CPI and Fed Week | Bloomberg Surveillance 12/12/2022
The Fed doesn't want to actually grasp the nettle and tighten financial conditions. We've got them going shifty now and December 50 in February and another twenty five in March. We think that next year what we're going to see is a Fed that's continuing to tighten Google's risk and we'll put it under quite a bit more of sound cycle. Strong lessons about needing to get inflation down. The stagflation problems that we've seen this year.
They're not gonna go away anytime soon. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. Why is your bracket so good? Oh, please. Seriously, how is your bracket that good? Here's the way it is, folks, and we do it from March Madness is what Kailey Leinz taught me this. She only she only goes with like
Netherlands and the others have orange in their jersey like the Cavaliers. You chose blue. It's a blue theme that she. So you've got to France and Argentina. And that is slowly very various things. I promise. This is gonna be a refuge for English
football fans for the next couple of hours. We're just not going to talk about it. Life in New York City this morning. Good morning. Good morning. Your equity market positive by about a quarter of one percent on the S&P 500 this week. T.K., we're told it's all about two things. It's a huge week. Inflation are going to get that survey. And then, of course, we have a Fed
meeting. Join us for that, folks. We'll be there on Wednesday. I think it is. And John, what's important to me is to see if Powell can keep the ball contained and the goal and not put it over the crossbar.
You've got to keep taking note that the answer is, I think he's going to be very contained. He's going to be very on message. And because of that, I'm looking far more at the inflation data and Michael Barr Morgan Stanley. Yesterday's news. He knows how to make a headline over at Morgan Stanley. Doesn't it make sense? Yesterday is the final chapter of this bear market is all about the path of earnings estimates, which he says are far too high. I got on Twitter this week and there's like ISE was really busy this week and Fox and somebody said, you know, he's going to be the number one strategist years and he's not because he's too nice a guy. Is that what the street likes to say? You got to be mean. You got it.
Not me, but you got to. We believe we believe we bully people like Elvis seen as like Mike Wilson. You know, they have grace and dignity and he's got humility. And he nailed it this year.
You know, everyone believes that we get this death and then a rep next year, DEP and rep. I keep saying that we're getting this downdraft where we retest the lows of last year off the back of weak earnings in the first half. And then, Tom, it's all gone, recover and began back to four CAC. That is the consensus view on a street right now. Let's get this out of the way.
I mean, everybody is an important notes this week, including RTX will cover some of them for you. And I agree with you and the consensus there. Other data was inspired. Mike down. Mike, darling, the whole blah, blah,
blah, Wisconsin economics and, you know, the whole nominal GDP thing. And then he spent the whole backside of the note saying that Chairman Powell ought to play top golf. Have you played top or haven't played a top golf? You've got like there's three branches in the Washington area and DART is like the S and that's that fancy driving, fancy driving range. And he said they got to get on the same
page. You do that over a beverage of your choice at top because you have a bear and you play golf. Okay. Sounds good. You want to try that? You ever played golf? They used to ask me to leave. Let's wait for the price action briefly.
Up two tenths of 1 percent on the S&P. Weaker losses last week on the S&P 500. The losses in crude. Let's just say on that just a moment. Deputy ISE down for seventh session. Deputy ISE down to the low 70s, just about holding on to a 70 handle. Tell us a big deal on crude. Seventy dollars and 40 cents last week on crude biggest weekly loss. Going back to April, we were down 11 per cent on crude and some.
That's even with the China reopening story. Yeah, it is Edmund Morris publishing moments ago with Nathan Sheets over at Citigroup. There looks and he says, look, it's a tectonic shift in the next year. He nailed this lower price outcome and
he looks for, you know, maybe bounce around and all that, but he gets out to sustain commodity weight due to GDP. And the headline from it, Morris, as he goes bullish on gold, which we haven't heard much of. We have ignored the headline on Brent City cut that twenty three Brent forecast by Dallas today. Dancer waiting for next year. So they're coming in again even for next year. Well, I don't think we got a sixty nine point seventy 48, as you mentioned, and West Texas Intermediate to American Oil. But come on, how many people look for?
Sixty nine? I'll have Morocco. Croatia. Morocco, France is competing with Chairman Powell. Why does that bother at same time? Well, we'll have full coverage. Can you get a choice to make? Do you want Morocco, France? Would you want a little bit more? Actually, if I was doing the first thing, we're gonna have two screens and we see a screen. How do you think they're going to go? No, just said on Monday I would do fantastic Fed things better.
Maybe we should do that. Maybe we should swap. Larry Canvas Senior joins us now. U.S. Equity Strategy, RBC Capital Markets. Larry, I just want to start with Mike's
words and then we'll get to yours. Mike Wilson says The final chapter to this bear market, it's all about the path of earnings estimates, which we think are far too high. Laurie, you on a similar page. Do you agree with that?
So I'm on a similar page with Mike, but I don't exactly agree with him. I think it's a little bit more complicated. So we're at one ninety nine for next year. The consensus has been around to 30 to 31. And I do think that the need to pull those forecasts down is going to create some headwinds from additional volatility, perhaps a retesting of the low, but doesn't have to make a new low. I'm not so sure.
I think the main issue here is that the buy side wants certainty around multiples so that they can come in and buy and we can have a sustainable rally. All the buy siders know and they've known since June that next year numbers were too high. If you look historically, most of the cuts down earnings years are in by April. And if you look on a single stock basis, when the rate of revisions to the upside is falling, you watch for it to turn positive again. You watch for that shift from negative revision territory back to positive revision territory. And stocks typically bottom the S&P 500 price three to six months before earnings estimate revisions for single stocks, stock going down. What that means is that if we can kind
of get all these cuts out of the way by March, it's still reasonable based on the historical playbook for October to be below. Now, that doesn't mean we're not going to turn around. But I don't necessarily think that we have to break to a new low because of this earnings issue and make it a time cooler. Now, it's really, really difficult, Larry. But what do you suggest people do between now and March? So I think you have to back up and say, what have people already died? And where are they? And most defensive sectors are near peak multiples relative to the S&P 500. And people have been loading into
Staples all year, rotating into health care since the summer. I don't think people have enough recovery trains for when we finally do put that final bottom end and start to recover. So we tell people, look at things like financials, look at things like tech. I look at things like small caps. Those are areas that typically
outperform when you're coming out of a recession after you've made that final bottom. And small caps, frankly, John, are already starting to outperform. They put in their relative low back today. So we think that people really don't need too much more on defense. And, you know, I wouldn't necessarily
dump all your defensive shares right now, but I would start thinking ahead to that recovery trade, not just this final churn. Laura, I think is a great Dave. David, triple it pioneer years ago, who would explain to me the small cap and mid-cap go once every nine years, once every eight years, whatever the pop is. And I read in your research, you're really looking for that pop to be this year. If we have a great zombie roll up, which frankly we're beginning to percolate and see because money actually costs something, kind of small caps react to the fact we now have a risk free rate. We have zombie companies that have to do
something. How does it play into your call? So I think you want to be in line with the higher quality small caps, the bigger names, the more liquid names, you know, kind of where the typical small and mid-cap portfolio manager likes to invest. Not kind of the bottom three quintiles of market cap where you get tend to get the dicier balance sheet, you tend to get the lower quality names. We actually think there's plenty of valuation appeal in that upper echelon of small cap right now, which is one of the things that makes it so interesting to me because we haven't had that for a really long time. Are small caps correlated to the weaker dollar? Finally, end of strong dollar international played you cross correlate those two categories. I think that the dollar is complicated for small caps. They have been benefiting from an
earnings perspective by dollar strength. If you look at if you try to sort of match up the relative cycle with the dollar over time, you're not you're going to just want to pull your hair out. It's not. Watch yourself, Laura. Be careful. But recently, they've been benefiting
from an earnings perspective since they don't have those pressures. I think that what I see right now and yeah, I just got off of a week of being in Europe talking to investors there. They are very European based equity investors are very perplexed by the expensive valuations that we have sitting in S&P 500 companies right now. You don't have that same valuation
pressure down in small cap right now. So I think when you're starting to trip across borders, I think you've still got the better valuation story here and that will be appealing regardless of some of these currents. But are they going to roll up? I mean, I don't mean the quality small caps. There's like three thousand, let's say, as a working number. What are the other twenty seven hundred going to do? Is there going to be one grand roll up because money finally cost something. I mean, what do you mean by role of
exactly mergers, transactions, combinations, Microsoft taking out a teensy weensy bit of the London Stock Exchange today just to get on board? That kind of stuff. I think that you will get that in certain sectors where you have more valuation appeal. I think industrials, even though it's not cheap, is always an area where we see those roll up stories and the reshaping thesis could further some of that along. But I think ultimately those roll ups and that ended in a cycle that's really more about what wakes up on the other side of this recovery and a sluggish GDP environment growth is scarce and companies, I think, will feel more compelled to go out and buy growth when you can find that in some of those higher quality small caps, not necessarily the smaller ones. But again, it might bring you back to some of those higher quality, you know, more liquid type names. And Laurie, you've touched on something really important here, and that's about leadership in the recovery in the second half of next year.
Is it too early to draw conclusions about where that leadership comes from? That's a discussion relatively happen right now. Why is now the right time to have that conversation? I think it's the right time because, you know, you know as well as I do, John, when these functions happen and people are convinced of these bottoms, they just sort of take off and you don't have time to get in. You have to do your homework early while things are sort of quiet and turning around. But I'll tell you, last week we did have
a lot of discussions about what is the new leadership typically in a sluggish economic growth backdrop, which I think is the price we pay for a short, shallow recession. Growth stocks outperform. But is it the old growth or is it the new growth? And that's why I think a sector like industrials is starting to get a bit overvalued. Now, we're just neutral there. We don't like the valuations. We have been talking to people a lot about how that might be the best long term growth story in town. And that might be one of the reasons why you're seeing these valuations lift.
People basically kind of looking at the old economy and saying what's old might potentially be new again. And that might be where you get for the better growth profile going forward. Larry, this was brilliant. Don't be a stranger. Come back soon, Larry. Have a seat of the RBC Capital Markets. Just one of the absolute best. And we just had a 10 minute conversation on the market that talking about the Fed. What you make of that?
I think it's good. Isn't that refreshing? Yeah. Then later on this this morning on a five page note and he says, look, you can do all the Fed navel gazing. I'm sick of it. You know, we have the Fed show here and he says it's about markets and markets will surprise and do better than the economy. Gloom on the Federal Reserve.
Did you read that piece over the weekend from Craig Thomas and less CAC Michael McKee side? Fantastic read over the last five interest rate. There are no cycles in terms of the average hold at a peak rate was 11 months over the last five cycles. Eleven months. And this market's price in NYSE like six weeks. It's like a couple of months later after
we hit the terminal. Right. It's a pretty interesting debate, isn't it? I think the parlor game, we're going to try to avoid that, folks, not only in the Fed show, but through this important sequence, CPI, Tuesday, tomorrow. Tomorrow. Yeah. You know what? We won't avoid this line from China. In the last 24 hours, the top medical adviser in the country X and the risk from Micron, the same fatality rate is the flu. Now, a lot of people might say the same thing in America.
But to hear that from China is something no real change, a big number. We're going to catch up with Undercurrent a little bit later. From New York, this is Bloomberg. Keeping you up to date with news around the world with the first word. I'm Lisa Mateo.
A man charged in the 1988 Lockerbie bombing of a Boeing 747 that killed 270 people is in U.S. custody. He's been identified as a former Libyan intelligence officer. The U.S. calls the suspect a third conspirator in the attack, saying that he helped build the bomb that destroyed Pan Am Flight 1 0 3 over Scotland. Germany's Chancellor Olaf Schulz will host a virtual meeting of the Group of Seven leaders today to discuss Ukraine's immediate needs. That's following Russian missile attacks on the country's energy infrastructure. Female President Biden spoke to
Ukraine's president, Vladimir Zelinsky. The White House says the president affirmed the U.S. commitment to keep providing military and economic aid in the UK. The government is planning for military
staff and civil servants to cover for striking rail, health, postal and other workers. Strikes are planned for almost every day through the rest of the month. Workers are demanding pay hikes that keep up with inflation. It's the biggest wave of industrial strife in the U.K. since the 1980s. The Federal Reserve looks set this week to downshift on interest rate hikes after four straight seventy five basis point moves to curb inflation. The central bank is likely on Wednesday to increase its benchmark rate by a half percentage point. Meanwhile, traders are pricing in Fed
rate cuts in the second half of 2023. Global news 24 hours a day on air and on Bloomberg Quicktake, powered by more than twenty seven hundred journalists and analysts and more than 120 countries. I'm Lisa Matteo. This is Bloomberg.
So I believe inflation will be lower. I am very hopeful for the labor market will remain quite healthy so that people will feel good about their finances and their personal economic situation. Janet Yellen, the US Treasury secretary, on 60 Minutes over the weekend, live from New York City this morning. Good morning. We talk a little bit more about that a little bit later. All right. She was surrounded and that it was right
after the shooting. She had some things to say. FTSE was gay. You should have heard the language used in my averages in my household over the weekend. Some select words, select words features right now up a third of one percent on the S&P 500. This week has a real final week of the
year feel to it? Yeah, CPI tomorrow. Federal Reserve decision coming up on Wednesday features trying to bounce back by a quarter of one per cent on the S&P. There is a rally in the bond market yield to lower by five basis points to 352 32 on a 10 year. I believe that's about 80 basis points off the peak for the year on a US 10 year. And a lot of people, Tom, lining up to
say buy, buy, buy bonds into next year. The price up you construct, there's a basic theme hearing again, you a curve inversion negative 80 basis points really hasn't done much. So it's a curve that shifting up and down versus moving around like a yo yo. We've got Horizon Therapeutics to take
out there by Amgen. It's a real company. Folks want to make that clear. These are people with free cash flow, Deerfield, Illinois out of Dublin and it's real scientists.
Immunology is a broad sense. And, you know, we'll have more on this as is 26 billion, T.K.. Yes, it's like a it's like a real you know, we're all affected by this Twitter thing. These guys are going to go out for less price to sales, I believe, than what Mr. Munster Twitter out. And Twitter is a shell of a company
compared to this is like real medicine, real finance. In a way. They go Horizon Therapeutics, which is what China needs. Except they don't have Horizon Therapeutics. They don't have efficacious medicine. What China has is hope and prayer and occur and joins us and usually on economics.
But right now, I think we've got to go to the society of all. How long was the weekend and occur in in Beijing, Shanghai, Hong Kong and indeed west to Chengdu? Clearly, Tom, events are moving at a very rapid pace right across China. Even through November, there was no hint of a pivot by the government when it came to Covid 0.
December has been a totally different story. Yeah. Messaging out of the message you had to Beijing now is that, as you mentioned earlier, only corn is on worst on the seasonal flu. People who have symptoms are being told to stay at home. Don't be troubling the hospital
hotlines. They're dealing with patients who do need care for, for example. And that messaging is being rolled out right across the country in a fairly sharp pivot trickling down to Hong Kong, as well as some changes on the cards here, too. Some talk of reopening the border with Shenzhen, which could mean much faster than expected. Goldman Sachs today said all of these changes are playing faster than expected. So all we know right now is all we know right now, it's been a pretty sharp pivot, but I don't think anybody knows where exactly or how exactly does that play out over the next three to six months.
And the longer you go on far away, an amateur like me, we had the great advantage of our people worldwide, folks, and particularly from Johns Hopkins University. We learned that adults watch the hospitals. Tell us about the hospitals in China. Like I know there's famous hospitals in Hong Kong and Shanghai and all that. But I like to believe that China is under a hospital for the state of this this virus. Well, you know, obviously has its world
class medical facilities good. A lot of the expert commentary in the build up to his outbreak was making the point it doesn't have enough on the kind of ICU coverage that saved lives in Japan and South Korea have not got weakness in its hospitals is clearly going to be a concern when you have an outbreak on the scale. Now that people are talking about, our colleagues in Beijing are talking about and writing about anecdotally, there's obvious disruption going on in hospitals in Beijing in terms of people turning up, looking for admission and either can't get it kind of get or or I don't need to get it. That was a similar story, by the way, in Hong Kong when they were trying to manage Covid 0 while the disease spread as well. So I think no doubt that one of the concerns among China is the low vaccination rate among the elderly and of course, whether or not the hospital network can deal with an outbreak on a scale of what's expected over coming months.
When it comes to helping end up, what do you think they believe is the lesson from the West as they've gone through it in the previous two years? Well, it's tough to know just one out, John, because a lot of experts are saying they're going to go through the same kind of exit way that the West went through that this is inevitable. China, some of the official messaging coming out of China saying actually their vaccination rates, vaccination rates are reasonably high. They're making the point that their vaccination rates of their elderly was hired and the vaccination rates of the elderly in Hong Kong, for example, that are saying they may not have a Hong Kong style hit on the way out of this. But regardless, everyone is keeping a
very close eye on how to coming three to six months. We go. Nobody's quite sure how it will pan out. Whether or not it is a severe public health crisis or if they can navigate it, can mitigate it, maybe it spreads at different speeds around the country. We're talking about a vast continental sized economy. But regardless, people are wondering now on the other side of it what happens.
Already it's clear that China is reopening faster than expected. We know in the interim it's going to be very bumpy. And of course, public health is number one.
But if when China gets through all of that, economists are talking about maybe a a faster growing Chinese economy next year. And money expected as recent as only a few weeks ago. That's what I wanted to get to. When do we really underestimated the potential for inflation to build and build quickly in Europe, in the United States, as we reopened? What's different about China as it reopens? Why is the potential for that perhaps a little bit lower? Well, again, you get different takes on this, John, there's an argument out there that China could actually put a bit of a floor under slowing global inflation next year. Let's say it reopens. You're going to have two stories on domestically in China, for example, this year.
They bought the lowest part, imported the lowest amount of oil since 1990. Obviously, that wouldn't happen if China's economy was reopened and humming again. There wouldn't buy more import materials. They would need more commodities are indoors and all of those materials prices for those would would go up or at least be kept steady. And an external China, you would have
Chinese tourists, Chinese students, Chinese business people all traveling again, looking for airlines seats, look for hotel rooms for real estate. So that's expected to spill over to global trading partners and put a floor on a global inflation. So there are two ways of looking at it. People are saying there's a near-term China economy story, which is going to be pretty bumpy. But if and when China fully reopens and reconnects with the world like a humming China, economy will probably add some inflation pressures to the rest of the world. And very quickly here, what should we look for this week? I mean, it is as you said earlier, it's a moving story.
Where are we on Friday, end of the weekend and into the holidays? So every day they're taking down some of the defenses to head against Covid, either true signaling and messaging or, for example, is health and safety tracking apps that they were using. So keep an eye on what further barriers they continue to take down over coming days. Tom, that will indicate the speed at which they are dismantling this massive Covid 0 operator that had been built up right around China. And of course, don't forget, we're heading barreling towards Chinese New Year, which comes early in January this year. And that's going to be pivotal test for how willing the Chinese authorities are really to live with Covid Lunar New Year just around a corner and a current. Thank you. What a change.
And it's happened so, so quickly. I got back to those comments from China's top medical adviser downplaying Tom the fatality ophthalmic chronic, comparing it to the to the flu. But, T.K., that's a massive shift in a row. Yes, short amount of time from Chinese authorities. Well, yeah, Chinese authorities, but they're only one authority, which is Mr.. I mean, I I take the point. It's a massive shift, but a shift.
What if they don't have the medicine, they don't have a program of vaccination? Maybe they're going to develop a program of vaccination within a totalitarian regime. That's why I still think making a call on Chinese growth next year, Tom, is really wonderful. I wanted to go there then. If you get a clean reopening, maybe you can make a call. But as Zander pointed out right now, some it's whether we get a repeat of what happened. The West, which has stopped start an incredibly lumpy. Thanks for listening this morning,
everyone. They don't care about inflation. What are you going? What are you taking this. At the University of Cambridge. Okay.
Someone's you know, they slept in a Queens college. This is Mohammed talking once again. Snowden talked once more. World Cup. Yeah, it's 20 above zero Fahrenheit Snowden. OK, what would you like me to say? I want you to explain. And this came from a sophisticated Mrs. King. Why didn't England go down the field
more and just attack? I think they did. The initial tactics were spot on. They contained in backpay. They turned the left side. The French left side, which the massive
strength into a weakness. Sakura attention. It really. Tom Keene. Yeah. Theo Hernandez. Ultimately, ultimately. Then the substitutions happened. Think it was the substitutions that I just couldn't make sense of from Gareth Southgate at the weekend. But we can't keep doing this. Give the UK a break. Giving them a break.
Taking up. Coming off the back of the biggest weekly loss on the S&P 500 since September, going in to CPI, the Federal Reserve. You know, that was really mean. That was really cruel.
Futures on the S&P. Looks like this positive, a third of 1 percent on the S&P 500, on the Nasdaq up a third of 1 percent. We're doing okay. As we kick off the trading week into the
bond market last week, 10 year yield just a little bit higher by 10 basis points. Likewise, on the two year time, the whole curve just shifted up a little bit last week and now it's back lower again, right the way through the curve and flattening my market to a 19 VIX. Even an 18 for a cup of coffee is we're back to 24 point to 1 as we go into the Fed meeting on Wednesday. If we have the cathartic spike, that's
what junior Emmanuel Abacha was talking about. We had the cathartic spike in the VIX yet. Let's say you're a John Joel Weber. Like they know what they think is what he was going to opinion on is what I know is there's some tension in the ones jumping in with the VIX. Let me finish the bond check. Ten year 352, two year 432 crude looks like this seven day losing streak on WTI. We're down three quarters of one per cent on crude on Brent were down three quarters of one per cent also.
And we are clinging on to a 70 handle. We have just had the worst week, biggest weekly loss since April on WTI crude. Some makes sense of that. Makes sense as Ed Morris, as you know, we're talking about Mike Wilson and equities would add more stood and oil is just shrugging.
I believe Deutsche Bank was a great co fantastic record. Busy week ahead for market. You're going to hear that all week, CPI data tomorrow. Later in the week, retail sales and eurozone PMI and CPI plus 9 central bank decisions on tap, including the Fed Reserve ECB and Bank of England. All of that clearing the path for
investors to look ahead to the new year. If you look at what we all enough for the U.S. economy of the eurozone economy next year, there's a slight chance of recession. Absolutely right. But probably at best, a mild one based some in the U.S. and the eurozone, of course, to help the
overall developed is going to calibrate that, too. Jeff, you have been my man and some looking ahead to next year. And you know the conversation we're having a conversation about the potential for a recession. And it's just not in the data yet. It's in the market. We can talk about that. But you certainly don't see it in the labor market right now, do you? Yeah, I go segmented here in a lot of people say I'm wrong here. There's a part of America right now that is in recession.
But, you know, you can just say a little take half of America, whatever you want to do. There's a lot of pain out there. While there is a buoyant, employed America, are they booming? I don't think so. Some is not there, to your point. That's good. I think even last year, the GDP data was so much better. Consumer sentiment was pretty self given everything we'd seen in the last twelve months with gas prices and inflation. And C.K., you've made this point many times.
I think we all have around this table. There's a massive difference between how people feel about this recovery over the last couple of years and what the DAX Hampshire. That's what the markets will do and the economics of it. This may be an underpinning that they can be separate. And I'm hearing that a lot of outlooks right now. Let's all look right now at Stifel,
their chief economist, Lindsey Pigs, who joins us right now. Lizzie, I don't want to get into the silliness of pivot this or pivot that. Where are we right now? What is your real GDP call for this ending Q4? Well, I do think there is enough momentum or ongoing resilience in the consumer that we will see a second quarter of positive activity, albeit markedly below the near 3 percent pace we saw in the third quarter. But the bigger question is, can we
maintain that going into 2023? And I don't see that resilience being able to be maintained as we continue to see some of these variables increasingly weigh on the consumer, i.e. elevated prices, negative income growth, negative manufacturing activity, a housing market that's under extreme pressure. So I think that we can argue you can check the recessionary box for nearly every sector of the economy, even at this point, except for the labor market. But even there, we're starting to see cracks. We're starting to see signs of emerging weakness. So while we do maintain that positive trajectory through December, I think 20 0 3 is opening the door for a recession.
Let's do algebra Monday, Lindsay. It's y equals. I don't know what it is. C plus I plus G plus an X is out there somewhere. Can you split your analysis between domestic final sales in real GDP? Can you pair off trade dynamics? Are they part of getting to a recession? Oh, absolutely. And I think this this when we pass through the trade and inventory data, that's really what complicates the earlier weakness that we saw at the start of the year and why it's likely that we don't see a technical recession in hindsight called for the first six months of 2022. Because when you strip out that volatility from trade and inventories, we see that we actually had positive momentum from December into the first quarter of the year. So this is very much complicating the
picture and we'll continue to complicate the picture going forward. If we look at third quarter GDP now, one of the largest contributors to that top line increase was trade contributing nearly 3 percent. But a lot of that was reflective of the weakness on the import side, and that reflects a declining demand or at a level of declining demand on the consumer part. Again, highlighting the fact that consumers are on increasingly fragile footing as we turn the calendar page into the next year. Lindsay, there will be some people tuned
into this program right now listening to another recession call for 2023 and wondering why on earth the Federal Reserve is hiking interest rates by 50 basis points on Wednesday and probably signaling they're going to do a whole lot more after that. Lindsay, how do you reconcile those two things? Well, remember, the Fed is trying to slow the economy. So the fact that we're seeing increasing calls for recession in 2023 means that the Fed's earlier policy initiatives are already having the intended effect of tapping down investment, tapping down consumption and resulting in a significant slowdown in the economy. Now, the reason the Fed is so focused on continuing to raise rates, not necessarily at the supersized 75 basis point increase that we saw earlier, but 50 basis points that, as you said, more work to come down the road is because inflation is still elevated. And at this point, with the labor market still arguably on modest footing, the Fed is hyper focused on bringing down inflation, reinstating price stability, which the chairman has said time and time again is the bedrock of the economy.
So how much more damage do you think another 100 basis points of heightening does? Well, I think it ensures that we do see recessionary conditions. But depending on the behavior of inflation, depending on what we see in terms of international factors, that will determine the depth and duration of the downturn. But again, from the Fed's perspective, it's not about whether or not we see negative activity. It's about whether or not we can get inflation on a meaningful downward trajectory back towards the committee's desire to present, you know, with me, target range. What's your probability getting back to 2 percent until England wins in football again? Lindsey, I mean, come on. Are we getting back to 2 percent, 25 or is at 26? Well, if you look at the Fed's trajectory, they're still very optimistic that we're going to see a two handle by 20 by the end of 2023, maybe early 2024. But I think the reality of the data
suggests that committee members have been calling for this meaningful improvement in inflation for the better part of the past two years. And we simply have not seen that come to fruition. So the Fed, the market continues to. All right. Appreciate the complicated nature of the inflation equation at this point.
And that's why, along with a 50 basis points increase this week, we do expect the Fed to meaningfully revise higher their expectations, policy and inflation going forward. This is VIX, a one to one service inflation, isn't it? I mean, we're going to get a reversion to David Malpass. World Bank was greater in this years ago. Where do you get a logic? Goods, disinflation? Dare I say true deflation.
But services isn't going to get there. What will you what do you see as a sustained services inflation above 3 percent? I think that's absolutely reasonable. But you're right, we are going to see this bifurcating between goods and services. And already we're seeing it in the data outside of inflation. Manufacturing turning back into contractionary territory while we look at the ISDN services index. And that is still arguably on solid footing. And so this bifurcation I got highlight
the difficult nature that the Fed is going to face in trying to tackle broader inflation pressures, particularly as we see this wage price spiral continue to accelerate. Lindsay, you and John are way too young to understand this. We survived this before. If we really come down with services elevated to 5 percent or 4 percent or three point eight percent, life goes on. Right? People adapt, right? Absolutely.
And we will come out of this. But I think the trajectory of how we come out of this depends on the Fed's resolve to reinstate price stability. If they start to get cold feet, if they start to pull back prematurely, then we could see inflation become entrenched in the economy, meaning that we don't see that improvement. Back to the Fed's 2 percent target. But if they stay the course, it will be more painful in the near term. Well, we could see the economy emerge faster and with more gusto as we begin to get back to a potential level. After that, 2 percent target is reinstated. Lindsey, thank you.
Lindsey VIX that of stay full me this coming at the same time we're having conversations about maybe shift in the inflation target from 2 to 3. Larry El-Erian talking about in the FTSE potentially pushing back against the idea at the moment. Heard the same thing from Bill Dudley, also pushing back against the idea as well. Why did this come from? Was this Adam posting? It started. Does she know? Three know from two who say Dr. Poses when such a supporter remember Jackson Hole? Yeah, yeah, yeah.
Mom came out in shorts and a t shirt with three cents below zero. Folks, a heritage of this is the courage of Olivier Blanchard and the laureate Joe Stiglitz. I'm going to guess 2009 where they just said, let's frame out 4 percent inflation and people went mental. I mean, people went absolutely apoplectic over this 4 percent number. And it's a model. An atom is very clear to say here's 3
percent path is with nuance is different than what his colleague Olivier Blanchard says. You get to 3 percent. My answer is put a band around it. I mean, three percent, maybe two point seven percent or whatever. How far is that from a John Taylor like 2 percent? My answer is we're splitting hairs here.
The backdrop matters. I think you start questioning the inflation target income at a time when inflation is too high. I think people not question your credibility today. Even three, never my to some. Isn't it just the time?
A rising question. Don't you just turn around. Push it out. Push it out. Another twelve months. Yes. But it's like when England was unanchored, they put in Sterling.
What? It's sterling. Okay, men, let's go. Sterling. Is this punishment for 10 years of trolling the Red Sox? Is that what this is? So go there. Come on, move it to India. You mentioned this earlier for people
just tuning in. The big worry was in backpay, Carl Walker did a phenomenal job. Yes. Down that side, that pay was almost absolutely contained. And as I mentioned a little bit earlier, that was meant to be the strength of France down that left side. He said real quick, the lobby are down. They turned that side into a weakness. Sacca was phenomenal. He was terrorized in that defense for about 90 minutes, just playing the field. So why was he taken off?
So to me, the conversation there were the beverages. That is sort of like what burst the conversation had to be. Come on. They kicked the ball from farther out. That's about the first goal, is it is that you don't like matchday analysis? Yeah. It's my nerves to kick the ball. How do you feel about Harry coming back dispersed? Don't you think? Has he going to feel no one knows. I think it's you know, it's a little to miss a penalty with the stakes that high. It's a lot of pressure, but some do you
know what? Out of everybody. Who would you have picked to take that penalty spot? CAC you wouldn't have picked you. Nobody else from anybody on a single case. Anyone else is allowed. Most folks I don't have all I know is Argentina wears a blue jersey in France and that's why they're in the finals, your bracket. And that's why you have absolutely wipe the floor with me back in the bracket.
What is it? The 18th is the finals next Sunday. This Sunday bistro. You wanna watch it together? You missed the viewing party.
I didn't miss a beat tonight. We'll talk about today. Behave behavior. So Amari turned up mental pictures for a third of one percent. This is pulling back. Keeping you up to date with news from around the world with the first word. I'm Lisa Mateo in China, Covid is rapidly spreading through households and offices after the country's pandemic rules were eased. Now that's led to turmoil and poorly prepared hospitals.
Some facilities are struggling to find enough staff and others are suspending non Covid treatments. President Biden and Treasury Secretary Janet Yellen have reaffirmed U.S. support for Ukraine. CBS CBS asked Yellen about how long American support can carry on, and she replied, as long as it takes. Meanwhile, President Biden told Ukraine's president Vladimir Zelinsky the U.S. is committed to aiding Ukraine and holding Russia accountable for the war.
Scientists in California have made a breakthrough in nuclear fusion technology. Bloomberg's learn that for the first time, they produce more energy than consumed in a reaction. It took place at the Energy Department's Lawrence Livermore National Laboratory near San Francisco. While the results are considered an achievement, it's still a long way to creating a viable technology. Microsoft has agreed to buy a stake in the London Stock Exchange Group.
The move will give the software company a 4 percent equity holding, which is currently valued at about two billion dollars. The stake is part of a long term agreement to help LSC develop data analytics and also cloud infrastructure using Microsoft products. The group will spend a minimum about 2.8 billion dollars on cloud services over
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The dangerous war is extraordinary and it can go on for years. But this oil and gas thing, it looks like the Europeans will get through it this winter. But this oil and gas problem is going to go on for years. So I know I was, you know, in the government or anywhere else, I'd say I have to prepare for getting much worse.
That was Jamie Diamond at JP Morgan, CEO on CBS over the weekend from New York City this morning. Good morning. CPI data coming tomorrow morning. Then it's on to a Federal Reserve decision coming into all of that equities activated by just a quarter of one per cent on the S&P 500, on the Nasdaq by about a third of 1 percent. Yields are down. Treasuries are up 350 to 14. The whole curve shifting low, which is a bit of curve flattening in the mix set. So that move lower, led by tens and led by 37.
I'm going to call it resilient dollar here off the blush. You know, we had a strong dollar. We were just about I know that story, but it's sort of like churned, I think, ready for tomorrow's massive turnaround that's come from the end of September for euro dollar to go up from what was in 95 to about 1 5 1 6 at the moment. Sonali Basak know better than me. But is everybody shut down for the year? I mean, certainly after Wednesday, after Wednesday, until, you know, gone year over year. I'm out. I'm taking a rest a year off after that.
You are? Yeah. I don't know if anyone noticed that yet, but we'll work it out. I'll leave it to 32. Are you going to. Last time I did that and the bank having that hiked interest rates, didn't they? You still got to be away in the ECB on Thursday. Then after that, as far as the schedule is concerned, we're done.
I think a lot of people would wrap this up in code that day on 2022. Well, what we'll do is a day afterwards we have ECB bank meeting them. Break out the Tang mimosas. Oh, nice. Special talk about Horizon Therapeutics. It's really, really interesting story. We'll get to that here in a few moments. Right now on a story that matters to you. The big shock, your voice coming in in a
breath of fresh air with the concern of refined products. Stephen Schork briefs us. His research note with a short group of the Schork report is absolutely definitive on dynamics, on valves, in pipelines. Stephen Schork, what is our integrity now of our system? If we get a cold like Aberdeen, Scotland is getting. Yeah, absolutely. And a lot of dire straits here. It has to be called as far as the
distillate market, Tom, here in the mid-Atlantic and the New England market areas, the northeast United States consumes 70 percent for space heating, a home heating oil and light. There's still a dearth of products. We've had a significant sell off over the past week, a week and a half in this market. And quite frankly, my clients, the heating of the people are on the boots on the ground. People who have to consume, maybe they buy and they sell and distribute heating oil. They're perplexed by the move lower. They cannot find product that very difficult for them to find product. And yet prices are still moving lower. So it is a conundrum for some of my home
heating oil people. Right. You know, I look at how they blast through the great chart out this week. And as he writes up his Bloomberg opinion piece on the spike, the surge in English utility costs. Do we get the same surge if we get the same cold or are we are we managed in a way where distill its core oil, gasoline, diesel, the rest of it, where we don't see a spike like they see in Europe? We won't see quite the spike that we've seen. But we are.
We have and we will continue to see a spike in demand not only for home heating oil, but, of course, our electricity costs. Our natural gas costs are sky high relative to recent norms. Tom, probably the only market if you heat with propane, that is the only market here in the lower 48 where there is actually a surplus of propane. We are swimming in propane, whereas in our other heating beats use be at this. Fuels are natural gas. There is there's actually no product. And that's a piece of thing. We got to the deck.
We're using not six days a week in Istanbul because like it sells like hockey, golf. You got the kids. So outside your profile, three pieces, they're really hot. You'll definitely ridiculous. Steven, can you talk to me about the demand supply backdrop gone into next year? We've drained a big chunk of the SPDR. Europe managed to refill natural gas,
but only doing so through Nord Stream and take us through most of this year at the back end of this year because the cold snap didn't kick in until now. Stephen, I want to understand the dynamics into next year. You heard that warning from Jamie Diamond at JP Morgan. Can you run us through that right now? Of course. I'm going to agree with Jamie that the long term structural imbalance between supply and demand globally is not going away.
And yes, we have for the moment dodged a bullet with regard to the start of the winter and the Ukraine war. But we're not addressing the long term issues of bringing more infrastructure to sate growing demand. The narrative has shifted to a point now where it's moved away from supply, which has been the real bullish driver, and now it's a demand picture. I think all the Wall Street banks now are singing the same course about economic contraction in the first half. If we look at the Federal Reserve Bank's favorite recession indicator, the three month, 10 year yield, it has rarely been as bearish as it is currently trading. I mean, version right now. So and then, of course, we look at the employment numbers now the latest job numbers seem to be relatively constructive.
But once again, people are not working, especially men in their 20s, the 40s are not working. And we're looking at a huge chasm between the household numbers and the establishment numbers. 1 1 survey of job says, yes, jobs are growing. The other one says no jobs are contracting.
And then one that says jobs are contracting really can meld with what we're seeing in the tech sector. Tech, the the white collar, the the haves are now starting to see massive layoffs, layoffs they haven't seen since the Great Recession. So there's a lot of minefields to kind of navigate in the first half. It's certainly pointing towards an economic contraction. And therefore, that is really, I think, the overhang on the market right now. We're worried less about supply and more about dwindling demand for the new year. Is that worry about amount misplaced
given China's reopening? Could China fill the gap even if we do rollover next year in China? Ken, Phil, absolutely. Fill the gap. And there is that demand. But. But they were giving a nice little gift by the West. They were giving fantastic negotiating price saying, OK, Russia, you can't sell your oil for more than 60 dollars a barrel. Now, of course, the Indians and the Chinese will continue to buy Russian oil.
They will buy it above 60 dollar. I mean, they will negotiate, but there are far better negotiating deals. So while this demand will continue to grow, as China continues to lower their their mitigation protocols, we're still going to be buying oil at a well below market value. Stephen, one final question. Really important. How is an electric vehicle thing going? I mean, you follow tangentially over from your expertise in hydrocarbons, but from where you sit.
How's he doing? These are going to be the biggest drain on the environment. That will make one hundred and twenty years of mining for coal and oil look like a year like they were members of the Sierra Club here with the amount of progress we have to dig up. Now, personally, guys, I drive an electric hybrid.
It is a 17 gallon tank. I just drove. I just had to refill my my car after not filling it for two months. I drove nearly 14 hundred miles while the combined electric seventeen gallon tank. That's the way of the future.
Inform and getting out. Here's a compromise. We have to work together. It's not as if we are the people. Stephen Schork, thank you. I think you're just done. I stood in Detroit at the North American International Auto.
The international piece of that simple Mercedes said just what Stephen Schork said. The certitude each way is baloney. I caught up with Mercedes on Friday. You missed that. I missed that. Caught up with the CEO. And I just had to drop their prices on that offering in China. That's a drop that prices working out what's going on in China right now and it comes at taxes in China. So I spoke to at Ludlow about Tester in
Shanghai and reduce factory hours. And I was trying to work out is it production line upgrades or demand one or the other or both. And he said perhaps a little bit more of that production line upgrades than they a weaker demand picture. But I guess we'll see. We'll see. Apple got similar issues over that at
the moment on the production side. We talk science by all means immunology. Horizon Therapeutics is taken out today by Amgen. This is a logic company with legit sized Deerfield, Illinois, Dublin and the rest. And what's great about this for those you on radio, the academics of this crew is heavyweight.
And these are people that went to all sorts of schools like Muhlenberg and Pennsylvania, Franklin and Marshall and the fabulous Harvey Mudd out on the West Coast. And they've got lots of graduate degrees and ramped it up first in science. And the best thing about this is the leader, Tim Walberg, was actually a patient. He was grievously ill in immunology years ago.
It's amazing how he got into it. It's a great story. It's you know, I don't think there's enough said about this about these biotech companies. They got prodigious academic chops. And then to do the financials that they've got with Andy Pearson, it came from Bain and Company. And and, you know, they put it together, boom, you know, to 26 billion dollar deal, 20 percent premium.
Muhlenberg has gone. Do you want hockey? That's what it means. I can just say, you know, we D1 hockey. No, I was not D1 hockey at the time. What division will you.
Division 5 division. Yeah. Was that because you wanted to cuts with high school? No, just that was there was the time where the rink was sold out and the streakers went by. I was on ISE. Hey, I'm on ice and the place goes mental. I think there's a flight and it's three guys going naked around the top. Coed go tigers. They run. They made the national lose the next night.
That's that kind of hockey. John Tucker. Yeah. This was this is the Zamboni you pulled. The Fed doesn't want to actually grasp the nettle and tighten financial conditions. We've got them going shifty now in
December of 50 in February and another twenty five in March. We think that next year what we're going to see is a Fed that's continuing to tighten forwards with on the removal of some cycles from Forbes about Kurumi Mori inflation down the stagflation problems that we've seen this year. They're not going to go away anytime soon. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. This was supposed to be a World Cup free zone for the duration of the program. It's been a success, but you are refusing to drop it. I want to like hang out like they do in
Qatar. You know, no tie on. And they got the shoes of the white soles. Have you noticed? I'm not into that sports presenter with the suit and their sneakers and no time for that. I'm having fun from New York City this morning. Good morning. Good morning to you all.
Equity futures aren't just about positive on the S&P 500. We've got a big week coming up. We've got CPI coming up tomorrow. The Federal Reserve decides on Wednesday, Bank of England Thursday alongside the ECB. What more do you want? What you want is clarity. And we got there from Lindsey Pigs.
It's Steve. I thought she was great on this. This passing of goods inflation back to a disinflationary trend of some form, but services inflation. And that is the mystery the next year. What does servicing 70 percent of the economy, what does service inflation do? She has it like a lot of people, sustained service tax shelter. Gonna be talking a lot about that maybe on Wednesday. I'm sure there's also a service sexy. But that's a different we're not gonna
talk about that when we talk about the dot plot. You love that as much as I love this thing. So do you have a dot plot on top? Oh, I that he that. The essence of the decision comes down to the top line. How far does one he 2040 comes garbage. And with Richard Burton pushing back against that, I have told Mike McKee when this market trades on projections from the Federal Reserve, what he going to say and when I'm going to say it's Euclidean garbage capacity, it's France, France is going to win.
So it's garbage. And then what? You just you're not going to listen to whatever the Fed thinks is going to happen? No NASDAQ mistake. Oh, I think I think it will be very, very good press comments, I believe. Vice Chairman Clear it will be with us, which is a yes. I felt really I and Mr. Duffy coming out the other side of the news. I didn't know that.
Okay. That's a show that's been CAC. I mean, I don't if Bill knows that yet. But first, let's get to the price action briefly. As we keep saying, keep town in new massive week, I think defining week coming up for the next couple of months at least with inflation on DAX tomorrow. Then a Federal Reserve decision.
For those of you that do follow the Delta flight, it is about the 2023 deal and how far that's going to come up. Chairman Powell has been leading us to believe that will bump higher at the next meeting. Equity futures right now up a quarter of one per cent. The whole curve shifting lower 2s at the 30s. Just a little bit of flattening for you. Were down about five basis points on a 10 year 352 51 euro dollar. Not doing much of one at 566 crude,
doing a lot over the last seven days, down for a seventh consecutive session on WTI crude. Tom, with just about holding on to 7C. We've just had the biggest weekly loss on WTI since April and we're doing this as China continues to make an effort to reopen. And we're going to talk about this later.
The top medical adviser in China, China's top medical adviser, comparing Armstrong to the flu. Now, that is a massive change from, what, a month ago? Oh, two weeks ago. A few weeks ago. I would time it to the party Congress and that they've got the political news out of the way. So now finally, they can take anti science and try to nudge it towards the 90s culture and society. Oh, I do. I think that, you know, you know, we're just regular nut jobs, but we're showing the claim of Horizon Therapeutics and what they're doing with Amgen.
These guys are the anti science that everything at Horizon Therapeutics is science. I mean, they're joining us around the state. Judy ISE Haidi Lun place to say is Michael Schauer, CEO of Market Filled Asset Management Michael Barr. This is great. We're not going to talk about England. Let's do it. I don't know. I don't know how many clients invest e trouble this morning.
Let's talk about markets. The consensus view next year is recession. The consensus view next year is that we get this dip in the first half off fear of bad earnings and bad earnings materializing. And then it's something you want to party around and we end up something close to where we are right now.
What you make in that cute little story for 2023, I mean, it sounds a little b