Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz.
Speaker 2: Join us each day for insight from the best and economics, geopolitics,
Speaker 2: finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple,
Speaker 2: Spotify and anywhere you get your podcasts, and always on
Speaker 2: Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App.
Speaker 3: Randy Kreisner, former FED comfnor, now professor of economics at
Speaker 3: the University of Chicago, let's talk about it. Randy, your
Speaker 3: first reaction to this one.
Speaker 4: So, as we were saying before, I think the FED
Speaker 4: focuses a lot on wage growth, and we've seen wage
Speaker 4: growth above expectations. I think it's really clear that the
Speaker 4: Fed is going to be waiting a while before it
Speaker 4: starts cutting rates because the labor market is still quite strong,
Speaker 4: the wage growth is still quite strong, and we just
Speaker 4: the key thing that then feed into services as well
Speaker 4: as manufacturing inflation, not.
Speaker 2: The simple arithmetic of a real way, but almost as
Speaker 2: a cultural and societal note.
Speaker 1: Do you see here wage.
Speaker 2: Growth being beneficial across America and that people will have
Speaker 2: more inflation adjusted cash in their pockets.
Speaker 4: Oh, it's super great to have real wage growth. Finally,
Speaker 4: I mean we had even though nominal wages were growing
Speaker 4: very rapidly, they weren't growing as fast as inflation, and
Speaker 4: so people were feeling left behind. And they were left
Speaker 4: behind because they wanted to put food on the table
Speaker 4: for their families, and the food was a heck of
Speaker 4: a lot more expensive than it was before. Now they
Speaker 4: started to earn a bit more than inflation, which is
Speaker 4: great for them.
Speaker 5: But I think what that's going to mean over.
Speaker 4: Time is that, well, when it was great to be
Speaker 4: hiring people, when labor was relatively cheap in real terms,
Speaker 4: Now I think you're going to start to see a
Speaker 4: little bit of softening the labor market because it's just
Speaker 4: not going.
Speaker 5: To be as.
Speaker 4: Worthwhile for firms to be hiring when workers are more
Speaker 4: we're relatively more expensive.
Speaker 6: Randy, Why is it that we've seen so many downward
Speaker 6: revisions of the prior months. Does that mean that we
Speaker 6: can expect a significant downward revision of this upside surprise
Speaker 6: come the data that we get in February.
Speaker 4: Well, this gets back to what Tom was talking about before.
Speaker 4: The Saner deviation has gotten wider, so there's a lot
Speaker 4: more noise that's in there. I don't think you can
Speaker 4: take something specific out that it's always going to be
Speaker 4: downwardly revised. I think we just know that they're going
Speaker 4: to be some substantial revisions.
Speaker 3: Hey, Randy, appreciate the update. Some revisions some forecast as
Speaker 3: well for rake cuts maybe after this one, for anyone
Speaker 3: penciling in March. I think there's a rethink following that,
Speaker 3: especially if we get another one of these for this
Speaker 3: month next month. Really place to say that joining us
Speaker 3: now is built down to late Bloomberg opinion columnist and
Speaker 3: former New York FED president. But you've had the benefit
Speaker 3: of about set seventeen minutes to go over some of this.
Speaker 3: What's your reaction to it?
Speaker 7: I think it just reinforces the notion that the FED
Speaker 7: is not going to be in a rush to cut rates.
Speaker 7: So the last couple of weeks there's been a sort
Speaker 7: of change of view that the FED great cuts might
Speaker 7: materialize a little bit more slowly with less force.
Speaker 5: And I think that this just reinforces that Kami's still
Speaker 5: doing pretty well.
Speaker 7: It looks like we're going to have growth in the
Speaker 7: fourth quarter of two percent plus financial conditions have eased
Speaker 7: a lot over the last couple of months, So I
Speaker 7: think that risks are that the Fed's going to keep
Speaker 7: rates higher for longer.
Speaker 2: Bill an unfair question. Why is the economy doing well?
Speaker 2: Is productivity? Is it a follow on a pandemic stimulus?
Speaker 2: What's the why of what we saw in Q three?
Speaker 1: What Atlanta GDP says about.
Speaker 2: Q four, and maybe a few people optimistic about the
Speaker 2: first half of two thousand and four twenty twenty four.
Speaker 7: Well, I think the biggest thing is that there were
Speaker 7: such large fiscal transfers that occurred during the pandemic that
Speaker 7: households and businesses are actually in pretty good financial shape
Speaker 7: for this late and economic cycle, and so people have
Speaker 7: the ability to continue to spend.
Speaker 5: This is unusual. I Typically what happens is people get.
Speaker 7: Over their skis, they're overextended, FED tightens and that actually
Speaker 7: bites quite a bit on economic activity. This time, I
Speaker 7: don't think people are as overextended, and so the FED
Speaker 7: rate hikes have it had less restraint on the economy.
Speaker 6: Given that Bill, and especially since you said the Fed's
Speaker 6: not going to be in a rush to cut rates,
Speaker 6: do you think that the market is still pricing in
Speaker 6: too great of a chance of March rate cuts. If
Speaker 6: they're talking about a fifty percent chance right now, Yeah.
Speaker 5: I do, I do. I think, I mean, I think
Speaker 5: May is more likely.
Speaker 7: I mean, if the Fed wants to cut rates, I mean,
Speaker 7: they've made it pretty clear that they knew that as
Speaker 7: inflation falls Maitrey, policy is being tightened, and so that
Speaker 7: they need to follow inflation down. But to do that,
Speaker 7: they also have to get some signs that the economy
Speaker 7: is slowing sufficiently so that there's enough slack in the
Speaker 7: economy to bring inflation all the way down to two
Speaker 7: percent and keep it there. You know, the wage trend,
Speaker 7: obviously is something that's going to concern them. If wages
Speaker 7: are rising faster than four percent a year, that's probably
Speaker 7: not considering percent inflation in the medium term.
Speaker 6: Given that, and given the fact that we are seeing
Speaker 6: the rate cuts being priced into the market more than
Speaker 6: you think is warranted by the Federal Reserve, how.
Speaker 1: Much do you think it set them back?
Speaker 6: The Fed officials that the markets did rally as much
Speaker 6: as they did into year end, how much do you
Speaker 6: think that I'm going to ask you the same question
Speaker 6: I asked Alan Ruskin, how many. How much do you
Speaker 6: think that turbo charged the US economy.
Speaker 5: I don't think it turbo charged US economy that much.
Speaker 7: I mean, the easier financial conditions just haven't been in
Speaker 7: place for that long.
Speaker 5: It's really only been a couple of months.
Speaker 7: But I do think the FED is a little frustrated
Speaker 7: by the fact that the market always must be more
Speaker 7: dubbish than the FED wants, because that makes the Fed's
Speaker 7: job more or more difficult. Because as the market rallies,
Speaker 7: that eases financial conditions, that adds impetus to the economy,
Speaker 7: which means that then that there's more for the FED to.
Speaker 5: Do rather than less. So I think they're a little
Speaker 5: bit frustrated.
Speaker 7: Powell was asked about this in his press last Breast conference,
Speaker 7: and he basically said yes, at the end of the day,
Speaker 7: though that you know, these things have to come to.
Speaker 5: What the FED does ultimately determines where the FED markets
Speaker 5: are going to end up. And so the FED does
Speaker 5: hold the whipping and they'll get their way.
Speaker 7: And I think the way they get their way is
Speaker 7: they'll just be slower than what the market expects.
Speaker 2: Bill Dudley, I've got to do an acclaimed surveillance audible,
Speaker 2: and look at the celebration by you and the New
Speaker 2: York Fed over doctor Masellam joining the Saint Louis FED.
Speaker 1: Bullard was always with great respect.
Speaker 2: To the gentleman from Indiana University, an outlier. His doc
Speaker 2: plot was always unique. What kind of dot plot are
Speaker 2: we going to generate with Alberto Mussolam taking over at
Speaker 2: the venerable Saint Louis FED.
Speaker 5: I don't have a really strong view that Alberto it's
Speaker 5: going to, you know, be dubbish or hawkish.
Speaker 7: I think he's going to take the information as he
Speaker 7: sees it and respond accordingly. I think what he brings
Speaker 7: to the Federal Reserve though, is the fact that he
Speaker 7: not only is he a really good economist, but he
Speaker 7: also understands markets really deeply. Uh So, that combination of
Speaker 7: macroeconomic knowledge and also market experience. I think it's you know,
Speaker 7: pretty rare in the Federal Reserve system. So he brings
Speaker 7: really a good, great tool set to the FED.
Speaker 2: I look Bill Dudley also, just within the crush of
Speaker 2: the jobs report, we have to look at your really
Speaker 2: spirited essay, not the fragility of our banking system, but
Speaker 2: just the idea of where we're going in twenty twenty
Speaker 2: four and shoring up the supervision of our banks. Are
Speaker 2: you optimistic we could get that important job done.
Speaker 5: Well.
Speaker 7: I think that is pretty clear based on events that
Speaker 7: happened last last March, that their supervision needs to do better.
Speaker 7: They need to be more forceful in forcing banks to
Speaker 7: remedy problems more quickly. But one way I think that
Speaker 7: to do that, though, is to actually release some of
Speaker 7: these supervisory findings.
Speaker 5: That currently are secret.
Speaker 7: If you knew that the supervirus advisory finers were going
Speaker 7: to come out with a lag of say sponsors, so
Speaker 7: that creates huge incentives on bank managements and banks boards
Speaker 7: to get going to remedy the problems. Right now, a
Speaker 7: lot of these problems are not known people in the marketplace,
Speaker 7: and I think that makes it easier for the banks
Speaker 7: to sort of delay and not proceed as quickly as
Speaker 7: they need to do to remedy their problems.
Speaker 3: Bill, fantastic column they came out from you earlier this week.
Speaker 3: Appreciate it.
Speaker 7: Bill.
Speaker 3: I just wanted to squeeze one further question in if
Speaker 3: I can, But we've been ahead of the curve big
Speaker 3: time on how far this FED would have to go.
Speaker 3: Do you think there is still a risk that they
Speaker 3: have to move again, that another height could be in
Speaker 3: our future.
Speaker 5: I think it's pretty unlikely.
Speaker 7: I think that the bard to raising rates again would be,
Speaker 7: you know, they have to totally reevaluate.
Speaker 5: Their whole framework.
Speaker 7: I think more likely the story is that if things
Speaker 7: turn out to be stronger, they'll just keep rates higher.
Speaker 5: For longer before they actually start to reduce stream. So
Speaker 5: I think the barer raising rates again is pretty high
Speaker 5: at this point.
Speaker 3: Bill Dudley, thank you, sir, appreciate it, and Happy New Year.
Speaker 3: The brilliant built out Lee former New York Fed President
Speaker 3: Annam Ruskin's world. The dollar is stronger, the euro is weaker.
Speaker 3: We've broken one O nine. Want to wait ninety six?
Speaker 3: Anam Ruskin at Deutsche Bank joined us. Now, Ana, good morning,
Speaker 3: Happy New Year morning, let's get straight into it. What
Speaker 3: do you think of that one?
Speaker 8: Yeah, well, certainly good news as far as growth is concerned.
Speaker 8: A little bit more worrying as far as the underlying
Speaker 8: inflation picture, with wage inflation in particular. I think one
Speaker 8: thing the market should take into consideration is that the
Speaker 8: state of the economy in December was reflecting tightening financial
Speaker 8: conditions from months earlier, probably more reflective of a bond
Speaker 8: market at said tenure to five percent healed than a
Speaker 8: four percent held. So there's a lot of stimulation that's
Speaker 8: still going to come through that's going to be supportive
Speaker 8: for the employment reports coming forward. In Q one and
Speaker 8: Q two.
Speaker 2: We're misguessing GDP third quarter was a shock five maybe
Speaker 2: now revised under four point x percent. We're hearing that
Speaker 2: for quarter maybe the same, We're diminished, but still the same.
Speaker 2: Are we just miss guessing the strength of the American
Speaker 2: economy office jobs report? Is it just simply better than
Speaker 2: we expect?
Speaker 8: I think it's been simply better than we've expected for
Speaker 8: more than a year. I mean, you just look at
Speaker 8: the employment report misses. There are very very few downside
Speaker 8: misses in terms of the forecasting. So there's a pattern
Speaker 8: here of underestimating the strength of the US economy. I
Speaker 8: don't think that this is that different. Really, the now
Speaker 8: cast Q four GDP numbers are close to two and
Speaker 8: a half percent. Certainly, when we're looking at the data,
Speaker 8: we're anticipating that if there's going to be genuine weakness,
Speaker 8: it's got to start showing up in the first half
Speaker 8: of this year, and that's the highest probability in terms
Speaker 8: of negative growth.
Speaker 2: Are we misjudging two week a dollar that seems to
Speaker 2: be the zeitgeist. Now, I know you're pushing.
Speaker 8: Against that, but yeah, yeah, no, I think that's certainly
Speaker 8: true in terms of the short term. Think what we're
Speaker 8: seeing for twenty twenty four so far is this pushback
Speaker 8: in terms of rate cuts for the first half of
Speaker 8: these year, second half of the year as well, and
Speaker 8: the dollar is just a reflection of that, and we're
Speaker 8: seeing some pretty big moves.
Speaker 2: Now.
Speaker 8: I think the biggest question mark is really over dollar yen.
Speaker 8: A lot of people have anticipated in that this is
Speaker 8: the year of the yen. I don't think going to
Speaker 8: be the year of the yen, at least in the
Speaker 8: first half of the year.
Speaker 6: Well, we can talk more about beg of Japan policy
Speaker 6: another time. I am curious though, with respect to rate cuts,
Speaker 6: you were forecasting quite a few in the back half
Speaker 6: of the year, not necessarily starting in March. If this
Speaker 6: continues you said, we have to see weakness in the
Speaker 6: first half of the year, when do you revise your
Speaker 6: call and maybe don't call for as many rate cuts
Speaker 6: and actually get incredibly bullish on the dollar versus the
Speaker 6: euro and a whole host of other currencies.
Speaker 8: Yeah, so, I mean there'd be something that in my colleagues,
Speaker 8: Matt Lazette in particular, would revise in terms of any
Speaker 8: sort of reconsideration. I think if you had the first
Speaker 8: quarter generally put up some solid numbers, these kinds of numbers,
Speaker 8: you'd really have to question whether the economy is slowing
Speaker 8: down materially at all. And I think the Fed's bias
Speaker 8: has still been in the very short term. They could
Speaker 8: store high grates that could still come back on the table.
Speaker 8: I think, you know, that's leaping ahead a long way,
Speaker 8: but certainly taking back rate cuts is a relatively easy core.
Speaker 8: As for what John said in terms of March, I
Speaker 8: think looks you know, that two thirds probability of a
Speaker 8: rate cut that we had effectively before this data looks exaggerated.
Speaker 3: To see you mentioned some of the big moves were saying,
Speaker 3: I just wonder whether we're learning more about market positioning
Speaker 3: than we are the US economy. Which one is it.
Speaker 8: I think a lot of what we saw in November
Speaker 8: and December looked like a real squeeze of positioning in
Speaker 8: an exaggerated move in relatively thin mind. People obviously wanted
Speaker 8: to judge and jump on a what is seen as
Speaker 8: a sea change, you know, move from rates no longer
Speaker 8: going up, and I think that made sense. But then
Speaker 8: the market just got ahead of itself and now we're
Speaker 8: in retreat.
Speaker 3: It can I ask you, and particularly off the back
Speaker 3: of data like this, I think it's worth asking. I
Speaker 3: have no idea where we're going, get absolutely no idea,
Speaker 3: But I think the overwhelming consensus is not just cuts.
Speaker 3: Even the people who don't think you get cuts anytime soon,
Speaker 3: they think this FED is absolutely done. Is there a
Speaker 3: chance they need to hike interest rates again? Based on
Speaker 3: information like this?
Speaker 8: I would say that if you were flatlining consistently and
Speaker 8: you still had wage inflation running at these kinds of levels,
Speaker 8: then the FED would have to think in terms of
Speaker 8: whether they could get inflation all the way down to
Speaker 8: two percent in a reasonable timeframe. But I think we're
Speaker 8: quite a long way away from that sort of reconsideration
Speaker 8: of rate hikes. But it's not totally without you know,
Speaker 8: out of the realms of possibility.
Speaker 6: Well, what John said that I want to pick up
Speaker 6: on this idea that are we learning more about market
Speaker 6: positioning than the economy, especially at a time where every
Speaker 6: month the previous month's data gets revised so significantly, and
Speaker 6: you have seen that sort of gap increase over time.
Speaker 6: Does that make you less confident in these numbers? Do
Speaker 6: you sort of not look at these numbers as much
Speaker 6: as you do the three month rolling average that looks
Speaker 6: perhaps less rosy than this one.
Speaker 8: Yeah, I think you've got to take a very holistic
Speaker 8: view of all the data as such. So it's not
Speaker 8: obviously not just the employment reporter that I would still
Speaker 8: say it's the number one release. Absolutely, look at the
Speaker 8: two month, three month, four month moving averages, Look at
Speaker 8: things like the diffusion index, which has shown that the
Speaker 8: breadth of employment growth is narrowed over time. I would
Speaker 8: still say the labor market is slowing. That all the
Speaker 8: underlying dynamics that we've seen in things like the quick
Speaker 8: rate for example, the opening's data to some degree as well,
Speaker 8: does suggest that the breadth of employment is weakening.
Speaker 6: Just real quick here. Do you think that the accommodation
Speaker 6: that we saw in the market that actually effectively gave
Speaker 6: a rate cut to the market over the past couple
Speaker 6: of months, Do you think that that turbo charged the economy.
Speaker 6: On the margins, I think.
Speaker 8: It's gained to turbo charge the economy, and I would
Speaker 8: say it's much more than one rate cut. You know,
Speaker 8: if you have one hundred basis point reduction in the
Speaker 8: ten uere heel, that's going to equate to one hundred
Speaker 8: and fifty basis points at the outside two hundred basis
Speaker 8: points of Fed funds rate cuts. So there's a lot
Speaker 8: of potential stimulus that's going to kick in and obviously
Speaker 8: spilt over to other financial conditions as well. So the
Speaker 8: equity market is going to keep that wealth effect on
Speaker 8: the consumer side buzzing as well. So there's a lot
Speaker 8: of stimulus there.
Speaker 3: What a start to twenty twenty four. And thank you, thanks,
Speaker 3: pretty good to see you. Anam Roskin of Deutsche Bank.
Speaker 2: Tifferiting wild In to give common sense to a job
Speaker 2: report today. This was green on the screen right now,
Speaker 2: markets of reverse nicely to a more constructed tone off
Speaker 2: of five days of challenges here, three days whatever it
Speaker 2: is of twenty twenty four. Tiffany Allen Ruskin was on
Speaker 2: from Deutsche Bank and he said, you know what, job
Speaker 2: formation is a good thing. Why are we upset if
Speaker 2: we're creating two hundred x x thousand jobs, it just
Speaker 2: doesn't make sense to me.
Speaker 9: No, I agree with you, and thanks for having me on.
Speaker 9: I mean, today's report was a pretty solid report, you know,
Speaker 9: two hundred and sixteen thousand perils per month, and I
Speaker 9: think we're kind of close to that in terms of
Speaker 9: the average for this year. I mean, that's that's a
Speaker 9: very good outcome for the US economy, you know. I
Speaker 9: think what is a little bit more concerning for the
Speaker 9: FED and for monetary policy, though, is that if you
Speaker 9: look at average hourly earnings or wage inflation, you know,
Speaker 9: that does appear, you know, at higher levels, higher than
Speaker 9: levels that would be consistent with their two percent inflation target.
Speaker 9: It doesn't really appear to be moderating.
Speaker 2: So I've been pauling your travels. I mean, the bottom
Speaker 2: line is we're seeing a buoyant America.
Speaker 1: I get it.
Speaker 2: Bankruptcies are terrible, and there's a lot of worry out
Speaker 2: there and restriction and the real rate in that.
Speaker 1: But the answer is it's pretty good GDP. It's pretty full.
Speaker 1: This report.
Speaker 10: It seems like pretty good GDP. I mean, it's so,
Speaker 10: I guess, Tiffany, the issue is when you look out
Speaker 10: at twenty twenty four, how do you think this economy
Speaker 10: is going to unfold?
Speaker 2: Here?
Speaker 10: I mean, I think the consensus building in that, you know,
Speaker 10: the last ten weeks of last year was what soft
Speaker 10: landing looks like? The smart bet here?
Speaker 1: Does that ring true to you?
Speaker 9: Yeah, I mean, I definitely think the odds of a
Speaker 9: soft landing have increased more recently, you know, just because
Speaker 9: you've seen the subtle reserve that is, I guess now
Speaker 9: more clearly communicating you know that that cuts could come
Speaker 9: because inflation has moderated so much, you know, and one
Speaker 9: of the I think the main reasons why the markets
Speaker 9: were so you know, we're more worried about a hard
Speaker 9: landing risk was because you had a central bank that
Speaker 9: was very focused on inflation, you know, and there was
Speaker 9: potentially maybe willing to, you know, to sacrifice the economy
Speaker 9: in order to get inflation down. So now that that
Speaker 9: rhetoric has changed, I definitely think the soft landing odds
Speaker 9: have gone up, you know. But nevertheless, we're not out
Speaker 9: of the woods yet. You know, the Fed still has
Speaker 9: to balance the fact that the economy is strong. You
Speaker 9: could get inflation that reaccelerates you know, obviously again some
Speaker 9: of the downside risks that monetary policy lags, you know,
Speaker 9: start to kick in more meaningfully next year.
Speaker 10: I mean, it feels like for a lot of folks
Speaker 10: the inflation rate is coming down, but the reality is,
Speaker 10: for I guess, if we talked to the folks out there,
Speaker 10: I'm paying a lot more for a lot of things
Speaker 10: than I did two or three years ago, and that
Speaker 10: still hurts. But I mean, I guess the issue is
Speaker 10: the inflation rate is in fact coming down, so that's
Speaker 10: all the FED can really work towards.
Speaker 9: I guess, yeah, And I mean I think I think
Speaker 9: that's the issue. You know, that's kind of the issue
Speaker 9: with why wage inflation is still so appears to be
Speaker 9: so sticky here, although price inflation is coming down, and
Speaker 9: the reason is because you know, wages haven't fully caught
Speaker 9: up the wage level, you know, with the price level
Speaker 9: adjustment that we've see. So although prices are high, you know,
Speaker 9: inflation is coming down, but prices are still higher than
Speaker 9: the one where they were a couple of years ago.
Speaker 9: You know, in wages, the wage level adjustment that we've
Speaker 9: seen hasn't really caught up with that, you know, So
Speaker 9: you know, Our view has been that wage inflation is
Speaker 9: probably going to continue to be sticky because people can
Speaker 9: catch up, labor markets are tight.
Speaker 1: Is the fed restrictive?
Speaker 11: Now?
Speaker 2: I have had a number of indews matsu Cline with
Speaker 2: a real sharp tweet out really wonderful economists, matsu Cline saying, look,
Speaker 2: at the end of the day, we're restrictive now off
Speaker 2: the two year real rate, are we?
Speaker 8: You know?
Speaker 9: So I think it's obviously this is something that the
Speaker 9: federerserve has to probe for. It gets to this idea
Speaker 9: of there being some neutral rate in the economy, a
Speaker 9: level of interest rates that the economy can kind of
Speaker 9: handle and is neither accelerating or decelerating, and where that is,
Speaker 9: and obviously that's very uncertain.
Speaker 4: You know.
Speaker 9: We think the economy is or the monetary policy is restrictive.
Speaker 9: And one of the reasons why you haven't seen that
Speaker 9: so clearly is just because of the amazing amount of
Speaker 9: fiscal policy stimulus that we got after the pandemic, and
Speaker 9: you had that fiscal policy that was still sloshing around
Speaker 9: in the economy. You know, consumers still have elevated savings,
Speaker 9: you know, but eventually all of that will normalize, and
Speaker 9: once it does, once people spin down that savings, what
Speaker 9: you're going to be left with is tight monetary policy,
Speaker 9: you know, and we think that that becomes more obvious
Speaker 9: in twenty twenty four in terms of the growth drags,
Speaker 9: you know, assuming you know, the Futteral Reserve doesn't aggressively
Speaker 9: cut rates, which which we don't think that they necessarily will.
Speaker 1: What's the number one question the bond managers of Pimpco.
Speaker 9: Ask you, Well, you know, I mean, I think understanding
Speaker 9: how fast essentral banks have cut rates historically, even in
Speaker 9: non recessionary cutting cycles, you know, has been an important
Speaker 9: you know, sort of historical benchmark to think about market pricing.
Speaker 9: And when we do that analysis, we look across fourteen
Speaker 9: developed markets. You know, it's about two hundred basis points
Speaker 9: on average in the first year after cuts that central
Speaker 9: banks tend to cut. Now that's a pretty fast pace.
Speaker 9: That's twice that that's baked into the Federal Reserve forecat.
Speaker 9: But nevertheless, the markets are kind of there, you know,
Speaker 9: the front end is actually getting kind of close to that,
Speaker 9: you know, so when we look at you know, value,
Speaker 9: at least in the front end of the you know,
Speaker 9: the bond market, the short short interest rates. You know,
Speaker 9: we don't see as much value there now, you know,
Speaker 9: just because the market's already pricing in a pretty decent
Speaker 9: cutting cycle. That would be more consistent with what we've
Speaker 9: seen in the past.
Speaker 10: So, Tiffany, I'm looking at the w I RP function,
Speaker 10: the interest rate forecast function on the Bloomberg terminal BLOY,
Speaker 10: the bond market, the Fed's fund the FED funds market
Speaker 10: really aggressive talking about it. I don't know, five maybe
Speaker 10: six rate cuts this year? Is that even? Is that
Speaker 10: something that Fed has ever done before?
Speaker 9: Yeah, I mean so so certainly in there. You know,
Speaker 9: usually central banks they usually cut when they are pretty
Speaker 9: certain that we're in recession. In other words, usually they
Speaker 9: don't have the foresight monetary policy work through lags, right,
Speaker 9: They usually don't have the foresight to see the weakness
Speaker 9: ahead of time, So they're usually late in cutting, and
Speaker 9: they're cutting when they're pretty sure that we're in recession. Nevertheless,
Speaker 9: there's a handful of cycles historically where they've cut and
Speaker 9: we haven't had a recession, you know, And I think
Speaker 9: if you if you think recession risks have receded more recently,
Speaker 9: you know, I think those are the cutting cycles that
Speaker 9: are more interesting here. And even in those cycles, the
Speaker 9: Central Bank has cut about two hundred basis points in
Speaker 9: the first year that they started cutting. But again that's
Speaker 9: kind of close. We're kind of there in terms of
Speaker 9: market pricing. So I think you really need data to
Speaker 9: suggest that recession risks are higher at this point, you know,
Speaker 9: to get the markets to price in more, you know,
Speaker 9: and I think the risks to inflation accelerating are there
Speaker 9: as well. So you know, in terms of the front
Speaker 9: end pricing, you know, it seems pretty fair to us.
Speaker 1: So you do it. Giving me a Newport Beach GDP.
Speaker 2: Now statistic like Atlanta that we've got solid two percent
Speaker 2: economic growth and we're distant from a recession.
Speaker 9: I mean, the labor market data today, you know, the
Speaker 9: data that we've seen, the kind of current activity indicators
Speaker 9: that we look at would suggest we're still kind of
Speaker 9: at two percent. So we're really not seeing the real
Speaker 9: you know, real activity. We're not seeing it decelerate like
Speaker 9: many people thought it would into the year end.
Speaker 2: Tiffany, Thank you so much, Tiffany. Well to the pymicle there.
Speaker 2: Ellen Walld is definitive with her one volume on Saudi
Speaker 2: and on Saudi Arabia and the Soud family.
Speaker 1: We're thrilled that she could join us.
Speaker 2: Right now, Senior fellow at the Atlantic Council, Ellen, just
Speaker 2: let me begin with a blunt instrument.
Speaker 1: Why hasn't the price of oil really moved?
Speaker 2: Well?
Speaker 11: That that is a very good question, and I think
Speaker 11: that the answer is mostly US production is very very high,
Speaker 11: has been very very high, and we're not seeing any
Speaker 11: kind of significant disruption in terms of supply getting to
Speaker 11: where it has to go because the the oil can
Speaker 11: be transported on these very large crude carriers which actually
Speaker 11: can't even go through the Suez Canal. So I think
Speaker 11: we're we've definitely got disruption or potential disruption to the
Speaker 11: oil trade, but it's it's not as bad, I think
Speaker 11: as people might have hoped. However, I do think that
Speaker 11: the potential for risk to oil supplies is growing basically
Speaker 11: every day.
Speaker 2: If we can shut down the Red Sea, let's go,
Speaker 2: I believe it's east. Can we shut down the Arabian
Speaker 2: or Persian Gulf.
Speaker 11: I'm not sure that that would be quite as easy,
Speaker 11: but we can definitely threaten threaten the safety of shipping
Speaker 11: in that area. And so I do think that this
Speaker 11: is almost a case study or a very important inflection
Speaker 11: point to see what is the international community which depends
Speaker 11: on on safety in the waters. I mean, we're talking
Speaker 11: about global international shipping. We're not just talking about what
Speaker 11: goes through the Red Sea, what goes through the US Canal.
Speaker 11: But these actions that the Huthis are taking are having
Speaker 11: reverberations all around international shipping.
Speaker 5: I mean, rates are up.
Speaker 11: Eighty eight percent pre pandemic simply because of what we're
Speaker 11: seeing in the Red Sea. So this isn't just a
Speaker 11: local or isolated issue. This is having large scale reverberations.
Speaker 6: I saw your comments on this, Ellen earlier this morning
Speaker 6: on Twitter or x however you want to call it,
Speaker 6: or basically you're saying freedom of the seas is a
Speaker 6: global issue and that the who the these actions are
Speaker 6: going to have pretty broad based ramifications. Given that, Ellen,
Speaker 6: why aren't we seeing Saudi Arabia cutter get on board
Speaker 6: with the United States to try to prevent these Houthia attacks.
Speaker 11: The short answer is it's complicated, and the relationship between
Speaker 11: Saudi Arabia and Huthis and the UAE and who these
Speaker 11: is very complicated and is much deeper, and I think
Speaker 11: we haven't heard a lot about it unless you're really
Speaker 11: zooming in on the Middle East. I mean, the conflict
Speaker 11: between Saudi Arabia and Yuei and the Houthis has been
Speaker 11: going on for a very long time. I mean there
Speaker 11: were troops involved. Yue and Saudi were sending troops into
Speaker 11: Yemen for quite some time. There were missiles that the
Speaker 11: Houthis were shooting at Riod and that we're finding locations there.
Speaker 11: We had RIOD using some of the missile systems from
Speaker 11: the US to counteract these missiles, and then eventually they
Speaker 11: kind of reached a I don't know if you call
Speaker 11: it maybe a daytont where everything kind of cooled down,
Speaker 11: and I think that the Saudis and the Amoradis are
Speaker 11: really loath to re engage in that conflict. Now, if
Speaker 11: the Houthis do threaten any kind of Saudi shipping or
Speaker 11: Amoradi shipping in the area, then I think the pressure
Speaker 11: would be on them to get involved. And Saudi Arabia
Speaker 11: is particularly at risk because they have ports in the
Speaker 11: Red Sea between where the Houthis are and the Suez Canal,
Speaker 11: and those are pretty important ports and pretty important areas
Speaker 11: for them. So if the houthis are able to threaten
Speaker 11: those ports, then I think that we would see them
Speaker 11: get involved on the side of the United States. But
Speaker 11: I think until that happens, they're pretty strong reasons keeping
Speaker 11: them out of this conflict.
Speaker 6: Given all of these complications, which are dizzying to think
Speaker 6: about when you zoom out, how do you put this
Speaker 6: genie back in the bottle? And if you can't, doesn't
Speaker 6: that mean that even with US production, hydrocarbon costs have
Speaker 6: to go up really materially if not only shipping is interrupted,
Speaker 6: but also the shipping of those hydrocarbons.
Speaker 7: Yeah, exactly.
Speaker 11: And we're not just talking about hydrocarbons that go through
Speaker 11: the Suez. We're also talking about hydrocarbons that go through
Speaker 11: the Siumed pipeline, because unless they're coming from Saudi Arabia,
Speaker 11: they've got to go through that Red Sea point to
Speaker 11: even get to the Siumed pipeline. That's basically a workaround
Speaker 11: for the Suez Canal. So it's more than just transit
Speaker 11: through the Suez Canal. I do think Europe is going
Speaker 11: to see the biggest effects of this because they're getting
Speaker 11: a lot more of their oil from the Middle East
Speaker 11: right now, and they're going to be affected by much
Speaker 11: longer shipping times and higher rates as these ships are
Speaker 11: going around around Africa. And I don't think we're going
Speaker 11: to see shortages, but there's definitely potential for higher costs,
Speaker 11: and if we see oil prices getting higher, then that
Speaker 11: will compound these issues. I do think that the United
Speaker 11: States is going to have to make a decision whether
Speaker 11: this is purely a defensive operation or they're going to
Speaker 11: go on the offensive to some extent and actually frighten
Speaker 11: the Hoho thies and show that there are real consequences.
Speaker 6: Ellen, you've been stuttying the Middle East for years and years,
Speaker 6: you're ate the book on Saudi Arabia. A lot of
Speaker 6: people look to you for your insight about the kingdom
Speaker 6: and about the region, and I'm just wondering, based on
Speaker 6: everything that you've seen over the past couple of weeks,
Speaker 6: how much have the chances of an escalation really increased
Speaker 6: for your vantage point.
Speaker 11: I do think that the chances are higher than we're
Speaker 11: seeing priced into the market right now. I think there
Speaker 11: are still very strong deterrences to seeing the conflict spread.
Speaker 11: Saudi Arabia does not want to get involved. It's not
Speaker 11: good for business to, you know, get started in a
Speaker 11: war in the Middle East. It's not good for you know,
Speaker 11: the oil business to start any kind of conflict with Iran.
Speaker 11: But at the same time, we are seeing escalation that
Speaker 11: may not be able to be quell unless some offensive
Speaker 11: action is taken by parties that aren't just Israel. Particularly
Speaker 11: if Israel starts to escalate the conflict into Lebanon, into
Speaker 11: something against Hezbola, then we're likely to see just greater tension,
Speaker 11: greater potential for terrorism across the Middle East. We already
Speaker 11: have seen things happening in Iraq and in Iran, and
Speaker 11: so I do think that we're definitely at a higher
Speaker 11: higher risk of conflict than we were even in October.
Speaker 3: With that in mind, just put a bow on it. Ellen,
Speaker 3: how long would you expect this options in the Red
Speaker 3: Sea to continue for?
Speaker 11: I'd say they can continue for the foreseeable future unless
Speaker 11: unless this coalition decides to go on the offensive. This
Speaker 11: is a very low cost, high return event for the Hoothies,
Speaker 11: and so unless their supply of weapons is cut off
Speaker 11: or someone higher up in Iran tells them to cut
Speaker 11: it out, I don't think that there's any real sign
Speaker 11: that they're going to stop.
Speaker 3: Isaac Allen, thank you. I appreciate the insight and I'm
Speaker 3: well with that the Atlantic Council and the situation in
Speaker 3: the Red Sea.
Speaker 2: Subscribe to the Bloomberg Surveillance Podcast on Apple, Spotify, and
Speaker 2: anywhere else you get your podcasts. Listen live every weekday
Speaker 2: starting at seven am Eastern Bloomberg dot Com, the iHeartRadio
Speaker 2: app tune In.
Speaker 1: And the Bloomberg Business app.
Speaker 2: You can watch us live on Bloomberg Television and always.
Speaker 2: I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Kane,
Speaker 2: and this is bloomber