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tv   Bloomberg Real Yield  Bloomberg  January 28, 2022 1:00pm-1:31pm EST

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jonathan: from new york city, bloomberg really yield starts right now. coming up, chairman powell teeing up rate hikes, bank of america calling for seven this year, fueling a volatile first month of 22. we begin with the big issue, march and beyond. >> in march, it is go time. >> we are seeing a massive migration up in expectations for rate hikes. >> that that has to be careful. >> bank of america is at seven.
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>> we hear talks of seven interest rate hikes this year. the market is expecting a significant amount of tightening. >> more and more aggressive monetary tightening. >> we are at a turning point. >> does the fed have to tighten the screws more than that? >> a lot left to be determined. >> we are walking a tight rope here. jonathan: joining us to discuss is subadra rajappa, tony rodriguez, and gershon distenfeld. how far do you think this fed is willing to push things? subadra: it is hard to know. if you listen to chair powell's statements, he did not deliberately commit to any preset path of rate hikes. what we know is that they will hike rates at the march meeting, but beyond that, it will depend on the data.
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we know that inflation is what higher than the projections in december, but they feel the labor market is strong enough to be able to withstand a more aggressive path of rate hikes. that said, the market is not really willing to look at the longer-term and say the fed is going to be able to orchestrate a prolonged period of expansion. the terminal fed funds rate did not budge at all. the market priced in five hikes for this year. i think the fed will be very cognizant of that because that is ultimately what decides how long the expansion lasts. jonathan: you talk about the strength of this economy, the strength of this labor market compared to 2019. this is what he had to say. >> i think there is quite a bit of room to raise interest rates without threatening the labor market. this is, by so many measures,
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and historically tight labor market. jonathan: when did you think when you heard the fed chair say that earlier this week? gershon: i thought the fed chair was just giving him and the fed optionality. the market is pricing in five. who knows? the fed will tell you they don't know. they were more hawkish this week than anyone would have thought. i was not surprised given what has happened. what if it is saying is we are going to look at the data, see where inflation is. if supply chain bottlenecks work themselves out over the next few months, inflation starts to come down, they will not go as high, or they will pause. but he gave himself the optionality. [indiscernible]
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all options are on the table. if inflation stays stubbornly high, maybe seven or more hikes this year. jonathan: i'm are running with it. "the fed as all but admitted that they are behind the curve. we look for seven rate hikes this year. this should affect the economy with a lag weighing on 23 growth." tony, run me through your thoughts on that. 725 basis point hikes this year. tony: good to be with you. certainly high level of rate hikes being protected by bank of america. they have eliminated forward guidance for the first time in over a decade. we all know the job of that that is to pull away the punch for when the economy is hot, inflation is running high.
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we think seven hikes is the equivalent of tipping over the bar and shutting down the party. we don't think the economy can handle that in 2022. our guess is four hikes this year, balance sheet reduction, and then you'll see tightening in early 23. we don't think it is seven this year. the curve will flatten dramatically, potentially invert on 2s and 10s, and that may destabilize broader markets and then maybe we can get to where the fed put is suddenly in the money, even though we know it has a lower strike price today than it did in previous cycles. jonathan: subadra, barclays is asking the right question now, are we at the point of maximum hawkish this? i am sitting here asking myself, where are the upside surprises going to come from? we saw that with eci this morning, yields backing away.
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where are the upside surprises going to come from, where is the hawkish nurse going to come from if you have bank of america at seven in the market at five. do you start to lean the other way? subadra: my instinct is to lean the other way but there is a lot of variability. where i see the hawks coming in is from the perspective of maybe supply chain disruptions getting worse, contagion into emerging markets, china. some significant growth slowdown there. those are the concerns broadly speaking on the inflation front. otherwise, it feels like the market is price for rate hikes this year. i don't see us pricing in seven hikes without a whole lot of clarity on the data over the summer. the expectation, even for the committee, is that base effects will kick in. middle of this year you should
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see inflation start to decline. if that trajectory happens, i don't see the rush for the fed to hike at every meeting this year. jonathan: and we don't even have the clarity on the balance sheet reduction, what kind of impact it will have on markets, the economy going forward. what is the relationship between this move on the front and and shape of the curve, what will influence that in the coming quarters? gershon: liquidity, we think the curve will continue to flatten. history has shown that is what happens from a hiking cycle. what we saw this week was a microcosm of that. yield on the long and almost as much, and then they rallied all the way back yesterday. the u.s. does not live in a vacuum. at some point, we start getting much about 2% on the 10-year, that will be very attractive to many foreign buyers.
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if the fed has to go faster, quicker, we could even see in inverted yield curve. jonathan: tony, your thoughts on the yield curve? tony: i think they will front end the hikes this year, maybe consecutive for the first three, but then we think it will slow down in the second half as inflation data begins to moderate. we think you'll see a flattening. we don't think you'll get to curve inversion on 2s/10s because you are not pressing in seven rate hikes. of course, if the data goes away, employment seems to be stuck at this level for the next few months, that could then drive us to in inverted curve and to seven rate hikes. jonathan: and then the worry on hiking into weakness. we had this massive year in 2021, inflation fears, fed response to it, and that every kind of downside surprise we get, people extrapolate that out
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to the rest of 2022, and become nervous about what is to come. we saw that with consumer sentiment earlier this morning. comes in at a decade plus low end of the worries start. factor that into your thoughts on where you think this curve is heading. subadra: that is definitely a concern. the curve remains flat for a good portion of this year. where i see prospects for some term premiums buildup is based on how the fed decides it will unwind the balance sheet. there is a potential they hold treasury bills, they have mortgages they could be paying down. they have ways that they could steepen out the curve, but to me, 2s/10s at 60 basis points, the entire curve well below 60 basis points is troubling. two years out, the curve is extraordinarily flat. the market is pricing in the
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potential for a meaningful slowdown in growth in two years time. this goes against what the fed is trying to do which is prolong the cycle as long as it can. it does not want a shorter and faster cycle. it wants a very prolonged period of expansion. jonathan: do they have to choose between a long expansion and inflation? can they do one without hitting the other? gershon: we are in an unprecedented environment, at least in my career. certainly had shocks over the past few decades. i think this is the fastest things have changed. in some ways we are in uncharted territory. growth is very strong at a time when we are wrapping up qe, hiking rates, but we are still accommodative by historical
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standards. the next few months will be very telling. i think the puts have been re-struck here. they will not bury that the equity markets are back down. we got down 25% on equities and they didn't care. they will do what they have to do to fight inflation. jonathan: we will talk about that next. gershon distenfeld, subadra rajappa, tony rodriguez are sticking with us. that conversation is next. this is bloomberg. ♪
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jonathan: live from new york
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city, this is bloomberg real yield. it is time to kick things off in europe, recording its lowest week of the year. a quiet stretch in u.s. high-grade markets. weekly sales hitting $2.6 billion, short our projections and missing estimates for the first time this year. the junk-bond remains open. we need to talk about the fed put. this is what guggenheim this is what guggenheim. >> the options for puts are running out given the high valuations. it would seem to me to make more sense, so let's start to reduce the size of the balance sheet which will reduce the growth of money. jonathan: back with us are subadra rajappa, gershon distenfeld, tony rodriguez. your thoughts on how things have changed in this moment versus
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the previous cycle, what we saw repeated over the last 10 years? gershon: what we saw in reality and what the market came to expect was that the fed would bail us out. as soon as we got that volatility, the fed went out of its way to sound more dovish. i think this time is different. maybe if we are in real bear market territory there is a change, but if you listen to powell -- maybe he didn't outright say it -- but he made clear implicitly that if late in remains stubbornly high. let's be honest, six months ago, we all thought it was transitory. if it stays stubbornly high, they will act aggressively until it gets under control and will not worry about the markets. jonathan: subadra, agree? subadra: it depends.
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what you are seeing with four or five hikes, this normalization of policy, you are going from the severe lower bound to something where it will still be accommodative policy was. you are looking at accommodative policy. the question is do they get to tighten to the point where policy is restrictive? i am not sure that we get there this year or even next year. i think for the most part they'll be very measured after they get into shape around 1.25, 1.5%. beyond that will be much more dependent on financial conditions. jonathan: a lot of people talk about where policy will be restrictive, they use words like, we can calculate that, we can work that out. how difficult is that in practice to work out? isn't that just an experiment in
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real time? subadra: i definitely think so. if you look at the example of the last cycles, they kept raising rates to the end of 2019. next thing you know, they had to pivot rapidly because of this selloff we saw in equities. i should say 2018, sorry. that is the dynamics they are looking for. they keep raising until they get to the point where they see financial conditions start to tighten, and then they have to reverse course. it is more about setting expectations then don't exactly where and when to stop. jonathan: i'm pleased we mentioned the labor market quote at the start of the show. when i heard that, it reminded me of the back end of 2018. put together, quite a bit of room to raise interest rates without hurting the labor market. in 2018, we may go past neutral
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but we are a lot way further from neutral. probably that was a bad call at the end of 2018. how do we know? neutral is here, this is where there is trouble. how much of a guessing game is it for you, tony? tony: the reasoning it is a guessing game, it is a multifactor model. it is not just about the rate but what is happening with economic conditions, foreign growth, etc. how the market responds to those factors drives the fed's decision-making. the reason the put is so much lower this year comes down to their mandate. in the previous 15 years, they've been looking at a market where gdp growth was troubling to get to 2% real, inflation was below the 2% target. today's environment has gdp well above potential and inflation well above the 2% target.
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they certainly will have a much lower price level in the equity market for that put, potentially also for the credit market. our view would be that the credit market might give a clearer signal to the fed as to when maybe policy has gone too far in terms of looking at risk premiums in those markets rather than equity markets. jonathan: i want to turn to credit, read your quote for the audience, gershon. within credit, it is a tug-of-war. how difficult is this moment for you? gershon: it is tough that there is not a lot of dispersion, not a lot of opportunity to add proactive alpha. tony brought up an excellent point. the credit markets are behaving a lot better than you would have thought. s&p was on a rally, down today.
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but the most important factor is ccc's are outperforming. if the credit markets were telling you the risk of the fed going too far, ccc's should be moving in we have not seen that. if we start to see weakness in lower credit quality despite higher rates, if higher credit outperforms, maybe we are in the danger zone. jonathan: you are a student of market history. when you look back to previous cycles, do you have more confidence in the continued resilience of credit versus equities? gershon: both are very rich by historical valuations. that doesn't mean that either don't will suffer in the long term. there is little correlation between short-term returns and valuations.
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i am not an equity expert. you can just look at the levels of spreads, everyone's favorite indicator. it's a completely different market. three years ago, most of the past two decades, [indiscernible] tighter spreads are justified. this is something we have talked about many times before. longer-term returns, true in the equity and credit markets, will be lower than in the past 15 years. jonathan: gershon distenfeld sticking with us alongside with subadra rajappa, tony rodriguez. a number of global rate decisions. that conversation is around the corner. this is bloomberg. ♪
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jonathan: live from new york city, this is bloomberg real yield. time for the week ahead. rate decisions in focus around the world with the rba kicking things off on tuesday. thursday, ecb, bank of england. wrapping up the week with the main event, u.s. payrolls on friday. with us now i subadra rajappa, tony rodriguez, gershon distenfeld. the bank of england has already made a move. can the ecb really sit this one out? i saw the german print for gdp this morning, dreadful. do you think they can? subadra: i think they will. it is still too premature for them to have any pivot. the market is pricing in aggressive policy normalization, rate hikes for this year. there is still focus on asset
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purchases, moving away. that is where the focus will be in the first quarter, especially with the slow down with omicron, like the bank of canada. they will be cautious as they are still actively purchasing assets. jonathan: let's start the rapidfire around on that question. rate hikes from the ecb this year, yes or no? do we get any? gershon: no. tony: no way. subadra: no. jonathan: credit spreads, wider or narrower from where they are by years end? tony: modestly wider. gershon: unchanged. subadra: wider. jonathan: final question. you know what it will be because i keep coming back to it.
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if you put all my shows together over the past three months, these numbers keep going up. how many rate hikes this year from this federal reserve? subadra: three. tony: four. gershon: my very sophisticated models is an average of 5.38. jonathan: thank you. i need to get my team out of here before the snow starts coming down in new york city. see you next week, same time, same place. this is bloomberg. ♪
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mark: welcome to the bnn bloomberg audience. i'm mark crumpton with bloomberg first word news.
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ukrainian president volodymyr zelensky says russia's posture on the border has not escalated since last spring and that the media is making the situation appear worse than it is. >> he image that mass media creates is that we have troops on the roads, mobilization, people are leaving from places. that is not the case. we don't need this panic. mark: president zelensky says warnings of an imminent invasion by moscow is damaging the economy. russia intends to avoid invading its neighbor despite amassing thousands of troops on the border. in vienna, diplomatic attempts to revive the landmark nuclear deal between iran and world powers are entering their final stage, according to european negotiators who caution that political leaders still need to make difficult decisions to strike an agreement. envoys adjourned their eighth round of discussions today, 10 months after

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