Recession Fears | Bloomberg Surveillance 09/23/2022
Every central bank is competing with every other to bring inflation down quickly. There there's a lot of confusion. Investors are not sure how this is going to play out. We're finding real opportunities. There has been carnage in this market. It's all about the rate of change. And I think that's what really central banks would react to the governments really taking a gamble here.
The policies of these implementing are going to do something to boost growth. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz a messy end to a messy week. Welcome back. This is Bloomberg Surveillance on Bloomberg Television and Bloomberg Radio. My partners in crime Tom Keene and Jonathan Ferro are off watching reruns of Ted Lasso Together which is great for us because we have Kelly Lines and Damian Sasso are in the seat. It feels like something is breaking a sea change.
Kaley in markets I love the way our colleague Jon authors put it in his column in Bloomberg opinion this morning. This was a week that shook the world each and every day. Some kind of market fiasco seems to have happened in terms of pricing and assets in foreign exchange. In bonds of course we've seen intervention to stem the weakness in the Japanese yen. For the first time since 1998 we've seen the Fed saying we're going to go farther and stay higher for longer than the market previously anticipated and after a 50 basis point hike from the Beazley yesterday. This market now pricing in a 50 percent chance.
They go 100 next time around because of the fiscal policies we've had announced in the UK this morning. And Damien in your world your world is driving so much of this people looking for something to break particularly in the developing world as the dollar continues to strengthen. Are things starting to break. Well I mean if you're including Japan in my world which I don't believe you are well then yeah sure things are breaking. I mean look you know the money has to come from somewhere right. You don't see the Bank of Japan hitting the Fed swap lines.
Are they selling. Are they selling treasuries in order to fund their intervention policy. That remains to be seen. But if yesterday's price action is any indication. Yeah you know IBEX had some central banks out there selling treasuries to raise assets to protect the currencies. Lisa Abramowicz. When we talk about currencies in Kelly I know you've been on top of this.
We've been looking at what currency pairs are really breaking down. And today very much front center the pound. It's been breaking down for the past few weeks but now we're down to 111.
And this is just raising a lot of questions and comes as this administration of Liz Truss announces the biggest tax cuts going back to 1973. Does it feel controlled. I mean what are you hearing this morning. I don't think it feels particularly controlled because this is also a case of monetary and fiscal policy running against each other in some sense because she's talking about tax cuts at the same time that they are attempting to boost spending to stem the energy crisis. They say that's going to cost about 60 billion pounds. They have to issue debt to do that. So what you're seeing is huge moves in
gilts. We at one point on the day up 50 basis points on the day on the five year gilt yield in the pound as you allude to Lisa. We had a breach of 111 at one point the lows of the day 110 77. These are levels we haven't seen since nineteen eighty five. And it is a sense of there is not much
that policymakers can do to stem the losses in this currency unless you see something akin to the 80s in a plaza accord. So before we get to the price action Damian I know you've been in this market for decades and I'd love your perspective on what the analogy is what the conversations among the traders who speak to you are like what the level of concern of fear of a potential opportunity and excitement there is. Well I mean for me look I mean I've long been on the record here as saying I think interventions of bygone conclusion there will need to be intervention at some point whether it's unilateral or there's some sort of co-ordinated plaza type accord remains to be seen. I mean I think the only thing quite frankly holding back sort of a coordinated intervention so to speak is the fact that a stronger dollar is bad for China. And so you know the U.S. has no intention I think of you know
basically tweaking the weakening it intentionally because of that fact. And so look Europe and England and the rest are really going to have to deal with that in the current environment. Right now we're looking at losses pretty much across the board. And I want to get a sense and Kelly you know jump in here with what you're seeing. But what I'm seeing is an S&P that is down nearly at 12 percent actually going toward 13 percent so far. Right now you are seeing it continue the
losses ISE just on a week to hour of the past couple of weeks right now down eight tenths of a percent. And you can see the Nasdaq down 1 percent. It just has been this grind in particularly the big tech stocks some of the most High Flyers from earlier in the pandemic. It's valuation pressure in the face of higher rates and more importantly higher real yields.
That is the very reason why we had David Kostin over at Goldman Sachs saying hey I'm cutting my S&P 500. As of that valuation question and when you take a look at some of the yields you're just seeing yields stabilize here. But just after coming off such incredible highs you know I was just looking for example at two year yields and since mid August they have climbed about a percentage point four point one eight percent. You could see 10 year yields also
climbing. One full percentage point going back to mid August. Right now we're looking at three point seventy four percent. Kelly what are we looking at today. Well we're going to see whether or not we get any more substantial bond moves because we are going to get some economic data. It is not the most paid attention to but we will be getting the preliminary read for September. U.S. PMI ISE. What we're looking for is contraction
territory still when it comes to that services and composite metric services the expected rate. Forty five and a half. And remember 50 is what indicates expansion or contraction territory. The manufacturing still expected to be in expansion territory but a little bit lower at 51. So it really just speaks to the kind of softening we are seeing in certain areas of the economy as we are seeing policy tightening. And on the subject of policy tightening we will hear from the tighter himself Jerome Powell. He'll be speaking at 2:00 p.m. Eastern today at the Fed Listens event.
I wonder if his message is just going to be do you guys get me now. Are we all on the same page. Because I said in the Jackson Hole and I said it again on Wednesday. And finally it seems like the market is coming around to how aggressive the Fed is actually thinking at this point.
So it'll be interesting to see how much he just repeat some of the same language he has been using for some time now. And if he reiterates that line it will be enough. And finally looking ahead past this Friday into the weekend Sunday going to be critical for Italy as they head to the polls. The Italian election going to be closely watched not just in Italy but across Europe as it looks likely the frontrunner in this race is the right wing Jihye Lee a Georgia Maloney of course brothers of Italy party. She says she is going to be in keeping with Mario Draghi ISE policy on the fiscal front.
But given that she does have a history of being somewhat of a euro skeptic there is a lot of question as to what her actual policy will translate to if she does indeed win the election. And that is going to be something very closely watched by these markets. We'll have coverage of that of course here on Bloomberg Quicktake. Yeah regime change pretty much across
the board. Kelly thank you so much. Regime change leading many people to wonder are things starting to break. Steve Sosnik. Joining us now chief strategist at the Interactive Brokers. Are you starting to see things breaking. Good morning Lee said. I wouldn't say breaking.
My point was going to be exactly the one that Caylee just made which is people are coming around to realize that the Fed has stopped looking for the Fed to be your friend. Stop looking for Powell to say something conciliatory. He's not. And this is I think a big splash of cold water in the face of the market.
And you know we're back down sort of at the levels that were freaking people out in June. We've done a basically a full round trip over the past two Fed meetings up and down. And this was all because of the way market interpreted Fed's rhetoric. The big problem to me though is you know when you have market unable to price relatively safe assets like two year securities you know what's safer than two year treasuries in theory. But if you can't figure out a way to
price two year treasuries it makes it almost impossible to come up with a way to price other risk assets like stocks and things that are even riskier. Well Steve let's talk stocks. I mean I hate to talk seasonally but the world is cyclical and equities have historically performed rather well in the fourth quarter. I mean and week we're also going into a midterm year. Right. So they performed pretty well on the 12 months following a midterm.
I'm curious you know what are your thoughts on the impact of seasonal factors as we head into the fourth quarter for U.S. equities. Well you know what. My first my my first real job like basically came out of the Salomon Brothers trading class just in time for the 1987 market crash.
So I'm very much a you know a person who keeps seasonally in mind the seasonal that I'm keeping in mind unfortunately is the last time that the Fed raised rates and and had you know it's trying to shrink its balance sheet. I don't even know if they called it Kutty at the time. Acute Kutty at the time was fourth quarter 18. And that was a seasonal problem because
you know the markets sort of came to this nasty slamming of the brakes. I I don't want to go quite so far as to say we're going to see that again. But the you know the 15 or so percent decline since we've seen you know in the last few weeks has that smell to it. And so yeah you know the problem with seasonal are they work until they don't. But I do think there's a bit of psychology that goes on you know as people sort of realize oh it's the end of the year my my performance is good. My performance stinks. I've got to you know I want to lock in whatever it is.
And I think that that mentality tends to pervade now as well. Well aside from seasonal is in psychology if you look at actual fundamentals and the kind of multiple you can put on stocks Goldman Sachs their argument being basically it's about 15 is what's appropriate when you look at forward earnings forward multiple given the kind of rates pressure they expect to see where they expect the Fed to go on the price side on the earnings side. You also have the Fed trying to fight inflation demand possibly deteriorating in this economy that can hit corporates on the earnings side as well. What kind of valuation do you think we're going to end up with for the equity market as a whole.
Well that's you know we're we're very much in flux now. I do tend to think that the lower valuation when I saw the 15 comments I was not I was you know it's not really. That's basically the number I've been sort of putting in my head. We've got an interesting problem we may have. We don't know what earnings are going to
do yet. We have we're going to find out over the coming weeks. They have to be slowing. The dollar has to be a huge headwind for the big multinationals that make up the major indices. And also remember most of your money
that's made and lost in the stock market is through multiple expansion. And so that's really just you know that that's animal spirits to a certain extent if nothing else. And you know to get back to Lisa's original point the animal spirits feel crappy this morning and have a do Sosnik. The animal spirits feel crappy.
That's the technical analysis. Interactive brokers thank you so much for being with us. It's true Damien right now things feel kind of crappy and you see that just money going into cash. Yeah. No I mean the whole pyramid is collapsing now as they say. Not at all.
I mean look you know the whole thing for me is is the Fed put really dead. You know Lisa I I'm not convinced there. I think the Fed blinks at some point here when things get pretty painful. Really. Yeah I do. OK. So what does it mean to get pretty painful.
I mean this is what actually something that I think what we want to ask our experts Lisa. OK. OK. Painful means I imagine we're going to see it in the perils. First and foremost I've got to believe that's going to be the print that's going to move the needle. Well and I wonder Kelly how much this just has to do with how quickly unemployment rises which is a really uncomfortable thing not only heading into midterms but just in general. No one wants to see anyone lose their jobs. Right.
If that's what's going to cause the Fed to back away from the rate hiking it's uncomfortable. It is. We thought the politics of inflation were difficult. The politics of hurting the economy and the jobs market by fighting inflation are also incredibly challenging. And that is what we're facing going into the midterms. And what a fed that is becoming increasingly politicized is dealing with as they set policy.
Now it's a soggy morning ahead of the open about two hours and 15 minutes to go here actually three hours and 15 minutes. And looking right now the S&P down a tenth of a percent nine tenths of a percent. Call it euro 97 handoff versus the dollar. This is. Keeping you up to date with news from around the world with the first word.
I'm Lisa Mateo in the UK. Liz Truss's government has come out with the most radical set of tax cuts since 1988. Both workers and companies will see their taxes reduced.
Chancellor of the Exchequer quasi courting also ease the stamp duty on her home purchases. And that's likely to help home builders and 200000 buyers a year. And he lifted the cap on bankers bonuses in Ukraine. Voting starts today in four Russian occupied territories on whether to join Russia. Ukraine and its allies have blasted the vote says Shams. U.S. Secretary of State Anthony Blinken said
quote We will not allow President Putin to get away with it. Hong Kong is making its biggest move yet into the push to end its pandemic isolation. The city is scrapping hotel quarantine for inbound travelers starting next week.
In the three days after they get to Hong Kong travelers will face restrictions on their movements. Among them not going to bars and eating at restaurants. Meanwhile Singapore has overtaken Hong Kong to become Asia's top financial centre. That's according to the Global Financial Centers Index.
Hong Kong's Covid curbs have hurt. While Singapore has been attracting a number of high profile events York and London have the first two spots in the rankings followed by Singapore Hong Kong and San Francisco. And Boeing has agreed to pay two hundred million dollars to settle the S.E.C. investigation into a 737 max safety issues. Former CEO Dennis Muhlenberg will pay one million dollars as part of the agreement. Regulators say Boeing and Muhlenberg failed to disclose problems with the 737 max which was involved in two fatal crashes. Global news 24 hours a day on air and on
Bloomberg Quicktake powered by more than twenty seven hundred journalists and analysts. I'm Lisa Mateo. This is Bloomberg. Next year's planned increase in corporation tax will be the council tax rate rise to 25 percent. It will remain at 19 percent and we will have the lowest rates of corporation tax in the almost 19 billion pounds a year back into the economy. Some pretty shocking policy changes from quasi partying. UK Chancellor of the Exchequer as UK outlines how they're going to cut taxes the most going back to 1973.
Also deal with some of the banker bonuses by scrapping them and raising a lot of questions about how this is going to play in the markets. It is playing with the pound that is falling absolutely out of bed. No new post 1985 weakness as people take a look at the prospects of foreign investors financing this nation. It comes as there's just general
wholesale flood into the dollar. The euro also weaker versus the dollar. 97 68 to shocking at a time when some people are calling for it to go to 95 or even 90 depending on how bad the winter is. You're seeing the risk off Tom permeate through the end of the week. S&P down eight tenths of a percent 37 40 and the 10 year yield. I just can't get over this three point seven four percent right now.
It has risen from two and a half percent at the beginning of August and from one point six percent at the beginning of the year it has more than doubled. At a time when people are wondering what is going to stop it from going even further we have to talk about the United Kingdom. And Lizzie Borden has been covering all of this. She's at Abington Green for us here at Bloomberg. This is a package that is causing a complete reset in UK assets. It's also creating a reset in some of the social landscape of this nation.
Lizzie what sticks out to you in this vast plan that was put out there by Liz Truss's administration. Well you know what's the truth. A whole lot of our viewers in the UK just got a whole lot richer. You've got quasi quiet tanks scrapping the 45 percent top rate of income tax. He scrapped the caps on bankers bonuses. It's 45 billion pounds worth of tax cuts. If you earn more than a million pounds a year in the UK you get a fifty five thousand pound tax cut next year which is twice what a typical earner earns in a year.
That's according to the Resolution Foundation. And he's doing it while he's cutting benefits for people who aren't doing enough to find a job in the middle of a cost of living crisis. All in the name of growth which is a huge gamble.
As you say politically Liz Truss says she doesn't mind being unpopular but she's got to be popular by the electorate in 2024. And it's an economic gamble as well. You've talked about the tanking bonds tanking pound. We spoke to Martin Wheel the former Bank
of England policy maker yesterday. I have to say that he is one of the most known as one of the most levelheaded. Bank of England Monetary Policy Committee alumni. And he said it's all going to end in tears. Take a listen to what he said. We've had other previous experiences where no charges have gone for growth. The most famous examples were the dash for growth in the 1960s and then the barber boom in the 1970s. And they both ended in tears.
And I must say I expect the same sort of thing will happen with CAC policy that they'll probably be although I wouldn't like to say when they'll probably be a clear run on the pound. And then the Bank of England will be forced to put up interest rates to stabilize the exchange rate so much as we had in 1976. So you heard from Moss Wheel former Bank of England policy maker that expressing his concerns about what this is going to do in markets.
But we've just heard from quasi quoting he says that markets are going to do what they do. So he's going to crack on with the job regardless. It's amazing to me that he can just say yes it is what it is when you're seeing your currency drop to the weakest level since 1985. Lizzie and on this fiscal question it creates a huge issue for monetary policy makers. The Bank of England just takes 50 basis points yesterday.
The market is now pricing an 80 percent chance of them going 100 basis points double that in November. How do Andrew Bailey and CO respond to policy like this on the fiscal side. Well what we heard from the Monetary Policy Committee yesterday was that they were leaving the door open to future hikes. They said that they would assess the
impact of this mini vote in their November decision. Goldman had already said before this mini budget that they saw 75 basis points in November and December. I reckon you'll see a lot of economists changing their calls today. There was such a big vote split on the committee that it wouldn't have taken a lot of movement to get a bigger hike down the line. And crucially if you look at the guidance that came out alongside that decision they said that yes that puts prepared to respond forcefully if inflationary pressures persist.
They'd already said that. But now they're saying that they're looking out for inflationary pressures including from stronger demand. So a bit of a side eye at the Treasury anticipating the inflationary impacts of this mini budget. How are corporates and households really reacting to this. I mean are they are they a fan of Liz
Truss's plan. I mean do they believe that the BNP is going too far. I mean I'm just curious to hear your thoughts here. Well you could ask the same of the mini
budget and we're going to have to see. Trust is hope. Is that the energy bailouts for consumers and businesses are going to win the hearts of the voters on that side whilst also introducing all of these measures that will hopefully boost the City of London Post Brexit and mean that the bank has come flooding back. The Bank of England is going to have to deal with the blowback if this package overheats the economy. Lizzie Borden of Bloomberg thank you so much for this. You'll be joining us again later in the show.
I appreciate that. Damien to your point the social response really is fascinating. Torsten Bell who's the CEO over Resolution Foundation put out this tweet that he thought was fascinating. Any of you earn a million pounds you're getting a 55 pound fifty five thousand pound tax cut next year twice what a typical earner brings home a year. You know very well from your sector the social pressures that can rise in a circumstance like this. I mean how much are people looking at
the UK increasing like a like an emerging market currency when you take a look at the pound. I mean when it's exactly right. When I when I when I look at the U.K. now I'm thinking Chile. I'm thinking this social unrest we're seeing in other places on the planet. I mean maybe not to that extent but certainly you know the path is there. You know that populist pivot that we saw throughout Latin America that's still ongoing is really now reaching Europe shores and it's reaching the UK in my mind. Well how much pushback and Amy and we've been looking at a bunch of rate hikes from a lot of developing markets and particularly front loading ahead of the Fed.
How much pushback is there socially at this point to some of those moves. Well you know it's really quite interesting. And you're bringing up a great point. We saw a host of central banks move on
the heels of the Fed this just this week. But the one that really catches my eye was Brazil. Brazil was way ahead of the curve in terms of hiking rates ahead of the Fed. And look at the reaction. I mean I mean in terms of the Brazilian
real dollar cross rate it's really not gone anywhere. In fact the real is the best performing currency in the world this year. And Erica honestly this has been the issue which cleared up former vice chair of the Fed saying they are watching the rest of the world not the U.S. for something breaking. Coming up we'll talk about that with Derek Maas head of Research for the Americas and head of ethics strategy at HSBC Securities. As you take a look the S&P is deepening some of those losses ahead of the open. Dow now about one point one percent.
This Bloomberg. This is Bloomberg Surveillance Tom Keene Jonathan Ferro and Lisa Abramowicz. Today we have Kailey Leinz and Damien starts out with us on a soggy finish to a very difficult week a reset as we take a look at what's happening with the expectations for a Federal Reserve. What you're seeing in the markets is a pretty dire response. This week alone S&P futures are poised for a more than 4 percent loss. Just giving you some perspective the S&P is down more than 13 percent or will be so far since the middle of August.
Just based on some of the retracement the Nasdaq down poised for a four point three percent loss on the week. You could see Russell also following in with this. This all has to do with yields. We've been talking about that. Jon's been talking about how the poison is at the front end. Very much so.
But it's also generally about what's going on with yields broadly not just at the front end. You could see it's in the U.S. right. You are seeing intraday the yields continue to climb with a 30 year yield now three point six seven percent 10 year yields three point eight percent. But the real issue is the United Kingdom. We are looking at a British market that is falling out of bed on some of the biggest tax cuts being proposed going back to 1973 at a time of rapid inflation and a potential now increasingly priced into the market for a 100 basis point rate hike at the next meeting. This really highlights some of the pain. It does highlight the pain. And the question is if you have that
kind of fiscal policy what on earth can monetary policy makers do to stem the bleeding is even 100 basis point rate hike from the Bank of England. Enough to support the British pound. And that's the reason why you're seeing five year yields climb forty six basis points on the day to 4 percent and 10 year yields to three point seventy five percent twenty six basis points on the day. Which brings us to the currency and the pound has been just absolutely hammered. And we've been talking about this. And Damien you were saying it's trading like an emerging market currency.
Well here you go. This is the British pound going back to 1985. It climbed at one point up to almost 2 per the dollar. And now we're talking parody. We're talking 111. We're talking 1 12 but we're talking there isn't necessarily a sense of what's going to be happening. Damien. And that's I think what people are
really getting concerned about. Yeah well CAC has been a thorn in the side of all international creditors not just pound investors as well. So look I mean I think what's interesting yesterday is that moving gilts really blew out to the rest of the world. If you look at fixed income curves in the US and Europe abroad.
And so my question is really is there more to come. All right. Well Kelly maybe we can get some answers at that. Well we can at the very least try to you Damar head of Research America an epic strategy at HSBC Securities is joining us now. We have cable sub 111 110 79 right now on the pound versus the U.S. dollar. Is parity realistic. Yeah it's like who's going to rule out a
number when things are moving this quickly and how do you look at the fundamentals and you're describing them. Look what I think is interesting here is that the currency market at least for sterling has taken on if you like the structural view. The UK has external imbalance. The current account plus FDI is like 8 percent deficit of GDP. And now you've added on the fiscal deficit and concerns on that front and also captured in those gilt yields. And so you have you the twin deficit story that people always throw barbs at the US dollar wrong.
This is a UK story because if you a purely on a cyclical angle you'd be like hey this could be good for sterling. You know it's hawkish for rates it's bullish for growth. That's why starting. But clearly it's the structural parameters that are absolutely dominant at least in the UK market. So yeah who's going to rule out parity.
I mean our forecast is we get 2 1 2 8 and I'm and I guess then we'll have to reassess but. OK. The one thing I would caution on is there is a tendency when things move to get super excited and say this will go forever. And so now we need to be a little bit mindful of that. But for now sure the momentum is in that direction.
Well what's stopping it from going forever though. Because it doesn't seem like central bankers are going to be the ones to do that because we've seen the hikes not just from the VOA but really central banks across the board. And those hikes are not supportive of the currencies. It is just dollar strength.
Full stop. What stops that. Well I don't. I don't think it was a great deal in the way of dollar strength as you know we've been dollar bills for for a long time upwards of a year year and a half. One of the curiosities though I've noticed in this dollar bull rally is when I've gone to see clients are talked about it. The question I tend to get is is it. Have we reached a peak. And rather than can this go another 10 percent higher. It's kind of like that.
You know the road trip where you're only out of the garage and the kids already asking are we there yet. We've had this. Are we there yet. You know in this dollar rally not is a slight concern for a dollar bill like me is. Now we're getting the question. Do you think we'd go to parity on cable
or how low can we go on euro. No it's we're not getting that kind of reticence. And of course not can be a sign that things are getting a little exhausted. I still think we've got some ways to go. I'm dollar's strength because you got a hawkish Fed. You've got a global economic slowdown. You've got risk aversion debt train drivers to our dollar view. And until they change we won't change.
Darren you have a DOJ that's just not going to abandon its pledge to cap yields. I mean what should we make of dollar yen at 143 here. Well it's a Japan. Japan is a peculiar case isn't it. Ordinarily with with the risk aversion
we're seeing the yen historically is. OK. Was of course killed at this time around is not. Risk aversion has been accompanied by rising U.S. yields rather than declining U.S. yields. And as you point out the BMJ is sticking to its guns on its monetary easing for the next two to three years. They told us earlier this week. So that divergence is problems. So in terms of what we can expect for
dollar yen it might actually boil down to the ministry of Finance. How ambitious are they in cutting dollar yen. And also I think we reach a point where the market will look at the yen and say if we're in a global recession scenario now is mounting. The end is a pretty cheap safe haven at this point. And you know if you set aside monetary policy historically the yen has done pretty well and maybe we're exhausted on the dollar. Let's look for some other safe havens. But that doesn't feel particularly I
would say imminent. So I think the pressure will be for dollar yen higher with the M.O. after the China introduced two way traffic periodically darts. It's difficult to read too far into some of the price action. Yesterday I'm talking on the fixed income markets. But you know there are other countries like India and Chile that come to mind that have been intervening in their currency markets to defend. And so my question for you is you know
can we expect some sort of a coordinated effort here. Is there something like a 1985 plaza accord in our future. But feels a stretch because of course to keep the plastic cord was the US. We have the Fed is still battling inflation. You're coming up to midterm elections in the US. Is the Treasury going to get on board with something that potentially adds to US inflation issues by weakening the US dollar.
That seems improbable. I suspect the angle I would have thought for a yen intervention if you like. The contagion element is simply people in your industry. You're going to keep quizzing central bankers about currencies. Now you're going to know the guy is gonna get asked about the euro and everyone's going to get to ask Sterling.
It's a question of is this complicating your life in terms of trying to manage inflation and get inflation lower. And what can you do about it. Those kind of questions I think are going to be front and center. Don't only the US is going to be part of that narrative.
They don't want to be. But it does of course raise the specter of currency war which is now a new fashionable term once again. Of course there's a question of how to fight that war. Derek I mean we heard from Kelly mentioned earlier that there's now a 50 percent chance being priced into futures that the Bank of England raises by 100 basis points in November. If they do that if there is an outsized rate hike. What happens to the currency. Does the pound strengthen or does that we can even further because that just inflicts that much more pain on the economy.
I think the pound would soar for at least two minutes. So what if no one really saw it. Look we saw that we hadn't Swedish with Find earlier this week did it 100 basis points and then Stuckey went absolutely ballistic. And then 20 minutes later we'd reversed fully and it was weakening. And now you know dollar stock is just powering higher because at the end of the day these currencies are no longer trading on relative rates. Donnie Yen is the exception.
Most G10 currencies are trading on risk appetite. Most G10 currencies are trading on the domestic growth outlook. And so long as they both remain challenging then rate hikes aren't going to rescue the DLC helping the inflation fight from a currency perspective. You know we're seeing mismatches on euro dollar relative to two year swap differentials on cable by some distance. And I'm frankly across most of G10 now.
Dollar bears say well that's why the dollar is overvalued and it's going to retreat. My perspective is this just demonstrates that the relative rate story is not at the heart of effects anymore. It's about global growth. It's about fed hawkishness and it's
about risk appetite. OK. So how do you then fight or reverse currency war. You can't. Well you can fight it but you can't win
it. You know these are our global market forces. And you know I think you can argue. What can you do. Well you can try and moderate the
impact. And then that's what the IMF and Japan I guess that's their aspiration. That might be their measure of success is you know OK we can turn dollar yen around on a sustainable basis. We're fighting pretty profound fundamentals. But can we at least introduce to a traffic not allow this to become a self fulfilling spiral downwards for the yen. And I think that's maybe what other
currency or central banks I should say we've tried to do with the currencies. They've introduced verbal rhetoric. They'll talk about how the exchange rate is an important consideration when setting interest rates that say we're closely watching all of the older things you've heard from the from the MLS. We are likely to hear from the ECB and the Bank of England and others.
But at the end of the day it comes back to the dollar and it comes back as I keep saying to the to the Fed to global growth and to rust risk appetite until they change or at least stop moving in the direction they're moving currently. Then I think it's going to be hard to fight the dominant dollar. Derek Meyer of HSBC Securities thank you so much. You can't fight it on that Damien. Seems to be the tone out here which is
the reason why you're seeing increasing bearishness not necessarily in emerging markets but developed market currencies. Just anything other than the US. Yeah. Lisa I mean it's this pivot from the inflation story to the growth story. It's never been a smooth pivot. And this time is no different. I mean honestly this is hard to see Caylee how this transpires. And you asked the question earlier whereas the staffing point doesn't feel like there is one.
And certainly the moves are even picking out today in the U.K. market seem to indicate that's the case in the UK when we're looking at a 1 10 on the cable rate in China where we're looking at seven twelve on dollar you want. I mean I get the sense in currencies everywhere just a loss of control on the part of policymakers.
The PPACA keeps trying to set stronger reference rates. It's not doing anything. Japan tries to intervene. The yen is still weaker. Central banks in the west are hiking.
It is not doing anything to support the currencies. And I know I'm a control freak. But that loss of control makes you feel a little panicky. I think a lot of people are control freaks right now. How do you reverse a currency war.
How can you fight a reverse currency war. You can't. That to me might be one of the poets of the morning as we take a look at the markets that are in a world of pain. Coming up Terry Haynes founder of pension policy from New York.
This is Mark. Keeping you up to date with news from around the world with the first word. I'm Lisa Mateo. The last time the UK saw tax cuts like this it was 1988 and Margaret Thatcher was prime minister. Chancellor of the Exchequer quasi qua dang is cutting taxes on workers pay and corporations. The goal is to boost the long term potential of the economy.
Gauteng also cut the stamp tax on property purchases. And he's doing away with a cap on bankers bonuses. The special master in the Trump documents case has ordered the former president's lawyers to state in a court filing whether they believe the FBI is lying about the papers in effect. Judge Raymond Dearie is demanding that
Donald Trump's lawyers back up his claims that the FBI planted items during the search of his Florida home. Japan is moving to revive its tourist industry in the wake of the pandemic. Prime Minister Fumio Kishida says a slew of Covid border controls will be abolished next month. Individual visitors will be allowed to enter and Japan will reinstate visa waivers. The cap on daily arrivals will also be
ended. Some of Wall Street's biggest banks see oil rebounding in the fourth quarter. JP Morgan Chase is forecasting Brent crude at one hundred and one dollars a barrel. The final three months of the year. Goldman Sachs is targeting 125. Brent is trading around ninety dollars today. Analysts say low inventories and sustained demand will keep prices elevated despite concerns of a global slowdown.
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. I think we're now at a point where given these significant rises in interest rates and yields across the yield curve since the beginning of the year the equity market is now focused much less on inflation and yields than it is on earnings. Hateful comments from Abby Joseph Cohen professor at the Columbia Business School a longtime partner at Goldman Sachs talking about how the focus is shifting trying to look for some data in the underlying earnings that we're getting in for example FedEx.
Kelly yesterday it was really just sort of confirming some of the fears that people already had. Well of course we had already heard from them last week about the deteriorating macro macro economic picture hurting demand. So as a result what FedEx said yesterday is look we're going to try to cut costs to the tune of about two point seven billion dollars. What I thought was interesting though
Lisa is they also want to raise prices. They want to raise rates. How does that work in a demand destructive environment. Does that not just kind of have the opposite of the intended effect. How do you exercise that pricing power in an environment like this one.
And it's a really good point because there's a social aspect here too. And Terry Haynes has been tracking this which is we're dealing with site Flashman. We're dealing with this concern that a lot of companies are going to be dealing with margin pressures trying to pass it along at the same time that you have interest rates rising and a fiscal landscape that is fraught. Terry Hands founder of pension policy joining us right now. And Terry we're looking at that in the United Kingdom as a great example or perhaps a terrible example of what happens at least by the reflection of the currency market and the bond markets in the face of a fiscal policy trying to give more and focus on growth and a monetary policy going in the opposite direction.
Yeah I think that's right. The. Yeah. I've been writing about this for a while. You know the for the first time in a generation we've got a serious divergence between monetary policy and fiscal policy. And there I mean there are a lot of
reasons for that that are in the abstract good ones. The UK wants stimulate growth. The UK is very interested in making sure that its citizens don't freeze this winter. And let's remember that part of Chancellor Qua Chang's package that was first discussed is what was what was it. Energy price caps and the like to help
tide people over for this winter. But you know it's going to be very difficult. But whether you whether it's trust in the UK whether it's Biden in the United States whether it's the European Union the European Commission we have this problem across the board. And you know in the UK it's a bet that growth overcomes the risks and the problems. And and in the United States it's really
kind of the opposite. Making sure that what you have is you have particular policies that have there that that get filled up and have the ability to be properly funded. Whether it's reforming semiconductors or or pushing green policies. But yeah.
Yeah. But there's you know it's a whole new world for an awful lot of people that have worked around of the 70s and 80s that's for sure. If we could continue the conversation on the United States Terry obviously the Federal Reserve is hiking rates trying to fight inflation. At the same time you have policymakers in Washington like Elizabeth Warren saying I'm worried they're doing too much because they are going to raise the unemployment rate. They're going to hurt the American consumer.
How did the politics of inflation which have been difficult for the Democrats to this point match up against the politics of hurting the economy to fight inflation. Which one is worse politically as we get closer to the midterms. Well what you've got is a situation where where President Biden and the Democrats very much wanted the new Fed. Let's remember five out of these seven
governors had to wait for six months to be to be renominated reconfirmed. And you know that that tracked the time in which inflation really started to dig in and become entrenched. But you know it's it's it's it's bad timing for Democrats certainly. But Democrats really wanted a much more dovish fed. And what happened is I think that the
Fed was that the incoming Fed was very good at keeping its cards close to the vest. But once they got confirmed then they decided it was time to do their jobs that Congress gave them the first mandate here. And then the so-called dual mandate is is attacking inflation. And that's exactly what the Fed is
doing. Fiscal policymakers are now complaining in essence that they no longer have the free hand that they had before. And that's true enough. But it's going to require the fiscal policymakers to start thinking creatively and again for the first time in a generation and not simply continuing to throw money at things and call problem solved. Terry I know these are rough estimates heading into the November midterms but there's a 40 percent probability of an all Republican 40 percent probability of sort of a split and 20 percent that there is an all Democratic Congress. What's the best outcome for asset
prices. Damien to be to be perfectly clear those are the odds that those are my prognostications not yours. So if they're wrong then the blame is mine. The you know generally speaking what you're going to end up with is that you're going to end up with very little changing in Washington in a real sense of you know if it's 40 percent Republicans. Those are very tiny majorities and they run up against a Democratic president.
If there's a split Congress then you get very little done domestically. And even if there's a tiny Democratic Congress have you just seen all Democratic Congress as we've just seen over the last two years it's very difficult for those folks to to get to figure out between the progressive and the centrist Democratic coalitions exactly what their priorities aren't exactly what they're willing to do. So you know net net you know by experience has been that the sort of confused do nothing Congress is domestically generally or are not bad for us at the end. And and I should also mention that I think regardless of outcome unanimity on foreign policy whether it be Russia Ukraine or China or anything else continues as well. Terry hands of pension policy. Thank you so much. Damien the mood right now just to give you a snapshot from Twitter kielbasa over at Janney basically stuff's breaking more stuff breaking.
And Paul McNamara who I know you probably are familiar with emerging markets veteran over at GAM Limited. Put out this Jeff that I. Really quote on Arabic self-defined but he said mood everything is bleep. And also something is on fire. But that seems to be the mood that you
could see pretty steadily across Twitter. Yeah. Now for me it's going to be about the plumbing right as something breaking you know our markets clearing our credit markets clearing. I mean spreads haven't really gone yet
at least. We all know this. We've been talking about this awhile. I'm going to be hyper focused on spreads in the short end and both in ISE and high yield credit.
Yeah. And a lot of people are looking at that. Just to talk about things breaking and that's not where you're seeing things break. Kayleigh you're pointing out five year gilt yields and it looks as if they have risen almost half a percentage point in one day which looks like it may be the most going back to at least 1991.
If you just take a look at the pace of moves the pace of an exodus from the bond market the United Kingdom it's truly alarming. I mean I almost don't believe I'm looking at an intraday chart when I am looking at the moves we are seeing in the gilt market in the sovereign market. But to Damien's point on credit you really aren't seeing that blow out. You still have high yield spread sub 500 basis points.
We've heard from Bob Michael Barr J.P. Morgan for example saying realistically that should be something like 750. I'm wondering what all other asset classes seem to be getting in terms of messaging that hasn't shown up in credit yet. And if it's not showing up in credit is
there anything going on right now that is going to cause the Federal Reserve to blink. And this really goes to a point that Bank of America's Michael Hartnett put out overnight where he was talking about some of the recent flows in the great bond market the third great bond by a bear market talking about how there are some potential threats to liquidation events. But this quote stands out to me. True capitulation is when investors sell what they love and what they own. Right now you see the S&P futures are deepening. Some of those losses down nearly one point four percent. The euro continuing to trade at a ninety seven handle versus the dollar.
This is Bloomberg. Every central bank is competing with every other to bring inflation down quickly. There's a lot of confusion. Investors are not sure how this is going to play out.
We're finding real opportunities. There has been carnage in this market. It's all about the rate of change. I think that's what really central banks would react to the governments really taking a gamble here. The policies that it's implementing are going to do something to boost growth. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz. A deepening sense of doom. Welcome back. This is Bloomberg Surveillance I'm
Bloomberg Television and Bloomberg Radio. I hear that Tom Keene and Jonathan Ferro have stopped watching Ted Lasso and now John has convinced Tom to watch reruns of Spurs and said Justice Research. We are very lucky today. We have Kailey Leinz and Damien Sass our in the house on a day the market's very much front and focus Caylee. Things are deteriorating rapidly after already resetting through the week through the month. You call it deteriorating Lisa.
Some people might call it breaking. We are seeing a real breakdown specifically in the UK today with the cable rate now at a 1 10 10 handle after fiscal policy announcements from the government the new government in the UK and the five year gilt yield on the day is up forty seven basis points. These are just unbelievable market moves Lisa and is really everywhere you look so breaking. That's actually a really important word because so many people have come out Kailey Leinz said.
Until things break the Federal Reserve is not going to blink. They are not going to pause. They may not even slow. Does this count toward that breaking. I wonder if it matters what thing it is
that is breaking. If it's the labor market that looks like it's breaking which it does not look like yet even if we have seen some softening if it is the credit market which looks like it's breaking which to this point it doesn't really yet. It's a lot concentrated in foreign exchange and in the government bond markets. And I wonder if the Federal Reserve is looking at they're saying OK well this is kind of what we thought would happen when you understood how much we're really going to tighten. And Damien this goes to the point that
you were making. Credit is not breaking. You're not seeing credit spreads blow out. You still are seeing people say it's actually a great time to buy because you're getting yield. Why has credit been so resilient. Well that's a good question. I mean look the fact of the matter is
they're relatively illiquid when you look at it relative to ethics and treasuries. Right. So it doesn't take a whole hell of a lot to move the needle there. I imagine after some of the price action we've seen over the last few days you're going to start to see things slide. The question is how far do they slide. So this is a really important point Amy. And you're saying that perhaps just that things are not trading enough to really get a true sense that there isn't necessarily the forced sales that people have been able to avoid triggers. What will be the trigger if a bear market unlike anything we've seen in modern history isn't enough to do it. Well I mean look I I mean it's far be it
for me to judge but for me it's always going to be about the plumbing. You know I started my career in money markets at Goldman Sachs. You know I mean I'm talking tri party repo. I'm looking at you know specials versus GC spreads. I mean those are the kind of things that you have to look at for indicators of whether or not the plumbing is working properly.
Right now it seems to be. But you know again you know as you rightly point out I mean if we see for selling from fund from retail investors and institutions alike you know the credit markets could start to snap here. Right now what we're seeing is very much pain across the board particularly when it comes to United Kingdom market. Just taking a look at futures right now. They are down. They are continuing to decline
throughout the morning down one point four percent on the S&P. NASDAQ deteriorating even more one point five percent. But really what we're looking at is in the United Kingdom five year yields climbing by nearly 50 basis points but nearly half a percentage point up nearly four point to one forty four point one percent.
The pound absolutely hammered down 2 percent versus the dollar 1 10 handle. How much are we going to hear about parity at a time when people are looking at the biggest tax cuts in that nation going back to 1974 and crude off Caylee as we take a look down 3 percent taking a look. That's Brent to 87 73 as people look toward trading backdrop. People not spending as much growth slowing.
It's really bleak. It is a bleak week morning. I mean it's right. Everywhere you look into your point on parity on the cable rate what stops these moves in foreign exchange what can stop the strength of the U.S. dollar at least at this point. The answer seems to be nothing yet. Now as for what is ahead on the day today in terms of what we should be looking at events wise 945 a.m.
we aren't going to get a little bit of economic data here in the U.S. in the form of preliminary September PMI ISE. What we're likely going to see is contraction territory again on the services metric as well as the composite softening in the data we are seeing which of course is in part intended as we see the Federal Reserve tightening policy in terms of the Federal Reserve. We will be hearing from the man himself
Jerome Powell for the second time this week. He'll be speaking at 2:00 p.m. Eastern Time at the Fed's listen event. Is he just going to repeat himself like he repeated much of what he said in Jackson Hole at the press conference this week. His message is we are going to keep going we are going to fight inflation and ultimately it will be enough. Is he now happy that the market seems to
be more onboard with his and his team's messaging on that front. Then finally looking ahead through this weekend Sunday is a day to watch in Italy. With the election it is likely going to be George Maloney the far right candidate who ultimately wins that along with her far right coalition. She has said she is going to stick with
the fiscal policy of Mario Draghi but there remains some serious questions around what actually governance translation will look like in terms of how it compares to what she has been saying. Rhetoric rise. That is a lot of concern around the euro the eurozone. She is somewhat of a euro skeptic so definitely something that the markets are going to be watching in the days ahead. Louise Kelly thank you so much. It is a morning of fear. It is also a morning of revision.
And it has been a week of revision for Wall Street strategists across the board with Goldman Sachs slashing its here on target for the S&P 500 to thirty six hundred. It previously had been forty three hundred a pretty big revision. Julian manual equity derivatives and quantitative strategist at Evercore ISI has been out ahead of some of what we have been seeing. Julian. Have you reset some of your expectations based on the Fed meeting this week. Oh we we certainly have. Looking we're calling for earnings next year basically to be flat year on year with this year.
And frankly we were below consensus and continue to be below consensus for 2022 as well. And obviously we slashed our price target. And it's one of these years that now actually Wednesday has ushered in the emotional phase of this bear market which frankly every bear market does tend to have an emotional phase simply because when you look at what the Fed chair said and the projections. And importantly it's that unemployment number projected to be four point four percent next year where the rate of change there has never not been a recession following hard upon that kind of change.
And all of that has caused the emotion to come into the markets and subsequently of course these types of revisions. You know Julian I mean rising bond yields higher commodity prices these have been the two dominant factors that are impacting U.S. equity earnings. I'm wondering the piece of equity earning downward revisions are we comfortable with that.
I mean is it going to accelerate over the next few months. Well it's actually less about the pace than the band of uncertainty. So if you look at estimates for next year they range from 185 on the low end to 255 on the high end. That's absolutely unprecedented. And it speaks to the uncertainty in all asset markets. And again frankly when you think about it you see the screen you know everything is read today. And that tells you that uncertainty
really is approaching those critical levels. Well Julie and on the earnings side we have been having the conversation for some time now that there is inflationary pressure higher input costs. It's going to weigh on corporate margins.
They aren't going to be able to pass it on. And yet it's been actually OK to this point. Why would things change now as we're seeing some of those inflationary pressures winding down a bit. Why is it now ultimately that those margin pressures are really going to come through. Is it just an inability on the demand side to be passing those costs costs on to the customer. So Kelly if you think about this year it's been very unusual in that the sentiment data on the consumer side has been you know subdued you know worse than subdued the entire year because of the consumers sort of internalizing the idea of inflation.
But yet the spend has been you know really quite reasonable when you think about it. That in our view is about to change because frankly conditions are really warranting a little bit more of a button down type of attitude. And to that point that's where the attack on margins. The attack on you know volumes comes in. And again the risk in markets. But the story is that this is part of the Fed's calculus.
The question being though are we in the process of potentially breaking something. Well Julian to that point let's begin where we started let's say and where we started rather you said this marks the emotional phase of this b
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