Fed Speak: Bloomberg Surveillance 10/04/2022

Fed Speak: Bloomberg Surveillance 10/04/2022

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The big issue here is does the Fed get the kind of controlled moderation in labor markets and growth. We just haven't seen that rise in the unemployment just yet. We are starting to see some companies rip off their earnings. Band-Aid markups are insanely high everywhere. People have been gouging prices for

NGOs. I think what's breaking is the soaring dollar. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz. This is the 10th edition of Peak Bond Yields. Life in New York City for what it gets. Why.

Good morning. Good morning. This is Bloomberg Surveillance live on TV and radio alongside Tom Keene and Lisa Abramowicz. Some Jonathan Ferro Tom Keene. How many times have we done this. We're doing it again. We're doing it again in June. And of course we see at the Dow up 100 points or whatever. And you see the leading the way maybe in the NASDAQ coming up too. But John I've got to go around the globe

from Sydney to Perth this morning shock and awe. How do you link in this bond rally you're talking about with the shock from the Bank of Australia. They go 25 basis their blankets that are 50. It's not a blink. That's it. That's not a blank.

That's just basically saying that perhaps for close to peak yields. Right. I mean that's is a blink. Does that count as a blessing. They blinked in Perth.

They did. Doubling considerably. OK. But here's the question. Does this symbol symbolize that central bankers around the world are hitting the thresholds for how much they can tighten policy in the face of financial stability risks. Even as all that Fed speak which I ignored yesterday but still was there basically came out and said we're not going to blank. We're going to keep going. We can have considerably more to go before we get to a tighter policy go through the numbers and talk about where we are now relative to where we were a week ago. The 2 year was 435 last Monday. Right now it's about 4 per cent. The 10 year was a little north of 4 per

cent last Wednesday. Right now the 10 years 358. Do you fold that into this discussion about the RBA and you've got this broader story that we've seen peak bond yields. Again we've done this about five different times this year.

We are data driven into the fourth quarter in every way shape or form including earnings I believe October 14th. But John mostly what we are is data dependent outdoor Friday. So I would pick up on the data point as well. Let's say we have seen peak bond yields. Is that bullish. Is that bullish. If we've seen peak bond yields in the weak data is still in our future. The weaker earnings is still just around

a corner. Mike Wilson says no. Mohamed El-Erian says no. Many people say no which is the reason why people are watching this story play out again of the pivot. The imminent pivot has to happen from the Fed.

It has to happen from the ECB. Take a look at ECB European bond yields. Wow. No absolutely. Crashed yesterday. And people are saying you guys are

ridiculous. This is not what they're going to do. Can we pick up on stone. And just briefly please six days of sterling strength. You always want to destroy 350 last Monday 114 this morning. I think it's worth picking up given the weakness we saw last week up yesterday. Come on.

No flat. No. So you want to talk about Sterling just as much as anyone else. Yes that's true. But I would say James wrote about the move. Jihye Lee. I honestly I've never seen anything like what we're seeing from the daring to have the trust government is unranked. Honestly I'm like everybody else. I'm on my phone to be honest. I go to the telegraph and a Bloomberg

Daybreak route and they go you gotta be kidding me. There's now a conversation about maybe moving the budget forward and moving from November whatever moving in. So it's before the Bank of England rate decision. I mean that would be the logical decision here to allow the Bank of India to come up with some accurate forecasts relative to what they've heard from the fiscal side of things. The problem is how did they bungle this so bad. Sure. Why did they rush this out.

If they knew that there was going to be some pushback. And is this basically just a comment too. We messed up but we're not going to say we messed up. And it really reduces the confidence in this minister.

We've got some time to write down Dalio a little bit later. Yeah. The cash is no longer transitional. Yeah we've seen capitulation across the board here. Well it's you consider that Marco. Collectivist capitulation.

Lovely for Marco. I think so. We spent that close to Sri Lanka. I was I was wrong. You're gonna say my price targets are at risk of being achieved in 2023 than that. No longer a price target south. I would look at Swiss franc as a real litmus paper of this entire debate.

Seriously from Australia to or from from what's the capital of Australia. Perth NASDAQ pretty sure is Canberra. Canberra. Is that how you pronounce it. I think Canberra.

Canberra to Washington. It's all the same. It's all the same. It's just about the data and it's a fascinating debate. Mr DeLeo several Australians will love us this morning that's for sure. Do him now on our way through the price section for you on the S&P 500 features our positive after a big day of gains yesterday in the S&P this morning up by one point six per cent were positive 59 points. You want to lower by six basis points

358 on a 10 year. As I said last week last week on its own. Yeah a little north of 4 per cent some. We've come all the way back down. Mark Gurman. When I look at as a real yield inflation as it should look for the program folks on Friday comes in from a one point six euro to one point three and a lower inflation adjusted yield. And John you do that with the Bloomberg Financial Conditions Index. Improving today is less restrictive a dollar weakness at the epicenter of that I would argue Tom five straight days of dollar weakness euro dollar Lisa 98 82. Yeah.

Right now we're also looking at a whole host of Fed speak. We didn't do it yesterday. Today it's going to matter quite a bit. We've got Fed speakers including Dallas Fed President Laura Logan and New York Fed President John Williams at 9:00 a.m.. I just want to point out John Williams spoke yesterday basically coming out saying we're not going to pivot ISE. It just stop it and the markets head haha just kidding. So we'll see whether he reiterates that today. Cleveland Fed President Loretta M.

at 915. Fed Governor Phillip Jefferson at eleven at forty five a.m. in San Francisco. Fed President Mary Daly. At 1 p.m. yesterday we saw the biggest one day decline in 10 year Treasury. Real yields going back to March of 2012. There was a complete reset because

people are not buying with these officials are saying which is that they can still need to raise rates considerably and they're going to stay the course until they see material change in the labor market. Among other things talking to the labor market 10:00 a.m. we got us August jolts job openings data. This is key. Arguably watch the data.

Tom you're saying this is what I'm watching because you're looking for some sort of loosening up in the flat in the labor market which we haven't really seen. I mean yesterday the last time that we got job openings data we actually saw it increase not decrease. Companies were advertising for more people raising questions about whether the labor market is fundamentally changed and companies are going to hang onto the workers for longer because of what happened during the pandemic and because of the workers during that. They still actually do face at 11am we hear from ECB President Christine Lagarde. She's going to speak alongside president the European Central Bank to Cyprus ahead of a European Central Bank meeting over the next couple of days. How much they address this belief and a pivot.

Do they come out and they say look we still have considerably more to go. We're going to keep raising rates. Oh and by the way we see the chance of recession as more likely. John how much is that projection of a no recession scenario as a base case for Europe.

Part of what's giving people confidence in this pivot story because if they're not recognizing reality then they're not weighing the political ramifications of hiking into more dramatic weakness. Lisa thank you. The ECB is the only group that right now not forecasting a recession in the Eurozone. Seriously you take pretty much everyone else is forecasting exactly that recession in Europe. I do want to go back to this is Europe is the focal point. The war is in Europe. Legarde All of the institutions there have to face as we underestimate particularly after furious today that Jeff Sachs interview. We underestimate the emotion right now

of this. Let's get to the market conversation with Ben Late like global market strategist Tara Ben in your work. We see some hope this bond drought may be easing. This is a key ingredient for any equity recovery. Before we get to talking about whether this is positive or not for risk assets can you tell me why you think bond yields may well be peaking this time. I think it's difficult to see real yields just continuing to head to the moon at a time when all your inflation lead indicators are rolling over where recession risks are spiking. I think the disconnect is in there and I

think given where real normal yields not too. And on the flipside given where valuations and sentiment have got to I think that risk reward sudden offers is very very interesting. Byrne Given that if the Fed is going to retrace some of its pretty hawkish statements what does that mean in terms of earnings.

We've heard this from Mike also. We've heard this from Mohamed El-Erian that be careful what you wish for because if the Fed does retreats that means that things are really bad. We have not priced in. I think this is Jihye Lee comment. This feels a little bit like Groundhog Day right. I think the setup is very similar to

where we were before the big sort of June rally. I think the market is sniffing out based on the top of the Fed cycle. I think bond yields have overshot and are now coming down.

And I think to your point on earnings we're going into third quarter earnings season yet again. Expectations are very very negative. I think this is an attractive setup. I think I mean we're just going to leap over this sort of low bar and breathe a little bit of a sigh of relief. Then I want to go to your huge track record on three cycles of getting the market right. And I want to go to Lisa's gloom

yesterday. I want to go to nodes of revenue guesses. What it comes down to is with the slowing economy everybody's going to try to guess revenues at the top line.

Given all the economic mumbo jumbo. What are the nodes of revenue guess is going to do. I think this is all sort of fair versus reality. I think markets we were down 25 percent. Earnings expectations have actually fallen quite a lot. I would argue and not all recessions are created equal.

I mean granted we're almost certainly going into a recession at least outside of Asia. But this is not 2007. This is not 2020. This is I think a much more plain vanilla central bank driven recession. And I think that is given where we are. I think that's actually pretty investable. That's a two percentage point GDP peak to trough fall.

That's a 14 percent decline in earnings expectations. Well I think you're at least halfway there. Again I think where markets and sentiment and valuations are at this point I think the bigger risk is being out not a story being out not Emma Chandra. OK so Ben given all of that. Just quickly here. How much are you buying with your

conviction. I mean basically are you loading up the truck. I think we're building a bottom. I think this is a U shaped recovery not a V. I mean the Fed has told us quite clearly that you know they are going to stay the course until something breaks. Well hey stop by. Sorry. I'll be starting to break out. We don't need the top of the Fed's cycle.

We just need a little bit of visibility that it may be coming in the next two to four or five months and the Fed's just not going to keep hiking it. I think all the lead indicators are telling me that I'm comfortable enough saying we're building a bottoms. I'm fully invested. I'm slightly tilted a bit more to defensive risk is still pretty high but I'm absolutely nibbling at that sort of quality risk. That's the big take you know discounted small caps. I mean the more this goes on the closer we get to inflation definitively coming down. I think you want to be raising the risk

budget into that. Ben Nadler thank you sir. Tara defiantly bullish on this equity market with equity futures this morning going in his direction Lisa at one point sixty five per cent on the S&P Juliette Saly says everything that you have to say defiantly bullish because you're right. I know. But defiantly bullish at a time when a lot of people are saying that even a pivot isn't gonna necessarily do much. I want to quantify your opening June about the market lift. We're seeing the Bloomberg Total Return

Index the full faith and credit index. It's up one point five. Six percent would say we'll take this launch. So we'll take that after the brutal year we've had so far. Brutal. My favorite word. Note your failure. Love it. Yeah love that love. Brutal.

Nothing brutal about the screen now. Brutal. Four Bears may be as a one off. Futures up by one point six per cent. From New York this is Bloomberg. Keeping you up today with news from around the world with the first word.

I'm Lisa Matteo. In Ukraine President Vladimir Zelinsky said that liberating settlements from Russian occupation is now the trend. His forces have pressed further into the eastern Donetsk region and seek gains in the south. Meanwhile the Biden administration will announce another package of U.S. weapons within days.

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I'm Lisa Mateo. This is Bloomberg. It was becoming a distraction. That's why we immediately changed that policy and that's the kind of government we are. We do respond when there are concerns and we act quickly. The British prime minister less trust. Earlier today from New York City this

morning. Good morning. Sterling stronger for a sixth straight session. We've gone from one to 350 last week through 114 on cable just this morning.

Elsewhere futures positive one point eight per cent lift again in this market. Futures positive with the it's taken a dive lower by another seven basis points on a 10 year some 356 97 Michael Bloomberg and very exciting into over after Labor report. It will pick up I believe on Wednesday ADP. And on we go to the jobs report on Friday. John I saw a movie the Queen movie kind of thing over the weekend and there it was 1945. And I wonder of this Conservative Party

where they adore Churchill and the certitude in the movie that Churchill would win a 1945 war hero and all that. He got crushed by Clement Atlee. You'll wonder for going to redux out here. There has to be space for a government to make a decision to change course if they want to. And the clearly changing course after the pressure of the last couple of weeks.

Joining us now is Bloomberg's Lizzie Burton in Birmingham in the UK. Lizzie you're at the Conservative Party conference. There's now a conversation about whether the budget that was pencilled in for the end of November actually takes place before the next bank giving the decision. What are people telling you about that. Well we don't have a date yet. There are rumors that it could be best months. Speaking to employees around the conference hall. And as you say it would be ideally

before November the 3rd so that the Monetary Policy Committee could take it into account. And it's not just what the government says that's important. It's also what the Office for Budget Responsibility the fiscal watchdog says whether how much all of this is going to cost how much growth it's going to create is the overall less optimistic than the chancellor about that. Because of course it was the absence of an AP all forecasts from accompanying the budget in the first place. That seemed to partly be the reason why the budget was undermined in the eyes of the market. So this is the U-turn for the markets the U-turn for the consumer for the voter.

Was the U-turn on the top rate of income tax policy in sterling one or three to 1 13 is the feeling in Birmingham that it's all clear. Well I say that the bringing forward of the overall forecast is for the markets. If there remains the massive concern that you've got this huge package of tax cuts and even the government admits that the top rate of income tax that they've now reversed was merely the tip of the iceberg remains on costed and funded. And it's not an emergency measure like the energy bailout visa permanent effectively. And this is of course what originally

offended the markets. So are we going to see more reversals on these. It seems like it's open season now. Less trust has been bullied on the top rate of income tax by her own party. Remember she wasn't even the peak of Tory MP to be the leader. Are there going to be more reversals. Markets perhaps are taking a bit of comfort from the fact that this government seems to be a little bit more malleable than we thought from those trusses.

Margaret Thatcher impressions in the first place. But Lizzie to that point is she actually less popular among her own party. In other words does she have less power and less credibility in response to the U-turn in response to her malleability by markets by other conservative members who pushed back. I have to say there seems to have been a change of wins since yesterday. Yesterday we were hearing that employees were writing to the chair of the 1922 committee from several backbenchers to try and remove this one year immunity that Ms.

Cross has from a vote of confidence. That seems to have died down. But what my colleague Kitty Donaldson has reported she's been lurking in the dark corners of the conference hall. Is that even cabinet ministers are worried that Liz Truss is just going to be a lame duck for the rest of her premiership. And it's the first U-turn was the top rate of tax. Now we're going to see less trust pushed

around by Tory employees on planning reform on the cap on bankers bonuses. And actually she may not be able to materialize her plan for economic reform. And if she can't do that if she can't boost growth then how are they going to win the 2024 election. It's going to be a hard time that's for sure. Lizzie wonderful coverage in the last couple of days.

Lizzie Borden there over in Birmingham England covering the Conservative Party conference. The government some under less trust not even a month old. And we're having this conversation about maybe this is the beginning of the end. Explain this to us. I mean I go back to Wars of the Roses and I think it was the 14th of 15th century Israel. Nothing's changed.

I don't think much has changed. I mean how many times have we seen this movie play out in the last five years. Never mind the last seven percent to Juliette Saly given junior cabinet member and trust they get the big lift up there in 10 Downing. Sure they're in the room. And then this is all of a sudden and the approach is changing.

Let's be clear about scrapping the top rate cut that they were looking at and now they still delivered a U-turn. It's two billion sterling out of 45 billion in tax cuts. It's tiny. The approach is the bigger point here. The approach is change but that's domestic UK politics. I think the issue across Europe is much bigger than that. The initial plan to cap energy bills

that was the big one. That was a lot of money unfunded uncapped liability. And Germany's joined in two. And the controversy in Europe for me now at least for this week is far more interesting than the drama the soap opera playing out in the U.K. especially because nations in the region are angry that they didn't have a better sense before Germany announced their fiscal spending plan of what they were going to be doing. This affects borrowing costs around the entire region. This affects the ECB ability to tamp

down inflation and it affects their ability to really plan to figure out the other nations of what they want to do. But really at the heart of this how much slack is this bond market giving to fiscal policymakers to actually go forward with some of these plans. This is the heart of the matter. Shery Ahn meaning police in Notting Hill. But you know walk through four streets over where somebody is got five six thousand square feet. They get the same heating bargain that someone in the Midlands unique unique the unit cost.

They're trying to cap the unit to Americans. This is on a manager's are they trying to cap the CAC the unit cost and therefore cap the overall average bill. I think it's been mis communicated over the last month or so. But you're capping the unit costs. So if you consume more energy time you will have a bigger bill than someone who consumes less. You'll just be charged to a unit cost

that has been capped by this government. That makes sense. I'm learning from the Jason Kelly that the problem is that ultimately this comes back to how do you dampen demand. Because ultimately if you don't and you're getting yourself into some sort of downward cycle or you're belling yourself out only to have a bigger hurdle to bail out.

Right. I mean that's essentially what the fear is. But it's not just the United Kingdom. And we were talking about how this is an idiosyncratic story.

You had the IMF come out with that pretty shocking statement saying this isn't really responsible but they're not alone when it comes to fiscal health. Right now the headline out 20 minutes ago I guess shot were from Kremlin. Quite positive. That's her language quite positive that Elon Musk seeking peace in Ukraine. I didn't know whether to mention it was sure it was a real good. You've got 15 seconds to explain it. Do you think you can consent. Yeah I think I can either.

I looked at it and said really. I didn't trust it. Features up by one point eight percent of the S&P light from New York. This is pulling back.

Life of New York City equities looking good here on the S&P 500 pushing higher by one point eight per cent on the S&P equities up across the board yesterday and the S&P 500 the biggest one day pop since July. We add some weight to it on the Nasdaq 100 futures up by more than 2 percent. The way you'll find it in the bond market yields lower aggressively. So yesterday and a two year down 17 basis points on the session this morning yields lower again by 11 basis points on a two year to a ran. About 4 per cent were way off the highs of last week. Push it for 35. So you to lower equities up and guess

what. Dollar weaker sterling positive once again sterling climbing from one to 350 a week ago Monday morning through 114 today. At one point some 113 63 in crisis over cable up a 31 percent more to go. I think we've still got more to go.

I'm not saying you're going to have the kind of volatility you had a week ago but we still got some issues to settle. And I think that's the bigger point. To watch the bond market maybe more than that easy to watch. Foreign exchange market will give you some of their perspective along the way. Right now she has one of the greatest parchment streams in the United Kingdom from Edinburgh to London School of Economics with real expertise China. The chief economist he has Lombard Freer Beamish joins us right now. Fraser just a start. Are we in a global recession.

I think we're heading that way. I don't think we're quite there in the US. China's probably coming out of its recession but still very weak and not coming. Not really going to get its reopening boost until each one of next year. The real problem is is Europe. And I think this is this is what's

what's moving markets at the moment as well that there's something much wider going on here than just the kind of. If I can use the term so CAC handed delivery of the of the of the fiscal policy response in the UK. I looked through the news flow and clearly Australia blinking is important. What are the ramifications for other central banks including the ECB that RBA just decides enough. Yeah I think what's happening here is that there's a global shift towards a higher returns environment but you can't get there all in one go. The real economy just can't can't handle it. And there are these sort of powder kegs

of financial accelerators that have been left behind by the period of low yields in the 2010s. So trying to get from the 2010s level of yields to a pre global financial crisis level of yields which is where we think we ultimately will be ending up over the 20 20s trying to do that in one mini cycle which is the Covid cycle is is just too much for the real economy and for and for financial markets. So I think what we start to see now is the QE comes back in in a very different guise from how it did in the 2010s.

It's much more of the sort of the budget response to try to provide liquidity where necessary in order to prevent yields from rising more rapidly rather than to try to keep yields from from shifting lower. And I think the underlying forces here are much much wider than than the kind of narrative at least around the UK suggests. What's what's happening here is that there's been a redirection of funds in favor of the energy funds in favor of of of Russia really and dumb. And the non fossil fuel farms. And what that does is you're handing

funds to companies and countries that are much more likely to want to invest them than they were in in the. The recipients of those funds in the 2010s. Well Fred in that process you're dragging yields higher. There's a lot there.

And I want to just hone in on one thing that you said. The quantitative easing this time around is going to look very different. Does that mean that you think the quantitative tightening is over and then we're entering a new quantitative easing cycle of trying to reduce the pace of bond yield yield increases. I think in as far as the UK goes yes I would say that quantitative easing is sort of dead before it gets off the off the ground. Yeah the quantitative tightening. Thank you. The quantitative tightening just doesn't doesn't really get off the ground that you get this kind of QE that is is not the same flavor as the 2010s. And it's that to prevent yields from

rising to too rapidly. And that that is probably the case for. For Europe as well where we are if anything more worried than we are about about the U.K. with Germany already having suggests that they're going to go it alone on the on the fiscal front. Where does that leave countries like like Italy where we'd be much more worried about those kind of structural issues starting to realize in the euro area therefore you get the move back to the CPI which can very easily translate into something similar to what the the Bank of England is doing with regards to its kind of short term new flavor. Q.

So it's a very different flavor of monetary policy since since the since the 2010s. How much is this a European story and how much is this a global story. I mean Tom was talking about the RBA blinking raising just 25 basis points rather than a bigger rate hike that was expected overnight. How much is this the example rather than a story of specific nations facing specific inflationary pressures.

I think there are now so many different idiosyncratic problems that are arising at the same time that we can say that something systemic is actually going on. The European trouble Europe is is definitely at the center of this. I would definitely point out problems in China that can arise perhaps not till after the reopening so therefore into the second half of of next year.

But I would definitely point that out as a structural turning points for China as well. And I think because of this kind of draw in yields the fiscal authorities are very much are very much leaning against. You've got this battle for funds that really speaks to the longer term secular trends that have just been sort of fast forwarded by this energy energy shock. That deterioration of the geopolitical environment and the natural environment these are all factors that are kind of nasty cost push inflation factors that speak to the need for higher returns and that the likelihood of higher returns in the in the 20 20 that we're just seeing the fast forwarding of that in the in the short term. But I think it does lead to to capitulation from central banks first in the form of pushing back against the financial accelerators as we've seen in the in the UK in the pension funds fiasco. But then in the case of Europe as a result of the slowdown in growth. Yes governments are supporting their

economies through fiscal spending. But the cost of doing that there's no free lunch. The cost of doing that is that yields are much higher. So you're getting the spending on energy but it's happening at a higher higher yields. And therefore the property market in the UK and the yields more broadly are starting to tighten financial conditions and tamp down on growth in that math and fashion. So central banks turn from worrying

about inflation in Europe to worrying about to worrying about the financial accelerators and then growth and therefore you get the capitulation in that sense. I think in the US we are in a very different position here because inflation is more embedded and therefore the policy response has to be still focused on inflation. This is the heritage of two years. Lombard. I mean model out how they get to 2 percent. Given that a huge body of people say that's an impossible event do you just assume they get to 5 percent or 4 percent and then recalibrate. I think that's probably where we're getting to further down the line that they will eventually explicitly or implicitly revert inflation.

Inflation targets higher just because there are so many secular forces that are pointing in favor of higher inflation and not all of them being kind of cost push inflation. There is also this change in the relationship in global labor markets and credit as well. That suggests that China is no longer a cap on wage growth in developed markets. Therefore you have faster wage growth. You also have faster faster credit growth. And both of those things are inflationary. So leaning against that means you're

kind of accepting this politically unacceptable idea of a much higher unemployment rate in order to get inflation back down again. But I think in the shorter term with the Fed the point that I would get across is that there's too much reliance on on leading indicators that are simply monitoring what the cost of doing and the demand supply imbalance in the US both in terms of the goods market still both in terms of the labor market is still great enough that you've got this underlying heat in the demand in the in the economy. And therefore while the rest of the world has good prospects for a slowdown in inflation I'm still worried that you'll get upside surprises in inflation in the US because margins have have greater room to expand on the back of demand still remaining relatively strong. So we're very much looking out for that U.S. recession coming through because that's

the kind of the key the key turning point for the Fed. But it doesn't seem like we're quite there yet. I thank you for being with us this morning. Trampy. Mr. RTX just absolutely brilliant and some I'm so pleased you brought up the difference between Australia and the rest of the world.

Bear in mind the RBA has a price target 2 to 3 per cent. That's a key difference here 2 to 3 per cent as opposed to two. Consider also that inflation in Australia looked this way in the last quarter was running at about 6 per cent on headline versus 8 to 9.

So that's another key difference. And also consider how bad the RBA has been through the pandemic. So as you sort out your bow tie so discreet about forecasting some of this because the RBA back in a pandemic.

Governor Lowe admitted this was a mistake. He basically said you probably won't get a rate hike until 2024. And look at where we are now. But that was all the central banks.

They should have gotten it completely wrong. The point that you made about 6 percent inflation that is different than 10 percent inflation. That was different. The 9 percent inflation. And when you're talking about that you perhaps can push back especially if the underlying drivers don't have the same kind of stickiness as in the United States. And we're both on the same page on this for the Federal Reserve.

The overwhelming line of attack right now is to keep repeating the following line which is we are committed to not pulling back prematurely. Now if the market conditions eased somewhat going into the next decision doesn't that just make it easier to keep on hiking. Right. Well this is sort of the perverse

consequence of the market not believing what the Fed is saying. Other people would argue that the Fed's tightening is affecting other areas other than just the stock market price just as much if not more and creating some sort of constriction in the economy. But either way you're right. If the market doesn't buy what they're saying it will force the Fed to more aggressively double down and actually complete what it is they're saying they're going to do now.

So again that goes against the the theme of this morning which is peak yields and Fed pivots Tom with the equity market up by one point eight percent. Yeah I tell you I'm speechless here John because I'm waiting for the data and all of this could change by Friday. But we have a June. Is it a Judas. Judas bustin out all over October.

ISE. Sounds like the ISE Rosalind Chin hell is a Broadway. It the ISE was ahead and that may be the dark data is softening just a little bit. Dani Burger. People want to see what they want to see in the data. It's not always the case.

Yes. I mean that's using the RBA as an example as to why the Fed's going to it. Exactly. I mean come up we stretch in the main question possibly 50 57 by one point eight percent of the S&P going to sing us out.

Do you know CAC Boston ISE. Right. I'm still as sure everyone's going to stay tuned to. Many towns of Tom Keene keeping you up today with news from around the world with the first word. I'm Lisa Matteo.

The oil market is looking to OPEC's claws to deliver a substantial cut in supply at its meeting on Wednesday. The price of West Texas Intermediate was around eighty four dollars a barrel after rising more than 5 percent on Monday. Currently many nations in the cartel can't meet their current production quotas so any agreement on headline reduction in output would not lead to a drop in actual barrels. New York Fed President John Williams says the central bank still has a ways to go when it comes to raising interest rates. Speaking in Phoenix Williams said interest rates are not at the level that would restrict economic growth. He said he expects real GDP to be close

to flat this year and grow modestly in 2023. In Florida the death toll from Hurricane Ian has now risen to at least 68 people. And according to model of their risk insured losses are now estimated to be as much as 57 billion dollars. President Biden heads to Florida Wednesday for a firsthand look. Bloomberg's learned that iPhone exports from India went over the billion dollar mark in the five months since April.

It's a sign that the country is making progress with its bid to become a force in electronics. India is on pace to double its output of iPhone over a year. Rising exports bode well for Prime Minister Narendra Modi's plan to make the country an alternative to China in manufacturing. 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.

Elevated inflation today is the most pressing issue facing monetary policymakers and by creating long term upward price pressure then secular shifts in supply chain management could present additional challenges for monetary policy makers during a period of already elevated inflation. Rafael Bostic then the Atlanta Fed president live from New York City this morning. Good morning. A very good morning. Have you along this equity market

because we have a squeeze a bounce again both in on yesterday's gains on the S&P 500 pushing higher on the S&P by one point eight percent one point eight percent higher on the S&P also lower by six or seven basis points to 357 36. Off the back of that this dollar's weaker euro stronger 98 97 on euro dollar positive seven tenths of one percent. I blame a giant Danny for the last 20 fleece who came on this program yesterday and said the following. I think they have one more rate hike coming in November and that will be it. He said that because the financial stability issue will pop up as a primary concern.

It is in about every seven eight years. There's the three books at the IMF as I mentioned yesterday. And guess what. All of a sudden suddenly the Green Book matters. That's right. Where we are this time. I'm not buying it. I have to be honest. I'm not buying. I'm out.

That's why we love you. OK. Thanks Bill. Well get a second. I don't buy it because none of those financial stability concerns have actually bubbled over. Should we have him with them actually explode. So suddenly we're expecting there is to be a response to something that is getting prevented from happening because people don't buy that. They're going to actually push things to

that extreme making it more likely that it might happen. You're going to keep hiking. That's reason why I don't buy it. There you go. You have to speak up.

That makes sense. I think we brought the show to a dead end. I think a lot of Paul Sweeney cuts that most people agree with you. If you ease financial conditions going into next Fed decision what you think they're going to do makes it easy to hike rates. Exactly. That's another. It is October which means we must speak

with Paul Sweeney Tom Keene founder and lead analyst at Sankey Research was ignoring this conversation. Paul Sweeney has decades of experience in oil and knows in October there is Vienna and there's also Park Lane. A string of hotels in London where the elite meet degreed in the oil community as they do beginning today. It is the well the energy executive of Years from Qatar will pass on that but far more CEOs together and the rest. Paul is a consensus opinion that oil will rise back into the hundreds. Yeah I think so. I mean the first consensus is that we'll

get a million barrels a day cut from tomorrow and what people here are saying will be a brief meeting. I was told that the decision's already taken. I was actually hoping that they would take some time and argue a bit. So I'd get a chance to get out to Vienna. It was the end of the week but evidently

the decision will come tomorrow. That should be I think a million barrels a day cut about half of that. Probably time actually delivered but it's still enough to tighten what's effectively a market imbalance in Q4.

So any cut will effectively serve to raise prices the elite mid degree at the Intercontinental Hotel or at the Dorchester with umbrellas in their drink. But is it just about Saudi Arabia Arabia and Russia. Well I have to say I've got to wear a black tie tonight for the for the award dinner. Tom I need your help with the bow tie. Yeah no I mean we had we had the CEO of Aramco talking very eloquently. Japan's burden of show.

So very eloquent. We had protesters outside the Intercontinental yelling in my ear as I walked in. But the problem is the protesters don't really have a coherent solution. In fact nobody does. And that's that's one of the issues. Couple of interesting points from Shell for instance he said that this quarter alone China is adding more coal production than in the entirety of Shell's energy production. So essentially in one quarter China

grows coal by the entire size of Shell. And again talking about the CEO of Aramco again talking about lack of spare capacity and how demand is remaining strong. So again further to your first question it's all pointing towards higher prices basically. And that's really the crux of the matter.

How much is this potential cut of a million barrels really an issue of a lack of capacity rather than the appearance of lack of demand. How much pushback will OPEC plus get from the United States from Europe saying we need lower prices at this point to stave off a crisis. Why are you effectively causing an increase in prices or potentially laying the groundwork for that going forward. Well at least he made a great point which I'll come back to you. But firstly I think the Saudis have enjoyed one hundred dollar oil and would rather be close to 100 than to 80. So that's point one. Point two that you made is that they're

so tight on spare capacity that they may well feel that you know to rest their fields a bit to give them. So some more breathing room. A cut is is a good thing. The outside chance was that there'd be a major quota renegotiation. But it doesn't sound like that's happening. These guys are still using 2018 quotas which are just completely nonsensical now in terms of things like Nigeria and Angola just not even close to their quotas.

But I don't think there's going to be that kind of agreement. I think it will be a pretty strong cut decision led by Saudi. A 15 minute meeting with of course because we got 15 minutes or more for this meeting. More than 15 I think you know that those ones were just rubber stamps but it may be.

I think what I was the. I was hoping it would be would take longer than than a day and roll into Thursday Friday. It sounds like we'll get a decision tomorrow and before the markets in the US tomorrow. You could be. There we go. Thank you. Thank you sir. Good to see you. Post. Thank you.

Thank you. Research. It's a turnaround isn't it. Remember a number of months ago in the summer when President Biden went to see the crown prince of Saudi Arabia Mohammed bin Salman was a fist bump like this. It was like that kind of nice. That was a fist bump. There was a hope compromise. They said our group was nice.

There was a fist bump. There was a hope. There was a hope that maybe they would loosen things up. And now they're talking about a big comeback. Do you feel like that those fist bumps were just as awkward as President Biden.

No I don't think anything comes close to how awkward that fair was in reality. OK. So that's good. That set the bar low enough for us to succeed it.

That's what we did. But I do think it's gonna become a political real big issue especially as we've seen a plateauing in gasoline prices. They've basically bottomed out. And how much are they going to come down. This has been a huge political issue heading into the midterms at a time when this has been the one thing going for the inflation year over year inputs for the United States. And we're going to technical charge John

too fancy for TV. And the answer is resistance rather for Brent crude has 98 dollars a barrel that were ten bucks away from where I began. He's excited about potential Emma Chandra potentially Tom going into a global recession. You can see why I pay. Plus he's having this conversation. It does make sense does it not. The other thing that Paul Sankey said that stands out for me coal in China. I mean this is problematic isn't it. Talk about from an energy from a green

energy standpoint from this question of how much pollution is going to be put in if they're supplementing the equivalent of what did he say Exxon's total shower. Shell's total output with coal in a single quarter. In a single quarter. It really speaks to on one hand potentially they're generating more economic activity which could speak to also demand not exactly slowing as much as it might be.

Again this goes to the point. The Paul Sweeney you were saying that perhaps a million barrel cut is more an issue of a lack of capacity from some of these nations than really reflecting a cooling in demand as they perceive right now in them. You've got a sense of that worry through the summer. Hundred percent. We got a really big sense of that's on the concern from people in this oil market about the lack of spare capacity that these guys in many places were at maximum. The Matt Miller across on radio it's

tough to do. But I got my fingers crossed that the petrol marshalling and cross is much much much more sensitive than we pursue. Translate that to that. The two lines crossing a really really hypersensitive were one little thing moves and that equilibrium gets out of point. And in this case there's a there's a

constraint in Saudi Arabia. So that moves that price higher. My daughter. That was beautiful. That was beautiful. You know that worked wonders.

So it really worked. An intriguing segment. Well yeah well I got an umbrella on a tank so I asked what's going on with oil. That's right. This is. The big issue here is does the Fed get the kind of controlled moderation in labor markets and growth if we just haven't seen that rise in the unemployment just yet. We are starting to see some companies

rip off their earnings. Band-Aid markups are insanely high everywhere. People have been gouging prices for NGOs. I think what's breaking is the soaring dollar. This is Bloomberg Surveillance with Tom

Keene Jonathan Ferro and Lisa Abramowicz. Peak everything can a sprinkle of capitulation. From New York City this morning. Good morning. Good morning for an audience worldwide. This is Bloomberg Surveillance on TV and radio alongside Tom Keene and Lisa Abramowicz.

Some Jonathan Ferro futures positive. Take care. But a capitulation out there across Wall Street. A bit of June a capitulation zero recovery. I don't know what the shorts are doing on the short cover but what is happening is we're all looking to Australia. First to blink. First to blink. You calling the links. Yes. October 25 instead of the 52 that simply

they went 25. And you saw an Aussie Kiwi and you saw that's the currency. Thank you for that. I appreciate that. Yeah I didn't know New Zealand is to the

east of Australia. I thought it was way over to the west. You've got out there. That's so dumb. I am. Okay. Anyways I think Australia is the first to blink.

Will we see more of that. Given the data that's coming in and it plays into the theme of the moment Lisa yields lower. Yields lower. I don't know if I would agree that they blinked. They perhaps ratchet back the pace. And that I think is actually one heated debate among Fed officials as according to Bloomberg reporting that it's not so much the destination. That's the big question at this point. It's the pace at which they will raise

rates. Do they want a front loader. And are they willing to experience some sort of breakage against the financial stability risks. Ed Yardeni was speaking. Are we seeing perhaps on a blinking but perhaps a retracement in the pace of how much and how quickly so many central banks are going to raise rates.

Talked about a step down through the whole of the summer from 75 for 50 to 25 for the Federal Reserve. Doesn't this rally just make it more likely they go 75. Right. I mean this is sort of the perverse element of the whole thing is that the more the markets get comfortable the more the Fed is going to have to be that much more aggressive. And the party John Tucker that on capitulation seen the big both the J.P. Morgan market CAC comes out with a note last week added to it yesterday says the following are 22 price targets are at risk. That's one. So that's the big bell on Wall Street. I would say this a bit of capitulation

in the mix there even though he's not my brothers. You want to do the others right. Dalio of Bridgewater. When the facts change I change my mind. This is what he had to say. I no longer think cash is trash. Lisa your take on that.

It's you know he talking about adjusting to the facts which have changed. And basically he's getting on board with a trade that's already gained a lot of steam. Right. I mean if you think about it I was looking for example at this ETF of T bills that are seen more than 10 billion dollars of inflow so far this year. People have been flooding to cash. And finally he's saying OK hold on a second. Actually it's not terrible. It's all right.

Dalio Germany said cash was trash. Davos. Yeah. You know my problem with this with triple leverage or cash is I'm doing two and 20 on triple over even greater value. Again it's large and I agree. But it's some pointed. What I'm going to suggest is when the facts change which is why we need to focus on the facts along with the well-intentioned punditry that we listen to data every day that money matters. And I'm sorry I'm going to payrolls with a three month moving average.

I can't remember the number 250 868 thousands assigned poll friendly. The mantra don't fight the Fed is now in reverse. And the Fed keeps saying we're not going to blink. We're not going to retrace. That's what caused Ray Dalio to move away. That's what caused Michael Barr clan effect to get very annoyed at the Federal Reserve because they weren't cooperating with us. He said he sounded annoyed didn't he.

He did. Just a little bit. It might be a lot. He was saying they're going to pursue policy in the line of the Fed. Speak at the moment is we are committed to not prematurely loosening policy. That's what you heard from Vice Chair Brainard earlier this week. Futures right now they are positive in a big way. They add to the gains of yesterday.

Let's watch the price action for you on the S&P 500. Equity is up by one point six percent. Equities up by 60 points on the S&P. Yields are lower by 5 basis points to 350 890 for your tenure. Yesterday was down 17 basis points 17 or 18 basis points year to year was down that much as well. So we are well over a couple Carol Massar and last Wednesday some 4 percent north of that level. Right now your 10 year 358 74 off the back of that he came some dollar weakness euro strength. This is curve moving not elastic to and

spread is pretty much unchecked. All the whole thing just shift in lower shifting just a little bit steeper by couple of basis points today. But really the whole curve just shifting lower euro dollar links in 98 97.

Positive seven tenths of one percent. Yeah but still hovering below parity as we look at dollar dominance. And perhaps it's not going to change that much. We get a slew of Fed speakers today. Logan of the Dallas Fed John Williams thought a master Mary Daly line them all up. They're all speaking today. Perhaps they will all repeat what we heard from John Williams yesterday which is they are committed to continuing with these rate hikes. So don't fight the Fed. Is this belief in a pivot that the

market seems to be buying perhaps premature if the Fed is saying don't do it. And yesterday just to give you a sense we saw the biggest one day drop in a 10 year real yields going back to March of 2020 as people start to believe in this idea of a pivot at 10:00 a.m. we get the JOLTS data in order for job openings in August to give some semblance of where we are in the labor market in the July reading. This to me shocked me. We actually saw an increase in job openings. How much are we actually seeing the labor market cooperate with what the Fed has been really saying they want to be seeing and how much and John you can really talking about this.

Are we looking at a lagging indicator in order to dictate future policy. And it sort of creates this real dissonance for the Federal Reserve and frankly for markets trying to get their heads around it. At 11:00 a.m. we hear from ECB President Christine Lagarde. She is in Cyprus speaking with the ECB president of that particular bank at a time when you're seeing the same private discussion happening in Europe. It is slightly different as you see

yields come in pretty dramatically yesterday and again today. John it is different because there is this belief as we were hearing from Freya Beamish earlier that they will engage in some sort of quantitative easing to buy bonds to suppress peripheral yields to control the pace of increases in order to control financial stability and keep on hiking simultaneously. Yes. Unreal. Lisa thank you. That's your day ahead. Let's get to Amy where Silverman the equity derivative strategist at RBC Capital Markets.

Amy wonderful to have you with us on the program. Your words a shoe and a half has dropped. What do you mean by that. All look I think the question of the day has been you know where we are in terms of capitulation in the volatility markets. That's certainly been you know the

question and we've had kind of a regime change right. And we've had a reprieve now. But we had been watching since August John for a pickup in volatility for September. We've certainly got it. We have picks up 22 percent. That's the third highest on record this past decade.

I actually do think there is more to go. So I guess the shoe and a half. And so the full two shoes and I look at where we are through a fractious third quarter and I've got to gauge in the fourth quarter. Does the cross moments work right now. From variance on out to courtesies skew to the cross moments work the derivative mathematics is it work now or is it less useful. You know it's been an interesting narrative Tom because with those the skew the courtesies the tales these are all the metrics we look at and options. And the narrative has been that it's

been quite broken this entire year. I don't really know that that has shifted too much. You know if you look to historical skew levels and tails they're also quite low. And I think you have to kind of bear in mind that when you're an overall higher volatility regime these numbers seem on a relative basis lower. But the reality is we're just at such nosebleed levels. Right. So the math kind of doesn't work in your

favor from that perspective but it certainly doesn't mean that people are not buying things. We aren't seeing it even with the reprieve we're getting in the market right now. Amy you saw this September will go down as the third most volatile month in the past decade. And so people looked at this and said OK now we're worried about financial stability risks.

And it's good because central banks to pull back from the rate hiking plans. How much are you seeing this in the opposite way. The basically the stress tested a market that is being that is seeing with liquidity withdrawn and that it passed that we didn't see anything break.

So it actually gives Fed officials conviction to keep going. Yeah it's interesting. And you know let let's say that is truly said that could thereby keep them on their path which would actually generate more volatility. So it's this interesting cycle that we're seeing. I think that you know historically when you look to October October actually tends to be the most volatile month across the past decade. And that's even with the bump that we

got in September. I think that especially with a critical earnings season that's going to continue. Again I think this reprieve is sort of the fact that we've gone through a big quarterly expiry. We sort of have this kind of no man's land of idiosyncratic data for the next two weeks.

But then you know we're gonna be back in the hopper again. And so I would say that you know don't count volatility out now even though we're kind of dropping back to 20 and a level. I mean it's one of those days isn't it because the equity markets out. We'll be talking about pig fat pig yields pig dollar pig volatility and me a feature of your research through much of the summer much of this year is just how much we can shift towards a higher volatility regime for longer.

Amy can we just end on that. Have clients got on board with your view with thinking beyond say the next quarter into next year and perhap

2022-10-08 03:33

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