tv Bloomberg Markets Bloomberg July 27, 2022 1:00pm-1:30pm EDT
kriti: 100 basis points just on the table as the two/tens curve inverts -- inverts further. "bloomberg markets" starts now. green on the screen, pretty traditional, a fed day you see a little bump in the markets into that specific decision. earnings stories are also there. apple that, microsoft, helping the mood a little bit and big tech is prepared for this kind of environment. maybe the rest of the s&p 500
has a chance, at least the narrative for the stock market. the bond market all eyes are on, not just the nominal 10 year yield where you have down for basis points with the twos and tens curve, down 31 of an inversion, huge when it comes to what that is signaling in terms of whether or not we are in a recession and whether we will get there. something we talk about in the next 30 minutes, the bloomberg dollar index slightly stronger, interesting to see a stronger dollar as we see a higher stock market as well. let's get down to quick words from alice levine and this is going to be important when we talk about one of the issues hitting the market. i want to recap what she said earlier in the session, the chief equity strategist there, saying navigating the federal reserve and navigating the market is going to be challenging because we are not in a qe environment, we are in a qt environment. we have not been there in a long time. especially we should be talking about the inflation story. nine handle on the cpi print,
the surprise to the upside, only one firm that got that inflation call right and it was deutsche bank. fred ryan at deutsche bank joins us now alongside megan graber. let's start with you, fred. -- brett, i want to talk about this inflation call. i we peaked, 9%, and is this the end of it especially since we talk about the labor market that does not seem to see softening? >> thanks for having me on a market. from a headline perspective, we hope that is the inflation rate has become headline cpi. the core cpi, i think is a different story. we see core cpi at 6.5% in september of this year. more to go in court, especially with rental prints as they have been over the past several months. kriti: that is what i'm very curious about because i have a bet at matt miller on whether inflation peaks and i said it had to pick because commodities will have to come down and i say
it is the wages that will join -- push it further. meghan graper, at the same time we have to talk about what the markets is to -- market is telling us. we look at the twos/tens curve inverted and when you look at past recessions, that get sound to 40 and 50 basis points and we go back to the 1970's and it is down 200 basis points. what is that telling you? meghan: i think what we are seeing as we had into today's meeting and the response from the market is a market digesting a slew of weakening data at a time where we see unprecedented coordinated central bank tightening and it is that i think is shifting the balance of risk from higher inflation to visibly slower growth and recognition the u.s. ultimately is not going to be immune to looming recessionary pressures we are seeing play out in europe. so there are markets players priced in expectations that the fed steers away from this
commitment over tightening but i think there is probably zero probability that powell risks that pivot today having really just regained control of this more restrictive narrative. kriti:kriti: let's talk about that restrictive narrative because i'm curious how much has the financial conditions tightening already done the job for the federal reserve? meghan: i think powell has his work cut out for him. when you look at what has changed from the last meeting, we have seen oil prices come down 15 if not 20%. you have really a host of other commodities down, the housing market has had mortgage rates higher, really struggling and if you look at breakeven inflation, the number that was a catalyzing effect for the fed to be more aggressive, there is certainly signs they are heading in the right direction but the fed will have to reinforce this message that they are committed to 2% inflation and also acknowledge
the market is increasingly preoccupied with a deteriorating economic backdrop and that is particularly true ahead of tomorrow's gdp release which i think is likely to paint this picture of sequential quarters of contraction and will fuel a debate around the potential for a technical recession. i think employment treasury curves and try -- and credit spreads are saying the possibility of a potential recession is kriti: kriti: months out. kriti: we do have the gdp numbers tomorrow. i'm curious about the terminal right. we will come back to the data in a second. 4% to 5% on the terminal rate. do we get there? what does it take for the federal reserve to pivot and repeat the mistakes of the 1970's? brett: a substantially lower profile for the fed to pivot, number one. that is how powell frame this today. we think he will have the same aggressive guidance with 75
going forward the next meeting and it will take a clear and consisting evidence. i think what the market is under appreciating is to get that pivot, you need to have the recession happening in the back half of the year, 6% unemployment, to get lower than what the market is pricing for the fed turmoil right now. that is by even their most dovish policy roles. in our view, the market is under appreciating how committed the fed will have to be to bring inflation down. kriti: if that is the case then, why not go 100 basis points? why not put it all out there? what is the point of slowing down those increments now? brett: i think from powell's perspective and others in the committee, they are of the long and variable legs of committee. the 75 is a decisive move that shows they are responding to inflation and they really do not want to add more disruption to markets, especially with q2 acting -- qt acting in the
background as a tightening. kriti: and of course we have the economic data we will get, gdp numbers and implement cost index to add to the labor story. what does that mean for the market reaction? is the bull case for treasury back based on slowdowns we see? meghan: on the treasury side, i think it is about the three month tenure basis. they are flushing sides of recession there. 30 basis points today is closer to 190 basis points at that relationship at the end of q1. to me, there are more important factors here, credit spreads, which are arguably too tight and are heading into a recessionary backdrop where you should see the ultimately playing into end levels and berkeley strategists have been at the forefront of that view. we are calling for a material widening of credit spreads over the next six months. as a leading albeit
imperfect indicator about slowing and fundamentals which you will see play out on the right sides but we see spradling's -- spreads settling in close to 210 basis points lower. that is a massive leap from the 149 where the corporate and is today. in high-yield, we see it capping out to nine for -- 850, 9 900. that is 350 to 400 basis point of widening. increasingly bearish views are starting to emerge and berkeley is at the forefront of many of those views. david: i know i would give -- kriti: i know i said i would give the last word to you, but we will give the last word to brett ryan. we had a technical recession tomorrow? brett: yes. it will not be an official recession tomorrow. kriti: for a market as -- market it is a technical recession regardless. brett ryan and meghan graper thank you for your time. it is now time for first word news with mark crumpton. mark: president biden tested
negative for covid-19 and has ended his isolations. the president speaking from the rose garden earlier said to covid's knock on can avoid serious illness with vaccines and treatments. the president tested positive for covid last thursday. green experts from ukraine could resume within a week and reach 25 million tons by the end of the year. that is according to turkey, who has brokered a deal between ukraine and russia. the united nations expects the first ship could leave the ukrainian port in a few days. for the second night in a row, the two conservative candidates to succeed british prime minister boris johnson faced off against each other in a televised debate. the foreign secretary and former chancellor rishi sunak clashed again over the economy. both accused each other of pursuing policies that were morally wrong. the debate was cut short when the moderator fainted.
she is said to be ok. a strong earthquake triggered landslides and damaged buildings in the northern philippines today. at least five people have said to have been killed and thousands of others injured. it has been reported as a magnitude seven quake. a safety officer in the town near the quake's epicenter said "the ground shook like i was on a swing." global news, 24 hours a day, on air and on "bloomberg quicktake," powered by more than 2700 journalists and analysts in over 120 countries. i am mark crumpton. this is bloomberg. ♪
federal reserve. we also know we wait for mike mckee's final question to chairman powell in the press room but first thank you as always for joining us. let's start with a question on gdp. tomorrow we get numbers, do we had a technical recession? michael: that is a good question. obviously we have talked about this wherefore -- before where with economists there is no such thing as a technical recession but contraction is certainly in the markets are in the forecast of bloomberg economists is for a 4/10 percent rise in the fourth quarter so it may not be but when you get down that low, it does not matter because you are so close, it is rounding error and it comes down to a question of how people feel about the economy. do they think it is so bad that they stop spending? have not seen indications of that yet. we will find out more friday when we get the personal spending numbers. kriti: that is crucial for our international audience. michael mckee made it clear to me over and over again that a
recession is not just two technical cores but it could potentially be the turnaround or bookcases for one of the equity markets pricing something along those lines. let's talk about the other piece of data this week, the index numbers. especially when it comes to labor participation. and just how much more unappointed the federal reserve may need to see to avoid further consequences. your take? michael: there are couple questions in that. one is in terms of unemployment, there is something called the psalm role, invented at the fed by claudia psalm and also some people, bill dudley, who came up with some of the same ideas. you have to have an increase in the under limit rate by at least five ash .5% and a moving average in order to have a recession. at that point, recession is likely. we have not seen the on a point at rate move at all. the other thing we watch in the jobs report is average hourly earnings. that only gives you a snapshot of people who are on corporate
payrolls, what they are making. if you are a freelancer or if you are somebody who wins that alien dollar lottery and takes the annuity and don't think about it because i will win that ticket, those numbers are not recorded but the eci does record in detail. it is only quarterly but it does record in detail. one of the criteria the national bureau for economic research uses is incomes less transfers. if you are getting on a plum and or something like that, they take that out of that because it is not income, it is not paid by a company or income for work. so if that is still going up, and we will find out more friday, then that is another sign maybe we are not in recession. kriti: michael mckee, our international policy and economics correspondent is at the fed and will be asking those questions in the hour ahead. still ahead, the market consensus is 75 basis points but 100 is on the table. we speak to a senior
bit, they had a lot of questions on both sides of the aisle and support from both sides. the idea of bringing that reduction capacity from overseas back into places like arizona, like new mexico for example, for the likes of intel and nvidia etc., the question is it doesn't actually pass the house and there are questions on whether legacy chipmakers can get the grants even though they have massive businesses in china and taiwan. we will keep you apprised of all of that. for now, it has hit the senate. let's get back to the event of the day, the federal reserve. 100 basis points on the table. what is interesting is the case were simply the risk and whether it is too fast or too slow. what is the bigger risk here? the city chief economist weighed in earlier on bloomberg take a listen. >> the risk the fed is faking -- facing is not hiking. if you do not hike fast enough, you get higher inflation and it becomes embedded in the economy
and that much more difficult to bring it back down. he may need an even higher unappointed rate to bring it back down. does the fed care about unemployment or inflation, the right thing to do is address inflation had on. kriti: of course the chief city economist right there and base case is 100 basis points for the federal reserve. they were not the first to make the call. another was out in front of consensus making 100 their base case. joining us from the team is the senior u.s. economist. rob, think you as always for joining us. let's start there. why go 100 when it was made clear by even governor waller that 75 is still a huge amount? why take the extra 25? >> i think there are a couple reasons. the first is the single most important thing we learn from the june fed meeting is inflation is much more entrenched relative to what policymakers thought. even a couple weeks ago. he saw things like median cpi in
the june cpi report rising around 10% on a month over month annualized basis. that is a good measure for where trend inflation is in the u.s. are now. it is much more embedded than i think policymakers realize. in addition, during the month of july, we have seen financial conditions ease. i think that worked to where the fed, may be leaning toward doing more at the meeting, surprising markets, trying to get financial conditions to tighten. that has been their goal this entire year and i think that is what we have seen during july works against that. finally, i would say i think we end many others are expecting an additional series of rate hikes even be on the july meeting. if you wear the fed i thing there is a huge advantage to even frontloading that's more. if the fed raises rates by 100 basis points today, that will move their policy rate immediately into restricted territory. i think that is kind of an appropriate setting policymakers will gravitate toward. a 75 basis point hike would only move you to neutral.
the question for policymakers at that point, why are you satisfied with neutral when headline cpa -- cpi inflation is 1.9% on an annual basis? kriti: the idea of 1.9% is there is consensus on that is the peak if you take out for example the wage inflation which is not included in cpi. that is your answer. your take on that? robert: i thing at this point the fed is not that concerned about the market debate about whether we have had peak inflation or not -- had to be conflation or not. their focus is how quickly do we come off and where to be ultimately settle. that is the real issue for the fed. the concern is, while inflation might moderate on a year-over-year basis for the four pitiable -- the foreseeable future, it is easy to believe they could settle above the 2% target without aggressive action. nominal wage growth in the u.s. depend on which measure you look at is between 5% and 7.5 percent. we are getting the q2 employment cost index friday, an important
measure of where rage -- wage growth is. see increased evidence that both firm and consumer inflation expectations on the longer-term are both becoming unanchored. all of that suggests the debate now for the fed is how quickly can they normalize and tighten policy to make sure inflation does not end up well above their target in the next 12 to 18 months? kriti: you mentioned financial conditions earlier but they are already in restrictive territory. they have been near to date and definitely since march when you saw the extra move from the stock market. to what extent have financial conditions really already done the job for the federal reserve comes to market reaction? kriti: i think the tightening in financial positions we have seen so far is certainly welcome for the fed. i thing they will view that as part of their overall objectives of what they want to see this year but they are not overly tight by historical standards be a they are certainly not tight in a sense we would expect them to be going into a recession for example. i think one concern the fed might have is, as we have gotten
a series of weaker growth indicators, the market has started to price a less aggressive fed despite the fact incoming data on inflation means concerning. i think one risk today is powell may face an incentive to come out at 2:30 at the press conference and remind marcus it really is an inflation story, not a growth story. the fed is effectively mandating a central bank right now and they might not be comfortable with easing and financial conditions we have seen so far this month. kriti: what is it going to take for the federal reserve to pivot and perhaps not make the same mistake of the 1970's? the idea being they see signs of softening and they hold back. what is it going to take for the federal reserve to start perhaps i don't want to say slams the break -- slam the brakes but perhaps gently press the brakes. what to they need to see to make the dovish tilt? robert: i think he comes down to month over month inflation measures. you can look at cvi, median cpi, their preferred metric is core
pce inflation. i think they will need that's month over month core pce inflation figure to come down to 2.5% or 3% on an annualized basis. we get core pce friday. we are expecting month over month figure to accelerate sharply to .63%. almost double the pace we have seen in may and there is no incentive right now for the fed to slow down. eventually, once the month over month inflation rate slows, i think they will be able to back off a little bit and produce the size of rate hikes they are currently following. we are expecting them to slow down to 50 basis points in september and three 25 basis points hikes is inflation flows. i think larger than 20 five basis point hikes will hang around for a while. kriti: and of course that comes as we see some right cuts are getting price into the market. robert dent, it is a pleasure always to have you on our show.
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