Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Ley, we bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple podcast, sun Cloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg terminal.
Speaker 1: George boy joins us now, and this is extremely timely
Speaker 1: with all Spring global investment. He's trying to place a
Speaker 1: long term perspective on short term and marshal emotions and
Speaker 1: were thrilled it he could be with us today. George,
Speaker 1: What is a bond investor to do if I am
Speaker 1: in fixed income and I want a coupon, do I
Speaker 1: just as soon yield up in price down? Well, thank you,
Speaker 1: good morning, good morning, Thanks for having me on the show.
Speaker 1: It's it's great to be on again. Um you know,
Speaker 1: as as as Lisa just mentioned, you know, it's sort
Speaker 1: of opposite day and markets. It seems, as you know,
Speaker 1: the market is rallying, at least stock markets rallying as um,
Speaker 1: you know, as central banks kind of around the world
Speaker 1: that they're trying to re establish their credibility as inflation
Speaker 1: fighters and you know, the playbook if you will to
Speaker 1: fight to fight inflation is is pretty well understood. You
Speaker 1: tighten policy, you hopefully you reduce liquidity in the system,
Speaker 1: that slows growth and inflation comes under control. Now, all
Speaker 1: that takes time, takes a lot of effort, and what
Speaker 1: seems to have happened in the last day or so
Speaker 1: is the Fed. You know, the Fed has basically met
Speaker 1: market expectations and in doing so, you know, now the
Speaker 1: market seems to believe that we're on course for a
Speaker 1: soft landing, that the market knew what they wanted, the
Speaker 1: Fed gave it to them, and now all we need
Speaker 1: to do is sit back. The glide path is set,
Speaker 1: and we're gonna see slower growth next year and moderating inflation.
Speaker 1: That's a very optimistic outlook. You know. Our view is that,
Speaker 1: you know that things are gonna be a little bit
Speaker 1: more choppy than that. And even Powell acknowledge that this
Speaker 1: is this isn't this is a totally unique market, and
Speaker 1: that they're going to watch the economy just like we will,
Speaker 1: and they're gonna respond. They've basically told us that their
Speaker 1: forward guidance is going to be a little less clear
Speaker 1: going forward. So to use that flight path analogy, you know,
Speaker 1: it's it's not so safe to move around the cabin.
Speaker 1: It maybe might take a little bit more. There might
Speaker 1: be a little bit more volatility. And you're right, Tom,
Speaker 1: bond investors need to watch this very closely. It's been
Speaker 1: pretty benign action in the bond market. Ten Your yields are,
Speaker 1: you know, up a little They're probably gonna go up
Speaker 1: a little more, and curves could steep in a bit
Speaker 1: in here. But we're now starting to sort of play
Speaker 1: the expectation game. FED hikes are now priced in and
Speaker 1: the long end has remained anchored, so you have to
Speaker 1: reach for yield. Sorry, go ahead, but Georgia have to
Speaker 1: reach for yield. And this is the reason why you've
Speaker 1: seen such disability and the credit markets as well. I'm
Speaker 1: looking at spreads. They didn't widen on the heels of this,
Speaker 1: of this announcement and more hawkish tilt from the Federal Reserve.
Speaker 1: This is exactly again, the opposite of what happened in
Speaker 1: two thousand and thirteen when our markets going to get
Speaker 1: a little more rattled. Could that happen or is there
Speaker 1: ultimate faith that FED share J. Powell will step in
Speaker 1: the moment that there's turbulence and and really try to
Speaker 1: calm the waters by taking a step off the pedal.
Speaker 1: I think bond markets, we think bond markets are a
Speaker 1: little too sanguine in here. You know, if you take
Speaker 1: the largest buyer of bonds of certainly uh, you know,
Speaker 1: treasuries out of the market. As we go forward, you
Speaker 1: should expect more volatility. Also, the economic outcomes here are
Speaker 1: not quite as certain perhaps as the market expects. But
Speaker 1: the one thing that is certain is that, you know,
Speaker 1: the economy is strong, inflations running high. That is pretty
Speaker 1: good for for corporations. And so there's a there's an
Speaker 1: argument to be made as to why, you know, stock
Speaker 1: prices are at least holding moving up a bit higher.
Speaker 1: But in the world of credit and the world of
Speaker 1: of sort of you know, sort of credit based fixed income,
Speaker 1: you know, sort of higher inflation is actually a pretty
Speaker 1: good environment from from a default perspective, default should go down,
Speaker 1: stay low, go down, remain low as we move forward.
Speaker 1: And that's that's that's that's a healthy indication you need
Speaker 1: the extra income. Diversified sources of income are the best
Speaker 1: thing you can have in a fixed income portfolio today,
Speaker 1: and you need that extra income. Number one, you may
Speaker 1: use it, but more importantly, from an investment perspective, you're
Speaker 1: looking for opportunities to reinvest. The income yields should go
Speaker 1: a bit higher. We need to be able to reinvest
Speaker 1: at higher rates, so we want slightly shorter duration. And
Speaker 1: then liquidity. Liquidity is really really important in the market.
Speaker 1: Liquidity has been great for a long period of time,
Speaker 1: which is why risk premiums are so low. As liquidity
Speaker 1: starts to decline, we need to preserve that liquidity and
Speaker 1: portfolios we need to be able to tactically move when
Speaker 1: the market shifts. Now all those things come together in
Speaker 1: a fixed income portfolio, and so we need to protect
Speaker 1: CAPA in a rising rate environment where the FED is
Speaker 1: basically given the green light to start tightening policy. As
Speaker 1: you guys have mentioned, Bank of England saw the green light.
Speaker 1: They moved, Other banks around the world they've moved. We're
Speaker 1: moving into a regime of tighter monetary policy. You know,
Speaker 1: sort of basic principle of don't fight the Fed is
Speaker 1: something that people should adhere to. One Taylor Riggs teaches
Speaker 1: me day in day out that it is about rate
Speaker 1: of change. And of course we are seeing significant rate
Speaker 1: of change a move of were boring cost for the
Speaker 1: United Kingdom yell spike higher across the Guild curve. I mean,
Speaker 1: you see the six basis point move on the teniest
Speaker 1: similar moves. Who're seeing the short term, but we've seen
Speaker 1: a slight bull stephening of the US yel curve today.
Speaker 1: What though a rate of change of how much steeper
Speaker 1: these yel C couves could become and how quickly? From
Speaker 1: your perspective, So, I think the rate of change has
Speaker 1: a lot to do with market expectations. And I think
Speaker 1: one of the reasons that the the the long end
Speaker 1: of curves are remaining so well behaved is they still
Speaker 1: market still sees very strong government intervention. And the market
Speaker 1: and the and the and the Fed and other central
Speaker 1: banks have indicated the pace at which they are going
Speaker 1: to change. Now the Fed increase the rate of change,
Speaker 1: and bond yield state the same. So there's always sort
Speaker 1: of this tension between the market and the you know,
Speaker 1: policymakers is to where is the breaking point? Uh and
Speaker 1: and the market seems to be comfortable with the rate
Speaker 1: of change, of the deceleration if you will, of q
Speaker 1: E and and not too spooked, spooked by that. If
Speaker 1: inflation remains much hotter than expected, if it actually accelerates
Speaker 1: from here, well, then those paces that rate of change
Speaker 1: is ultimately going to have to change. The rate of
Speaker 1: change of money coming into the market was like nothing
Speaker 1: you've never experienced. Back in the rate of change of
Speaker 1: money coming out of the market tends to be slow
Speaker 1: and steady until you reach that tipping point the markets
Speaker 1: selling you. Right now, we're far far from that tipping point.
Speaker 1: There's a long runway ahead of us, but we simply
Speaker 1: don't know, and we're gonna have to see. It does
Speaker 1: seem like it's more than twelve months away, but again
Speaker 1: we're gonna have to see. We think you should keep
Speaker 1: those seatbelts buckled, extra income, shorter duration, and lots of
Speaker 1: liquidity in your fixed income. Work secuy nicely for me, George,
Speaker 1: as we talk about seat belts buckled. George Bowie with
Speaker 1: us there from all spring, and thank you for the perspective.
Speaker 1: We now moved to Seth Carpenter, cheat global economist at Morgan,
Speaker 1: Stanley and South. I want to frame those pushing against
Speaker 1: the zeitgeist. I think of Priam Miserable at t D
Speaker 1: Securities who made clear, yes, rising inflation is there, but
Speaker 1: if it ebbs, it will not dissuade the Central Bank.
Speaker 1: And the brilliant note from your colleague Ellen Zentner overnight,
Speaker 1: who stood aground and said inflation will cool in February
Speaker 1: or March of next year. What does Jerome Pool Jerome
Speaker 1: Powell do if we see a inflation I think the
Speaker 1: real answer is it depends on how much it's cooling.
Speaker 1: So uh, Ellen's forecast is great, and we think the
Speaker 1: monthly prints are going to start to come down and
Speaker 1: you'll start to see it in Q one and more
Speaker 1: in Q two um. But just coming down isn't going
Speaker 1: to be enough. What I took the change in Powell's
Speaker 1: rhetoric to mean is that he still cares a lot
Speaker 1: about the trajectory of inflation, but he also cares about
Speaker 1: the level. Now he started talking about price stability being
Speaker 1: uh the path to to full employment, and he said
Speaker 1: there's versions of the world where they would hike even
Speaker 1: before they got to full employment if inflation was too high.
Speaker 1: So now we're looking at not just the need for
Speaker 1: inflation to come down, for them to sort of come
Speaker 1: off the boiler a little bit. But also what that
Speaker 1: level is going to look like. SOE, I'd loved your
Speaker 1: sense of what happened yesterday in markets in response to
Speaker 1: this hawk is chilt from a fatal reserve that may
Speaker 1: be unwarranted to some degree if you do see a
Speaker 1: cooling off in inflation. We saw stocks rally, bonds rally,
Speaker 1: we saw everything rally, and people said why. And one
Speaker 1: theory is because Jerome Powell basically said they would not
Speaker 1: just halt any purchases right away because they didn't want
Speaker 1: to disrupt markets. It would be too difficult to absorb.
Speaker 1: Is this basically tacit admission that the markets are an
Speaker 1: incredible call on anything that they do, and that they
Speaker 1: will not do anything to unduly route royal valuations. Well,
Speaker 1: I don't think it's quite quite as strong as that.
Speaker 1: I think Powell was clear that they are going to
Speaker 1: be cautious, they were not intending to to disrupt markets,
Speaker 1: and so I think there's probably some comfort taken from that.
Speaker 1: I think there's probably a slightly more fundamental version of things, though,
Speaker 1: which is the whole market started to has already had
Speaker 1: already thought that that the FED was going to turn hawkish.
Speaker 1: If you look at market pricing for rate hikes. There's
Speaker 1: still material probability on a rate hike as soon as March.
Speaker 1: So the turn to hawkishness I think was not a surprise.
Speaker 1: The relief, perhaps in part, was that they didn't in
Speaker 1: fact get more hawkish than they than they did. I
Speaker 1: think there was a part of the market at tail,
Speaker 1: if you will, the distribution that was worried that they
Speaker 1: could be even more hawkish than they were. So you
Speaker 1: put together the fact that he he said they weren't
Speaker 1: going to actively try to disrupt markets, and the fact
Speaker 1: that some people were probably relieved that they weren't more hawkish,
Speaker 1: and you get the price action. How much can we
Speaker 1: actually glean in terms of a narrative from the market,
Speaker 1: and particularly the bond market, because right now it is
Speaker 1: not signaling any worry about runaway inflation or frankly any
Speaker 1: inflation whatsoever, and doesn't see what the FED is seeing
Speaker 1: in terms of something new. Uh Yeah, So that I
Speaker 1: think is the tricky part. Tom mentioned ellen Zentner and
Speaker 1: the great work that she does here. I'll highlight Matt
Speaker 1: Hornback and his team at the point to jet Still,
Speaker 1: how much liquidity central banks globally or put you know,
Speaker 1: have have added to markets just how big balance sheets
Speaker 1: still are, and that's got to be weighing on the
Speaker 1: long end of the curve, you know, over time. As uh,
Speaker 1: the FED keeps hiking rates over the course of next
Speaker 1: year and starts to signal the discussion about balance sheet runoff.
Speaker 1: Presumably the long end starts to go up from here.
Speaker 1: But there they've been very vocal that the global central
Speaker 1: bank liquidity of provision is weighing on the long end.
Speaker 1: You of course, that's spent fifteen years over at the FED,
Speaker 1: and I'm interested. There was a lot of handwringing across
Speaker 1: Bloomberg and many an intelligent writer saying, look, they there's
Speaker 1: never been such a signal from the yield curve and
Speaker 1: we cannot hike into this sort of a flatten yield
Speaker 1: curve expectation. But from your perspective, we heard from j
Speaker 1: Pow saying, look, we are focused on maximum employment, on
Speaker 1: price stability, and not on some model. What does how
Speaker 1: much do they care about the yield curve or not.
Speaker 1: One of my former bosses that the FED was find
Speaker 1: of saying that the m C is seventeen people that
Speaker 1: don't agree on the color of an orange. So there's
Speaker 1: a range of views as to how important the yield
Speaker 1: curve is. We can just go back to the last
Speaker 1: right hiking cycle. The market chatter then was also about
Speaker 1: the flattening of the yield curve, and they were members
Speaker 1: of the committee that said they would not vote for
Speaker 1: a rate hike that would flatten or invert the curve,
Speaker 1: and there are others that were willing to just keep
Speaker 1: hiking along with it. I think what I heard from
Speaker 1: Powell yesterday as he pointed to strong job growth, he
Speaker 1: pointed to strong GDP growth that's still above potential and
Speaker 1: inflation running well above target as as a backdrop for
Speaker 1: an economy that he thinks can handle some more normalization
Speaker 1: of policy. So if I want to go to your
Speaker 1: Princeton PhD. And there's a good guy there named Blinder
Speaker 1: who's done pretty good in economics and blind one of
Speaker 1: Blinders acclaimed quotes is, you know inflation is not a
Speaker 1: problem when people stop talking about it. When do we
Speaker 1: stop talking about inflation? I think that's probably some time off,
Speaker 1: because I think for the regular person, they don't look
Speaker 1: at the CPI index and take the month on month
Speaker 1: change annualize it. They they ask themselves, and might paying
Speaker 1: more to put gas in my guest tank? Am I
Speaker 1: paying more to buy food of the grocery store? And
Speaker 1: we could easily see inflation itself come down a great deal,
Speaker 1: but price levels staying high, especially for the ones that
Speaker 1: are most salient for consumers. So I think there's gonna
Speaker 1: be a long time that the discussion of inflation is
Speaker 1: in the air. Seth, thank you so much, Seth Carpenter.
Speaker 1: With Morgan Stanley, it's so hard to make sense of
Speaker 1: any of this. Biat of her will do a better
Speaker 1: job than I. She has co head of investment Strategies
Speaker 1: at Bernstein Private Wealth Management, joining us now Biada. What
Speaker 1: do you make of the markets shrug to all of
Speaker 1: these hawkish proclamations. Has it all just been baked in
Speaker 1: or is there something that you're gleaning that's a message. Well,
Speaker 1: what we make of the market's reaction to the FED
Speaker 1: statement yesterday is the market cares about clarity and communication,
Speaker 1: and what the market is responding to is that this
Speaker 1: FED has moved in an extraordinary every way from their
Speaker 1: talk track this summer when transitory ruled the day and
Speaker 1: there was not an acknowledgement of the persistence of inflation.
Speaker 1: Just one meeting later, the mood has shifted completely, and
Speaker 1: I think the market just feels confident that the FED
Speaker 1: is being clear about its communication, being transparent about what
Speaker 1: it intends to do, and I think that is really
Speaker 1: confidence inducing. What part of the equity market am I
Speaker 1: most comfortable in? While I'm going to go with the
Speaker 1: part that it's not a sector and it's not a stock,
Speaker 1: it's quality. Which companies can control the supply chain the best,
Speaker 1: which companies have an edge in terms of retention of
Speaker 1: labor assets and attraction of labor assets, and then which
Speaker 1: companies can exert pricing power. It's not an even outcome.
Speaker 1: It is very much a stock pickers market because some
Speaker 1: companies are going to be able to exert that price
Speaker 1: pressure and really control the supply chain better than others.
Speaker 1: It's to of out there, and we see that with
Speaker 1: both the employment picture and the supply chain picture, and
Speaker 1: that's not going to be easily resolved in twenty two.
Speaker 1: What will be the dynamic of margins We really haven't
Speaker 1: talked about it in the last week, but the bulls
Speaker 1: obviously taking a victory lap here with a terrific move,
Speaker 1: but what is your shops say about margin dynamics? Given
Speaker 1: what central banks are doing, we think there's likely to
Speaker 1: be real pressure on margins. We do feel like that's
Speaker 1: a vulnerability of the market, that's a risk that we
Speaker 1: have to watch. We're still optimistic about equities because we
Speaker 1: see earnings growth next year still in the high single
Speaker 1: digit range. But again, it's going to be very specific
Speaker 1: to companies on what they are able to control, and
Speaker 1: there's not that much that they can control. It's just
Speaker 1: which companies are taking matters into their own hands, whether
Speaker 1: it's buying their own planes for logistics and distribution, or
Speaker 1: real changes on the labor cost pecture. But margins are
Speaker 1: a key area for us to watch next year. So
Speaker 1: can you go as far to say as you can
Speaker 1: look at industry groups or indeed the way in which
Speaker 1: you can focus on a value versus a growth stock,
Speaker 1: or do you really have to be individual stock named
Speaker 1: by individual stock name at this moment because we all
Speaker 1: anticipated that at some point value might get its time
Speaker 1: in the sun. Many anticipating in Europe could outperform us,
Speaker 1: for example, because they're more value in nature than growth.
Speaker 1: But growth can can sometimes help held up in terms
Speaker 1: of margins, certainly for big tech. Yeah, I look at
Speaker 1: the market response yesterday in big cap tech. A lot
Speaker 1: of market watchers really believe that when the FED starts
Speaker 1: raising rates, growth is going to be vulnerable. And in
Speaker 1: the end big cap tech, when you look at their
Speaker 1: defensive modes around pricing and the need for their goods,
Speaker 1: that didn't happen. So we would not be abanned any growth,
Speaker 1: but we also would not be ignoring value. We want
Speaker 1: to remain balanced across sectors. We want to remain a
Speaker 1: global investor as well. You can't deny that x US
Speaker 1: markets are more attractive on evaluation basis. And let's talk
Speaker 1: about Europe in particular. You've got more cyclicals there, You've
Speaker 1: got more financials, So as Amicron makes its way around
Speaker 1: the world, they may be able to emerge first, really
Speaker 1: opening up the opportunity for more of those value stocks
Speaker 1: and cyclicals x US where valuations are much more attractive. Vietta,
Speaker 1: does it concern you that the consensus is bullish at
Speaker 1: a time of such incredibly high valuation, certainly on many
Speaker 1: historical levels. Well, if you look at valuations on the
Speaker 1: US market at twenty one times with the tenure where
Speaker 1: it is. It's not that out of line, Frankly, and
Speaker 1: I think you have to look back to rate hike
Speaker 1: cycles and I think we've got thirteen of them since
Speaker 1: nineteen fifty. The S and P is actually up eight
Speaker 1: percent on average in those rate hike periods, and that's
Speaker 1: an important statistic to keep in mind. Again, Why did
Speaker 1: Actuality have the response they did yesterday and continuing throughout today?
Speaker 1: It could be okay, right, the messaging from the FAT
Speaker 1: is going to be the most important part of what
Speaker 1: happens in twenty two, So we don't look at valuations
Speaker 1: as incredibly high relative to the rate environment. We come
Speaker 1: back to Tina, there is no alternative. The flows into
Speaker 1: equities are going to continue to be sustained. Um. We
Speaker 1: think there's tremendous liquidity and excess savings out there to
Speaker 1: support that. Be out to thank you so much. Out
Speaker 1: of Kurt with burnste in Private Wealth Management right now
Speaker 1: parachuting in. Stephen Englander joins us with that question. The
Speaker 1: number one Cross Rates guy in the world working for
Speaker 1: the Cross Rates Bank standard Charter. We're thrilled at Steve
Speaker 1: Englander could attend this morning. Steve, I want to go
Speaker 1: Matthew on you what you have the ability to do.
Speaker 1: Chairman Powell changed the ex excess yesterday he was on
Speaker 1: the edge of draggy and he tried to pull the
Speaker 1: discussion out to twenty three and twenty four. What is
Speaker 1: the lengthening of the Fed's vista mean for the US dollar? Well,
Speaker 1: you know, I agree with what Bill Dudley said, and
Speaker 1: I think that's going to be the eventual outcome, that
Speaker 1: the Fed ends up being more dubbish and that the
Speaker 1: uh sort of token withdrawal of stimulus isn't going to
Speaker 1: be enough um and the dollar is gonna fall. I
Speaker 1: think that the you know, circumstances that were likely to
Speaker 1: find ourselves, say in the middle of next year when
Speaker 1: rates hikes are going to be on the table, will
Speaker 1: be somewhat different, and that they probably won't be quite
Speaker 1: as hawkish as they make themselves out to be made
Speaker 1: themselves out to be yesterday, Stephen is that basically the
Speaker 1: Betton markets right now that the FED isn't going to
Speaker 1: balk and is not going to come through on some
Speaker 1: of his projections for as many as three rate hikes
Speaker 1: next year. You know, I don't know if it's the
Speaker 1: bed and more kids. But I think looking at the forecast, right,
Speaker 1: the inflation rates up like half a percent in two
Speaker 1: and you know, almost a quarter percent, I think, and
Speaker 1: all you all you have is a quarter percent more
Speaker 1: interest rate hikes. So you know, for much of the period,
Speaker 1: real rates are even more negative projectively more negative than
Speaker 1: they were before. You know, I think the market looking
Speaker 1: at this is kind of saying that, you know, they're
Speaker 1: they're not over the top, And that was the big
Speaker 1: fear I think going into the meeting. You know, our
Speaker 1: questions weren't are they going to stick to you know,
Speaker 1: fifteen billion, the questions where are they going to do fifty?
Speaker 1: Are they gonna go to zero? And so the market
Speaker 1: was really scared and kind of was caught, meaning in
Speaker 1: the hawkers direction, and that was pulling back. So what's
Speaker 1: your view on the dollar? Considering that people have the
Speaker 1: most overweight according to one Bank of America survey, going
Speaker 1: back to thinking that the dollar will strengthen more next
Speaker 1: year after what maybe it's biggest annual gain in six years,
Speaker 1: is it basically premature to make that bet that this
Speaker 1: is one of the most likely bets to get up
Speaker 1: ended as the FED is likely to disappoint, as is
Speaker 1: being basically communicated to us by the market. I think
Speaker 1: they're likely to disappoint. But that said that there are
Speaker 1: two forces driving up the market. With dragging up the dollar.
Speaker 1: You know, since say beginning of October when is that
Speaker 1: inflation numbers have been much higher than expected. But I
Speaker 1: think the market is also underestimating the risk off fact
Speaker 1: there by COVID first, you know, the spread of delta
Speaker 1: across the world, and now concerns about omicron um. Both
Speaker 1: of those together are very dollar positive. We expect both
Speaker 1: of them to say over time. So in the short
Speaker 1: term we're getting bad COVID news and you know, bad
Speaker 1: inflation news, and dollars still confined some support once that passes,
Speaker 1: which we think will be kind of at the end
Speaker 1: of Q one and into Q two. We do see
Speaker 1: dollar weakness ahead and then extended period of dollar weakness
Speaker 1: that Donna smile the many had talked about maybe just
Speaker 1: planning out slide to your perspective. Then, it was interesting
Speaker 1: that we got sort of shout out from J. Powe
Speaker 1: yesterday regarding currency hedged treasury yield, schooling us on the
Speaker 1: fact that this is why the long end has been
Speaker 1: so bid because well, once you hedge out the fex
Speaker 1: risk with you and it's still a great Viye, does
Speaker 1: that at any point change from your perspective? You know?
Speaker 1: I I think he was stressing that a bit too much.
Speaker 1: I mean that, you know, that's something of a factor.
Speaker 1: I think in terms of you know, buying dollars. I
Speaker 1: don't think it's it's an enormous factor. I mean, the
Speaker 1: real interest rates from the US are really really negative
Speaker 1: as far as the eye can see UM. And if
Speaker 1: you don't believe in what we call immaculate disinflation, UM,
Speaker 1: they're likely to stay negative for an extended period. Steve.
Speaker 1: One final question if I can, and this goes to
Speaker 1: your cross right work. How fragile is EM right now?
Speaker 1: I mean you're the guy that honitors this down to
Speaker 1: cross moments. How fragile is e M? Does it hearken
Speaker 1: back to the fears of stan Fisher of decades ago?
Speaker 1: Or is it a new em more resilient? Parts of
Speaker 1: it are are more resilient. I think the investors are
Speaker 1: looking at Chinese government bonds and and kind of saying,
Speaker 1: you know, c N Y c N H verry stable
Speaker 1: yields are high government very cautious in what they're doing. Um.
Speaker 1: You know, there are other bits and bobs, you know
Speaker 1: that benefit from higher oil prices that are doing well. Um.
Speaker 1: And I think a lot, a lot of bad news
Speaker 1: is now priced into e M. It's not where we
Speaker 1: were in September, you know. We I think the market
Speaker 1: understands the issues that certainly the short term EM is facing.
Speaker 1: So if we're right that things look better in the
Speaker 1: sense that we get past COVID and you know, at
Speaker 1: least the FED isn't quite as hawk as as advertised.
Speaker 1: There's a lot of room for EM to go up.
Speaker 1: But right now everybody is super cautious. Steven Angler in
Speaker 1: short notice greatly ship adding value with Standard Charter Bank
Speaker 1: this morning, Paul, it has been way too long since
Speaker 1: we've spoken to Shahab john Nus of Credit Sweets. He
Speaker 1: is outstanding folks, and and and the way I would
Speaker 1: would would put this is his notes are so dense
Speaker 1: that the only way you can read him, and I
Speaker 1: say this with great effects and job is you sit
Speaker 1: there and you lean in a chair forward, and you
Speaker 1: have a desk or whatever you're holding the paper on
Speaker 1: with a pencil, and you read every line like it's
Speaker 1: the old testament. They are so detailed and so smart.
Speaker 1: They they bring me back to Peter Cook years ago
Speaker 1: with us in Washington, or do you remember the late
Speaker 1: David Guray, So late David Girl is the same way
Speaker 1: he would sit there. David would read research and notes
Speaker 1: like word at a time. That's what you do with
Speaker 1: the FX strategist of credit sweets Shabab in those paragraphs
Speaker 1: of detail. What is your number one f X message
Speaker 1: for next year? Hi? They um, thank you very much
Speaker 1: for that. I think in terms of our number one message,
Speaker 1: it's still to try to stay long the dollar where
Speaker 1: where possible the price sanction will be will be tricky,
Speaker 1: obviously and noisy, but the underlying trend is, at least
Speaker 1: within G tennant still towards the higher dollar. And it
Speaker 1: might be getting a bit repetitive to say this, but
Speaker 1: no change from on site. Forget about Turkey, that's its
Speaker 1: own idiosyncratic story. Where's the big figure opportunity of resilient
Speaker 1: dollar weaker em next year? Well, I think, as you said,
Speaker 1: Turkey is a tricky one. Um. There are other e
Speaker 1: m s that that that are potentially going to struggle.
Speaker 1: For example, Mexico is one that we have an ol
Speaker 1: radar simply because uh, it could be the case that
Speaker 1: the composition of the central bank changing may create the
Speaker 1: more dovish slant there and over time degrade the real
Speaker 1: rates uh support for the Mexican pay. So, so that's
Speaker 1: one to keep on the agenda. Uh. And we're still
Speaker 1: a bit cautious on the C three currencies and maybe
Speaker 1: even the Russian rules to some extent, given their longer
Speaker 1: term popularity UM and relatively strong positioning in those at
Speaker 1: a time when particularly in the C three, there are
Speaker 1: questions about whether they're central banks are behind the curve
Speaker 1: at this moment. How about we we had the Bank
Speaker 1: of England today, I guess surprising some folks in raising rates.
Speaker 1: What is your thoughts on sterling here? We've actually been
Speaker 1: bullish on sterling because we've actually been in the camp
Speaker 1: that did expect the Bank of Williman to hike, which
Speaker 1: I know was a was a not very commonly held view,
Speaker 1: but well it was in our in the notes that
Speaker 1: you mentioned, we discussed the symmetry in favor of you know,
Speaker 1: going with that view, given how how little the marko
Speaker 1: was pricing in for it. UM. Well, look that the
Speaker 1: issue with the Bank of England from our perspective is
Speaker 1: it's one of those central banks that UH still has
Speaker 1: a symmetric target in price stability target and inflation target.
Speaker 1: It does not have a mandate, for example, to try
Speaker 1: to reach full employment. So it's very traditional, I guess
Speaker 1: in terms of its mandates UM and as we can
Speaker 1: see from the exchange of letters today between the Chancellor
Speaker 1: and the Bank of England, the government in the UK
Speaker 1: is supportive of this at this point in time as well. UM.
Speaker 1: So the truth there is that the Bank of England
Speaker 1: does maybe have more reasons to worry about inflation expectations
Speaker 1: getting undermined given that mandate than some other central banks.
Speaker 1: So to deliver a fifteen basis point rate hike, which
Speaker 1: is not very much in the big picture, and through
Speaker 1: that signal that they're taking that mandate seriously, I don't
Speaker 1: think that was too much of an answer for them.
Speaker 1: And if you look at longer term rates in the
Speaker 1: UK UM and but a longer time I am only
Speaker 1: talking about twenty four expectations for those years barely changed.
Speaker 1: Because the market knows that the Bank of England has
Speaker 1: a lot of flexibility UM between now and then to
Speaker 1: interpret data. However, it likes, particularly with O Macron as
Speaker 1: early as the February inflation reports. So I think this
Speaker 1: was not a particularly big ask of the Bank of
Speaker 1: England to deliver fifteen basis points today. Shure, have you
Speaker 1: said it is tough to derail the dollar strength? What
Speaker 1: in fact could derail the US dollar here? In your opinion,
Speaker 1: probably the most likely. I think we might have lot
Speaker 1: up there a little bit of a problem coming from
Speaker 1: eleven Madison Avenue, the home of credit Swiss. Yeah, well,
Speaker 1: there we were with some effects dynamics, John and Nison.
Speaker 1: What's interesting there to me is do we see obviously
Speaker 1: the market celebration, the Dow up five hundreds, very close
Speaker 1: to an inter day record high going back to Thanksgiving,
Speaker 1: but in the in the VIX eighteen point seven nine.
Speaker 1: But Paul, what's so interesting to me is does all
Speaker 1: this mumbo jumbo, this bow tie fancy talk we're talking about,
Speaker 1: how does it redound on e m There are Pacific
Speaker 1: rim bulls who look for a renaissance. Yeah, I'm the
Speaker 1: Pacific rim absolutely, and I think that obviously it boils
Speaker 1: down a large part to what happens in China, and
Speaker 1: of course China has taken a seemingly a more inward
Speaker 1: looking view of their economy and their growth. That gives
Speaker 1: some of those folks in Asia a little bit of
Speaker 1: a pause here, But again that's where the growth has
Speaker 1: been in the Pacific room, and that where it continues
Speaker 1: to be. And we'll see to what extent Europe and
Speaker 1: in North America can rebound and continue to rebound and
Speaker 1: reopen here. So there's a lot of play out there
Speaker 1: in in the currency markets. A few more ministers shot
Speaker 1: up Jonas as well have after this ECB talk. What
Speaker 1: will you listen for from the starting with Governor Waller
Speaker 1: all the FED speakers here, what will you listen for
Speaker 1: is they try to stagger to January into what is
Speaker 1: I'm told a critical merchant meeting. Well, look, I think
Speaker 1: we can now accept that there's a lot priced in
Speaker 1: in terms of rate hikes for two um. The Fed
Speaker 1: itself has validated that with the message that it gave yesterday. UM.
Speaker 1: So it's difficult now for the market to to look
Speaker 1: for more at this point near term from the Fed
Speaker 1: in that sense, I think. So there's two things to
Speaker 1: think about. On the doubst side, we are going to
Speaker 1: be sensitive to any messages around O macron and how
Speaker 1: quickly any growth slow down link to omcron could lead
Speaker 1: to a reassessment of two rate high prospects. UM. I
Speaker 1: don't expect that to come anytime soon because the data
Speaker 1: is likely to be shown that anytime soon. So that's
Speaker 1: more of a Q one issue probably. UM. The other
Speaker 1: thing to think about, of course, is what could cause
Speaker 1: the rate curve in the US too to stepend, particularly
Speaker 1: between two and twenty four or twenty five, where actually
Speaker 1: you have a very flat curve at this point, So
Speaker 1: what could make rates uh go higher? Um? Now, the
Speaker 1: problem there is that the Fed itself is trying to
Speaker 1: push the market through the dots for a higher view
Speaker 1: than what the markets already pricing in. So whether the
Speaker 1: Fed can say anything to change that at this point, uh,
Speaker 1: it's difficult. So so we need to try and figure
Speaker 1: out what the what the tipping point for the market
Speaker 1: is on that one. So thank you so much, it's
Speaker 1: been too long shot. I've jealous with us with credit
Speaker 1: sweeze on a resilient US dollar. This is the Bloomberg
Speaker 1: Surveillance Podcast. Thanks for listening. Join us live weekdays from
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Speaker 1: Tom keene In. This is Bloomberg.