tv Bloomberg Surveillance Bloomberg March 21, 2022 8:00am-9:00am EDT
>> the big elephant in the room is inflation. that is the issue. >> commodity prices were already on the upside, but they are definitely getting pushed higher. >> what the fed need to do is send that is simply step up on inflation. >> unless they can fix the supply chains around the world and do something about energy prices, i think they are tilting at windmills right now. >> this is "bloomberg surveillance" with tom keene, jonathan ferro, and lisa abramowicz. jonathan: what a fascinating bond market. if you are not interested in
bond markets, bear with me. from new york city this morning, good morning. this is "bloomberg surveillance ," live on tv and radio. do you like the promo for the next hour? stay with me. istk -- tk is away. we are up six basis points on the day. lisa: the big question of the morning, our bond markets and stock markets speaking past each other or peeking from the same book? jonathan: your three year, your five year, your seven year trading above where you 10 year yield is right now. that curve is inverting. lisa: basically, inflation running hot in the near term. the fed responding with faster rate hikes. over the longer-term, how much does this lead to lower inflation ahead and a lower fed funds rate, which is basically being priced into the bond market as people see the value of locking in yields a little bit north of 2% for 10 years? jonathan: how far is this fed willing to push it?
you will hear from so many fed speakers this week. raphael bostic moments ago saying risks are two-sided. he sees six rate increases in total in 2022. that is not a major move over the next 18 months or so. kailey: he says the pace of rate hikes has been tempered by high uncertainty as it relates to the war in ukraine. what is interesting is this echoes what we heard out of the boe last week that warned of risks on both sides of the rights outlook. on one hand, you have high inflation exacerbated by the conflict. on the other hand, you have concern around growth for the same reason. how do central banks come down on that? it will be interesting to your from the chairman later today. jonathan: we often talk about the data come of the information, than how i market responds to the incoming data. stuart kaiser of ubs picking up on that this morning, publishing moments ago, "we are a degree less cautious this week, not
because our views on geopolitical and policy rates risk has improved, but because price action shows the market more tolerant of those challenges." it is how the market is responding to the information, not just the information itself. lisa: it is not just predicting the future, it is predicting everyone else's response to that future event. how much do people get confident -- scott minerd you were talking about earlier -- that we could see higher equities from here, even with an inverted yield curve? how much is this the only place you go still? do you hide in the dollar, gold, cash if you've got inflation running at 7.8% on the cpi level? jonathan: let's go to scott's call. he emailed us about 5, 10 minutes ago, and came out with his base case, a move higher of 20% in the equity market. could be more over the next 12 to 18 months. took note of what we are talking about in the bond market. if we can rally through it, we
have in the past, so why wouldn't we now? lisa: perhaps because we are coming from a high base, and if people think real yields are going to go close to zero, then how much do you get some sort of pushback on that front? frankly, i don't have a call. i don't think anybody because -- anybody does. jonathan: futures unchanged on the s&p. on the nasdaq, down about 0.1%. lisa has no call. [laughter] lisa: is that the headline today? we are all confused. jonathan: the two-year up about five basis points. if you are just tuning in, year to year yield now has a 2% handle, up seven basis points on the day. twos-tens, now a break of 20 points. the spread between the 2, 19 basis points. that curve is flatter. lisa: how much does this pressure the banks? remember when we were talking
about the steepening yield curve and how that was going to help the banks? now you have the fed could be hiking, but the yield curve could invert, creating some uncertainty in that sector. jonathan: david riley joins us, chief investment strategist at bluebay asset management. your reaction to what is happening in this bond market at the moment? david: i think the bond market is clearly signaling that it is not as bullish as the equity market. i think there is a little bit of a disconnect between those two, and if you look at the one year forward, tends to's had already inverted. -- tens-twos had already inverted. i don't think the market is necessarily pricing a high risk of recession. i think what is pricing at the longer end is a wider distribution of outcomes. there's this uncertainty you have been talking about during the program. where is inflation going to
settle? how high is the fed going to raise rates? we will see growth not only this year, which is going to be reasonably solid, but as we go into 2023 and 2024. what we do know, priced in the two-year note, is that the fed is on a hiking cycle. they are going to be raising rates 25 basis points every meeting. it is going to start balance sheet reduction as well, and some tightening in financial conditions. that i think is going to be quite a meaningful headwind of risk assets, particularly for equities. jonathan: if we were to price stagflation in fixed income, and this is not a view of mine, this is an observation about what is happening in fixed income, you would say what would happen ultimately is you would start to see inversion of the yield curve because this market would start to smell out slowing growth, and what you would also see is elevated breakevens because this market would believe that even with slowing growth, inflation
will remain elevated. i have to say, that is exactly what i can see. post federal reserve, what we have seen is the curves slowly invert. we've got three year yields above tens, five year, seven year yields above 10's. at the highs of the year last week, on tenure breakevens, isn't that what stagflation starts to look like in fixed income? david: you are right to highlight that, but also i would say look at the five-year-five-year in terms of inflation breakevens. that is actually not that far above what you would consider to be over the medium-term the fed's target. what the market has done, with the bond market has done is say we've got a stagflationary shock coming from the russian war on ukraine. we don't know how severe that is going to be in terms of growth and in terms of inflation because it depends on how that conflict develops, what happens
in terms of commodity prices. but we do know the reflection is going to be higher as a result of that, particularly in newer terms. clearly the market is pricing a broader distribution of risk, and i think that is why we are starting to get a bit of a bid at the longer end. that inflation pressure is feeding through in terms of the fed, but i actually think now we are pretty fairly priced at the short end. we closed our short duration positions at the end of the curve because i don't think the fed is going to be more aggressive that they setting out at the moment. what i think the fed is clearly signaling in the press conference is that we want to avoid those stagflationary risks. we need to get to signal
sooner rather than later. i think they are on a pass to more aggressive path for rate hikes. and then let's see what happens in 2023. my bias is the fed will have to do more because of those sticky inflation. right now, i think the market is reasonably well put, particularly at the shorter end. lisa: if you are just as confused as we are, what is the safe it -- the safest asset class right now? david: where i would go and where we have been at the margin adding some risk is basically, for example, in credit. the credit market is part of the broader bond market, and it is not signaling rich -- signaling near-term recession risk. we have seen repricing both in yields and spreads, and i think you're getting comments over the next 12 months or so, so actually do like parts of the credit market, and in places
like structured credit, getting exposure to the u.s. consumer through mortgage securities and other structured credit, i think guests were highlighting the consumer has proven to be resilient. so if you are cautious around the risk, i think u.s. consumer risk is a good place to take exposure. jonathan: interesting. david riley, fantastic to catch up, of bluebay asset management. what a fascinating time in this bond market, just to see things slowly invert. to see that persist, it is kind of a toxic environment for risk assets, except risk assets are doing ok. jonathan: you asked the question about flash -- lisa: you asked the question about stagflation. i think what we are looking at right now is definitely a gloomier bond market than the equity market still seeing that
resilient consumer. whether it is dave altig, david riley, the idea that people are still spending and still have more to spend. jonathan: to be clear, it was just an observation about what is being priced as opposed to me making a call or stating an opinion on what i think will happen in the future. a line coming out of the u.k. from prime minister doris month -- prime minister boris johnson's spokesman, saying the u.k. saying russian-made hoax calls to ministers last week. kailey: it all speaks to the idea of disinformation circulating as you see this war ongoing in ukraine. hoax calls to british ministers. jonathan: we got a whisper of that last week. people pretending to be officials from ukraine to get a call with the british government. interesting times. coming up, the latvian defense minister, about 20 minutes away with maria tadeo. futures unchanged. this is bloomberg. ♪
ritika: keeping you up to date with news from around the world, with the first word, i'm ritika gupta. boeing 737 passenger jet has crashed in a mountainous area of southwestern china. the china eastern airline flight was carrying 132 people. no word yet on casualties. the plane was a 737-800 model. china eastern's withholding flights of those planes. ukraine has rejected a russian demand that its forces lay down their weapons city of mariupol. the ukrainian government says instead, russia should let residents leave and deliver aid to those who want to stay. meanwhile, talks between the suicides are likely to resume -- the two sides are likely to resume -- to resume today. china would face serious consequences of it tried to cushion the blow on sanctions to russia. judge ketanji brown jackson will
go before a senate committee today for her nomination to be the first black woman on the u.s. supreme court. unless a major problem develops, the democrats' narrow control of the senate means confirmation is all but assured. goldman sachs has developed its third over-the-counter crypto offering to wall street investors. goldman derived a derivative relative to bitcoins price. global news 24 hours a day, on air and on bloomberg quicktake, powered by more than 2700 journalists and analysts in more than 120 countries. i'm ritika gupta. this is bloomberg. ♪
negotiate does not mean surrender. we are not ready to give up either on our dream of territorial sovereignty or integrity, but we are ready to negotiate, even with a preliminary -- a brutal -- a brutal enemy, in order to stop it. jonathan: the nasdaq 100 down 0.2%. this follows the biggest weekly gain on the s&p 500 of the year so far, taken all the way back to november 2020. in the bond market, some fascinating moves, up seven basis points on twos, 2% now. on a 10 year yield, 2.20%. on a three year, just above that, almost 2.21%. that curve, there it is. not just flatter. it is starting to invert. lisa: it is starting to invert in many places. when do we get it crossing the threshold? but again, how much does the fed
try to get ahead of this and how much this is being priced and elsewhere? jonathan: we get some comments from chairman powell in about four hours. looking forward to that. let's talk about china and the united states. there was a call last week, and this is what we heard from china's ambassador in washington. the country would do "everything to de-escalate the war in ukraine." its relationship with russia "not part of the problem." lisa: here is the issue. are they actually going to come out and take steps to pressure russia, or are they going to continue this line of neutrality in a conflict where you kind of cannot be neutral, and basically say it is nato's fault for supplying weapons. we do supply baby formula and food and things like that. can they remain in that kind of nonpartisan kind of place, or do they have to be taking a stronger stance? jonathan: terry haines joined us
, founder of pangea policy. the president flying into europe as war continues in europe. what you may expect this week? terry: i think what the fed may expect from the president is three things. one, he's got a prep call with a lot of the western democracies today for the summit, but we should expect that the united states and nato hone their strategies to try and figure out what the next step is. secondly, i think the united states needs to come to a really razors edge point on what its own strategy is going to be. we have seen some missteps here, most famously with the whether or not airplanes will
be delivered to the ukrainians are not come as a president biden needs to get his team's later focused on what they are doing and how they are doing it. thirdly, i think the president is going to have to start talking to the american people about exactly what america's role here is. there have been a lot of cold war analogies thrown around. i will give you a different one. franking roosevelt, the arson bill democracy. that is where we are heading. he will have to be explicit about that with all of the implications for the economy that that entails. lisa: implications to the economy, but also where this war goes, a lot of people, myself included, look at these images of people being killed, a village is being destroyed, towns and cities being destroyed by the bombings. at what point does the pressure build for western nations to enter with troops even though they have been saying it frankly , and strategists agree with
them, that would be the start of world war iii? terry: this is one of the points i have been thinking about. it was brought to mind by another weekend interview that was secretary of defense austin, who was pressed on pretty much with the red lines would be for the united states here. secretary often would say we are going to have to be very clear in successive weeks about what we think the humanitarian costs are here, and just how far we are willing to go. we are also going to have to be clear with the european union's -- with the europeans that we will back them economically, and with oil and gas and all kind of other things, too. so it is a problem. kailey: in terms of where further u.s. actions could emanate from, how much power is within the executive branch exclusively, and what role could
congress play here? terry: there is a korean war era law called the defense production act that was first brought out of mothballs in 9/11 and has been used increasingly since. it is flashed around a lot. but it allows the president and congress essentially together to provide some industrial direction to the economy about what the most important things are, what should be produced and where they should go, that kind of stuff. the united states has used that in kind of marginal ways over the last 20 years, but if we are going to really support europe in terms of their energy is much as anything else, and key people warm and dry or there come -- dry over there, we will have to take a different look at exactly what we are reducing and
congress has been leading on a lot of the sections and military actions. so congress i think is in a mood to keep pushing on this. the administration needs to return from a defensive stance and start leading a unified foreign policy year. the next step needs to be taken and we need to honed down exact a what we're doing and how we are doing it. jonathan: given the defense production act has been used in the past, is there any reason to believe they could use that and it would work? terry: i think it could come ashore. in terms of prioritizing what gets produced and how, it is a tool that can be used, so that goes for the both domestic and international. i do not know where it has been
used hugely on the energy front come but there's no reason why it can't be. jonathan: thank you. some interesting thoughts to ponder for the weeks ahead. how many fed speakers other today? lisa: there are at least two. no, mary daly is also speaking today. jonathan: this week, there will be tons. interviews here, there and everywhere. lisa: what will we glean from them in terms of the reaction function if last week's press conference seemed to give the different message than we thought that it gave, at least at first blush? jonathan: it would be interesting to see if they believe the market correctly interpreted what they were trying to communicate. they have been open about that. if they believe the market has picked up on their communication , they said that, so i wonder if they buy the price correction of the past couple of days. lisa: fed officials are also confused as to how to accurately
jonathan: kicking off the new trading week with interesting moves in the bond market. futures down .1% on the s&p. in the bond, yields higher by 222 on the 10 year. not the 2% on the two-year. lisa: it seems to have pushed through some sort of threshold. how much do we get the message today from jay powell? jonathan: larry summers moments ago saying this. why would anyone's best guess beat that for the first time we would have unemployment at 3.5%? this is the triumph of hope over experience and analysis.
there it is, in the forecast of the federal reserve. i think it is fair to say he is throwing shade at the forecast out last wednesday. lisa: he has been for a while. how much do they have to come out and say we have to dampen the economy to dampen inflation? this is not a good situation for them. it has a lot of people nervous. jonathan: we will be keeping an eye on that. we have been lucky over the last month with safe and has to team at bloomberg bringing us conversations out of brussels and the continent. we have another one right now. hey, maria. maria: we are joined by latvia's defense minister who is one of the most outspoken ministers in the european union when it comes to defense. you were telling me that europe
needs a reality check and needs to be more forceful with russia. what do you mean? >> the job is half done. we reacted in a united form afar as sanctions towards russia and military and humanitarian assistance to ukraine. now we are in the fourth week of aggression and the job is half done because there are still things in russia functioning. as far as europe itself, i think we have to go complete with completion of the de- putinization of societies where the russian people have been deeply rooted in the societies. this has to be done. as far as military and other
support to ukraine, maybe it sounds at the beginning as a dangerous approach, but i think we should consider to reverse the early escape of a number of indices from kyiv because the country -- embassies from kyiv because the country needs support. maria: if it means what i think it means, many in europe say it is provocative. you say europe should not be scared of being provocative when it comes to putin and russia. >> it is simple. they will always find an excuse. that is not important. i think we should look into the eyes of the kremlin leaders and saying you committed a crime, you committed aggression, now we will act. there is nothing provocative simply telling you have been
buying these properties and you are waging an aggressive war just like hitler's germany against a neighboring country, but at the same time you want to enjoy a great life in the west. this is impossible. maria: you say de-putinize. you say it is almost like hitler was nazi germany. it is no secret you are part of the soviet union. is this a madman or someone who has been clear he wants to restore the ussr? >>'s state of mind at this moment is difficult to say because we do not know the information first hand. he is kind of confused because he was not thinking this type of
war will not succeed. at the same time, we have to act in a way that we force all russian society to rethink its stance. i think it includes the information sphere and all the possibility to break the bubble of information which the kremlin is using for their own population. maria: there is a debate about what to do with energy imports.
in dollars. is it time to target energy? >> we have to get the western countries out of russia. it is a moral duty to leave now. as far as energy, if the country had been on the gas or oil needle for 20 or 30 years, it is difficult to do in one day. imagine if ukraine was invaded by russia or the european union was invaded, would we still buy their gas? maria: when germany says we cannot unplug, your thinking germany is wrong, they can do it? >> it is difficult to do it immediately. we have to be hyperactive and fast to unplug as fast as we can and not to think about returning to this anymore. maria: you say it is a point of no return. isolation for russia. when it comes to ukraine, many believe it has been 26 days, brutal on the ukrainian population, negotiate a cease-fire and get on with it. >> a cease-fire is not a way out. the way out is immediate withdrawal of all russian troops from ukrainian territory. there is no other way out.
ukrainians by their blood paid for their membership in the european union. i understand ukraine cannot become a member today or tomorrow, but there must be a fast-track established along with the way we would pay for the construction of the country. i believe five years would be the limit with putin threatening to accept the country as a member country. maria: over the weekend, we saw the russians say you have to surrender mariuple. do you think that ukraine can win the war? >> ukraine already won the war. even if this city falls and even if kyiv falls, which i don't think will happen, because these people have nowhere to retreat. western european friends, we
have nowhere to retreat. we have to keep the line. we have been retreating on this dictator for too long. that was our hugest mistake. maria: i know you have communications with the ukrainian government. do you think zelensky will win or die? >> he will win and we will stand with him. maria: always good to speak with you. you're always open with your words. jonathan: thank you. wonderful work. i will catch up with you in 30 minutes. just going through the data to get a feel for latvia's dependence on russian gas compared to germany. you might have thought it was less based on the conversation. it happens to be more. >> 93% of its gas supply comes
from russia. for germany, the number is only 49%. it is harder for players in the former soviet union. jonathan: there are different ideas on what we should do next. kailey: i wonder how much we can glean from the conversation with qatar and the conversation president biden's administration has with the local oil and gas producers to export more to europe, how much more they can ramp up and how much money they will put behind it. jonathan: your equity markets down about .1% on the s&p. on the nasdaq down .3%. this move on the bond market get your attention. 10-year yields update basis points. we have two .25 on five's.
kailey: we have seen a hawkish pivot. people can view it as a dovish pivot or whatever people want to say about the press conference. i heard on one hawkish pivot again as inflation surprises to the upside. jonathan: interesting word choice. ongoing. you think the pivot is still developing? lisa: they have not made the moves yet. they have raised 25 basis points as expected. they stopped purchases when expected. they just stopped expanding the balance sheet. forget about shrinking it. i would say this is an ongoing shift. jonathan: kailey leinz is just getting started. the conversation about 50 at the next meeting. kailey: escalating conversation.
you heard that already at the march meeting. what will we hear from the chairman? the chairman forecast we are moving 25 on capitol hill. his indications matter a lot. if he signals the doors open for 50, i wonder how the market reacts. jonathan: as we say often in the news conference, the chairman has to reflect some consensus. today is an opportunity for him to offer his opinion. lisa: the consensus right now feels like we know. we just don't know what fed chair powell seems to think because he does not seem to be with the consensus. jonathan: we will continue to count you down to chairman powell and his address later. looking forward to that in about 20 minutes. from new york, this is bloomberg. ♪ >> keeping up to date with news
from around the world. in china, a boeing 737 operated by china has crashed. there were 132 people on board. no word on casualties. the video shows smoke in the western area. china is withholding flights of those planes for now. russia's attack on ukraine has forced 10 million people to flee their homes. that is almost one quarter of the population according to the united nations. while most displaced people stayed in ukraine. 2 million are in poland. president biden's administration will brief business executives today. among the companies at the meeting, exxon mobil and bank of america. the price of oil rose for the third day in a row. the global oil market has been
pitched into turmoil by russia invasion of ukraine. the e.u. will consider a russian oil embargo. there has been a shakeup at credit suisse with the chairman stepping down along with other members of the board. credit suisse is reeling from a series of scandals earlier this year. the chairman was outed after just nine months on the job. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i am ritika gupta. this is bloomberg. ♪
2022 more for 2023. and extremely aggressive rate path is appropriate. conditions are shifting rapidly. demand could warrant adjusting the trajectory. lisa: raphael bostic speaking, the atlanta fed president, joining a roster of speakers, including fed chair jay powell. i was looking at some of his other comments. kidding inflation under control is their top priority, shifting away from employment mandates. kailey: if what inflation is what the central bank are worried about, if they are willing to get it under control no matter what it costs, is that the message we are getting from yield curves which are inverting? the two-year yield breaching 2%. kriti gupta is looking at yield
curves with her chart of the day. we have inversion in some places. kriti: if you keep this in mind as a proxy for all the belly curves, you will see it is inverting similarly. you have not seen this going back to 2006. the bond market is pricing in the aggressive rate hike in the face of a low growth environment perhaps brought in by geopolitical tensions, also pricing in a quick policy reversal. some say this will be a harbinger of what you will see in the other curves. that would potentially signal more of a recession. whether that will happen is one of the questions in the market.
>> this has led not just to the united states with ingressive rate hiking path. the co-head of global fx rates in emerging markets at global sex is joining us. there has been a complete rejiggering on the heels of the war in ukraine. how much do you think further rate hikes from the federal reserve will exacerbate the pain in the areas hardest hit? >> it is a tough spot for emerging markets. the rate hike path you described, the aggressive moves, the fact that they are more focused on inflation is having an impact across emerging markets, especially those where the external funding requirements are acute. you are beginning to see this ripple across the frontier
markets, places like egypt, pakistan, ghana, a lot of countries on the wrong side of the terms of trade shift going on. they are beginning to feel the impact of this through cold currency moves, interest rate hikes. this is a difficult place for emerging markets. the interesting thing is the extent to which markets have differentiated between a flight to safety and a flight to commodities. you see places in latin america that are exporters be quite resilient even though you're seeing commodity importers bear the brunt of the shock. lisa: this has been the big question. can the central banks in latin america get ahead of the fed by hiking rates enough to make them attractive? do you think it has been accurately priced in that the
fed will be on the aggressive hiking path? >> seven hikes for the fed is what we have in our forecast. it is interesting you have seen a disconnect in hiking cycles, particularly in latin america, where they have been further ahead in terms of the rate hike path. is it enough? that is a good question because you have seen another shock with respect to oil prices. russia and ukraine is a big food exporter, so there's another shock that could require more hikes from central banks. there is a lot of risk premium embedded. the first hint is becoming obvious in a place like brazil and more moderately in mexico.
i think there is some chance the market starts to tease these apart. lisa: as policy gets tighter, what does that mean for the dollar? >> for the dollar, it is a slightly different question. you often see different behaviors of the dollar in rate hike paths depending what else is going on in the global economy. the 2000 hiking cycle was a great example where you had 17 hikes from the fed. the dollar appreciated against the backdrop of smaller growth. -- stronger growth. trade was flourishing. you have moderate commodity price increases. the current environment is different. there are downside risks from the shock emanating out of russia and ukraine. we have to see how it pans out before the trajectory of the dollar becomes clear.
kailey: there's a narrative about whether the dollar's status is being threatened. where you come down the argument? >> it is easy to think of reasons why certain events erode to think the reserve currency status. the freezing of the reserves means it is used as a tool in the overall sanctions that might make it less appealing. you have to look at the other side. what are the options for any country that wants to have a substantial amount of liquid assets that it can deploy when most needed? the dollar is still first amongst equals. there is a slightly greater argument for people to diversify reserves more broadly if that was not already the case. it is also important to
recognize we often have discussions after events like this in the dollar is still the most preeminent currency, partly because there is a large pool of liquid assets people can deploy when they need it. kailey: thank you so much for being with us from goldman sachs. as he was speaking, fascinating to see the 10-year yield. the two-year yield is coming back from session highs. the 10-year yield surging at one point, moving to the highest levels going back to 2019. people are gaming out what this looks like if the fed gets aggressive. kailey: they seem to be reacting to his words. how will the market react when we hear from the chairman himself, speaking for himself? i think what he says will have a
unchanged. the countdown to the market starts now. announcer: everything you need to get set for the start of u.s. trading, this is "bloomberg: the open" with jonathan ferro. jonathan: we begin with the big issue. chairman powell taking center stage. chair powell: tightening is happening right now. >> they have become fairly aggressive. >> there's a signaling to the market. >> the idea the fed has done its job, delivered as advertised. >> seven or eight hikes. >> very reflexive, buy the dip kind of balance. >> and nasdaq went up more than the s&p. >>
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