Market Optimism | Bloomberg Surveillance 1/10/2023
What's Fed is indicating is that they are willing to put up with a lot of pain. The market's going to give the Fed not much credit, frankly, whether or not this is a recession, something close to it, something that kind of smells like it. But this fight, this one. Whatever it is, we need to go ahead and get it done. If we tip into a recession, you could have a fair amount of earnings weakness. The recession is not a question of if. A question of when. This is Bloomberg Surveillance with Tom
Keene, Jonathan Ferro and Lisa Abramowicz. Waking up to a little bit of optimism this morning from New York City. Good morning. Good morning for audience worldwide. This is Bloomberg Surveillance alongside Tom Keene and Lisa Abramowicz Jonathan Ferro, Jillian Amandi, one of Evercore alongside us.
We'll catch up with him in just a moment. Equity futures right now only S&P 500 negative, almost a tenth of 1 per cent. T.K., cool off the Cole. Goldman Sachs dropping its eurozone recession. Cool in the last 24 hours.
Morgan Stanley getting super bullish on Chinese assets. Just a little bit of optimism, a construct, a few, T.K., this morning on Friday after the inflation report. Everybody's going to recalibrate after that report. No end of rebuts.
That's all there is to it. I get the euro recalibration right now. But when I would look at the elephant, the room is the Bloomberg Financial Conditions Index. Before we go to commercial break. Miguel, positive. There is absolutely no way I would have guessed that three weeks this chairman against that he ate three times. Should he? He has to. Even the people that are looking for a more accommodative Fed need a chairman that can say, no, we're just not going to be that accommodative.
Your long risk right now. Are you facing the Federal Reserve chairman Paul, speaking at about three hours time? Lisa, HSBC, Max Cantona bearish through the whole of 2022. Then this morning we change our forecast. Yeah, it is interesting that it's happening in the second week of 2023 to show you how quickly things are moving and how much sentiment is shifting. Basically saying that originally it was that it's going to dip and then wrap. Right. We have been talking about that.
It's going to be a bad for RTS. But that was, you know, as you know, was 100 percent. John Farrow branded saying. But then he said it's going to be reversed, that it's going to be a better than expected first half and then it's going to be a worse than expected second half. And that now he's actually neutral on stocks. Overweight on credit and neutral iron on
cash, in fact, in some ways underweight. So this is just a complete capitulation of his original view. I'm looking at Julian Emmanuel and he's just itching to jump in on this, Julian Depp and Rip. I think Mike Wilson of Morgan Stanley asked yesterday this for a home. We wouldn't do this for anyone to come off the hook. Let me let me get this. Mike Wilson turned round and said, how
is the consensus wrong? He thinks it's not the direction, it's the magnitude. Max CAC coming out this morning saying first half, first half might be better than people expect. What do you say? Well, look, you know that we're in the dip in rep camp. I know.
And frankly, being in the consensus has always been a point of bother for us. But when you when you look at it, you know, you're fighting this whole notion that the Fed is going to hike at least 50, maybe 75 basis points more in VIX, both manufacturing and now services are in recession. So it's 50 50 and people still want to buy this market.
Would talk about it in a moment. Equity futures right now down a tenth of 1 percent on the S&P, Judy, and is going to stick with us. That's not the length of the interview. We'll catch up with Gillian in the next. Thank you. Julian CAC, let me go. We'll speak to him again as well about Europe, China reopening and getting bullish on on Europe. We're going to talk about that, too. Futures negative then yields up about a basis point, a 10 year yield this morning, Lisa. Your 10 year, 354, 67, a lot of people
leaning into the long bond kind of trade. Can the Fed push back? And now I just want to say yesterday Atlanta Fed President Rafael Bostic said I'm not a pivot guy. So perhaps Fed Chair Jay Powell says something similar. 9:00 a.m. State Power does take part in a panel discussion on central bank independence. He is speaking at the Rex Bank in Stockholm. He will be followed by a host of others,
including ECB Governing Council member Pablo Hernandez. The costs in class, not there. They're also speaking. But later in the day around ten thirty a.m. Eastern, how do they talk about the move in the markets? Tom, you mentioned the easing of the financial conditions. They will have to push back against this.
What can they say that's actually going to get the market's attention? Right now, we're looking at two year yields in the U.S. that have come off, that have actually plateaued. But in Germany, people are buying into the story that it isn't going to be a hawkish ECB, partly because of that optimism, partly because you have seen a reversal of reversal of some of the bearish calls with Goldman Sachs saying that Europe is no longer going to enter a recession. Does the ECB kill that excitement by saying, OK, now we raise rates, we raise rates a lot? That has been the tone and that has been recognized both in ethics markets as well as bond markets. And at 1:00 p.m., the U.S. will test the waters.
And this is actually interesting. And Tom, I know you're going to laugh, but the U.S. is selling 40 billion dollars of three year notes. It comes at a time of so many questions
around what's going to happen with short term yields. The Fed one member after another coming out saying we're going to hike above 5 percent and we're going to keep it there for a very long time. The market not buying it again and again and again, basically telling significantly lower for. Is there's something there is there's is is something called auction gloom, auction gloom and gloom.
I spoke to Lisa about two minutes this morning and she sounded almost constructive, endorsing some of the views we got from Max Kellerman, HSBC. Lisa, we'll be back in a studio. Shall weigh in on that in just a moment. Julian, let's start here with Chairman Power. Three hours away. Tom mentioned it.
Financial conditions have eased somewhat. Do you think he pushes back against that? He does. Do you think it works? Here's the issue. The issue is there's a lot of positioning going on in front of the Thursday CPI. So. So from the aspect of a cap being on risk assets like we saw basically two hours into yesterday's session, it probably does work. But it's could be an entirely new
narrative after that report comes out. Your shop invented the synthesis of equity analysis and economic analysis. A guy from Texas did this a few years years ago, synthesized right now the enduring at home and believe that America clears itself like nobody else. We will get through higher rates.
We will get through all the tech layoffs and all the other drama that's out there. Synthesize the optimism on your floor right now. Well, point blank, Ed has been of the view a good nine months now that inflation is going to fall faster than the market believes. And thus far it's starting to
materialize. His full year inflation forecast is two and a half percent. The golden to handle, OK, that is an entire new set of circumstances for the Fed to deal with.
If in fact. That's right. And you know, that is probably in and of itself the argument for risk assets that we think materializes at the end of the year, at the end of the year, but not at the beginning of the year. And this is what I wanted to raise, because I actually understand what Max CAC is getting at. And people who are saying, wait a second, the data isn't that bad.
There has been a change in facts with the better than expected weather warmer than expected weather in China that's reopening. Why isn't that enough to sustain things for a bit longer before people hear what Rafael Bostic is saying? I am not a perfect guy. Look, no question about it. The surprise to me when I got to the green room was to look at natural gas and realize it has a three handle on it. After what we've seen the last several months, that's a big deal. But but at the end of the day, we have this set of circumstances where the Fed is intent on reigning in the labor situation.
And the only way you do that at this point is to cause I wouldn't call it a material slowdown. But look, Ed is looking for a couple of negative GDP quarters. What we used to call until the first half of last year, a recession. OK. I understand they dig there. But what people are saying, it didn't actually happen. So what causes the rip?
What causes the upside if the Fed is determined to bring inflation down? If they're really going gangbusters there and you don't necessarily get some sort of fiscal impulse or anything to really drive things the other direction, it's essentially this idea that there is a terminal, you know, end point to the hiking. You don't necessarily need to see the easing. And the market is probably and I think we're going to hear this in a few hours. Incorrect in believing that there is going to be any sort of material easing in 2023. But what it really is, is what you have every time at market bottoms.
There has never been a bear market bottom without a capitulation, without an emotional volatility spike. And that in of itself clears the playing field for the next bull market. And we think that's going to happen. If I'm not 100 percent in cash, where am I? What sectors have value and have protection? We continue to think that value has value. Okay. It is going to be challenged for the next couple of weeks at Devon Minerals. I know that that's that's part of it. Look, we're very defensive minded right now.
Consumer staples, health care and energy continues to be. You know, it's sort of the pinata back and forth, you know, with waves of emotion and, you know, ticks in the oil price. But at the end of the day, even if we dip into a recession, energy is 5 percent of the index weight and is going to account for 9 percent of the earnings this year. So you don't think tank can regain leadership here? It's basically the message in the short term. It absolutely can. But in the long term, look, the fact is, is that the investing public still owns too much fame. You're a student of market history.
I think what we're all leaning on here is this idea. It's incredibly rare to get a market low before the recession. It's not basically the argument here. Yeah, in a nutshell, absolutely. It would. It would.
Look, again, we have to take it from the jump off point that everything that we've seen in the last three years is about, you know, has very little, if any, historical precedent. But this is one of these things in time, the entirety of 2022. We were asked, when's the capitulation? When's the ship classes? When's the emotion? It's coming. And the same it yet seems to be the message and we get lucky. Going to stick around, going to talk about Europe as well. Just the optimism all of a sudden, not
just a China reopening. But we mentioned a number of months ago the number one thing you needed in your outlook was a meteorologist to come by and give you the weather forecast for the Europeans. That seems to be the champ. It is it is a surprise in his Franklin's in the United States as well, not so much that were as warm as them, but we're not freezing, etc., etc. But I do agree, John, that has been the
magic pleasant surprise. My phone was lighting up this morning. Today. Today. Oh, just ping, ping, ping, ping. Ping.
Message be seen. This would be seen. This Goldman drop in its call. Deutsche Bank saying perhaps we could escape recession. Brammer.
Just message after message. Research? No. After research note saying the same thing. But this is where our price can determine the sentiment, because right now some of the other indicators are also moving that the way small business optimism just came out below estimates, just to give you a sense. So there is that as well.
Well, I go back to what Julian said. We've got ISE in negative 50 or rather below 50 in contraction territory. The I seem to remember the last time the Fed hiked with the ISE 50 Joel Weber. You know that it is ISE time it happened. There's only been a couple of precedents for it. We actually ran that yesterday, you know, as I said, just just a couple of times.
And you know, the outcome has not been terribly pleasant over the near and medium term. It's a very unique moment for this fed. Some incredibly unique. Well, yeah, know these comments. That's why I want to speak at 9:00 a.m. as of 9 a.m.. Yeah, 9 a.m. So this is a morning event, folks, as we get into Thursday. You know, I think the summer here is important. It is a toxic brew of debt and I mean a
toxic brew. It's a toxic brew of different rules. I will say, you know, we spent a lot of this morning teeing up this conversation at the Rex Bank with Chairman Powell, spoke to Michael McKee yesterday. It's unclear how much he's actually going to address current monetary policy. So perhaps bear in mind that we might take this up and then get absolutely nothing. We hope we get something that's a Q and A session in the mix as well.
We better guess I'd better ask good questions in the next hour. And we were Silverman of RTS Jet and Emanuel sticking with us Maria Tadeo out of Europe. Up next. Keeping you up today with news from around the world with the first word.
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Most likely the balance of this year unless the economy crashes or financial markets crash. My data was fantastic yesterday. The chief economist, the macro strategist at MKM Partners from New York. Good morning to you all. Equity futures just a little bit softer. We're down a quarter of one per cent on the S&P 500 in about two hours and 40 minutes. You'll hear from Chairman Power. We'll bring you his address to the BRICS bank in full, of course, and get you all the headlines from Mark McKay as well.
Equities down. It higher for a couple of basis points, 355 and euro dollar back with a 1 0 7 handle on the euro. Want a 7 35 and Goldman dropping its recession call saying the following. We no longer look for eurozone recession reflecting better growth, momentum sharply lower natural gas price, says an earlier China reopening. We upgrade our eurozone forecast, notably above consensus.
Maria Tadeo joins us now out of Europe in Brussels. Maria, where is this eurozone optimism coming from? Well, Jonathan, there is bullishness today and this morning there is something in this environment you talked about that note from Goldman Sachs. They dropped the recession, called. They now see positive rows of zero point
six percent. This year they talk about this mild temperature. The reality is, we were told this was going to be the winter from hell. I had a very nice three week break in Spain and the temperatures were not freezing. We have seen actually better than expected weather. Gas prices have dropped massively. That removes a lot of the risk premium.
And then, of course, the China reopen in which they say will be good for meat in Europe. Funnily enough, we also had a note from Deutsche Bank almost an hour later. They essentially said, when you look at the PMI ISE, it looks like this recession can be averted.
And also noted this China reopening. Also positive for the euro area. You comfort the ECB, no doubt. If we can escape that recession, this ECB just getting harder, isn't it? Well, if you remember back to that December meeting, she repeated many times more than the gaffe that she was not going to pivot, that she was going to continue to hike no matter what, they were going to be restrictive, that there were no limits potentially to the actions that they could take, that this was the number one priority and repeated so many times there is going to be no pivot. So that's where she left it. And that's, of course, where I guess she would want to repeat a pick up in this new year. But of course, you know, this data, will it change something for them? When you look at Goldman Sachs and their note, they say 50 basis points in the next two meetings, a 25 basis points in May.
That's what they predict. Maria, thank you. Out of there on the latest out of Europe. Euro strength. Dollar weakness. The dollar. The X Y is down almost 10 percent from
the highest home in late September. That's quite a move. We had a momentary print of a one or two hander, which is a huge deal. It's a huge signal. This is the major trading index. Bloomberg Dollar Index is more sophisticated, more varied, has China and it is as well. This is a raging debate among Netflix people. Mark Michael Barr McCormick to join us
here. Is this a weak dollar trend? Yeah, Jim Foley pushed again. He said the real deal. One, two, three. And dollar index right now. Janet Emmanuel of Evercore alongside us in the studio today.
Jim, what you make of all this euro optimism we're waking up to this morning and this dollar weakness we're seeing is well off the back of this China reopening story in the immediate term. It may be a little bit in terms of the reaction of of euro dollar 1 0 7. That's understandable. But the bigger picture is, is that what the last nine months have been about is reading the eurozone of the psychology of negative interest rates. It's very difficult to overstate how important that is for risk assets for investors, you know, assessing capital allocation decisions, you know, in that part of the world. And frankly, when you think at about the discount for over a decade, during which time the dollar rallied almost consistently, it makes sense. The case for Europe, what's revenue
growth do if we get an at home and inflation scenario, which is a 48 or 52, I can't remember even outright deflation in the early 50s. What is corporate revenue growth do? Given a rapid disinflation, it's certainly going to decline and it's going to decline faster than the market expects. Is it going to go negative? Very unlikely, because frankly, again, you have the other side of the fact that you've got so much stock of consumers savings. And in that environment, one might be able to argue that you're going to have, I wouldn't say a soft landing, but not a crash to call it over 5 percent in the unemployment rate. And so you're still going to have that backstop that gets you through the shallow recession to the recovery in 2014. If this is true, does that mean that the Fed, the ECB can remove accommodation completely, go from negative or zero to 2, 3, 4 percent without causing a financial crisis, without causing a crash normalization? That just leaves a couple potholes, but not that much more along the way. It's very difficult.
It's literally only happened in 94, 95. And interestingly enough, when you look at 94, that was the only other year in the Bond Star Quadrant where you had negative returns to both bonds and stocks. Granted, they were nowhere near the scope of what we saw in 2022. But the upside is it is possible. But we reverted back to low yields after
that. And it really entered this decade, these two decades, three decades of the incredible bond rally. If we don't get that, if this is the new normal, maybe not this high, but a 3 percent Fed funds rate and ECB rate of 2 percent. Does that mean that we can just live with that, that it just is basically money isn't free. But it's not going to necessarily cause some complete rerating of stock and bond returns for a longer period of time. It is possible it's going to compress multiples.
It's going to compress leverage. It's going to compress valuations across assets. But it isn't a deal killer. And at the end of the day, it doesn't depress materially the concept of earnings and earnings growth, which is what drives stock prices in Europe. This goes beyond the weather. This seems to all go back to China. I think so many of the calls that we've seen this morning are underpinned by this more optimistic, constructive view on China reopening.
Morgan Stanley were pretty blunt about it. We believe the market is underappreciated, the far reaching ramifications of reopening and the possibility that a robust cyclical recovery can occur despite lingering structural headwinds. So make it really simple. I think for a lot of people waking up
this morning in the market, they want to work out whether they should be investing in a story where growth slows or investing in a story where growth rebounds. Which one is it? We think there's a very good case to be made for China assets right now. In fact, our China strategist Neil Wang thinks we get to six point two percent GDP growth this year. Yep. Wow. Yeah. That is stunning. Yep. Exactly. And NASA Evercore Asian economist feels
they got a six plus handle. Yep. Wow. Absolutely. John, what we're talking about here in my head is spinning over where we were three weeks ago. I believe three weeks ago. The world was ending as we know it. And now we've got all this optimism here in only one thing is change disinflation in Spain, disinflation in France, some other place. I can't remember this stunning 6 percent
call, stunning 6 percent call on China. And what are we going to see Thursday in the United? So I'll answer my question. I guess it depends where you look. If you look to China. Things look better. If you look to the United States, maybe things look worse. And Julian, just as a final question that takes up the question we ask almost every single January, every single year is whether we can get our performance excuse, whether that's where the outperformance says international markets beyond U.S.
shores. Is that where it is? So. So it's it's been in fits and starts type of argument. And again, if you look at the broad sweep, it's because of the prevalence of negative rates in much of the rest of the world and because the dollar has rallied. We think that we're not saying you're in a dollar bear market, but the dollar has topped in our view, and that is absolutely tailwind for rest of the world outperformance. Julian, this was great. Janet Emmanuel of ever cool in a studio, some some massive calls on the Chinese economy and the effects markets. And also Ed's idea of disinflation in
America. But without question, the hallmark called is week away from what we're going to see Thursday is Evercore ISI with a 6 percent plus China GDP. That's months. I'm sure I've missed somebody. But to me, that's like you say, it's a monster that set off Goldman as well. I'm not focused on himself. Stanley, I believe I'm I'm off. You distracted while I'm distracted
because somebody said the talks may go on sale to the Qatari investor. Right. We're not going to call on anything when you like the money. I don't know.
United you like to consider. Harry blocked us. Harry Vonnie Quinn United is in some chat about that take. The main event this morning, Chairman Powell, two hours and 30 minutes away going into that, equity futures down about two tenths of one percent. Good morning to you on the S&P were negative on the NASDAQ, too, down a little more than a tenth of one per cent into the bond market. Big move lower in the two year to start the year over the previous two days, down 25 basis points on a two year. We tried to bounce this morning a 2
basis points for 23 hours when the effects market the call from Goldman. You know it well now. Dropping their recession call on the eurozone. Euro dollar through 1 0 7 and may be having a look at what a one of 740 on euro dollar up by about a tenth of 1 percent. This, of course, can all change with the
words of chairman pound later and inflation coming up on Thursday. Investors questioning whether we have seen the peak. Atlanta Fed President Rafael Bostic weighing in, saying, quote, If the CPI comes in, showing the same kind of trending that we saw in the jobs number, that will make me have to take 25 more seriously and some move in that direction. But we still have some time to go before that. So that's Bostic, some on the side and a
move at the next meeting, 25 or 50. He was asked once we get to 5 percent. How long will stay there? Tom Keene, he said three words a long time. So it's really about how long they stay at terminal. That's their tool they're using to really push back against these rate cut calls we're seeing elsewhere. These well-meaning people, including a front line economists like Mr. Bostic, they're very visible there in the Q and A, the press conference, wherever they are. Dow Jones real simple.
Do we want the presidents of the Fed gaming 25 or 50 beeps like a derivatives trading company? Hasn't this become I I just don't participate. I honestly think you. Hold on a second. Hold on a second. No, it matters. And I think it does matter because what they're trying to do is set up a 25 basis point rate hike that isn't viewed as a dovish signal that they're backing away and they're trying not to ease financial conditions more, but build in some insurance. It's a real issue that they're trying to make that is very difficult, but that is what they're trying to signal. And that's probably what they're trying
to Stephen Engle. They have to get to Thursday's inflation data and retail sales. I believe it's next week, the 18th. Hold on a second. I believe you. Hold on. Hold it.
Governor, agree with you that it's true what you said. Your payroll is going down. It's Caroline Hyde quite straightforward. It's just brown. Fired up this morning. So fired up. Chairman Powell, some two hours and 28 minutes away would have a 10 0 break. Well, is that strong? Is that one strong? I don't like the aftertaste, it's like Coke Zero, it's just the same as it could be. Let's get some intelligence on this.
Lindsay Pigs are with us, chief economist at Stifel. Lindsay, I'm going to cut to the chase. Our audience is our viewers, our listeners. Their heads are spinning. Atlanta GDP now is a stunning three and a half percent plus guesstimate of where we are. The fourth quarter looks pretty good after all the gloom, whereas the assuredness of economic slowdown in this 90 days or dare I say, even Q2. Well, I think the assuredness comes from the weakness that we're seeing on part of the consumer.
As a consumer based economy, if the consumer is not out in the marketplace, happy and healthy, we would expect a meaningful decline from that more robust pace as we saw in the second half of the year and against the backdrop of negative real income growth, higher borrowing costs. And, of course, many consumers facing the risk of variable rate debt resetting in the first quarter at higher level. Well, that's right. This will compound the pressure on consumer. Lizzie, you're reading my mind the chart yesterday. I believe zero hedge had it. Thank you.
Zero hedge. It was a big Bloomberg chart. I can't remember of the credit card. Interest rate is a variable rate. I mean, we're all looking at housing in that. But fold into your analysis, credit card rates that were 21, 22 percent that are now 28, 30 percent. How does that play in to the caution? Well, it plays in significantly, particularly as savings are now drawn down to near zero levels, where the consumer was very much supported by this accumulation of wealth during the pandemic in the immediate aftermath.
We estimate there was an additional about 6 trillion in terms of a wealth cushion supporting consumers and that removed any sense of immediacy to revert back to the normal labor force participation formation that we've seen in previous cycles. But now as we go forward and consumers draw down that savings, we're seeing this return to a reliance on credit card debt. Now, arguably, the household balance sheet is beginning from relatively a healthier position than in previous cycles. But still, we don't have this unlimited amount of wiggle room for consumers to take on that new amount of debt, and particularly as that debt is now repricing at higher levels. This will compound that pressure, as I said, on consumers limiting their ability to go out into the marketplace. That doesn't mean that consumers are
going to fall off a cliff. But that does mean a meaningful loss of momentum. And again, is the key part of the economy, it's going to be nearly impossible to maintain then that level of 3 percent growth as we turn the corner now into the new year. So, Lindsey, would you push back against some of the optimism that we've been hearing from people who've been pessimistic through all of the second half of last year? Well, I think the timeline for the pessimism to set in was extended. Consumers did prove to be surprisingly resilient through much of this turmoil in 2022. But again, it doesn't negate the fact that these outlying variables will weigh on the consumer and limit their ability to spend.
There's only so much savings that we can draw down. There's only so much credit card debt that consumers can ramp up. And so just looking at this from a quantitative perspective, regardless of our qualitative optimism, the numbers suggest that consumers simply will not be there in the first half of the year. Just changing the timeline changed the
depths of whatever downturn you're expecting to happen. In other words, does it make it less or does it make it more as new? Excesses build up now? Well, I think the depth and duration in terms of the downturn is very much going to be hinged on monetary policy and the sticky nature of inflation. The higher that prices remain, the longer that prices remain in this uncomfortable level relative to what the Fed can withstand. That's going to force the Fed to raise rates higher and potentially keep rates higher for a longer period of time. And that's going to be the scenario that's going to compound that that downturn in the duration of that downturn.
You know, Lindsay, I know you're hanging on every word we do. And Julian Emmanuel is just done with Mr. Edward s time and in their team in Asia, modeling 6 percent plus China GDP.
Not that I don't need you to tell me. That's what we're going to see. But if we get five point eighty six point two, whatever, what does that do to exports and imports in your U.S. GDP? Math. Well, certainly it is going to be
difficult to get to 6 percent. That's extremely optimistic. That being said, it does seem as if there's nowhere to go but up when you're talking about an economy emerging from a nationwide shutdown or more restrictive 0 Covid policies. But that being said, what we've seen thus far has been far from an ideal reopening.
It isn't a flip the switch scenario, so it's more going to be a slow bleed, particularly against the backdrop of a number of black swans that continue to float around those with over heightened optimism. No variance, a lack of natural immunity to the virus. Any of these resurgence is as deemed by the government is inappropriate or intolerable. Could lead back to many of these zero Covid policies. So I do think it's overly optimistic to
think that once the door cracks open, it's going to swing wide open and get us back to that structural fluidity that we saw prior to the Covid pandemic. John Pilger, you there was on the edge of Bruno. I mean, that's what I noted there. I mean, she's on the edge of grandmothers. I think a lot of people waking up this morning feeling like they've been told conflicting things at a late date in the last three weeks for manufacturing and services that make up this big boom that people are talking about over in China and they're wondering whether they should be pricing in slower growth or a growth rebound. Lindsay, what's so important here to go back to your earlier insight is variable rate. John Farrell lives this in England.
They're the land of the variable rate, the floating rate, mortgage and all that. How big a deal is the variable variable rate in America? I'll get it out. I think it's a very big deal, particularly when we go back to the conversation we had about consumers, when we're talking about credit cards as a key support to consumer spending going forward as that interest charge continues to rise. That's going to limit the ability for consumers to access alternative sources of income.
Aside from returning to a more traditional position in the labor market now, this could actually be somewhat of a double edged sword, but it but a positive in the way that if consumers feel they can't rely on these alternative sources, that may create more of an incentive for these sideline workers to move back into the labor market and help increase that labor force participation, which, of course, as labor demand outpaces labor supply. We've seen this upward pressure on wages. If we see the reverse occur, that could put some welcomed downward pressure on wages, something the Fed is certainly looking for. Just real quick here, if you choose a data point, you can tell your own story.
You can pick whatever data point you want to edify your view. That has been basically the belief for the first couple of weeks of this year. Which data would you be watching most closely for a true read on the pace of how the economy is developing? Well, I think when we turn the page looking at the consumer, I think negative real income growth for the better part of the past year tells a longer term story about the unsustainability of positive spending activity.
And that is really going to be the driver of 2023. Whether or not the consumer can continue to shoulder these elevated prices against the backdrop of negative real income growth. Lindsay, thanks for this. Lindsay VIX, author of Stephen Engle on the US Economy and the Global Economy, for that matter, head of the Fed Reserve chair. Jack Powers speaking a little bit later this morning. Big change from the team over HSBC.
Max Kennedy this morning. I think this got the attention of many of you having been staunch bears for more than a year. For much of 22, we think the consensus is wrong about a weak first half and a second half rebound. The team at HSBC went on to say, we see a variety of reasons to be less bearish on risk assets in the first half with depressed growth expectations being key. So he was max underweight equities for
so much. If he's the gloomiest guy we visited without a debt question. We're going to catch up with Max is 715 Eastern. So we didn't know that 35. Nobody tells me anything. And that's a big change from him. And it's yeah, it's a big shift here. And, you know, you folded into what Steve Majors talked about. And if you get an idea, I'm in decent
flexion. What does this student student, Steve Majors, long term caution on the certitude of higher rate if you get in at time and ethical. China GDP story six and do that. That that's something we will remember in monitor six, nine months. Totally, Lisa. A couple of months ago, I don't think anybody was thinking about six hand was out of China GDP for the year ahead.
Nobody was thinking about them elevating the debt ceiling levels and how much they were going to offer to the stimulus as well. So there are a lot of different factors here, not just a reopening in China. Juliette Saly you. Well, it depends on what say.
But sure. Okay, okay. You and I both in all three of us, I think say enough on Bitcoin and SB F, whatever his name is. This is heating up, folks, in the last 24 hours. Now, we've got Coinbase just out moments ago with layoffs. And it's 950 people, John, but it only got under 4000 people. So it's like a 20 percent cut or whatever. But the bombshell here is yesterday
Forbes magazine had an article having a pause over there of the money, walking out of this, buying it. I have always said I'm way more interested in the investigation and the allegations, speculation about pioneers than any of this. SPF stuff. That's what I'm watching in January. And when we get some news, we'll bring it to you. Refreshed, refreshed. Ran that on the crypto show. You could see that it went out to front
run anything. You know, we're just out for another crypto show or selling it. We're going to talk about foreign exchange next. Should I have a beard like no pants? I'd like you with a great beard after a vacation when you're a bit more chill. You know, you don't want a grumpy beard. Is it that you want to chill? There's a chill bit. Then there's a grumpy bit. You know, when you come back from
vacation, some it works. Hopefully not kill me. Coming up next, frenzied day for New York. This is pulling back. Keeping you up today with news from around the world with the first word. I'm Lisa Mateo. The UK is attempt to send the first
satellites into orbit from its own soil has failed. A rocket launch from a Virgin orbit, Boeing 747 that took off from England malfunctioned. That led to the loss of its payload of nine satellites. The jumbo jet and its crew returned safely after years of drought. California is in a long flood fight. Since the end of December, waves of storms have rolled in off the Pacific Ocean. It killed at least 14 people, closed
highways and forced residents to flee. On Monday, there was an evacuation order for the town of Monsanto. Home to Oprah Winfrey, Prince Harry and Ellen DeGeneres. China is striking back at countries for
imposing Covid related curbs on Chinese travelers. Beijing has suspended issuing some visas for South Korea and Japan. It's China's first attempt at retaliation after a number of nations implemented testing requirements for travelers from the country. Apple is pushed to make more components for its devices in house is hitting more suppliers. Sources tell Bloomberg that the tech
giant is dropping a key Broadcom, Wi-Fi and Bluetooth chip in 2025. Apple also reportedly plans to make its own first cellular modem chip by the end of next year or the following year. Swapping out electronics from Qualcomm. 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 Mateo. This is Bloomberg. STARTING POINT is the SVP putting it between 5 to 5 and five point five. If memory serves. That's a reasonable place to start.
The word I need to go in and imagine is the data rule is do you go higher or can we stop a little earlier? I think something about 5 is absolutely not, in my judgment, going to be likely. But when I say absolutely going to be likely, still have uncertainty bands around that. But that's where I'm putting right now. Mary Daly, so much faith speak in the
last couple of days. The San Francisco Fed president speaking to The Wall Street Journal just yesterday. We'll hear from Chairman Pound a little bit later this morning. Equity futures right now and the S&P down about a third of one per cent.
So much optimism out there around Europe just relative to the pessimism that existed a couple of months ago. This morning, the likes of Goldman drop his recession call on the eurozone. Right now, Eurodollar, one of seven thirty seven, were positive that by about a tenth of 1 per cent, the move in the dollar since the highs of late September D X Y down by almost 10 per cent. Now, some real dollar weakness, Tom, this come through in the last couple of months and much more. So again, in the last couple of days, we heard from Matt McCormick recently of today. This is what he had to say about the
dollar in 2022. Inflation, momentum and Carrie were all the rage. Now the focus has shifted to value and growth. Keep in mind, the terms of trade still matters, but the momentum is reversed in favor.
Some of the importers like the euro, yen and Korean want another shift from last year. The Korean War, A.K. last couple of days, major moves. That was we have a sinking back to last summer. Last year.
That's right. I believe that's on the Pacific Rim. And that's what I'm looking at as ADX GM. Why? This is a really important conversation. Let me frame it with you. Before we go to the mindful Mark
McCormack on a technical basis, I am dead set on the death cross. I think it's absolute total Mickey Mouse mathematics. There are other things related to it that are really important.
And there's a three moving average exponential study which has finally shown weak dollar trend just in the last couple days. There's other indices of people like Mark McCormack or Jordan Rochester used to confirm that they haven't confirmed yet. And that's a setup to go to to Marc here. Right now he is with T.D. Securities Mark Crumpton to cut to the
chase were gone wild like you and I used two years ago. Wells Wilder in 1978 looked at momentum and came up with something called ADX D.M. Lie. It is yet to signal weak dollar trend. But I'm BBDO x y. ADX PMI is awaiting a trend. Are we going to get that trend? Is it going to confirm a moving average study? Yeah, I think we are. I think we're moving in and out of regimes. That's been really the way we've been
set up for the whole pandemic that we kind of get three to six months, maybe even a year of one thing, and then we move into the other. And as you mentioned, we're kind of moving totally out of the inflation regime, moving into something new. And I think that new regime is really going to be focused on how the global economy is reacting, how certain countries have divergence across financial conditions. But a big thing that's going to really drive this is, again, the reversal of the terms of trade in the repositioning of equity markets and the optimism around equity and the optimism around growth.
It's not really optimism per say, but really stabilization of global economy. And we're running out of stagflation. So that will help confirm the trends in the price action, because the macro regime changing in the last decade, one of the people codifying regime change has been James Bullard.
He has talked in the last number of weeks, maybe a month, maybe six weeks about the trajectory to higher interest rates. He's stunned with a 7 percent number. Can you hear world stay peace together, instability? If we get Mary Daly, say, five and a quarter, dare I say five and a half percent terminal rate? I think five and a quarter is manageable.
I think part of it is really the journey. Right. So a lot of the price discovery and the volatility that came across different asset classes, I think call it macro volatility, the VIX to move currencies, all of that had to do with the discovery of where the terminal rates at. And I think if we even if we go our
expectations that we go to five and a half, I don't think that needs to be a tremendous shock to markets, but it does shake up positioning. So our view is that in the very short term, we could see the dollar consolidate a little bit, maybe give back one, one and a half percent. But the next move over the next quarter of the next two quarters is a 5 percent move lower against particular currencies. So we're we're in this environment, we're positioning and technicals and Matt are going to matter, but we are moving into a momentum based regime change that is going to be ultimately bearish for the dollar.
Mark, where am I getting that 5 percent move one against? I think it's against a whole host of things. It's going to be if we look at we're still extremely bullish on the yen. I think there's a very good amount of upside for euro if we can get down back to about 1 0 5. We can use that as a level to buy into
for a move through 1 10 through the first half of the year. I think the other currencies, again, as we talked about Asia a little bit, Aussie Korea. Those guys look quite appealing in this backdrop. And I guess it would be a little bit of rotation to to seem as well on the back. A stronger euro, which would also
probably support Poland. Mark. So the move yesterday in Delaware and the Korean War dropping to its lowest level since June. That's someone's strength. Everything in Asia was stronger against the US dollar. Can you tell me where the Aussie fits in? You mentioned it there. How important is that trend going to be? Yeah. ISE is quite important because what it is is one of reflection of kind of Chinese growth and too, it's a reflection of kind of the dynamics around what's happening with commodities. If you look at commodities over the last
three months, the sector performance, which is what matters for affects kind of the composition is really the most important factor. What we've seen is energy prices have underperformed in, industrial metals have outperformed. So this is a focus on the Chinese reflation trade, which again is somewhat in its infancy. But as you're as you kind of see, consensus is stumbling over itself to push up Chinese growth for this year. So Aussie fits into it. One, if Asian equity markets are outperforming Aussie, she's going to kind of be lumped into that backdrop to if Chinese growth is performing in terms of trades improving in Australia. Right. That's going to give the RBA a little bit more confidence as well.
And it's also going to be supportive of capital flows and trade flows into Australia. Mark, within these interdependencies, if we get Evercore ISI stunning 6 percent plus GDP call for China, what does it import into America in terms of the inflation guesstimate out six months out a year? Yeah, that's it. That's an important quest because as we just talked about, the commodity prices, particularly different parts of it, maybe not energy, but other things will move higher. So we do have a bit of a tug of war where you could introduce more inflation into the US economy. But the exact same time, all the supply side mechanics, if you look at the Fed's supply disruption index and also PMI delivery times, all those things are also linked to Chinese, to China closing into China lockdowns.
So I think what we have is the supply side, which has been really kind of not focused on over the last year, because people do focus on the demand side of how we can reduce inflation that way. I think the big thing is that China reopening basically helps the supply side continue to improve, even if it's somewhat stimulative for inflation from the demand perspective. So on net, we probably have still inflation moving lower, but maybe it kind of settles at a higher level with China reopening linked us into premise work. I mean, she's just been phenomenal on
inversion as well. Dominic Constant over at Mizuho says risk assets can win this year. And that's an outlier call. I would suggest to you in previous suggest risk assets can win.
Yeah, I think they could. It's largely a function of kind of leaking the things we talked about around stagflation and I get it from an effects conception. If you think about three things, you think about global economy where where we were in September when we talk about the peak of the dollar. China was never gonna reopen in the eurozone, was going to have a very long, drawn out recession based on energy prices. We got the miracle weather that people are looking for. That was a very good cushion to get
eurozone passed this through their recession. In most it again, the data is coming in better than expected. You know, rates are about to peak. And again, the terms of trade shock is reversed. So if you think about what risk assets need, risk assets, we're focused on stagflation. We no longer have stagflation. We might not have an acceleration in
global growth because the US is now the laggard. What we do have stabilisation at the exact same time. What we should also start to see is some acceleration coming from Europe and China to offset the slowdown in the US. So this is a great environment not for U.S. risk assets, but it's a great environment for non U.S. assets, particularly equities in Asia, which is why is is very bearish for the dollar.
I keep hearing the same thing to keep hearing the same thing about X U.S. International feel like we've done this a million times. And as for Europe, I just wonder how soon before we start worrying about next winter right now. But the optimism is there for all to see. But you don't do it in a vacuum. If you assume international goes on weak dollar and know robust GDP recovery, can domestic and G3 equity markets also rise with them, if not as much? I think that's left out of the discussion right now about Michael McKee ISE Securities. Ma, thank you.
Lisa, you and I have talked about this a million times. Regards to China, not the demand side, the supply side. Mark touched on it that we still trying to figure that out.
Is this supply side relief or for the supply side dislocations? We don't know. And a lot of the problem are seeing this right now more as relief and fueling growth more than anything else, including even shrugging off the potential demand for crude and for natural gas. It makes continue in about 20 minutes, which when we ask him what's behind this change and also how significantly does this affect the magnitude of the downturn that he's expecting in the second half? The second half rep that we're expecting is that now the second half dip, if you expect the better rebounder, is it? It's a toxic brew at depth. I think we need to go to London and see
Max and the entire HSBC team there ripping. How do you happen? Is that is that a nightmare? I kind of can't rip it apart. It's either Londoner. Indiana would go to either one.
I take London. No offense to Indiana. Of course, I keep it up. I was just a home base. That just seriously. No offense. What's Fed is indicating that they are willing to put up with a lot of pain. The market's going to give the Fed not much credit, frankly, whether or not this is a recession, something close to it, something that kind of smells like it. But isn't this one?
Whatever it is, we need to go ahead and get it done. If we tip into a recession, you could have a fair amount of earnings weakness. The recession is not a question of if. It's a question of when. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. Let's get you set up for the trading day. Hello from New York City this morning. Good morning. Good morning for our audience worldwide.
This is Bloomberg Surveillance on TV and radio alongside Tom Keene and Lisa Abramowicz. Some Jonathan Ferro equity futures not too in March this morning, down about a third of 1 per cent on the S&P a few hours away, T.K. from him and from Chairman Powell. We will hear from him. But are we going to hear from him? You know, I have trouble here, John. He's in Sweden, right?
Is out. The Religious Right Clerics Bank, which is a really important historical bank. But are they going to contain the questions because they're supplied over there to not obnoxious questions like you get from Michael McKee? Well, she said Michael McKee every time, chairman. Excuse me, sir, I'm from America. What do you write in that? Lisa Abramowicz NIKKEI. You start concerns about brambles of like Rambo to leading and I'll just sort of, you know, skulking around waiting. You probably wouldn't take the question
if he did take the question, would he answer it? What kind of question would it be at a time when the markets aren't listening? He's got to maintain control. I mean, I mean, I don't know what this is going to call it. Whipsaw Tuesday, where we were three weeks ago versus the conversation this morning for global Wall Street. My head is burning over the shift. Alisa has touched on the heart of the matter. The chairman and his words carries more
weight than the rest of the committee. But have those words lost weight over the last couple of months? Because, Lisa, what he's selling. I'm not sure this market is buying at the moment. They've looked past it. If you've taken a look at to your yields in the U.S. over the past couple of months, they've
plateaued. They're not going higher, even as you see this resilience, even as you see this optimism that's causing yields in the euro region to increase. If that's the case, the market saying we're seeing something that you're not because your rhetoric has not changed. If you're saying 5 percent is still that low that you potentially could see actually talk about some of the optimism that let's please less Goldman Sachs first. So Goldman come out and drop their eurozone recession, kill Morgan Stanley, get all balled up on Chinese assets and growth. That maybe pushes close to 6 percent, at
least in the high fives. And we heard from Evercore about an hour ago that they could get 6 percent plus GDP growth in China. And then Max category is going to join us at least in about 15 minutes time, suddenly turns more constructive on risk. In fairness, a lot's happened. This is actually rooted in true events.
And if you have a reopening of China, that was surprising. And then also fiscal support coming from China. That is surprising. And then whether that is historically warm in euro. And oh, by the way, they're natural gas
tankers floating around that can't find homes. There's that much in terms of oversupply. So you see they supply shock. I don't know the exact numbers, but at one point you had a 20000 handle on moving his ship across the Pacific and has crashed down to 2000 dollars. Just as another indicator of the dynamic shifting with trade in the weather. Did you expect that?
No, I'm not sure. I'm not to basically bring it down. What do you not trade in the window? No. Why not? I just think it's too unpredictable. It's like the Reds. So my issue my issue with the weather
story and the crude in the energy storing the gas story in Europe is as follows. This was one winter. What about the next one? Exactly. And if you're going to get build up on your own economy, how long for when you start worrying about the next one? People say that they're actually much better setup now for the next winter because they're at 91 percent stores. And so heading into the summer, it could potentially be a much better setup heading into a time when they cannot access the Russian stores. So some people are even speaking that way that they're optimistic even on that level. So this is the level of optimism that
right at the heart of the matter, I'll head home and call those who spoke to Julian Emanuel. Well, as do we have disinflation, like the two bouts of disinflation in the late 40s and early 50s, really nothing else matters. And everybody's got an opinion on the CPI on Thursday, Hugh. And shoelaces point now in the markets
and price can change sentiment pretty quickly. And I imagine based on Thursday's print, things could change again. Actually features right now on the S&P down a third of one per cent where a negative by about eleven or twelve points in a bull market, yields are higher by about three basis points 356 33 and some euro dollar unchanged right now. But we have reclaimed a 1 0 7 handle there in a our Deutsche Bank looking at a 115 ish and could use that thought with a really smart loaded sock. John saying x Putin x, the war right now settled. It should be a 120 stronger euro bromo. That's the euro co after a couple of days of real dollar weakness.
Honestly, the euro call has been amazing and the dollar weakness really has pervaded the sentiment that we've gotten pretty much across the board today. We've been talking about at the big event. Fed Chair Jay Powell taking part in that panel discussion on central bank independence hosted by the Wrecks Bank in Stockholm. What will he say that actually will matter at 10 35? We get the ECB Governing Council member is Pablo Hernandez to cause and close, not both. Also speaking a