Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot
Speaker 1: com and of course on the Bloomberg terminal. Joining us
Speaker 1: now for three hour conversation. I just Dr Morris joins
Speaker 1: his global head have come out of the research at
Speaker 1: City Group and truly expert on taking the global reach
Speaker 1: of our oil politics and crossing over to the micro
Speaker 1: economics at Emerita. Sent was just talking about and I
Speaker 1: don't want to talk about the martiality and cross and
Speaker 1: fancy micromumbo jumbo of supply and demand. The arch guess
Speaker 1: is the measurement of global recession again, the marginal emerging
Speaker 1: to market demand is the e M and Pacific RIM
Speaker 1: come out of COVID. Those are two titanic forces who
Speaker 1: will win global recession price down or burgeoning e M
Speaker 1: demand price up. I think it's the macro environment that wins.
Speaker 1: And actually we don't see the burgeoning the burgeoning demand
Speaker 1: coming out of China. There's a return to be sure,
Speaker 1: But we have to remember that while China was cutting
Speaker 1: off about a million barrels a day of oil and
Speaker 1: real demand, they were importing a record amount of oil.
Speaker 1: They were stockpiling, and that had an impact on the
Speaker 1: global market. We had our inventory drawing, they had their
Speaker 1: inventory building. I don't see the international implications of Chinese
Speaker 1: recovery having much of an impact on the global setting. Well,
Speaker 1: if that is the case, what are you watching is
Speaker 1: the dynamic that drives oil, as Emerita said, down to nine,
Speaker 1: the are you suggest even lower? What is the single
Speaker 1: distinction right now that drives us to that shock? I
Speaker 1: don't know whether there's a single distinction. I think it's
Speaker 1: called both supply and demand. So I think there's another
Speaker 1: view of supply that a Marita has not talked about.
Speaker 1: We see over two million barrels a day of Western
Speaker 1: Hemisphere growth this year, including a million three out of
Speaker 1: the United States. The US is already up a million
Speaker 1: barrels a day year on year. Canada looks for sure
Speaker 1: to be up three hundred thousand barrels a day, Mexico
Speaker 1: up on a hundred a day, uh Brazil up a
Speaker 1: couple of hundred a day, Argentina is up more than
Speaker 1: people thought then, as well as even up three hundred
Speaker 1: thousand a day year on year. So we think if
Speaker 1: you look closely at supply, it really is growing and
Speaker 1: it's accelerating as we move from here to the end
Speaker 1: of December. Your scenario work on a recession end got
Speaker 1: a ton of attention in the last couple of days.
Speaker 1: Can you help me understand what's behind that word recession?
Speaker 1: To you? What is that word? What does it mean?
Speaker 1: What kind of numbers are you thinking about? The US
Speaker 1: down to say forty five by the end of twenty three,
Speaker 1: sixty five by year end. So it really is on
Speaker 1: the why demand balance a drag on the demand side.
Speaker 1: Almost everybody has reduced their expectations of demand for the year.
Speaker 1: We reduced Stars by about a million, two hundred thousand
Speaker 1: meryls a day. We're at the two point four two
Speaker 1: point five million Barladay level. That's similar to where the
Speaker 1: E I A and the I A are and I
Speaker 1: expect that we'll be seeing further downward revisions in demand.
Speaker 1: Demand is simply not growing on an empirical basis to
Speaker 1: the greed that people had expected, and we've seen that
Speaker 1: US demand is down. And there was a Bloomberg quote
Speaker 1: yesterday that to somebody at Bloomberg saw demand as low
Speaker 1: as it was in fourteen. We think you've got to
Speaker 1: go back to thirteen to see demand at the levels
Speaker 1: that we're now seeing when it comes to transport fuels
Speaker 1: like diesel and gasoline. Uh. And if if the movement
Speaker 1: is going to be anywhere, it's gonna be downward. We're
Speaker 1: not gonna see. There's no evidence that we're going to
Speaker 1: see this summer surge in driving and summer surgeon demand.
Speaker 1: The price is too hot as it was. Uh. And
Speaker 1: that's a force in looking at global g d P
Speaker 1: from the perspective of one of the countries that's growing
Speaker 1: the fastest and has the most robust growth. The demand
Speaker 1: simply isn't there as people have thought. But if it's
Speaker 1: not an outright recession, if it's just growth that slows
Speaker 1: back toward trend, which is the case of some people
Speaker 1: out there, at how does that change the demand picture?
Speaker 1: What are we talking about then? If it's not sixty, well,
Speaker 1: we're talking about just our base case, and we still
Speaker 1: have recession at lower than but we're thinking in our
Speaker 1: base case, said oil is gonna go down to eighty five.
Speaker 1: And that's looking at it purely on a supply demand basis,
Speaker 1: looking at what the headwinds have been in the talent winds.
Speaker 1: We've had a lot of challenge underlying where oil prices
Speaker 1: have been. We might have some moral We don't know
Speaker 1: what the summer weather is going to be. It could
Speaker 1: be a very volatile period of time. But we're looking
Speaker 1: at a supply demand balance that's seeing inventory builds from
Speaker 1: here to the end of the year. And that's that's
Speaker 1: based on a uh, you know, purely empirical analysis of
Speaker 1: where we see kind of probability of supply. We don't
Speaker 1: know what's going to happen to Iranian supply. We don't
Speaker 1: know what's going to happen to Russian supply. By so far,
Speaker 1: Russian exports into the market have been higher than people
Speaker 1: have anticipated. And hire what the historical trend was a
Speaker 1: year ago. And this was a fascinating breed. Thanks for
Speaker 1: giving us some of your time this morning at a
Speaker 1: timely conversation too. After briefly look at it a handle
Speaker 1: on w T and I've said most of city life
Speaker 1: right now on fixed income. Kelsey Barrow joins US fixed
Speaker 1: income portfolio manager JP Morgan asset manage and putting real
Speaker 1: money to work. I believe it's price up, yield down.
Speaker 1: If on the first order condition of inflation coming in,
Speaker 1: how will bonds react and where is the opportunity to
Speaker 1: go from nine to say seven percent inflation? Yeah, So
Speaker 1: what we've been noticing in the market, and there has
Speaker 1: been incredible volatility in the inflation markets and in the
Speaker 1: bond markets recently, is that there has been a repricing
Speaker 1: of inflation, particularly when you look at the one year
Speaker 1: one year inflation swaps. So what the market expects not
Speaker 1: for this year, but for next year. It's erased all
Speaker 1: of that inflation risk premium that got baked into the
Speaker 1: market as a result of the invasion of Ukraine and
Speaker 1: all of the upside inflation that we've been talking about
Speaker 1: for essentially half a year um. And so what we're
Speaker 1: trying to debate right now is is this a true
Speaker 1: signal that inflation is going to decelerate or is the
Speaker 1: Fed actually going to need to continue to press because
Speaker 1: the data they're looking at actually is not showing any
Speaker 1: signal yet that they need to stop hiking rate. How
Speaker 1: do you use versus Chasmin and Michael Faroli's work, particularly
Speaker 1: on the labor economy. For only puts at it on
Speaker 1: the Weekly Prospects of Son on page one. He's got
Speaker 1: a buried on page seven where he's talking about the
Speaker 1: labor dynamics of the United States. How do you fold
Speaker 1: the labor question that John Farrell just mentioned into what
Speaker 1: yield and price are going to do? Yeah, well, the
Speaker 1: labor market is still very strong, and it does paint
Speaker 1: a very confusing picture. You have g d P which
Speaker 1: is weak. You have the Atlanta FED which is tracking
Speaker 1: at minus two percent. Now a lot of that is
Speaker 1: not necessarily organically driven. There's a two hundred basis point
Speaker 1: detraction in that in that forecast from inventories. But really
Speaker 1: what we look at in terms of are we in
Speaker 1: a recession is are we seeing the unemployment rate rise?
Speaker 1: And is nominal income falling? And neither of those things
Speaker 1: are happening. And to get the unemployment rate to rise
Speaker 1: this year, you're going to need to see a material
Speaker 1: deceleration payroll's growth, which is not what we're expecting. In fact,
Speaker 1: just to get it back to four percent by the
Speaker 1: end of the year, you would need fifteen job loss
Speaker 1: on average for the next seven months to get there,
Speaker 1: So we're not in that environment yet. Jobless claims is
Speaker 1: what we're watching to see if that's checking up. For now,
Speaker 1: the unemployment rate is on the decline. Never in my
Speaker 1: career have we hoped for job loss like It's honest,
Speaker 1: Lets be clear, I'm not sure Calcy is hoping for that.
Speaker 1: I'm not hoping for Ultimately, when you look at the
Speaker 1: tragetory of things, there is a belief that's what they're
Speaker 1: trying to engineer to take some of the heat out
Speaker 1: of this labor market, and there will be consequences. Unfortunately,
Speaker 1: this is how this works, CALSE. So we're trying to
Speaker 1: understand how much pain they're wanting tolerate, how far they
Speaker 1: wanted to push it, and what business The two year
Speaker 1: has at two eddy two if you think it's Fed
Speaker 1: cameras on hiking. So the two year yield right now
Speaker 1: is actually inverted to what the market expects the Fed
Speaker 1: funds rate to be in just three months time. So
Speaker 1: the market is really pushing the Fed right now and
Speaker 1: saying how much longer is this rate hiking cycle going
Speaker 1: to last? And in our view, it's going to last
Speaker 1: for a bit longer. Uh, it's not yet time for
Speaker 1: the Fed to us say that they've accomplished their missmission.
Speaker 1: Even with inflation expectations in the market declining, we do
Speaker 1: expect that the Fed will hike grade seventy five basis
Speaker 1: points in July. We expect them to hike another fifty
Speaker 1: And by the way, right now, the market is not
Speaker 1: even pricing in a full rate hike for December. We
Speaker 1: think that the market is getting just a bit, uh,
Speaker 1: going a bit overshot here in terms of the two
Speaker 1: year yield um, and it should be going higher. Well,
Speaker 1: I heard something similar for pre Amiser over at TV
Speaker 1: Securities earlier this morning, saying, essentially, inflation is still the problem,
Speaker 1: and the problem is going to stick around. Therefore, expect
Speaker 1: the Fed to stay the course and be more aggressive.
Speaker 1: She said. What all that leads to is a yield
Speaker 1: curve that is going to become even more deeply inverted.
Speaker 1: Is that the same camp you're in, Kelsey. We've been
Speaker 1: expecting the yield curve to invert. It has been inverting.
Speaker 1: Different parts of the yield curve have been inverting at
Speaker 1: different times. Right now we're seeing the belly lead in
Speaker 1: the inversion. So the five to tenure point is what
Speaker 1: what is leading, and that's because the market is is
Speaker 1: testing the FED again. They're testing the FED and saying
Speaker 1: can you really go through with this, particularly as the
Speaker 1: growth signals are really decelerating, and we noticed that the
Speaker 1: growth data that's been released more recently really is showing
Speaker 1: more of a deceleration than I think people thought that
Speaker 1: third revision to Q one GDP. I mean, no one
Speaker 1: looks at the third revision to Q on GDP. It
Speaker 1: showed really meaningful deceleration in services spending. And we need
Speaker 1: to be careful because we know that the consumer is
Speaker 1: this primary engine of growth and they're not as on
Speaker 1: as strong footing as we originally anticipated. I don't remember
Speaker 1: when we tried it on. Expectations have been fly ship
Speaker 1: and you Mitch either and here we are so confusing
Speaker 1: to me, I need to squeeze this in councy. It's
Speaker 1: just the final question. High spreads have been widened out
Speaker 1: for five straight sessions three. You and Bud Michael worked
Speaker 1: closely with each other. I just want to understand from
Speaker 1: from you and the team. Has that got interesting yet
Speaker 1: for you? It's a bit of a Noman's land right now,
Speaker 1: because spreads are too narrow if we are expecting a
Speaker 1: full blown recession, but they're probably too wide if we're
Speaker 1: going to escape recession. But in the longer term, we
Speaker 1: do think fundamentals in the corporate in the high old
Speaker 1: market are actually much better than they have been going
Speaker 1: into previous recessions. So if you think about it and
Speaker 1: think about defaults, defaults peaked around ten percent in the
Speaker 1: last in the Great Financial Crisis, we don't think they're
Speaker 1: going to peek at nearly as high as a rate
Speaker 1: and around six d basis points on spread that's already
Speaker 1: pricing in around a six percent to fault rate on
Speaker 1: a thirty five percent recovery rate. So actually a lot
Speaker 1: is priced in the market is considering a modest amount
Speaker 1: of default risk. But unfortunately the markets do tend to overshoot,
Speaker 1: and so it is possible that you continue to get
Speaker 1: that spread widening that goes beyond what we think is
Speaker 1: probably justify based on our default expectations in this next downturn. Kelsey,
Speaker 1: thank you so much greatly. He was at Barclays and
Speaker 1: he was absolutely brilliant, so brilliant, brilliant. He went off
Speaker 1: to point seventy two, where he has to watch the
Speaker 1: New York Mets. D. Mackie joins US now Chief Economists
Speaker 1: dead point seventy two on a very changed global economy,
Speaker 1: a very changed United States economy as well. Dean, what's
Speaker 1: great about your Stanford economics as you go to the
Speaker 1: micro data and you go traditional old school and say
Speaker 1: we must watch jobless claims. We'll see them tomorrow. Define
Speaker 1: surging jobless claims. Surging jobless claims would be a rise
Speaker 1: of in a fairly short amount of time. Uh. And
Speaker 1: you know, so far we've gone up, maybe from the
Speaker 1: very bottom. So right now I think we can confidently
Speaker 1: say we're not currently in a recession. Um and because
Speaker 1: that always happens in recession, jobless claimed surge, the unemployment
Speaker 1: rate surges, payroll growth declines. None of that's happening right now.
Speaker 1: It's not saying it won't happen at some point late
Speaker 1: this year, for example, but we can say what's happening
Speaker 1: right now with measures like that. The troops went out
Speaker 1: to the Hoover Institution of Stanford and they talked about
Speaker 1: regime change out of Bullard in this new word that's
Speaker 1: out there frontloading, Dean Mackie, If we front load our
Speaker 1: rate rises, what will that do to the real economy
Speaker 1: that wraps around labor. I think it depends how much
Speaker 1: frontloading they actually do. Um. You know. I think what
Speaker 1: we can say is, if the FED keeps going seventy
Speaker 1: five basis points a clip for an indefinite period, we
Speaker 1: will have a recession soon. Um So, so really it
Speaker 1: depends what the Fed means by that, you know. I
Speaker 1: think what we've been hearing and what we're seeing the
Speaker 1: dot plot is something like another seventy five and July,
Speaker 1: maybe a fifty and September, and then twenty five per
Speaker 1: meeting after that. If we do that, then I think
Speaker 1: the economy can stick day in a slowdown mode and
Speaker 1: not slip into recession. But if the Fed feels they
Speaker 1: can't slow down from that seventy five per meeting pace,
Speaker 1: that's really going to cover the economy. So Dean Tom
Speaker 1: doesn't care about the Fed minutes. Michael McKee didn't actually
Speaker 1: seem to care that much about the Fed minutes, do
Speaker 1: you Well, we certainly have to pay attention, um, you know,
Speaker 1: I don't think we'll probably have a decisively different view
Speaker 1: of the FED based on the minutes, but we you know,
Speaker 1: sometimes there is there are some things in there that
Speaker 1: are interesting and maybe color the outlook a little bit,
Speaker 1: but I wouldn't have great expectations for them. Okay, So
Speaker 1: as we talk about kind of front loading of the
Speaker 1: hikes of potentially seventy five and seventy five seventy five
Speaker 1: for who knows how long, at what point are we
Speaker 1: no longer going to be talking about hiking but cutting instead?
Speaker 1: You know? I think that again that depends partly on
Speaker 1: how rapidly the FED raises rates, Because if the FED
Speaker 1: does induce a very sharp slot on a recession, then
Speaker 1: cutting next year is quite possible. But if the FED
Speaker 1: is able to slow down and get on a gradual,
Speaker 1: more gradual hiking path, I don't think they'll necessarily be
Speaker 1: cutting soon. So it really depends on how much frontloading
Speaker 1: and how quickly the FED does. Dan let us talk
Speaker 1: about the arch glide path, which is the inflation migration downwards.
Speaker 1: If there's a kink in the curve, where's the kink?
Speaker 1: Where does this become hard? John and I are going
Speaker 1: to talk to Adam pose and in a few days,
Speaker 1: and he says the new two percent is three percent?
Speaker 1: Do you have a point six percent or five where
Speaker 1: the dialogue changes, because then it's way harder to push
Speaker 1: inflation lower. I don't think it works quite like that,
Speaker 1: tom So. I tend to think of it more as
Speaker 1: the different parts of inflation. So we know, goods inflation
Speaker 1: already is coming down. And if you talk to industrial
Speaker 1: analysts or people that are following those companies, they're talking
Speaker 1: telling us prices are falling in those industries already. And
Speaker 1: we're singing in the in the c P I and
Speaker 1: the PC goods care goods inflation is already falling. The
Speaker 1: services are really what's going to determine how far we
Speaker 1: can fall. And you know, I think that it's realistic
Speaker 1: that we fall down into the three percent range. Whether
Speaker 1: we can get down below that on core PC is
Speaker 1: a question mark, and it really depends on how rapidly
Speaker 1: wages are rising at that point. Let's go to the
Speaker 1: rate of change, and I don't mean metsmental relief. The
Speaker 1: Mets are killing it this year except for another team
Speaker 1: up in Bronx. But Dan Mackie very simply here, where's
Speaker 1: inflation in sixty days, ninety days? How rapidly do we
Speaker 1: come off the panic of eight nine percent and come down.
Speaker 1: How fast is that going to happen? Well, I tend
Speaker 1: to focus more on the PC because that's what the
Speaker 1: Fed follows, and we're at six and a half there.
Speaker 1: I think by year round we can be down into
Speaker 1: the three or four percent range. On Thank you, Thank you, sir.
Speaker 1: Henrietta Treys right now gives perspective on radio and television
Speaker 1: across America, Director of Economic Policy Research at Beta Partners,
Speaker 1: with some real tangible experience within the white marble of
Speaker 1: the Capital, Henrietta, we have been transfixed today by the
Speaker 1: questions of the Prime Minister, the drama of what's going
Speaker 1: on for Prime Minister Johnson and Theodic Kingdom. Would your
Speaker 1: world be better off if we had President's questions, if
Speaker 1: we had much more fiery, visible debate within Congress in
Speaker 1: the sleepfest it's become. I would love that. I think
Speaker 1: that would be fantastic. I think that politicians tend to
Speaker 1: speak more truthfully when they're put on the spot, and
Speaker 1: we're always looking for those little mistakes that might hold
Speaker 1: nuggets of truth, which we've seen from President Biden time
Speaker 1: and again. Um. I would I would love to see
Speaker 1: that in less agenda journalism, as Gilberts mentioning, it's a
Speaker 1: great idea. How unified other Democrats right now in the House.
Speaker 1: In the Senate, that's a great question. On the House
Speaker 1: side of my anxiety has been pretty high because we
Speaker 1: saw the Progressive Caucus UM really derail a lot of
Speaker 1: the BBB agenda in the back half of last year
Speaker 1: as they were negotiating that infrastructure bail and ultimately failed
Speaker 1: to sway the Senate, which is always the case, and
Speaker 1: the faster House members understand that senators always get their
Speaker 1: way the better. On the Senate side, you have a
Speaker 1: very shaky, you know, faux majority of just fifty senators, UM,
Speaker 1: and I think there are very few things that they
Speaker 1: can agree on. One of them is, Hey, healthcare really
Speaker 1: rallies voters during an election cycle. So let's do a
Speaker 1: reconciliation bill with the healthcare component climate change post very
Speaker 1: well with independent voters who are going to be so
Speaker 1: critical to turning out the vote favor of Democrats or
Speaker 1: Republicans in this next midterm cycle and the general election
Speaker 1: that's just a couple of years away. UM. And so
Speaker 1: if you can call together a bill that's a healthcare
Speaker 1: package and climate keep all the toxic stuff out. You
Speaker 1: can get a real bill passed through the House and
Speaker 1: set it by September. The reconciliation front, which is um
Speaker 1: I think something that will happen. Okay, So, Henrietta, if
Speaker 1: we kind of look at these two scenarios together. When
Speaker 1: we were watching the Boris Johnson in Parliament talking trying
Speaker 1: to get around the questions around his integrity, saying, but
Speaker 1: look at what we're doing. We're putting pounds into bank
Speaker 1: accounts of UK citizens today, We're cutting taxes, we are
Speaker 1: doing all of these things. On policy, President Biden also
Speaker 1: has been trying to take action, or at least signal
Speaker 1: action on policy when it comes to fighting inflation. Just
Speaker 1: look at the news yesterday of potential tariffs talks on
Speaker 1: ten billion dollars worth of worth of goods. How many
Speaker 1: more signals does the president have left a send? What
Speaker 1: other cards are there to play that are in his control?
Speaker 1: They're throwing everything at the wall here. UM I would
Speaker 1: say a couple of things on that. The ten billion
Speaker 1: dollars sounds big on paper, that represents roughly two percent
Speaker 1: of the overall tariffs that have been imposed against China,
Speaker 1: and the way that it's been expressed to us and
Speaker 1: via the news reporters you all have the great Jenny
Speaker 1: Letterard at Bloomberg, is to say that the consumer facing items,
Speaker 1: which are you know, your bicycles, you're back to school gear, backpacks,
Speaker 1: baseball gloves, those are all in List four A. So
Speaker 1: when investors think about those tariffs and what the administration
Speaker 1: is signaling, be mindful that those tariffs are only on
Speaker 1: at a seven and a half percent tax rate anyway,
Speaker 1: So you're talking about a very small portion at the
Speaker 1: lowest possible tax bracket today. So, Henrietta, what you're saying,
Speaker 1: we're not going to feel that. Voters aren't going to
Speaker 1: feel that. I sincerely doubt it. It It sounds very big
Speaker 1: ten billion dollars, but you're looking at three hundred and
Speaker 1: sixty billion dollars worth of goods that have entire and
Speaker 1: the only rate to reduce the seven and a half percent,
Speaker 1: not that exists for the other items that are hired
Speaker 1: in fight Apote. This is the Bloomberg Surveillance Podcast. Thanks
Speaker 1: for listening. Join us live weekdays from seven to ten
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Speaker 1: and of course, on the terminal. I'm Tom Keene, and
Speaker 1: this is Bloomberg.