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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amerie Hordern. Join us each day
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Speaker 2: with stocks turning lower on renewed tensions in the Middle East.
Speaker 2: Ross Mayfield of bad writing, the US blockade is working,
Speaker 2: but we'll take time to force around's hand. The question
Speaker 2: is does the market hold up in the face of
Speaker 2: this risk? Ross joins us now for more. Russ Good morning, sir,
Speaker 2: Answer your own question. Do you think it does hold out?
Speaker 3: I think the risk is that the administration takes the
Speaker 3: market at all time highs as a vote of confidence
Speaker 3: in a longer you know stand off dis blockade being
Speaker 3: the main way that that goes about, and that if
Speaker 3: it goes for you know, another month, there will be
Speaker 3: economic gramifications in the second half of the year that
Speaker 3: are hard to see right now. So I think you
Speaker 3: can hold up if we're a week away. I think
Speaker 3: if we're talking weeks or months, it's a much bigger
Speaker 3: question for an economy that's already you know, fairly narrow
Speaker 3: and being propped up in a lot of ways by
Speaker 3: AI spend and not the strength of the consumer, which
Speaker 3: is obviously had some trouble in the phase.
Speaker 2: Of wells last the debate right now economic ramification, so
Speaker 2: we see the consequences of nature. They're on the horizon,
Speaker 2: if not the reality right now on the ground in Europe.
Speaker 2: For the US, the US has got a lot going
Speaker 2: for it right now, seven hundred billion dollars of campas
Speaker 2: coming from just a handful of companies. More than that
Speaker 2: if you include o US. The radcount's already the pipeline
Speaker 2: from the end of last year, the tax refunds hitting
Speaker 2: bank accounts already at the moment coming into this quart.
Speaker 2: Can that stand up to the risk out it can?
Speaker 3: I mean, I think it's the main reason, along with
Speaker 3: corporate earnings, which've been robust, that the market is back
Speaker 3: at all time highs despite what is so clearly a
Speaker 3: very live war in the Middle East, in despite oil
Speaker 3: that has now been over one hundred dollars a barrel
Speaker 3: both Brandon WTI for a lot of the last two months.
Speaker 3: So there is a lot working for the economy. But
Speaker 3: there are two things that the economy can't stand up
Speaker 3: in the face of, which is higher for longer oil
Speaker 3: or really higher for longer rates. If we continue down
Speaker 3: this path, we run the risk of a little bit
Speaker 3: of both. If we put the FED in such a
Speaker 3: bind because of higher oil prices.
Speaker 2: Well, let's go with the right story. So we're at
Speaker 2: four basis points at the front end of the curve
Speaker 2: on TUESDA today at around three ninety two, not far
Speaker 2: off the highest of the year. At the front end
Speaker 2: on tens, we're basically there. Likewise, on thirties RUSS what
Speaker 2: does a five percent thirty year four forty ten year,
Speaker 2: let's call it four percent two year due to eanquities.
Speaker 3: We've seen over this pullmarket, you know, particularly the ten year,
Speaker 3: when it pushes past four fifty and starts to move
Speaker 3: towards five. That's really the like red zone for risk
Speaker 3: on equities, you know, the thirty I think the market
Speaker 3: cares a little bit less about but that four point
Speaker 3: fifty on the ten year.
Speaker 4: Is a really key level.
Speaker 3: So obviously market watchers and investors will be allaised on
Speaker 3: that for the next couple of weeks.
Speaker 4: Here, you know, on the front end of the curve.
Speaker 3: I think it's representative of a FED that is going
Speaker 3: to have its hand force. And I don't think we're
Speaker 3: talking hikes yet, but certainly it would be surprising to
Speaker 3: see a cut. In particular, following the descents from a
Speaker 3: handful of governors last week.
Speaker 2: When you say it.
Speaker 1: Has its hands force, that basically just mean you think
Speaker 1: the FED is on hold for the rest of the year.
Speaker 4: Yes, I think so.
Speaker 3: I think it would be really hard, even if worsh
Speaker 3: makes a convincing AI productivity case, to build consensus to
Speaker 3: get a rate cut, unless we're talking about maybe a
Speaker 3: rake cut in December, if we can get past I ran,
Speaker 3: you know, in a timely order. But yeah, I think
Speaker 3: a base case should be a hold for the remainder
Speaker 3: of the year.
Speaker 1: Well, so, if you're watching the market, what would it
Speaker 1: take for the FED you think to have to actually
Speaker 1: hike It's.
Speaker 3: Core inflation, right, So I think the FED is rightfully
Speaker 3: saying all the right things about looking through an energy shock.
Speaker 3: But we've also seen some pressure in core services inflation.
Speaker 3: We know the labor market is really tight in terms
Speaker 3: of you know, we're not adding jobs. The labor force
Speaker 3: is probably even shrinking. So if you started to see
Speaker 3: wage pressure, if you started to see housing and rent's
Speaker 3: bottom and turn back up, then the FED is forced
Speaker 3: to reconsider where we're at. The problem is the labor
Speaker 3: market doesn't look strong enough to stomach many heights.
Speaker 4: So we'll keep an eye on core services inflation.
Speaker 3: But I think the FED is again kind of caught
Speaker 3: between a rock and a hard place here, which maybe
Speaker 3: makes their job easier in some ways.
Speaker 2: And so what kind of FED reserve do you think
Speaker 2: that Kevin Walsh is inheriting when he steps into the
Speaker 2: big seat in June.
Speaker 4: Obviously very split FED.
Speaker 3: I mean, we haven't seen so many descents in a
Speaker 3: couple of decades at least. I think it's going to
Speaker 3: be really hard to build consensus towards a view that
Speaker 3: AI productivity merits rate cuts. Now, I think you might
Speaker 3: get a little bit more consensus on winding down the
Speaker 3: balance sheet a little bit maybe on some of the
Speaker 3: banking regulation issues that the FED has a hand in.
Speaker 3: But I think it's going to be really hard to
Speaker 3: build consensus, even if the economic argument is sound, because
Speaker 3: of all of the other noise from Iran, from the
Speaker 3: labor market, and from what AI might.
Speaker 4: Do to jobs.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: So here's the links this this morning, the President announcing
Speaker 2: the US will have ships transit the strate of form,
Speaker 2: Mercer run warning US forces will be attacked if they
Speaker 2: enter the waterway. Norman role of csis right in the following.
Speaker 2: There is still no evidence that either Washington or ten
Speaker 2: Round is prepared to make the concessions necessary for a
Speaker 2: near term settlement, nor I'm joined us now for more
Speaker 2: non Welcome to the program. Things feel a little bit
Speaker 2: tense coming into this week. How frangile is this true? Still?
Speaker 4: Good morning?
Speaker 5: Well, we have two countries that are each uninterested in
Speaker 5: starting hostilities, but neither ours are interested in making the
Speaker 5: concessions that would bring about a settlement. As I mentioned
Speaker 5: earlier the piece, the talks do remain ongoing, and that
Speaker 5: is a good thing and are likely to continue. And
Speaker 5: I think we're watching with Washington with the Project Freedom
Speaker 5: is to test the environment to see how far Ron
Speaker 5: is willing to go to change the atmosphere of the region.
Speaker 5: So the next couple of days will be quite important.
Speaker 1: But norm Project Freedom, it sounds like electronic guiding of
Speaker 1: ships through the strait of her moves. Is that actually possible?
Speaker 1: Do these ships actually need a naval escort?
Speaker 5: Well, they don't need a naval escort per se. But
Speaker 5: just because we're providing electronic guidance doesn't mean that we
Speaker 5: wouldn't be also having radar, perhaps air surveillance, and if
Speaker 5: they were to come under attack, that doesn't mean that
Speaker 5: we wouldn't be able to provide.
Speaker 4: Assistance if that decision.
Speaker 5: Were to be made, and we would be able to
Speaker 5: do so, but presumably from aircraft for example, if that
Speaker 5: were needed. Now, when you're talking about how the ships
Speaker 5: are moving, it's conceivable that they could be moving through
Speaker 5: Omani waters. So let's pull this issue apart. We've watched
Speaker 5: the Iranians in the last few weeks use their own
Speaker 5: waters to move ships from the north of the Persian
Speaker 5: Gulf to Pakistan. It could be that what is being
Speaker 5: considered is just to allow ships to move through Omani
Speaker 5: waters through the straight up hor Moos and then to
Speaker 5: exits to the Arabian Sea. So in essence, it's a
Speaker 5: reverse of what the Iranians themselves are doing. And then
Speaker 5: if the Iranians were to attack, they would be an
Speaker 5: essence attacking into Omani territory. The Omani's would have given
Speaker 5: the US permission to conduct operations. We would be providing
Speaker 5: defensive support. All of that would be legal under international law.
Speaker 5: So again that is a hypothetical scenario, but that is
Speaker 5: something that might be possible.
Speaker 1: Around this morning, is announcing a new control zone of
Speaker 1: the Strait of Hormuz. Is there any evidence that they're
Speaker 1: going to allow the US to have such operation, Well.
Speaker 5: There's no evidence that the Iranians are going to say
Speaker 5: anything that the US will care about him, and the
Speaker 5: Iranians are going to make a number of statements exerting
Speaker 5: their control over the straight orfor moves, but the US
Speaker 5: doesn't recognize that because they have no legal authority to
Speaker 5: control an international waterway. So this is just another statement
Speaker 5: by the Iranian government, and their parliament has made a
Speaker 5: number of statements making such claims.
Speaker 4: So this is just one more and a long line
Speaker 4: of such statements.
Speaker 1: Normal when do you think the Iranian oil industry will
Speaker 1: start to see shut ins and really be forced to
Speaker 1: potentially have a little bit more of an economic collapse
Speaker 1: in the oil industry. The Treasury Secretary yesterday said next week,
Speaker 1: although two weeks ago he said it was just a
Speaker 1: matter of days. We are seeing the Iranians use alternative roots,
Speaker 1: like putting some oil by rail to China. At what
Speaker 1: point do you think we see really economic collapse.
Speaker 5: Well, we're that this Treasury secretary was correct. Within some days,
Speaker 5: the Iranian system was facing severe problems. They started to
Speaker 5: use old ships that they had in storage to store oil,
Speaker 5: and they are indeed sending some oil out through land
Speaker 5: routes through Pakistan reportedly, but this does not relieve them
Speaker 5: of their problem. But the question really becomes that once
Speaker 5: they start shutting oil fields, does this really change their
Speaker 5: decision making?
Speaker 4: And so there's a question of.
Speaker 5: Why will they feel economic pain and will the pain
Speaker 5: be sufficient to actually matter in terms of the diplomatic negotiations. So, yes,
Speaker 5: they will start feeling pain significant increase, probably in about
Speaker 5: a week to two weeks, but it's going to be
Speaker 5: some time after that before they actually reach a point
Speaker 5: where it starts to grade ier GC revolutionary Guard operations
Speaker 5: and government operations to the point where the government fields
Speaker 5: that have to make changes. That could be some time,
Speaker 5: but we should be upfront. The Iranian government is losing
Speaker 5: hundreds of millions of dollars a day because of their
Speaker 5: decision making, and that is certainly impacting the debate within
Speaker 5: their decision making. However, as we've seen over the weekend,
Speaker 5: it has not changed their diplomatic positions, which essentially remained
Speaker 5: unchanged from the beginning of the war.
Speaker 1: The President will be heading to China soon. At what
Speaker 1: moment could China potentially play a bigger role to making
Speaker 1: sure the Iranians actually show up to the table and
Speaker 1: have a negotiation with the United States.
Speaker 5: No country has significant influence over Iranian decision making. The Iranians, however,
Speaker 5: do use the number of countries as doorways to diplomatic
Speaker 5: exits when they wish to do so. In China, Russia,
Speaker 5: Pakistan could be those doorways when necessary, But we should
Speaker 5: be clear China does not have significant influence over the
Speaker 5: Supreme Council for National Security in Iran, or they would
Speaker 5: have stopped this war some time ago. We should recall
Speaker 5: that China was a facilitator for the Saudi Iranian Peace
Speaker 5: of Court March twenty twenty three, and that obviously.
Speaker 4: Didn't mean it didn't mean anything.
Speaker 1: Where do you think talks stand right now? Because the
Speaker 1: President yesterday announced this operation to guide ships or the
Speaker 1: straightup removes, also said that there have been positive discussions
Speaker 1: with the Iranians.
Speaker 5: Well, talks are underway indirectly through the Pakistanis, which indicates
Speaker 5: that the diplomatic process does exist, and that's a good thing,
Speaker 5: and it shows that a process exists vice a move
Speaker 5: towards hostilities. So as long as that trend continues, we're
Speaker 5: moving in the right directions. At the same time, the
Speaker 5: President has a good history of showing that when he
Speaker 5: feels his time has been wasted, he will move to
Speaker 5: military action. And we do have two aircraft carrier task
Speaker 5: forces in the region, and those military personnel are prepared
Speaker 5: to initiate operations to clear the straight of removes, which
Speaker 5: of course would mean operations against the billistic missiles and
Speaker 5: dernes in mainland Iran were that to order be given.
Speaker 2: Stay with us more Bloomberg surveillance coming up. After this,
Speaker 2: Three FED officials single in caution about the Central Bank's
Speaker 2: path forward. The former New York Fed President Bill Dudley,
Speaker 2: seeing no good reason for Kevin Walsh to allow interest rates,
Speaker 2: writing his latest rustionale that inflationary pressures are subsiding is
Speaker 2: no more convincing than its predecessors. Bill joined us now
Speaker 2: for more. Bill, Welcome to the program, Sir. What is
Speaker 2: the strongest argument against not cunning interest rates right now?
Speaker 6: Well?
Speaker 4: I think two things.
Speaker 6: Number One, the risks of inflation have increased, obviously because
Speaker 6: of the team rise and energy prices. And number two
Speaker 6: that the liver market seems to be pretty stable. We're
Speaker 6: not seeing a lot of job growth, but we're seeing
Speaker 6: enough job growth to keep the unemployment rate from rising.
Speaker 6: So I think that the balance of risk is actually
Speaker 6: shifting more or to the inflation side away from the
Speaker 6: libor market side. Second thing is that there's not a
Speaker 6: real evidence that monetary policy is actually restrictive right now.
Speaker 6: We've had Bodally a restrictive manitary policy for quite some time.
Speaker 4: Yet the economy is operating at.
Speaker 6: Full employment and inflation is well above the Pedes two
Speaker 6: percent objective. So the evidence that the Mandrey policy is
Speaker 6: actually holding back the economy, I think it's pretty weak
Speaker 6: in the current environment.
Speaker 2: But what do you make at the AI argument. It
Speaker 2: wasn't something that was articulated in the hearing, but it's
Speaker 2: something we've heard from Kevin Walsh before in the lead
Speaker 2: up to its confirmation that ultimately will lead to lower
Speaker 2: prices and will give them room to reduce interest rates.
Speaker 2: What's the pushback to that.
Speaker 4: I think the pushback to that is twofold number one.
Speaker 6: AI in the short term is actually increasing investment demand,
Speaker 6: so that's actually pushing upward pressure on interest rates. Number two.
Speaker 6: There's a lot of uncertainly about how fast the AI
Speaker 6: protivity benefits will materialize, and it's not really clear whether
Speaker 6: that will you know, what will dominate the downward effect
Speaker 6: on inflation or the upward effect on the demand for capital,
Speaker 6: and that effect of that on interest rates. There was
Speaker 6: a poll of a comust that basically found that over
Speaker 6: eighty percent of the economist said no, I would not
Speaker 6: recommend cutting rates now prospectively on the basis of an
Speaker 6: AI productivity boom. The other weakness of the argument is
Speaker 6: Kevin Wirsch has cited the green span experience in the
Speaker 6: late nineteen nineties is a reason to cut well The
Speaker 6: reality is Greenspan did not cut in the ninety nineteen nineties.
Speaker 6: He just didn't raise interest rates, and.
Speaker 4: Interest rates at the time we're well about where they
Speaker 4: are today.
Speaker 2: Bill. Do you think that's just a sequencing problem. What's
Speaker 2: your ultimate view? Your personal view on the matter is
Speaker 2: that a sequencing gets you that is expensive up front,
Speaker 2: It pushes up costs, there's a climate to buy all
Speaker 2: kinds of things, and then later on costs for well.
Speaker 6: I think AI, if we do get a productivity surge,
Speaker 6: it's going to be good for the outlook for inflation.
Speaker 4: I think it's less clear what that means for interest rates.
Speaker 6: Because if AI results in a you know, obsoletes lot
Speaker 6: of the capital stopping, you need to sort of build
Speaker 6: a new capital to take full benefits of the AI.
Speaker 4: If you can actually see continued upward pressure on real interest.
Speaker 2: Rates, no good races account rights. That was the title
Speaker 2: of your pace right now, Bill, you echo that in
Speaker 2: this conversation. It does bank the question why is the
Speaker 2: current FED chair and the committee maintaining an easing bias?
Speaker 6: I think they can start with the presumption that number
Speaker 6: one entre policy is restrictive, which I don't really agree
Speaker 6: with and number two that they're concerned about the downside
Speaker 6: risks of the labor market. I think those downside risks
Speaker 6: of the labor market were probably pretty relevant, you know,
Speaker 6: a few months ago, but the labor market seems to
Speaker 6: have stabilized. Look at the level of initial unemployment claims
Speaker 6: and total unemploymable cains. They're really basically as low as
Speaker 6: they've been in many, many years. So there really is
Speaker 6: very little evidence that the liver market's falling apart at
Speaker 6: this point.
Speaker 1: Well, what do you make of Chair j Powell staying
Speaker 1: on for longer than many have anticipated, given he will
Speaker 1: be a former FED chair at the next meeting.
Speaker 6: Well, it's clearly unusual, but not without president. And you know,
Speaker 6: for the people that are criticizing, you know, Jay Powell
Speaker 6: for staying on, I think that's not really fair.
Speaker 4: I mean, he didn't start this whole situation.
Speaker 6: You know, the FED has been under merciful attack, merciless
Speaker 6: attack from the President, and the FED independence is under question,
Speaker 6: and I think Paul thinks that by staying on the FED,
Speaker 6: that's going to actually bolster of the FEDS the perception
Speaker 6: of the Fed's independence. So I think it makes sense
Speaker 6: for him to day on if he's willing to do so.
Speaker 1: I believe over the weekend the Treasury Secretary called it
Speaker 1: an overreaching shadow FED chair. Do you believe that this
Speaker 1: will be confusing for financial markets to have what some
Speaker 1: might think to co chairs.
Speaker 6: Well, I think Paul has made it very clear that
Speaker 6: he's going to keep a very low profile.
Speaker 4: So I don't think you're going to see Paul going
Speaker 4: out and giving.
Speaker 6: A lot of speeches about the economic outlook and the
Speaker 6: implications for monetary policy. But obviously around the committee, when
Speaker 6: you have the actual fmc meing, it's going to be
Speaker 6: pretty relevant what Chair Powell says about the economic outlook
Speaker 6: that people are certainly going to continue to listen to him.
Speaker 2: Well, obviously the incoming FED chair is going to want
Speaker 2: to do it his own way. What kind of changes
Speaker 2: would you advocate for in communication? Whatever it might be,
Speaker 2: a fewer speeches, the dot plot, what would you change?
Speaker 6: I think there are a lot of things that they
Speaker 6: could change and improve. I mean I think that number one,
Speaker 6: you need a framework for quantitative easing and quantitative tightening.
Speaker 6: They don't have one right now. When you do it,
Speaker 6: how do you do it? How do you exit from it,
Speaker 6: how do you evaluate the cost and benefits of it?
Speaker 6: Number two, I think they really do need to improve
Speaker 6: their communications. And I think what I would recommend, and
Speaker 6: this is something that Ben Bernanke recommended, is to actually
Speaker 6: publish a staff forecast with scenarios, alternative scenarios. Scenario analysis
Speaker 6: right now is so relevant in an environment where we
Speaker 6: don't know how long oil prices, how high oil presses
Speaker 6: are going to go, or how long they're going to
Speaker 6: stay high. So having different scenarios that basically say how
Speaker 6: you respond if things turn out differently than you expect
Speaker 6: is very helpful information to guide markets.
Speaker 4: So I think, you know the ECB does this.
Speaker 6: I had a conversation with Christine Lagard a couple weeks
Speaker 6: ago about this. You know, they have three scenarios baseline,
Speaker 6: adverse scenario, and severe and she basically said, every day
Speaker 6: that the situation in Ron stays the way it is today,
Speaker 6: we're taking one more step away from the baseline scenario
Speaker 6: towards the adverse one. So having alternative scenarios I think
Speaker 6: to help people think better about the monetary policy.
Speaker 2: But is it harder when you have a dual mandate?
Speaker 4: I don't think so. I mean, I think the dual mandate.
Speaker 6: I think people overestimate the tension in the dual mandate
Speaker 6: at the end of the day. I mean, I think
Speaker 6: the Fed's view is we need to keep inflation at
Speaker 6: two percent because that's actually going to help us more
Speaker 6: easily achieve our employment objectives. So the two are not
Speaker 6: quite as much tension in the long run their intention
Speaker 6: in the short runs at times, but the long run,
Speaker 6: you really need to keep inflation at two percent of
Speaker 6: you're actually going to achieve your objective in terms of employment.
Speaker 2: This is the Bloomberg Survendments podcast, bringing you the best
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