Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa brown Witz Jay Lee. We
Speaker 1: bring you insight from the best and economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud,
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Speaker 1: Joints and macro strategist at UPS the City. Talk to
Speaker 1: me about what you think about what we've just heard
Speaker 1: from the c c B. Yeah, well, I think the
Speaker 1: market reaction makes sense. Um, we got fifty basis points,
Speaker 1: which is kind of in line with you know, the
Speaker 1: Bloomberg story that came out a few a few days ago. Clearly,
Speaker 1: the points that you've been making about forward guidance apply
Speaker 1: not just to you, not just to ECB, but to
Speaker 1: other central banks as well. We've seen those quick turnarounds
Speaker 1: and changes of mind. And and look, I mean that's
Speaker 1: that's the inflation picture in Europe and globally. It just
Speaker 1: forces central banks to front load. It really made no
Speaker 1: sense to end up with negative rates at the end
Speaker 1: of this meeting. And and and that's what that's what
Speaker 1: the CB decided. To Tom's point, I think the fragmentation
Speaker 1: tool is probably longer turn the more important, the more
Speaker 1: important variable for the Euros. So we're gonna see, we're
Speaker 1: gonna be anxious to see, um all the details from
Speaker 1: vastly to me, what's so important here is nonlinearity. We're
Speaker 1: getting to a restrictive state within the Central Bank of
Speaker 1: the United States. We're nowhere near that with the e
Speaker 1: c B. How nonlinears Leaguard's trip to the end of
Speaker 1: two thousand twenty two, and in the next year, this
Speaker 1: gets ever more difficult, doesn't it. It doesn't, It doesn't
Speaker 1: get easy. I think the problem for the some of
Speaker 1: the central banks that are front loading right now if
Speaker 1: you get a front load and then get to neutral
Speaker 1: and then stop, but inflation is not slowing than than
Speaker 1: what do you do right? Uh? The CB is going
Speaker 1: a little bit slower as you point as you're pointing out,
Speaker 1: at least they're starting later. What we do think they
Speaker 1: probably get to you know, at least one and a
Speaker 1: half percent by by next year, which which is starting
Speaker 1: to push them into into a neutral or restrictive as well.
Speaker 1: But again, the key variable here's this, quite how quickly
Speaker 1: can inflation start coming down? Uh? In order for those
Speaker 1: central banks are actually to actually stop where they think
Speaker 1: they're gonna stop. And that's uh, that's probably you know,
Speaker 1: that's probably the key question for the markets. And then
Speaker 1: of course, I think increasingly from here it's it's you're
Speaker 1: going to be the growth inflation mix, right, the growth
Speaker 1: inflation mix has been very, very bad. Um, they're hoping
Speaker 1: it's it's you know, they can hike without triggering and
Speaker 1: even deep a downturn. But that's that's very mution open questions.
Speaker 1: Well to that point, for silly, can this bounce we're
Speaker 1: seeing in the euro stick Yeah, it's very hard to
Speaker 1: see that stick for a very long time. And I
Speaker 1: think the problem is it's not just about the fragmentation, right,
Speaker 1: So what we'll see about the details of this instrument, um.
Speaker 1: I with Tom's point in the sense that you know,
Speaker 1: if it's open ended, that's a that's a very good signal,
Speaker 1: um Right, if it's not, if it's not limited, um,
Speaker 1: that might get us to let's say one or three,
Speaker 1: one or three and a half. As far as the
Speaker 1: you're a dollar. The problem is that some of the bigger,
Speaker 1: bigger issues related to European growth are still there, right,
Speaker 1: and this is gas supplies, um, and how what are
Speaker 1: we going to do this winter? So in that sense,
Speaker 1: I think investors, most investors do it. We talked to
Speaker 1: are still um, quite negative on the euro and and
Speaker 1: and probably you know, getting ready to sell to sell
Speaker 1: the rallies. Um. The whatever the e CP does today
Speaker 1: unfortunately doesn't really change the threat of a deeper downturn um,
Speaker 1: you know, in the next six months if indeed we
Speaker 1: moved to things like um, you know, energy supply rationing
Speaker 1: in Europe. I have a silly, truly historic I'm been
Speaker 1: able to say these words for a long time. Have
Speaker 1: we cilly cetub break off? There have ups the first
Speaker 1: interest right high from the e CP since twenty eleven,
Speaker 1: giom Wack. We are honored that he is with us today,
Speaker 1: is the chief economistic acts investment management and is arguably
Speaker 1: the most read acts in market economics in Europe. So
Speaker 1: let me ask you an open question right now, what
Speaker 1: will you listen for X and or ex post from
Speaker 1: Christine Lagarde. Um, it's going to be an interesting sell
Speaker 1: for a cassing again because um, what they've actually done
Speaker 1: today is by going to fifty, whereas they add actually
Speaker 1: telegraphed twenty five. They've basically get rid got rid of
Speaker 1: forward guidance. We used to have a pretty precise followard
Speaker 1: guidance from from the CD and since they've done something
Speaker 1: which is quite different from what they had announced last time. Accordingly,
Speaker 1: uh they have just said that for the next moves,
Speaker 1: for the next decisions, it will be a meeting by
Speaker 1: meeting process. It would be completely data dependent. So I
Speaker 1: guess journalists are going to try to extract as much
Speaker 1: information from Casina gald as to what the next moves
Speaker 1: are going to be, and I would expect her to
Speaker 1: be extremely guarded because that's a new regime. Basically, we
Speaker 1: have a central bank today which is saying us, okay,
Speaker 1: I read the band aid, I got fifty and sorry,
Speaker 1: I told you something different in June, and for one's
Speaker 1: going to come up next well, we'll see. So it's
Speaker 1: going to be I think an interesting debate. The other issue,
Speaker 1: obviously is on the rules of engagement of of TPI S.
Speaker 1: It's you know, that is the name of the anti
Speaker 1: fragmentation weapon. It's likely to be quite a big instrument
Speaker 1: and possibly a convincing instrument on paper. We'll have the
Speaker 1: details a bit later. But the question everyone has is
Speaker 1: what are the conditions, what are the circumstances under which
Speaker 1: you would actually activate it? And um consensus right now
Speaker 1: and I agree with that is that given the nature
Speaker 1: of the crisis currently in Italy, which is a home
Speaker 1: ground political crisis, it's unlike clear that you could use
Speaker 1: an antifragmentation instrument to deal with this. So I guess
Speaker 1: Christinagan is going to have a lot of questions on
Speaker 1: you know, what are exactly does engage controls? So you
Speaker 1: know there's two points there. There's one on interest rates
Speaker 1: and the other is on t P. I let's just
Speaker 1: start with rates and finish up there. They're not going
Speaker 1: to give us a guide towards what they're going to
Speaker 1: do in September. I get all of that. Which she
Speaker 1: needs to establish in this news conference is the reaction
Speaker 1: function of the ECB. What they have led us to
Speaker 1: believe is that the next move is a hike. They're
Speaker 1: basically saying that further normalization of interest rates will be appropriate.
Speaker 1: What they're not telling us is the size of that hike.
Speaker 1: Do you have a decent understanding of what the economic
Speaker 1: data points will be the influence the decision between twenty
Speaker 1: five and fifty, and how we're meant to understand the
Speaker 1: incoming data, internalize that and come up with a view
Speaker 1: about what this means for ECB rate hikes. Well, clearly,
Speaker 1: you know CPO prints that will be important even if
Speaker 1: by September, honestly there's you know, we are unlikely to
Speaker 1: have a big change actually into kind of information will
Speaker 1: get from from CPO prints, So you probably probably want
Speaker 1: to go up the pipeline basically of of inflationary pressure.
Speaker 1: I think a key issue is what's going to happen
Speaker 1: with with wage growth, and that's a problem we have
Speaker 1: specifically in Europe because data reliable data on wage growth
Speaker 1: come very very late and much later than they do
Speaker 1: in the US. So when you have a central bankmaking
Speaker 1: decisions basically on the risks of second round effects from
Speaker 1: from inflation, you need to know exactly where the labor
Speaker 1: market is going and whether or not we are seeing
Speaker 1: some proper in a wage acceleration. So that is going
Speaker 1: to be to be to be key and probably also
Speaker 1: a side issue which is unfortunately very binary and which
Speaker 1: actually probably explains why these doesn't want to give us
Speaker 1: any kind of forward guidance is what the Russian is
Speaker 1: going to do with gas, because news today is that
Speaker 1: apparently there's at least a trickle of gas supply going
Speaker 1: through north Stream one. But we never know whether or
Speaker 1: not this is going to be uh, this to continue
Speaker 1: for several month, whether or not will have another maintenance
Speaker 1: period in which the Russians cuts access to gas, and
Speaker 1: that is superbinary. In Europe. Basically the border between stagnation
Speaker 1: and the proper significant recession is whether or not we
Speaker 1: still have access to Russian gas by by the winter.
Speaker 1: So that might actually be quite an important input in
Speaker 1: their in their reaction function. You're just briefly then on
Speaker 1: t P I. The conditionality around this hard to make
Speaker 1: it cool at the moment, but best guess what do
Speaker 1: you think it will be. I don't think it's going
Speaker 1: to be big. I think it's going to be about,
Speaker 1: you know, the next generation YOU program is going to
Speaker 1: be about you know, complying with the European surveillance physical
Speaker 1: surveillance rules which actually at the moment have been have
Speaker 1: been suspended. I don't think is going to be heavy.
Speaker 1: The problem is that for those milestones to be ticked
Speaker 1: for this to be for this even like contionality to
Speaker 1: be complied with. You need a government. You need a
Speaker 1: government in Italy that actually plays place according to the rules,
Speaker 1: and that's a big Christian market the moment. Well, and
Speaker 1: there's a conversation happening on our type top live blog
Speaker 1: on the Bloomberg terminal right now about the fact that
Speaker 1: you've got the fifty basis points, which appeases the hawks,
Speaker 1: but you also got at the same time this tp I,
Speaker 1: which appeases the doves, because then you have a crisis
Speaker 1: management tool to ensure that the transmission is smooth. If
Speaker 1: it doesn't work as intended, does the ECP get stuck
Speaker 1: here at zero? It's it's it's it's a possibility, I
Speaker 1: would I would doubt it, because my impression is that
Speaker 1: you know, they've raised the bar quite high. They really
Speaker 1: really want to normalize. Now. It's true that once you've
Speaker 1: hit zero, possibly the debate changes a little bit because
Speaker 1: at the Goblin Council get a number of people, including
Speaker 1: among the dogs, who never actually liked negative interest rate
Speaker 1: in the first place. We've always thought they was controversial,
Speaker 1: possibly counterproductive. Once you've brought post rates to zero, it's
Speaker 1: a slightly different conversation. However, given the kind of inflation
Speaker 1: we have the pipeline, it would take a lot, I
Speaker 1: think for the CD two to stop normalizing from from
Speaker 1: where we are right now. Okay, so maybe they won't
Speaker 1: stop normalizing entirely, but how much do you think they'll
Speaker 1: actually be able to normalize? What rate do you think
Speaker 1: they will get to before the economy forces them to stop.
Speaker 1: My forecast is that at the end of year there
Speaker 1: at one percent, which is the lower end of the
Speaker 1: range that they gave us for what they consider to
Speaker 1: be um neutral rates. Uh So, end of twenty three,
Speaker 1: if we avoid a catastrophe a link to to to
Speaker 1: the gas situation, they might go to the middle of
Speaker 1: that neutral range, around one fifty. But that would probably
Speaker 1: the maximum of what I could expect. Then there is
Speaker 1: a significant risk that they get stuck at one percent
Speaker 1: if we we end up with a very significant slowdown
Speaker 1: and if you wage growth desiderates instead of externating. But
Speaker 1: the natural slope I think for the CP is to
Speaker 1: really get at least into this neutral range, which is
Speaker 1: at least I think I've been taking to you on
Speaker 1: of for about ten years, and this is the first
Speaker 1: time we've got to talk about right hike from the
Speaker 1: e c BO. Thank you, Mark of Extra Investment Management.
Speaker 1: We've got Mark Chandler Bonnockburn Chief Market Strategies here. Mark,
Speaker 1: Tom and I were just talking about kind of what
Speaker 1: we've seen from the e c B this morning, the
Speaker 1: surprise fifty basis point rate hike. We saw strength initially
Speaker 1: in the euro, but it seemed to be giving that up.
Speaker 1: What are your takeaways? Yes, so I think you're right.
Speaker 1: I think that the ECB surprised many people by hiking
Speaker 1: fifty basis points. To Bloomberg had the leak earlier this weekend,
Speaker 1: when the leak first came out and unsourced reports saying
Speaker 1: that you know, officials close to the ECB are talking
Speaker 1: about a fifty basis point hike, I recognize that as
Speaker 1: a likely quid pro quote for the for what now
Speaker 1: the Guard calls a TPI, the transmission protection instrument. I
Speaker 1: think that the market had been set up for a
Speaker 1: by the rumor sell the fact. In any event, you
Speaker 1: think about what's happened. The euro rallied about ninety nine
Speaker 1: and a half cents to about one oh two and
Speaker 1: a half cent in the first three or four days
Speaker 1: of this week, and so I thought this was a
Speaker 1: short covering move. And I think now the focus shifts
Speaker 1: to the stud of reserve, which is going to high grates,
Speaker 1: most likely by seventy five basis points next week. That
Speaker 1: means that the rate differential, the policy rate differential is
Speaker 1: moving in the US is favored by twenty five basis
Speaker 1: points this month. Okay, the rate differentials there, but also
Speaker 1: it's about confidence in the economy and Mark Chandler, and
Speaker 1: you've been so good about folding in foreign exchange dynamics
Speaker 1: over to what g d P actually does. There's a
Speaker 1: headline in the blur here where she says their run
Speaker 1: rate is there's no recession in Europe. Do you buy that? Yeah?
Speaker 1: I think you know that. I think is just the
Speaker 1: typical kind of central bank talk. I mean, what's Cyple
Speaker 1: Bank really forecast of recession like the FED doesn't. I
Speaker 1: think that the odds of a European recession are in preasing,
Speaker 1: but I think the odds of the U S re
Speaker 1: session are increasing too. In Powell is not going to
Speaker 1: say that next week. Do you have a call in
Speaker 1: euro at Bannockburndeed, you you know, do you have it?
Speaker 1: Can you give us a single point call five days
Speaker 1: out in Euro five days out, I think we're gonna
Speaker 1: be lower. I think that we're gonna be having to
Speaker 1: go back and test at nine and nine and a
Speaker 1: half cent area that we saw last week. And I
Speaker 1: think I would expect that before the f O m
Speaker 1: C meets and you know when they before they make
Speaker 1: the decision at seventy five basis points a dollar goes
Speaker 1: better bid. You know, besides the ECB, the other big
Speaker 1: the other big thing today, of course, is that Italy
Speaker 1: political crisis and those spreads are widening, and typically those
Speaker 1: widening spreads works against the Europe. They a candidate for
Speaker 1: the t P I a crisis tool. Well, you know,
Speaker 1: I think that Leguard try to put the best face
Speaker 1: on it, but first she told us it's a secondary tool.
Speaker 1: The first tool is gonna be the flexibility with the
Speaker 1: recycling or reinvesting of the emergency purchases they already made.
Speaker 1: I think the euro going through yesterday's low, this is
Speaker 1: really setting up a very poor technical condition for the
Speaker 1: next few days. I mean, Paul I make jokes about it,
Speaker 1: but I adore Clause Reggling, who I've seen twice in
Speaker 1: the last six months. Who's at the absolute pivot point
Speaker 1: of these discussions. He is an esteemed diplomat and economist
Speaker 1: from Germany. And I can't fathom le Guard and Reggling
Speaker 1: talking about the future of Italy. I can't imagine it's
Speaker 1: it's always it seems like it's always a front and
Speaker 1: center mark. So as we think about the US Federal Reserve,
Speaker 1: we think about July, we train our attention on that.
Speaker 1: In your mind, is a hunter basis points off the
Speaker 1: table completely? Well, I think the market is pricing in
Speaker 1: about a one in five chance it had taken place.
Speaker 1: I think that the odds of it are really you know,
Speaker 1: look at what happened today with the Philly Fed survey.
Speaker 1: What a big myth, and so I don't think that.
Speaker 1: I don't think this is going to stay of sedand
Speaker 1: I think they just want to do a measured pace
Speaker 1: seven fight. The market is giving them seventy five dabs points.
Speaker 1: I think they want to take that. So what are
Speaker 1: the key issues here? Uh? From your perspective, as you
Speaker 1: think about kind of where this economy is going, you know,
Speaker 1: how much credit do you give the Fed here? I
Speaker 1: guess for trying to find that balance between fighting inflation
Speaker 1: and preventing recession. I don't really see the FED pretty
Speaker 1: much emphasis in the resistant recession. I mean they I mean,
Speaker 1: I think Powells really says it right. I mean, I
Speaker 1: think he says, we're really determined to curb inflation. We
Speaker 1: hope we can, we can avoid a recession. To me,
Speaker 1: that's like asymmetrical, like surrect perception. So I don't see
Speaker 1: I don't see the FED really trying hard to avoid
Speaker 1: a recession. I think they're more much more focused on inflation.
Speaker 1: And I think, you know, because so long these people
Speaker 1: cried for a Voker moment, and now they've got a
Speaker 1: Vocer moment and to get afraid of it. Mark Chan,
Speaker 1: thank you so much. Too. Short of visit with Bannock
Speaker 1: Burden this morning. This is the Bloomberg Surveillance Podcast. Thanks
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Speaker 1: and of course, on the terminal I'm Tom Keene, and
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