Fed Meeting Preview: Bloomberg Surveillance Show 9/19/2022

Fed Meeting Preview: Bloomberg Surveillance Show 9/19/2022

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This is still a period where it's going to be very difficult for the Fed to sound anything other than hawkish Powell might have to thread the needle and talk the market away from the ledge if you will. They don't want to do is intentionally cause a recession. And getting to that point I think will require a bit of luck. Despite the recession risk in the horizon this is an fans that wants to continue. This inflation situation is so extreme. You just have to make. There's no way around it. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz. It's good to be back.

Rameau gets feedback from New York City from audience worldwide. Good morning. Good morning. This is Bloomberg Surveillance live on TV and radio alongside Lisa Abramowicz.

Some Jonathan Ferro features down nine tenths of one percent on the S&P. Lisa another morning of losses coming right up. And it comes ahead of a meeting not only from the Federal Reserve but more than a dozen other central banks within a 24 hour period time where they're expected to raise rates by 500 basis points on a combined level to see global tightening cycle. And people trying to press on what that means for economic growth. Equities down yields up your 2 year advancing I think for an eighth consecutive session.

Your tenure through 350 will keep reflecting on this through the morning. But Lisa how many guest came on in the last couple of months has said the Harvey year was the June high. Well now we got a September Haidi Lun. You had a year. So this raises a question how quickly do buyers come back in. Or is there a reset of how high inflation were allowed to stay because central banks do not want to experience the pain required to get inflation back down to that 2 percent target.

Expect a lot more discussions about this and expect a lot of questions about what exactly four to four and a half percent Fed funds rates really means for the economy. So we've both read a lot of notes coming into this week ahead of the Federal Reserve. I found maybe a glimmer of hope over at Wells Fargo with Chris Harvey. Chris said this The anticipated decelerating path determined by the market and ourselves is in our view expected to be a near term positive for risk assets including stocks. How many people share that view Lisa.

And will we actually get that decelerating approach to terminal. Because at the moment it's 75 and maybe 75 again in November. So if you take a look at where Fed funds futures trading prices have really put things there is a deceleration and then a pivot if you will next year perhaps not as aggressively as people had thought. What's not understood and to me this is what I'm really thinking a lot about John. It's not understood what kind of economic pain a four to four and a half percent Fed funds rate even briefly will incur. And that really is the question. If it does incur a lot of pain then what does that mean in terms of what you can expect with equity valuations. It's a simple question for Wednesday.

Well the forecast from this Federal Reserve capture some of that pain. Will it capture the risk of hard landing. If it doesn't. What does that say about Fed

credibility. What does it say about a forecast. I mean yes if we had called him aspirational over the last seven fantasyland aspiration he can't do it again on Wednesday. Exactly. It's a Wednesday.

Former vice chair Rich Colorado alongside us going out of the decision and coming out of the news conference too. I think we're all looking forward to that. Futures right now down nine tenths of one per cent on the S&P on the NASDAQ 100 negative one full percentage point yields higher by four or five basis points on a 10 year. And briefly three 350 340 983 euro dollar negative. Lisa were down a third of 1 per cent. Ninety nine 87. It's very much dollar strength. And a big question for this week is how concerned is the rest of the world about that dollar's strength which is leading to importing inflation even more.

So here's we're watching in the week ahead. Today we have more of the pageantry coming out of the United Kingdom. And we have some housing data this week though it is a massive week. United Nations General Assembly meeting happens in New York City. Black President Biden will go from London to Washington D.C. and then to New York City on Tuesday with a host of other world leaders.

Expect a lot of gridlock but also expect a big discussion about this new world order that we keep talking about with China and Russia and the western states. Also on Wednesday. This really is the main issue of Fed rate decision. Also reached sessions from more than a

dozen other banks in just 24 hours. This is something I am not understanding. What is the joint effect of all of this hike. Right. And we were talking about the global easing cycle. How do you put that into reverse when people are still talking about excess liquidity and then at 12:00 p.m.. Well also on Thursday Janet Yellen treasury secretary is going to be making some testimony.

Some people are concerned about what she's going to say about the IRS. Also digital dollar. That is a big topic of discussion. I'm curious to hear what she has to say about inflation now especially given some of her mea culpas about transitory the past and a focus stays on the U.K. as well Lisa. And a very different way because it's

back to reality for the conservative prime minister. Let's try. I believe we get a mini budget. We get a bank giving the right decision and we're staring down the barrel of 113 maybe 112 on sterling 130 79 right now. That's what I was going to say is take a look at the fax market. It's already weighing in on that plan. And it is supposed to be a quiet week. It was not in the fax market for Great Britain. And how much does she.

Create even more weakness when she starts posting details of this plan. Mark McKay joins us here in New York. Mark McKay great to catch up with you sir. Let's start with the fat 75 or 100. Mike how unusual would it be to follow up with 100 basis points at this meeting given they haven't flagged or signaled that.

Well be virtually unprecedented. I mean you have to go back to the Volcker years when they were not targeting a particular rate. But the money supply to see the effect of a 100 basis point rate cut or more I mean they have gone as much as 400 at one meeting during the Volcker years. But we're nowhere near that now. So I think if you got to 100 it would shock a lot of people in the markets and there would be a knee jerk market reaction that the Fed doesn't want to risk.

Also long and variable lags. They don't know when the full effect of a rate increase is going to hit the economy. And so they'd rather be a little more cautious than 100.

Not that 75 is a mild rate increase by any means. Mike how much discussion is there in your Federal Reserve circles about the disproportionate effect of rate hikes on lower income individuals at a time when they used to have a dual mandate when they used to be more concerned about the varying and broad effects. And now it seems like they have one mandate and that is to get inflation down at the expense of anything else. Is that really what the discussions are like behind the scenes. Well essentially I mean they've been concerned in recent years more publicly with people in the lower income strata but they also feel that inflation is a big tax on those people much more so than wealthy people who have big bank accounts. And so getting inflation down is a good move for people in the lower income strata.

Now there will be some job losses but they think that the job losses can be contained because there are a lot of openings right now. So their focus is going to stay on inflation. Mark McKay thank you. Mark McKay covering all these central

bank decisions this week. And there are many. Lisa went through some of them 350 on a 10 year briefly. Right now 349 yields up four basis points on a two year up five basis points 3 92. Joining us now David stops global head across asset matic strategy at J.P. Morgan Private Bank. David good to catch up with you sir. Let's start here. Can you give me one good reason to be bullish right now.

Well John I think if you're going to make the bullish case I think you're going to look at the resilience of the domestic consumer spending in parts of the Western world. I think you're also going to look at how much tightening has been priced in and indeed expectations of recession. You're broadening of course across Wall Street.

But I think bullish is not that we're going to see the kind of boom conditions we saw last year. Bullish would be a soft landing a pretty soggy economy next year but one that avoids a recession and avoids a major go down in earnings. That's as close as it can get. I think that that's not exactly a ringing endorsement of risk assets. David I do wonder especially at a time when Tina is dead right. There is an alternative and it is cash. It is short term instruments that are actually yielding something on inflation adjusted terms for the first time in a long time. Is there any justification not to just

hide out some of these instruments collect the income and wait for a better more clear entry. Well we are absolutely recommending parts of the fixed income universe. At this point as you as you rightly say a lot of value is being created both for the short and long end as as you said in the intro the ten year three year 350 we would be buyers of that in portfolios that don't have any duration. Right now we see a lot of value in birds as well. So there's plenty of ways to meet your

financial goals if you want a mid single digit return without taking a lot of equity risk. And it's maybe the first time you could say that in a long long time given the lower for longer year with that we've been to on interest rates. David also these are things that I think that you've really seen still some value be created in the structural you know in the structural changes that we see in the economy going to be going for clean energy fintech genetic therapy some tremendous value there in in factors and themes that are going to be huge drivers of our society going forward. David I just want you to elaborate a little bit. You said that you would be buyers of 10 year treasuries at three and a half percent. Do you think that this is the new peak

and that basically they cannot continue to lose more value yields up to either. Oh no. We never said we'd never say that definitively. We just think that part of the fixed income space right now have some asymmetry about that.

If we do go into a recession next year we would expect bond yields to fall significantly. And we think that the potential returns in that scenario are now greater than the losses you may get if a bond yields continue to drift higher. So this is absolutely not a risk free trade right now but a lot of our close portfolios have very very short to nil duration and clients have been waiting to log in to better yields over you know over the medium to longer term. Well now here they are. And I think for the right portfolio for clients looking for you for that yield and for that stable return. Treasuries now are an option in the way as you said that they had not been in the previous decade.

Dave thank you. David stuff's there. Have J.P. Morgan Private Bank Lisa that positive correlation between equities and bonds right now is pretty toxic year to year at 390. Never mind by tense front into Kathleen Hays now must 4 percent. Isn't that a story. Yeah. And how much more can you actually see. Yields continue to rise in the front end.

If you have four to four and a half percent Fed funds rate almost baked into expectations right now. If you take a look at some of the futures trading. So what does that mean for that curve inversion rate. Is that basically just mean that it widens to record level because people do keep piling into 10 year treasuries but his longer term this confers some sort of pain will be expressed in lower inflation lower growth over the next 10 years. So you see this Fed's going to tee up the November decision. And of course student Emmanuel wrote about this over the weekend.

Flack the midterms that take place several days after that decision. Do you think it's something they have to take into account. Because typically in a rate hike in cycle around the midterms Lisa we'd be having a conversation about maybe this Fed setting that out. That's not the conversation this time around.

Do you think that if they actually did care about the midterm elections that anyone would say it was anywhere remotely connected to the Federal Reserve. They're going to stay away from that as hard as they can because that is toxic. They're not politically motivated. Mike McCusker was calm about it in the news. Good. I hope so. You always make that ISE. I've got no idea.

Tidjane Thiam director. Maybe he should but he won't answer it. She pointed out this reference as a Might McLain question. Correct. Which is like his last features down eight tenths of one percent on the S&P on the NASDAQ 100 down almost one full percentage point. Live from New York this is Bloomberg.

Keeping you up today with news from around the world with the first word. I'm Lisa Matteo. Leaders from around the world gathered in London today for the funeral of Queen Elizabeth. The second. More than two thousand people attended the ceremony in Westminster Abbey for the UK's longest serving monarch over the last four days. Hundreds of thousands of people lined up for hours to pay their final respects. President Biden says U.S.

forces would defend Taiwan if there was what he called an unprecedented attack. It was the administration's latest pledge of support as it seeks to deter China from military from increasing military pressure on Taiwan. And the president was interviewed for the CBS News program 60 Minutes. Ukraine's president Vladimir Zelinsky has renewed his pledge to retake all Russian controlled territory after his country's recent advances.

Zelinsky hinted that another offensive is being planned. Ukraine claims that some Russian military units suffered loss rates of up to 90 percent in their retreat in Hong Kong. Local media report the city may end hotel quarantine and free flight Covid test requirements for incoming travelers. That would be its most significant moves yet to end more than two years of global isolation. The changes may come before a series of

major international events set for Hong Kong starting in late October. Volkswagen wants to raise up to nine point four billion dollars from the IPO of iconic sports car maker Porch. It would be Europe's largest listing and more than a decade. VW is seeking a valuation of as much as 75 billion. That's below an earlier Top End goal of

as much as 85 billion. Global news 24 hours a day on air and on Bloomberg Quicktake powered by more than twenty seven hundred journalists and analysts in more than 120 countries. I'm Lisa Matteo. This is Bloomberg. We've got a substantial underlying inflation problem that doesn't come out without very substantial monetary policy adjustment and the market is waking up to that fact and is now building in substantially more monetary policy adjustment. Is it enough or too much.

That was Larry Summers the former Treasury secretary on Wall Street week with David Westin over the weekend live from New York City this morning. Good morning with Lisa Abramowicz. Some Jonathan Ferro futures down eight or nine cents of one per cent on the S&P. Andrew Holland host over a city publishing just moments ago. Lisa here's the quote for you. The federal needs confront whether the 4

to 4.5 percent cent me right now being priced in is restrictive or just neutral given underlying inflation currently 4 per cent plus Joel Weber. It's a moving target in a moving economy. And how can they really signal that. At a time when they want to keep financial conditions tightening further rate we're not going to get much clarity on that. Basically on this front because they're

going to have a hawkish tone otherwise the market move against them. Well financial conditions are tightening right now. We're down nine tenths of one per cent on the S&P. Yields are higher the dollar stronger astray. That question and NIKKEI. The international economist at Wells

Fargo. And Nick let's start there is 4 to 4.5 per cent the terminal rate the price by this market right now restrictive or just neutral. Well I wouldn't mind the measure is probably neutral. Maybe it's slightly that for decide. But still in this current context when you've got core inflation at six point three percent when you've got headline inflation at eight point one percent I mean our forecast at Wells Fargo is we're gonna get 44 important. But I do believe you know we see versus the upside to that.

So it could be that the neutral rate is a little higher than that for affordable coverage. Well clearly they want growth below potential. They want it to be restrictive and I want to bring inflation back down. Nick how much below potential do any growth to be to get inflation back towards Target.

That's what's to. Well that's a very good question. You know I think you know 2 percent potential growth trying to sort of engineer a soft landing I think is a very delicate dance. And maybe even a little bit unreasonable in terms of expectations of financial market participants. It's like kind of almost lending you know sort of an aircraft on a just on a picnic blanket shall we say. So yes while you can perhaps aim for growth of say half to 1 percent that's a very precise kind of just the fact that you can bring the economy to that slow level but not then tipping into a recession.

So you know I do think we need to get them to that 0 1 percent range but it's going to be extremely difficult to just be so precise with your imaginations in terms of interest rate policy. There's a question about the collateral damage Nick especially as the dollar strengthens as John was mentioning in some levels the strongest going back to 2002. The World Bank has been concerning has been warning that we will enter some sort of global recession if the Fed continues to tighten at the pace that they're projecting. Do you agree.

We do agree in the sense of we have a recession for the United States. We think it's more likely than not. And then actually when you look at the eurozone in the United Kingdom it looks like perhaps is even clearer path for recession there. We believe those starting late this year

because those guys energy price increases. So you know I wouldn't want to criticize central banks or policymakers or what they're doing. It's unfortunately just the world we live in and the reality. It's a very significant inflation problem. And it's gonna be hard to get that

longer term inflation under control without a significant disruption to near-term growth. How much is is being driven particularly the pain in non U.S. company countries by the strength of the dollar. How much is that creating a feedback loop of having to import inflation even more and really frustrating central banks and fiscal policy makers. Yeah I think it's a relevant point.

And you know I think the strong dollar in the case of the US is probably not a particular problem. In fact it's probably helpful given the inflation that they have. But we haven't started to see some central banks. The Bank of Japan is perhaps a very obvious example that very concerned at the weakness of the yen. I think even the European Central Bank with some of its comments have started to at least notice that the weakness of the euro. So the strong dollar I don't think is a problem or an issue for the Federal Reserve. Not a state's policymakers but it is

becoming at least a bothersome. I would say for many foreign central banks. However at the end of the day it's it's it's those domestic inflationary. Even in places like the eurozone in the United Kingdom that are front and center and probably the main issue. Nick what's a failing on the effects front though.

The Bank of Japan has tried some verbal intervention. It hasn't worked out. China's trying to do the same with the West fixes the currency on any given day. That's not working out. Nick do you expect a policy response from somebody central banks that are grappling with a weaker currency that at this point is undesirable. Yeah I would say the answer to that is probably not certainly not a policy response in terms of foreign exchange intervention from the Bank of Japan for example.

And you know if you go back two or three decades even the Bank of Japan and in the 1990s and the early 2000s when it was a very heavy and active player in the foreign exchange intervention markets those interventions were at best modestly successful. And of course the foreign exchange markets nowadays are much more liquid. So I suspect that most central banks if not all central banks will really refrain from any lifestyle if it's intervention. I do not see that as part of the landscape. What do you expect to hear from the Bank of Japan this week. I think when you know when you look at

the bridge again I really wouldn't expect much of a change message. In fact you know the typical pattern this year has been a lot of speculation heading into these meetings that they will all bond yields first to rise and that they will have to give way on the CAC that they have on Japanese government bond yields. But the Bank of Japan has been especially comfortable with the idea that they've got modest growth and they certainly don't. One of the few countries that has limited inflation it's only about two and a half percent. So promote economic perspective. I think they're happy with their policy settings. And for that reason I think they will

continue to say we will buy bonds as needed. We will keep these bond yields low. I don't see any change in message from the bank to imagine the Fed is going to have any sympathy for them. NIKKEI have NASDAQ. Thank you. Because at the end of the day if they're complaining about at least they can do something about it. They just remove the yield curve control

and all of a sudden they get a currency that reflects more of the normalcy that is the differentials in economy. I just question how comfortable it really is. I mean we were talking and we were talking about this last week when we were in London about how the grocery store prices reset at the end of this month. We were talking about this with Jeffrey you. And all of a sudden there'll be sticker shock Joel Weber where people will actually start to experience the imported inflation of such a weak yen relative to the dollar. Is that comfortable. I remember a message I received in the last couple of weeks on this.

I just wonder how comfortable the bond market would be with the removal of yield curve control on a morning where we have to sit 392 and maybe this is more pertinent to the long end to the curve on a 10 year in America if close to 350 and through 350 a little bit early this morning. It's a great point. People saying that one of the tail risks for the 10 year yield. What could make yields go much higher even hit a 5 percent level would be the Bank of Japan abandoning their yield curve control that would royal markets in a way that people are not expecting. The currency perhaps is expecting some sort of change policy disruption but not necessarily the JCB market. That is no longer a market.

And markets have basically discounted the yield curve. Control being abandoned hasn't been a market for a long long time. How many people have you spoken to the set. 357 A. Here it is 349.

And David Stubbs basically reiterated that saying this is a good time to go long because if you haven't really been long if you've had short duration you're actually getting yields. Okay. But what happens. I guess that this is the question the balance of risks people seeing it less likely that that the Bank of Japan will abandon the yield curve control. Then we get some sort of downturn in the

economy. It sends people back into longer term treasuries. We'll talk about the opportunity in fixed income in just a moment. Matt Brill the head of North American Investment Grade and Invesco is going to join us in about five minutes time. If you're just tuning in futures are lower down nine tenths of one percent on the S&P on the Nasdaq 100 percent about 1 percent.

Yields are higher briefly on a 10 year through 350. Just short of that right now on a two year three ninety two and pushing in 393 from New York. This is blowing back. We are into the thick of what we think is gonna be a disappointing earnings revision lower to get inflationary pressures under control. You just have to expect earnings across the board to be lower than they are now. One of the issues that rescue facing is an economy added capacity constraints.

The strength of the dollar is already pushing half the world economy under the bus. Price stability matters more than the risk of unemployment at this point. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz. What a week for central banks coming right up live from New York City for our audience worldwide. Good morning. Good morning. This is Bloomberg Surveillance live on

TV and radio alongside Lisa Abramowicz. Some Jonathan Ferro futures are down about a 1 per cent on the S&P 500. Lisa yields are higher. Much much higher. Yeah reaching the highest levels since what you were talking about this before 10 year yields reaching the highest since 2011. That two year yield continuing to climb. This expectation that central banks are poised to hike hike aggressively and that yes that will curtail longer term growth.

But will it be enough to get back down to that 2 percent target up close to 7 basis points on a two year now 393 on a two year. I think that's eight consecutive days of a two year yield climbing. Have we seen the bulk of this rate shock off the back of that inflation print a week ago. Right now the market is pricing in more than a 4 percent Fed funds rate by the end of this year. I keep repeating this. But what's not known is what kind of

pain that will cause on the economy and how resilient this economy will be. Is this a liability that it is less interest rate sensitive right now with people having locked in mortgage rates at very low rates. The idea that people don't have as much consumer debt the idea that companies are flush with cash. This all makes the economy more

resilient which makes the transmission mechanism delayed making it hard to see the pain when it comes to Southern inflation keeps surprising to the upside. In addition to that Bank of America said this in the last 18 months headline inflation a surprise to the upside 11 times and to the downside only twice. This week wasn't meant to be like this. Lisa we're meant to have another soft inflation print. We talk about that step down that shift lower and rate hikes from 75 to 50 the next 125. And the pause that was kind of a soft landing. Hope that got some freezing cold water poured all over it in the last week especially because of what elements really were driving the inflation. Not only was it rants which actually

affects the lower income individuals but the higher income individuals keep getting rage increases that are driving some of the inflation. I was looking at the Atlanta wage track or the Atlanta Fed wage tracker. It now has a six point seven percent average gain in wages which is below the headline inflation number. But still the highest rate going back to 1983. How do policymakers message it. This is a bad thing that they want people to lose their jobs and get smaller wage increases at a time when people have been arguing for a bigger share of corporate gains for so long. That's why I think it's gonna be very difficult for this government to keep on giving the Fed the space that it's giving it at the moment. So one good I saw some comments from

Jared Bernstein an adviser to the White House on the economy over the weekend talking about the prospect of the Fed doing its job getting inflation lower. House prices will naturally come down because of that. To your point when we start to see the job losses. Is everyone going to be on the same page that we need to keep on hiking.

And when you talk about everyone it's not just in the United States. I mean this has been the week of the U.N. General Assembly in New York City. Global leaders are going to get together. They are dealing with the same inflationary pressures that dealing with the post pandemic realities.

But a very different landscape based on the dollar based on the fact that the US has a much stronger wage growth and employment picture than a lot of other countries. How much pressure is there internationally at a time when really it's become very difficult many places pressure on Europe. We just come back from the U.K. We should reflect on that Tom Keene and the team doing a great job wrapping up the funeral service for the late queen early this morning for the prime minister Liz Truss. It's confronting reality almost immediately through the rest of this week. Do you think she's confronting reality. Do you think that that's an accurate description of what her policy is putting out from the reality of the policy they've put out there. It's very very expensive.

We don't know how much it's going to cost. We just know it's very very expensive. And there are some doubts in this market already. Well that's what I was going to say. The reality of a pound below 114. All of a sudden they're looking at the pound weaker than that 1992 Black Wednesday that we were talking about the anniversary of which was last week going back to 1986 I believe Bank of England rate decision on Thursday to 1985. The weakest I should say. Thank you. I appreciate that.

I remember that. Well I all lots of it. It was nice too. I remember it so well. It isn't either. He's down nine tenths of one percent on a might on the Nasdaq 100 down 1 full percentage point.

We've talked a lot about a move in. Yields were up 50 basis points on a 10 year 350. Do we have to get comfortable with 350 now. I'm still not comfortable with 394 on a two year was only a week or so ago. We were talking about 360 370 380 now 390 and staring down the barrel of four percentage points.

So Lisa reflected on it all. Both nominated them. Real rates were above the June highs and the equity markets still about. 5 percent of the June lows is a retest now inevitable. I mean some people say yes. Right. Certainly the Mike Wilson crew over at Morgan Stanley and other people are saying the fact the companies have held in this well.

The fact that consumers keep spending the fact that CPI continues to increase and you're seeing it not decelerate as quickly shows the strength not necessarily the pain that will need to happen later on. Matt Miller joins us now. The head of U.S. investment grade and senior portfolio manager at Invesco Mat.

Have we seen the worst of it. And do you want to start buying. Hey good morning Jonathan. Yeah I think we've we've probably not seen the worst of it yet but these are certainly attractive.

I think you look at valuations it's impossible to argue that they don't. Things don't look cheap particularly investment grade high yield. They look very cheap. But the problem is investors keep being

early and it's painful to be early. You know that the old saying is you know if you're early you're wrong. And right now everybody that's been early has been wrong. And so even though the valuations are there it looks attractive. You're probably gonna make money over the next year but over the next few weeks who knows.

We've still got to get to the next CPI print before you can have any sort of clarity at this point although a lot of people question what credit spreads with the extra premium that investors demand to own corporate debt over benchmark rates over the benchmark full faith and credit of the United States. Whether that's actually pricing in the economic pain that a four to four and a half percent Fed funds rate is conferring. Do you think so. So at this point it's not it's really

pricing in a slowdown of the economy it's not pricing in a hard recession. I mean I think at this point all in yields you know historically have not been I've been up in this high in 30 years. So you're looking at pure credit spreads versus falling yields is a little bit different story. But we're not seeing a lot of pain in corporate credit the last few weeks even in the last week or so even after the CPI. It's mainly been rate driven. So the credit markets are telling you that corporations can get through this that unless this inflation continues forever at some point we're going to get the Fed more in balance and we're actually gonna see strengthen. These balance sheets went out but we still have to get to that terminal terminal high end terminal rate in order to know how bad it's gonna be from the Fed. A number of investors have gotten pretty

bullish actually on the prospect of credit. I'm thinking for example if Jeff got Mark over a double line or Oaktree seeing equity like potential returns in credit. Do you agree that at this point it's time to lean in and get really good returns. So yeah we look at the difference between equity yields in credit yields and if you like to look at three to five year credit yields because you want to take on a lot of duration there and you're like you're getting about three percentage points extra yield by buying bonds and you are buying stocks. And so to me it's it's it's a very very

attractive time to be buying bonds versus stocks. And I'm not a stock expert. I'm just saying on a relative basis looks pretty good to me. And so from that standpoint you're locking in 5 percent yields for the first time since 2009 on 10 year credit. You can lock in pretty much the same on the front end credit.

So I like credit this point again. I just think that the timing is very difficult. But if you're able to close your eyes and buy we think you're going to do well. I've got no problem with the bond market guys talking about stocks. The stock market guys do it all the time. They're always talking about the bond market at least when I reflect on the following over the last week or so in fact we've been doing it for a few months now. The tone that I still get from a lot of

guests on this program is that these issues are still somewhat temporary that even if the Fed goes to four four and a half ultimately we return to the well world of the last 10 years or so. You pushing back against that Matt. I think we'll eventually get there but it's just taking so long to get anywhere. Just think about how long we've been in this pandemic how long been officially out of it now I guess but it just taking longer to get out of everything and get back to normal. So I think the longer term trends down the road aging demographics technological innovation. Those are key drivers of having deflation or lower inflation. But they just can't take place fast enough right now. And so in that regard any expectations

that we would have had for a quicker turnaround would have been even put on hold or a quicker quicker return to normal. And so from that standpoint they're going to have to ride this out a little longer with the next CPI trend is going to be on everybody's mind but that may not be enough for it. We have to wait for another one and then another one. So call it 2024 2025. But it's not happening nearly as quickly as we would like it to. We just have to rely on valuations being attractive at this point.

Just quickly Matt what would you be asking Fed Chair Jay Powell this Wednesday. What you want to hear from him. So I want to know two things. First off. What are you gonna do with your mortgage book.

I mean are you going to start to sell. Is that are you are you are you. Are you considering that at this point at least. And then second I want to know how patient are you.

We know that there's a lot of hikes that have been in the pipeline. There's a lot of pipes that lot heights that are going to hit the economy at some point. You know how patient are you willing to be and at what point are you. Are you going to be more even more

aggressive. You know that would be 100 basis points rather than 75. I think he's going to take his time. I think he has to know that this is going to slow the economy. But if he just says I'm out of patience you know that can be a problem. My bro of Invesco might go to catch up buddy as always.

What a morning for this. Bond market yields up 7 basis points 393 on a two year. We're looking at three ninety four right now on a 10 year through 350. We're talking about levels we haven't

seen since 2011. Lisa it's been a while. Yeah. And I'm looking right now at credit. And if you take a look at investment grade corporate bonds the yield is the highest going back to 2009. This is the all in yield at more than 5 percent. You just wonder and it goes to your question which is a really good one. Are we going back to what we're used to

in three years four years. Where is this regime change. A move away from zero rates a move away from the ability to keep lowering rates in response to financial pain because of the inflation that we've seen and the fact that it is harder to get rid of. I'd suggest the consensus is still on the former not the latter. Correct. I wonder what it would take for many people to capitulate on that view.

Whether there is a sense of some sort of structural inflation that's different. But how long before people realize that. I mean people could say it like Larry Summers is saying it's here. Take a look. It's stick here. And especially the way that people have

turned out. Certain debt creates more availability for rates to be higher generally in the economy. We're unwinding an era of unprecedented monetary policy.

Literally a decade of it more than a decade off in this conversation as if everything's gone back to normal in the first half of next year maybe it will. I'm just saying that there are some big questions to ask here. T.K. got in touch Saturday night. He made it to a Tottenham game. He was almost crying on the phone.

Thank you so much for introducing me to this garbage. I'm pretty sure that was a compliment. Yeah that's heartrending. OK futures negative. Eight cents on the S&P.

From New York this is Bloomberg. Keeping you up to date with news from around the world with the first word. I'm Lisa Mateo. It was the final public moment for a woman who reigned over a country for 70 years. World leaders gathered in London for the funeral of Queen Elizabeth the second today. Her coffin was transported by carriage from parliament to Westminster Abbey for the services over the past four days. Hundreds of thousands waited in line for hours to pay their respects. President Biden says U.S.

forces would defend Taiwan if there was what he called an unprecedented attack. It was the administration's latest pledge of support as it seeks to deter China from increasing military pressure on Taiwan. The president was interviewed for the CBS News program 60 Minutes.

A recession in the euro area now looks almost inevitable to economists. Those polled by Bloomberg put the probability of two straight quarters of contraction at 80 percent in the next 12 months. That's up from 60 percent in a previous survey. There's growing concern that an energy squeeze this winter could cause a slump in economic activity. The EU's executive arm has recommended

freezing seven point five billion dollars in funds earmarked for Prime Minister Viktor or Bonds government in Hungary. That's because of allegations of corruption and fraud. Orban has rewritten Hungary's constitution overhauled election rules and even extended his influence over the courts and education.

Global news 24 hours a day on air and on Bloomberg Quicktake powered by more than twenty seven hundred journalists and analysts in more than 120 countries. I'm Lisa Matteo. This is Bloomberg. We agree with what we signed on to a long time ago and there is one China policy that Taiwan makes your own judgements about their independence. We are not moving. We're not encouraging them and being

independent. We're not too late. That's their decision. But would U.S. forces defend the island. Yes. If in fact there was an unprecedented attack quite an exchange in this country yesterday evening. President Joe Biden on CBS 60 Minutes. Life in New York City this morning. Good morning with Lisa Abramowicz. Some Jonathan Ferro futures. Negative nine cents on the S&P and the

Nasdaq 100 were down 1 to 4 percentage points. Yields are higher by 7 basis points at the front end on a two year 393 on a 10 year 3 350 the highest level on a 10 year. Come back to twenty eleven. Crude is lower down by almost three percentage points. Brahma were 82 63.

Talked a lot about the rate shock. I think you're right to pick up on a theme that we've got to drive home through to the end of the year. Had the rate shock maybe. Have we had the consequences of that rate shock in this economy. I think a lot of people would push back and say no Mark Gurman. Right.

And what you're seeing right now is people perhaps gaming that out in the oil market about a lack of demand at a time when you have arguably shortages or a lack of supply to meet certain demand in the oil market. So to see that kind of decline is quite notable. Gas prices lower. That's been a thing for this president helping him out. Crude lower for the wrong reasons. I'd argue at the moment. Lisa wouldn't you. Well I mean it's lower because people expect lower growth and people let's move around and industry to shut down in the face of higher prices.

Not great. It makes joins us now. Amari RTS correspondent and she's here in New York City. It's good to see you AMH. Can we just talk about those comments on Taiwan. Is that the strategic ambiguity that this president is looking for. Clearly this is the fourth time he said

similar comments about defending Taiwan. Remember in way in May he was asked would the U.S. defend it militarily. He said yes. Then White House aides came out and they

said what they meant is we would send more hardware. But this interview was a little bit different. Not only did he say yes we defend Taiwan but then when you had the interviewee following up saying U.S. policy has not changed are you basically saying that U.S. forces men and women would defend Taiwan in the event of a Chinese invasion unlike Ukraine.

Again a direct. Yes from the U.S. president. It comes at a time though where U.S. China relations are really in this difficult place. Obviously last month we had Speaker Pelosi go to Taiwan. We saw massive provocations in terms of military drills around the strait China cutting off climate talks cutting off military talks from the United States. And then in Washington there's talk of potential new legislation that would say Taiwan is a major non U.S. NATO ally as well as sending more

military hardware. So you have a deterioration in these two countries. And the president is now coming out and say something that really is going to put the backs up of individuals in Beijing especially ahead of this massive party Congress for Xi Jinping. Is there any connection between President Biden's discussions and comments now and the meeting between Vladimir Putin and Xi Jinping over the past week. Well potentially Biden just wants to show a big strong force that he will defend countries like Taiwan and countries that he feels that other nations are intruding on and approaching on their sovereignty. I think what you saw between Xi Jinping and Vladimir Putin was actually Putin for the first time basically saying to China we know we've put you in this difficult position and maybe the president is harping on that difficult position now.

These two leaders are far find themselves in Joel Weber. This is quite a quick interview with President Biden. He talked about a lot of things saying that the pandemic was over. He expects inflation to eventually abate. He also talked about the potential for another run at president basically saying he would decide after the midterm elections.

Is that a shift in tone. Is that less conviction at a time when he doesn't necessarily have the popularity behind that likelihood of a 20 24 run. Yeah. And he also talked about the fact that if he was going to come out and declare this there's a lot of legal issues that go into that.

And he's not ready to make that decision. But he will at some point although there is lots of talk that if it was to be President Trump then it would be President Biden for the Democrats. But we should know the first lady Jill Biden said that she had an ad this conversation with the president when she gave an interview to The Today Show. And while we have seen the president really come under a lot of strain and pressure in the polls I think the NBC poll that that is out is pretty astonishing. Forty five percent is now President Biden's approval rating. That is the most we've seen since October 20 21. So basically it took him an entire year

to get back to this point. And what a moment to get back to this point because we're less than two months away. Less than two months away from the midterm elections the direction of travel has really important. AMH was a theme on this program. Much of this year we talked about the calendar potentially being on the president's side and on his party side as well. If the midterms were back in spring they take a beating and absolute hammering.

If the midterms were right now just how close are things. And John honestly credit where credit is due. You said that early this summer. You said I think the calendar may be on the Democrat side. They potentially have this. Can you imagine it was midterm elections in June with gasoline prices at five dollars a gallon. This would have been really difficult for them. It's very close right now.

In this same NBC poll you have they're levelling out. Democrats and Republicans in terms of congressional seats in terms of what people are focused on. When you look at all the polls it really comes down to the issues like immigration migration the economy. People are more for the Republicans but it comes down to health care when it comes down to abortion. You do see these numbers tick up. And The Wall Street Journal poll this just about a month or so ago.

Overall people say they want to go out. And when they go out and vote top of mine is the economy. But second is abortion and women's access to reproductive rights. And third is inflation. So you do see are really two major big competing issues that both sides are trying to harp on. But to your point the calendar is on their side in the sense that if this was in the summer it would have been much more difficult. MH Awesome to have you here in New York City. I know the president's going to be

speaking later this week as well. Annmarie Horden here in New York. Lisa what a change in the last what three months just three months three months. Interesting time frame. Guess what. Ninety seven days straight of falling gasoline prices. So there is three months and Cahiers pretty directly. How much is that really the driving

factor at a time when that is the benchmark for so many people walking or driving down the street seeing the prices. It's basically like inflation rate. If you take a look at the gasoline banners what the price is. It's changed pretty strong correlation between U.S. consumer sentiment as well and the direction of that chart you're speaking Su Keenan. I wonder what happens if there is some change in China.

And I know this sounds like you know the butterfly theory or whatever but if there is a change in zero Covid if there is a shift with respect to the winter months and demand does that change the narrative. How quickly can that happen based on how quickly people have readjust their expectations growth immobility pretty strong inverse correlation correct. Well understood that anyway. Futures down nine tenths of one percent

for classically fish. That's for me. It's for me. Because no doubt someone will say what are you talking about. Anyway there you go.

Thank you. I appreciate that one guy out there on Twitter. I love the iPhone back. Thank you. The Nasdaq's down nine tenths of one

percent. I was correcting me not you. Yeah. Former vice chair Richard Clarett. Later this week around the fat decision the Fed decides to life on Bloomberg TV and radio on Wednesday. This is Bloomberg. You are not waking up to an equity market bounce this morning from New York. Good morning alongside Lisa Abramowicz.

Some Jonathan Ferro futures down 8 or 9 cents of one per cent on the S&P on the NASDAQ 100 futures down nine tenths of 1 per cent yield to higher a 4 basis points on a 10 year 349 briefly through 350 on a two year three ninety three yields up at the front end by six basis points. Guess what. The dollar stronger euro dollar negative a third of 1 percent and 99 90 on euro dollar and with down on crude 82 71 WTI down by 2.8 per cent. Nat gas down about 3 per cent. What is it. Rameau crudes up.

Gas is up and it's bad. Cruise down. Gas is down. And if it's like it's bad never good has it. Right now no. And that seems to be the tone when it comes to the oil market and also potentially for the bond market. Right. I mean right now yields are up and that's bad but yields are lower than the Fed has to come out and actually hammer them higher in order to get the tightening of financial conditions. Right now is a tricky position and nobody can figure out that soft landing that Joe Biden was talking about and how likely that really is. Even when the 10 year yield starts

plummeting they'll be selling. It's ready. It's really bad. It's really bad for 30 years. Up a couple of points 354. I get the gain I get. It's just you know it's worth pointing out sometimes. Dana Petersen joins us now chief economist at the Conference Board.

Dana can you tell us how bad things are in this economy. Because the data we're still getting signals resilience. Are you see the same thing. Sure. We're definitely seeing resilience in the U.S. economy. The labor market is still strong. Jobless claims have been coming off. The JOLTS data tell us that there's

still a lot of job openings when we look at GDP tracking for the third quarter. Maybe we'll have something just slightly north of zero. Certainly consumers did spend in August. Spending was up two tenths of a percentage point in real terms. And also the trade outlook is looking a little bit better with all that. We think that the Fed is it's a great opportunity for the Fed to continue to raise interest rates to tackle really elevated inflation. OK.

So to go to John's point is consumer resilience good or bad. You're saying it's a good opportunity for the Fed to raise rates which other people would say is bad for the economy. Longer term. Well I mean the thing is that inflation is is really bad right. So headline inflation for the CPI only ticked down the eight point three percent. Meanwhile the core moved upward to six point three percent. A lot of the drivers are food and shelter costs basics for consumers. So that's really negative for the

consumer. And certainly it erodes their incomes. And so it's definitely not a good thing if you have high inflation but certainly it is a good thing if consumers are able to still weather higher interest rate hikes. Certainly. That weighs on housing purchases. But nonetheless it's still a good thing overall for the economy. Do you have a sense of how quickly we're going to see the effects of the rate rises that we've already seen of quantitative tightening that has yet to really happen but suspect ostensibly will happen at some point the near future. How long does that take before it hits the economy.

Well the thing is that it's really difficult to know. I mean back a long time ago we would say well it takes well to 18 months for any Fed actions to really feed through. But we're already seeing that Fed actions are having an impact on the housing market. And that's certainly a positive for the Fed in terms of its it's addressing inflation. So you're getting out those asset prices even though the Fed does not target asset prices.

But certainly in terms of the consumer price index as the Fed still you know really needs to do the work now and we should probably start seeing the effects later on next year. We're thinking that core inflation all key inflation gauge is probably won't return to 2 percent until very early 2024. Dana every single piece of research we've had basically over the last week has been a bank somewhere on Wall Street upgrading that terminal right view. GOLDMAN The latest they look for 4 to 4.5 by year end to 22 and maybe higher than that by the time we get through 2023. Dana the number one pushback the least against that I get the Tomcats is that we can't live with 4 percent rates to this economy just can't live with it that the debt piles is too high and the sovereign and the Treasury. Dana do you agree with that.

What's the constructive view on why we can live with a 4 4.5 percent Fed funds rate. Well I mean first of all I want to say the conference board came out really early with that call for interest rate topping out at 4 percent. And we've even been saying it could be even higher inflation. Does it really move.

And he made sticky but I think the U.S. economy can. And certainly when you think about what policymakers are saying they're saying look you know we're in for a bit of pain which I think is code for a recession a mild maybe brief recession. And certainly when you look at the labor markets that's still super strong. It's going to remain pretty robust

especially given the fact that you have labor shortages. And so that means they're still going to be some hiring and not that cratering in the labor market. I think with all of that yes the U.S. economy is going to have to endure a period of elevated interest rates in order to tackle inflation. Inflation's the worst problem here. So Dana that's going to lead to higher unemployment by design. And we've been talking about this. How much higher. I mean do we see a commensurate increase in your expectations for the unemployment rate. With every increase that we hear Dow

Jones point from Wall Street about the Fed funds rate and where we end up we think with our forecast of a 4 percent Fed funds rate we think the unemployment rate will probably rise to 4 percent. Even so that's incredibly low. And even if we go in a four and a half go to four and a half percent that's probably around the neutral rate. And so that suggests we still have a very strong labor market. We're not expecting to see 5 and 6 percent unemployment here. This is a very different labor market. We didn't have shortages 10 20 years ago. We do now. And that's really going to help I think

keep the labor market from worsening relative to the overall economy. Is it instructive for us to look at averages here when we talk about the labor market. When we talk about how well different households can weather this especially because you're talking about you know half of the income in the United States driven by households that earn more than one hundred thousand dollars is put out there by Morgan Stanley. Most of them own their own homes either outright or else with mortgage rates that were locked in lower very low rates. The rest of the economy the rest of the households are really struggling both because they've got lower income and because they have if not fixed costs but pay rents and have to deal with the increase there.

How do you gauge that out at a time where we're looking at averages to determine policy. Well it's interesting when you look at certainly wage gains the folks who gain the most in terms of wage gains over the next blast over the last couple of years have been people on the lower end of the income spectrum also people who've been quitting. Also people work in those in-person services types of jobs that tend to have lower wages in general. Those are the people who have seen the biggest gains in wages. And so it's.

We certainly should look at the granular data but it's not necessarily the case that you know folks at the lower end of the spectrum have been losing out here. They've actually been gaining by quitting and also through the very aggressive tactics that companies have been using to attract labor especially for things for businesses like restaurants and hotels and manufacturing and transportation which tend to have folks on the lower end of the income spectrum. Lisa creditors no fan of BlackRock for coming out in the last month or so and raising a question I don't think we've talked enough about which is what is the appropriate time frame to try and bring inflation back towards Target. Well you hear that from Dana as 2024 not a 2023 story. And I just wonder if the risk is skewed towards maybe pushing that out even further.

This task might be bigger more difficult than maybe we've given a credit for. And perhaps people won't have the appetite for some of the economic pain in order to get it down to 2 percent by 2023 or even 2024. And I think that that to your point is what Adam Posen view.

Do we get comfortable with a 3 percent target for a little bit longer. Is that politically feasible. It's only. Would you go with that. Do you think maybe risk askew to this

taken longer. Well it certainly is in our forecast that it

2022-09-26 00:13

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