tv Bloomberg Surveillance Bloomberg July 25, 2022 8:00am-9:00am EDT
inflation. >> possibilities that the western world are going to need more to bring inflation back. >> brought environment. >> starting to slow down more materially then maybe what the markets are thinking. announcer: this is bloomberg surveillance with john payne, jonathan erland lisa abramowicz. tom: good morning, everyone. back together again, with you on television and radio. after that fed meeting, an important measurement of gdp. benji -- within the gdp report, a measure of inflation. from -1.5% up to 8%. the survey, 7.9%. that is trouble. jonathan: it is because of september, tom, will that be the last 70 five point basis hike in this cycle? before you get to september 23, that if the next fed meeting after this one.
you got two later market reports, tom. on the latter point, will be start to see some weakness after three weeks of seeing jobless claims in america start to entire? tom: as we say in the morning, we are as data-dependent as we have ever been. really, worldwide as well. i just don't see how the story changes. let's say it comes down to 7% inflation. that is miles of work to be done. jonathan: begs the question, how much damage needs to be done to gdp? this can be the second consecutive and america. you will get a ton of pushback about whether it is a real recession or not based on what is happening with the labor market. to your point, the fed has got more work to do, hasn't it? that means four. not two, not three. tom: maybe a nascent recovery in
china. we are still pandemic-adjusted, are we? lisa: we are when it comes to the inflation we are looking at. about one third if you take a look at the studies presented to the ecb in the past few weeks. how much is this the fed view versus a fed that is not looking for nuance. it is for inflation. it is still worried about the picture of having to deal with inflation and then they get it down far enough and they ease off. what happens if they lose all credibility? tom: can you tell me what you've seen in the credit markets? what is happening in the dynamics of credit? >> honestly, we've been looking at a rally, that has been dramatic. at seems to be the theme. last week was an incredible rally. it is poised to be the best month for riskier credit in the united states going back to
march, april, may of 2020 when the fed was really stepping out with their survival programs. how much are we hearing about earlier versus something that is more sustainable, given the profile of these companies that have financing for years to come? tom: she seems to be the one, but it is absolutely amazing how strategist not even micro-adjusting, but just trying to keep up with the gastimates in the news flow. jonathan: it is a big week for earnings. those big tech companies make up 20% of the s&p, 40% of the nasdaq 100. that is where you get a really clean read on what is happening. that is read get a clean read of what is happening with the consumer. they'd multinationals, a translation from four the back to the u.s.. formerly, maybe some insight into what has been happening in china as well.
tom: the china question is really open. john, to me, the data point of the last 72 hours, this goes back for your consideration of what john did on the real yield friday which was breathtaking. the real yield really came in last week from 0.3. jonathan: how do you say that with a straight face? tom: is a positive number, but i'm sorry, it makes some headway. jonathan: we started to see the intended consequences of fed policy, tom. they wanted to see a slowdown in housing. they wanted to see job openings come down as evidence of demand may be, just softening a little bit. what they don't want to see is the control. will we be confronted with a wall of economic data much more quickly than they are anticipating? tom: the bloomberg surveillance team seems cool, calm and collected.
let me tell you, folks, is extraordinary. the interns have really saved us this week. i can't say enough, when does the fed meat, wednesday? i can't even say enough about the quality of what the fed shows. you're going to love it. starting strong here, fixed-income strategy, bank of america private bank as well. how close are we to this strange word since time began? restricted? i've got a comment about generational dna. how close are we to restrictive. >> getting closer, definitely getting closer. another month of expectations on wednesday. then the next meeting this year will be to restrictive territory. jonathan actually hit the nail on the head earlier. the fed policy is working as
expected. and while we are not actually seeing a decrease in inflation, as you pointed out, we are seeing all of the leading economic indicators like jobless claims higher, consumer confidence down, yield curves down from flattening to inverting. all of this tells you is the actual confidence that inflation will come down. the market has been long afraid by inflation numbers for over a year now. but you are definitely in the sense that the market senses a slowdown, particularly on the housing market. all the data is coming in, telling you that inflation, which is a lagging indicator of what happens, the fed is going to have to stay through the policy. but it will be restricted by the end of the year. jonathan: would you think that
weaker economic data becomes undesirably week? what would you look for it? jonathan: -- matt: so, we think we have got a while to go. we are still 3.6% unemployment. our forecast is on bank of america securities for a mild recession. unemployment rate really up to 4.6 or so over the next year. the fed is going to be able to deal with negative economic data. moving into the mid to high 4%, even 5%. unless you actually see the whites of the inflation size,-- of the inflation' eyes,, we think they are going to tolerate a fair amount of economic weakness. we do think that fairmount of the to handle significantly higher employment -- because again, there is a very long way to go from 9.1%.
lisa: i was just going to say that this is the reason why people are saying that perhaps we've seen the peak in the 10 year yields, because what we would have to see in the labor market, in the economy to achieve what the fed is looking for is substantive and would lead to much lower growth going forward. deal agreed that we are only going lower for those ideas? matt: we had this conversation last time. that low to mid 3% range. the close we look at where the yield curve flattening from 160 basis points, and we saw future fed rates in 2023. that has not changed. we still believe we are in a consolidation range and future fed cuts are going to increase.
that four priced in active actually hit the peak next year. so it is absolutely the case, is absolutely possible that we have seen the high in 10 year rates. we would never say anything with certainty because there are still a chance that the fed is behind the curve on inflation. and if the 1970's is any example for us, coming into the 70's, core inflation was about 1.5%. there was a spy for got to about 3.5%. another spike, over 4.5%. they raise the rates three times in 1980. you only get core inflation back to 4% for the rest of the 1980's. we never got back to 1.5% level. for percent core inflation for the 80's. that is just an example like getting inflation back to where you started can be quite
difficult. if that is the case, then the fed might have to do with the market expects. the market says about 3.5%. we are jumping at 4%. jonathan: thank you. lisa, that is one more name for the long list of names i've got now. the higher the yield for the cycle for the year. lisa: a lot of it has to do with the idea that the fed is going to get what it wants, which is much lower growth, and then they are going to be able to start cutting rates as inflation does go lower and for threats that really is the type of 1980's inflation that so many people don't think. tom: i looked at it three times this weekend. way under standard deviation. it is about as consistent as my
optimism. jonathan: once again, what is happening with the triple seas. lisa: people just piling in. the biggest in 20 months. unreal. futures of half of 1% this morning. good morning to you all from new york. this is bloomberg. >> keeping you up-to-date with news from around the world, for the first word news, treasury secretary janet yellen does not see any sign that the u.s. economy is in a recession. she has told nbc that the u.s. is like the sisi -- likely to see some slowing of job creation but said that is not a recession. now the european central banks made increases in interest rates . the governing council member has said that the late increase in september also needs to be quite
significant. the ecb has tried to reduce inflation that is already more than four times its target. plus in the u.k., the next prime minister will introduce low tax investments to spur economic growth. the foreign secretary is leading the polls where she is cracking down on china's -- in the u.k. he called on the biggest long-term threat to britain. an exclusive today, the investment banks founded by -- is starting a bridge for --. the company was beginning its effort in the midst of the so-called crypto winter. funding in the industry has tumbled. meanwhile, it is less than one thirds of the record high of more than 68 per $1000. 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.
round and. jonathan: looking ahead to the fed decision and a ton of tech earnings. a list and treasury yields as well, data have six basis point on a 10 year. the court of the month so far easily. this years inflation has peak as last use inflation is transitory. tom: that is a dynamic price and of course something that is affecting all of our listeners and viewers as well. that is why this conversation is critical. he is flat out the best cross rate strategist in the world. he joins us now with standard chartered. steve, your view is an outlier. we go to 3.0% and then we stay there for something like five or
even six quarters. if we get a stephen englander outcome way below the gloom that is out there, what does that do the servitude, the belief in a resilient and strong dollar? >> i think that the market is waiting to see clear signs of a recession. the signs are powerful, but not definitive yet, and they are waiting to see some kind of inflation coming off. they will say look, we are going to wait and see where inflation goes. tom: what size of big figure move does that mean for the dollar? are you looking for five or 10 big figures like euro strength off of the 3.0% in u.s. call?
>> mostly. yes, mostly in 2023. in 2022, there is still some risks that the prophets look weak and that the equities come off. we are still not sure what is going to happen in europe. the risk is going to be harder than the market thinks over the last week. but 2023i thing will be a weak dollar year. lisa: 5%-10% is not necessarily 10%-20% obviously, but this is a big differential when it comes to the risk asset on the heels of that. what would be the driver here? is it the euro strength, or the dollar weakness in the face of more optimistic sentiment? >> i think the key thing is to
get some evidence that inflation is coming down. not defending some of the pessimism, what we've seen is that wages are lagging, so there is no labor market pushing down inflation, we are likely to see some of demand destruction leading to price calls and energy prices even in things like cars and use of other goods. i don't know that this inflation is going to be permanent, but the outlook over the next year is actually pretty good. once the market sees that, it is a risk on market. tom: steve, it is incredibly lonely. help me here. we are out of 4% at citigroup. there is a huge, huge differential.
what do you say to people that are convinced it is just going to keep going and going? what would be the damage to the portfolios, steve? steve: a very famous economist once said everybody has a plan until they get punched in the face. right now, we haven't seen the downside on the economy. labor markets look ok. we think that that pickup is coming. and when it comes, the pressures on the fed are going to be different, and the fed itself responding to the shift in the political climate. it means that demand promotes supply and every model they have tells them that that means inflation comes down a little bit quicker and a little bit slower. but it means that they sort of got themselves on the track that they want to be. having gotten on that track, why keep pushing it?
if you have the central banks, it is not what the mutual rate of interest is because they don't have a clue. the big uncertainty is how fast the economy is responding to the tightening of monetary conditions, how fast inflation is going to respond to that. lisa: given that we don't have any good models for this, can you give us a sense strategizing about markets? how uncertain the scenario is, how much of a lack of a conviction you have over a time when the dollar has really been one of the most difficult parts to get right? steve: it certainly has been difficult to get right, but right now, everybody has the dollar. the market is very long at this stage. i think that what you are seeing is not evidence that the u.s.
economy is better in some ways than everybody else. what you are seeing is indication that the world is such a scary place that the only assets you want to hold is dollars. i think once those fears recede, the dollar is very vulnerable. at one point, they thought it might be a 2022 story before the russian invasion, but they see terrible world continuing to keep going. jonathan: awesome to get your view on things. over the weekend, eric robertson putting out this note. tom: this is what surveillance is all about, this is divergent opinion. to have the 3.0 and the others
-- not others, but some strategists out with 100 basis points up to four present or even higher, this is fascinating. jonathan: tell us how quickly does inflation come down? tom: that is the mechanism that is in process to watch. but yes, wrapped around it is how quickly does the economy slow when the central bank adjusts? jonathan: this thursday we get gdp. bank of america tv, deutsche bank, all looking for a second consecutive quarter of negative growth. tom: and pinterest. jonathan: and pinterest, yeah.
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euro higher by seven basis points. bureau showing strength. a little bit of weakness. tom: right now, this is perfect and thank you to our great-looking team for doing this as we have talked to others. moments ago, a stunning conversation with stephen englander of standard chartered. we find someone to talk to with some perspective. edward barely describes his years of work and we are thrilled he could give us a moment of time here in a most uncertain summer. the great gap is stephen englander saying the fed will stop at 3.0%. others out at 4% or dare i say even 4.5%. what a divide. explain the debate of that divide and where you fit into it. edward: i guess i'm in the range
of 3%-three point -- 3.25%. i agree with the economist. the quantitative tightening means the reduction of the fed balance sheet has a tightening impact. it is an equivalent of a rate hike. the fed has not really produced any estimate of that. i would say it is at least 50 basis points from quantitative tightening and then there is a strong dollar since the beginning of the year. i think that is at least 50 basis points. there is a tremendous amount of tightening already going on from these two developments. i'm not convinced we are going to see 4% or higher. tom: are these rate increases nonlinear?
we had an original one of 75 basis points and now another one. this one has a lot more wallet than the system. edward: it does, but the financial markets are not going to be surprised by 75 basis points at this one or the next one. i think it is pretty well anticipated. it is very important to look at we are constantly focusing on the fed funds rate. we have to focus also particularly on the mortgage rate. i think that is where the tightening really has been extraordinary. we have seen this basically doubling of the spread from the mortgage rate and the 10 year bond yield. that has kinda put the brakes on anything housing related. we are seeing that not just in housing activity, we are also seeing that in housing related retail sales. i think that is where the fed has already accomplish what they wanted to accomplish which was to put a lid or at least bring
some of the demand that has contributed to inflation. lisa: a lot of this is supply-side driven and it is not trickling in yet to lower inflation. we have not necessarily seen peak inflation because we have not necessarily seen a drop off in any material way. how much does this factor into your beliefs of a soft landing or challenge it? edward: you mailed it. that is really the issue. if inflation remains persistent, protracted, obviously, folks who are saying the fed is going to have to kind of do a -- are going to be correct. i think there are already some signs and i am marvelously reaching for whatever i can find, but i am looking at the regional business surveys in both new york and philadelphia for july, so they are very current, showing prices paid and prices received indexes are in
fact starting to moderate as either indexes for supply chain disruptions like backlog of orders and so on. lisa: but there are also other surveys that show a lot of companies do expect supply chain disruptions to continue for the years to come. basically, all of this, trying to put it together. you came on the show and said you still believe in the strength of the u.s. economy. have you shifted at all? edward: not really. i think clearly, we are going to have a negative real gdp number. as you know, that is really not an official recession. i think it is a mild recession at best. at best, a midcycle slow consistent with what we had in the mid-1980's and mid-2010s. we have seen this before. if the consumers in good shape, corporations are in good shape.
i don't see a hard landing. tom: how is the equity market linked to this particularly where you and steve englander are. edward: it is never easy to pick up bottom in the stock markets, but i'm when to give it a try. i think on june 16, when we thought down to -- on a closing basis, which was 3000 points higher than the intraday low we had in 2009, i think that was the bottom and a coincidence with that is we have seen commodity pricing is coming down and a slowing in the economy which i think will help to moderate inflation. the real question is going to be the earnings season and so far, the earnings season is going reasonably well. it has not really trashed the stock market.
they all look quite well. tom: i have that at 10:22 on june 16. we talk here about what a chairman will do with the fed. what we look for in the cross conference? he has got to come out and frame what he does after a presumed 75 peaks. how does he do that? edward: i think he has defined his inner volker. i think we are going to find the word inflation appears numerous times and he will make it very clear this is the fed's priority now. quite a shift from what we saw before following the initial pandemic of fact in august of 2020. the fed changed the priorities and made it clear bringing the unemployment rate down was the number one priority. powell is the great pivot or and
his pivoting toward the notion of the fed has to do whatever it takes to bring inflation down. lisa: i love it. fantastic. ways to color the moment we are in. how much do you view the 60/40 still being viable if we have seen the bottom in the s&p but also are looking at someone who is finding their inner volker heading the fed? edward: you talking about a bond equity portfolio? i think in line with this scenario is mine, i think 3% is the right rate for the bond market. 3% is back to normal. that is a pretty good return. that is one of the reasons we have seen valuation multiples come down so hard in the stock market. but they have come down and they are kind of fair value as long as we don't have a hard recession.
if we do, you want to be 60 in bonds and maybe 40 in equity. jonathan: can the bond vigilantes in europe make a comeback or will tpi stop that from happening? >> i think the ecb is going to give the best try to avoid -- and support italy, for example. i think they have come back and it is a big challenge. jonathan: your world of bond vigilantes. how many years ago was that? tom: it was a long time ago when there was not a bear market like this. that was a walk in the park compared to where we are now. jonathan: in many ways, the week begins tomorrow, not today when we get earnings from her soft and alphabet. lisa went through all of the economic data we get through this week as well. tom: we are trying to make
monday eventful as well. i think with out question, the conversation this morning was stephen englander. how many people disagreed in the game? the answer is seven out of 10? jonathan: it looks pretty divided down the middle. others looked at it and said i see evidence of this being stickier. lisa: this is the toughest market i can imagine. the factoring into the supply-side constraints, it is many different areas of the supply-side market. the idea that it is not just china and supply chain disruptions. it is shipping lines and very humid and disparate. how do you connect all of these dogs and get an economic picture? that is why i think earnings will be the most interesting. how much do we see that rolling over as an indication of
something that perhaps is deflating in this inflation bubbling dust bubble? tom: i just looked at august 10, we don't have a year-over-year cpi cory etc. steady yet, but it is amazing how the month over month first look really comes down. jonathan: are you looking for a pause or lisa: something? lisa:looking for a road trip. tom: for our viewers and listeners, what is a difference between 7% inflation and mine percent? jonathan: what is the difference for this fed? coming up, we check in with michael kushner and talk with and melody of offspring.
and peter coming up as well. why he thinks we could get the recession sooner and why it could be deeper and more uglier than people expect. that is at 9:30. brama will make some notes and double down. great to have you back. lisa: it is great to be back. head of a big week stateside. this is bloomberg. le ann: after raising rates in june by the most since 1994. policymakers are expected this week to appraise another 75 basis point hike and are likely to signal their intention to keep moving higher in those months ahead. the u.s. says a russian cruise missile strike on the port of
odetta -- odessa -- the deal was signed after months of talk. russia says the missile attack targeted ukrainian infrastructure. tesla has increased its capital expenditure plan. that is according to its latest quarterly report. the report also disclosed details about another problem about taking tesla private. the company has said it is cooperating. it is a big win for intel and washington's goal of increasing semiconductor production at home. intel has secured one of the biggest customers yet for its chipmaking units and will make chips for the time. global news 24 hours a day on air and on bloombergquint take,
>> this is not an economy in recession but inflation is way too high. the fed is charged with putting in place policies that will bring inflation down. i expect them to be successful. tom: the secretary-treasurer of the united states jared -- janet yellen speaking the message on nbc this sunday. lisa abramowicz and i are thrilled to give you a different view. it has been an intellectually interesting monday at surveillance. we have had some optimism out there, a lot of measured views of a measured recession.
i have talked about the rigor this weekend and looking at tpi, which he thinks is complete bolly as well. what was it like when he walked into his office at yale university decades ago? >> he was the one who hired me, so he has been a great intellectual friend. and mostly right. tom: you two have an old worldview. what is the old worldview of this recession, this slowdown we are in where maybe it is a mega threat, this new world, it is all going to be fine? >> the consensus is that a hard
landing as opposed to soft landing. short, shallow, mild, garden-variety. i beg to disagree. debt ratios are historically high, 420%. lots of zombie corporations. during the 70's, expectations were low. this time, we have stagflation negative. in the previous recession, this time around, going into recession by tightening monetary policy. tom: out of their covid
disaster, can china come to the rescue if we see surging asian growth? tom: if china were to go faster, that would help. the policies are all against economic growth. the backlash against the private sector, tech sector and so on. they're down to have low economic growth, debt ratios. lisa: a lot of people look at the lack of leverage akin to what we saw leading up to the 2008 crash.
what are these notes of leverage that could cause what you're looking for? nouriel: there is leverage in the corporate sector. it is through the banks now. there has been a rise significantly in the debt and leverage of the financial system. those spreads are already widening. i would say corporate first, then shadow banks. many sovereigns are in trouble and low income is fragile. the housing sector is divided. lisa: in the past, the financial sector has led. is this time different?
are we going to see the economic downturn before the markets wake up to the reality that you are talking about and start to respond? nouriel: yes, the economic downturn this time around is going to lead to severe debt and stress. you're going to see parts of the corporate sector going back. the trigger for the financial distress is going to be a recession. lisa: in this stagflation, do you believe against have said that we see the peak in 10 year yields? nouriel: no, i expect inflation is going to remain persistently high medium turn forces going to lead to stagflation over time. aging of populations.
restriction to migration. global climate change, cyber warfare. pandemics. people are not thinking in the medium-term. in the medium-term, icy medium term shock. tom: we are going to continue this on radio but i have to ask one thing for those worldwide that really listen. have you ever been this gloomy before or is it a different gloomy? nouriel: it is a different gloomy. i was gloomy right before the global financial crisis. tom: we sat in davos over a beverage and you absolutely nailed that. that is why people are listening now. nouriel: in some sense now, it is worse. there was a debt crisis in latin america.
i think this time around, you have a stagflation rate. it could be worse. tom: we are going to continue on radio. an important book coming out. it is the kind of book where if you are an optimist and you find out disagree, you still have to read the book to fremont your thoughts. lisa, what is great is nouriel just sold the movie rights. lisa: he always makes me sound rosy. at the same time, there is a lot of legitimate argumentation simply because we are seeing a sea change. with respect to supply-chain disruptions or deglobalization or whatever you want to call it, there are big changes happening and how de facto these out into
a new environment? tom: and what is so important about this, they are all out of the yale complex over the years, but they are very balanced she centric versus income state solutions. this is a really informative monday. i thought it was going to be a snooze fest. some really interesting stuff to think about. diving into the week and the week is to wednesday and an important meeting. we will do our special coverage in the afternoon as well. stay with us. this is bloomberg. ♪