Powell Goes to the Hill | Bloomberg Surveillance 03/07/2023
Our core view is still one where you're going to see economic growth, resilience, yield curve is a very powerful signal that we might be seeing a very big slowdown in the economy. I'm not sure that that disinflation the market was really grabbing onto at the start of the year is necessarily going to come through in the second half of this year. You are going to see the consumer pause. I think that markets are trying to sort of, frankly, start ignoring 2023. I think people are ready to get past it. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. Another scene in love, actually, where they get into St.. Bottle in the brewing.
Yeah, that's what Brennan has done to me in the commercial break. Yeah. Will you get me to say words? We can't say RTS. So you use D instead, but tell me you've got us beautiful. That's lovely. From New York City this morning. Good morning. Good morning for our audience worldwide. This is Bloomberg Surveillance on TV and
radio actually features positive two tenths of one per cent on a S&P 500 chairman pound on Capitol Hill. A little bit later this morning, he came front of the Senate Banking Committee. What's he going to say or not say? He's going to be very careful about what not to say and how they think he'll be the interesting part. With Greg Barton coming up here, I think it's going to be interesting to see the scenarios he lays out in those scenarios are the same ones the Fed has. It's really difficult for him today because he's up against the calendar. And we've talked about that Canada a few
times already this week. Lisa, on Friday, we've got payrolls. Next week, we've got CPI as CPI falls in the quiet period. So it's not like they can undo whatever he says today. And I think that makes today just a little bit more complex, especially because the data has been coming in hot. There was a story about how payrolls
have come in hot over expectations for 10 straight months, which is the longest streak going back in decades. We've been talking about the Elizabeth Warren side of things. How much is there a concern that they're trying to kill jobs? I'm worried about the other side, people saying, what are you doing about inflation that is too high? And that continues to surprise to the upside. Inflation is there. But you know what I'm going to see here with all the economic data, the anticipation of the data, we're all data dependent, showing the markets walking away from the bears. I see. And thanks to the bears and to see what
Mike Wilson has done to me as buried in the news flow of the last four. Mike, even acknowledging that may be, at least in the short term, we can have a lift in this equity market. And I think that's been underplayed is that the bears are starting to. It's not that the rationalizing a bull market, but they're just saying, okay, let's revisit our caution.
And when that caution clicks in, the pushback coming from Chris Harvey of Wells Fargo, he won't even call this a bear market anymore. He's saying it's not a bear market. JP Morgan, Mr Latham, a taker. Marco CAC just saying they're saying nope, nope, nope.
Note that Q1 strength does not carry over to the second half. Here's the issue that people have. People were expecting softer earnings. They got softer earnings. Dani Burger. The response in markets was not what they were expecting.
You did see the earnings expectations come down. But markets didn't follow in tandem in the same way. People had forecast. Joe Weisenthal leadership came from tech to start. The year matter is still absolutely
flying matter, by the way, according to our latest reporting, set to cut thousands, thousands more jobs perhaps as soon as this week. On that story in just a moment, I'm going to wait for the price action. Just briefly, equity futures are up two tenths of one per cent on the S&P 500. Yields come in just a little bit down by a couple of basis points, 393 24. Yesterday, the Austrian central bank governor of the ECB teed up Tom, half percentage point hikes for more times. That's 200 basis points of tightening from the ECB. I mean, Austria has got their own voice
within the conservatism of the central nations, the Bundesbank Anna Edwards that he mentioned. My ownership of the 97 year piece down 71 percent didn't pick up on. I'm sure he remembers that time we met on the plane on the way to Jackson. That's a great idea by the Greeks. It's on. That's the biggest talk on the ECB.
And then T.K. strikes up a conversation. What we are talking about BOVESPA century by the. I'm sorry, not 100 years. It's 99 years. And there wasn't one turning 115. And you're loving it down 71 percent
right now. That's called yield price now. Yeah. You wanna hold that to maturity? Yeah. Yeah, right. I don't. That will be a wrap for that one.
Yeah. Well I think that there's going to be the issue, especially if you end up with yields that much higher, but you're gonna have to hope to be around in 20 10 I believe is when that bond matures. All right. Here's what we're looking at today.
You were talking about Mike Wilson coming out and kind of caving a little bit to the bullish sentiment. He has. Chief U.S. equity strategist at Morgan Stanley. And he's gotten it right so many times. Here's the issue, though. I really want to hear from him. He's actually been right about a lot of the earnings, about a lot of the economics, and yet he hasn't been right about the market response to it. So what do we take away from that? Who is driving the market action? Is it quants or is it perhaps something else that is going to reset his expectations, telling him this is the main event? Fed Chair Jay Powell testifying before the Senate Banking Committee on Capitol Hill tomorrow.
He goes to the House. Here's my issue. I really do think that the bigger concern for him is explaining how far they have to go to fight inflation and whether they've gone far enough, whether they've actually done enough to dampen financial conditions, because that to me is going to be some of the bigger concerns. And the main group of senators is not necessarily the concern about employment because employment is so strong. And at 3:00 p.m., we get U.S. consumer credit. And here's the issue with that.
I'm curious how much people are reducing their credit card bills with higher rates versus the opposite borrowing to continue their spending as their savings get whittled down? John, we talk about the consumer. How long can they remain resilient? How long can they keep spending? Consumer credit might give some sense of where the sentiment is on that front. Lisa, thanks for that. Let's kick off the conversation this morning with Greg Mounts or the US head of equity and derivative strategy, Arthur at BNP Paribas. Greg, wonderful to hear from you, as always. So good to see you.
A little bit later this morning, Michael Barr chat with Chairman Powell down on Capitol Hill. What are you in the team looking for from the chairman? Yes, I think everybody is gonna be going through this with a fine tooth comb. You made the point at the top of the show that there is really a problem in terms of the sequencing of the data here. We're going to hear from Chip Howard today, tomorrow. But the real problem is what the Fed is
looking for is the data. And Paul isn't going to have the data. So Friday's payrolls number is really going to be a key print after we saw this massive positive surprise in January. We're looking at whether there's some seasonality, some one affect factors there or whether there is actually a kind of more sustainable, hawkish narrative coming through the labor market. And that's what's going to drive the Fed. Greg, you talk about one outcome, which is a Goldilocks outcome. Let's go there right now with a Goldilocks outcome.
What do central banks do and what do the equity markets, how do they respond? I think the Goldilocks scenario that we see is the least probable of the outcomes and is really what the market's been pricing, you start this year, the U.S. equity market, it's this idea that we do get this gradual fading of inflation and the Fed are able to engineer this no landing or a soft landing. We still get robust growth. We don't get a collapse in margins. We don't have to see a large correction. The labor market, a large pickup of unemployment and that contains inflation seems probably a challenging or very narrow runway to land. What I see right now and I'd like you to folded into a derivative strategy there seems to be a shocking partition in the market between profit and free cash flow generators and non profitable companies. How do you how do you see that within the derivative market of almost a bypass market? Well, certainly one of the things we've seen at the start of this year, Tom, has been price action that I think has been quite divorced from fundamentals.
So we've seen this deterioration in terms of the earnings picture, yet we've really seen some very strong outperformance to some of the kind of least profitable, lower quality parts of the tackle growth spectrum in the market. We have a basket that we track IBM people that's caused our squeeze basket. And it basically consists of the names of the largest short interest and the names that have seen the largest open interest in call options increase over a monthly basis. And this basket really peaked at the end of January. We've seen a little bit of reversal since the rates market has started to reprice and we've seen slightly higher rates.
So our opinion is that this was largely technical and we think that it's going to start to fade. So let's lean into this idea that the fundamentals are somewhat divorced from what we're seeing in the market as read article about the increased use of quantitative trading and momentum traders and how they seem to be leading the charge so far. How do you sort of game that out when coming up with a forecast of when they sort of hit a wall and are forced to reckon with fundamentals that you say are very different? I think the thing about quantitative strategies and we track things like vote target funds, CTA is of a kind of factorial exposures. And what you tend to find is that these things don't tend to tend to set the direction of the market, but more tend to amplify the moves when we get them. So momentum trend following.
By their nature are exacerbating the moves that we already see in the market. So I think it is fair to say that the strongest part we've seen to equity markets here is not entirely divorced from fundamentals. It has in fact, been triggered by better growth that we saw at the back end of last year. And again, some strong data that we've seen the start this year, but it has snowballed into a more technical rally that has seen a squeeze in some of the least loved names. The question for us and this is what we address in our outlook we published this morning. Unfinished business is how that data is
going to manifest in terms of central bank policy. I think the risk of the equity market is not really priced for here is that stronger data in term drives a more hawkish fed that ultimately is going to be challenging for the equity market. Indeed, the economy further down the line. We've been talking with analyst after analyst who have changed their views on what's going to happen this year. Several times already in the first two months of the year.
How have your views changed as we've gotten different data? So our equity market view is unchanged from where we are at the start of the year. We still expect to see a recession this year. Economists have pushed back one quarter from Q2 to Q3, but we actually now expect that recession to happen from a backdrop of even higher terminal rates. So the expectation from our economics team is that the Fed get to 575. So the issue we have for equity markets
is when we look at things from a valuation perspective, we already have an equity risk premium, which is a multi decade lows. If we are going to have a more hawkish reaction function from the Fed and ultimately a recession as this tightening that we've seen, this very rapid pace of tightening over the last year feeds through into the real economy that we think it creates a very difficult environment for the equity market in terms of valuations. And we think in terms of fundamentals, margin compression, we still think is coming, and that's going to be a very difficult backdrop. And let's just quickly put some numbers
on that, Greg. And so you've got car rocket Donner over at 575 on Fed funds. You're on well, on the S&P 500, 600 points lower. Yes, so we see the S&P dropping around 34 hundred. I think the big difference that we have in our U.S. equity forecast and we've had this all year versus our peers is what our peers have generally been looking for is some kind of trough, some kind of capitulation that sees the market trade down to low three thousands. But then ultimately, many of our peers
have the market then recovering and having a kind of strong back end of the year to kind of finish close to to where we are now. The big difference in our forecast is that we see the market getting down to thirty four hundred, but then potentially flatlining through the second half of the year, because if we do get this recession that we're forecasting, we don't expect to get super accommodative fed and very easy monetary policy. We don't expect fiscal stimulus stimulus to help bail the market out. So we think we could get a very different type of equity reaction function to to that kind of bear market capitulation than the V shaped recovery that we saw almost three years ago. Well, some big co-stars just just. Thank you. Was on the battle of BNP Paribas crack. Was that 15 percent from here down
saying, I don't know, leases do over there doing the math? Sixteen percent downside yesterday. Well, some milk and some cyber 575 from car wreck on it on Fed funds. This is where we are. We can take no coming back numbers and views.
The narrative is shifting to another view. Mike Wilson of Morgan Stanley, 8:00 a.m. Eastern Time, about an hour and 48 minutes from now. Don't miss that conversation. Futures just about positive. Chairman Powell coming up a little bit later this morning. Keeping you up to date with news from
around the world with the first word. I'm Lisa Mateo. President Biden will propose raising taxes on wealthy Americans to help avert a Medicare funding crisis. His plan would boost Medicare taxes from three point eight percent to 5 percent on certain kinds of income above 400000 dollars. It also would allow the government new power to negotiate drug prices for Medicare. Bloomberg has learned that more job cuts are on the way at metro platforms.
The parent of Facebook will cut thousands of employees as soon as this week. Now, that follows a 13 percent reduction in November. Mayor has seen a slowdown in advertising revenue and has shifted focus to a virtual reality platform called The Metaphors. The new foreign minister of China warns
that the U.S. approach to Beijing is a reckless gamble. Jin Guang says the U.S. is trying to contain and suppress China and get the two countries locked in a zero sum game. He accused the U.S. of creating a crisis over Taiwan and criticized the use of sanctions in Russia's war in Ukraine. In France, unions are hoping to bring
the country to a standstill in a sixth day of protests. They're demonstrating against President Emanuel Microns plan to raise the minimum retirement age. Transportation is likely to be severely disrupted. Only one of every five high speed trains will be running global news, powered by more than twenty seven hundred journalists and analysts in over 120 countries.
I'm Lisa Mateo and this is Bloomberg. We made a lot of progress, but there's so much more to do when you respond to a fire. You know, you don't leave it to the fires out. I'm telling my colleagues, don't leave. We finish the job. We have more to do.
I'm determined to finish the job. The president of the United States, there are the firefighters conference in the last 24 hours live from New York City this morning. Good morning to you all. Big day for Wall Street. Chairman Powers speaking a little bit
later this morning at 10:00 am Eastern Time in front of the Senate Banking Committee. Look out for that. Go against to equity futures shaping up as follows three day winning streak. Tony S&P 500 belief along the three day winning streak is the longest since early February. That's how dicey things have been over
the last month. Equity futures right now eight points positive, two tenths of 1 percent. What's come in two or three basis points on a 10 year, still just short of 4 percent cent after reaching that milestone last week for the first time since November, your tenure. Right now, 392 84 just on China. Some really interesting comments through
this morning from various officials, including Xi Jinping. But this from the foreign minister, who many of you will remember was the former Chinese ambassador to the United States. Here's the quote for you. The U.S. claims that it seeks to outcompete China
but does not seek conflict. Yet in reality, the so-called competition aims to contain and suppress China's slump in all respects and get the two countries locked in a zero sum game. I don't know where it ends up. I really don't have a handle right now
on it. I think it's important that the speaker of the House, I believe, is going to meet Taiwan authorities in some form of America, whether it's Hawaii or the West Coast. Maybe he's not going to travel to Taiwan. It's very delicate now on multiple fronts.
Well, look at this language, Tom. The approach taken by Washington to Beijing is, quote, a reckless gamble with the stakes being the fundamental interest of the two peoples and even the future of humanity. It will take some pretty dramatic language.
That's dramatic language. And maybe it's lost in translation. But at the same time, this is a new China. More than anything, I would suggest it's a new China will be something that's Lisa Abramowicz. The official translation actually was
watered down. And if you actually did the verbatim, that was the real fiery rhetoric. I do wonder who they're talking to when it raises the question of whether they're using the US as kind of a political hot button issue to try to garner support locally when there are a lot of issues facing. Exactly. Really well said. And I've also been told there's a lot of idiomatic phrases here where there's nuance and body language between the niceties, where in English we translate it verbatim and maybe they don't.
Let's be clear. U.S. officials deliver statements on China out for China, right? Right. But that's for domestic consumption. But that's a great point. How do you then bring two nations together that may have common ground, but don't necessarily have a reason to express it publicly? Given where the populations are, where we are right now on China, we're going to digress here with a brutal note this morning from Greg Valliere, a widely read from EGF investments.
And it was shocking how he addressed what's going on in Ukraine. I would suggest it's beneath the headlines of Happy Talk in America. He harkens back to Leningrad of 1942 in far more the emotions of a one mile charge of the Confederacy Pickett's Charge at Gettysburg. Annmarie Horden joins us now on Ukraine with a recent reporting, I should say, in Poland. Emery, I heard and I was thunderstruck by Greg values use of history right now. It's not something trite like is Bachman the new Gettysburg? But just what exactly is going on and the violence, the viciousness of this war? Well, this is really the epicenter of the fighting and the most brutal fighting, as you mentioned, Tom, in eastern Ukraine.
This is in the Donetsk region. And you really see all forces at play here. Zelinsky was out last night saying no one will be abandoned in Ukraine, even though you do have a really proper offensive coming from the Russians. But you also have men, as Defense Minister Shoigu talking about the fact that why back move is so important for the Russians. He's saying that this is a link of
Ukrainian defense forces if they're able to capture back moot. It is really the only way they have to really maintain their control in eastern Ukraine. But the Russians are fighting also amongst themselves in the eastern part, specifically in back. And you see this from Yevgeny Ghosn of the Wagner Group saying to the Russian military, you're not giving us enough to succeed here. So potentially you could see the Ukrainians try to divide the Russians in this city. And this is one thing that a former
Putin advisor was taking to telegram and explaining to the world of some of the intricacies that's happening with your reporting. And Maria, today, those are the allies on the same page of the immediacy of supporting Zelinsky and the Ukrainians. I think they are at this point and let us potentially see what happens on Friday. You have Ursula von der Leyen coming to the White House is on the heels of olive shots coming to the White House. And the United States is making it very clear that they want to continue to support and defend Ukraine to the very end. What you hear from Ukrainians time and time again, besides that, they ask for more weapons right now.
Obviously, it's six teams that are at the top of their agenda is that they need sustainable renewals of ammunition. And this is really what it's come down to. A I ready to talk about what's happening at home. Last week we talked about the C suite in America, financial institutions being caught between blue states and red states. And what we're seeing more recently is
not just the C suite in America, the financial institutions, but also Walgreens. So last week it was about banks and whether they could do business with states like New York or whether they could do business with states like Texas based on their views on fossil fuels. This week, it's about Walgreens and birth control. AMH, can you tell us what happened with Walgreens, with California and Gavin Newsom, the governor there, and how this is going to look going forward? Well, it's a great point, Jonathan, this back and forth between the blue states and the red states and how it's becoming incredibly difficult for corporate America to navigate. So last week what you had Walgreens say is that they're not going to be selling this abortion pill in some 20 states because those attorney generals said that they will get sued because this is illegal in those states. Following obviously would have meant Roe v. Wade.
Now you have Governor Gavin Newsom of California saying that California, the state, will not do business with Walgreens because what Walgreens is doing in these red states. So corporate America is finding it very difficult at this moment to figure out, one, the laws and legality in some of these states, but also what the pushback will be from the other side. And this is just the latest in a string of, I'm sure, many to come, because these issues are really being politicized at the moment.
Are we asking corporate America, Emory, to choose between doing business with states like New York, states like California or states like Texas? I think from a state level, that is what you are seeing, whether or not it's controller, attorney general or governor. You are seeing these states basically telling companies that they have to choose. But from a federal level, that's not happening yet. But that's what it does feel like. There are being feel like they are being pushed and pulled in either direction. And at some point, the problem is this is going to hurt everyday Americans, right? This is going to hurt. I mean, with this particular instance, when it comes this abortion pill, this is potent. And also just stopping business with
Walgreens in general. This is going to come down to hurting everyday Americans. But I imagine there's going to be a lot of legal battles, Jonathan, when it comes to this decision in particular. Emma Chandra, thank you. On the latest Emery there, it's difficult to assess just how much business the state of California does with a company like Walgreens leaks. But clearly, you can gauge the direction
of travel here on several fronts. You said last week risk mitigation Emma Chandra. That is going to be the issue for the C suite. They want to basically reduce the risk. And if you have 21 attorneys general coming out and saying, if you do this, we're not going to allow you in our state. Well, then the risk is to not sell in those states. Well, California's trying to do as I say on the other side.
You know what? We're going to ban you if you don't sell this, which basically creates a quagmire of the ultimate of the ultimate size for a lot of the executives of these companies. Who do they cater to? James Diamond, I think he loves Florida. Is he going to get wrapped up in this big banking? Unclear wrapped up in this Jason Kelly. I want to be very clear.
It won't stop Walgreens from operating in California. It's about whether the state of California will do business with Walgreens. And that's the lever the states like Texas have to pull as well. At a certain point, though. How does the corporate America had as corporate America deal with a very polarized mayor? IBEX difficult.
Tremendously difficult. I mean, we we sort of look down on those about the red tape in Europe. Look what's developing here in the United States. Super, super hard to operate here with this backdrop from New York. This is Bloomberg Markets.
He features with just a little bit of a left on the S&P 500, up a little more than a tenth of 1 per cent on the S&P, on the Nasdaq, up a quarter of one per. Greg Battle of BNP Paribas. On the program 10 minutes ago, the team over at BNP car wreck. Donna, the chief economist there is
looking for 575 on Fed funds as the terminal rate, the peak they're looking for. And Greg thinks it's about eight entry points of downside and two year rent on the S&P. Lisa did the math. That's about 16 per cent from the close yesterday. At least that's some downside in the equity market. That's the call from BNP at least. What drives it? What's the trigger for the reversal? Because we've already priced in higher rates.
We've already priced in earnings expectations that are coming down. We've seen some margin compression, perhaps not as much as some people had expected. What's the trigger now? 575 and growth decelerates. That's the view that this Fed has to take rates to the point where growth starts to get her. And I'm with you to this point. So far, we haven't seen that in a major
way. They just don't believe clearly that the numbers we saw in January are going to carry on through the rest of this year. I would suggest that there is a bet that we will have disinflation. It's still on the market now. Is it at home and disinflation?
I don't know. David Rosenberg, it's not just disinflation time. It's how you achieve that disinflation. You need growth to get absolutely hammered to achieve that disinflation scenario of the NASDAQ up 17 percent, make it 18 percent off the October low is the growth slowdown is not all that much. And maybe the disinflation is not all that much.
It's also it's sequencing Mark Gurman. It's a sequencing issue as well, because if you get declining growth rate like you're saying for the rest of the year and then all of a sudden people say, well, wait a second, maybe inflation isn't so bad, maybe we can actually expect it to go down more significantly, then rates come in and then all of a sudden you have the beginning of a new boss cycle. I mean, this is what you get the bulls arguing that it basically takes the pressure off the Fed and accelerates some sort of pause. I'd suggest if you've got that backdrop, there'd be a lot of people screaming. Earnings will be absolutely dreadful against the backdrop of growth, decelerating, inflation rolling over and rates still in and around 550. Can you get bullish earnings on that?
That's hard. It's hard, especially when you've already had some negative surprises. And yet there still is this optimism. I want to get to the bond market as well. Let's look at two stents and 30s. Your to year looks a little something
like this for 85, 48 after going through for 90 last week, your 10 year, 392, 84 after having a liquid 4 percent last week at one point last week to tease at the 30s, the whole curve is 4 per cent plus. Now we've got a 30 year back to about 386 just to run you through the next couple days. Chairman Powell is later in front of the Senate Banking Committee at 10:00 a.m. Eastern Time.
Then after that, you're going to see Powell in front of the House Financial Services Committee tomorrow. Then it's on to payrolls on Friday and CPI next week as well. CPI and the 14th falls in a quiet period for the Fed. So it's not like they can all come out
and talk about what they think they should do off the back of CPI. Some so the Fed speak ends at the end of this week. Joel Weber really got a brief dial and was going to join us here in a moment. First, Michael McKee is in Washington. Our international economics and policy correspondent. We're waiting for what we're going to see in the Sherrod Brown, Tim Scott, Jerome Powell Derby.
Mike, you are the only two within the Beltway that still call Humphrey Hawkins testimony. How will this be different than the other gazillion before when he's up against Brown of Ohio and Scott of the South? Well, it will be significantly different because every hearing that the Fed chair attends is an effort by members of the Republican and Democratic parties to get him on their side. There is going to be some dispute about how far the Fed has to go and whether or not they are going to be sacrificing Americans jobs in the cause of bringing down inflation. I would add to your list, Tom, Elizabeth Warren, who's been very outspoken about this, we should hear from her on that.
One thing we haven't talked about, because we've been so focused on whether or not he'll say interest rates are going up, is the debt ceiling and the idea that we might see a government shutdown come October. I'm sure those topics will come up and you'll be asked to take sides and he will do his best to avoid doing that. Who is opposite of the senator from Massachusetts? Who is the Republican? That is the opposite of Warren? Well, probably any of them would take the view that the inflation rate is something that needs to come down. Nobody's going to endorse losing jobs, but they will point out the unemployment rate is three point four percent. And so inflation takes a toll on
everybody, including the lowest paid. And so the primary goal of the Fed should be to bring that down. That argument is we've gone from zero to 400 to 75 basis points for three quarters percent in a year. And we are not seeing the economy slow. So we have to go higher.
We've only taken away accommodation at this point. It really hasn't hit the idea of some sort of effort to slow the economy. That hasn't happened yet. We haven't gotten restrictive. So we may have to go a little bit further. Michael McKee, thank you so much. Greatly appreciate it this morning. And much more coverage from Mr. McKee as we hear from the chairman.
Look for that on Bloomberg Radio and Bloomberg Television this morning. He is with Deutsche Bank and they have absolutely nailed the recession delay called there. No other way to put it out front on it. Alan Ruskin joins us now, our chief international strategist.
Alan, to get started and I got a ways to go here. Let me talk to you about one of your glide paths, which is, as I mentioned to John earlier, we don't get the outright disinflation back to the romance of three or dare I say two percent. But we get back to moderately inflated. Then what then? Then we have a problem, Tom, because, Fred, you know, Fed credibility, I think is really on edge. I think they're committed to that 2 percent inflation target. And if it looks like it's not achievable, then, well, eventually you'd expect that they'd have to raise the target or alternatively place much more additional pressure, downside pressure on inflation.
I think it's the latter course of action. That is the first course of action that they would just tighten up that much more rarely in a way. So it really means probably a higher terminal rate and greater risk of a recession. And, you know, ultimately inflation does come down. There has been a feeling that as inflation comes down and as we see recession calls start to loom more seriously and more significantly, perhaps more imminently, that you're going to see the long end of the yield curve come in and stabilize. And yet your colleague, George Savalas
was talking about the Bank of Japan and how they're actually going to see 2 percent inflation and they're going to raise rates more significantly. How does that translate to a view of longer term U.S. debt? Yeah, look, I think the Japanese role in funding the US fiscal deficit and the current account deficit is much exaggerated. Japan has not been a major player for
some time now in terms of portfolio flows. So I wouldn't worry on that score. I think what is going to be very interesting is that you could build into a scenario and this is it feels that at least as much the end of this year or 2024 story where you start to think in terms of the Fed rate cycle turning over and the Japanese rate cycle just beginning. And that makes obviously for a much stronger yen. I think the market has maybe been a little bit premature in thinking in those terms.
Obviously, the yen appreciated quite sharply towards the end of last year. It's performed less well recently. But I think there is that scenario out there towards the end of this year where you have this disjuncture between the BMJ and the Fed that could actually be very, very helpful from a year and exchange rate standpoint. But I would not suggest that just because the Japanese might be buying somewhat less in the way of US debt, that U.S. yields are going to be much higher
because of that. I mentioned the Bank of Japan because Friday is Kuroda as last meeting and where people are assuming that you're going to get some peaceful transfer of the regime and the monetary regime that he has overseen. Where does the next disruption come from, Alan, especially as we look out to this idea of the re-opening trade in China pass, possibly already having run its course and this feeling of disinflation, that now is just a question mark. Yes, I think Japan is still a potential source of market disjuncture in so much, the DOJ is trying to prime the market and allow the market to effectively get out of some unhealthy long bond positions. But there's all the possibility that eventually JCB yields tenure yields jumped substantially and you could envisage that, you know, full normalization. You could even have, you know, in Kenya,
a JCB hill climbing from, say, one and a half, two into the tooth kind of being and a long run equilibrium rate. And in terms of short term rates at 2 per cent, were they BMJ to get into a proper tightening cycle. So it still feels to me like there's a lot of room for disruption from the BMJ standpoint. I don't think that's the story for the
next week, for the next month or so. Right now, I think we're focused much closer to home. Alan, how do we make Central Bank boring again? How do we do that with balance sheets this big? Sorry.
How do we make the central banking boring again? Central bank policy is just completely dominated and taken over for much of the last decade. How do we get back to the old days? I think these maybe all the old days. Right. The old days are a sense of change in terms of short term reign. A sense in which rates are well above zero and interest rate differentials do drive currencies and create volatility. I think we're in fact. So to some extent normalizing. And if anything, I think we're going to
come out of this cycle with an equilibrium interest rate that is definitely higher than it was pre Covid. So in that sense, I think that the needs of this is actually a return to the old normal that were arrested at Deutsche Bank. And I think those balance sheets. Lisa, they look normal to you. And if they don't look normal, which they don't. Because it's a trillion dollars in the
U.S. and all around the world. If you take a look, we've actually had quantitative easing over the past year, not quantitative tightening. There is a question of where do we go back to smaller balance sheets? Do we shrink them or do we just sort of let this be the new normal amid a backdrop of boring central bank High Flyers love for its people? And again, can you mentioned the destruction of Japan, tried to one right unready unwind that balance sheet. So here's the thing. Alan Ruskin was saying he doesn't think that the Japanese really find the CAC deficit for the.
So it wouldn't have as big of an effect on Treasury yields. No. I mean, honestly, this has been one of the big tail risks, people seeing the potential for 10 year Treasury yields going over 5 percent if Japanese buyers suddenly have one and a half to two percent annual rate changes in 10 year Jason Kelly.
You described it, the peaceful transfer of power, some from one central bank to another. Well, that's what I mean. That's what I've been thinking about this the last couple days and that you're going to get back to what we remember 20 years ago, which is to daily calculate where the U.S. 10 years should be. But it's not because foreigners who bid up the price bring in the yield in a little bit. We haven't really had that conversation for two decades. It's going to be a quarter point yield,
half point yields, three quarters. Huge tenure right now in Japan, just short of 50 basis points. The balance, right. Ultimately, that would meet some major changes down the road.
We'll talk about that later in the week. What is it, March 10th? The governor Kuroda. Last last meeting. Last meeting. Well, 10 years has gone by fast. It's been a transformative 10 years. Futures positive to tense.
This is pulling back. Keeping you up to date with news from around the world with the first word. I'm Lisa Mateo. The job cuts are in over at Facebook parent metal platforms. Bloomberg's learn the company is planning a new round of layoffs and will cut thousands of employees as soon as this week in November. Mayor eliminated 11000 jobs, 13 percent of its workforce. Taiwan's president citing when reportedly persuaded House Speaker Kevin McCarthy to meet in the U.S. due to security concerns.
According to the Financial Times sized government shared intelligence with McCarthy about threats posed by China. McCarthy said he wanted to visit Taiwan at some point. The powerful sister of North Korean leader Kim Jong un has issued a new warning to the U.S. and South Korea. Kim Yo Jong is threatening severe consequences if the two countries go ahead with joint military drills next month. Last month, North Korea threatened to turn the Pacific Ocean into a firing range if the exercises took place.
President Biden is reportedly considering reinstating the detention of migrant families who crossed the border illegally as his administration prepares for the end of Title 42. According to The New York Times, no final decision has been made. The more restrictive measures would be a reversal for the president, who wanted a more humane immigration system.
Global news powered by more than twenty seven hundred journalists and analysts in over 120 countries. I'm Lisa Mateo and this is Bloomberg. I worry the most about it. If you're green for oil gas, though, the leadership of the world and know our relationship with China. That is much more serious, though, the economic vibrations you'll have to deal with on a day to day basis. Always good to hear from Jamie Time in the JP Morgan Chase. Chairman and CEO on Bloomberg TV and on
Bloomberg Radio actually features right now on the S&P positive, a little more than a tenth of 1 percent on a S&P 500 three day winning streak on S&P 500. Can we make it for three days? Believe it or not, the longest since early February. I keep saying that cause I can't believe it's been a month and change since we put together three days of gangs and the S&P 500 yields down about 3 basis points your 10 year, 392 45. As we all count down to Chairman Power a little bit later this morning, 10:00 a.m. Eastern Time in front of the Senate Banking Committee, some then it's on to Wednesday in front of the House Financial Services Committee, and then it's on to Friday.
Ready. It's about the data, its payrolls and just around the corner. Tell them who's going to tell these people whatever their angle is, whatever. As you mentioned, John, the film moment they want to get with the chairman is going to say, you know, I'm waiting for the data.
You should, too. I don't think politicians want to wait for the data. They're worried about what happens tonight at dinner. And I think people in markets want to
wait for the data. I think there's a lot of that going on. And, you know, this is the ex-post reality for every central bank. Is he open to a bigger move at the next meeting, if indeed this February data that comes in on Friday confirms what we saw in January? I'm not saying half a million, but I've sat Shery Ahn plus say I'm a rose.
Does that encourage a bigger move? No, I'm not going to give you my opinion. No one cares. I will say the following. I will say the following without question. On a risk basis to be measured gives you
less error than to be jumpy. That's I mean, we went to silence. There's that, but we just thought you had more to say, in my opinion. Now we just thought you had more to say. You're finished.
I didn't know you. It's sort of like finished. I'm just saying. Greenspan invented measure because he was risk averse. Yeah. And Powell is no different. I mean. I mean, it's all there is to it. Let's jump to this and say this segment,
because this could be my last interview with Bloomberg. Rothman joins us now. We are thrilled to have her back, really to begin our coverage of what the International Monetary Fund will be doing here one month out. We're making a lot of good plans and that John Farrell leading our planning meetings on IMF spring meetings. Looper Rahman is with PIMCO and is well versed on the emerging markets.
Look, but let's start with the beginning. To me, there's two M's at the minimum, the frontier economies greatly beleaguered and another E of great prosperity. Or dare I say, could there be three worlds of VIX? Which is it? I think he is extremely diversified right now, and you hit the nail on the head in terms of vacating the frontier economies, especially the low single be high yield economies that are facing a lot of stress. Some of them have very large external
financing needs. They're having to have IMF programs or other bilateral lines from creditors like the Gulf states and China. And then there is the rest of em. There is the investment grade portion and the WB portion of the E.M. asset class. Even though there is a lot of diversification and differentiation, both in terms of the balance sheet as well as how these economies are coming out of this Covid and growth cycle. Do you look at this as country by
country or by asset class or even subsets of asset class? You have to look at all. Unfortunately, I don't think GM is a one size fits all in terms of the framework or model that you need to use. And so, you know, really thinking about asset classes and regions makes a lot of sense right now, as well as countries that perhaps are going to benefit more secularly from the near shoring and structuring structural shifts that are occurring both in the global and macro playing field for E.M. Lubin. I was reading this morning all of the rhetoric, the fiery rhetoric coming from the Chinese Communist Party, coming from leaders, talking about the increasingly fractious relationship between the US and China. Hear the same coming from a lot of US
officials. What's the investment consequence of this? Because right now I'm still seeing a lot of people say Chinese debt, Chinese equities, thereby. I think that the main investment implication from this is to really think about EEM in terms of the various centers of global growth and drivers of global growth for GM as a whole. This fractional ization that we're
seeing much more of from from the US and China, trade relations and geopolitics is really going to be a headwind for many countries within the asset class. Slow globalization as that as the IMF has coined the term, is not a positive for the E.M. asset class as a whole. Having said that, there are areas that are going to be growing and perhaps benefiting from this. Countries like Mexico, countries like India, many other smaller emerging markets that perhaps have a niche in particular parts of the supply chain and so forth. For the E.M. asset class, I think the investment implication really is to start from the bottom up and really focus on country by country selection in terms of really thinking about the investment opportunities that are out there specifically with China.
I think about Mark Mobius, the emerging markets investor who complained that he had some money in China, that he couldn't get out because of all of the red tape that he had to go through to bring the money out of the country. In your view, is China not an investable, but increasingly a front investing proposition that perhaps isn't recognized in pricing currently? Well, I think that, you know, looking at the fixed income opportunities in China over the cyclical horizon, you know, we are a bit more cautious given the opportunities elsewhere within the fixed income world as well as within emerging markets. So if you're looking at the level of real rates, really, you're getting better opportunities elsewhere, whether it's Brazil or even Mexico. If you're looking at currency plays, perhaps the CNY is not the best player right now given with outbound tourism, you may see capital outflows resuming. So I think that from an investment perspective, there are more interesting opportunities from a risk adjusted perspective elsewhere within EEM Lip in Ramat of PIMCO. Layfield, thank you. On China and whether it's investable or
not. When you sort of reopen it, I think everyone least apart onto the idea it is now we saw tech Chinese tech stocks absolutely rip. You pointed out yesterday off the back of this and not my language, other peoples disappointing Chinese growth target. Let's call it modest at 5 per cent as this economy snapped back. Does that open the door then to a little bit more fiddling? Some regulatory moves from the Chinese leader had to wonder about that, especially as we read about some of the changes to the structure of the government overnight. They took some people out of sort of the main bucket and then they took them and put them into higher regulation for the financial industry, more data oversight, a sort of tightening the screws of the corporate existence in China at a time when that balance between the economic side of things and the social side of things is changing.
I think it's really well said that I don't understand the triangle of Beijing. The so-called ASO is state owned enterprises and private corporations and China. I'm just a Euler because then would be twice here in the last couple of days.
I just can't. I just don't get it. Just don't get where that new news is right now. Business at hand when you say thank you to all of you on radio and television for a massive response. Yes, it's time for a victory lap.
And do that with Jonathan Ferro Taylor Riggs Human Effects Formula 1 guy 2 minute victory lap. We're gonna break the champagne out and start spraying each other. And the answer here is John. That was a lot of fun yesterday with a gentleman from Rome. It was cool, wasn't it? He's very smart.
He used to be a driver. I got lots of e-mails. Asked John, why are these so good? And I always ended up with a guy. He turned to his left during the race. Adrian knew this guy makes nine, 10, 12 million dollars a year, decides he knows who he is. Well, if you follow Formula 1, you know who he is. But he decides the car's genius, absolute genius.
This guy and he started with Emerson, Philip Poldi. Years and years. He's done this for years. But what does he do? I mean, it's not just tweaking the engine and all that. It's all the airflow rose, the airflow stuff. It's the stuff that you know more about.
Why did the nitrogen recede is what I mean. I don't get why they haven't had over 10 other teams don't know, but they lost some important people on that front, too, as the mountain. What does everybody wants to buy? Once everyone wants a piece of that, it's a talent acquisition over the winter.
I have a question about that interview. The Kurdish organization of fashion line. Yeah. Is that for America or is that also something that plays in Europe? No, I think it's for Europe, too. And it's about going beyond just, say, a
male dominated Motorhead audience. He talked about he'd said, diversify my audience. He talked about that twice, not just geographically, but the types of people that would follow the sport, that wouldn't traditionally follow a sport is important. You got to know the drivers, not just at the front of the grid, but also at the back of the grid, because sometimes those races can be tremendously boring.
And I think if you didn't have the interest in the people further down the grid on a race like Sunday, you would have looked at that, saw Max for snap in two miles up the road and thought, why do I want to watch this? And when you've got an interest in what the other guys are doing, well, and a lot of that effort there didn't search descriptions of Max for stopping. Was he was clinical about his win almost. I will say as a woman, I find the mechanical stuff fascinating. Basically driving a jet engine. Well, we were in Germany in three weeks and it'll be interesting to see. I mean, a Saudi course is radically
different. We're going to see if you've got that signed off. Yeah. I talked to run away. They said we'll cover oil changes
positive here. A tenth of 1 percent. Chairman Powell a few hours away. Our core view is still one where you're going to see economic growth resilience.
The yield curve is a very powerful signal that we might be seeing a very big slowdown in the economy. I'm not sure that that disinflation the market was really grabbing onto at the start of the year is necessarily going to come through in the second half of this year. You are going to see the consumer pause. I think that markets are trying to sort of, frankly, start ignoring 2023. I think people are ready to get past it. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz coming up on Capital Hill.
The most powerful man in financial markets worldwide, Chairman Powell, a little bit later this morning on Capital Hill, live from New York City this morning. Good morning. Good morning for our audience worldwide. This is Bloomberg Surveillance. Equity futures up by a little more than a tenth of 1 per cent on the S&P 500 T.K.. So over to you. Jay Powell a little bit later, Jay. Probably interesting. Always interesting in the two testimonies.
I'm sorry, old fogey. That's Humphrey Hawkins. And the answer is the Senate will be more collegial. Even the senator from Massachusetts will speak with grace, less yelling and screaming. And then at the House tomorrow, I think you'll see a lot more emotion. Andrew Holland, host The city says it
comes down to this. Perhaps the hawkish or dovish takeaway may instead depend on how strongly he endorses the path of hikes now priced. What are we looking at right now? Lisa 547. Yes, almost 70. See, what, Friday? What, 550? And it's been hovering around there for 40 to five, 550 by September. So how does he endorse it?
This is my question. What is he looking for and how long can he hold rates at that level to me? How much does he expressed concern about the fact that inflation data and employment data has come in hotter than people have expected for many consecutive readings? If we just said what you just said a year ago, 99 percent of our audience would say Dow 20000, S&P three thousand twenty eight hundred. Why are equities up with this spike in yields? I think we should have a frame where we were twelve months ago as well. Some still doing QE coming into March rates at zero. I think if someone had said 540 and you laughed and joked about Sanford, it's some people scratch their head. Well, you know, maybe twelve months ago that was kind of unthinkable.
Right. It was a farfetched idea. Now people are saying, well, if you actually follow the Phillips curve, we could get to eight. I mean, you have people gaming this out based on different models. The point is we're in a different
reality. And even with yields where they are, even still, inflation is surprise to the upside. So are we going to hear about long and variable lags today? Are we going to hear about just trying to break something? I read here about financial conditions and his concern about the fact that stocks are so long and you say grow legs was team Mercedes Shery Ahn. There were some longer blacks.
Yeah, that's a very long lines and variable. So to me, it lacks which its central bank speak like two. Yes. Anyway, equity features right now.
A positive a tenth of 1 percent. Let's work through this just briefly. Three day winning streak into Tuesday. You hear from the chairman in about three hours from now. Let's will give you the times of
everything. Good. Just the moment you come in a couple of basis points. Your tenure, 393 43 Eurodollar 1 0 656 were negative two tenths of 1 percent. I do want to talk about some ECB speak a little bit later because, Lisa, we've heard from so many hawkish voices in the last day or so. The ECB is Holtzman coming out and expecting that perhaps we can get to 425 of the ECB main rate to sort of unfathomable based on where we have been in that region. Here's how we're watching it. And we talk with Mike Wilson of Morgan Stanley, the chief U.S.
equity strategist there, about Tom's question, why aren't stocks reflecting what we had expected they would do in the face of rates that are much higher? Why have we not seen a reality between the fundamentals and the price action or are we right? And so we've talked from Greg Bottle over at BNP Paribas. He was saying he could see his 16 percent downside in equities. I think Mike Wilson is sympathetic with that view. What could make him change it?
At 10 a.m., we hear from Fed Chair Jay Powell. He is testifying ahead of the Senate Banking Committee, as John and Tom are talking about, 9:00 a.m. We get the comments released ahead of it. So perhaps we'll get some indication of where he plans to go, or maybe it'll just be some sort of antiseptic comment that gives him leeway to say whatever he wants. At 3:00 p.m., we get U.S. consumer credit. Are people still borrowing to spend? You know, and this to me is one of the main questions. How much more dynamism is there left in
the consumer spending engine that has fueled U.S. economic growth? This fuels of the inflation that we see in services in particular. Is there a beginning of some sort of restraint, especially as rates go up, as people get a little bit more concerned about what's to come? Lisa, thank you. Let's get straight to it in the equity market. And a home equity strategist at Wall Fargo Securities joins us now. Anna, always wonderful to catch up with you.
Good to see you. Want to start with that line. You start the week with with over over Chris Harvey and Wells Fargo. Do not try. As if we're in a bear market.
We're not. And what does that mean? What we spoke about earlier this year, how there is a fear of the bear market. Another repeat of 2022. But to us, we don't see those same
signs. The Fed has slowed down considerably. Credit markets stay healthy. The consumer continues to spend and and wages are continue staying strong. This is not the sign of a typical bear market. At the same time, we're not expecting this massive bull rally either because we don't quite see the catalyst there.
So rather than trading fearfully and too defensively, we're still on the offense here looking for opportunities in that equity market. So just to be clear, this is another way of saying October, what's the low for you? That was the low. We won't say it's the ultimate low. We do think that equities can drop lower, but for us it would take a lot to see those October lows again. It would have to be quite extreme case. And part of that right now, we don't see it lining up that way now. You know, we always love to talk about
tail risk, but our base case scenario in the near-term, we see more upside for equities. And I want to go away from the quantitative analysis and go to what you think is fundamentally going to happen in corporations. I know your love for team Mercedes and you, Lewis and George, just want to go faster. Are corporations going to be able to go faster given the high interest rates? Are they going to adapt and adjust constructively? I think they're still going through those growing pains right now and they're really wondering if the consumer starts to weaken, can they make