CPI Hot | Bloomberg Surveillance 10/31/2022

CPI Hot | Bloomberg Surveillance 10/31/2022

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Earnings coming in is just another data point that people have to absorb to try and understand this narrative. The source of the negative surprises this quarter has been in fact weaker margins than was anticipated. The market is consistently underestimating the level of inflation by anywhere from 50 to 150 basis points. The Fed has been leading the most recent push higher in global rates. Everybody wants to channel their inner Volcker. He better be careful. You get what you wish for to leverage. Just.

This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. T.K. takes Halloween really seriously. He took the day off. It's not the first time in the morning dressing up case think life in New York City this morning. Good morning. Good morning to you. This is Bloomberg Surveillance on TV and radio alongside Lisa Abramowicz some Jonathan Ferro CPI in Europe.

Just seconds ago coming in really, really hard. We'll talk about the next central bank to sentence a little bit later this week. But Brando, ten point seven per cent on CPI in a euro zone this morning. And there's really highlights the tension because the three third quarter GDP grew more than estimated at more than expected at zero point two percent versus the estimate of zero point one percent. So how much are we looking at this idea of consumer prices rising faster than expected, but the economy's still hanging in basically prodding the central banks to keep raising rates. The economy Hang Seng in for now. The PMI in Europe last week and a 40 75

basis point interest rate hike. It's not looking great for somebody. Central banks really struggling at the moment to maintain financial stability, to try and get inflation down, a support growth simultaneously. So Mike Wilson actually has talked about peak inflation that people may perhaps. People are getting it wrong this time as wrong as they did in 2021.

But on the other side, John Micklethwait, actually, inflation is going to drop much more quickly because of all the tightening that hasn't worked its way into the system. I wonder how much we start to hear that. I wonder how much the Fed starts to confirm that belief and then what does the market do rate with they take that and run with it and then they have to backtrack. Or do they understand to market participants understand this means a slower growth, slower bleed, slower margins in some of the companies that we see. The biggest challenge for the Fed this Wednesday is how do you communicate some form of stepped down that you're open to dropping, say, from 75 to 50 to 25 without triggering a premature easing of financial conditions, which is arguably what we've seen take place over the last week. And this is the real key here. How do they communicate?

There is a lot of pain and how does it get confirmed by earnings that have yet not capitulated? Right. People don't think that they've really expressed the full pain that will be coming next year in the first quarter. So if you haven't seen the full pain yet, it's going to be hard for the Fed to really sell that without causing some sort of rally on the market. Can I just say the last week was truly

impressive to see Alphabet, Amazon, Microsoft matter absolutely hammered and the equal weight rally every single day. Last week on the S&P and the S&P 500, the market cap weighted index up by, what, 4 percent on the week. So bear with me. This is somewhat complicated, but this is what I was trying to think about over the weekend. When does it not become good news for the Fed to pause or do a step down? When does it become bad news for rates to not go higher because the economy is not doing well, right? Right now the rest of the market treated that softer earnings were a good thing for this Federal Reserve, looking for more weakness from more pain. At what point will it just be a bad

thing? And at that point is that when we see the real capitulation. Futures right now negative about a half of 1 percent on the S&P. Let's wait for the price action for you, starting with equities, then move into bonds in a bond market, 12 consecutive weeks of yields climbing on a 10 year until last week. Last week yields lower, much, much lower on a 10 year right now, higher by 5 basis points, just north of 4 percent, 4.0, 6 percent on a 10 year euro dollar, down by a third of 1 percent off the back of some pretty hot CPI.

Got a decent stare that we'd get this off the back of the German inflation numbers, the French, the Italian at the end of last week. But still to see it, they're very close to an eleven handle on a eurozone figure for the month of October, year over year euro dollar right now, Rameau ninety nine, thirty seven, ten point seven percent. It's a pretty shocking number considering the inflation regime that we have for so long. This week ahead is going to be massive for a whole host of reasons. We had a number of Fed decisions are should say central bank decisions, the Fed decision being front and of them all, but also the Reserve Bank of Australia tomorrow gives out their policy decision. The FOMC rate decision will be the key

one on Wednesday, what they signal behind the step down the threshold that it takes, whereas their optimism about the economy and then the Bank of England decision on Thursday. I'll be interesting as well. And this comes as two year yields around the world continue to climb and hover near the highest levels since the financial crisis. We also get a slew of economic data. The US employment report on Friday for the month of October is the key one. But before that, we also get the JOLTS data and that comes tomorrow. I am very interesting in job openings.

How much do they continue to plummet because companies are sort of soft not hiring, right? They're sort of trying to look down for some kind of way to pare back without cutting jobs because they don't know how hard it's going to be to hire people for easing. Is the new firing right? Yeah. You can't fire what you couldn't hire. And that's been a story of the last 12 months. Job openings is going to be fascinating just to see how much that comes in and to see whether we do any damage to the labor market. On Friday, the unemployment report.

Ultimately, the Fed's goal, what is it to soften demand in the labor market if we see any sign of that whatsoever in the official data? Jason Kelly not in the official data, right? Not me unemployment rate. Not when it comes to jobless claims. But in the jobs data. Yes. And in the earnings reports. Yes. And that brings me to the third thing that I'm really watching this week, which is almost a third of the S&P 500, about 160 companies are going to be reporting earnings. This week, including Pfizer, Uber, Starbucks, Urban Bee, Marriott, Kellogg, Hershey, a whole host of them at a time where the consumer really is the question. How long can they hang in there given the savings that they have, but also the inflation that they're feeling really reduce their buying power.

Let's kick off the program of the trading week with Brian Weinstein, the head of global fixed income at Morgan Stanley Investment Management. Brian. Fantastic to catch up with you, sir. Walk us through Wednesday and what you and the team are looking for at this fat year when you guys did a great job setting it up for me. It's going to be a very interesting day. I mean, the Fed has a good old fashioned, friendly back called math, right? The Fed has raised rates 75 basis points now. So many meetings getting up to this 4 percent level so quickly and they have to slow down and the markets want to like it, but then they have to think some other mathematical tools at their disposal to remind people that the slowdown hasn't started yet. Mortgage rates 6 or 7 percent is a big

deal. Cash and fixed income as a as a drive capital, right. Isn't as an asset class you can invest in should slow down the economy. And so I think the Fed is going to have to step down to it to a lower pace. But at the same time, remind people that they've done a lot of work and that they still have more to do. Step down to a slower pace. Brian, does that mean that the end point

will be lower? Or does it mean that potentially it could be even higher because it isn't gonna cause the market to break in short order? If it means it could be higher? I think what they're trying to avoid is going 75 for the next three meetings and then easing again starting in, say, March or or so of next year. They don't want to do that. They don't want to break anything. What the Fed always wants is to see what they what. What has they're actually one of their actions done. What impact would have happened that such a lag and CPI being the worst of them. All right.

And how slowly it moves, they want to see if end user demand is slowing. And we're starting to see it in earnings. We're starting to see in anecdotes. So I think all they're doing is buying

time so that they can raise more would do it more slowly. Commerce access to up to their expectations for the end of the Fed funds rate to 5 percent. How much have you increased your expectation for the end point over the past few months? And where do you see it potentially going? If perhaps they do do this step down and it does allow the economy to keep going without some sort of sudden stop. And it is scary to look at the inflation

numbers rate. They do continue to surprise to the upside, despite the the idea that on the other side of this, as Mike Wilson has told us, is ISE because a quick slowdown. So we've been steadfast in that for now and that kind of four and a half to five percent range. That's what the Fed told us. We have no reason to believe that that's wrong. And we do believe that inflation will start to slow down, that it is lagging and that it will take longer than we want.

So, again, I've been a big believer that anytime you get to near 5 percent and 10 is above for four and a quarter, there are goodbyes, because I do think the flat curve is telling you that they don't have to go down much higher than here. So if that's the case, Brian, is one of your biggest convection calls at this point is just go into 10 year treasuries, go into the longer dated curve, whether it's ISE, whether it's whether it's treasuries. And just hang on. I like it. I mean, I I don't think you're going to wake up one day and have 10 looks back at 2 percent. I don't think that's the game here. I do think earning that income in high

quality assets, by the way, you can do it in agency mortgages might be the cheapest one. Investment grade credit, a high grade municipals. Treasuries are OK to earning that income is, I think, a very powerful, very powerful ally in a world of high volatility and uncertainty. If inflation is falling because you'll wake up one day wanting to own that stuff and it won't be 2 percent, but I might be back. It's been a quarter, three and a half.

And so those are great cash flows. Don't we do like them and we continue to add as rates go higher. We're less than two weeks to the US election. And this is something that people are watching, not only with respect to the economic policy of Washington, D.C., but also the political pressure on the Federal Reserve.

How does that factor into your bullish call on 10 year treasuries? What would you think or how much would you move away from that call if, say, there was political pressure put on Fed Chair Jay Powell to stop hiking rates and to be a lot less aggressive? You know, we've been debating this, I think, since their actions in a way, maybe even before about the central banks and their autonomy and whether or not that's under pressure. And it has been right. It continues to be. And yes, if you do see a government that wants to go after the Fed and stop them from doing what they need to do, that does change things. Right. It could risk much higher inflation rate. It could risk losing control of of the

dollar as reserve currency. But those are not things that we're investing right here. It's easy to talk about going after the Fed. It's much more difficult to actually do it. They've done a pretty solid job.

They've made their mistakes. They're not perfect. But I think they've they've corrected by raising rates a lot. And we're watching it, but not not terribly concerned at the moment. Brian, awesome to catch up, buddy, as always, from Y Stephen that of Morgan Stanley Investment Management. What I've seen a lot of over the last

couple of days is not just the talk of a step down, but maybe of a stretch. So that from Evercore a little bit early this morning, you added an extra 25 basis point hike. We've seen that from Evercore, seen that also from Goldman Sachs. So what you're communicating is sure

will basically step down in the pace of rate hikes. But with Shrub, another one in there anyway, because we're going to stay higher for longer. Well, and that's really the key issue. Right. Could they potentially talk about a step

down? And still communicate a hawkish message to the USA markets, right? How do they say, basically, look, you're going to take the step down, you're not going to take what comes after is going to keep going perhaps at a slower pace? Can this not be the step down show for the rest of this week? It's been driving me nuts for the last couple of weeks already to with serious story. Russia suspended the Ukraine grain deal. We understand the vessels are still leaving loaded up with crops. But this is something to watch for the next couple of days for sure. Emma Chandra. This is actually really painful. And I was watching and I was watching some of the footage and I was reading some of the stories.

But this is green that supplies significant portions of East Africa. Right. So there are entire nations that could go hungry if the grain doesn't get there. You're seeing wheat prices surge. How much does this really signal a

breakdown with respect to Russia from the rest of the world and how much they're willing to comply with trying to ameliorate world hunger on the basis of getting more leverage on their story will catch up with AMH down in Washington, D.C. in just a moment. Looking forward to doing so in the next hour. James RTS, investment director over at Appetizing, is going to join us on the Federal Reserve. Stepped down and the Bank of England know that. Good stuff. Later this week. Life in New York City with equity

futures down about a half of 1 percent on the S&P. This is Bloomberg. Keeping you up today with news from around the world with the first word. I'm Lisa Mateo. In Brazil, it's a dramatic comeback for

former President Luiz Inacio Lula da Silva. The left wing politician has won the presidential election, narrowly defeating incumbent Joe. You're both so narrow. Three years ago, Lula was in a jail cell on corruption charges. Also, Nardo has neither conceded the race nor commented on the results. His reaction will be closely watched by investors in Ukraine.

The government says Russia launched a massive wave of missile strikes across the country. Part of the capital Kiev was left without power and electricity after the missile strike. The attacks came after Russia pulled out of a deal that allowed millions of tons of Ukrainian grain to be exported. Russia withdrew after accusing Ukraine of attacking its warships in South Korea. The government has opened an investigation into one of the country's deadliest incidents in years. At least one hundred and fifty four

people were killed when a crowd squeezed into a narrow alley during Halloween festivities. Reports are that some people began to fall, causing others to tumble and pile upon one another in western India. At least 130 people were killed when a suspension bridge collapsed. The disaster happened in Prime Minister Narendra Modi's home state, Gujarat. Now, the colonial era bridge had been reopened last week after renovations.

Economists at Goldman Sachs now see the Federal Reserve raising interest rates to 5 percent in March. That's higher than their previous estimate. Goldman's new forecast includes another 75 basis point hike when Fed policymakers meet this week. 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 Mateo. This is Bloomberg.

I think the Democrats are going to get a rude awakening on November 8th. You know, high inflation, high crime, open borders, not what the American public wants. Don't punish the people who are fixing your problems and don't reward the people who are trying to exploit the problem for their own political power. That's really the difference right now. We're we're engaged in the hard work of bringing our country forward. The other side's working on their own power.

One way to go, Senator Rick Scott of Florida on ABC and Congressman Sean Maloney on New York, ISE CPS from New York City this morning. Good morning. Here's a state of the market for you. Equity futures look a little something like there, sunny. S&P futures negative five tenths of one percent. Call it down 6 yo tiger by about four or five basis points just north of 4 per cent. A whole host of banks, Evercore, the likes of Goldman talking up maybe an extra 25 basis point hoax somewhere in our future in 2023, euro dollar negative a third of one per cent 1934.

I can tell you a little bit early this morning, CPI out of the eurozone upside surprise ten point seven per cent. The previous number 10 per cent. The survey, the median estimate, ten point three in the ECB last week. Let me Tania's end up a flip flop in present the guard. Maybe she was in the news in the media over the weekend. Over last week, Lisa talked about inflation coming out of nowhere, out of nowhere. It doesn't really help her credibility.

I mean, it's not like it's boom, you know, it just came out of nowhere. It's Halloween. Sure. If I come around the corner and say, boo, there is this question about how much they actually have their hands around inflation. And that's something that's not just for the ECB, but also for the Federal Reserve. How much credibility they have that to

really say it's starting to roll over if you're not seeing that in the labor market, close to 11 percent on inflation in the eurozone. Joining us now is AMH down in D.C., Annmarie Horden, Olympia, Washington correspondent. And she wanted to start with the weekend's events in Ukraine and what's been happening with Russia. Russia suspending its involvement in that grain deal.

Can you walk us through the importance of that and whether that deal is ultimately still operational? Well, it's incredibly important and critical. As you heard from the U.N., Turkey, the United States over the weekend in terms of quelling that inflation you're talking about, especially when it comes to global food prices and the prison, United States saying this is just going to create more starvation in Hungary in the most vulnerable communities around the world. So over the weekend, Russia says they are coming out of this deal. What you saw immediately overnight is that wheat prices, soybean oil prices, all of this jumped on the news. You do see some shipments going.

But the fact of the matter is, because a lot of this process takes a while to unwind. Russia says they are going to pull back on it. But we should note, there was already a lot of concern in this marketplace because that deal was scheduled to end already November 19th. Now, what you have is the U.N. and Turkey really running this offensive is trauma offensive with Moscow to say, please stay in this deal. Russia is saying that there was a strike from one of these Black Sea grain shipments. They also said the UK was involved without offering any evidence.

And that is why they are pulling back on this deal. But there's a number of countries that are really trying to put pressure on Russia to stay in this deal because of the harm that it can do, especially going into these winter months in Russia at a time when inflation is one of the top voting criteria that people are using as they head to the polls next week. How much is there going to be a lot of pushback in terms of holding the line, remaining pretty much hard with Russia and keeping some of the tension ratcheting up at a time when it is causing prices to go up and potentially really threatening the food supply of many nations? Well, I think that debate and that tension, Lisa, was on display just last week when these progressive Democrats released this letter that they worked up over the summer and they had to take it back and retract that letter that said that if we're going to continue sending billions of dollars, whether it's military aid, financial aid to Ukraine, that alongside that there should be some sort of diplomatic outcome or at least a path or a goal to have diplomacy. And that was quickly absolutely tear down about their own party and they had a ton of backlash on it.

So I think there is that question floating around whether or not it's the progressives on the left or you had potentially going to be the next speaker. Kevin McCarthy, talking about the fact that when the House is taken over and his prediction and a host of other polls, predictions by the Republicans next week that they say that there will not be a blank check for Ukraine. And a lot of that has to come down with the fact, as you're saying, there is a lot of pressure on lawmakers to quell rising inflation, whether or not it's grocery bills, whether or not it's rent.

These are concerns of the voters. And you see that in poll after poll. This is what is going to get a lot of people out and wanting to vote in this election. There's a larger issue here, which is basically how much economic pain are you willing to tolerate for national and international security? And it's not just with respect to oil and grain deals with Russia. It's also with respect to Germany and China. It's what's going on with setting a coalition over to China on Thursday from Germany to possibly shore up some of the ties there. How much is there unity among some of

the western allies, especially heading in some really contentious midterm elections to really push that through, even though it does cause economic hardship? Well, when you talk about China specifically, there's bipartisan support and China is always an easy scapegoat and punching bag to get voters rallied up. And what is used by many lawmakers when it comes to Germany and their ties with China? I think Jonathan one day put it very well. Germany, you know, outsource their energy to Russia, their economy to China. And at this moment, what you see from the Biden administration, they have export current need export controls on China.

That was just a call overnight Monday morning, Beijing time about this. China pushing back on these export controls. China saying that the United States is trying to suppress their economic growth and future. And what you've seen from the Biden

administration is that they want this multilateral approach, meaning the United States, Western Europe and other allies on board with making sure they are competitive and tough on China. But at the same time, you see cracks when you see the likes of Germany maybe sending over a delegation. But we'll see where there's comes, because also, of course, we have the G. 20 coming up right after the midterm elections. We're going to see President Biden potentially sitting down with Xi Jinping MH. Wonderful to hear from you.

We'll touch base with you in the next hour. Emory down in D.C.. Did you see the president's comments before the weekend on the oil companies? Check this out for a quote. Granted, it was done at a fundraiser. You'd expect this kind of rhetoric.

I'm sure they talk about me picking on them. They ain't seen nothing yet. That's the rhetoric coming from the White House towards the energy majors over the weekend, Lisa.

Yeah, taking a hard tone, perhaps. It's just that. Taking a hard tone. I don't know what else he's going to do is at windfall taxes, what can actually push through before the midterm election. I want to and you know, at this point,

how much does this really hold any sway versus just campaign rhetoric? Well, it's campaign versus policy. Those exit excess profits are gone back to their shareholders, their executives, instead of going to lower prices. How much of those profits would they like to go to shareholders and how much would they like to go to lowering prices? Do they have a number in mind? You know, is the epicenter to this fair? That is unfair. You know, part of me is just ignores it. I'm just thinking campaign rhetoric. And then they came out with a very

specific number in terms of the downside risk for crude at which they'd start paying. So maybe maybe there is maybe you're on to something today. Mine is a numbers that they are going to unveil. What Tom Keene? I went to D.C. a number of months ago and we talked

about central planning. Tell us your number. Yeah, what's your number? If you've got one, what's fair features right now, then a half of 1 percent on the S&P. From New York, this is Bloomberg. Live from New York City this Monday morning, here's the price action on the S&P 500 big week of gains last week on the S&P, a week of gains of about 4 per cent. Futures this morning negative a half of 1 percent on the Nasdaq, down about six or seven tenths of one percent.

Last week, he ought to lower as well real yields, much lower nominal yields to down 20 basis points on a 10 year. Just note the 4 percent on a 10 year yield right now up to 4.0 6 percent yields higher by a run about four or five basis points. More data still to come this week, including the ISE Sam Fed decision on Wednesday. We've got to talk about eurozone CPI. Check out the euro.

Eurozone CPI early this morning came in very close to eleven handle after breaking through double digits in the last month or so. We were looking for something close to 10 per cent in the survey, ten point three. The actual number from ten point seven on euro dollar ten point seven was CPI and euro dollar right now is ninety nine. 36 came out of nowhere. Where did it come from? It's just it's just miraculous exhalation implicated in this ECB. Well, how much is this also because of the weaker, weaker euro? I mean, how much are they basically importing inflation because of the strong dollar with relation to their currency and how much they addressed that with policy? How much can they do? We hear about that and some of their rhetoric. We didn't really hear that last week,

but they kind of have to address that. How can we talk about it downshift in policy with numbers like that in inflation still coming out of Europe, still coming out of the United States, unless you start to adjust your target for where inflation ends up. And if that's the case. That would be a rethink. You're laughing, but this is what people

are thinking may happen tacitly, even though Fed officials say if we do that, it would be a disaster that would end up eroding a lot of our credibility and it would get carried away because people would then put the peg that much higher above what we're saying. The new target, I think, would make it tremendously difficult to achieve even NASDAQ. But everything went from two to three, correct? Just because I wouldn't believe them, then I'd be talking about four when five? It was six. This is the reason why people are saying there's going to be a pretty steep downturn in Europe and beyond because there is no other option if things are still climbing in terms of inflationary reads and the economy is still chugging along. Well, then how much do they have to do in order to really stop that? Futures right now down 22 on the S&P with down about five or six tenths of one percent.

Andrew Holland, Horst Asset, he joins us now, the chief U.S. economist. And Andrew has just been fantastic through the whole of this year after Sandra, congrats to you and the whole of the team, because I remember when he first came out with those caused a 50 basis point to every meeting, then 75. And everyone started to laugh and drew

and it quickly became consensus. Where are you now going into year round is the rest of the pack on Wall Street talks about a step down of financial conditions start to ease. Yeah. Thanks so much either. Thanks for having me on. You know, for our base case, we still think that the Fed might earn somewhat below 5 percent policy rates, but we would not be surprised by levels above 5 percent. I think anything up to five and a half

percent would not be too surprising at this point. And you know, it really goes back and kind of thinking all the way back in terms of why this Fed has been more hawkish and why we're getting higher policy rates as well. You were just talking about it in the European context. We just have inflation data that continues to surprise to the upside, that continues to push policy rates higher. Do you think the chairman navigates this conversation in the news conference entry this week, given that they don't have the forecast? There's no fresh ACP until December. It's really difficult in December. You do have a lot more variables that

you can use to try to guide towards a step down in the pace of policy rate increase. But at the same time, not trigger a loosening of financial conditions. And I think we saw a little of that last week as the market got excited about the fact that the Fed might be slowing the pace from a 75 basis point hike at this week's meeting being to a 50 basis point hike in December. And we think that is what's going to happen. And that's not necessarily a dovish outcome. Hiking 50 basis points is still a larger than usual sized hike. The Fed could continue to hike at those

larger sized hike sizes for a extended period of time, get the higher policy rates. So there's nothing inherently dovish about hiking at a slower pace with the Fed needs to do is communicate that. You're right at the December meeting that a summary of economic projections that can show higher Dodd suggesting that policy rates will move higher.

It's really just going to come down to communication in the press conference at Wednesday's meeting. Ken Powell, talk about slowing down the pace but still indicate resolve in fighting inflation. What's more damaging for the economy getting to 5 percent or five and a half percent and then cutting perhaps six months later or getting to foreign three quarters percent and holding it for two years straight. I think what would be damaging for the economy, and I think to their credit. Fed officials have recognized this is to allow inflation to persist levels that are well above target. I mean, you were just talking and were kind of joking about the idea, could we get a 3 percent, 4 percent, 5 percent inflation target? But implicitly, that's what happens if the Fed continues to miss on their inflation mandate.

If you continue to miss to the upside on inflation, then you embed in the economy a higher rate of inflation. And I think we're already seeing some of the costs, some of the uncertainty associated with not knowing how much wages, how much prices will be going up. That's the real risk for Fed officials. And that's why stopping too early is a risk and could imply actually hiking further at a later date. So you do have upside risk. You have downside risk. It's a complicated scenario. I think the primary risk right now is still the risk that inflation remains too high. Andrew, you said something really

important there, that by basically under shooting inflation again and again, they're basically communicating that inflation is going to remain higher than their target. This sort of speaks to what Diane Swonk was talking about, their projections being fantasyland. How much do you think they've already done that by not really communicating some sort of downturn or something that is more realistic, according to the economists projections, in terms of what kind of pain needs to happen in this economy to get inflation under control? I think it would be helpful if Fed officials concentrated a little bit more on the fact that labor markets likely need to loosen significantly to bring down inflation. It's a very unfortunate reality. It's a reality that nobody wants to be dealing with. But the empirical fact is that to bring

inflation down from levels like the levels that we're seeing in the U.S. and Europe elsewhere involves a significant loosening of the labor market. And that's almost a euphemism for saying the unemployment rate rises. Millions of people who currently have jobs no longer have jobs. It's a horrible outcome for the economy. That is the cost of inflation. That's too high. And the issue now is minimizing the further cost of that.

So I think that's right, Liz. I think there should be more direct communication about the pain that's associated with bringing down inflation and track consensus. Even you're hesitating to say it out loud and weighty, too, around the program, around the table on surveillance every single morning. And until I think they've still got to do a better job of communicating this, and it's not for me to do it for them and to have to they tell us that higher unemployment is a price worth paying to get inflation down. What's the answer to that? Yeah, it's a very hard message to deliver, frankly, and I think that the answer is to be clear, be forthright to talk about the historical evidence.

Talk about the theory, the theory that we have. We look at the employment cost index last week up one point two percent quarter on quarter. This is well above a pace of wage increase that would be consistent with 2 percent inflation. And so I think that's just one indication of very tight labor market. That's going to drive inflationary pressure.

There's strong theoretical reasons. There's strong empirical reasons to think that that doesn't change without a loosening of the labor market. I just think that we need to be clear and forthright about that. And to your point, Jonathan, it is an unfortunate reality. And I think that means that Fed officials and others have been reluctant to comment on it openly. Entropy CAC unemployment ISE. From Friday, we get the jobs report in America.

Right now, I'm looking at payrolls, the survey, the median estimate, about one ninety from the previous two sixty three. Andrew, can you tell me, is the illness progressed if you sense that perhaps this unemployment rate needs to go higher than you thought it did at the start of the year? So I think there is a sense that maybe the unemployment rate doesn't need to go higher, but the amount of restriction needed in the economy may need to be more to get to a higher unemployment rate. So we think that the unemployment rate may need to get to something around five and a half percent to bring down inflation. That would be a lot higher than three point five percent where we are now. Historically, it wouldn't be as high as

what we've seen in other recessions. So there is some good news there if you want to see it that way. I think that the issue is the labor market data continues to be very resilient. 190000 new jobs in a month is going to be strong enough to continue to put downward pressure on the unemployment rate.

Super tight labor market generating wage pressure that's too high and that labor market looks like it may be tightening further. The only evidence to the contrary. Job openings, the jobs, job openings, numbers, those are started to come down. Are we get a new reading on that this week. I think that's going to be important. But overall, low initial jobless claims are just a lot of evidence that this is a labor market that has not slowed sufficiently to bring down that wage pressure. Joe, states are coming up tomorrow with

the ISE and then on to the Federal Reserve on Wednesday and on to the payrolls report on Friday. What a week. Andrew, thank you, sir. As always, Andrew Holland, host of City on the latest and what they're looking for from this fat this week and perhaps beyond as well as we were speaking, I got this message from Bank of America, Matt Visa. Going to join me a little bit later on his the line. I think the line captures this conversation almost perfectly. The Fed is signaling the pause actually makes the pause less likely. That's the dilemma, Lisa, that this Fed

faces later this week, Joel Weber, which is the reason why people are talking about how could they signal some sort of pause and make it hawkish. Right. How could they say lies, but then also say, oh, by the way, we're also going to hit a five and a quarter percent Fed funds rate are going to keep raising for longer something to offset the potential rally that you get, the easing in financial conditions.

On the heels of that, I could come back to the communication, though. You get the sense is shaped by the politics of the moment. How do they say exactly what Andrew was talking about? And even on Wall Street, you get the economists talking about what the Fed is trying to achieve. And that danced around it, too, because it's just something you don't want to say out loud. This Fed is doing exactly what Senator Warren insanity sent Senator Sanders a word about trying to get unemployment up, to get inflation down.

That's the pain the chairman, Pat, talked about the back end of August in Jackson Hole. And it's still something I think is very difficult to communicate. Well, perhaps there is a bigger question around all of this. Has the possibility of a soft landing

gone off the table? Right. In a moment, El-Erian said there's still a small chance that possibly had avoided recession. Can we get a situation where participation rate starts to pick up and productivity starts to pick up and suddenly you compensate for the gap and you get some sort of natural easing out of some of the pressures in the labor market? It seems like maybe that ship has sailed and that's what people are, I think are not willing to say right here. You remember the positive supply side surprise we were all hoping for 12 months ago came a September 20, 21 year old thought perhaps would kick back in. And it just never did. On the commodity market and sent director of research energy aspects will catch up with her shortly. Right now.

Futures down about a half of 1 percent on the S&P with down 21. Live from New York, this is Bloomberg. Keeping you up to date with news from around the world with the first word. I'm Lisa Matteo. In Brazil, the results of the presidential election signal a change in direction for Latin America's largest economy. Luisa Garcia Lula da Silva was elected in a dramatic comeback for the left wing politician three years ago. He was in a jail cell on corruption

charges. Lula narrowly defeated incumbent Jihye Lee Bolsa Nardo, who has neither conceded nor commented on the results. His reaction will be closely watched by investors. Today, there's a showdown at the U.S. Supreme Court over affirmative action. Justices will hear arguments on admissions policies at Harvard and the University of North Carolina. The schools are battling an interest group that wants to overturn precedents that let colleges consider race when they choose students. The CEO of Barclays says the lenders

investment banking operation is critical to his success. So, yes, Banco Krishnan spoke to Bloomberg in his first television interview since taking the job a year ago. The investment bank has been what has kept Barclays flourishing and quite apart from many of our competitors in the fact that, you know, we performed extremely well during Covid. We were able to have a more diversified business model. Last week, Credit Suisse confirmed it is looking to downsize its own troubled investment bank after multiple losses in the UK. The economy is shuttering to a halt

under the weight of the biggest increases in borrowing costs in more than three decades. And there is concern that rates will go even higher. Economists and investors expect that on Thursday, the Bank of England will raise its benchmark lending rate by three quarters of a percentage point to 3 percent. 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.

The extraordinary investment by the United States and the extraordinary investments we've just heard from the United Arab Emirates and others is just not enough. This is a global crisis and therefore requires global solutions. So regardless of where you are on the energy spectrum, we must all invest and innovate towards achieving a more decarbonise net zero world. I was there. The US special envoy for energy supply from New York. Is the price action for you going into a massive week stay site? Once again, I say that every single Monday Joel Weber is fed a reserve. We say give me a break features a and a

half of one per cent. It gives you a hard time. I was giving myself a break. Please carry on with me. I was up for a five basis points on a ten year 4.0 5 8 2 per cent euro dollar down about four tenths of one per cent. If you're just waking up, tune against

CPI out of the eurozone eurozone CPI close to 11 per cent at ten point seven. The survey was ten point three, the previous number was ten. The ECB has a problem ninety nine twenty nine on euro dollar down by about a third of one per cent. One official crude WTI eighty 641 down one point seven per cent. Prince Abdulaziz bin Salomon was

speaking at an investor conference in the Saudi capital Riyadh last week. And this quote, I saw this quote all over Twitter all through last week. And lots of people messaged me and said, Please talk about this.

And I've waited. And here we go. People are depleting their energy stocks, their emergency stocks. They've depleted it. They've used as a mechanism to manipulate markets. Well, it's profound purpose was to

mitigate shortage of supply. Now, if the messenger was Prince Abdullah's, he's been summoned, then maybe we'd take the latter part of that quote a little bit more seriously. But when OPEC starts talking about manipulated markets, maybe people stop listening.

But the final line, I think the final line is worth our time. The profound purpose of some of these stockpiles and we're talking about the SPRO here is to mitigate a shortage of supply. Now, do we have a supply emergency in the energy market that is required, the kind of EPR release that we've seen from this administration over the last nine months? Well, Republicans are investigating this. This is something that a lot of people would debate, especially because this administration themselves have come out and said our objective is to lower prices. Right. At what point does this become an economic argument that's feasible? I'm not going to weigh in on that.

What is clear is that the politics are clouding the fundamentals at a time when China is actually declining in terms of momentum pretty quickly. And how much is that could ultimately be the driver one way or another, regardless of the political back and forth. I just think ultimately we've got to talk about how it sets us up for next year, for the next twelve months in the oil market.

Yeah. Well, in other words, how vulnerable is the United States if there actually is a shock and suddenly there is a shortage of oil production and that's something that's very relevant and reticent. Joins us right now, the director of Research Energy Aspects Emirates. Can we start there? Typically, we talk about the near-term story. Let's get out to next year. Just briefly, how vulnerable is the United States now with the SPDR at a four decade low? I think it's a great question.

We've calculated this and even before Prince Abdulaziz said this last week, we kind of highlighted the fact that right now the SPRO is actually being used to pretty much influence prices, whereas its objective was very much for supply mitigation. So remember, the SPRO also has legislative releases that was agreed back in 2017. So that's another hundred million barrels that's going to come out. We'll end the year this year at just below 400 million barrels, about 380. Deduct another hundred from the legislative releases over the next three years. It doesn't leave the administration with much more than 60 million barrels. We believe that they could do without

running into issues with the ISE at least requirement to have at least 90 days of net import cover. Now, of course, you can continue to run it down below that number. But I will I will say this again and again, that this is a time of energy security and running down SPRO is to influence prices is probably not the most prudent strategy. Do you think it leaves America even more exposed to the whims of OPEC next year? If you don't have SPF or rather, let me rephrase. If you were using SPRO to offset supply disruptions. That's very different. But if you're using SPF to just keep a

cap on prices, then yeah, absolutely. Because we've said this before as well. But if you are you want to use the SPRO to combat OpEx, that's like turning up to a gunfight with a knife because it's goal has millions of barrels per day of production that they could cut or raise where the SPRO is ultimately a finite volume, which also will need to be replenished at some stage. And given the fact that there isn't this relief valve of the SPRO that potentially could be tapped in a major way next year.

And given the fact that OPEC plus has that leverage over the U.S. and other nations, are we ever gonna see seventy two dollars a barrel kind of price levels where this administration said they would like to refill the SPDR? We don't think so. No, I mean, if anything. 5TH of December, when the EU embargo on Russian crude starts. That's when you're going to see the real supply disruptions kick in. Because this is about shipping disruptions. Right. We're just having to tie up so many

ships now to move Russian crude all the way to the east. We will start to see some Russian productions shot in, and that's only going to get worse next year. So we just do not see how we get down to the 70s. Unless and until the economy really collapses and China doesn't actually start to get better, which we expect should start to happen from April next year. I'm reader, based on some of the supply disruptions that you're expecting heading into the winter. And we are getting signs that, you know, it has been mild so far. But the UK, there are just reports that

they could see a colder winter than usual. Where could you see oil prices going and how does that translate to gasoline prices at this highly political moment? I mean, look, we are expecting prices to go towards hundred dollars, produce into into the year end and really trade into the hundred and ten to one hundred and 20s for most of next year. And the biggest upside, like you mentioned, is the winter. Of course, weather is always going to be erratic and nobody can really predict weather. But even otherwise, stocks are just very, very low. You do ask about gasoline.

It's a fair question. Gasoline prices in the U.S. have continued to rise because there so many refineries that are still down. And let's not forget the French strikes that are still ongoing. We're not producing enough, but I will highlight it's diesel that we need to be really worried about. Diesel stocks are at near record lows. We just haven't built over the summer and that's what we tend to use in the winter. If it does get very, very cold and I think that's a much bigger concern for the administration right now.

So we are expecting potentially some form of intervention by the administration, maybe saying you have to hold X amount of diesel stocks in the New York harbor before you can export from Patrick. Emirates got about 40 seconds on the clock to squeeze this in. We've been talking about this now for the best part of, what, eight months? Call it nine months close to Amrita. Have you seen any airfare either from Europe or the United States to build out refining capacity in a material way? No. Quite the opposite. And it's a great question because, you know, if anything, Europe is talking about windfall taxes on refining. And this is going to be the biggest

bottleneck next year. We have a few Middle Eastern refineries starting up, but after that, after 2025, we just don't have enough refining capacity to meet oil demand. And that right there is the problem. I'm reticent. Thank you. Director of Researcher Energy Aspects. Thank you. We talked a number of weeks ago about having a meteorologist on the show instead of having a NASDAQ strategist. Did you ever think you would see the effects market move on a weather report? I mean, that's basically what David said the last couple of months, and that's what happened, because you see them say that perhaps you get a colder winter than usual in the UK.

That's a game changer for the pound sterling just off session lows, 115 42. We'll catch up with James RTS on the weather in London and the UK. I mean, seriously, investment director at Aberdeen is going to join us shortly. Futures on the S&P, the S&P 500 down about six tenths of one percent. Life from New York on radio, on TV. This is Bloomberg.

Earnings coming in is just another data point that people have to absorb to try and understand this narrative. The source of the negative surprises this quarter has been in fact weaker margins than was anticipated. The market is consistently underestimating the level of inflation by anywhere from 50 to 150 basis points. The Fed has been leading the most recent push higher in global rates. Everybody wants to channel their inner Volcker. He better be careful. You get what you wish for a leverage system.

This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz coming off the back of a truly impressive week of gains on the S&P. Live from New York City, our audience worldwide. Good morning. Good morning. This is Bloomberg Surveillance on TV and radio alongside Lisa Abramowicz some Jonathan Ferro T.K.

taken a day off for Halloween. Happy Halloween. T.K. features a negative four tenths of one percent on the S&P. I say truly impressive. Last week, Lisa, because Matta got slammed, Amazon got hammered. Microsoft an alphabet. Not a whole lot better.

So basically this idea of possibly the Fed could I'm not gonna say it, but maybe reduced the piece of the increases of their read. Hey, I kid. You're going to say, is it going to be the step down shows? So it's not going to be the step down show. It's going to be reducing the pace of the rate hike show and how much they're basically going to provide a wind to a market with communication of just that fact, even if you do get earnings that come in weaker than expected. So the big challenge, how do you do

that? How do you achieve that without triggering a premature easing of financial conditions? And is that what we saw in the last week? You know, maybe kind of sort of. I mean, we didn't really see any bold moves. If you look at where yields are, they still are around the same levels near silver, getting about a 5 percent Fed funds rate next year. If they communicated that they were going to hold rates, they're going to go slower.

They could hold rates higher for longer. Given the maturity cycles, given how much people need to whittle down some of the savings that they have, that would cause more weakness in this economy than just getting it up to a higher point sooner. And so at what point do people understand that in the opening of this program for this hour, you heard Lindsey VIX of Steve for talking about inflation surprises, not just in America, in Europe, too, but a bit earlier this morning, about 60 minutes ago, we had eurozone CPI at close to 11 percent at ten point seven.

That's up from 10 up from 10 in the previous rate. How much of this is because of the weaker euro? How much of this is because of some of the disruptions that have been ongoing in China? How much is this because of the one point seven trillion dollars in savings over what they would otherwise have? U.S. consumers still have stockpiled in a bank as a result of some of the programs during the pandemic. How much is that feeding into this? Higher than expected inflation that continues around the world. You mentioned China, the DAX out of China over the weekend. Not impressive. Downside surprise will pick up on that a little bit later.

Futures right now recovering off. Session lows down about a third of one per cent on a S&P 500 yield shaping up as follows higher by two or three basis points, backing away from the highs at a session at 4.0 0 3 7 4 per. Any affects market Eurodollar looks a little something like this. 1938, when negative about a third of 1 per cent on euro dollar a soft the euro story. I want to talk about crude briefly 86 57 WTI brammer down about one point five per cent. And reader Sanjay saying she sees it going to about 100 by year and due to some of the supply constraints and a winter that could be colder will hurt.

We'll get the weather report coming up this week. We are looking at a whole host of rate decisions starting with the Reserve Bank of Australia. That will be tomorrow. The FOMC rate decision on Wednesday really is the key one.

How are they going to communicate that they will eventually, as planned, be reducing the piece of rate hikes and whereas their end point, do they start to communicate the amount of pain that this economy is going to have to feel? And similarly, for the Bank of England, either they've got a very difficult decision on Thursday. This week, we also get a slew of economic data, including the employment report that comes out on Friday for the month of October. But for that tomorrow, the JOLTS to report for the month of September might hold more clues in terms of how much softening you're getting. This is the job openings.

Are we seeing that sort of soft not hiring that could indicate perhaps a bit of a loosening in this labor market? And then, you know, the earnings really are important. And this week's earnings may be particularly important because they're focused in retail and they're focused in health care. Some of the areas that have gotten better, not retail as much as healthcare. Almost a third of the S&P 500 160 companies on DAX report. I'm looking at Uber in particular. How long can we keep ordering twenty

dollar salaries and getting them delivered? I'm just wondering, Todd, I mean, is that what's on your mind over the weekend? Just wondering, you know, how much people are going to start to push back and not necessarily take that? You know, I think last week we talked about how much investment had gone into food delivery and how insufficient investment had gone into things like taking energy out of the ground and building, refining, refining capacity and all of those things. I think I saw a quote in The Wall Street Journal over the weekend. It's about investing in real things again. And I think you've talked about that as well over the last nine months. Joe Weisenthal.

And you're seeing this in the tech earnings, right? Have we witnessed massive tech bubble? You start to see the deflation of that and the money come out, what's left and how much does that really lead to some sort of bigger economic deterioration vs. idiosyncratic pothole that allows everything to keep on climbing? What we all find frustrating is the politics and the difference between politics and making good policy. You hear all these complaints about getting energy prices down, but to catch up with Amrita Sen of Energy Aspects of Damp. About 10 minutes ago and ask of the Europeans or the Americans spent any material time trying to build out refining capacity this year. And they are multi-year projects.

And you haven't seen it in a in a profound way that is deeply frustrating. What do you expect to happen if you don't build out refining capacity? What do you think this is going to wind up or is this a communication problem where they could have been saying to their consumers, to their people, hey, listen. Oil prices are going to be higher. Gasoline prices are going to be higher because we have to invest in a whole host of other energies in order to get to a new reality. If they can't say that, it's going to become a really tenuous moment where you don't invest in what you need right now. And I think politicians want the bridge to the next election and want it to somehow OPEC to provide that bridge for them as if that was going to happen. I feel like you just have this real faith in politics right now. John, I feel like you've had this, you

know, just pure sense of lack of cynicism. Well, you know, I have this deep frustration with politicians. You think regardless of party. Yes. I know that that has existed for a long, long time. James RTS joins us now in the weather investment director at Aquitaine. James, serious question. Let's start there.

How important is the weather going to be for your calls in this market over the next three, four months? We're friends. We love to talk about the weather, John. Of course, the weather features heavily in all of our investment debates and discussions.

Yeah, I mean, obviously, putting aside my attempts to be facetious there, there is a direct linkage between some of these government programs and the weather, the extent to which we need a lot of gas, a bit of gas or not much gas will largely depend on to what extent we can be a bit more frugal about using it, but also obviously how cold it is and how much we need to heat our homes. And if governments are capping prices, that means they're on the hook for all of the wholesale price above which that they're capping. So it is imp

2022-11-10 00:05

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