that risk assets and other nations have lagged, perhaps they
Speaker 1: do begin to catch up as that narrative really takes
Speaker 1: hold this summer and into the fall. Okay, so Zach,
Speaker 1: what's your outlook for volatility? I'm a huge volatility nerds,
Speaker 1: so I have to ask this question. So if you
Speaker 1: see a background for risk assets, do you think volatility
Speaker 1: is going to decline as we start to come out
Speaker 1: of the pandemic hopefully, or do you think it's gonna
Speaker 1: be pretty bumpy still as we work through everything. So,
Speaker 1: at least with respect to the US, we think that
Speaker 1: volatility could pick up over the coming months, which would
Speaker 1: be inconsistent with a risk on general risk on sentiment.
Speaker 1: But what we think you're going to see is sort
Speaker 1: of a battle between the market and the Fed. We
Speaker 1: think that if you get another very high inflation print,
Speaker 1: even better economic data, the market's going to start to
Speaker 1: price in aggressive hikes by the Fed. You know, perhaps
Speaker 1: not in or even necessarily too much, but kind of
Speaker 1: looking at a longer term measure, looking at call it
Speaker 1: December euro dollars, if we've seen that come up quite
Speaker 1: a bit and back down more recently. But if if
Speaker 1: you have market pricing of the Fed getting much more
Speaker 1: aggressive than what they've signaled, we think that's going to
Speaker 1: put a lot of pressure on them to really tailor
Speaker 1: this message that they're on hold for now. But they
Speaker 1: can change tech when they need to, and it's going
Speaker 1: to be a really difficult needle to thread in the
Speaker 1: sense that they want to be patient, but if the
Speaker 1: market is telling them and suggesting that they need to tighten,
Speaker 1: they're gonna have to taylor this message. That's been very difficult.
Speaker 1: Everyone refers to the taper tantrum back in. The FED
Speaker 1: really wants to avoid anything like that happening again. But
Speaker 1: we think it's going to be difficult, and you know,
Speaker 1: our our view is they're going to take the approach
Speaker 1: that they want to have as little lead time between
Speaker 1: announcing a taper and actually commencing the taper, which is
Speaker 1: why we think you would see it maybe in December
Speaker 1: of this year to begin in early So that kind
Speaker 1: of push pull from the market and the FED, we
Speaker 1: think is going to create more uncertainty. And if you
Speaker 1: look at the valve service at least in US swaps
Speaker 1: here in the US, you kind of see that that
Speaker 1: peak of uncertainty, at least implied by recent data, is
Speaker 1: around the two to five year period. And that's when
Speaker 1: you really, how is the FED going to come out
Speaker 1: of this? How are they you know, are they going
Speaker 1: to have to raise rates aggressively? Can they really stay
Speaker 1: on hold for a long time after tapering? And we
Speaker 1: think that does result in more volatility down the road. Zack,
Speaker 1: I like talking to a guy like you, because in
Speaker 1: my view, there's there's three types of people in the market. Okay,
Speaker 1: there's there's those that read every speech by every f
Speaker 1: O m C member and every governor, even if they're
Speaker 1: voting or not. Then there's a second type who just
Speaker 1: read the headlines, maybe the first paragraph of the story
Speaker 1: about these speeches. I confess I'm in that category. I've
Speaker 1: got a stack of FED speeches that I plan to
Speaker 1: read one day. They're they're they're on my nightstand, right
Speaker 1: next to the books. Yeah, right next to the books
Speaker 1: of all that all my friends have written that I'm
Speaker 1: I swear I'm going to read it happen. Right. But
Speaker 1: then the third type is a guy like you, and
Speaker 1: you read speeches that I think the rest of us
Speaker 1: didn't even know happen, you know. And I'll give you
Speaker 1: an example. You you mentioned a speech by the FED
Speaker 1: Soma manager Lorie Logan, and she hinted UH in the
Speaker 1: speech that the FED might reduce their purchases of tips.
Speaker 1: And I think this is this is such a huge
Speaker 1: important topic, especially when you talk about, you know, the
Speaker 1: supply of treasuries coming. So I'm gonna ask you one
Speaker 1: of my famous multipart questions here about this. I'm trying
Speaker 1: to think of the motivation behind UH reducing the purchases
Speaker 1: of tips. You know, my guests would be and maybe
Speaker 1: they don't want to say this come out and say this,
Speaker 1: but they want to have some influence on the break
Speaker 1: even inflation rates in the market. Um, whether or not
Speaker 1: that be their prime motivation, it certainly could play a
Speaker 1: role in that and sort of bring down these break
Speaker 1: evens that everyone is so fixated on because they look
Speaker 1: like such hot inflation for the next five, five or
Speaker 1: even ten years. So I'm curious if you think it is.
Speaker 1: Would that be part of the motivation at least the
Speaker 1: unspoken motivation of reducing TIPS purchases, were messing with the
Speaker 1: the amount of TIPS purchases at all? And also, how
Speaker 1: are you thinking about sort of the match between the
Speaker 1: different types of duration we can expect the Treasury to
Speaker 1: sell and what the Fed then in turn will buy
Speaker 1: as part of its asset purchases. Yeah, Mike, that's certainly
Speaker 1: going to be an interesting announcement that that will get
Speaker 1: here soon. And with respect to tips, the speech from
Speaker 1: back in April really alluded to the fact that as
Speaker 1: Treasury increased nominal coupons drastically in finance the Cares Act
Speaker 1: and follow on COVID relief packages, tips issuance wasn't increased
Speaker 1: as much. So what they want to do, what the
Speaker 1: FED wants to do, is to better align their current
Speaker 1: state of purchases with what Treasury has been issuing. So
Speaker 1: Treasury has been issuing less and tips as a percent
Speaker 1: of overall issuance just because they didn't boost those auctions
Speaker 1: the same way they did that the nominal auctions in
Speaker 1: The other big thing that we think they want to
Speaker 1: address is have this bucket of purchases between seven and
Speaker 1: twenty years. And that was fine before there was a
Speaker 1: twenty year security because that really captured either very rolled
Speaker 1: down thirty year issuance or or the ten year sector,
Speaker 1: which is where they were focusing those purchases. Now it's
Speaker 1: unclear when they do these operations if they're going to
Speaker 1: focus on the ten year sector or the twenty year sector,
Speaker 1: which has notoriously suffered worst liquidity in the twenty year
Speaker 1: bond has cheapened quite a bit, so we expect them
Speaker 1: to really address that and perhaps breaking into a seven
Speaker 1: to fifteen year sector and then a fifteen to twenty
Speaker 1: five year sector, leaving twenty five to thirty year to
Speaker 1: cover the back end. So we think that's going to
Speaker 1: be the big focus in the next month of FED purchases,
Speaker 1: and that's also important when considering, like you mentioned that
Speaker 1: the supply of duration to the market and the biggest
Speaker 1: increases on an annual basis per ten or have been
Speaker 1: in the seven year and twenty year bucket. For the
Speaker 1: twenty year it's really focused on increases to to the
Speaker 1: auction sizes, but also we just have a full year
Speaker 1: of auctions, whereas the twenty year was reintroduced in May
Speaker 1: of last year, and you've seen problems in both of
Speaker 1: those tenors. So I think that the duration story really
Speaker 1: came into focus in February when you had the seven
Speaker 1: year auction with some of the worst stats we've seen
Speaker 1: in over a decade, and that really pushed the whole
Speaker 1: curve higher and steeper. And and the twenty years, as
Speaker 1: I noted earlier, has been notoriously cheap recently and and
Speaker 1: maybe richened up a bit. But we think that the
Speaker 1: supply of duration is going to be huge, and and
Speaker 1: you've seen that in the first quarter, and that's going
Speaker 1: to be a story that persists through the remainder of
Speaker 1: the year. While at the same time, and even if
Speaker 1: the FED remains on hold with its eighty billion per
Speaker 1: month and purchases as we expect, is taking down much
Speaker 1: less duration this year than last year, So that big
Speaker 1: mismatch leaves a glut of duration for the market to
Speaker 1: take down, and we think that's what gradually pushes yield
Speaker 1: higher along with this global reopening and higher inflation for
Speaker 1: the remainder of the year. Okay, so Zach, what are
Speaker 1: you thinking of most in terms of US policy going
Speaker 1: forward or potential legislation. What are you focused on, And
Speaker 1: especially if there's something where you think the market is
Speaker 1: really missing something or under pricing something that there's potential for,
Speaker 1: say later in the year, that's a great question. I
Speaker 1: think with the packages that the Biden administration is introduced,
Speaker 1: there's almost four trillion and perhaps additional spending out there
Speaker 1: with you know, at least a chunk of that offset
Speaker 1: by tax hikes. So I think if if I had
Speaker 1: to guess what might be miss priced or hasn't gotten
Speaker 1: as much focused that that could disrupt markets are our
Speaker 1: tax hikes if it becomes clear that that those are
Speaker 1: going to get enacted. You mean, equity markets are still
Speaker 1: near all time highs. They've come off a bit recently,
Speaker 1: but I don't think the tax hike narrative has really
Speaker 1: taken hold yet. So that's a risk. And just with
Speaker 1: respect to additional spending broadly and what it means for
Speaker 1: the treasury market, our economists don't think that both of
Speaker 1: these packages and full can get past, but something maybe
Speaker 1: on the magnitude of one to two trillion could get past,
Speaker 1: and just considering bills like the ones that they're considering
Speaker 1: for the second half of this year. They're much different
Speaker 1: than these cod relief bills that were depths of finance,
Speaker 1: and we're cash out the door very quickly, so the
Speaker 1: impact on the economy and importantly Treasury assurance will be
Speaker 1: much more minimal, even if we do get another one
Speaker 1: to two trillion this year. So that's something that we've
Speaker 1: been making sure people focus on. You look at the
Speaker 1: headline number and it looks similar to what we got
Speaker 1: with the American Rescue Plan, but the economic impact and
Speaker 1: the depths of impact are going to be much different,
Speaker 1: much more prolonged, and even partially offset by tax hikes,
Speaker 1: So really a whole different ball game, and not as
Speaker 1: impact it's full in the near term, more of a
Speaker 1: longer term story with any of those types of legislation, Zach,
Speaker 1: I think that is a wise thing for your clients
Speaker 1: to focus on. I'll tell you what our listeners focus on, though,
Speaker 1: and that's the craziest things we've seen in markets this week.
Speaker 1: Tiden up your straight jackets. It's time for the craziest
Speaker 1: things we saw in markets this week. I know you
Speaker 1: can't prepared. I know you can't prepared, Joanna. I have
Speaker 1: high hopes for you in this this segment. I know you.
Speaker 1: I have a feeling you can you can spot a good, crazy,
Speaker 1: crazy thing when you see it. So let's let's start
Speaker 1: with you. What's the craziest thing you saw in markets?
Speaker 1: I have to say, I mean doing crypto stuff. I'm
Speaker 1: gonna go with the the easiest one here, which is
Speaker 1: Elon Musk saying that Tesla isn't gonna take bitcoin anymore
Speaker 1: and saying he's concerned about the energy usage. I mean,
Speaker 1: just a few weeks ago when Cathy Woods are put
Speaker 1: out a paper saying that bitcoin actually could help with
Speaker 1: renewable energy, must responded to a threat about it, saying
Speaker 1: true about bitcoin being good for this stuff. So he's
Speaker 1: we know he's been watching it. But all of a
Speaker 1: sudden something happened, and you know, Bitcoin tanked somewhat, and
Speaker 1: the rest of crypto tanked. Even Dogecoin tanks, though the
Speaker 1: one of the co creators did make a case to
Speaker 1: Ellen to take dogecoin, and Ellen has told people about
Speaker 1: whether Tesla should take dogecoin. Um, I think Tesla's stock
Speaker 1: may have risen actually after this announcement, which is kind
Speaker 1: of funny too, but that that was just pretty crazy.
Speaker 1: I mean, Crypto covering this stuff. I feel like it's
Speaker 1: it's sort of like the Trump administration where you think, wow, things,
Speaker 1: this is about as amazing as it can get, and
Speaker 1: then something even more amazing happens. You know. I feel
Speaker 1: like this was definitely a pretty interesting twenty four hours.
Speaker 1: I agree, that's a great one. Elon Musk is sort
Speaker 1: of in the Crazy Things Hall of Fame. I think
Speaker 1: I think we get him in there about once a week.
Speaker 1: But yeah, it's just amazing that he's after investing how
Speaker 1: over a billion of Tesla's uh at one point five billion,
Speaker 1: he then later found out about the energy issues. I
Speaker 1: don't know, it sounds he could sell a lot of
Speaker 1: Tesla batteries. I think to these minors. Maybe that's where
Speaker 1: this Yeah, well but you see, like there are so
Speaker 1: many people who just have all his faith in him,
Speaker 1: Like you look at the memes online, there's like him
Speaker 1: as a saint protecting the baby doge and stuff. I mean,
Speaker 1: it's really incredible. Yeah, there's a lot of role within Crypto,
Speaker 1: but Ellen has definitely made it a lot more interesting,
Speaker 1: but not not not even to mention the SNL appearance. This.
Speaker 1: I know you were, you were watching the SNL appearance.
Speaker 1: I was talking to Jenny Paris, one writers, and I
Speaker 1: was like, I don't want to be the one to
Speaker 1: suggest it, but I feel like some reporters should watch
Speaker 1: SNL and write about the reaction. She said, don't worry,
Speaker 1: Joanna is already on it. I said, okay, that's a
Speaker 1: more reasonable time zone for for that sort of coverage
Speaker 1: for you. Yes, it was my morning. Saturday Night Live
Speaker 1: is not the time you want me writing or editing.
Speaker 1: I'll just put I'll just leave it at that. I'll
Speaker 1: leave it at that. Not my best work, but Zach,
Speaker 1: Joanna's had a pretty high bar there. I don't I
Speaker 1: don't know, can you top the Elon musk Uh crypto extravaganza.
Speaker 1: I'm gonna give it my best shot. Here was something
Speaker 1: that's near and dear to home. I didn't see this personally,
Speaker 1: but I saw an article highlighting that gas prices had
Speaker 1: risen to six dollars and cents in certain gas stations
Speaker 1: here in North Carolina with the Colonial Pipeline being shut down.
Speaker 1: And you know, if we want to talk inflation, if
Speaker 1: you got six gas. I'd say that's that's going to
Speaker 1: give another transitory pop to the to the headline cp I.
Speaker 1: But I think things, hopefully are are getting sorted out.
Speaker 1: And you know, the lines at gas stations have been
Speaker 1: crazy here. I think we're supposed to be. You know,
Speaker 1: the pipeline is supposed to open back up this afternoon,
Speaker 1: so hopefully that gets cleared up. But yeah, I got
Speaker 1: a little got a little crazy here for twenty four
Speaker 1: to forty eight hours. Unfortunately, that's right, I forgot. I
Speaker 1: forgot you were in North Carolina. Have you been like
Speaker 1: filling up your tupper wear with with gasoline? Some people have.
Speaker 1: I have not. I'm actually fortunate enough to have my
Speaker 1: old Cadillac in the driveway with a gallon gallon tank
Speaker 1: that I I recently filled up before all this, So
Speaker 1: I think that's gonna be my my reserves for this.
Speaker 1: Hopefully I don't need to tap into it, but I've
Speaker 1: got it there if I need it. Luckily, you've got
Speaker 1: your own strategic petroleum reserve in the in the in
Speaker 1: the drive exactly. That's pretty good. We talk about a
Speaker 1: black swan, uh if ever there was. I mean, when
Speaker 1: you think of how much work. It could have been
Speaker 1: if they shut that thing down permanently. I mean, we'd
Speaker 1: be in kind of mad Max territory right now. Yeah,
Speaker 1: we sure would. So hopefully that's all cleared up. So
Speaker 1: everyone update their north in Nanny or McCaffrey, I don't
Speaker 1: know whichever. Maybe you need something a little more heavy
Speaker 1: duty for the pipeline systems, I don't know. Alright, Well,
Speaker 1: those are both good. It's certainly the crazy things keep
Speaker 1: on giving. In the past year and year. We we uh,
Speaker 1: we have a lot of talk about I want to
Speaker 1: talk about um for mine. You know, we've heard so
Speaker 1: many different people talk about the ways to trade the reopening,
Speaker 1: especially now in Europe as it seems like that was
Speaker 1: a little bit behind the US and as now as
Speaker 1: picking up steam. This, however, is one of my favorite trades, uh,
Speaker 1: for the European reopening. Uh. This is courtesy of a
Speaker 1: charted the Hour on Bloomberg, a little feature we have
Speaker 1: by Joe Easton in London, and it's playing the reopening
Speaker 1: based on dirty laundry. And I love alternative data sets
Speaker 1: like this, like when you look at the volume of
Speaker 1: trash somewhere or I don't know, so he's saying, uh,
Speaker 1: there's a portfolio manager at Rathbone Brothers in England who
Speaker 1: was saying, there's gonna be a lot of dirty laundry
Speaker 1: as the economy reopens. When you think of restaurant, the napkins,
Speaker 1: the linens. So they're they're buying our advising being bullish
Speaker 1: on a company called Johnson Services Group which launders all
Speaker 1: the linens and the napkins and the chef outfits. So
Speaker 1: I like that one. I like the dirty laundry alternative
Speaker 1: data set. I gotta say, if if dirty laundry is
Speaker 1: a sign of a booming economy, it really is the
Speaker 1: roaring twenties in my house right now, I will tell
Speaker 1: you that. So wow. So even came with a stock
Speaker 1: tip there. That's exciting. Yes, yes, yeah, that's interesting. Not me,
Speaker 1: but this is this is courtesy of Alexandra Jackson of
Speaker 1: Rathbone Brothers says her her fund is bought shares of
Speaker 1: of Johnson's Services Group. And I dig it, I dig it.
Speaker 1: I think this was a good, good episode for crazy things.
Speaker 1: I think we all we all brought our a game.
Speaker 1: I'm gonna reward us all first place. Who a three
Speaker 1: a three way time? It alright, well, I think that
Speaker 1: is all the time. We have Joanna Ostnger reporting in
Speaker 1: from Singapore with the fresh report on Baby Shark Live.
Speaker 1: Great to catch up with you and hope to talk
Speaker 1: to you again soon. Zach Griffiths of well Spargo. Always
Speaker 1: a pleasure to catch up with you. Yes, very fun.
Speaker 1: Thanks for having me, and that's it. We'll see you
Speaker 1: all next week. What Goes Up We'll be back next week.
Speaker 1: Until then, you can find us on the Bloomberg Terminal,
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Speaker 1: can find us. And you can find us on Twitter
Speaker 1: follow me at Reaganonymous. Joanna Ostinger is at ossenger. J
Speaker 1: can also follow Bloomberg Podcasts at podcast I. Thank you
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Speaker 1: produced by Laura Carlson. The head of Bloomberg Podcasts is
Speaker 1: Francesco Levy. Thanks for listening. See you next time.