tv Bloomberg Real Yield Bloomberg December 3, 2021 1:00pm-1:30pm EST
jonathan: from new york city, bloomberg real yield starts right now. payrolls signal the all clear. the fed's teeing up a faster taper and markets pricing in rate hikes. we begin with the big issue, december 15. >> jay powell saying it is time to exit the market. >> there is no ambiguity. >> it does raise the stakes for the december meeting. >> the fed has the window to
move and will take advantage of it. >> that will be the driver into december 15. >> it is a more hawkish fed than but the chair signaled. >> the fed needs to exit this qe business. >> look at how markets are priced for next year. >> if you are late, you risk making a policy mistake. >> there is clearly more pressure on the fed to act now. >> there is a window to avoid it but the fed has to be very smart. >> the next step will be at the december fomc meeting. jonathan: joining us is bob michele, frances donald, and krishna memani. let's start with the payrolls report, got reaction, and then work our way to the fed decision. francis, your reaction to the
november payrolls report? frances: there is only one number i care about in every job number i care from now through 2022, and that is labor force participation rate. this is one of the most important economic data points over the next six months. if we can get labor supply back into the economy, we will see less wage pressure, less inflationary concern, and we can start growing this economy. today's report, i know the headline wasn't good, questions about the underlying component, but this is good news because we see that labor force participation rate rise. it is that number that will be far more important to the outlook to the fed and markets than just generally whether we are missing by 100k. jonathan: bob michele? bob: francis is right, terrific
report. you married that with the ism services index that came out, and that showed respondents showing there is still a labor shortage, and business is as good as it's ever been. this is a very healthy economy. jonathan: i has them 69 handle. krishna, your reaction? krishna: both bob and francis are making the right point. the economy is in fantastic shape right now. the key word is right now. participation will be the critical thing, not just from an inflationary perspective but more importantly, from what the fed decides to do in terms of raising rates rather than just tapering. i think frances may be too early in terms of declaring victory with respect to the participation rate. with everything going on with the virus, looking at that one number and sing the issue has
gone away, i think is a little premature. jonathan: frances donald, you can respond to that. frances: certainly not saying we are there, and i agree, what we are talking about is marked to market. a little bit of improvement in the labor participation rate, but i still worry about the first half of 2022. even though the fed is saying everything is looking good, i agree with bob, everything looks great right now. 2022, we will have lower pmi, drag from china, less income support. that will be problematic, even if we see improvements around the structural elements. we still have this big pot hole to get through in the year. jonathan: this takes us to december 15 and this rate decision. how much space is there between a taper and a rate hike?
bob: a couple of months at most. this week has been a gift to powell and the fed. it has highlighted that the market is concerned they are making two policy errors, near-term and long-term. the near-term error they are concerned about is they are accelerating tapering right as a very transmissible variant of the virus starts to spread. that doesn't seem to make a lot of sense. the longer term is the deceleration next year that frances talked about, when you will start hiking rates. i think the fed will address both of those. we are taking the other side of both of those arguments. jonathan: one about the risks of the omicron variant. we caught up with alan zentner with morgan stanley. >> risks around omicron is that the fed has to hike earlier, not later. that is because you have another supply shock compounding on top
of the current supply shock which creates even higher inflationary pressures that last longer. that would be your worst case scenario with omicron. that is a fed that has to hike earlier. jonathan: the risk is they have to hike earlier not later. do you agree with that? bob: congress is not going to like that. ellen may be right that one way to slow inflation down is to raise the cost of funding and hourly -- borrowing. so you are telling the consumer, prices have gone up, but it will cost you more money to buy that house or carry that credit card debt, or to finance your auto. congress will not like that. jonathan: they may not like it, but it is not about what we think they should do and what they will do. krishna: the taper is already in the bag. they are going down that path
regardless of what we find out about the virus variant. from that point on to actually raising rates, we have a few months. we will know a lot more in those months. the problem with the thesis that ellen is putting out, in the current environment, you can paint a picture with any credible set of argument. it could be a situation where the fed is tightening faster because inflation is picking up, but maybe we find out the virus is not as bad as we thought. the issues the market has to face, they don't know enough and they have to wait. in the interim, the risk of a policy error on both sides is increasing, and therefore volatility will probably go higher. jonathan: and the yield curve has gotten flatter.
this is a conversation about going from the tape are quicker to the first rate hike lift off, and from there, how high can they take it? this is what home and larry and had to say about that. >> when you start late, at some point, development on the ground force you to go faster than you would normally want to go. if you go faster than you would normally want to go, you risk breaking something. that is the problem with a highly leveraged economy. you are late, you risk making a policy mistake. jonathan: frances donald, we have a deeply negative real interest rate, a conversation about how far the fed funds rate can go. the talk is 1.75, others think it can go higher. it is about how steep that rate path will be. can you draw any conclusions on that just yet? frances: here is my issue.
how far we will go is a reflection of how strong the economy can accelerate. that is why omicron was such a big deal from a larger philosophical standpoint. we have to move away from this idea that we are going through one-off shocks, like a natural disaster or forest fire. to the concept that endemic covid is a smaller but semipermanent stock that reduces our risk over the long run. if that's the case, we have four or five years of this rolling epidemic. we are looking at a higher potential growth rate of the economy, and that limits how quickly we can withdraw and how far we will be able to go. jonathan: inflation is fixed. we have a deeply negative real rate in america. the conversation people are having, how much tightening do we need to see to actually see tighter policy? how much work do we need to do
at the federal reserve? bob: i think that is the right question, the amount of real yield across the markets. in our view, the fed needs to get to 2%. hopefully they will get there over the next 18 to 24 months. get to a zero real yield on the funds rate and pause there. there is a much bigger issue here. the issue we are talking about is, all of us have lived through the high inflation of the 1970's. all of us have lived through the disinflation of the last 30 years, but none of us, including the policymakers, have actually lived through financial repression. that is what we are all struggling with. maybe it is something that we should have picked up earlier, certainly when i was in london for 10 years, starting in 2000, i saw the inversion of the yield curve, what happens between tens and 30's and now to 50's, when
the government mandates plans have to buy long-duration securities. that is the great struggle ahead, financial repression. jonathan: krishna, final word. krishna: how far we have to go in terms of tightening it really depends on what your views are with respect to what the growth rate will be toward the end of 2022. on that front, frances made an interesting point. fiscal impulse will slow down meaningfully. china will slow down, we have already seen that. from the context of both of those drivers, growth rate, inflationary pressures are probably going to ease. the real question is does the virus make the fed's job much tougher? we probably see enough slow down in inflation, in growth, where they don't have to do too much,
but bob is right. 2% is not that an unrealistic expectation, but it would not be four or five times in a year, tightening path that some articulating. jonathan: we will see. 79 basis points as we close out 2020. right now, 77, pushing 78. the curve is flatter. surging volatility forcing issuers to the sidelines. that conversation is next. this is bloomberg. ♪
increasing volatility limiting issuance this week. total sales nearing 4 billion euros. and even quieter week for junk bond issuance in the u.s. a single offering from starwood properties raising close to $400 million. sticking with credit, earlier this week, bob michele said ditching government bonds and get back into corporate credit. bob: this is an opportunity to get rid of any remaining government bonds you have, and then go back into the credit market, go back into investment grade and high-yield. there may be some headwinds from the omicron variant. we will see over the next couple of weeks and months but for now corporate profitability looks good. i want to be a part of that. jonathan: bob is still with us along with frances donald and
krishna memani. build on the why, when you have a rally on the screen. why rotate out of that and get back into credit? bob: i will take a page from frances' book. three hours ago, it looked good, maybe three hours from now those comments was to look good. if you are looking at government bonds today from where they were at thanksgiving, they are down about 20 basis points. look at investment grade credit. it is the same yield today as it was before thanksgiving. high yield is up about 20 basis points today from where it was pre-thanksgiving. i think there is good value there. i look at isn services. corporate profitability is good. corporate profits will look great into next year. jonathan: you know how this works, people get greedy. i want more than 20 widening. let's get back to 500.
this could shake out like december 2018 again. why is that greedy? bob: going into december 2018, the probability of recession had risen a lot thanks to the trade wars that were arranging at the time. this time is difficult to see a recession out there. every time you have a recession, that is when you get a real blowout in credit spreads. if you don't have a recession, there are backups in credit. jonathan: the difference between what we are seeing now, the federal reserve engineered a massive pivot. it is different this time with inflation around 6%. take a look to what pgim had to say. >> is there still a fed put in play? that is the question on the table. if this is a worse situation than initially believed, then
there is not a lot of wiggle room, both on the central bank side and on the fiscal side. i am not convinced there is this "put." jonathan: frances donald, how durable is the so-called fed put? frances: i think it exists. i think we will have to live in this policy mistake land, concerned that the fed is going too fast, until we see a policy pivot. in the first half of the 2022, we will have enough deceleration in inflation, soft enough growth to allow the fed to pivot and see that reese deepening of the curve. i believe it will, but we have to predict when will people change their minds. first, they will need a lot of data that looks soft enough for them to do it. we will probably not get that until late q1 in 2022. i still believe in the policy
put. just does not always come when you want it to. krishna: let me first address the points that bob was raising. the key point with respect to credit is really not whether the scenario he is articulating can unfold. we could certainly have a much steadier environment than some of us are fearful about. but the problem with credit today is the risk reward is just very skewed. the best case is you make the carry for any reasonable time frame and then the worst case, we get into a recession and you have a 30-point correction in the high-yield market. if you wanted to make the bet that bob is articulating, you are better off making that with equities rather than credit. i would say there is a better case for long bonds than there is for credit today.
a barbell of long bonds and equity is a better outcome, better risk reward than credit. jonathan: bob michele, that is completely the opposite of what you believe, isn't it? bob: you can always say there is asymmetric risk in the bond market. if everything goes well, you get the interest and principal back. if it doesn't, it defaults, and you lose everything. i don't think there is one on the horizon either next year or three years from now. i think the economy is in pretty good shape. for krishna liking equities, i can see from his perspective, but think about this, you cannot like the bottom of the capital structure unless you like the top of the capital structure. if you like the bottom of the capital structure, then credit looks dandy. jonathan: krishna, final word. krishna: you like the bottom of the capital structure because it can go up a lot. the top can just tighten.
it's a question of not whether the scenario will unfold or not, the question is whether the risk reward proportion. jonathan: i know some managers with some long bonds to sell. krishna memani will stay with us alongside frances donald and bob michele. coming up, a host of global rate decisions and another big inflation print right here in the u.s. this is bloomberg. ♪
watched inflation print. your treasury market peak dow. in the middle of the year, we heard from frances donald who made this call. frances: we have already seen the peak in yield, we will see fiscal disappointment. that we hitpeak macro is not a surprise. we knew this would happen. what was a surprise was how tight chinese policy was, how quickly the pie in the sky fiscal game changer changed, and this delta variant which creates uncertainty around all of it. jonathan: how comfortable are you with that call with one month ago? frances: feeling pretty good right now but there are a lot of surprises that can happen until year-end. i would focus on the global component of this. we have talked about the u.s. but a lot of what happens to yields will be a function of what we get other global central bankers and china as well.
what really weighs on me are these ongoing supply-side shocks and how they will give us slightly higher inflation then what i expected, even at the time of that call. jonathan: still looking good. i can confirm, neel kashkari is scheduled to speak next week. of course, it is the blackout period for the fed to talk about monetary policy. i want to go to the rapidfire around. pastor tabor announced in december, yes or no? frances: no. jonathan: bob michele, yes or no? bob: the ship has sailed, yes. krishna: emphatic yes. jonathan: next question, fed funds, does it peak above or below 1.75? bob: above.
frances: still below. krishna: above. jonathan: that split will be important for risk assets. treasury yields above or below 2% by the end of next year. frances: below. krishna: below. jonathan: we have goodbye to 2% for the first tap of the year. above. jonathan: i had a feeling you might go there. thank you, bob michele, frances donald, krishna memani. this was bloomberg "real yield." see you same time, same place next week. ♪
michigan high school this week are charged with involuntary manslaughter. investigators say the suspects father legally purchased the semiautomatic gun used in the shooting last week. prosecutors claim the parents actions went far beyond negligence because they were the only ones in the position to know where the weapon was and it seems to have been freely available. ethan crumbley open fire inside his high school before surrendering to police. he is being charged as an adult. germany's health minister is as more than 1%, one in 100 people there, are currently affected with the coronavirus baby he is calling on citizens to be vaccinated if they have not already. top officials worn a long battle is ahead against the pandemic with pressures set to increase on intensive care units, even as infections show signs of peaking. a conflict