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

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

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

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

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Speaker 1: and of course on the Bloomberg terminal. Joining us right now.

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Speaker 1: Marilyn Watson had a global fundamental fixed income strategy at

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Speaker 1: black Rock long ago and far away she was had

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Speaker 1: a global fundamental strategy for the Bank of England. Were

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Speaker 1: thrilled that she could join his uh this morning, you

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Speaker 1: have been in the halls of the Bank of England.

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Speaker 1: How do you distill the chaos in England and also

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Speaker 1: at their central bank. Well, I think it's a combination

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Speaker 1: of obviously the high inflation, the Bank of England raising rates,

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Speaker 1: and the new government and the very poor communication around

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Speaker 1: the many budget that they announced, and I think that

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Speaker 1: really completely took investors unawares. Um There was no sign

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Speaker 1: of how you know, they were going to cut you know,

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Speaker 1: cut expenditure along with the cutting taxation, and I think

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Speaker 1: it just added, you know, on top of Brexit, on

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Speaker 1: top of you know, the deep um you know issues

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Speaker 1: were seeing in terms of economic activity in the UK. Um,

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Speaker 1: I think it just created you know, a lot of

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Speaker 1: um you know, can't is essentially in the guilt market

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Speaker 1: for a time, big time. So when you learn to

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Speaker 1: ride a bicycle in the US, they're called stabilizers training wheels.

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Speaker 1: We call them stabilizers in the UK. Just so everyone

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Speaker 1: knows what I'm about to say, is this bond market

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Speaker 1: going to struggle without stabilizers like the Bank ofing a

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Speaker 1: guilt market operation when it expires in the middle of October.

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Speaker 1: So I think the Bank of England have already signaled,

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Speaker 1: you know, with the temporary you know measures that they announced.

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Speaker 1: I think the Bank of England is keenly a where

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Speaker 1: that they want to keep the market stable. So they

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Speaker 1: may in fact need to do a little bit more.

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Speaker 1: I think at the moment they're sort of treading a

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Speaker 1: very fine line. The Bank of England, you know, have

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Speaker 1: a very very measured approach to Muntrey policy. Every step

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Speaker 1: that they take, you know, it is very very finely nuanced.

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Speaker 1: They assume essentially any tweaks that they make to the

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Speaker 1: mount of policy won't be seen the full effects until

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Speaker 1: at least eighteen months out, so they're trying to adjust

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Speaker 1: policy for a longer term trajectory, and yet they're dealing

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Speaker 1: with a very volatile market right now. So I think

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Speaker 1: the Bank of England is obviously incredibly keenly watching what's happening,

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Speaker 1: and I think they will be prepared to do more

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Speaker 1: if they do feel they need to keep you know,

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Speaker 1: the market stable. But I think it's also a global phenomenon.

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Speaker 1: I mean, we've seen volatility across all asset markets, We're

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Speaker 1: seeing across you know, all all sovereign bond markets are

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Speaker 1: We're seeing you know, volatility here in the US, We're

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Speaker 1: seeing it in Europe and elsewhere as well, So it's

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Speaker 1: not just a UK phenomenon. But I do think in

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Speaker 1: light of the fact that you know, we have issue

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Speaker 1: US at a global in terms of activity issues specific

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Speaker 1: to the UK, and then the fact that many central

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Speaker 1: banks were obviously draining liquidity from the system at a

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Speaker 1: time when inflation is high, I think I think it's

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Speaker 1: just a confluence of many things, and it's being exacerbated

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Speaker 1: in the UK, which raises this issue of stabilizers or

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Speaker 1: training wheels for other central banks in terms of quantitative easing,

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Speaker 1: not quantitative tightening. Are you expecting a lot of central

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Speaker 1: banks to fail if their attempts of quantitative tightening and

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Speaker 1: end up actually having to buy bond selectively on the

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Speaker 1: longer end to try to control some of the moves

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Speaker 1: that they're seeing. Yeah, so that's a I think it's

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Speaker 1: a very good question, and I think it's we've never

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Speaker 1: been in this environment before where we have had so

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Speaker 1: many central banks that came away from positions of such

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Speaker 1: loose moneture policy. They've had these massive bank balance sheets,

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Speaker 1: they had these huge QUI programs. Rates have been incredibly loose,

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Speaker 1: and we've never had a starting position. They're starting to tighten,

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Speaker 1: you know, from these incredibly low levels, given how high

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Speaker 1: inflation is as well. And so I think it does

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Speaker 1: remain to be seen. I think here in the US,

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Speaker 1: I think the path is pretty well laid out in

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Speaker 1: terms of QT, it's already in progress. I think in

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Speaker 1: the UK and also maybe in Europe as well, it

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Speaker 1: remains to be seen. I think in you know, in Europe,

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Speaker 1: we do expect in d CB to continue to raise

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Speaker 1: rates the next two meetings, but in terms of reducing

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Speaker 1: its overall you know, bank balance and in terms of QT.

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Speaker 1: The still a little bit unknown when you have the

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Speaker 1: asset purchase program on the one hand, you have the

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Speaker 1: PEP program on the other hand, and it's a fine

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Speaker 1: balance that they are trying to juggle. You know, well,

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Speaker 1: right now there's a lot of discussion about our star star.

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Speaker 1: I'm not going to get into the jarget. I don't

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Speaker 1: want to do that. It's sort of I know, I

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Speaker 1: feel everyone just rolling their eyes as I say that.

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Speaker 1: But I am curious whether you have in your mind

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Speaker 1: a level at which longer term yields could rise before

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Speaker 1: the financial stability risks become more pressing than the inflation ones.

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Speaker 1: I think it's not just the level to which they rise,

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Speaker 1: it's also the speed with which they do that. And

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Speaker 1: so we don't have a certain level that we're currently

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Speaker 1: looking at where we think will be overly concerned, and

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Speaker 1: we don't think they're going to get to extreme levels,

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Speaker 1: but we do think if the volatility increases and you

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Speaker 1: see a dramatic shift either because you know the the economy,

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Speaker 1: um you know, is much worse than we expect, or

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Speaker 1: you know, because of other factors we don't know. But

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Speaker 1: I think half of it is actually the speed, and

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Speaker 1: also how the curve reacts. It's not just the endpoint

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Speaker 1: and just final question. Just take a step back from

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Speaker 1: all of this. Can you tell us how much the

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Speaker 1: world has changed for you, Rick, for Bob, for the

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Speaker 1: whole of the team with rates where they are now,

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Speaker 1: and are you looking at this world as maybe something

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Speaker 1: that we have to live with for a while that

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Speaker 1: fed funds, the risk free asset sticks around three fifty

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Speaker 1: four percent and credit is hanging out at these levels.

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Speaker 1: That's right. I mean, the world has changed completely from

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Speaker 1: a year ago, three years ago, five years ago, ten

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Speaker 1: years ago. Um. But actually it gives us a lot

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Speaker 1: more optimism now in terms of fixed income actually giving

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Speaker 1: you a decent yield. I mean, obviously we're relatively cautious

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Speaker 1: in this environment, but fixed income now is really I think,

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Speaker 1: you know, a very decent, good asset class. Once again,

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Speaker 1: you can get the decent return with little risk at

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Speaker 1: the moment if you're the front end with low duration.

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Speaker 1: So I think for the long term and going into

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Speaker 1: next year, then I think the very huge number of

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Speaker 1: opportunities and fixed income that we haven't seen for such

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Speaker 1: a long time. So I think in terms of you know,

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Speaker 1: the team and fixing income investors in general. I think

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Speaker 1: this is a far better environment going forward than we've

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Speaker 1: seen for such a long time. Do you think we

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Speaker 1: can break out into this environment, a new equilibrium, a

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Speaker 1: new normal, on a sustainable basis to get the fitling

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Speaker 1: we can? We get a ton of push back around

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Speaker 1: the table that we just can't live with these levels

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Speaker 1: of interest rates. Do you think we can? Well, we've

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Speaker 1: we've seen it in the past. We've certainly seen interest

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Speaker 1: rates much higher than this the past, and I certainly

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Speaker 1: think we can live with interest rates being much higher. Um.

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Speaker 1: And I think to a certain extent to get back

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Speaker 1: to a healthy financial environment. You know, I think to

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Speaker 1: have rates a little bit higher, I think you know,

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Speaker 1: it's beneficial for a lot of different businesses. So, UM,

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Speaker 1: I think it's certainly possible to get to a sustainable level.

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Speaker 1: It is beneficial for the economy. The world has changed,

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Speaker 1: that's for sure. Thank You also want to catch out

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Speaker 1: mar name Watson a black crop Stephen Short. He's principal

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Speaker 1: the Short Group. We protect the copyright of all our guests.

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Speaker 1: Get his magnificent statement on the American distillate and oil

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Speaker 1: economy from the Short Group. Stephen, thank you so much

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Speaker 1: for joining us this morning. It's the simple question is

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Speaker 1: what does OPEC plus mean to a gout of gas?

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Speaker 1: But far more than that is the nuance. How does

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Speaker 1: OPEC plus his decision impinge on the many distillates that

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Speaker 1: we take from a barrel of oil. Absolutely, OPEC is

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Speaker 1: only influence over the market tom is the price of

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Speaker 1: crudal by by constricting the production or increase in the

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Speaker 1: production thereof. So obviously, with the move they've made now

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Speaker 1: or the announcement they made yesterday of taking two million

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Speaker 1: barrels off the market, clearly we're looking at a fewer

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Speaker 1: barrels on the market as we go into the fourth quarter. Now,

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Speaker 1: I want to be clear here OPEC made the announcement

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Speaker 1: of the two million barrel cut, but OPEC was already

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Speaker 1: it's thirteen members, and I want to add, for which

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Speaker 1: are in sub Sahara Africa are struggling to maintain their

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Speaker 1: current quotas. So by announcing a two million barrel cut,

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Speaker 1: given what OPEC is actually putting onto the market now,

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Speaker 1: the cut will amount to only seven fifty eight hundred

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Speaker 1: thousand barrels a day, which is still not an insignificant number,

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Speaker 1: and therefore it has the potential for an impact on

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Speaker 1: oil prices. Now, we don't consume oil, right, we consume

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Speaker 1: the derivatives of oil, gasoline, jet fuel, diesel fuel, so forth.

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Speaker 1: What we've seen here now, to answer your question Tom

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Speaker 1: on the US East Coast is our refinery capacity has

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Speaker 1: been slashed by more than half over the past ten years.

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Speaker 1: We simply don't have the ability to turn what kudo

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Speaker 1: there is out there into what we need, into everything

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Speaker 1: we need. That Thomas sal Uh statement on economics is scarcity.

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Speaker 1: We cannot produce everything that everybody wants. That is the

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Speaker 1: current situation when it comes to oil derivatives. We are

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Speaker 1: producing what most people want the most, that is gasoline,

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Speaker 1: and therefore what refining capacity we do have left here

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Speaker 1: in New York is geared towards maximis and gasoline production.

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Speaker 1: The other derivatives i e. Heating oil, which is also

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Speaker 1: diesel fuel jet fuel that suffers. So as we look

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Speaker 1: ahead to this heating season, the homes in this country

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Speaker 1: that heat their homes of oil are located in the

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Speaker 1: mid Atlantic New England states. We are going into this

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Speaker 1: winter with a thimble full of heat oil. We do

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Speaker 1: not have it is a dire situation we're going through

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Speaker 1: this winter. We don't have enough supply. It is going

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Speaker 1: to be a very violatile and a very expensive. So

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Speaker 1: we can get the using oil from Europe. Yeah, that's

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Speaker 1: gonna be a tricky right, So we're gonna be trying

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Speaker 1: to provide them with again natural gas as well. But

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Speaker 1: Stephen to your point about refineries and capacities, given that

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Speaker 1: there has been talk about releasing even more from the

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Speaker 1: Strategic Petroleum Reserve to lower gasoline prices, how much are

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Speaker 1: we bumping up against the limits of refineries where even

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Speaker 1: a release won't really make a difference in lowering prices further.

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Speaker 1: And really we're kind of out of bullets exactly, Well,

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Speaker 1: we never had the bullets LEAs, So I mean, doubling

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Speaker 1: down on a policy that has failed is stupidity on stilts.

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Speaker 1: We've been trying to manipulate the price. We being the

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Speaker 1: White House, have been trying to manipulate the price of oil.

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Speaker 1: Now for the past year or the last fifty two weeks,

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Speaker 1: we've dumped two million barrels up from my own crude

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Speaker 1: oil onto the commercial market. And what do we have

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Speaker 1: to show for that? One year later? In New York,

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Speaker 1: heating oil prices are a dollar forty six a gallon

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Speaker 1: higher higher than they were a year ago. So we

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Speaker 1: could drain and we're just about there with the SPR.

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Speaker 1: Over the last fifty two weeks, we've drained a third

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Speaker 1: of our emergency supply of oil. So what does that mean?

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Speaker 1: A year ago we had forty two days worth of

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Speaker 1: supply of crude oil sitting in the SPR. Today we

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Speaker 1: have twenty six days left of capacity. That is the

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Speaker 1: lowest level since nineteen three. Now, keep in mind the

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Speaker 1: cut patrolling reserve is for emergencies. Imagine last week of

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Speaker 1: Hurricane Ian did not go into Tampa, but instead went

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Speaker 1: into Houston or New Orleans, the i e. The oil

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Speaker 1: epic center of North America. We simply are the least

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Speaker 1: prepared ever for an emergency, and the only thing we

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Speaker 1: have to show for that least one year uh ON

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Speaker 1: is a thirty percent increase in this It costs so

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Speaker 1: threatening OPEC with Oh, we're just gonna put more, or

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Speaker 1: we're just gonna do what hasn't worked in two weeks.

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Speaker 1: I'm gonna do more of that. That is not a threat.

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Speaker 1: OPEC is laughing this off right now. Statement is a

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Speaker 1: strategic midsam reserved. Okay, remember that Stephen show, the show.

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Speaker 1: Thank you, sir, Nila Richardson. Let's go there right now.

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Speaker 1: Michael mckith, thank you so much, greatly appreciate that. This morning,

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Speaker 1: Nila Richardson with this chief economist at ADP, Nila, I

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Speaker 1: want to cut to the chase and just simply say,

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Speaker 1: in the new emphasis and tomorrow's jobs report, what are

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Speaker 1: you in a DP focused on? Well, good morning. I

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Speaker 1: can't think of a better way to start that conversation.

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Speaker 1: With wages. It's all about wages. It's about how wages

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Speaker 1: are driving or not driving, and inflation, and that's what

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Speaker 1: we're focused on. It takes to be a micro economist

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Speaker 1: in a macro world because when you are, you look

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Speaker 1: at things as a collective decision makings from small to

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Speaker 1: large firms. And what we're seeing is that timing has

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Speaker 1: been a very important factor in the entire dynamics of

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Speaker 1: the labor market. We are now starting to see more people,

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Speaker 1: at least as according to the August report, enter the

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Speaker 1: jobs market, and we saw a deceleration in wage gains

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Speaker 1: growth for job changers. And I think that deceleration is notable.

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Speaker 1: We saw it across all firm sizes because it means

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Speaker 1: that switching jobs is not paying off quite as much

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Speaker 1: as in this summer, and that might reduce some of

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Speaker 1: the pressure in terms of inflation. What's the ADPs wonderful

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Speaker 1: of this. What's the character of the job market differential

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Speaker 1: out there right now? Is it airline pilots? Is it bartenders?

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Speaker 1: Who is the job set? Acture? It matters to Kneela

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Speaker 1: Richardson right now? At all matters Tom? But um, I

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Speaker 1: think what where we are different points of rebounding? Right?

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Speaker 1: So the service sector was hardest hit, and so when

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Speaker 1: you look at leisure in hospitality, that's important when you

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Speaker 1: talk about inflation. Though, what's driving inflation is low pay,

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Speaker 1: low wage, low skill jobs. And are we still going

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Speaker 1: to see that bartender or that waitress. Bartenders actually can

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Speaker 1: make pretty good money. Let's go lower, Um, are we

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Speaker 1: going to see low skilled, low pay workers still see

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Speaker 1: gains and acceleration and pay that didn't happen during the

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Speaker 1: ten years of expansion leading up to the pandemic. Well,

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Speaker 1: we see it after we get over this hump of

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Speaker 1: getting really back to normal when it comes to jobs

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Speaker 1: and getting inflation down. That's the concern that low pay

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Speaker 1: workers won't see the pay gains in the future that

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Speaker 1: they saw over the last year and a half. So, Nila,

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Speaker 1: given that backdrop, i'd love you to comment and what

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Speaker 1: Michael McKee is talking about that there's this expectation that

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Speaker 1: the unemployment rate will rise but just marginally right. It

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Speaker 1: might peek out at four and a half percent, still

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Speaker 1: well below some of the peaks that we've seen in

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Speaker 1: recent downturns. How quickly could that move away from the

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Speaker 1: FED based on what you're seeing in the micro data, Well,

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Speaker 1: let's start with the jolts, because I think that's important.

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Speaker 1: That was in a big number this week, to see

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Speaker 1: a million fewer job postings. We had a DP actually

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Speaker 1: think that postings peaked this spring, so we weren't surprised

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Speaker 1: to see that decline. So that's the first indicator. The second,

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Speaker 1: this timing issue is really prevalent. If more people are

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Speaker 1: coming back to the labor market because they want and

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Speaker 1: need to work, and yet firms are slowing hiring, that's

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Speaker 1: what's going to happen, going to cause the unemployment rate

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Speaker 1: to increase. That denominator is really important. It's not the

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Speaker 1: number of jobs created every month so much. It's the

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Speaker 1: number of people entering the labor market right at a

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Speaker 1: time when firms may be slowing hiring. So I'm really

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Speaker 1: focused on the denominator of the unemployment rate. We're looking

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Speaker 1: at this hoping that we still managed to get some

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Speaker 1: sort of softish landing, but even FED officials are really

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Speaker 1: pulling back from that kind of language and elf from

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Speaker 1: what you're looking at. What kind of downturn are we

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Speaker 1: looking at based on some of the rate increases that

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Speaker 1: are expected, and based on the pace of weakening, the

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Speaker 1: pace of loosening of this labor market. I think you're

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Speaker 1: going to see at different angles. Um, maybe you could

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Speaker 1: call it a downturn by a variety of cuts as

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Speaker 1: opposed to one big stab. Sorry to be graphic in

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Speaker 1: the morning, but you're seeing interest rate sensitive sectors starting

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Speaker 1: to feel some weakness, and construction and manufacturing UH. If

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Speaker 1: we see UH inflation really hit pocket books and consumer spending,

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Speaker 1: you might see consumer services take a bit of a

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Speaker 1: hit as well, and so all those gains and leisure

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Speaker 1: in hospital tality that we've been tallentying might slow. Professional

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Speaker 1: business services are vulnerable for structural reasons. As fewer people

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Speaker 1: go back into the office, um, that might change the

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Speaker 1: complexion of like office support jobs. So the economy structurally

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Speaker 1: is also changing at the same time that we might

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Speaker 1: see some downturn dynamics driven by monetary policy, and tracing

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Speaker 1: that all out is very difficult to do. And they

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Speaker 1: always love listening to you. Thanks for coming on the

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Speaker 1: show with us, Nata Riches and me at ib Pig.

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Speaker 1: This is a joy. C IBC World Markets Capital Markets,

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Speaker 1: I should say out of Toronto is a wonderful, wonderful shop.

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Speaker 1: I think of Benjamin Tall in his great work bib

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Speaker 1: and right joins us right now. I had a foreign

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Speaker 1: exchange strategy there on Canada, but so much more on

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Speaker 1: the time we live in, which is strong dollar. But

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Speaker 1: I want to talk about the X axis of the

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Speaker 1: belief that the dollar is going to weaken. Everyone's been wrong, wrong, wrong.

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Speaker 1: Is your dollar study short term or to go to

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Speaker 1: the British medium term or long term? Where on the

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Speaker 1: X axis are you studying when the dollar breaks? We're

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Speaker 1: probably looking at the medium to long term. And if

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Speaker 1: you watch a specific gauge for how long to or

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Speaker 1: at least a way to calibrate that I would say

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Speaker 1: that potentially in the early to mid part of next

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Speaker 1: year's potentially when we'll started looking towards the next US

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Speaker 1: growth story, potentially leading to a softening of the dollar

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Speaker 1: and a sustained basis. Well, it's solving in a down

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Speaker 1: the same sustained basis. But the question is what does

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Speaker 1: EM do along the way? Are you partitioning now developed

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Speaker 1: economies from EM or they holistically the same against strong dollar,

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Speaker 1: so you have to partition them. I mean, if you

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Speaker 1: look at the way e m is trade this year,

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Speaker 1: it's been relatively robust compared to the dollar and at

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Speaker 1: least compared to other d ms. I mean, most of

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Speaker 1: the stronger dollar story has really been concentrated amongst the

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Speaker 1: DM currencies, predominantly the traditional funders like the Euro in

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Speaker 1: the end and also now late against the sterling. I mean,

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Speaker 1: we think that will migrate more towards a stronger dollar

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Speaker 1: versus commodity currencies that backdrop as we move forward, and

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Speaker 1: that's probably due to the imbalances that have been built

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Speaker 1: up in some of these commodity currency economies, including here

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Speaker 1: in Canada and of course Australia, New Zealand as well.

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Speaker 1: So over the past couple of months, and I really

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Speaker 1: mean a couple a month and a half, perhaps we've

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Speaker 1: seen a little bit more stability enter the market. We

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Speaker 1: haven't seen the same kind of runaway dollar strengthening, and

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Speaker 1: we've seen a little bit more stasis at much lower

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Speaker 1: levels versus a dollar for the euro pound is its

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Speaker 1: own story. How long do you expect to get this

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Speaker 1: kind of stability? Is people game out what we already know,

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Speaker 1: which is rate hikes on both sides of the Atlantic. Yeah,

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Speaker 1: so if we're talking about stability of the dollar, we

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Speaker 1: really need to delineate against what we expect the stability

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Speaker 1: to come from. If we're talking about the broad dollar gage,

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Speaker 1: say the d X Y, which of course is more

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Speaker 1: tilted towards a greater way waiting on the Euro. Yeah,

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Speaker 1: maybe the stability lasts a little bit longer because I

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Speaker 1: do think that a lot of the sources of concern earlier,

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Speaker 1: particularly with the day and interest security, you know what,

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Speaker 1: they've been pushed a little bit further out. I don't

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Speaker 1: want to say the completely resolved, of course, because a

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Speaker 1: lot of it now depends on how serious the demand

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Speaker 1: situation will be. And for that, you know, we need

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Speaker 1: to really look at the weather reports or at least

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Speaker 1: see what the weather looks like and how cold it

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Speaker 1: is in the AAR zone for this winter. So for

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Speaker 1: migrating away from this sort of you know, concern that

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Speaker 1: the dollars is going to continue to appreciate into the

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Speaker 1: year and eventually the end of course an intervention story there.

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Speaker 1: You know, that doesn't mean that the dollars still can't

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Speaker 1: appreciate against some of the other currencies. And you know,

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Speaker 1: I very much agree with, you know, some of the

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Speaker 1: other rhetoric that's been espoused by some of the other

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Speaker 1: guests that we're going to look at a higher for

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Speaker 1: longer story and not necessarily a scenario where central banks

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Speaker 1: entertaining cuts next year. If that's the case, then we

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Speaker 1: got to look at where the situations are fragile, where

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Speaker 1: you know, the higher for longer story could potentially break things.

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Speaker 1: And that to me is somewhat concerning, especially for Canada

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Speaker 1: in Australia. John, When do we just start to get

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Speaker 1: a meteorologist done that didn't not yeah, exactly, we should.

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Speaker 1: I mean, at what point is this going to determine

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Speaker 1: the tragic for the euro I mean, let's say it's

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Speaker 1: a called winter bribin. What are we looking at in

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Speaker 1: terms of what the euro dollars should be. Yeah, if

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Speaker 1: it's a cold and unexpected winter and we see as

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Speaker 1: much more serious draw and natural gas supplies, we're looking

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Speaker 1: at potentially ninety euro dollar I think, and maybe even

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Speaker 1: sustained momentum below there. That's when you start worrying about

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Speaker 1: whether or not as security risks or at least natural

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Speaker 1: gas security is is enough given what we have now.

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Speaker 1: I mean, one of the key things that have really

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Speaker 1: driven that has really driven the euro lower this year

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Speaker 1: is the fact that the largest economy in your Europe

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Speaker 1: and of course Italy as well, both have had the

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Speaker 1: re oriented or their energy story away from Russia. And

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Speaker 1: again that's that's a structural change. If that's not something

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Speaker 1: that you can really hope to address in one year

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Speaker 1: or even two years, open right. Thank you, sir of

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Speaker 1: c I b C Capital Markets. This is the Bloomberg

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Speaker 1: Surveillance Podcast. Thanks for listening. Join us live weekdays from

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Speaker 1: seven to ten am Eastern on Bloomberg Radio and on

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Speaker 1: Relations and subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

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Speaker 1: Bloomberg dot com, and of course on the terminal. I'm

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Speaker 1: Tom Keene, and this is Bloomberg