WEBVTT - Surveillance: Peak Inflation with Carpenter 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Ley, we bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:29.800 dot Com, and of course on the Bloomberg terminal. We 0:00:29.840 --> 0:00:34.520 will summarize with Seth Carpenter reachief global Economists at Morgan Stanley. Seth, 0:00:34.600 --> 0:00:37.200 I want to go to w t O Global markdown 0:00:37.240 --> 0:00:39.559 on g d P, but we must speak of what 0:00:39.640 --> 0:00:44.159 Ellen Setner will parse of this inflation report. Is there 0:00:44.159 --> 0:00:49.120 any site out there, Professor Carpenter, Dr Carpenter of demand destruction? 0:00:50.600 --> 0:00:53.960 Uh So, demand instruction is a tricky phrase, right. It 0:00:54.040 --> 0:00:55.880 says that prices have gone up because there was so 0:00:55.960 --> 0:00:58.640 much demand that demand goes away, which presumably then brings 0:00:58.640 --> 0:01:01.560 prices back down. I do think it's clearly a hit 0:01:01.600 --> 0:01:04.320 to the consumer. From the surgeon oil prices, Tom mentioned 0:01:04.360 --> 0:01:07.400 just how much gasolute prices were up. You were both 0:01:07.440 --> 0:01:10.080 talking about where real wages are going. I think it's 0:01:10.160 --> 0:01:14.839 unquestionable that when uh, some of the categories energy, food, 0:01:14.959 --> 0:01:17.800 that especially the lower end of the income distribution. Can't 0:01:17.840 --> 0:01:19.959 just substitute away from that's got to be a hit 0:01:20.440 --> 0:01:23.840 overall two consumption spending. But I think it's more important 0:01:23.840 --> 0:01:26.679 with this report, though, is the fact that core underperformed 0:01:26.720 --> 0:01:28.960 and we saw the rallying rates. I think if you 0:01:29.000 --> 0:01:32.200 look at use car prices, they were down sharply. Even 0:01:32.280 --> 0:01:35.160 the rent and overs owner's equivalent rent, which stayed solid, 0:01:35.480 --> 0:01:37.800 was actually off just a little bit. So instead of 0:01:37.800 --> 0:01:42.280 a continuing upward trend to those key drivers of inflation, 0:01:42.480 --> 0:01:44.679 we're actually seeing a little bit of a softening. So 0:01:44.959 --> 0:01:47.600 in our numbers at least, and it's always hard to 0:01:47.680 --> 0:01:49.760 make a forecast, but in our numbers, we've got to 0:01:49.800 --> 0:01:52.240 the peak of inflation and we're likely to start to 0:01:52.280 --> 0:01:55.120 see things come off, albeit gradually, from here. So if 0:01:55.160 --> 0:01:57.880 I gotta say the number, the absolute number came in 0:01:58.040 --> 0:02:00.800 above expectations. In the new Jerk respons is almost as 0:02:00.800 --> 0:02:04.040 though this is a downside surprise. What do you make 0:02:04.040 --> 0:02:06.960 of that? I think it really is the difference between 0:02:06.960 --> 0:02:10.840 core and headline. I think everyone knew that oil prices 0:02:10.919 --> 0:02:12.600 had gone up and that that was going to show 0:02:12.680 --> 0:02:15.519 through to this month's print. I think everyone knew that 0:02:15.560 --> 0:02:18.400 commodity prices for agriculture had gone up, and that that 0:02:18.480 --> 0:02:20.600 was going to show through to this month's print. And 0:02:20.639 --> 0:02:24.280 so for the durable underlying trend of inflation that's going 0:02:24.320 --> 0:02:26.600 to be with us not just this year but next year, 0:02:26.639 --> 0:02:29.080 that the Fed may have to respond to again, not 0:02:29.160 --> 0:02:31.240 just this year but next year. That I think is 0:02:31.240 --> 0:02:33.520 what the rates market is reacting to. So how much 0:02:33.680 --> 0:02:36.280 can you really project out from this one report? We've 0:02:36.320 --> 0:02:39.120 been talking about how it's not just necessarily the peak, 0:02:39.360 --> 0:02:42.079 but how quickly it comes down on the margins. How 0:02:42.160 --> 0:02:46.080 much does your forecast change after today's number. Well, on 0:02:46.080 --> 0:02:48.240 the bright side, our forecast doesn't have to change all 0:02:48.400 --> 0:02:50.800 that much. The core was a little bit softer. But 0:02:51.080 --> 0:02:53.480 for me, what's really important here is the pattern that 0:02:53.560 --> 0:02:56.640 we are starting to see some of that softer reading 0:02:56.800 --> 0:02:58.840 in some of the goods. We are starting to see 0:02:58.960 --> 0:03:02.679 for instances used prices start to come down. I think 0:03:02.720 --> 0:03:05.280 in that sense it's very much the pattern the trend, 0:03:05.320 --> 0:03:08.600 as opposed to the specific number. Does that pattern change 0:03:08.639 --> 0:03:12.480 anything for the Fed seth Uh? You know, at the margin, 0:03:12.520 --> 0:03:15.040 it probably takes off just a little bit of the 0:03:15.560 --> 0:03:17.680 you know, the fire on the on the on the 0:03:17.680 --> 0:03:20.160 burner at this stage but I don't think it changes 0:03:20.160 --> 0:03:23.959 things dramatically. There's no two ways about it. Inflation is high. 0:03:24.120 --> 0:03:26.880 Inflation is too high for the Fed's comfort level. All 0:03:26.880 --> 0:03:29.280 of the members of the FED, even the historically debblish ones, 0:03:29.280 --> 0:03:31.520 have said exactly the same thing. So in that regard, 0:03:31.800 --> 0:03:34.720 I don't think this actually changes things much. In fact, 0:03:34.760 --> 0:03:36.880 one of the points I've been making to clients is 0:03:37.320 --> 0:03:39.760 one month's CPI here there is not going to be 0:03:39.760 --> 0:03:43.200 respositive for the FED. What's gonna matter at least as 0:03:43.280 --> 0:03:46.000 much is how strong is the real economy. How much 0:03:46.000 --> 0:03:48.600 can they lean in to the strength of the economy 0:03:48.640 --> 0:03:51.200 to slow things down to get inflation under control. That 0:03:51.360 --> 0:03:52.920 I think is going to be the key well, and 0:03:53.040 --> 0:03:56.360 that comes down to the tolerance of consumers for higher prices, 0:03:56.400 --> 0:03:59.600 their propensity to continue spending even in the face of them. Seth, 0:03:59.680 --> 0:04:03.280 what is your expectation around the demand picture and whether 0:04:03.400 --> 0:04:05.440 or not destruction is going to start to take form 0:04:05.720 --> 0:04:09.040 in the face of the higher prices really across the board. Yeah, 0:04:09.080 --> 0:04:12.000 So Ellen set in our chief US economist and her 0:04:12.040 --> 0:04:17.080 team put out a bit of a forecast revision on Friday, 0:04:17.160 --> 0:04:20.479 and we took down the consumption path for the second quarter, 0:04:20.920 --> 0:04:24.320 largely because we did see this big spike in oil prices. 0:04:24.360 --> 0:04:26.520 Now a lot of those that rise in oil prices 0:04:26.520 --> 0:04:29.159 from the Russian invasion of Ukraine has has reversed, not 0:04:29.960 --> 0:04:32.400 but a lot of it has come out. Nevertheless, what 0:04:32.480 --> 0:04:34.919 we see in the data as a regular pattern is 0:04:34.920 --> 0:04:38.920 when energy prices spike for supply reasons, we do see 0:04:38.920 --> 0:04:41.679 a pullback overall and spending in the next couple of months, 0:04:41.680 --> 0:04:44.000 and so we are expecting to to be on the 0:04:44.040 --> 0:04:46.719 softer side for consumption Sethan. Wanting to talk about the 0:04:46.800 --> 0:04:51.840 social impact here. The integrand, Folks is the area above 0:04:51.920 --> 0:04:56.600 or below whatever the horizontal line is. It's one measurement 0:04:56.760 --> 0:05:01.039 of the tone of the x. X in the Great 0:05:01.160 --> 0:05:06.719 Financial Crisis has an integran of negative income Seth that 0:05:07.000 --> 0:05:11.080 is small now compared to what we're going through. The 0:05:11.240 --> 0:05:15.000 agony year for certain death stiles of America has to 0:05:15.080 --> 0:05:20.400 be tangible, uh, no question about it. The past couple 0:05:20.440 --> 0:05:23.520 of years has been extraordinarily difficult for folks, and it 0:05:23.560 --> 0:05:26.520 has been extraordinarily more difficult for folks at the lower 0:05:26.600 --> 0:05:30.719 entity income contribution um. The only silver lining there is 0:05:30.760 --> 0:05:33.760 that we do see a differential in wage growth across 0:05:33.760 --> 0:05:36.280 the income distribution, and it has been highest at the 0:05:36.320 --> 0:05:39.520 lowest quintile. So in that sense there's a bit of comfort. 0:05:39.560 --> 0:05:41.720 But I suspect for anyone who had lost their job 0:05:41.800 --> 0:05:43.840 during the pandemic, that's a bit of cold come but 0:05:43.960 --> 0:05:46.279 but Seth very quickly here, I'm so sorry, we don't 0:05:46.279 --> 0:05:49.320 have the time. I'm looking at a middle class flat 0:05:49.360 --> 0:05:55.359 on its back on an inflation basis, unquestionably, unquestionably, and 0:05:55.360 --> 0:05:58.640 in that regard, I think the retreat of oil prices, 0:05:58.960 --> 0:06:01.480 some of it on the news of the coordinated release 0:06:01.520 --> 0:06:04.240 from the Strategic Petroleum Reserve. That's got to help some, 0:06:04.600 --> 0:06:06.440 but it's not going to go anywhere near to the 0:06:06.480 --> 0:06:09.159 extent of making people feel good. The economy is growing 0:06:09.200 --> 0:06:13.600 extraordinarily rapidly, jobs are being created extraordinarily rapidly, and yet 0:06:13.640 --> 0:06:16.440 I think the sentiment, as measured through various surveys, is 0:06:16.480 --> 0:06:18.760 that people are still feeling fairly hard done by. And 0:06:18.800 --> 0:06:22.120 that's a very challenging thing when the macro feeling doesn't 0:06:22.160 --> 0:06:24.680 match the micro feeling. Dr Carpenters, thank you so much. 0:06:24.680 --> 0:06:33.880 With Morgan Stanley, Seth Carpenter. She is watching the French 0:06:33.920 --> 0:06:38.279 elections is one example of the new autocracy worldwide, the 0:06:38.360 --> 0:06:41.359 strident moment that we live in, and that is Joyce Shaying, 0:06:41.440 --> 0:06:45.040 Chair of Global Research at JP Morgan, hurting cats, dealing 0:06:45.080 --> 0:06:48.680 with Bruce Casman every day as best she can. Joyce, 0:06:48.839 --> 0:06:51.839 give me the new theme at JP Morrigan. You wrote 0:06:51.960 --> 0:06:55.719 most of Diamonds forty four page letter. What is the 0:06:55.880 --> 0:07:00.760 research theme of your shop into the rest of the year. Well, 0:07:00.800 --> 0:07:03.360 you know, we've taken half first half growth down quite 0:07:03.360 --> 0:07:06.560 a lot because of Russia, Ukraine in the higher energy crisis. 0:07:06.720 --> 0:07:09.320 I mean in Europe we're down three percentage points on 0:07:09.400 --> 0:07:12.240 first half growth. So right now what we're looking at 0:07:12.320 --> 0:07:15.720 is really the first energy crisis in the decarbonization era. 0:07:16.040 --> 0:07:18.120 And what jam has been writing about is the need 0:07:18.160 --> 0:07:21.520 for a martial plan, something where we actually look at 0:07:21.600 --> 0:07:25.960 how we can accelerate this transition, ensure our energy security 0:07:26.360 --> 0:07:29.000 and also just get used to the world where we're 0:07:29.040 --> 0:07:34.320 in place for more volatile cycles, higher inflation, higher treasury 0:07:34.360 --> 0:07:37.280 yields still to come. So there's a lot to watch 0:07:37.440 --> 0:07:40.920 right now in the commodities markets. Um, we're beginning to 0:07:40.960 --> 0:07:43.680 see just a lot of those pressures still with us. 0:07:44.160 --> 0:07:47.400 You know, I look here, Joyce, at the martial plan 0:07:47.520 --> 0:07:51.560 of JP Morgan, and I look at David Folk its 0:07:51.680 --> 0:07:54.920 land out the academic over Deutsche Bank saying the same thing. 0:07:54.960 --> 0:07:58.559 There will be a massive fiscal stimulus in Europe, whether 0:07:58.600 --> 0:08:01.480 they like it or not. And then I've got atmar 0:08:01.640 --> 0:08:04.800 Is seeing the giant of Germanic economics in the FT, 0:08:05.520 --> 0:08:09.720 screaming enough we need to tame inflation. Describe those two 0:08:09.760 --> 0:08:14.680 forces pushing against each other, government fiscal stimulus versus in 0:08:14.760 --> 0:08:19.120 a titanic fear of inflation. Well, I mean we're looking 0:08:19.120 --> 0:08:22.480 at very broad based inflation right now. It's not just 0:08:23.000 --> 0:08:25.600 energy prices. I mean, taking a look at what we 0:08:25.640 --> 0:08:28.120 see in Europe, the surge in the euro Area, we 0:08:28.200 --> 0:08:32.079 see that natural gas prices have actually pushed inflation about. 0:08:32.960 --> 0:08:36.360 And looking at the US, global inflation tracking close to 0:08:36.480 --> 0:08:39.760 nine in the first quarter of the year. So there's 0:08:39.760 --> 0:08:43.600 also rent inflation, there's wage inflation. So these inflationary pressures 0:08:43.640 --> 0:08:45.400 mean that the central banks newly are going to have 0:08:45.440 --> 0:08:48.199 to respond here, and we do see the moving fifty 0:08:48.240 --> 0:08:50.560 basis points in the next couple of moves. We do 0:08:50.640 --> 0:08:52.800 see that more stimulus is probably going to have to 0:08:52.800 --> 0:08:56.400 come online in China, particularly where growth is coming down there. 0:08:56.760 --> 0:08:59.280 But also in other places, we're seeing now the first 0:08:59.400 --> 0:09:03.000 discussions on whether they're going to need to be some subsidies, 0:09:03.000 --> 0:09:06.800 some automatic stabilizers that are put into places energy price 0:09:06.880 --> 0:09:09.240 to stay at these levels. And we do see UM 0:09:09.280 --> 0:09:11.760 Brent oil steing, you know, above a hundred dollar mark 0:09:11.800 --> 0:09:15.720 here Joyce, At what point do rates become restrictive? How 0:09:15.840 --> 0:09:19.600 high do benchmark overnight borrowing costs have to go before 0:09:19.600 --> 0:09:23.800 it actually has an impact on inflation. We really see 0:09:23.800 --> 0:09:26.600 the threads UM the thuds fund rates getting to two 0:09:26.679 --> 0:09:29.000 and seven eights next year and then you have more 0:09:29.000 --> 0:09:30.720 of a pause, but I think they're gonna move fifty 0:09:30.800 --> 0:09:33.400 at the next two meetings. Um you're reverted to twenty 0:09:33.480 --> 0:09:36.800 five basis coins in July and they're after But I 0:09:36.800 --> 0:09:39.560 think the issue is to get to neutral as quickly 0:09:39.600 --> 0:09:41.840 as possible and see where it settles, see if you 0:09:41.880 --> 0:09:45.880 can anchor inflationary expectations. But to your point about oil 0:09:45.920 --> 0:09:48.640 at a hundred and the fact that China is slowing down, 0:09:49.080 --> 0:09:51.720 at what point are we looking at these dueling shocks 0:09:51.720 --> 0:09:54.240 where basically these inflationary pressures are going to take some 0:09:54.280 --> 0:09:57.200 time to roll over, are exacerbated by the shocks and 0:09:57.200 --> 0:10:00.480 we'll all inevitably conspire to a slowdown that people are 0:10:00.520 --> 0:10:05.120 not accurately pricing. Yeah, well, everybody has first half growth down, 0:10:05.120 --> 0:10:06.920 but then they have this tilt up in the second 0:10:06.920 --> 0:10:09.640 half of the year, and that's really what remains to 0:10:09.720 --> 0:10:12.319 be seen. We're going to see a lot of um, 0:10:12.520 --> 0:10:14.560 you know, stress that comes in other parts of the 0:10:14.559 --> 0:10:17.120 world apart from the US in Europe. I mean, if 0:10:17.120 --> 0:10:19.439 you take a look at emerging markets, um you know, 0:10:19.480 --> 0:10:23.000 food inflation is as much as forty of the basket 0:10:23.200 --> 0:10:26.680 in certain countries like India, um in you know, the 0:10:26.679 --> 0:10:29.720 the Ascan countries. So these pressures are going to be 0:10:29.840 --> 0:10:31.400 with us. And I think that you know, we've made 0:10:31.480 --> 0:10:35.040 material downward revisions to growth. But the question is not 0:10:35.080 --> 0:10:37.240 going to continue in the second half of the year. 0:10:37.480 --> 0:10:40.280 And all eyes will be on China because we are 0:10:40.320 --> 0:10:42.800 seeing that the numbers that will come out for March 0:10:42.840 --> 0:10:45.480 and April are really gonna come down materially as they 0:10:45.720 --> 0:10:49.000 increased the lockdowns. The lockdowns in China they're affect being 0:10:49.280 --> 0:10:51.600 really the equivalent of more than a third of GDP 0:10:51.880 --> 0:10:54.160 right now. Well, of course it could have a direct 0:10:54.200 --> 0:10:56.600 impact on Chinese growth joys, but at the same time, 0:10:56.640 --> 0:10:58.520 a lot of production is housed in China. We've seen 0:10:58.559 --> 0:11:00.720 the impact has already had on company these that have 0:11:00.880 --> 0:11:05.920 production in Shanghai if supply stays constrained to a certain extent, 0:11:05.960 --> 0:11:09.640 potentially exacerbated by China's COVID zero policy. How much is 0:11:09.679 --> 0:11:12.600 the FED acting on demand actually able to make a difference. 0:11:12.640 --> 0:11:15.080 We talk a lot about the Fed's ability to engineer 0:11:15.120 --> 0:11:18.000 a soft landing. What about their ability to actually engineer 0:11:18.040 --> 0:11:21.600 a rolling over in inflation. Well, I mean, I think 0:11:21.640 --> 0:11:24.199 there's the FED hikes, but there's also the faster q 0:11:24.400 --> 0:11:26.959 T to come. You know, we really do see it's 0:11:27.000 --> 0:11:29.640 the combination of the two things. But it's also doing 0:11:29.679 --> 0:11:33.200 fifty basis point moves to try to anchor the inflationary 0:11:33.720 --> 0:11:35.960 you know, expectations. So I think, you know, the FED 0:11:36.040 --> 0:11:38.120 is in the front seat taking the lead on this, 0:11:38.480 --> 0:11:41.240 but we are seeing that across the developed markets and 0:11:41.360 --> 0:11:44.160 the emerging markets. I mean, there's more rate hikes to 0:11:44.200 --> 0:11:46.480 come here. But you know, I think that you know, 0:11:46.520 --> 0:11:50.240 on the oil side, releasing from the Strategic Controlling Reserve Fund, 0:11:50.480 --> 0:11:51.880 we don't think you're going to get to some of 0:11:51.880 --> 0:11:54.240 the worst case scenarios that we had thought about with 0:11:54.320 --> 0:11:56.880 higher oil prices. I mean, there are still ways in 0:11:56.880 --> 0:11:59.520 which in the oil market, that's a global market, you know, 0:11:59.600 --> 0:12:02.960 action are being taken right now well and obviously when 0:12:03.000 --> 0:12:04.880 faced with higher prices at the pump, when faced with 0:12:04.960 --> 0:12:07.160 higher prices at the grocery store. In theory, at some 0:12:07.240 --> 0:12:10.600 point higher prices are going to alter consumer behavior in 0:12:10.640 --> 0:12:13.600 a more material way. When do you anticipate that real 0:12:13.640 --> 0:12:17.400 demand destruction may kick in. I think that that's still 0:12:17.520 --> 0:12:21.040 a ways away. I mean the mobility, the summer driving season, 0:12:21.200 --> 0:12:23.520 and that's kicking in, you know. I think that that 0:12:23.640 --> 0:12:27.120 demand destruction will happen, you know, at some point um 0:12:27.160 --> 0:12:28.880 in time. But you know, we are not in the 0:12:28.920 --> 0:12:31.400 scenarios now where we see oil over a hundred and 0:12:31.400 --> 0:12:33.480 thirty dollars for beer. We're more in the range of 0:12:33.600 --> 0:12:37.560 looking at UH one dollars, you know, still seeing oil 0:12:37.600 --> 0:12:40.559 prices very luvated. But I think that you have a 0:12:40.600 --> 0:12:42.960 lot of pent up demand here still as the mobility 0:12:42.960 --> 0:12:45.880 comes back online. So that's gonna take some time, and 0:12:45.920 --> 0:12:47.320 I don't think it's going to be something that we 0:12:47.360 --> 0:12:50.200 see in the next quarter or something. Joyce, let me 0:12:50.240 --> 0:12:53.320 ask you a sell side question, that's what on everybody's 0:12:53.360 --> 0:12:57.480 mind right now, whether big tech. I mean, we saw 0:12:57.520 --> 0:13:00.400 the Amazon bond deal yesterday where they from this see 0:13:00.440 --> 0:13:02.360 go out. I don't know. Maybe you've got a phone 0:13:02.360 --> 0:13:05.560 call from Mr Jasse. I can see Jesse get Shane 0:13:05.640 --> 0:13:07.880 on the phone. We need to move five billion of this. 0:13:08.520 --> 0:13:11.280 What what do you think about the vibrancy of big 0:13:11.320 --> 0:13:15.360 tech in America? You know, look, I think that this 0:13:15.480 --> 0:13:18.560 is a pandemic that has really just changed the way 0:13:18.600 --> 0:13:21.760 that we live. That we were the dependentization, um, the 0:13:21.800 --> 0:13:24.640 dependency that we have on big tech. So yeah, we 0:13:24.920 --> 0:13:27.200 still see that there's pressures that are going to be 0:13:27.280 --> 0:13:29.440 in the equity market. A lot of that coming off 0:13:29.480 --> 0:13:32.920 of the growth numbers, the higher energy prices, UM, the 0:13:32.960 --> 0:13:34.960 fact that we had just such a massive rally. But 0:13:35.000 --> 0:13:38.640 I don't think that changes the overall story, um your 0:13:38.760 --> 0:13:42.199 vortex for what we actually need now as consumers, as 0:13:42.200 --> 0:13:45.360 we're coming back into the office and getting back to normal, 0:13:46.480 --> 0:13:48.200 I do want to just ask you, Joyce, as you 0:13:48.200 --> 0:13:49.920 talk about big tech, A lot of it has to 0:13:49.920 --> 0:13:52.679 be tied to the bond market, which has given a 0:13:52.679 --> 0:13:56.720 lot of the relative valuation trade too big tech. How 0:13:56.760 --> 0:13:59.720 concerned are you about the bond markets I don't want 0:13:59.720 --> 0:14:02.720 to say breaking, but breaking in terms of the lack 0:14:02.760 --> 0:14:05.320 of liquidity as the FED withdraws, how much is that 0:14:05.400 --> 0:14:07.560 going to caller the narrative in a way over the 0:14:07.600 --> 0:14:10.440 next six months that perhaps is different than even the 0:14:10.480 --> 0:14:13.800 rate hikes. Well, I think that you know, now ten 0:14:13.880 --> 0:14:16.200 year yields are in the three year high. They're finally 0:14:16.240 --> 0:14:18.720 looking like their fairly price. But I think that has 0:14:18.800 --> 0:14:21.280 further to go. Now this year, we're looking at about 0:14:21.320 --> 0:14:24.080 two hundred billions of treasuries that will run off this 0:14:24.160 --> 0:14:28.400 year compared to um UM relatives to our baseline forecast, 0:14:28.480 --> 0:14:32.560 due to a faster normalization that's occurring. I also think 0:14:32.600 --> 0:14:35.720 that the Fed is slowly onboard on selling um you know, 0:14:35.960 --> 0:14:38.880 MBS um to get to an all treasury balance sheet 0:14:39.040 --> 0:14:41.800 by the middle of next year. So I think, you know, 0:14:41.880 --> 0:14:45.680 MBS sales are a real possibility in three I think 0:14:45.720 --> 0:14:48.160 that the sales might actually take the form of setting 0:14:48.160 --> 0:14:51.080 a floor on the runoff rather than a cap on 0:14:51.120 --> 0:14:53.640 the runoff. But I think Treasury, you'll still have you 0:14:54.000 --> 0:14:57.440 hire to go here um and um you know we 0:14:57.560 --> 0:15:00.560 have the stage that for the balance sheet runoff nuns 0:15:00.600 --> 0:15:03.520 and may um you know, and right now some of 0:15:03.520 --> 0:15:07.200 those higher energy prices seem like they were in checks. Joyce, 0:15:07.440 --> 0:15:09.040 thank you. It's been way too long. We've got to 0:15:09.080 --> 0:15:11.200 do this more often. I'm thinking weekly, Joyce. Put it 0:15:11.200 --> 0:15:14.040 on acclendar, Joyce chain of JP Morgan ahead of all 0:15:14.080 --> 0:15:21.400 their research effort there as well. Right now to bring 0:15:21.440 --> 0:15:24.080 you up to date on the dynamics of this bond market, 0:15:24.080 --> 0:15:28.040 this original space. Robert Tip joins us chief investment strategist 0:15:28.040 --> 0:15:30.520 ahead of all of global bonds at PIGAM Fixed Income. 0:15:31.080 --> 0:15:33.320 How much bloods on the street, Robert, let me cut 0:15:33.320 --> 0:15:36.240 to the chase. Price down means money is being lost? 0:15:36.440 --> 0:15:42.040 How much tremendous amounting. This is a record move in 0:15:42.120 --> 0:15:44.760 bond yields we haven't seen for you know, thirty years 0:15:44.800 --> 0:15:48.520 plus and uh, even greater dropped in price because you're 0:15:48.560 --> 0:15:51.440 starting from low yields, which means prices are more sensitive 0:15:51.480 --> 0:15:54.560 to yield movements. So it's been a tough period and 0:15:54.600 --> 0:15:58.120 we've really jumped the rails in terms of growth and inflation, 0:15:58.720 --> 0:16:02.080 and investors had gone a long way towards handicapping that 0:16:02.360 --> 0:16:05.600 right here. Uh, and we're kind of at a waiting 0:16:05.720 --> 0:16:09.480 station in the market at this point. You can see 0:16:10.560 --> 0:16:13.600 today that I think in the price action where the 0:16:13.600 --> 0:16:16.160 market is rallying in the face of what we've been 0:16:16.160 --> 0:16:19.040 warned by the President's gonna be a high inflation number. 0:16:19.120 --> 0:16:21.720 So suggesting the market is pretty oversold here, at least 0:16:21.720 --> 0:16:27.800 short term. Okay, over sold? Does that mean that you're buying? Yeah, 0:16:27.840 --> 0:16:30.760 I mean, you know, we don't. We don't uh discuss 0:16:31.120 --> 0:16:34.360 client accounts and short term activity. I think though it's 0:16:34.400 --> 0:16:36.760 reasonable to expect. This is what you typically get in 0:16:36.800 --> 0:16:39.720 these cycles is that after the market has gotten say 0:16:40.080 --> 0:16:44.160 two d basis points ahead of the FAT, the market 0:16:44.240 --> 0:16:47.240 is that far ahead in terms of pricing in rate hikes, 0:16:48.040 --> 0:16:52.400 it's typical to get a drop in volatility, consolidation and rates, 0:16:52.720 --> 0:16:55.960 and even a consolidation and risk markets. In other words, 0:16:55.960 --> 0:16:59.600 some retracement tighters, some improven in performance. Well, the market 0:16:59.600 --> 0:17:02.080 waits for the FED to catch up h and then 0:17:02.120 --> 0:17:04.600 re evaluate what's going to be the next step in 0:17:04.640 --> 0:17:07.679 this process. So you're not exactly a screaming pool here. Basically, 0:17:07.760 --> 0:17:09.280 what I'm hearing from you, and this is something that 0:17:09.280 --> 0:17:11.000 I'm actually I've been giving a lot of thought to, 0:17:11.680 --> 0:17:14.720 is that if suddenly we had been talking about how 0:17:14.880 --> 0:17:17.560 yields of two on the tenure would break the market, 0:17:17.600 --> 0:17:20.159 would break the economy. They are not, and that is 0:17:20.160 --> 0:17:22.640 because growth is as fast as it is. What kind 0:17:22.680 --> 0:17:25.000 of messages that send you over the longer term about 0:17:25.040 --> 0:17:28.520 how much higher yields can go than people previously we're expecting. 0:17:28.520 --> 0:17:32.399 Basically the threshold has gone up dramatically because of the 0:17:32.440 --> 0:17:36.240 growth picture, right, So I think there are number of 0:17:36.240 --> 0:17:39.600 steps here. First one on your comment that you can't 0:17:39.600 --> 0:17:42.320 get a big rally here, you can't be very optimistic here. 0:17:43.480 --> 0:17:46.479 Remind you last year that in the midst of what 0:17:46.560 --> 0:17:49.080 was the strong economy in high inflation, then tenue rallied 0:17:49.160 --> 0:17:53.200 from down to one fifteen only two then turn around 0:17:53.280 --> 0:17:56.119 and have to reprice for what we have now. So 0:17:56.840 --> 0:17:59.480 I think it's um you want to jump to the 0:17:59.560 --> 0:18:01.199 conclusion and that this is going to be a one 0:18:01.280 --> 0:18:05.159 way much higher and yields from here. In terms of 0:18:05.440 --> 0:18:09.359 breaking the economy, though, uh, you know, you're looking at 0:18:09.400 --> 0:18:12.480 a housing market that is incredibly strong, with very strong 0:18:12.800 --> 0:18:19.159 price appreciation and some underlying micro demographics that are boosting activity. 0:18:19.680 --> 0:18:23.080 And so as a result, uh, you know, having your 0:18:23.119 --> 0:18:25.640 mortgage rate go up to five percent, it's not clear 0:18:25.720 --> 0:18:29.280 that's going to break it. Corporate performance has been very strong, 0:18:29.520 --> 0:18:32.320 and it's very common that arise in rates does not 0:18:33.240 --> 0:18:36.639 you know, necessarily kill the earnings per share outlook for equities, 0:18:36.680 --> 0:18:39.080 and so I think you're looking at a very strong 0:18:39.160 --> 0:18:43.560 economy with very hyphenomenal growth and that's why it's able 0:18:43.600 --> 0:18:46.840 to tolerate the interest rates increases that we've seen so 0:18:46.920 --> 0:18:49.440 far and may be able to tolerate more. Is that 0:18:49.520 --> 0:18:51.320 the signal you're taking from a yield curve that is 0:18:51.359 --> 0:18:56.240 steeping back out to north of basis points. I think 0:18:56.280 --> 0:18:57.800 the part of the yield curve to look at, and 0:18:58.080 --> 0:19:00.119 Grum and Pal I think tried to direct us to this. 0:19:00.240 --> 0:19:03.119 Another FED research has as well is the first two 0:19:03.200 --> 0:19:05.440 years of the curve. The first two years of the 0:19:05.480 --> 0:19:08.520 curve was incredibly steep. And when that's the case, in 0:19:08.600 --> 0:19:11.520 other words, the three basis points, you know, great hikes 0:19:11.560 --> 0:19:14.200 from the start of the cycle. That is a sign 0:19:14.240 --> 0:19:16.840 of Feds be raising rates because the economy looks good 0:19:17.400 --> 0:19:19.960 and they have runway to do. So that's the part 0:19:20.000 --> 0:19:22.840 that's typically a good indicator on the economy. The two 0:19:23.000 --> 0:19:25.920 tents curve is signaling that after they get there, and 0:19:25.960 --> 0:19:29.440 the market is banking on a soft landing. That is 0:19:29.520 --> 0:19:31.880 not going to be the important call. I don't think 0:19:32.520 --> 0:19:35.479 until at least six, if not twelve to twenty four 0:19:35.520 --> 0:19:38.240 months down the road, once they've taken up some of 0:19:38.320 --> 0:19:40.639 the slack on the front end of the curve, then 0:19:40.720 --> 0:19:42.400 the markets I think will be in the right place 0:19:42.480 --> 0:19:44.960 to reevaluate whether this recession or not coming. But I 0:19:45.000 --> 0:19:48.000 think it's way too early. Uh. And that's the part 0:19:48.040 --> 0:19:49.640 of the current to look at is the first couple 0:19:49.680 --> 0:19:52.240 of years, not the two tents, all right, So you're 0:19:52.280 --> 0:19:54.520 looking more where the feed is looking. How do you 0:19:54.600 --> 0:19:57.680 think the fete is viewing really ills that are still negative? 0:19:57.760 --> 0:20:02.360 And how credible the market seems to believe that it is. Yeah, 0:20:02.400 --> 0:20:05.840 I think there's so many moving parts here that investors 0:20:06.080 --> 0:20:11.000 are you know, much better off looking at nominal yields, 0:20:11.840 --> 0:20:16.919 looking at overall conditions and whether they're tight or loose, uh, 0:20:17.000 --> 0:20:20.920 and then letting the break evens the expected inflation rates, 0:20:20.960 --> 0:20:24.240 and letting the real yields drop out, because right now, 0:20:24.680 --> 0:20:27.000 you know, with inflation and let's say it's eight percent 0:20:27.240 --> 0:20:29.920 in a thirty eight basis point that funds rate, you're 0:20:29.920 --> 0:20:32.959 looking at almost a negative seven percent meal yield at 0:20:32.960 --> 0:20:35.119 the front end of the curve that's going to destroy 0:20:35.200 --> 0:20:37.680 the entire curve. The liquidity of the tips market will 0:20:37.720 --> 0:20:41.560 compound that and some of the dedicated investor based market 0:20:41.640 --> 0:20:44.080 segmentation and distort that as well. So I think going 0:20:44.200 --> 0:20:46.280 right to the real yields is the most confusing way 0:20:46.320 --> 0:20:49.560 to try to unravel it. Raber Tip, thank you for that. 0:20:49.720 --> 0:20:52.280 Totally agree there on the residual focus is a little 0:20:52.320 --> 0:20:54.359 bit out of let lack, and you gotta look in 0:20:54.440 --> 0:20:58.800 a more complex analysis of inflation adjusted yields. Mr. Tip. 0:20:58.840 --> 0:21:08.800 Of course, with Pigam, we moved to Ukraine now and 0:21:08.880 --> 0:21:11.960 we do this with truly an expert on human rights. 0:21:12.480 --> 0:21:16.439 Julie Norman is co director of UCL Center on US Politics, 0:21:16.840 --> 0:21:20.240 but her work at American University is on the heartbreak 0:21:20.720 --> 0:21:24.639