WEBVTT - Surveillance: ECB Surprise (Podcast)

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<v Speaker 1>Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along

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<v Speaker 1>with Jonathan Ferrell and Lisa brown Witz Jay Lee. We

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<v Speaker 1>bring you insight from the best and economics, finance, investment,

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<v Speaker 1>and international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud,

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<v Speaker 1>Bloomberg dot Com, and of course on the Bloomberg Terminal.

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<v Speaker 1>Joints and macro strategist at UPS the City. Talk to

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<v Speaker 1>me about what you think about what we've just heard

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<v Speaker 1>from the c c B. Yeah, well, I think the

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<v Speaker 1>market reaction makes sense. Um, we got fifty basis points,

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<v Speaker 1>which is kind of in line with you know, the

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<v Speaker 1>Bloomberg story that came out a few a few days ago. Clearly,

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<v Speaker 1>the points that you've been making about forward guidance apply

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<v Speaker 1>not just to you, not just to ECB, but to

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<v Speaker 1>other central banks as well. We've seen those quick turnarounds

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<v Speaker 1>and changes of mind. And and look, I mean that's

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<v Speaker 1>that's the inflation picture in Europe and globally. It just

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<v Speaker 1>forces central banks to front load. It really made no

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<v Speaker 1>sense to end up with negative rates at the end

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<v Speaker 1>of this meeting. And and and that's what that's what

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<v Speaker 1>the CB decided. To Tom's point, I think the fragmentation

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<v Speaker 1>tool is probably longer turn the more important, the more

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<v Speaker 1>important variable for the Euros. So we're gonna see, we're

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<v Speaker 1>gonna be anxious to see, um all the details from

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<v Speaker 1>vastly to me, what's so important here is nonlinearity. We're

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<v Speaker 1>getting to a restrictive state within the Central Bank of

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<v Speaker 1>the United States. We're nowhere near that with the e

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<v Speaker 1>c B. How nonlinears Leaguard's trip to the end of

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<v Speaker 1>two thousand twenty two, and in the next year, this

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<v Speaker 1>gets ever more difficult, doesn't it. It doesn't, It doesn't

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<v Speaker 1>get easy. I think the problem for the some of

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<v Speaker 1>the central banks that are front loading right now if

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<v Speaker 1>you get a front load and then get to neutral

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<v Speaker 1>and then stop, but inflation is not slowing than than

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<v Speaker 1>what do you do right? Uh? The CB is going

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<v Speaker 1>a little bit slower as you point as you're pointing out,

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<v Speaker 1>at least they're starting later. What we do think they

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<v Speaker 1>probably get to you know, at least one and a

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<v Speaker 1>half percent by by next year, which which is starting

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<v Speaker 1>to push them into into a neutral or restrictive as well.

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<v Speaker 1>But again, the key variable here's this, quite how quickly

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<v Speaker 1>can inflation start coming down? Uh? In order for those

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<v Speaker 1>central banks are actually to actually stop where they think

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<v Speaker 1>they're gonna stop. And that's uh, that's probably you know,

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<v Speaker 1>that's probably the key question for the markets. And then

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<v Speaker 1>of course, I think increasingly from here it's it's you're

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<v Speaker 1>going to be the growth inflation mix, right, the growth

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<v Speaker 1>inflation mix has been very, very bad. Um, they're hoping

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<v Speaker 1>it's it's you know, they can hike without triggering and

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<v Speaker 1>even deep a downturn. But that's that's very mution open questions.

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<v Speaker 1>Well to that point, for silly, can this bounce we're

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<v Speaker 1>seeing in the euro stick Yeah, it's very hard to

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<v Speaker 1>see that stick for a very long time. And I

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<v Speaker 1>think the problem is it's not just about the fragmentation, right,

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<v Speaker 1>So what we'll see about the details of this instrument, um.

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<v Speaker 1>I with Tom's point in the sense that you know,

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<v Speaker 1>if it's open ended, that's a that's a very good signal,

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<v Speaker 1>um Right, if it's not, if it's not limited, um,

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<v Speaker 1>that might get us to let's say one or three,

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<v Speaker 1>one or three and a half. As far as the

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<v Speaker 1>you're a dollar. The problem is that some of the bigger,

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<v Speaker 1>bigger issues related to European growth are still there, right,

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<v Speaker 1>and this is gas supplies, um, and how what are

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<v Speaker 1>we going to do this winter? So in that sense,

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<v Speaker 1>I think investors, most investors do it. We talked to

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<v Speaker 1>are still um, quite negative on the euro and and

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<v Speaker 1>and probably you know, getting ready to sell to sell

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<v Speaker 1>the rallies. Um. The whatever the e CP does today

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<v Speaker 1>unfortunately doesn't really change the threat of a deeper downturn um,

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<v Speaker 1>you know, in the next six months if indeed we

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<v Speaker 1>moved to things like um, you know, energy supply rationing

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<v Speaker 1>in Europe. I have a silly, truly historic I'm been

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<v Speaker 1>able to say these words for a long time. Have

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<v Speaker 1>we cilly cetub break off? There have ups the first

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<v Speaker 1>interest right high from the e CP since twenty eleven,

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<v Speaker 1>giom Wack. We are honored that he is with us today,

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<v Speaker 1>is the chief economistic acts investment management and is arguably

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<v Speaker 1>the most read acts in market economics in Europe. So

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<v Speaker 1>let me ask you an open question right now, what

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<v Speaker 1>will you listen for X and or ex post from

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<v Speaker 1>Christine Lagarde. Um, it's going to be an interesting sell

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<v Speaker 1>for a cassing again because um, what they've actually done

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<v Speaker 1>today is by going to fifty, whereas they add actually

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<v Speaker 1>telegraphed twenty five. They've basically get rid got rid of

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<v Speaker 1>forward guidance. We used to have a pretty precise followard

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<v Speaker 1>guidance from from the CD and since they've done something

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<v Speaker 1>which is quite different from what they had announced last time. Accordingly,

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<v Speaker 1>uh they have just said that for the next moves,

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<v Speaker 1>for the next decisions, it will be a meeting by

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<v Speaker 1>meeting process. It would be completely data dependent. So I

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<v Speaker 1>guess journalists are going to try to extract as much

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<v Speaker 1>information from Casina gald as to what the next moves

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<v Speaker 1>are going to be, and I would expect her to

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<v Speaker 1>be extremely guarded because that's a new regime. Basically, we

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<v Speaker 1>have a central bank today which is saying us, okay,

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<v Speaker 1>I read the band aid, I got fifty and sorry,

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<v Speaker 1>I told you something different in June, and for one's

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<v Speaker 1>going to come up next well, we'll see. So it's

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<v Speaker 1>going to be I think an interesting debate. The other issue,

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<v Speaker 1>obviously is on the rules of engagement of of TPI S.

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<v Speaker 1>It's you know, that is the name of the anti

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<v Speaker 1>fragmentation weapon. It's likely to be quite a big instrument

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<v Speaker 1>and possibly a convincing instrument on paper. We'll have the

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<v Speaker 1>details a bit later. But the question everyone has is

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<v Speaker 1>what are the conditions, what are the circumstances under which

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<v Speaker 1>you would actually activate it? And um consensus right now

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<v Speaker 1>and I agree with that is that given the nature

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<v Speaker 1>of the crisis currently in Italy, which is a home

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<v Speaker 1>ground political crisis, it's unlike clear that you could use

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<v Speaker 1>an antifragmentation instrument to deal with this. So I guess

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<v Speaker 1>Christinagan is going to have a lot of questions on

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<v Speaker 1>you know, what are exactly does engage controls? So you

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<v Speaker 1>know there's two points there. There's one on interest rates

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<v Speaker 1>and the other is on t P. I let's just

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<v Speaker 1>start with rates and finish up there. They're not going

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<v Speaker 1>to give us a guide towards what they're going to

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<v Speaker 1>do in September. I get all of that. Which she

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<v Speaker 1>needs to establish in this news conference is the reaction

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<v Speaker 1>function of the ECB. What they have led us to

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<v Speaker 1>believe is that the next move is a hike. They're

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<v Speaker 1>basically saying that further normalization of interest rates will be appropriate.

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<v Speaker 1>What they're not telling us is the size of that hike.

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<v Speaker 1>Do you have a decent understanding of what the economic

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<v Speaker 1>data points will be the influence the decision between twenty

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<v Speaker 1>five and fifty, and how we're meant to understand the

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<v Speaker 1>incoming data, internalize that and come up with a view

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<v Speaker 1>about what this means for ECB rate hikes. Well, clearly,

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<v Speaker 1>you know CPO prints that will be important even if

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<v Speaker 1>by September, honestly there's you know, we are unlikely to

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<v Speaker 1>have a big change actually into kind of information will

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<v Speaker 1>get from from CPO prints, So you probably probably want

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<v Speaker 1>to go up the pipeline basically of of inflationary pressure.

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<v Speaker 1>I think a key issue is what's going to happen

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<v Speaker 1>with with wage growth, and that's a problem we have

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<v Speaker 1>specifically in Europe because data reliable data on wage growth

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<v Speaker 1>come very very late and much later than they do

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<v Speaker 1>in the US. So when you have a central bankmaking

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<v Speaker 1>decisions basically on the risks of second round effects from

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<v Speaker 1>from inflation, you need to know exactly where the labor

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<v Speaker 1>market is going and whether or not we are seeing

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<v Speaker 1>some proper in a wage acceleration. So that is going

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<v Speaker 1>to be to be to be key and probably also

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<v Speaker 1>a side issue which is unfortunately very binary and which

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<v Speaker 1>actually probably explains why these doesn't want to give us

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<v Speaker 1>any kind of forward guidance is what the Russian is

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<v Speaker 1>going to do with gas, because news today is that

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<v Speaker 1>apparently there's at least a trickle of gas supply going

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<v Speaker 1>through north Stream one. But we never know whether or

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<v Speaker 1>not this is going to be uh, this to continue

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<v Speaker 1>for several month, whether or not will have another maintenance

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<v Speaker 1>period in which the Russians cuts access to gas, and

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<v Speaker 1>that is superbinary. In Europe. Basically the border between stagnation

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<v Speaker 1>and the proper significant recession is whether or not we

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<v Speaker 1>still have access to Russian gas by by the winter.

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<v Speaker 1>So that might actually be quite an important input in

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<v Speaker 1>their in their reaction function. You're just briefly then on

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<v Speaker 1>t P I. The conditionality around this hard to make

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<v Speaker 1>it cool at the moment, but best guess what do

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<v Speaker 1>you think it will be. I don't think it's going

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<v Speaker 1>to be big. I think it's going to be about,

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<v Speaker 1>you know, the next generation YOU program is going to

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<v Speaker 1>be about you know, complying with the European surveillance physical

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<v Speaker 1>surveillance rules which actually at the moment have been have

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<v Speaker 1>been suspended. I don't think is going to be heavy.

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<v Speaker 1>The problem is that for those milestones to be ticked

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<v Speaker 1>for this to be for this even like contionality to

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<v Speaker 1>be complied with. You need a government. You need a

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<v Speaker 1>government in Italy that actually plays place according to the rules,

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<v Speaker 1>and that's a big Christian market the moment. Well, and

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<v Speaker 1>there's a conversation happening on our type top live blog

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<v Speaker 1>on the Bloomberg terminal right now about the fact that

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<v Speaker 1>you've got the fifty basis points, which appeases the hawks,

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<v Speaker 1>but you also got at the same time this tp I,

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<v Speaker 1>which appeases the doves, because then you have a crisis

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<v Speaker 1>management tool to ensure that the transmission is smooth. If

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<v Speaker 1>it doesn't work as intended, does the ECP get stuck

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<v Speaker 1>here at zero? It's it's it's it's a possibility, I

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<v Speaker 1>would I would doubt it, because my impression is that

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<v Speaker 1>you know, they've raised the bar quite high. They really

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<v Speaker 1>really want to normalize. Now. It's true that once you've

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<v Speaker 1>hit zero, possibly the debate changes a little bit because

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<v Speaker 1>at the Goblin Council get a number of people, including

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<v Speaker 1>among the dogs, who never actually liked negative interest rate

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<v Speaker 1>in the first place. We've always thought they was controversial,

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<v Speaker 1>possibly counterproductive. Once you've brought post rates to zero, it's

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<v Speaker 1>a slightly different conversation. However, given the kind of inflation

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<v Speaker 1>we have the pipeline, it would take a lot, I

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<v Speaker 1>think for the CD two to stop normalizing from from

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<v Speaker 1>where we are right now. Okay, so maybe they won't

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<v Speaker 1>stop normalizing entirely, but how much do you think they'll

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<v Speaker 1>actually be able to normalize? What rate do you think

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<v Speaker 1>they will get to before the economy forces them to stop.

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<v Speaker 1>My forecast is that at the end of year there

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<v Speaker 1>at one percent, which is the lower end of the

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<v Speaker 1>range that they gave us for what they consider to

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<v Speaker 1>be um neutral rates. Uh So, end of twenty three,

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<v Speaker 1>if we avoid a catastrophe a link to to to

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<v Speaker 1>the gas situation, they might go to the middle of

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<v Speaker 1>that neutral range, around one fifty. But that would probably

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<v Speaker 1>the maximum of what I could expect. Then there is

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<v Speaker 1>a significant risk that they get stuck at one percent

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<v Speaker 1>if we we end up with a very significant slowdown

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<v Speaker 1>and if you wage growth desiderates instead of externating. But

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<v Speaker 1>the natural slope I think for the CP is to

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<v Speaker 1>really get at least into this neutral range, which is

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<v Speaker 1>at least I think I've been taking to you on

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<v Speaker 1>of for about ten years, and this is the first

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<v Speaker 1>time we've got to talk about right hike from the

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<v Speaker 1>e c BO. Thank you, Mark of Extra Investment Management.

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<v Speaker 1>We've got Mark Chandler Bonnockburn Chief Market Strategies here. Mark,

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<v Speaker 1>Tom and I were just talking about kind of what

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<v Speaker 1>we've seen from the e c B this morning, the

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<v Speaker 1>surprise fifty basis point rate hike. We saw strength initially

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<v Speaker 1>in the euro, but it seemed to be giving that up.

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<v Speaker 1>What are your takeaways? Yes, so I think you're right.

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<v Speaker 1>I think that the ECB surprised many people by hiking

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<v Speaker 1>fifty basis points. To Bloomberg had the leak earlier this weekend,

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<v Speaker 1>when the leak first came out and unsourced reports saying

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<v Speaker 1>that you know, officials close to the ECB are talking

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<v Speaker 1>about a fifty basis point hike, I recognize that as

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<v Speaker 1>a likely quid pro quote for the for what now

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<v Speaker 1>the Guard calls a TPI, the transmission protection instrument. I

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<v Speaker 1>think that the market had been set up for a

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<v Speaker 1>by the rumor sell the fact. In any event, you

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<v Speaker 1>think about what's happened. The euro rallied about ninety nine

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<v Speaker 1>and a half cents to about one oh two and

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<v Speaker 1>a half cent in the first three or four days

0:12:11.080 --> 0:12:13.080
<v Speaker 1>of this week, and so I thought this was a

0:12:13.080 --> 0:12:15.400
<v Speaker 1>short covering move. And I think now the focus shifts

0:12:15.400 --> 0:12:17.600
<v Speaker 1>to the stud of reserve, which is going to high grates,

0:12:17.640 --> 0:12:20.800
<v Speaker 1>most likely by seventy five basis points next week. That

0:12:20.840 --> 0:12:23.880
<v Speaker 1>means that the rate differential, the policy rate differential is

0:12:23.960 --> 0:12:26.280
<v Speaker 1>moving in the US is favored by twenty five basis

0:12:26.280 --> 0:12:30.200
<v Speaker 1>points this month. Okay, the rate differentials there, but also

0:12:30.280 --> 0:12:33.840
<v Speaker 1>it's about confidence in the economy and Mark Chandler, and

0:12:33.880 --> 0:12:37.320
<v Speaker 1>you've been so good about folding in foreign exchange dynamics

0:12:37.400 --> 0:12:40.600
<v Speaker 1>over to what g d P actually does. There's a

0:12:40.679 --> 0:12:43.920
<v Speaker 1>headline in the blur here where she says their run

0:12:44.040 --> 0:12:50.000
<v Speaker 1>rate is there's no recession in Europe. Do you buy that? Yeah?

0:12:50.040 --> 0:12:51.680
<v Speaker 1>I think you know that. I think is just the

0:12:51.760 --> 0:12:54.000
<v Speaker 1>typical kind of central bank talk. I mean, what's Cyple

0:12:54.080 --> 0:12:57.280
<v Speaker 1>Bank really forecast of recession like the FED doesn't. I

0:12:57.600 --> 0:13:00.360
<v Speaker 1>think that the odds of a European recession are in preasing,

0:13:00.400 --> 0:13:01.640
<v Speaker 1>but I think the odds of the U S re

0:13:01.679 --> 0:13:03.839
<v Speaker 1>session are increasing too. In Powell is not going to

0:13:03.920 --> 0:13:07.320
<v Speaker 1>say that next week. Do you have a call in

0:13:07.360 --> 0:13:10.280
<v Speaker 1>euro at Bannockburndeed, you you know, do you have it?

0:13:10.360 --> 0:13:12.440
<v Speaker 1>Can you give us a single point call five days

0:13:12.480 --> 0:13:15.400
<v Speaker 1>out in Euro five days out, I think we're gonna

0:13:15.440 --> 0:13:16.800
<v Speaker 1>be lower. I think that we're gonna be having to

0:13:16.880 --> 0:13:18.439
<v Speaker 1>go back and test at nine and nine and a

0:13:18.480 --> 0:13:21.720
<v Speaker 1>half cent area that we saw last week. And I

0:13:21.760 --> 0:13:23.800
<v Speaker 1>think I would expect that before the f O m

0:13:23.840 --> 0:13:26.280
<v Speaker 1>C meets and you know when they before they make

0:13:26.320 --> 0:13:28.640
<v Speaker 1>the decision at seventy five basis points a dollar goes

0:13:28.679 --> 0:13:32.080
<v Speaker 1>better bid. You know, besides the ECB, the other big

0:13:32.559 --> 0:13:35.000
<v Speaker 1>the other big thing today, of course, is that Italy

0:13:35.160 --> 0:13:38.600
<v Speaker 1>political crisis and those spreads are widening, and typically those

0:13:38.600 --> 0:13:41.960
<v Speaker 1>widening spreads works against the Europe. They a candidate for

0:13:42.040 --> 0:13:47.280
<v Speaker 1>the t P I a crisis tool. Well, you know,

0:13:47.920 --> 0:13:50.480
<v Speaker 1>I think that Leguard try to put the best face

0:13:50.559 --> 0:13:53.600
<v Speaker 1>on it, but first she told us it's a secondary tool.

0:13:53.800 --> 0:13:56.520
<v Speaker 1>The first tool is gonna be the flexibility with the

0:13:56.679 --> 0:14:00.720
<v Speaker 1>recycling or reinvesting of the emergency purchases they already made.

0:14:01.400 --> 0:14:04.240
<v Speaker 1>I think the euro going through yesterday's low, this is

0:14:04.280 --> 0:14:07.560
<v Speaker 1>really setting up a very poor technical condition for the

0:14:07.559 --> 0:14:10.079
<v Speaker 1>next few days. I mean, Paul I make jokes about it,

0:14:10.120 --> 0:14:14.000
<v Speaker 1>but I adore Clause Reggling, who I've seen twice in

0:14:14.040 --> 0:14:17.920
<v Speaker 1>the last six months. Who's at the absolute pivot point

0:14:18.080 --> 0:14:22.520
<v Speaker 1>of these discussions. He is an esteemed diplomat and economist

0:14:23.040 --> 0:14:27.280
<v Speaker 1>from Germany. And I can't fathom le Guard and Reggling

0:14:27.720 --> 0:14:30.920
<v Speaker 1>talking about the future of Italy. I can't imagine it's

0:14:31.160 --> 0:14:33.320
<v Speaker 1>it's always it seems like it's always a front and

0:14:33.360 --> 0:14:36.880
<v Speaker 1>center mark. So as we think about the US Federal Reserve,

0:14:36.920 --> 0:14:39.520
<v Speaker 1>we think about July, we train our attention on that.

0:14:39.920 --> 0:14:42.360
<v Speaker 1>In your mind, is a hunter basis points off the

0:14:42.440 --> 0:14:45.720
<v Speaker 1>table completely? Well, I think the market is pricing in

0:14:45.760 --> 0:14:48.240
<v Speaker 1>about a one in five chance it had taken place.

0:14:48.960 --> 0:14:51.200
<v Speaker 1>I think that the odds of it are really you know,

0:14:51.280 --> 0:14:53.400
<v Speaker 1>look at what happened today with the Philly Fed survey.

0:14:54.000 --> 0:14:56.080
<v Speaker 1>What a big myth, and so I don't think that.

0:14:56.240 --> 0:14:57.800
<v Speaker 1>I don't think this is going to stay of sedand

0:14:57.800 --> 0:14:59.280
<v Speaker 1>I think they just want to do a measured pace

0:14:59.680 --> 0:15:02.120
<v Speaker 1>seven fight. The market is giving them seventy five dabs points.

0:15:02.120 --> 0:15:04.560
<v Speaker 1>I think they want to take that. So what are

0:15:04.600 --> 0:15:07.720
<v Speaker 1>the key issues here? Uh? From your perspective, as you

0:15:07.760 --> 0:15:11.640
<v Speaker 1>think about kind of where this economy is going, you know,

0:15:11.640 --> 0:15:13.600
<v Speaker 1>how much credit do you give the Fed here? I

0:15:13.600 --> 0:15:16.520
<v Speaker 1>guess for trying to find that balance between fighting inflation

0:15:16.800 --> 0:15:20.480
<v Speaker 1>and preventing recession. I don't really see the FED pretty

0:15:20.560 --> 0:15:24.560
<v Speaker 1>much emphasis in the resistant recession. I mean they I mean,

0:15:24.560 --> 0:15:26.360
<v Speaker 1>I think Powells really says it right. I mean, I

0:15:26.360 --> 0:15:29.800
<v Speaker 1>think he says, we're really determined to curb inflation. We

0:15:29.880 --> 0:15:32.880
<v Speaker 1>hope we can, we can avoid a recession. To me,

0:15:32.960 --> 0:15:36.880
<v Speaker 1>that's like asymmetrical, like surrect perception. So I don't see

0:15:36.880 --> 0:15:39.280
<v Speaker 1>I don't see the FED really trying hard to avoid

0:15:39.280 --> 0:15:42.760
<v Speaker 1>a recession. I think they're more much more focused on inflation.

0:15:42.800 --> 0:15:45.120
<v Speaker 1>And I think, you know, because so long these people

0:15:45.200 --> 0:15:47.440
<v Speaker 1>cried for a Voker moment, and now they've got a

0:15:47.480 --> 0:15:50.000
<v Speaker 1>Vocer moment and to get afraid of it. Mark Chan,

0:15:50.280 --> 0:15:52.240
<v Speaker 1>thank you so much. Too. Short of visit with Bannock

0:15:52.280 --> 0:15:56.920
<v Speaker 1>Burden this morning. This is the Bloomberg Surveillance Podcast. Thanks

0:15:56.920 --> 0:16:00.600
<v Speaker 1>for listening. Join us live weekdays from seven ten a m.

0:16:00.760 --> 0:16:05.240
<v Speaker 1>Eastern on Bloomberg Radio and on Bloomberg Television each day

0:16:05.280 --> 0:16:08.920
<v Speaker 1>from six to nine am for insight from the best

0:16:08.960 --> 0:16:14.000
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0:16:18.920 --> 0:16:22.160
<v Speaker 1>and of course, on the terminal I'm Tom Keene, and

0:16:22.280 --> 0:16:24.119
<v Speaker 1>this is Bloomberg.