WEBVTT - Bloomberg Surveillance TV: October 8, 2024 0:00:00.120 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.680 --> 0:00:15.480 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.720 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.760 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.440 --> 0:00:24.880 from our global headquarters in New York City. We are 0:00:24.960 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.319 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:38.199 Terminal and the Bloomberg Business App. Mohammed l erna Queen's College, Cambridge, 0:00:38.200 --> 0:00:41.840 expecting more data surprises, saying quote, last Friday's data surprise 0:00:41.960 --> 0:00:45.040 relative to consensus expectations will not be the last one 0:00:45.200 --> 0:00:48.200 unless economists resist the temptation to look through the shock. 0:00:48.520 --> 0:00:51.000 What is needed in today's economy is to be more 0:00:51.040 --> 0:00:54.040 open minded about why such surprises keep occurring and how 0:00:54.080 --> 0:00:57.480 best to frame the accompanying policy regimes. Muhammedan pleased to 0:00:57.480 --> 0:00:59.720 say join us again, Mohammed, Welcome back to the program sir. 0:00:59.800 --> 0:01:00.600 Let's get into that. 0:01:01.000 --> 0:01:04.080 Why was it the volatility between reports that stood out 0:01:04.080 --> 0:01:06.679 for you and not just the strength in isolation. 0:01:08.120 --> 0:01:10.840 Thanks for having me, John. Look, this volatility, or what 0:01:10.880 --> 0:01:13.760 you've called ping pong narrative, has been with us for 0:01:13.800 --> 0:01:17.160 a while, and there's a clash. There's a clash between 0:01:17.200 --> 0:01:20.480 the mindset of most analysts that tend to think that 0:01:20.600 --> 0:01:24.559 the economy is in a structural equilibrium and the reality 0:01:25.080 --> 0:01:29.200 that we are going through major transition, both economic and 0:01:29.280 --> 0:01:32.280 policy wise. So if you're thinking one way about the 0:01:32.319 --> 0:01:36.759 economy but it's operating in another paradigm, you will get 0:01:36.880 --> 0:01:37.880 these surprises. 0:01:38.319 --> 0:01:40.520 So the obvious question with Bee Mohammad when you write 0:01:40.520 --> 0:01:43.560 things like how best to frame the accompanying policy regimes, 0:01:43.680 --> 0:01:46.600 what the Federal Reserve should be doing with this incoming information. 0:01:48.800 --> 0:01:52.080 So, first of all, understand that were going through structural changes. 0:01:52.560 --> 0:01:56.480 Luckily for us, these changes are favorable, unlike what you're 0:01:56.480 --> 0:01:59.520 seeing in Europe, unlike what you're seeing in China. That's 0:01:59.560 --> 0:02:03.240 the first thing. The second, it's not just about monetary policy. Yes, 0:02:04.320 --> 0:02:06.400 the FED was the only game in talent, but that's 0:02:06.400 --> 0:02:09.360 no longer the case. Fiscal policy is having an impact, 0:02:09.440 --> 0:02:12.560 Structure reforms are having an impact, So think beyond the FED. 0:02:12.600 --> 0:02:15.680 So what does it mean for the FED continue? In 0:02:15.760 --> 0:02:18.560 what I sense, and I hope I'm right. I sense 0:02:18.919 --> 0:02:23.280 is two evolution in how they are approaching policy, and 0:02:23.360 --> 0:02:26.080 you see this a little bit in John Williams's interview 0:02:26.120 --> 0:02:29.680 in the Financial Times. The first one is to be 0:02:30.160 --> 0:02:35.200 less excessively data dependent and have a more balanced backward 0:02:35.240 --> 0:02:39.160 looking forward looking approach. And the second one is to 0:02:39.200 --> 0:02:41.520 get away from this notion that you can target a 0:02:41.600 --> 0:02:45.880 specific outcome and have much more of an insurance mindset. 0:02:46.240 --> 0:02:48.720 And I think that if these two evolutions are correct 0:02:48.720 --> 0:02:51.480 and continue, it's good for the FED and would be 0:02:51.480 --> 0:02:52.320 good for the economy. 0:02:52.720 --> 0:02:56.200 Mohammed Just to that point, Adriana Kugler spoke yesterday too, 0:02:56.320 --> 0:03:00.520 and so that she's monitoring both Hurricane Helene and geopolitical events, 0:03:00.800 --> 0:03:03.160 but then goes on to say that the fear is 0:03:03.160 --> 0:03:06.040 is that they could have an impact on American employment, 0:03:06.120 --> 0:03:09.320 that risks escalate, uncertainty escalates, and that means that the 0:03:09.360 --> 0:03:12.080 FED might have to move more towards neutral more quickly. 0:03:12.360 --> 0:03:15.400 When you look at these exogenous shocks, is it still 0:03:15.680 --> 0:03:17.600 a FED put is it a FED that's going to 0:03:17.639 --> 0:03:19.960 come in and not cut And maybe isn't as concerns 0:03:20.000 --> 0:03:24.519 about the inflationary risks of for example, targeting oil capabilities 0:03:24.560 --> 0:03:26.760 by Iran Danny. 0:03:26.800 --> 0:03:29.880 The hardest thing is when the external shock, whether it's 0:03:29.880 --> 0:03:33.320 coming from oil crisis, whether it's coming from a supply 0:03:33.400 --> 0:03:36.280 disruption in the port, or whether it's coming from this 0:03:36.400 --> 0:03:42.680 awful hurricane down south. The hard thing is when it's stagflationary, 0:03:43.040 --> 0:03:46.880 when it lowers, grows, and increases price pressure. That is 0:03:46.920 --> 0:03:51.000 when the FED gets into a really difficult situation. Let's 0:03:51.040 --> 0:03:54.480 hope that none of these potential external shocks. One of 0:03:54.520 --> 0:03:57.200 them is resolved, but the other two are not. Let's 0:03:57.200 --> 0:03:59.280 hope that they don't because it will make it very 0:03:59.320 --> 0:04:02.839 hard for the FED to decide what to do. I think, 0:04:02.880 --> 0:04:05.880 and I believe for a long time, that the economy 0:04:06.520 --> 0:04:09.880 is fundamentally sound, so it can absorb shocks. What it 0:04:09.880 --> 0:04:12.560 cannot absorb is a policy mistake, Muhammad. 0:04:12.600 --> 0:04:16.400 When it comes to these potential policies and these exogged 0:04:16.440 --> 0:04:20.960 shocks that Danny's talking about, the big unknown is obviously 0:04:21.040 --> 0:04:23.360 the composition of Washington next year. 0:04:23.680 --> 0:04:24.440 How should the. 0:04:24.360 --> 0:04:27.080 FED be thinking about twenty twenty five when we might 0:04:27.160 --> 0:04:30.120 have very different policies coming out of the White House 0:04:30.160 --> 0:04:30.799 in Congress. 0:04:32.200 --> 0:04:34.440 I think they have no choice but to do what 0:04:34.480 --> 0:04:37.599 they said they do, which is, we will wait. We 0:04:37.640 --> 0:04:40.120 will see what happens in the presidential election, we will 0:04:40.120 --> 0:04:42.480 see what happens to Congress. We will see to what 0:04:42.560 --> 0:04:47.360 happens to actual as opposed to stated policy approaches, and 0:04:47.440 --> 0:04:51.640 then we will include this in our assessment. And Marie, 0:04:51.800 --> 0:04:56.440 is very difficult to move earlier. If you were forced 0:04:56.480 --> 0:04:59.719 to move, you'd be more cautious on the inflation side 0:05:00.160 --> 0:05:01.560 for both candidates. 0:05:01.880 --> 0:05:04.200 Is that why potentially we got this clear guidance today 0:05:04.200 --> 0:05:07.400 from President Williams in the Financial Times basically saying follow 0:05:07.400 --> 0:05:10.960 the dot plots, don't read into the fifty basis point cut. 0:05:11.000 --> 0:05:14.440 That was the exception, not the rule, because on November seven, 0:05:14.520 --> 0:05:18.160 they may be meeting without knowing the results of the election. 0:05:20.000 --> 0:05:21.880 Yeah, I know. I think they want to pivot away 0:05:21.880 --> 0:05:25.000 from the fifty because I think that if they knew 0:05:25.320 --> 0:05:27.560 then what they know now, they wouldn't have done fifty. 0:05:27.720 --> 0:05:30.799 They would have done twenty five, as many people proposed. 0:05:31.720 --> 0:05:34.400 So they're trying to pivot away from the fifty and 0:05:34.480 --> 0:05:37.440 get the conversation forward looking. And I think you see 0:05:37.440 --> 0:05:40.080 that in commentary over and over again coming out. 0:05:39.920 --> 0:05:40.320 Of the FED. 0:05:40.640 --> 0:05:44.560 Muhammad still every FED speaker that talked yesterday back fifty. 0:05:44.760 --> 0:05:46.920 No one tried to walk away from it. I mean, 0:05:46.960 --> 0:05:49.320 of course they probably wouldn't make a mistake, But what 0:05:49.360 --> 0:05:52.800 does that tell you about Chair Powell still hold on 0:05:52.839 --> 0:05:55.240 this committee and to direct monetary policy. 0:05:57.240 --> 0:05:57.880 Danny looked that. 0:05:57.920 --> 0:06:00.599 They have no choice but to defend the fifty because 0:06:00.600 --> 0:06:04.040 there was only one descending vote, so of course they 0:06:04.040 --> 0:06:05.920 had to defend the fifty, saying what we knew then 0:06:06.520 --> 0:06:11.280 okay led us to fifty. I think it's John who 0:06:11.360 --> 0:06:13.800 called it a drugy moment, the first time we've really 0:06:13.800 --> 0:06:18.039 had a drugy moment by chef, by Chair Powell. It 0:06:18.120 --> 0:06:21.200 was an important moment that he got done, and he 0:06:21.279 --> 0:06:25.960 was willing to tolerate one important descent. I don't think 0:06:26.000 --> 0:06:28.040 he's going to play that card over and over. 0:06:27.960 --> 0:06:29.719 Again, Mohammed. I love your thoughts. 0:06:29.839 --> 0:06:32.039 A little bit deeper on what we saw from Kolby 0:06:32.080 --> 0:06:34.760 Smith and John Williams in the Financial Times. I'll share 0:06:34.760 --> 0:06:37.239 the quote with you, the direct quote. If inflation fools 0:06:37.279 --> 0:06:40.239 even faster than expected, that would quote call for policy 0:06:40.240 --> 0:06:42.600 to normalize a little bit more quickly. If inflation still, 0:06:42.720 --> 0:06:45.279 that would call for interest rates to come down more slowly. 0:06:45.560 --> 0:06:48.599 There's a bias there, Muhammad, is to reduce interest rates, 0:06:49.120 --> 0:06:51.159 and it's a bias to reduce interest rates based on 0:06:51.160 --> 0:06:54.200 what happens with inflation, not what happens with payrolls. 0:06:54.360 --> 0:06:55.680 And I'd love your thoughts on that. 0:06:55.720 --> 0:06:57.640 Because last week before we spoke to you, before we 0:06:57.680 --> 0:06:59.839 had that data, we had some guest points out that 0:07:00.160 --> 0:07:01.360 the inflation data. 0:07:01.600 --> 0:07:02.680 Didn't matter anymore. 0:07:02.839 --> 0:07:04.760 Do you think it's the inflation data will set the 0:07:04.800 --> 0:07:07.240 tone for the pace of interest rate reductions over the 0:07:07.320 --> 0:07:10.120 next three quarters, and maybe not so much payrolls. 0:07:11.200 --> 0:07:12.880 So I think it's both, John, It's going to be 0:07:12.880 --> 0:07:17.000 the inflation data and the employment numbers. I think the 0:07:17.040 --> 0:07:21.760 bias you're sensing comes from where the neutral rate is. 0:07:22.160 --> 0:07:26.640 The midpoint the range is really large, really large. But 0:07:26.720 --> 0:07:28.960 if you look at where the midpoint is, it leads 0:07:29.000 --> 0:07:36.440 to this narrative that we are very restrictive. That's where 0:07:36.480 --> 0:07:38.960 that bias comes from. Now, as you know, my neutral 0:07:39.000 --> 0:07:41.400 rate is higher than the average. People will differ on 0:07:41.480 --> 0:07:43.880 where the neutral rate is. But that bias comes because 0:07:43.960 --> 0:07:47.520 people just compare where neutral is and say, wow, we're 0:07:47.520 --> 0:07:49.280 still very far away from that. 0:07:49.600 --> 0:07:51.800 We we've made the argument that things have changed and 0:07:51.840 --> 0:07:53.720 I think a lot of people on the FMC are 0:07:53.800 --> 0:07:55.880 yet to be convinced. Could you lay up that argument, now, 0:07:56.240 --> 0:07:58.560 what has changed over the last five years that's led 0:07:58.600 --> 0:08:00.800 to a high neutral rate in and what are those 0:08:00.800 --> 0:08:03.320 conditions while we in that regime for a long time 0:08:03.360 --> 0:08:03.640 to come. 0:08:04.880 --> 0:08:07.400 And you've heard it from others like Larry Summers, and 0:08:07.920 --> 0:08:11.640 there's also a hint of it in the Williams interview 0:08:12.080 --> 0:08:14.800 that we mentioned earlier. First of all, it has to 0:08:14.840 --> 0:08:18.440 happen what's happened between investment and savings, and that gap 0:08:18.680 --> 0:08:22.440 actually is getting bigger between investment and saving. The second 0:08:22.520 --> 0:08:25.360 thing is, let's not ignore what's happening on the fiscal side. 0:08:25.920 --> 0:08:29.040 And then the third thing is the fragmenting global system. 0:08:29.640 --> 0:08:35.640 The system of global system is structurally becoming more sensitive 0:08:35.800 --> 0:08:40.000 and more vulnerable to adverse shocks. So you put these 0:08:40.000 --> 0:08:42.920 three things together and it suggests that the neutral weight 0:08:42.960 --> 0:08:45.480 has migrated up, and not just by a bit, but 0:08:46.360 --> 0:08:47.440 by a notable amount. 0:08:48.120 --> 0:08:51.720 Martin, The language does continue to be gradual reductions. Do 0:08:51.760 --> 0:08:53.360 you think that there's a sense on the FED that 0:08:53.400 --> 0:08:56.000 they realized that this might be the case. In gradualism 0:08:56.080 --> 0:08:58.400 is necessary to end at the right point. 0:08:59.720 --> 0:09:02.640 That's the great point. But gradualism means different things to 0:09:02.720 --> 0:09:08.079 different people. Gradualism, I think, to most of us, means 0:09:08.160 --> 0:09:12.040 take small steps. You're still in the dark, the image 0:09:12.080 --> 0:09:14.000 that chair Pal shed with us a few years ago. 0:09:14.120 --> 0:09:16.280 You're still feeling around in the dark. You're not quite 0:09:16.320 --> 0:09:20.080 sure why everything is, so take it easy. That's one 0:09:20.120 --> 0:09:23.800 bit of gradualism, and that's the bit that I That's 0:09:23.840 --> 0:09:26.760 why I think I thought twenty five basis points starting 0:09:26.760 --> 0:09:29.320 in July was the right thing. Let's not do anything 0:09:29.640 --> 0:09:33.920 big bold, because what ends up doing is it changes expectations. 0:09:34.280 --> 0:09:34.439 Look. 0:09:34.480 --> 0:09:37.120 Then there's a much bigger point, which is markets are 0:09:37.120 --> 0:09:41.839 all over the place. In the last what fifteen days, 0:09:41.880 --> 0:09:46.720 the probability of a fifty basis point cut in November 0:09:46.800 --> 0:09:50.920 has gone from over sixty percent to zero. Think about that, 0:09:51.280 --> 0:09:54.560 November is next month. That is how much uncertainty there 0:09:54.559 --> 0:09:58.600 has been in this market. This market lacks anchors when 0:09:58.640 --> 0:10:01.120 it comes to how it sees the interestate part. The 0:10:01.280 --> 0:10:06.360 whole profile of raight cuts has moved up, meaning fewer 0:10:06.360 --> 0:10:09.520 cuts by fifty basis points. You know, these are massive 0:10:09.640 --> 0:10:14.160 moves based on data points, and until we restore some 0:10:14.200 --> 0:10:17.200 sort of anchor you're going to have this volatility that, 0:10:17.360 --> 0:10:20.199 as you know, I worry that at some point you 0:10:20.679 --> 0:10:23.680 may expose a structural weakness somewhere in the system. 0:10:23.920 --> 0:10:26.440 Well, when it comes to these anchors, how difficult it 0:10:26.559 --> 0:10:30.120 is to understand what the FED views as neutral. You 0:10:30.200 --> 0:10:32.600 mentioned Williams again, and he hinted that that in the 0:10:32.640 --> 0:10:35.560 Financial Times article he said, we'll quote way above it. 0:10:35.600 --> 0:10:36.880 What does way above it mean? 0:10:37.880 --> 0:10:40.760 That's exactly it. They have to be careful with their words, 0:10:40.440 --> 0:10:41.560 That's exactly it. 0:10:41.640 --> 0:10:41.920 I mean. 0:10:42.520 --> 0:10:46.040 I think that that there's going to be a lot 0:10:46.080 --> 0:10:50.720 written on what went wrong with FED communications starting in 0:10:50.760 --> 0:10:54.160 twenty twenty one, and why is it that now FED 0:10:54.240 --> 0:10:59.719 communication amplifies volatility, which is not what it's supposed to do. 0:10:59.800 --> 0:11:03.199 The whole point of forward policy guidance is to lower 0:11:03.240 --> 0:11:06.160 the overall volatility of the path and what we are 0:11:06.200 --> 0:11:12.800 living in this strange regime where FED communication enhances volatility, 0:11:13.360 --> 0:11:15.200 and that is something that I expect a lot of 0:11:15.200 --> 0:11:17.080 work is going to be done on as to how 0:11:17.160 --> 0:11:18.960 not to repeat this mistake going forward. 0:11:19.360 --> 0:11:21.080 We're lucky to speak to one of the authors of 0:11:21.080 --> 0:11:22.960 those books yet to be written. Mohammed is going to 0:11:22.960 --> 0:11:24.520 catch out with you this morning. Thank you, sir, I 0:11:24.520 --> 0:11:36.520 appreciate it. Muhammad al Aaron of Queen's College, Cambridge, winnis 0:11:36.520 --> 0:11:38.720 around the table logged into the Bloomberg terminal. 0:11:38.840 --> 0:11:40.880 Mark Havanner of Bank for America. Mark is going to 0:11:40.880 --> 0:11:41.160 see you. 0:11:41.280 --> 0:11:43.640 Likewise, thanks for joining to guess what's changed from you 0:11:44.200 --> 0:11:46.080 and your cause for the Federal Reserve based on what 0:11:46.160 --> 0:11:47.280 happened on Friday. 0:11:47.520 --> 0:11:49.520 Sure, we were in the fifty basiness point cut camp 0:11:49.559 --> 0:11:53.079 for November. The data dictates that that is no longer necessary. 0:11:53.600 --> 0:11:55.400 So we now think that they'll go twenty five, and 0:11:55.440 --> 0:11:57.520 that they'll deliver a string of twenty five basis point 0:11:57.600 --> 0:12:00.400 rate cuts until they get to March of next so 0:12:00.480 --> 0:12:03.000 around four percent, and then they'll slow down to a 0:12:03.080 --> 0:12:06.400 quarterly pace of cuts until they get to a trough 0:12:06.520 --> 0:12:08.079 of three to three in a quarter. 0:12:08.240 --> 0:12:09.559 At least that's the base case. 0:12:10.080 --> 0:12:13.880 Now, I'll tell you that amongst our clients, there's a 0:12:13.880 --> 0:12:15.920 lot of uncertainty out there right now. 0:12:16.000 --> 0:12:17.160 The data has surprised. 0:12:17.480 --> 0:12:19.160 It doesn't seem like the data is giving us a 0:12:19.200 --> 0:12:22.400 particularly clear narrative on what's going to happen. And we 0:12:22.520 --> 0:12:25.280 sense that investors are really shifting probabilities of what the 0:12:25.320 --> 0:12:28.600 most likely economic outcome is there was a lot of 0:12:28.640 --> 0:12:30.880 belief that we were headed to a soft landing with 0:12:31.000 --> 0:12:34.280 elevated risks of a recession, or at least increasing risks 0:12:34.320 --> 0:12:37.800 of a recession. Now soft landing is still the base case, 0:12:37.880 --> 0:12:40.160 it seems, but the market is putting a little bit 0:12:40.160 --> 0:12:43.120 more weight on the possibility that maybe there's a quote 0:12:43.160 --> 0:12:46.240 unquote no landing type scenario, or maybe the Fed doesn't 0:12:46.240 --> 0:12:49.600 need to cut much below four percent at all. And 0:12:49.679 --> 0:12:52.720 so the market right now, we think, given that uncertainty, 0:12:52.960 --> 0:12:57.679 is just trying to be a bit defensive rates Clients 0:12:57.720 --> 0:13:00.480 don't want to extend too far out the curve right now, 0:13:00.559 --> 0:13:02.480 especially given that we're just about a month away from 0:13:02.520 --> 0:13:05.400 the election, and as a result of that, they're keeping 0:13:05.480 --> 0:13:07.920 things nimble and light and kind of waiting for data 0:13:07.960 --> 0:13:08.959 to try and guide a bit more. 0:13:09.000 --> 0:13:11.199 We saw money pile into money market funds as well 0:13:11.280 --> 0:13:13.360 ahead of that economic data. And I've asked this a 0:13:13.360 --> 0:13:14.960 few times, what do you think is behind that move? 0:13:14.960 --> 0:13:15.760 What's driving that. 0:13:16.600 --> 0:13:17.840 Rates are still high? 0:13:18.280 --> 0:13:20.920 And just because the Fed is cutting doesn't necessarily change 0:13:20.920 --> 0:13:23.719 your behavior as a depositor. Ask yourself, what does your 0:13:24.160 --> 0:13:27.480 retail bank deposit pay you, if it pays you something 0:13:27.520 --> 0:13:29.600 close to T bill yield, you should tell me where 0:13:29.640 --> 0:13:32.200 you bank, because I'd be interested in knowing that. But 0:13:32.400 --> 0:13:36.840 for most retail depositors, they're offered something close to zero, 0:13:37.440 --> 0:13:39.920 and so T bill rates are still well above that. 0:13:40.360 --> 0:13:42.520 And so we do think that there's going to continue 0:13:42.559 --> 0:13:44.720 to be a lot of inflows into money market mutual 0:13:44.720 --> 0:13:47.200 funds even if the FED is cutting, because it's not 0:13:47.280 --> 0:13:50.080 about whether rates are rising or falling, it's about the 0:13:50.160 --> 0:13:52.760 overall level of interest rates. And work that we have 0:13:52.840 --> 0:13:56.200 done says that you shouldn't expect to see really large 0:13:56.240 --> 0:14:00.160 outflows from money funds unless the FED cuts to something 0:14:00.200 --> 0:14:03.040 that is at or below two percent, and that seems 0:14:03.200 --> 0:14:05.760 very unlikely based upon the data that we have at 0:14:05.760 --> 0:14:08.040 hand and what the market is thinking about the FED 0:14:08.080 --> 0:14:08.760 cutting cycle. 0:14:09.080 --> 0:14:12.360 Market's also a tenure that's been going higher. Yields have 0:14:12.400 --> 0:14:14.800 been going higher even since before the FED cut by 0:14:14.800 --> 0:14:17.200 fifty basis points, and it's just continued on. 0:14:17.760 --> 0:14:18.760 How much of that is just. 0:14:18.720 --> 0:14:22.160 A factor of what you first started talking about, that unknowingness, 0:14:22.200 --> 0:14:25.480 that vulnerability, and that volatility just adding a premium to 0:14:25.520 --> 0:14:26.480 this bond market, Well, I. 0:14:26.440 --> 0:14:28.200 Think it's a couple of things. Number one, I think 0:14:28.240 --> 0:14:32.880 it's that rates investors do believe that a more proactive 0:14:32.920 --> 0:14:36.760 FED today means a better economy tomorrow. 0:14:37.000 --> 0:14:38.840 And think about on the day when. 0:14:38.720 --> 0:14:41.480 We set, when we saw the FED cut fifty, you 0:14:41.560 --> 0:14:44.200 actually saw long end yields rise because there was a 0:14:44.240 --> 0:14:46.120 sense that the FED was going to be decisive at 0:14:46.240 --> 0:14:49.440 quickly do what it takes to support the economy, and 0:14:49.480 --> 0:14:52.400 then that should allow for better growth in the future. 0:14:52.640 --> 0:14:56.160 That we think is arguably the biggest part of why 0:14:56.200 --> 0:14:58.640 the back end has been moving up a bit. But 0:14:58.680 --> 0:15:03.200 there's also supply demand concerns, and the election is a 0:15:03.200 --> 0:15:06.960 big wild card. Certainly, it doesn't seem like fiscal policy 0:15:07.040 --> 0:15:09.920 is going to be tightened in a big way after 0:15:09.960 --> 0:15:13.520 the election, and so we can debate, well, how easy 0:15:13.560 --> 0:15:17.080 will fiscal policy get based upon the election outcome. But 0:15:17.160 --> 0:15:19.360 I think investors are just a little bit reluctant to 0:15:19.400 --> 0:15:22.320 extend out the curve, knowing that you can get political 0:15:22.360 --> 0:15:25.760 outcomes that would result in much easier fiscal policy and 0:15:26.160 --> 0:15:27.280 more treasury supply. 0:15:27.600 --> 0:15:29.360 As you're saying this, though, I'm thinking in my head, 0:15:29.400 --> 0:15:32.400 who is the candidate for less fiscal spending? 0:15:33.280 --> 0:15:35.640 So I don't want to get into the politics too much. 0:15:35.800 --> 0:15:36.880 But it's a good response. 0:15:37.200 --> 0:15:42.400 Thanks, I've been trained well, but via media people. But 0:15:45.360 --> 0:15:50.360 investors right now do not expect that there's really any 0:15:50.440 --> 0:15:55.960 party or any candidate that supports meaningful fiscal austerity, and 0:15:56.000 --> 0:15:58.240 so therefore it's just a question of whether or not 0:15:58.320 --> 0:16:02.680 the fiscal outlook gets a lot worse or a little worse, 0:16:03.360 --> 0:16:07.560 and investors, knowing that the election is very tight, and 0:16:07.840 --> 0:16:10.480 knowing that investors don't want to take a strong call 0:16:10.640 --> 0:16:14.240 on that right now, are deciding to just stay a 0:16:14.280 --> 0:16:17.840 little bit shorter duration. So some of the flows work 0:16:17.920 --> 0:16:20.600 that members of my team do sees that they're very 0:16:20.600 --> 0:16:23.800 sizeable inflows into fixed income funds, not too different from 0:16:23.840 --> 0:16:26.480 the money market mutual fund inflows John that you referred 0:16:26.520 --> 0:16:30.120 to earlier. But when those flows come in, they're generally 0:16:30.200 --> 0:16:32.680 staying short on the curve, and that is due to 0:16:32.800 --> 0:16:36.320 investors who just don't have a lot of confidence in 0:16:36.480 --> 0:16:39.600 what the political or macro backdrop looks like in a 0:16:39.680 --> 0:16:42.760 month or so. And as a result of that, these 0:16:42.840 --> 0:16:46.000 positions are kind of de facto and steepeners. And when 0:16:46.040 --> 0:16:48.400 you get really strong data like we had on Friday, 0:16:48.760 --> 0:16:51.960 then that does create a bit of attension for investors 0:16:52.000 --> 0:16:53.680 who have moved further in on the curve. 0:16:53.880 --> 0:16:55.480 Jonathan and I were just talking about the fact that 0:16:55.520 --> 0:16:58.680 if we might not have a decision days or even 0:16:58.720 --> 0:17:01.160 weeks out, this could also drag on for months. This 0:17:01.200 --> 0:17:03.960 could be contested. What are flows on the short end 0:17:03.960 --> 0:17:04.800 look like then. 0:17:06.240 --> 0:17:09.520 So it's a great question. I guess I would just 0:17:09.640 --> 0:17:14.560 respond by saying that over recent weeks and months, we 0:17:14.600 --> 0:17:19.800 have certainly seen that treasuries have regained their flight to 0:17:19.920 --> 0:17:24.280 quality attributes. When inflation was high, let's say, rewind a 0:17:24.359 --> 0:17:27.240 year ago or so, I think we could have debated 0:17:27.520 --> 0:17:31.560 how much treasuries actually retained that flight to quality benefit. 0:17:32.160 --> 0:17:34.720 But if there is acute uncertainty, whether it's due to 0:17:34.960 --> 0:17:38.520 US politics or whether it's due to geopolitics, we do 0:17:38.560 --> 0:17:42.520 think that treasuries will still retain that flight to quality attribute, 0:17:42.600 --> 0:17:46.520 and we should expect to see cash move into treasury securities, 0:17:46.680 --> 0:17:49.840 probably mostly at the front or belly of the curve 0:17:49.920 --> 0:17:53.280 in those types of scenarios, but certainly for the asset 0:17:53.320 --> 0:17:56.440 class overall, we do think that it will retain those 0:17:56.760 --> 0:17:58.840 kind of risk off or flight to quality benefits that 0:17:58.880 --> 0:18:00.000 we have historically. 0:17:59.600 --> 0:18:01.080 So a lot about the front end. 0:18:01.160 --> 0:18:03.439 You've talked about how that money and money market funds 0:18:03.440 --> 0:18:05.680 could be quite sticky and less FED funds. Comes down 0:18:05.720 --> 0:18:08.040 to something like to can we talk about the long 0:18:08.119 --> 0:18:08.800 end and just finish that? 0:18:08.960 --> 0:18:09.200 Sure? 0:18:09.280 --> 0:18:10.840 What are you looking for the long end to curve 0:18:10.840 --> 0:18:12.399 what kind of numbers? We had a guest from pagim 0:18:12.480 --> 0:18:14.399 Yes THATDA saying we're in the buy zone four percent 0:18:14.480 --> 0:18:16.679 for twenty five lock it in, get a second by 0:18:16.840 --> 0:18:18.240 second opportunity, take it. 0:18:18.440 --> 0:18:19.199 What's your advice? 0:18:19.359 --> 0:18:23.280 Yeah, So we wrote yesterday that we do think at 0:18:23.359 --> 0:18:25.480 least using the tenure as a proxy between four to 0:18:25.520 --> 0:18:27.680 four and a quarter is a reasonable place to begin 0:18:27.760 --> 0:18:31.760 scaling in. We're already there, obviously, But here's the framework 0:18:31.800 --> 0:18:34.639 that we have used, and a number of folks on 0:18:34.680 --> 0:18:37.760 our team have wrote recently written about this in slightly 0:18:37.760 --> 0:18:41.359 different ways, but we called it two three four type framework. 0:18:41.840 --> 0:18:42.359 The FED is. 0:18:42.359 --> 0:18:45.359 Almost certainly going to cut to four percent, almost regardless 0:18:45.359 --> 0:18:45.800 of the data. 0:18:45.840 --> 0:18:46.399 Don't believe me. 0:18:46.440 --> 0:18:49.200 Look at their dots in twenty twenty five, all dots 0:18:49.240 --> 0:18:52.439 except the one or below four percent, So that seems 0:18:52.480 --> 0:18:54.879 to be the recalibration zone. And that's maybe consistent with 0:18:54.920 --> 0:18:57.440 quote unquote no landing, and so if the economy performs 0:18:57.440 --> 0:19:00.280 really well, then four percent is probably where the they'll 0:19:00.359 --> 0:19:03.560 end up. In a soft landing scenario. Using the fed's 0:19:03.600 --> 0:19:06.959 own baseline, they'll probably end up closer to three percent. 0:19:07.240 --> 0:19:09.480 That's the b of a house view. That's our economist's 0:19:09.560 --> 0:19:11.679 view as well. And if there's a recession or some 0:19:11.720 --> 0:19:13.800 type of sharp slowdown, then you can envision a two 0:19:13.880 --> 0:19:16.680 percent or lower type of outcome. So then the question 0:19:16.760 --> 0:19:20.360 is really how do you assign probabilities to those various outcomes. 0:19:20.720 --> 0:19:23.720 And again, our base case is the soft landing. 0:19:23.880 --> 0:19:25.800 That's all well and good, But if you. 0:19:25.800 --> 0:19:28.400 Just look at ten year ois, let's say that's around 0:19:28.440 --> 0:19:31.040 three sixty at the moment. If that gets up to 0:19:31.080 --> 0:19:34.520 three seventy five or even higher, then clearly the market 0:19:34.560 --> 0:19:37.639 is overweighting that four percent outcome. That's so called no 0:19:38.040 --> 0:19:41.560 landing outcome, and investors can decide for themselves whether or 0:19:41.600 --> 0:19:44.840 not they think that's reasonable. We think that's very optimistic, 0:19:45.440 --> 0:19:47.720 and the world's a very uncertain place. The rest of 0:19:47.760 --> 0:19:50.320 the world is maybe not as robust as the US is, 0:19:51.000 --> 0:19:52.600 and so to think that we could slip into a 0:19:52.640 --> 0:19:56.160 soft landing or a potentially harder landing is not unreasonable. 0:19:56.320 --> 0:19:59.639 And again US rates and fixed income provide a hedge 0:19:59.720 --> 0:20:01.080 again to those outcomes. 0:20:01.400 --> 0:20:02.359 And therefore we do. 0:20:02.280 --> 0:20:04.840 Think that if ten year OIS gets to three seventy five, 0:20:05.000 --> 0:20:08.760 again be thinking the ten year close to for fifteen, 0:20:08.880 --> 0:20:11.280 for twenty five. At that point, we do think that 0:20:11.280 --> 0:20:14.520