What's Next for UK?| Bloomberg Surveillance 10/21/2022
We're probably going to see persistent inflation and that these yields are not overdone. The real worry is not only about this winter shortages, but also next winter shortages. We have an almost normal obsession with all things and inflation for the most part, what we're seeing is the consumers okay.
People continue to have a pretty high cash copper. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. Good morning, everyone Jonathan Ferro Lisa Abramowicz Tom Keene It's a Friday on radio, on television, we could see you today, a special surveillance. Maybe we'll do normal hours today now like we did yesterday. Thank you all for your comments and our
coverage of the resignation of the prime minister yesterday. Today. We don't care. Lisa, it's a bond market. Let's reset.
It is unreal. And they are connected. The bond vigilantes are tightening over. They are coming out in force. We thought that perhaps we'd seen peak hawkishness.
Perhaps we've seen peak yields. That was not the case. Yields around the world, whether the U.S. or Germany's surging to multi decade highs, at least according to what we're seeing in some places or a decade highs. And how much does this reset expectations and value? Let's reset with Garfield Reynolds of Bloomberg News. He goes back to nineteen eighty four and you've allowed on this list. It's not about the level of where yields
are in that. It's been the persistency of the lift, this distraction, that distraction, the midterms coming up, forget about it. The persistency of the yield lift is the story of this October. Well said. And what was I is the longest streak of consecutive weekly increases in yields, declines in price for the 10 year Treasury. How much does this reset the
understanding of where equity valuations are? We were talking about resilience in the face of earnings. How much does that change simply because the euro equation doesn't give them that freedom. And there's this talk of Powell and Volcker. We're going to have Steve Major with us with HSBC in the 8:00 hour that's must watch for must listen for global Wall Street. But Lisa, what's so important here is with the 10 year yield, 12 weeks higher yields back to 1984, that sorta edge of that historic Volcker moment of about 81, 82, and raises issues about whether Larry Summers, whether Bill Dudley, whether they were right, whether the yields can go that much higher than many people ever thought was possible because the markets haven't broken, because we have seen inflation continue to surprise the upside, because the global nature of a sell off has a well, Cincy, we haven't seen it in an entire generation. My level for the U.S.
House hunting this weekend, if you're done with your leaf peeping, you're going to go look at the house. So thanks. It's Mark Gurman seven point three. Two percent is my blink rate, 30 year mortgage. What level do you use? Less as your benchmark yield as we go into the week of the Mortgage Association? Right. Having that as well. I'm just looking actually to take a page
out of your book. Leaf peeping notwithstanding real yields to media are really spin all. You really sound at one point seventy six percent on the tenure year. This is adjusted for the market expectations for year inflation. How much are we looking at something that is unsustainable? I remember speaking with a couple of investors who thought that one and a half percent was the line in the sand. Well, we've blown through that and keep climbing.
What we're also doing, of course, and thank you to Anna Edwards on the green. I believe we're going to go there in this hour. This is the reality. There are selected group looking at a
selected airline which has a selected former prime minister on its supposedly landing at LHR right now. Now, I don't want to say that's happening, but that's the speculation I'm talking about. Boris Johnson. It's a. Exactly. So as prime minister is to think is is it a or I mean, that's OK. So we weren't planning is not on there towards getting those who don't know died in the early eighteen hundreds and was the second shortest serving prime minister.
Otherwise, this is really an anomaly. How much are we looking though at. I keep going back to this. Yes. This is UK specific. Yes. This is turmoil. You could say this is spurred in part by
Brexit, could say this is spurred by the energy crisis and also the inflationary environment. How much is this an example of what we can expect of the bond market taking control? Markets really in the driver's seat at a time when governments are not used to not having their backs. And you have, meanwhile, central banks that are not going to finance the deficits by simply buying all of the debt issued. This is a game changer. How much does this change the political environment globally? Let's do a data check, do a briefing, get to a true foreign exchange expert. I'm going to talk with. The collapse of sterling is down one big
figure, 111, 21, a one prince, a big deal, anything through 1 point 1 0 0 0 is a huge your dollar stronger d x Y back above 113 gets my view here in yen 151, I'm going to rounded up 151 is stunning. We'll talk about that in a moment. Futures a bit negative here. The VIX does nothing for the week thirty point one six. Read a twenty nine for whisper there. We had a 29 on the VIX in the yield as
we've been talking about. Pick your yield. I go with the 10 year yield, lease a four point to seven percent. All right. Well, today we're looking at the last
slew of Fed funds for a quiet period, the quiet period beginning God. Right. So we're going to get possibly Charlie Evans. We're not sure. At nine forty a.m., he's a Chicago Fed president, John Williams. York Fed president will be speaking at 9:00, 10:00 a.m. just we'll be speaking throughout the show, but just as a side note, I'm curious. We speak about all the Fed speak, Jim
Bullard kind of in it in a bit of hot water with question marks around this off the record event at Citigroup. And some people wondering, he's saying he's not going to be doing any more private events. Earnings continue today. American Express and Verizon Communications within the next 90 minutes or so. The earnings that we have gotten have been, I guess, some strong some week. And this really highlights the bifurcated nature of the physical goods market, as well as some of the services that continue like that airline, that flight flight perhaps carrying a far higher British share will do, you know, with all their troubles through the pandemic versus what we saw from United and American Airlines as well. Just one final note.
He's in Brussels. European leaders will be gathering to talk about the energy crisis. And we have seen energy prices soar over the last year. And significantly, what do they say about the United Kingdom? What do they say about where their hands are tied in terms of how much fiscal support they can provide, the prices come in and gas hysterics of a couple of weeks ago.
And I think it's worth studying over the weekend. I mean, everyone's week in reading is going to be incredibly richer, just starting with the politics of the United Kingdom. Again, I'm going to go back to folks today. Our real focus is going to be on Bonds. Steve Major, HSBC will join us in a minute. Futures negative 18.
Mark Chandler has written books on the astrology of foreign exchange, the Unit Dependencies Nation, the Nation. He is chief market strategist at Bannockburn. And we start strong when Mr. Chandler this morning. Mark, let me go to global Wall Street. What everybody wants to know, what is the comfortable time for Ministry of Finance in Japan to step in on 151 yen? Did they do it now? Do they do it in the quiet of their weekend or did they wait for the Asian? Monday morning are Sunday, 7:00 p.m.. It's a great question.
How time after they intervened at the end of last month. And I think they did three things that make the intervention less than successful. First, it was not a surprise. They continued to warn the market they were planning to intervene.
Secondly, they did it unilaterally. That is, there's very little support from you when it's Europe or the United States for the OJ intervention. And the third thing I think they did is they by intervening, they did not signal a change in policy. And so what we were telling our clients was that the only thing worse than intervention was failed intervention.
And I think that's what's happened. So I think to the Bank of Japan's in a tough position. And if they do intervene, it probably won't be as successful as a as a as a last bout. They spent 20 billion dollars practically to get maybe a week's night. A week, right. Night with a pleasant sleep.
Mark, the Chandler word for acceleration for a rapid advancement is convexity has cleared convexity in the unraveling of Japanese yen, Turkish lira and that. Do you anticipate a fourth quarter in 2023 of acceleration in these trends or can we find stability? I have to death a million dollar question and time, I I think that the dollar is close to a top, partly because I think that Fed policy as the markets got priced in their five percent, now that's a 75 basis point hike in early November and again in December and another rate hike early next year. I think that inflation is close to a peak. Even if the core rate is sticky, I think here's what I'm looking to get one. The annualized rate of CPI was over 10 percent in Q2. The annualized rate of U.S. CPI headline was still above 10 percent. Q3 failed to tell you about 2 percent.
So I'm looking at inflation to be coming off. I know that it's very controversial right now. I know many people get burned calling for this before. But I think that where we're coming to the tail end of this historic dollar move and I think the Bank of Japan and the see the central bank of China are basically playing for time. It fed policy weeks until the market
brings the dollar back off of these historic levels. Does this mean simply that it doesn't matter what happens in Europe, that this is entirely a Fed story from your vantage point and peak inflation in the US and that it's not necessary to see a material turning around in a European region that seems like it's heading into a really difficult moment. Yes, I agree with that, at least I think that for me, there's two big drivers here. One, of course, Fed policy. Everybody everybody knows about that. I think it was less appreciated is that
there's been a serious deterioration of Europe's trade balance as well as your pants. So the deterioration of the external accounts, as economist would call it, I think is another factor weighing on the currencies. But I think the most immediate sense it wants, if the Fed would announce today, maybe a Fed speech says that we're done.
I think you're right. The dollar's off very sharply. Mark, you've just driven the 10 year real yield ever higher rounded up. We're up at one point seventy eight percent.
We've moved mightily like 88 percent to my study of two point zero. Five percent is somewhat of a normal 10 year real yield. Where's your number on that? What is a normal 10 year real yield? Yeah. The truth? I don't have a clue. And I think that I say part of because know these things like a real yield are star. You can't touch down short of the abstractions in statistical abstractions. And I think that when you look at Fed
funds rate, which is really what I focus on, the real rate, I think we're still looking at a negative real rate on Fed funds and typically looking for 0 4 down to the 2 year. You get a positive two year yield, real yield. And we don't have that yet. But I think this is a different cycle. And I'm and I think that because it's an unusual cycle, it's all these shocks with it's Covid, whether it is a supply shock, whether it is Russia's invasion. I'm just not sure that these benchmarks
are very useful right now. This is a really, really important focus. This is why we have chatter leading off today, because, A, he does not have a clue. No question about that. And also, he moves away from the usual statistics and looks at a benchmark for Chandler and Bannockburn of 2 percent.
That was brilliant. That should be our mantra. To tell you the truth, I don't have a clue. If anyone tells me that are coming back, you know, he's not coming back because you said he's playing footsie with the Dow and he said, you know, a zero. He quoted from his paper last night, I thought it was pretty good. Appendix six, a negative 21. Yes. We all speak of London. We are going to go to parliament. Here is the quick battle heats up for a
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I think Chancellor Jeremy Hunt was getting on top of that, putting together a package that would have been reassuring to the markets on the study first of October. Clearly, what we mustn't do now is anything which signals to the markets more chaos, instability and uncertainty from the time of Theresa May laud him. And he's the former chancellor of the exchequer for the United Kingdom with a view on his party. There are many views this morning, to say the least. It is a moveable feast. And again, we say thank you to our team and particularly to John Micklethwait, our editor in chief for wisdom yesterday. In the chaos, I believe it is less
chaotic. Yesterday, Tom Mackenzie is at Westminster and picks up the pieces for us this morning. Tom, I wanted to civics one out, one which I believe is in the United Kingdom. When you want, you can change the rules. We are going from a count of 20 employees to get to five or six candidates, whatever, to a hundred employees to get to two or three candidates who decided that the Conservative Party could change the rules. So that was the back bench. Well, that was the 1922 committee, Mr. Brady, who chairs that committee. You're absolutely right within this system.
They do have the power. He does not have the power with that committee to change the rules in terms of how they select the leader of the Conservative Party. They've done that, of course, on a shortened, radically shortened timeframe, as you say. We could have a prime minister, a new prime minister in place by the end of play. Monday, the deadline is for the 28. So Friday, of course, in terms of when they get that new leader.
The jostling, of course, and the horsetrading continues in the houses of parliament. Behind me, the last count was according to the BBC. That really soon CAC is currently leading with 44 employees who have come out to support him.
But Boris Johnson as well. A lot of reporting these cut short a holiday and he's coming back as well to throw his hat in the ring. That is not confirmed. There's not official really soon, Jack Penny Mordaunt and Boris Johnson, none of them have officially thrown their hats in the ring yet, but they are the three leading contenders. The key question is for the markets. What happens to October the thirty first when the new chancellor, Jeremy Hunt, had said he wants to pronounce and come out with his fiscal plans, which will be checked by the Office of Budget Responsibility that is crucial for these markets.
Now, that date is very much in question on how much is it really important for a lot of the members of parliament that they get a candidate who's going to keep Jeremy Hunt, who's going to keep the status quo, who is not going to pressure the Bank of England to be less aggressive? Well, Jeremy Hunt has unarguably done something of a decent job in terms of getting the premium on UK assets down off of that many budget yields that come off the pounds strengthen, not in today's market action. There is that volatility back again. Of course, we're seeing yields up in the band on the pressure, but on the back of his ability to unpick that trust nomics plan and to, of course, gutted most of it, 90 percent of it. He did restore something of some stability across these markets. And most of the guest that would be speaking to say they would like to see the chancellor remain in place important for investors.
Here's the question, though. When Boris Johnson, if he does confirm he's running. We know there is animosity, deep animosity between the current Chancellor Hunt and Boris Johnson.
Boris Johnson takes the number one spot on Monday. Then there is a key clear question as to the longevity of the chancellor, who has done some work to restore at least partly the stability across UK assets. And, of course, that that sense of credibility in the markets. Tom, how vulnerable is the Tory party right now? How much is Labour making some inroads at a time of incredible deterioration in popularity? You know, we spoke to a former strategist with Boris Johnson, worked with him on that successful 20 19 campaign very closely, is no need for 12 years. And he says it is not hyperbole to talk about the future of this Conservative Party, given just how deep and how entrenched these divisions are.
And actually really soon I can, Boris Johnson are really symbolic of that deep entrenched division really soon. Of course, on one side, the more modest, the more moderate parts of the party. Boris Johnson, of course, who led the Brexit campaign. So you have the right wing parts of the party, but also at the grass roots are very much in line with Boris Johnson really soon, though, supported by the moderates, but not so much amongst grassroot member of the party. So a split in the Conservative Party is not out of the question longer term time.
You know, DeBar from the Beatles here from a few years ago, and I guess it's happening right now, according to his father, flew in from NASA, BBC. So maybe it is Boris Johnson to the rescue. How does he treat now after the scandals with the Labour voters who chose to vote for Prime Minister Johnson? A number of years ago? Has he lost them forever? That is that is a key question is worth reminding viewers, as you've just done, that he did come through with this thumping majority in the election that won over these former Labor seats. But he has also faced all of these scandals within the party. 148 members of his own party voted against him in a confidence vote outside of parliament. The popularity of Johnson.
Boris Johnson has declined on the back of all of these scandals. It's also worth noting that he faces a parliamentary investigation as well. That would haunt him if he does indeed throw his hat in the ring. And if he does end up being the leader once again at this Conservative Party on this country, Tom Mackenzie with our British team here on Bloomberg DAX UK outside of parliament this morning. Lisa, what we do as you look at the litmus paper and it's not good this morning, Sterling weakens. And this to me is really telling, given the lack of certainty with the path forward as well as what it will take. And this goes to a John Micklethwait was
saying yesterday what it will take to restore credibility to a nation that has seen a pretty significant blow. It just put this in a perspective. Whoever comes in next will be the third prime minister of the United Kingdom for this year. It comes at a time when you've seen bond yields surged to the highest levels in more than a decade.
And it comes as the Bank of England is tasked with tightening policy at a rate that many people are uncomfortable with, including some of the candidates that have been named to possibly head less trust. And just to pause here, Chris Hayes at MSNBC had a tweet yesterday which was very quietly Prime Minister Truss shaking the hand of Queen Elizabeth. The second and all Chris said was this was seven weeks ago. Well, that's how fast things have moved. And that's why it was sort of poetic that she handed in her resignation after 44 days as prime minister to the king after accepting the prime ministership from the queen. This sort of upheaval in a nation facing a difficult winter cannot be overstated.
The difficult winter is seen on bond market and in foreign exchange as well. We continue to follow this story in the United Kingdom, politics of it. But, of course, the ramifications back to the city and global Wall Street. And I want to go again so I can report this morning, folks, Sterling is broken down. We're back to one eleven, fourteen, nowhere near one or seven. But any migration of that under a 110 would be shocking and would change his political race.
To be very fair, though, this is a global story and it comes with dollar strength. All we see is this wields higher, dramatically higher in the cases of some denominations in the United States. And to me, that is one of the biggest stories, if not the biggest story of this year. How long it takes to have a cup of tea saying it's really simple. The real 10 year yield printing a legit
one point seventy percent. Claudius some soon. This is Bloomberg. Bloomberg Surveillance, welcome, all of you, on a Friday, a staggering into the weekend and you need reading, here's my first read of the weekend. John Byrne Murdoch or do you have tea with an absolutely brilliant piece on what he calls the opacity of Chinese data? He's being polite. He's got a couple of charts that just are jaw dropping about how the economic data structure of China is radically different than what it was five or six years ago.
We await GDP sometime before Christmas, I think is what we're looking at. The data equity's weaker futures negative 21 VIX does nothing, thirty point one, a yield yield yield is a story. Abramowitz is all fired up four point to eight percent 10 year yield real yield. A stunning one point seven. Eight percent is not one point six. One percent dollar demonstrably stronger today in sterling with the headlines, I'm going to get a one 10 handle on Sterling here in a bit. 1 11 0 6. That is a much weaker sterling.
151 is in its right in on story in the Sunday morning as well. Is it always good to have somebody come into the studio who has a relationship, a ratio, an economic belief that's picked up by Fred? This is very when you when you have your name in the database of Fred, you're on the edge of rock stardom. Well, let's bring in the rock star, Tom. Let's do it. Claudia Sam with this one. You go to Lisa because I know you're off shoots up her out of Michigan with all sorts of discussion and analytics on when a recession is a recession. Yeah. And what comes is she's been in the Fed. She's worked on the inner workings of this body that has been at the forefront of global economics and markets where we are right now with respect to Fed speak.
Do you think that it is accurate pricing to look at a 5 percent Fed funds rate for the first half of next year and think that that will be what it takes and that this is going to not torpedo the economy as much as perhaps people are pricing it? I think at this point, anyone is talking about the first half of next year. There's a lot of false confidence. I would not be surprised how fragile financial markets are that the Fed has to pause to get them back under control. But I mean, the U.S. financial markets are in a good place right now.
But if nothing else, the UK has shown us how fragile to an event, to a bad policy decision. So I I I don't feel comfort about what they're going to do in December, let alone where we're going to be by June of next year. I know Tom thinks of the parlor game of Fed speak and what they're going to do or what aren't they going to do? It's not very instructive. There is a question about the
consistency of the Federal Reserve from a personal level. And we talk all the time about Fed speak and how much of it there is the latest. Jim Bullard, the St. Louis Fed president, has been reported to have given a private off the record event at Citigroup to hedge funds and bankers. Reporters were not invited.
This is causing a firestorm. Even former Fed officials are coming out and saying this does not look good. What's your reaction to this at a time when people are looking to the Fed for leadership? It's inexcusable. And to me, it's not an optics problem. It's an ethics problem. Jim Bullard is one of the Fed officials that is making decisions about rate hikes that have effects in the United States will have effects for U.S. workers, and they are having effects
around the globe. The idea that he gave any kind of private remarks to investors is outrageous and he should go and reserves. Pritchard did a tour de force in the Telegraph on modern theory and its lack thereof. He tore apart the Phillips curve in the belief that it right now from the early 50s, Eddie Phillips at London School of Economics, he tore apart the Beveridge curve, which Krugman believes in this out of beverage of Middle Century London School of Economics. Is there a theory right now or are we making it up as we go there following a theory that is so outdated? What is the theory there? Phone. The Phillips curve. So there's a tradeoff between
unemployment and inflation is at the core. You observe that right now. I can see that in their logic. This is why they're waging a war on workers, trying to get the labor market to, quote unquote, soften. They think that's what it takes to get inflation. This is your way.
I interrupt. This is Claudia Sam's wheelhouse, folks. I'm going to make this as clear as I can. If the Phillips curve doesn't work, what is the relationship of monetary theory to our labor, our complex labor dynamics so we can use the tools like the Phillips curve. But there is so much supply driven inflation. They the speed at which they are going. The speed at which they need to think. They think they need rates by the next half of the year. That's it.
You can't use that tool for that. And there's a lot of research, it turns out. We've done research since 1958 and they're not using it. They're trying to excuse away.
It's all demand driven. And if it is, the Fed does that. And the Fed is being. Very impatient. And it is hard to watch if we are ex post, if we are after the fact. What is the data we should look at? If we are ex post claims isn't getting it done, isn't it? Because jobless claims look extraordinary right now. They look fully employed, frankly, in a
very unusual way. The Fed has painted themselves in a corner and it is all CPI. The Consumer Price Index is the last place that these the lower producer prices, lower import prices, any kind of weakening which we're already seeing. That's the last place that shows up.
And they've told us they will not stop until it shows up there. But earlier this year, you were talking about how we could see even disinflation, right. That we could see inflation rollover pretty dramatically heading into year end.
We haven't. And services inflation has really been a big driver. It's not just rents. It's much broader. We just get the results from airlines. They're doing great, even though their tickets are incredibly expensive. So what have you gotten wrong with respect to the pace of the deceleration in inflation? What I've gotten wrong is to look at the macro data. And in talking to businesses now, I
mean, they have excess inventories. They like why aren't you putting price? I mean, inflation is a business decision. They're the ones that write the price out. And what they see is the consumers are here.
Why would we cut back? And so I think the process of some of the supply disruptions, whether it's people coming back to work, whether it's like getting the goods here faster or the strong dollar feeding through, it's taking a lot longer than I would have expected when I talked to business owners. I mean, that makes sense. Well, but this is the concern for the Federal Reserve and possibly the reason why they are being as aggressive as they are because they had waited too long in the past. And that arguably is the reason why inflation accelerated to the pace that it did. If there is this uncertainty about why it's not coming down more, there is a big risk to it not raising rates substantially. Isn't that right? We're not in the 1970s. There was a decade of high inflation where the Federal Reserve was asleep at the wheel. We had like less than two years of high
inflation and the Federal Reserve has gone in big this year. Mortgage markets are showing us, wow, like these are big increases and they're really fast. And we know long and variable lags like it takes time. And we also know that the rental market, what's happening right now, those prices are coming down. The Fed knows this and they're they're growing fast and hard full of the international events. I was thunderstruck at the IMF meetings
how the adults down there have a much longer time frame back 40 or 50 years. And they're much more looking at international dislocations than the parlor game of inflation rate dynamics. What level is Jerome Paul, central banker to the world, driving the policy of all these different nations? The Fed is absolutely in the driver's seat. I mean, the dollar has strengthened so much. He is pushing the ECB to raise rates that the Bank of England to raise rates. They have absolutely supply driven inflation.
And frankly, they're going to make a bad situation worse. Europe is headed towards a severe recession and the Fed is they are contributing. So what did they do? I mean, we've got a Fed meeting on November 2nd. And after that, let's have Claudio, some market expert come in here and give us to take it or we way overdoing the parlor game out. Fed meeting 2, Fed meeting 3. They need to slow down.
They're not going to I mean, 75 is absolutely happening. 75, 50, 25 would be great. But I don't know. I wouldn't be surprised at all for a seventy five. Seventy five is currency of value to you here. I mean it's two studies, strong dollar and all the different dynamics of pairs.
So what a strong dollar does is it means it's cheaper for us to import goods and we like a lot of cheap goods from abroad. And right at this point we are doing beggar thy neighbor. We are bringing in with the strong dollar. We are importing disinflation and we are exporting inflation. And that's good, right? ISE.
Yay, America. But that's not it's if we push the global economy into a severe recession, we're not going to withstand. You come out of the Michigan combine, which is massive inflation analysis, all the different professors and the wonderful Lincoln and all the rest of it, which matters to you now, a services pullback or a goods pullback to disinflation or even outright goods deflation.
Which of those two is more important? Well, broadly, we we say that the best cure for high inflation is high inflation rate, that consumers need to get price sensitive, they need to pull back. And we're seeing that there has been slowing in the growth of consumer spending. We have rotation away from goods and back to services. It's going to be.
Disruptive, every real disruption we see is disruptive. We need to get back to something that is a semblance of norm. Lisa e-mails and she says, would you ask Claudia's here about what the inflation worriers are getting wrong? I mean, the inflation e is used to be Chuck closeted Philadelphia. And now the inflation these days are Larry and Dudley line them up like ducks. What do they get wrong right now? Well, Larry in Dudley's were right for the wrong reason this year.
Last year, when they retire, it was all about the rescue plan. The rescue plan. Well, Covid, Delta and Omicron and all the variance. And then Putin showed up.
Right. So if you don't get the story right for the right reason, you will make very bad forecasts. So their forecasts right now are just, you know, set them to the side.
The thing the Federal Reserve is doing is they are so afraid of these inflation expectations taking hold. Those expectations look. So people believe the Fed is into fighting inflation. Right. But they're now worried about, well,
they're stable, but they could come on anchored and rise. And it's like you really are going to tank the global economy over something we have no signs of. And when they move, they move slowly. Right. So it's just that's that is their big fear right now. Right.
Embedded inflation expectations. You have cats at home, your new cat. Did you really name it pivot? No. She's a huffy, puffy bodies. Thank you so much for some consulting and certainly one of our great experts in this nation of the measurement of a path to recession. We're going to continue sterling weakens. That is front and center futures
negative 20. This is Bloomberg. Stay with us. Keeping you up to date with news from around the world with the first word. I'm Katie Lines. President Biden has started aggressively promoting his student debt relief plan. The government has been working out the kinks in the program.
And a White House event Monday is set to officially launch an application Web site. But multiple legal challenges, including a lawsuit from Republican led states, are moving through courts, threatening to halt the effort. Italy's Giorgio Maloney has clinched a mandate from the coalition on the path to becoming Italy's first female premier. The coalition, which includes her brothers of Italy party, former premier Silvio Berlusconi's party, and Matteo Sweeney's leader, told President Sergio Mozzarella that she is their candidate. Mozzarella is expected to formally ask her out as early as Friday to form a government. China has locked down parts of a central city, confining some of its 13 million people to their homes for at least a week. Other major hubs are rolling out virus
restrictions as well, reflecting the country's commitment to its Covid zero policy. Residents in high risk areas are required to stay at home until no new infections are reported for seven days, and then they get moved to medium risk. Hong Kong officials have cancelled a screening of a Batman film one year after passage of a law that less than banned movies on national security grounds.
It was the showing of the 2008 movie The Dark Knight set for next week at an outdoor venue. I noticed that the decision was, quote, based on direction from the Hong Kong Government Office for Film, Newspaper and article administration 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 Kailey Leinz. This is Bloomberg. I think inflation has reached the top. I think it is starting to come down. I think it may come down more slowly than people are hoping because of the stickiness in the shelter cost and the stickiness in the labor markets. But as I said, I think the Fed has had a positive impact.
One of my favorite people, Jonathan Gray of Blackstone Group. If you were young and you make a lot of money, what do you do with it? And this guy, more than anyone I know, on the island of Manhattan and the five boroughs, his pony, the money to charity. No one like Jonathan Ferro. Great to hear from him.
Sonali Basak, you're over what blacks was doing brilliantly in reverse, at least. Let's just take a moment here on that. This is a sensitive issue where in the modern age, fancy people with fancy money are cornering the real estate market in America. And that's part of the. The Blackstone questioning, if you will. Well, and this has been a story for a number of years.
Will they continue to be buyers as mortgage rates go up and prices come down? And also, how much are they going to raise rates at a time? Raise rents? Yeah, raise rents at a time when there is this increase. And yet there is popular antipathy toward this vicious negative 23. We're watching yields, Lisa, stunned by a one point seventy eight percent real yield. And that folds into all of our
investment calculations on a Friday. We're seeing a macro move. Let's be very clear. That day has a nice phrase of the day. Joel Weber. This is macro. Macro move. Yes, higher dollar, stronger disrupting a lot of different trades. You're seeing that with the euro weakening. But again, this is a dollar story.
Ninety seven. Thirty seven year old dollar cross. You could see this in the 10 year yield breaching the highest levels we've seen going back to 2007. What does this do to reset valuations, to reset understandings and how much further this has to go? Sebastian Gilley, senior macro strategist at Nordic Asset Management, joining us on a macro move. Sebastian, how durable do you see the moves of today seeing new highs and yields, seeing new highs, the dollar versus certain asset classes, seeing the yen on the brink of unraveling? The interesting question is, in essence, can we predict how high the Fed has had to go? Well, one thing we don't understand, the inflation dynamics very well. Over time, people have become more details, supply, demand, side looking rents, looking at the different subcomponents, announcing the different stratification within the consumers are rich consumers. They don't care their middle income consumers some other way to care. They're very leverage and they're the
ones who are poor. Obviously, you can't sell so much a target. Others have to may seek you're left with inventory of prices, which they've overpriced. And margins are very, very, very high profit margins. And so we have this big demand which is coming in with supply, which is an issue and eventually slows down led by the poor. But the middle income and the rich are still doing very well.
And the message hasn't completely gone through that leverage is getting very expensive, that your real estate market is probably over the expensive. And so there's not yet the moment of doubt within U.S. consumer where everything adjusts. And on the corporate side, also, some of the corporates remain in in a delusion. They think everything is actually doing well for CEO. Confidence indeed has fallen a lot, but
it's probably led by the people who sell low profit marching type of products, the likes of Apple a little bit worried they might fire a thousand people, not very much more. And so we haven't seen that big adjustment both on the House side and the corporate side. When it happens, it happens brutally. Well, that's the issue. We don't know when it when it's going to happen.
We don't know how much if at exactly asked to tighten. It's probably already over tightening, but it has no choice. How close are we, Sebastian, to something breaking in markets before they reach that point? And if you look at equities broadly outside of the United States, they're actually quite cheap, so you have to make a cause in asset allocation. You can see in the next three to six months or they say three to five months is actually going to become very interesting for equity investors from the U.S. side. Some big.
NASDAQ and the lights still remain very expensive. There's still this belief in America being a great a great economy, well managed economy, and just a great place to invest. And it's not only for Americans, but pretty much everyone else right around the world. It's part of the reason where the dollar is so strong. Sebastian, you wrote a brilliant essay
of optimism on the United Kingdom. You said the compare and contrast with Italy is wrong, wrong, wrong. Explain to us your optimism is the United Kingdom extracts itself from political crisis. And so one of the reasons you can get political instability is because you pander to simply one group within that population and not the entire population. Then UK has a long history of basically being well governed and we've seen significant accidents recently.
But in general, they just know how to do the right thing, both from the Labour side and from the conservative side, not always immediately, but eventually. And so there's a sense that there's a social contract in the United Kingdom. As you can see it also all around Europe, not everywhere around Europe and also to some extent in the United States, and means that people believe that the Bank of England will eventually do that. The necessary the government eventually does it.
And Mrs. Trust actually resigned. Nobody pressured her as under significant pressure, but she did it by herself. So she consider, okay, this is not good for our country. I will step aside. It doesn't happen. Right, countries?
I got a data through to Monday. Am I going to go long? Sterling here. Sebastian, help me. Are you what you want to do and effects in general? Preferably is avoided. Its long experience as a currency strategist. What you do want is a stable on a low dollar position, but it's becoming increasingly dangerous.
Also, on a day side and dog vs. emerging market, we're seeing the renminbi weaken consistently on the back of a one must be recession in China. And so it's quite it's a difficult and unfortunately complex environment, the long time. So probably still has some legs, but it's becoming very dangerous. Sebastian, thank you so much. Sure. Every Friday, Bruce Sebastian, goalie, always better on Friday when the NDA asset management is.
Well, you know, Lisa, I use this word too much, but the swirl that we've been through not only this week, but the months or maybe it's eight weeks, I lose track here in this forever long 2000, 22. I look at the screen and all I can hang on is the inflation adjusted yield. That's what every guest is focused on. And to be very clear, because people
will say real yields are still very negative. They're not actually positive. If you look at where you worry where inflation is now, this is for what people are gaming out in markets for inflation over the next 10 years. So that means that people think that the Federal Reserve is going to raise rates by the most above where that inflation rate is expected to be over the next 10 years going back to 2009. How much, though, does this talk about what we've been discussing for a long time? People keep getting it wrong with inflation and we don't understand why the lack of certainty around what the main drivers are in the stickiness of this.
I mean, Philadelphia, Fred, President Patrick CARNEY said this. He said that the Fed's anti inflation policies are, quote, frankly, disappointing. And he talked about how he expects the yields to be fed funds rates to be well over 4 percent by year end. This is the base case. Yeah. To me, it's not the level of what the yield is doing. It's going to be the length of that in the major message I have out of IMF meetings. And all that's going on right now is
transitory is just gone. There's no other way to put it. And we're getting comfortable with yields from 30 and 40 and 50 years ago, which leads me to my great theme, I think for next year, which is the great zombie roll up. What do you do? What do you do in tech if you're a non profitable company? How do you drive that forward? You're seeing it certainly in the share prices that you see SNAP. I mean, like higher value added to what they do. Yeah, exactly. It's all because of you top mosquito only you would endorse that.
All of these companies that you're seeing that really blew up during the pandemic and expanded have been deflating bubbles over the past couple of months and just continue to be so. 113 VIX. Why the yen? A one fifty one point three four is newsmakers through your weekend on the Asian Sunday morning. Stay with us. This is Bloomberg. We're probably going to see persistent inflation and that these yields are not overdone. The real worry is not only about this
winter shortages, but also next winter shortages. We have an almost normal obsession with all things and inflation for the most part. What we're seeing is that consumers okay. People continue to have a pretty high
cash copper. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. Good morning, everyone. Jonathan Ferro.
Lisa Abramowicz. Tom Keene. On a Friday on radio. On television and what you need to know where we're going to go to Tom Mackenzie hit parliament on the derby in the United Kingdom. It is an odd Friday in the United Kingdom after the history that we saw yesterday.
We are going to try to steer through the next two hours. Steve Major to join us for the HSBC year on yields Lisa. It has been secondary this week. It deserves, as you say, to be the macro
story. The 10 year real yield can't get out of its way, one point seventy eight percent. Bond markets are taking charge in a global economy and the global political regime that could arguably say given what happened in the UK.
How much does this really tie the hands of fiscal policymakers that have gotten used to it? Central bankers that will buy their bonds and bond markets that will give them cheap financing at a time where yields are surging to the highest levels in wealth and surging is the right word. I mean, as we go into the jobs report is we go into November 2nd and a Fed meeting. The answer is there is a dynamic year into that meeting. We didn't see two, three weeks ago. And part of this is driven by that tension that we were passing out a cloudy SRM. This idea of the Fed is moving further than people had imagined they ever would or could simply because we have been surprised again and again. The inflationary and possibly how
durable it is and how strong it is. And it's not just the U.S., it's Canada. It's United Kingdom is the European region. You know, I look here at the Bloomberg index and this is the blend, folks, that you see on the Bloomberg Total Return Index.
There's like eight or nine, 10 of them, and there's one that is center on negative 80 percent in widening out every day. A price decline in bonds and a price decline that people are saying is resetting yields to a level where they're sort of becoming attractive. But the marginal buyer is not yet coming in. And I know that you have your thoughts on that. But how much is this a reset to your point about how long rates remain at this level, a reset in corporate America, in the global corporate sphere with roll ups, with potentially companies going bankrupt.
Now, we're not seeing that priced into the market and earnings have held in, at least for the most part, Sunday night, Phillies, Padres, maybe Yankees, Astros, maybe Ministry of Finance will make it Sunday night, 151 again. Maybe we need to pay a touch. I know, right? 151 climbing. In terms of the dollar versus the yen. And at what point do they step in? What's the line in the sand? Right. People were saying it was 150. Let me search through that. They before said it was 145.
We're well past that. And how much do we keep going? And are they just simply going to try to control the pace of the deterioration of the weakening in the yen versus the dollar versus outright support it on Friday? Not that many earnings on Friday. American Express comes in or the report will go over it. Two seconds here. Revenue up 23 percent or so to be up 25 percent. I mean, that's what they're their view is that seems like they'll see my ginormous numbers and yet it trades off a little bit here. They see their forward gains is not so.
Yeah. The full year earnings per share is estimated to be at nine and a quarter, nine dollars and 25 cents to nine dollars and 65 cents. The estimate was nine dollars, 90 cents. This is actually really quite important given this could be a bellwether on wealthier individual spending and whether they could be cutting back as well. I don't know. We haven't seen it in the RTX Bloomberg headlines on American Express. Here's one. American Express haven't seen changes in
consumer spending and the next headline is Roto Keeper of the M, says, Tom, stop spending. So there's some of the granularity that you've got data. Let's do it right now. Before the brief futures negative 17. Dow futures negative 100.
The VIX critically above 30. The VIX has gone nowhere this week. That in itself is a story. The curve inversion a little bit less in that 10 year real yield, one point seventy seven percent on dollar strength. Lisa, we're looking also at a slew of Fed speak and I really do have to harp on this Patrick Harker comment yesterday about how is disappointing, how the Fed tightening has worked so far and where the CPI has come in. We do hear from John Williams, New York
Fed President Nine 10, Charlie Evans is expected to speak Chicago for president Ed at nine forty. And also today, earnings we did just touch on American Express, which just came out in about a half an hour. We'll get for ISE in communications. It's been hit or miss, right? It has not been consistent. We have about a quarter of the earnings coming in at this point. And that's really been hit or. American Express missing to me is very interesting.
I'm curious to pass through and understand, OK, if their spending habits aren't changing, why is revenue coming in line what they don't get here? Horizon 10 year total return per year, two point eighty three percent. I don't know what to do with it, but this was what we were talking about yesterday. Utilities have been chugging in at less than junk bonds in terms of the returns. Does that change?
I mean, how many people have come on the show and said utilities are the place to be because they're havens, they haven't been bid up, they haven't done the same thing. All right. We're also going to be hearing from our European leaders today. And this, to me is something I am just sort of keeping an eye on. This is the second day of a summit in Brussels, talking about price caps, talking about what's going to the energy crisis. I know what's important about this, seriously.
Explain for our American audience. What's the so what to Brussels this morning? Two things. Number one, I want to see what they have to say about Liz Truss's resignation and where the bond markets have been pricing different plans to try to address the energy crisis. And then I want to understand, okay, crisis over. We see a natural gas prices in Europe plunging on the likelihood that they have higher stores.
So what do they have planned for the winter after the winter after that? Okay. Tom Mackenzie here in a bit will give us an update from parliament right now. Your conversation, the day of a diversified portfolio. Sarah Hunt joins us, portfolio manager
at Alpine Saxon Woods. We'd love to have her on with the linkage here of all the media babble into what do you actually do in the equity market? Sarah, how much cash do you hold right now? I would say no holding higher than normal cash levels of normal is somewhere between 0 and 5, maybe closer to 5 to 10 or something, some cases over that. I think that this is a very difficult time in the equity markets. As we've seen, the volatility has just been much wider than expected and we have had the markets come down and multiple compression before we really get an earnings reset. And I think that's the biggest issue going forward besides what the Fed is doing.
It's the earnings reset and we haven't really seen that yet. And I think it's coming. And given that we think it's coming and other people do, too, I wonder how much Chris Harvey really was ahead of the curve yesterday when he was saying that he downgraded banks to neutral from overweight, even after they just reported better than expected earnings because it offered a pop of the market that gave him a good exit point. How much are you looking at earnings to basically cash in or out of the sectors that you don't like some sort of strategic level regardless of what the earnings actually said? Well, I think what we're looking for on the earnings side is more consistency than trying to cash in or cash out. I mean, I think the banks have a tough road road ahead of them. So given the fact that you still have an inverted yield curve.
And so I think that as much as they've had good numbers so far, I think that that is why people are a little bit concerned about them going forward. I think that the hard thing is you just look at every different piece of this market and you're getting some good news and some good news. If you said that they're worried about stuff. CSX said they weren't as worried about going forward, Carlos. So I think that there's just a lot of uncertainty between companies and everybody else right now. And I think that I just don't see how S&P was consensus has higher next year. I don't see how that doesn't have to
change before we start to get more comfortable with where equity valuations are because the multiple compression has happened. But the E is still expected to be higher next year than it is this year. Let's just put a bow on that. Sarah, does this earnings season so far make you more or less bullish on riskier assets in the months to come? So does either. I think I think really I mean, this goes
back to what are you looking for? We're looking for companies that can both grow their dividends and have some consistent earnings power that through different cycles. I mean, I think that this earnings season isn't really changing, that. The fact that he does just came in after Nike was bad numbers and everyone saying that consumer is so great. I think there's just a huge disparity in what's going on in different places where people are spending. And I think it's really hard to game
that out at the time and think that you know exactly where you're going to, correct. Sara, it's a new territory that we're going to some form of risk free rate. A lot of really good conversation on this show about the new regime for equities. What is the Sarah Hunt new regime looked like if you get an actual real yield and actual risk free rate? Well, you guys have talked a lot about on this show about the fact that it's hard to price risky assets when you're still repricing the risk free rate, right. So that's part of what we're. That's part of what some of the volatility is about right now. I think historically speaking, it's not
and it's not unusual to have rates meeting, not in the 5 to 6 percent range, but meeting with 3 4 percent range. And I think that there will be an adjustment for that. And part of that adjustment has been the multiple compression that we've seen so far. The problem on top of that is that we are probably facing recession if we're not already in one now. And we certainly are concerned about global growth and not just debt. I mean, that's just U.S. growth, the growth everywhere.
And I think that part of that you've got energy prices that are problematic. You've got food prices that are providing some of that on the back of Russia, Ukraine. There's a lot going on. So we just need some advice to buy Apple this morning. We like Apple. I think that the market gives you
opportunities to pick everything up a little bit cheaper. And this is what we've seen so far. So, you know, there's a lot of spots that we like. I think it's apples more of a staple than a tech company because nobody can live without their phones or their iPods. I think that there are some places in
the tech world that we like. Right. Know, the whole the whole group has been sold together for the most part, although Apple has held them better than a lot of its compatriots. There's your business this morning. Hunt. Apple is a staple Shery Ahn. Thank you so much. Alpine, Sex and Woods as well. Let's digress. To Tech chat right now. Your house does various offspring have
lined up the marginal the next Apple item that needs to be bought? No. In my household, I think we're out. Seriously? They know they have antiquated tech, that they sort of line up and have a screen. I know their event. Yeah. No way. It's funny. They have like five screens and they kind of switch from screen screen. I'm basically fantastic mother, as you can tell.
I can tell. But basically it's just it's amazing. Is it this is really important, actually, with all the, you know, the macro babble. We do. Some of these stocks are s