WEBVTT - Surveillance: Market Slowdown with Stanley (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.800 --> 0:00:23.560 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot 0:00:23.560 --> 0:00:30.440 Com and of course on the Bloomberg terminal Squeezing. Stephen 0:00:30.480 --> 0:00:32.720 Stanley here with Amer's Pierpont as we wait for the 0:00:32.720 --> 0:00:37.520 President United States in Madrid. Steve Stanley just doing fabulous 0:00:37.560 --> 0:00:40.880 work on the makeup of the American economy with Aaron 0:00:41.000 --> 0:00:44.200 Amer's Pierpont. What's your biggest mystery? Into Q three? Steve 0:00:44.240 --> 0:00:49.680 Stanley on the classic equation, consumption, investment, government or trade dynamics. 0:00:49.760 --> 0:00:53.080 Which one is the great Stanley mystery? Well, I think 0:00:53.120 --> 0:00:55.960 you gotta watch the consumer and you gotta watch housing 0:00:56.160 --> 0:01:00.440 because the markets are starting to smell us economic slowdown, 0:01:00.480 --> 0:01:02.800 which I think is a little premature, but certainly that 0:01:03.080 --> 0:01:05.280 is the issue of the day, and if we're going 0:01:05.319 --> 0:01:07.120 to get a slowdown, that's where you're gonna see it. 0:01:07.280 --> 0:01:10.320 So we've been focused very keenly, I think, over the 0:01:10.440 --> 0:01:12.479 last couple of months on housing, and it does seem 0:01:12.480 --> 0:01:14.560 to be cooling off, but it's cooling from a very 0:01:15.000 --> 0:01:18.400 hot temperature. Uh. And these numbers today on the consumer 0:01:18.400 --> 0:01:21.280 are a little disappointing. So um, I do think that 0:01:21.360 --> 0:01:23.600 the consumer is going to have a big summer, people 0:01:23.760 --> 0:01:26.120 getting out and uh, doing all the things they haven't 0:01:26.120 --> 0:01:27.560 been able to do for the last couple of years. 0:01:27.640 --> 0:01:30.280 But the data this morning or not, uh, not all 0:01:30.319 --> 0:01:32.480 that encouraging. And Steven, that's exactly where I wanted to go, 0:01:32.640 --> 0:01:36.640 especially because real spending declined for the first time going 0:01:36.720 --> 0:01:39.600 back to December, and more than people have previously expected. 0:01:39.680 --> 0:01:44.080 This as inflation adjusted actual spending. How quickly is the 0:01:44.160 --> 0:01:47.320 consumer based on this data and other incremental points that 0:01:47.400 --> 0:01:50.520 we're looking at, how quickly is the consumer rolling over 0:01:50.680 --> 0:01:53.240 in terms of their ability to really accept some of 0:01:53.280 --> 0:01:57.840 the price increases. So well, there's ability and willingness, right, 0:01:57.960 --> 0:02:03.120 and I think the ability is unusually strong because consumers 0:02:03.160 --> 0:02:06.040 are sitting on a huge pile of cash that accumulated 0:02:06.120 --> 0:02:09.280 during the pandemic. Um, you know, all the fiscal largesse 0:02:09.320 --> 0:02:13.079 in particular, so consumers have the wherewithal at least send 0:02:13.080 --> 0:02:15.360 the aggregate to spend. I mean, obviously inflation is going 0:02:15.400 --> 0:02:19.239 to create stress for certain households. But uh, there is 0:02:19.280 --> 0:02:21.960 a question about willingness, and I think given the consumer 0:02:22.000 --> 0:02:25.079 confidence dada, you have to wonder a little bit about, um, 0:02:25.880 --> 0:02:28.920 how eager consumers are going to gonna be to continue 0:02:28.919 --> 0:02:32.680 to spend. My sense is that there's still very enthusiastic. Certainly, 0:02:32.760 --> 0:02:35.320 any any field trip to the airport would suggest that 0:02:35.760 --> 0:02:39.639 that people are are still looking to get out to 0:02:39.680 --> 0:02:41.400 the airport tomorrow and it's going to be a nightmare. 0:02:41.440 --> 0:02:44.399 Already prepared for this. Flights are getting canceled. How much, though, 0:02:44.639 --> 0:02:46.600 is this part of the story that it is a blip. 0:02:46.680 --> 0:02:49.040 It is revenge travel. It is people who are reprising 0:02:49.200 --> 0:02:51.119 the past that they were not able to live during 0:02:51.160 --> 0:02:54.400 the pandemic. That ends, it ends with the miserable experiences 0:02:54.440 --> 0:02:57.160 that people have in the airport. It ends with the 0:02:57.280 --> 0:02:59.840 fact that people have gone out, they've traveled, they're now exhausted, 0:03:00.000 --> 0:03:02.679 already to start whatever it is that is the post 0:03:02.760 --> 0:03:06.200 pandemic reality. How much is this the last hurrah when 0:03:06.240 --> 0:03:08.519 it comes to travel and some of these inputs that 0:03:08.680 --> 0:03:12.720 leads to the next phase that begins at Labor day, right, Well, 0:03:12.760 --> 0:03:15.600 there's definitely it seems like there's gonna be some catch up. 0:03:15.800 --> 0:03:18.480 So that's the short run burst, if you will, in 0:03:18.520 --> 0:03:22.160 the economy, and I think that does certainly protect any 0:03:22.560 --> 0:03:25.040 threat of the down of a downturn in the near term. 0:03:25.440 --> 0:03:27.320 But but as you say, I mean, once you get 0:03:27.360 --> 0:03:29.840 past that, then it becomes it gets back to the 0:03:29.960 --> 0:03:32.840 usual fundamentals. I mean, certainly, one thing that is on 0:03:32.919 --> 0:03:35.320 the positive side is the labor market. And you know, 0:03:35.360 --> 0:03:37.920 the unemployment rate around three and a half percent, so 0:03:38.280 --> 0:03:43.160 people have jobs and um incomes are not necessarily keeping 0:03:43.240 --> 0:03:46.000 up with inflation the way we might like. But but 0:03:46.160 --> 0:03:49.119 income growth has been pretty strong and I think sufficient 0:03:49.200 --> 0:03:54.240 to support ongoing growth and consumption. So um, I do. 0:03:54.560 --> 0:03:56.760 I take your point, but I think that the the 0:03:56.880 --> 0:03:59.560 underlying fundamentals are still pretty good. I think what we 0:04:00.000 --> 0:04:03.120 really have to see is how sensitive is the economy 0:04:03.160 --> 0:04:06.640 too higher interest rates. We haven't had higher interest rates 0:04:06.720 --> 0:04:09.080 for a very long time, certainly going back before the 0:04:09.120 --> 0:04:13.080 financial crisis, and it remains to be seen how sensitive 0:04:13.120 --> 0:04:16.200 the economy is uh as interest rich rise. And I 0:04:16.240 --> 0:04:18.000 think housing is going to be the test case there. 0:04:18.080 --> 0:04:20.320 So that again is why I'm keeping it. When this 0:04:20.400 --> 0:04:23.800 conversation often comes up. Often here economists described the aggregate story, 0:04:23.839 --> 0:04:25.960 the headline stuff. Can you break it down a little 0:04:25.960 --> 0:04:27.880 bit more for us, what the low income groups, middle 0:04:27.880 --> 0:04:30.280 income groups, high income groups, what do you expect from 0:04:30.320 --> 0:04:32.359 them this year? Because from an ex re market perspective, 0:04:32.640 --> 0:04:38.520 that's gonna have different consequences, different outcomes, ramifications for different companies. Sure. Yeah, Well, 0:04:38.600 --> 0:04:40.720 if you if you go through the pandemic period and 0:04:40.839 --> 0:04:43.720 think about that accumulation in household balance sheets, there were 0:04:43.760 --> 0:04:47.680 really two stories. Um. For the wealthier households, they weren't 0:04:47.720 --> 0:04:50.000 getting a lot of the fiscal largees, but they were 0:04:50.120 --> 0:04:55.360 benefiting from the markets, in particular the equity market but 0:04:55.440 --> 0:04:59.320 also housing UM. And then the people with more modest 0:04:59.400 --> 0:05:01.680 incomes were the ones that for the most part who 0:05:01.720 --> 0:05:05.600 were receiving the rebate checks and the unemployment UH supplement 0:05:05.600 --> 0:05:07.880 on employment benefits and things like that. So even the 0:05:07.960 --> 0:05:10.839 folks at the lower end of the spectrum UM came 0:05:10.880 --> 0:05:12.960 out of the pandemic, perhaps a lot of them at 0:05:13.040 --> 0:05:15.560 least in better shape than they might have been otherwise. 0:05:16.200 --> 0:05:18.880 Of Course, you know over time that that cushion will 0:05:18.920 --> 0:05:22.039 get spent UH and and in particular in this environment, 0:05:22.040 --> 0:05:26.120 inflation will erode of purchasing power to a degree. So uh, 0:05:26.240 --> 0:05:28.160 it's going to be important for the labor market to 0:05:28.200 --> 0:05:30.880 stay strong. Those folks at the lower end of the 0:05:30.920 --> 0:05:35.080 wage spectrum have been doing particularly well in terms of 0:05:35.160 --> 0:05:37.440 wage gains, and um, you know you'd like to see 0:05:37.480 --> 0:05:40.200 that continue, you would, Stephen. Thank you, Stephen standing there 0:05:40.279 --> 0:05:43.360 of Amherst popon the challenge to the consumer issues we've 0:05:43.360 --> 0:05:45.360 all got to think about when it comes to markets 0:05:45.640 --> 0:05:52.160 and this economy. Closing out June and looking ahead to 0:05:52.240 --> 0:05:55.240 July to like thirte CPN Americans, you like fourteenth JP 0:05:55.320 --> 0:05:57.840 more can kicking off things for the banks in corporate America, 0:05:57.880 --> 0:06:00.240 looking ahead to warnings, looking ahead to what they spawn 0:06:00.279 --> 0:06:02.280 market is going to provide for this Federal Reserve and 0:06:02.279 --> 0:06:04.359 it's next mazing. My shoemak At joins the snap Global 0:06:04.400 --> 0:06:07.080 head of Macris Strategy at Wells Faco and Mike, Lisa, 0:06:07.240 --> 0:06:09.360 Tom and I trying to work out where the bike 0:06:09.440 --> 0:06:11.560 point is in this credit market for this FED to 0:06:11.600 --> 0:06:14.080 have a rethink. It's not where we are now, where 0:06:14.200 --> 0:06:17.120 is it? Mike? Yeah, it's interesting trying. I feeok at 0:06:17.200 --> 0:06:19.840 high ELD typically it peaks at about ten percent in 0:06:19.920 --> 0:06:22.480 the cycle. Right now, it's heights, so I would say 0:06:22.600 --> 0:06:27.120 that's tennish, maybe somewhere around there, but nowhere near current levels. 0:06:27.160 --> 0:06:29.320 The FEDS looking right now at the tight end conditions 0:06:29.360 --> 0:06:32.480 and saying yeah it hurts, Yeah, it's painful. But this 0:06:32.640 --> 0:06:34.120 is a feature, it's not a book. We're going to 0:06:34.200 --> 0:06:36.600 see more of it, Michael. The clear theme here and 0:06:36.720 --> 0:06:40.640 particularly off the important panel yesterday, is the FED and 0:06:40.720 --> 0:06:45.360 other central banks are resolute by reading a meltzer, Anna Schwartz, 0:06:45.920 --> 0:06:50.599 Friedman Richard Timberlake of the Georgia School is simple, that's bologny. 0:06:50.960 --> 0:06:55.760 They always succumb to the political zeitgeist, the political pressure. 0:06:56.120 --> 0:06:57.680 Is it going to be the same way this time? 0:06:59.720 --> 0:07:02.080 I respect the FED and the other central banks will 0:07:02.120 --> 0:07:04.360 feel a ton of pressure from the politicians time. It's 0:07:04.400 --> 0:07:07.760 almost inevitable. But the question is how quickly they I 0:07:07.760 --> 0:07:10.560 wouldn't say cave, but had the impact or decision making. 0:07:10.720 --> 0:07:13.960 And for Chairman Powell in particular, it's really a challenge 0:07:14.040 --> 0:07:16.080 because he's got to look at that wall down of 0:07:16.160 --> 0:07:18.480 the FED and say, you know what, Arthur Burns worst 0:07:18.520 --> 0:07:22.240 chairman ever, William Miller probably a close number two. I 0:07:22.280 --> 0:07:23.960 don't want to be number three. I've got to fight 0:07:24.040 --> 0:07:26.640 inflation and I think that that personal legacy is going 0:07:26.680 --> 0:07:29.600 outwigh to politics for him quite some time. Michael Schumacher 0:07:29.760 --> 0:07:32.680 harsh today. Well, Mike, given that harsh review and given 0:07:32.760 --> 0:07:34.960 some of the barishness that you have currently looking at 0:07:35.000 --> 0:07:37.000 this market, how do we get to four percent on 0:07:37.080 --> 0:07:40.200 a tenure treasury yelled, given that we are looking at 0:07:40.240 --> 0:07:42.640 such a pessimistic scenario that usually sends people back in 0:07:42.680 --> 0:07:45.880 the bonds at least, it's really interesting. I think you've 0:07:45.880 --> 0:07:48.240 got to break it down into where does inflation and 0:07:48.320 --> 0:07:50.520 the cycle and what sort of real rate is going 0:07:50.600 --> 0:07:53.040 to be implied or expected at that point in time. 0:07:53.240 --> 0:07:56.280 So we think core probably a core inflation that is, 0:07:56.360 --> 0:07:58.960 and the cycle maybe two fifty, perhaps a bit higher 0:07:59.400 --> 0:08:01.720 and really olds at least an our Va Wells Fargo 0:08:01.840 --> 0:08:04.320 have to be one fifty plus, So that gets you 0:08:04.400 --> 0:08:06.600 to four percent. You might say, well, wow, one fifty 0:08:06.680 --> 0:08:09.200 with a recession, how can that happen? Think about the 0:08:09.280 --> 0:08:12.560 last cycle, granted fairly mild, but still at the end 0:08:12.600 --> 0:08:14.840 of that cycle you have the real tenure rate about one, 0:08:15.520 --> 0:08:19.280 so one fifty with incredible inflation and really the FED 0:08:19.360 --> 0:08:21.760 one and to take out insurance against that inflation, Genie 0:08:21.880 --> 0:08:24.360 coming back out of the bottle. That seems pretty reasonable 0:08:24.400 --> 0:08:26.560 to us. That's how we get before. What is four 0:08:26.680 --> 0:08:29.440 percent on a treasure yield for a tenure treasure yield 0:08:29.480 --> 0:08:34.160 to do US equities, that's a really rough ride. So 0:08:34.400 --> 0:08:36.920 I think if you do get four on tens, certainly 0:08:37.000 --> 0:08:39.760 speed manners. Let's say it happens sometime around the end 0:08:39.760 --> 0:08:42.120 of this year. It takes stocks down quite a bit. 0:08:42.200 --> 0:08:44.400 I'm not sure if they get down towards three thousand. 0:08:44.440 --> 0:08:46.400 I'll leave that to Chris Harvey, but it's going to 0:08:46.440 --> 0:08:48.800 be a pretty painful journey. We'll catch up with Chris 0:08:48.920 --> 0:08:50.719 Likes and ask him that. Mike, I just want to 0:08:50.720 --> 0:08:53.640 finish up with deal reflections on yesterday. What was the 0:08:53.679 --> 0:08:56.360 big standard thing for you? Listening to President of God, 0:08:56.400 --> 0:09:00.679 listening to Chamman Pou, listening to Governor Bady too. When 0:09:00.720 --> 0:09:02.959 I listened to those three central bankers, John, it strikes 0:09:03.000 --> 0:09:04.640 me the e c B has got the toughest job. 0:09:04.840 --> 0:09:07.840 Certainly it's most closely impacted by the situation in Russia 0:09:07.880 --> 0:09:12.920 and Ukraine. And I listened to Christine Legard and say, well, okay, 0:09:13.120 --> 0:09:15.240 so the e c b s history of ray hikes 0:09:15.360 --> 0:09:17.959 is not particularly great, And on top of that you've 0:09:18.000 --> 0:09:20.319 got the question of gas floats. I would circle, I 0:09:20.360 --> 0:09:23.720 mean circle in bold red July one on the calendar. 0:09:23.840 --> 0:09:27.040 It's the ECB meeting and also, perhaps more importantly, that's 0:09:27.080 --> 0:09:29.120 the day of the nord Stream pipeline comes off. Me 0:09:29.280 --> 0:09:32.480 its will the gas go back on? How much that's 0:09:32.520 --> 0:09:34.640 going to drive policy through the CP. So they're all 0:09:34.720 --> 0:09:37.000 uncomfortable that. I think that's a central bank. It's got 0:09:37.040 --> 0:09:40.040 the biggest challenge ahead. Fascinating stuff. Mike my Shoemak of 0:09:40.120 --> 0:09:49.679 that of Wolds FAKA for Global Wall Street, get out 0:09:49.720 --> 0:09:52.679 the pad of paper and take notes. Jane Foley is 0:09:52.720 --> 0:09:55.679 a student of foreign exchange. Yes, dollar centric, but with 0:09:55.840 --> 0:10:01.040 Robbo Bank far more looking at the linkages between foreign exchange. 0:10:01.400 --> 0:10:04.720 What I noticed irrefutable, and I know the President Trump 0:10:04.880 --> 0:10:08.360 was way out front on this, Jane is strong strong dollar. 0:10:08.520 --> 0:10:11.679 Trade weighted dollar by any indusicries is back to two 0:10:11.760 --> 0:10:14.959 thousand three, even back to two thousand two. What is 0:10:15.000 --> 0:10:20.480 the significance of a strong dollar back twenty years? Oh well, 0:10:20.520 --> 0:10:23.040 this is, as you say, a pretty strong DOLI. But 0:10:23.160 --> 0:10:25.679 I think what it's reflecting is is the riskiness of 0:10:25.840 --> 0:10:28.839 other assets. I mean there is a pretty strong correlation 0:10:28.960 --> 0:10:31.319 or inverted correlation between the dollar and one hand and 0:10:31.600 --> 0:10:34.840 risky assets. When risky assets are not performing well well, 0:10:34.920 --> 0:10:36.800 the dollar goes up and vice versa. And I think 0:10:36.840 --> 0:10:38.800 if we look at the tone and markets right now, 0:10:39.120 --> 0:10:42.719 people talking about recession, the US recession potentially over over 0:10:42.760 --> 0:10:45.800 the winter in Europe because the gas prices a slett 0:10:45.800 --> 0:10:48.160 with growth worldwide, then then that's an environment which the 0:10:48.280 --> 0:10:51.319 dollar performs well and risky assets do not. And I 0:10:51.400 --> 0:10:53.280 think that's, you know, very much a story that we're 0:10:53.280 --> 0:10:55.400 looking at right now. I don't go short term with 0:10:55.480 --> 0:10:57.520 too much respect for your work, Jane, but I am 0:10:57.600 --> 0:11:00.199 going to do it here in June thirty where is 0:11:00.280 --> 0:11:05.960 euro and Yenne set up against dollar September thirty, Well, 0:11:06.040 --> 0:11:08.719 you know, our forecast for for Dolly Yenne, sorry for 0:11:08.880 --> 0:11:10.640 for euro dollar for a while has been you know, 0:11:10.840 --> 0:11:13.599 one oh three ish, and the reason for that is that, 0:11:13.679 --> 0:11:16.400 you know, we have this massive, big support level and 0:11:16.440 --> 0:11:18.400 one oh three and a half and and you know 0:11:18.480 --> 0:11:21.360 we're staring really closely at that today. If we go 0:11:21.520 --> 0:11:23.360 below that, you know, we could see parity. And I 0:11:23.440 --> 0:11:26.280 think from while we've been able to outline the risk 0:11:26.320 --> 0:11:27.760 of a parity, and this is this is to do 0:11:27.840 --> 0:11:31.120 with Europe. This is to do with gas prices high 0:11:31.240 --> 0:11:33.560 over the winter, This is to do with that creating 0:11:33.679 --> 0:11:38.120 these refreshing recession recondition stackflation, and that of course putting 0:11:38.160 --> 0:11:40.640 a lot of focus on fragmentation in the Eurozone, which 0:11:40.720 --> 0:11:42.920 is a bad story for the euro. So that is 0:11:43.000 --> 0:11:45.480 what we're looking at, I think this week. But with 0:11:45.640 --> 0:11:48.920 respect to the yen, well, you know that is a 0:11:49.160 --> 0:11:52.120 I think a yield story. Now the dollars gone up 0:11:52.160 --> 0:11:54.520 today more than the yen, and it's brought us up 0:11:54.520 --> 0:11:57.280 to you about one thirty six. But actually, if US 0:11:57.400 --> 0:12:00.559 yields do start to come down, then I think that 0:12:00.679 --> 0:12:02.960 gives the Bank of Japan a little bit of room 0:12:03.679 --> 0:12:06.880 to carry on doing their your care of control until 0:12:06.960 --> 0:12:08.679 they want to stop it, which will be one way 0:12:08.760 --> 0:12:11.199 to spegin to go up in Japan. Jane, I want 0:12:11.200 --> 0:12:13.160 to stick on the Euro for a minute. You're really 0:12:13.240 --> 0:12:16.160 saying it's quite bearish for the euro right now, which 0:12:16.200 --> 0:12:18.880 a lot of people see the same, especially given some 0:12:19.000 --> 0:12:22.079 of the gas constraints for Germany. So why haven't we 0:12:22.200 --> 0:12:25.960 seen more weakness already? You know what? I think people 0:12:26.000 --> 0:12:28.280 are only just beginning to come around to the recessionary 0:12:28.320 --> 0:12:30.120 story for for the euro Zone. We've had that as 0:12:30.160 --> 0:12:32.600 a forecast for a while and we've been an outlier. 0:12:32.720 --> 0:12:35.320 But I think more recently, you know, that has become 0:12:35.720 --> 0:12:38.000 or that view that we could see recession over the 0:12:38.240 --> 0:12:40.640 over the winter months has become a little bit more 0:12:40.679 --> 0:12:43.000 commonplace in the market. Now we've got the guard still 0:12:43.080 --> 0:12:46.280 defending the view that she still thinks the easy we 0:12:46.280 --> 0:12:48.640 would still carry on seeing growth in the Eurozone. But 0:12:48.760 --> 0:12:51.319 the fact that she's defending it again this week, the 0:12:51.360 --> 0:12:54.440 fact that she's reiterating it almost sounds like a pushback 0:12:54.480 --> 0:12:56.439 against the fact that she's aware of these weight of 0:12:56.520 --> 0:12:59.480 views coming through from the market about Eurozone growth. Now, 0:12:59.720 --> 0:13:01.880 if look back to last week, we had the German 0:13:02.280 --> 0:13:07.280 Finance Economy minister talking about the possibility, you know, that 0:13:07.400 --> 0:13:11.160 we could have maybe supply cut off to some industries 0:13:11.200 --> 0:13:14.520 in Germany that would relate to Italy too, very difficult 0:13:14.559 --> 0:13:17.800 not to see recession if that happens, Jane. The spiraling 0:13:17.840 --> 0:13:22.040 effect of a weakening currency in an inflationary environment is 0:13:22.320 --> 0:13:24.640 something that is also a bearer case because it will 0:13:24.679 --> 0:13:28.760 only exacerbate inflationary pressures in the euroregion. Prompting the ECB 0:13:28.880 --> 0:13:32.720 potentially to act more aggressively, only furthering the downturn. How 0:13:32.840 --> 0:13:35.719 much are you looking at the incremental weakening in the 0:13:35.880 --> 0:13:40.319 currency as a bear case for the economic trajectory? You know, 0:13:40.440 --> 0:13:42.480 this is really quite interesting, and I think we've seen 0:13:42.520 --> 0:13:44.360 this quite a lot in the last few weeks, certainly 0:13:44.440 --> 0:13:47.000 this month, amongst at central banks. You look, for instance, 0:13:47.000 --> 0:13:48.679 sort of speech by Catherine Mann from the Bank of 0:13:48.760 --> 0:13:50.959 England last week. She was talking about the spiller of 0:13:51.160 --> 0:13:54.800 over effects of the FED hiking by large amounts and 0:13:55.080 --> 0:13:58.120 that coming through into the UK and and perhaps setting 0:13:58.520 --> 0:14:02.760 the scene for a more aggress pace of interestrate hikes 0:14:02.800 --> 0:14:05.360 in the UK just to defend the currency. Now you 0:14:05.440 --> 0:14:08.280 can see that already in in Norway. Norway height interest 0:14:08.320 --> 0:14:11.599 rates recently by fifty basis points, bigger than expected. It 0:14:11.760 --> 0:14:14.720 only served to stop the currency going down. It didn't 0:14:14.760 --> 0:14:17.880 push the currency higher. The ricks bank today fifty basis 0:14:17.960 --> 0:14:20.760 points not an awful a lot of game for the currency, etcetera. 0:14:20.880 --> 0:14:24.400 So we're seeing this this momentum where central banks have 0:14:24.600 --> 0:14:26.760 to go big because all of the big ones are 0:14:26.800 --> 0:14:30.040 going big, and as you say, that can just accentuate 0:14:30.240 --> 0:14:33.840 the downside risks and in terms of demand, and whilst 0:14:33.960 --> 0:14:36.960 that might be that might fit well perhaps for the US, 0:14:37.880 --> 0:14:40.160 maybe for the Europe, and certainly not for the UK, 0:14:40.920 --> 0:14:44.480 will that be necessarily suitable when you have less wage 0:14:44.520 --> 0:14:48.520 inflation and and perhaps more vulnerable demand? There what a 0:14:48.560 --> 0:14:50.800 great point, James Folly there of rather Bank, the head 0:14:50.800 --> 0:14:59.840 of FX Strategy, chief global strategist at Principal Global Investors, 0:15:00.000 --> 0:15:03.280 Echard joins us right now, seeming you wrote a midiar 0:15:03.360 --> 0:15:06.720 report five days ago. What's changed in the last five days? 0:15:07.080 --> 0:15:12.000 What is the new staggering in the Q three? Hi, 0:15:12.320 --> 0:15:15.400 I joined try Tom, thanks for having me on um. 0:15:15.880 --> 0:15:17.840 I don't know what's necessarily changed. I think all that 0:15:17.920 --> 0:15:19.960 we've seen is that central bankers are finally being a 0:15:20.000 --> 0:15:22.480 little bit up from about what that actually having to 0:15:22.560 --> 0:15:26.560 deal with, and they've they've finally emphasized, especially for the feather, 0:15:26.600 --> 0:15:29.320 they finally emphasize that prestability has to be their number 0:15:29.360 --> 0:15:31.760 one priority. And I think the markets has given a 0:15:31.800 --> 0:15:33.400 bit of a wake up call. This is not going 0:15:33.440 --> 0:15:34.920 to be an easy ride. But I don't think that 0:15:35.000 --> 0:15:37.400 excess can rally the back of the year. That makes 0:15:37.480 --> 0:15:39.360 the assumption that the set is going to let go 0:15:39.440 --> 0:15:41.920 of its entire focus and pricetability, and to step back 0:15:41.960 --> 0:15:43.920 from that and we have a very different view. We 0:15:43.960 --> 0:15:46.520 think things are gonna get pretty tough, seem that's another 0:15:46.560 --> 0:15:48.600 way of saying they are not going to tolerate anything 0:15:48.640 --> 0:15:51.320 of financial conditions. They're not going to tolerate a running 0:15:51.320 --> 0:15:53.000 and gets with the market, They're not going to tolerate 0:15:53.080 --> 0:15:55.760 tightening credit spread. So I want to understand from you 0:15:55.800 --> 0:15:57.240 just how much downside do you think there risk. Do 0:15:57.280 --> 0:15:59.840 you think of this as a moment where markets can't 0:16:00.000 --> 0:16:01.800 alley or do you think of this as a moment 0:16:01.880 --> 0:16:05.880 where markets have to sell off more so, it's interesting 0:16:05.920 --> 0:16:07.600 because when we look at technicals, if you look at 0:16:07.640 --> 0:16:11.560 just investor sentiment is getting extremely nervous negative um. You know, 0:16:11.640 --> 0:16:13.920 there's been a fair amount of flows into cash as well, 0:16:13.960 --> 0:16:16.040 which means that I think we could see a bit 0:16:16.080 --> 0:16:18.800 of a technical rally over the next couple of months, 0:16:18.840 --> 0:16:21.680 assuming that there are no negative or actually say positive 0:16:21.760 --> 0:16:24.600 upside prints on the inflation side. But that doesn't mean 0:16:24.680 --> 0:16:26.920 that that is a sustained rally which is going to 0:16:27.000 --> 0:16:30.080 continue into three by any means. We think that as 0:16:30.120 --> 0:16:31.880 soon as you start to see your second leg of 0:16:31.920 --> 0:16:35.200 the downturn, which is essentially when earnies growth starts to 0:16:35.280 --> 0:16:38.200 come down, that is when you get your a further 0:16:38.280 --> 0:16:40.120 drop in the extra market declines. How far we go 0:16:40.200 --> 0:16:42.000 from here is a difficult one to cool. I think 0:16:42.040 --> 0:16:44.640 you could get another tent to fifteen decent dropped from 0:16:44.720 --> 0:16:47.000 this point, but between now and then you can't get 0:16:47.040 --> 0:16:48.680 a bit of a rally. If we were doing a 0:16:48.760 --> 0:16:51.000 full on jargon hour, we would be talking about a 0:16:51.040 --> 0:16:53.560 softer recession, which possibly is the biggest cliche of the 0:16:53.640 --> 0:16:57.280 moment as we talk about how much this contour of 0:16:57.360 --> 0:17:00.200 the contours of this particular recession will be different than 0:17:00.280 --> 0:17:02.960 those of two thousand and eight or two thousand and nine. 0:17:03.160 --> 0:17:05.200 Do you agree with this assessment that it's going to 0:17:05.280 --> 0:17:07.360 be shallow, that it's not going to be as painful 0:17:07.680 --> 0:17:11.359 as previous down terms. I do, and I think the 0:17:11.400 --> 0:17:13.520 reason is is that when you think about the GFC, 0:17:13.720 --> 0:17:16.359 that was really that was so much imbalance um that 0:17:16.480 --> 0:17:18.520 had to be worked through the economy, and that dragged 0:17:18.520 --> 0:17:20.440 it out for quite a long time and also made 0:17:20.480 --> 0:17:22.639 it pretty deep. I think from our perspective, we can 0:17:22.680 --> 0:17:24.720 see that this is gonna be a shallow recession, but 0:17:24.760 --> 0:17:27.120 almost A more difficult part is that once we start 0:17:27.200 --> 0:17:29.600 to see the FED cut rates in response to your 0:17:29.600 --> 0:17:32.520 recession and inflation fears coming down, how far do they 0:17:32.560 --> 0:17:34.400 really go? Did they go back to the zero present 0:17:34.600 --> 0:17:37.080 level that we've become so accustomed to, or do they 0:17:37.240 --> 0:17:39.200 start to settle it just below the neutral right, which 0:17:39.280 --> 0:17:41.680 is around two percent? So well, I agree that this 0:17:41.760 --> 0:17:44.119 is this is a more inflationary period going forward for 0:17:44.119 --> 0:17:47.320 the next ten twenty years UM and Monterrey policy is 0:17:47.320 --> 0:17:49.280 going to have to follow with up. So Seema, how 0:17:49.320 --> 0:17:51.879 does that reshape your thesis in terms of how to 0:17:52.000 --> 0:17:54.800 arrange some of your assets. I'm thinking particularly of sixty 0:17:54.880 --> 0:17:58.600 forty that just had its worst quarter ever. Yeah, well, 0:17:58.680 --> 0:18:00.640 I think this really plays into the idea that it's 0:18:00.680 --> 0:18:03.479 real assets. Right, We're looking at not just a medium 0:18:03.560 --> 0:18:06.080 or a short term inflationing period. This is the medium 0:18:06.160 --> 0:18:08.960 term inflation outlook where commodities, infrastructure you can really continue 0:18:08.960 --> 0:18:12.240 to outperform. From a bond side, Well, look, I think 0:18:12.320 --> 0:18:14.560 we can still think we think about higher quality and 0:18:14.680 --> 0:18:17.840 moving into slightly longer duration, but unfortunately the longer duration 0:18:17.920 --> 0:18:19.800 doesn't work for too long because we just don't the 0:18:19.960 --> 0:18:22.800 US Treasury yields falling too far if you start to 0:18:22.840 --> 0:18:24.639 think that even in a recession, the FED isn't going 0:18:24.680 --> 0:18:26.440 to cut all the way to zero. And a couple 0:18:26.480 --> 0:18:28.680 of messages this morning from a terminal subscriber, and he 0:18:28.800 --> 0:18:31.120 talked about the consensus that we've gone over a million 0:18:31.200 --> 0:18:34.159 times and how quickly that consensus has changed. This is 0:18:34.200 --> 0:18:35.960 what he said. I think the market call was this. 0:18:36.320 --> 0:18:38.400 The FED won't hike much in twenty three. The Fed 0:18:38.440 --> 0:18:41.280 won't hike fifty. The Fed won't hug seventy five. Inflation 0:18:41.320 --> 0:18:44.280 peaked in March, Fed wal force in September. Inflation will 0:18:44.320 --> 0:18:46.000 come down in the fall. The Fed will pause in 0:18:46.040 --> 0:18:50.920 early twenty three. No recession, no recession, recession risk, fifty 0:18:51.359 --> 0:18:54.280 recession risk. And now seemingly tim the new one. And 0:18:54.400 --> 0:18:56.160 this is not me throwing shade a seema ca semara. 0:18:56.240 --> 0:18:57.680 Give you the chance to respond to this, but the 0:18:57.720 --> 0:19:01.560 new consensus view, it's recept but a shallow one. And 0:19:01.680 --> 0:19:04.040 we've heard that several times this morning. In fact, we've 0:19:04.080 --> 0:19:06.600 heard it a lot of times this week. John, you're 0:19:06.680 --> 0:19:09.400 killing me. Will give me something to magnitude, I would 0:19:09.440 --> 0:19:12.960 look with an all the discussion here of y will 0:19:13.000 --> 0:19:17.640 c plus I plus G plus n X, the international component, 0:19:17.760 --> 0:19:21.840 the trade component. It's about gaming the magnitude of a slowdown. 0:19:22.160 --> 0:19:24.639 John Williams, New York Fed says, there's not going to 0:19:24.720 --> 0:19:27.440 be a recession. We're gonna get that growth. The agony 0:19:27.560 --> 0:19:30.959 of a of a more subdued positive ste to one 0:19:31.040 --> 0:19:33.399 point five is what I think he said, seem I 0:19:33.440 --> 0:19:34.960 wanted to give you the shows to respond to that 0:19:35.440 --> 0:19:38.320 because it started to become this consensus view recession maybe 0:19:38.400 --> 0:19:41.840 but a shallow one. You're comfortable with that that a 0:19:41.920 --> 0:19:43.560 lot of other people just see it the same way. 0:19:43.680 --> 0:19:45.600 But we've had that story a few times this year, 0:19:45.640 --> 0:19:50.720 and it's changed pretty quickly. I think. I think that investors, justice, 0:19:50.760 --> 0:19:53.240 central banks have been caught up many times in terms 0:19:53.280 --> 0:19:55.119