0:05

Welcome to the Bloomberg Surveillance Podcast.

0:07

I'm Tom Keane. Along with Jonathan

0:10

Ferrell and Lisa Abramowitz. Daily

0:12

we bring you insight from the best and

0:15

economics, finance, investment, and

0:17

international relations. To find

0:19

Bloomberg Surveillance on Apple podcast,

0:21

SoundCloud, Bloomberg dot com and

0:24

of course on the Bloomberg terminal

0:30

at the FED and working at the FED with the Board of Governors

0:32

for years with Michael gap and he's Bank of America

0:34

Chief US Economy is truly holistic

0:37

on our monetary and fiscal linkol. Just

0:39

Michael, thank you for briefing us UH

0:41

this morning. I want to go Michael

0:44

within a swirl of the data right now to

0:46

what matters for you. We go to

0:48

jobs and we go on, we stagger

0:51

into November. What matters from Michael

0:53

Gabon honestly

0:55

only one number, and that's the payroll number.

0:58

I think that there's a lot of just doortion in

1:00

the data, as you know, and we've talked about it many

1:02

times and and it's really hard

1:04

to know, you know, which one do we take

1:07

the right signal from? And so what matters

1:09

to me in terms of the underlying

1:12

momentum in the economy, how far the FED may

1:14

go, and the near term course of the economy.

1:16

It's it's almost exclusively just

1:18

payrolls. Let's droll into that to payrolls

1:21

versus the two studies that will see on Friday.

1:24

If I take a three month moving average

1:26

of non farm payrolls, the number

1:28

of folks that comes out at a thirty that everybody

1:30

reads first, what is the appropriate

1:33

three months moving average

1:35

for the Fed to say all clear, let's

1:38

change and

1:40

to slow to to move to a slower

1:43

pace of hikes. You probably

1:45

need that number to drop below two

1:47

hundred thousand to get a soft

1:50

landing. That number probably

1:52

needs to be about fifty two, maybe seventy. So

1:55

I think that it's to two hundred

1:57

and seventy five thousand a month.

2:00

Those are still robust numbers. That tells

2:02

the Fed to keep going, so pivot to

2:04

a slower pace, probably below two

2:06

hundred. But to get the unemployment

2:08

rate to rise gently over a two

2:10

year period like their forecasting, certainly

2:13

someone and that's something that

2:15

is going to be hard to see. What that's at least

2:17

based on a lot of the projections that we've

2:19

been seeing. Liz Ane Saunders actually put

2:21

out some interesting charts of Charles Schwab

2:24

talking about how the data

2:26

is showing peripheral weakness. You're seeing

2:28

more part time jobs appear in

2:30

some of the anecdotal data. Is

2:32

the headline non farm payrolls number

2:35

really the one that we should be watching for real

2:37

time changes in just how

2:39

quickly this labor market is softening. No,

2:43

certainly there are there are other data points

2:45

that are complementary to the overall picture.

2:47

And I would never say we shouldn't look at those of

2:49

the jolts data that we received with fewer

2:51

job openings, the quits rate,

2:54

um, the ratio of openings to the unemployed.

2:57

I think all those are important to provide context.

2:59

And yes, they do show that on the margin,

3:02

labor demand is softening and the labor

3:04

market is cooling, and that's of course where the FED

3:06

wants to to go. But I just think ultimately

3:09

the Fed's not going to conclude that policy

3:12

the policy setting is right, the outlook

3:14

for inflation is correct if

3:16

we're still adding two to three thousand jobs

3:19

a month. So at the end, yes, it comes down

3:21

to where payroll growth is, where

3:23

employment growth is over time, But there are certainly

3:25

other data points that we should

3:27

be looking at to see whether or not are they

3:29

right that we can reduce labor demand

3:32

without pushing the unemployment rate up

3:34

significantly. Those other data points

3:36

that you mentioned and including the jolts,

3:39

can help give context around that story.

3:41

Mike. There are a lot of people pushing back and saying that inflation

3:44

is actually decelerating pretty dramatically. They

3:46

point to a number of different metrics, and they say that

3:48

looking at the labor market data as

3:50

it is is not accurate. It is

3:52

a misleading way to create

3:55

future policy based on a

3:57

lagging indicator. John has talked a lot about

3:59

this. Would you agree in

4:03

part yes, I think you do have to be forward

4:05

looking in your in your policy settings,

4:07

So only looking at the data under

4:09

your feet at that moment in time may

4:13

mean that you overcorrect in one direction

4:15

or the other. And there are going

4:17

to be other factors that help

4:19

bring inflation down, whether it's global commodity

4:22

prices or some reversal and goods prices,

4:24

So wholesale use car prices

4:26

being down seven of the last eight months, according

4:29

to Mannheim, we should start getting

4:31

some relief from from global

4:33

supply chains that are going to help the FED.

4:36

So it's not just the labor market,

4:38

uh And, and certainly setting policy on where

4:40

the labor market is today would increase

4:43

the likelihood that you make a mistake. Um.

4:45

But it's it's you know, it's some in some respects.

4:48

You have what you have, and that's the data

4:50

point that over time is going to tell them

4:52

where is services inflation going to end

4:55

up? Michael. And this is your wheelhouse

4:57

from from the day's i've known you at the FED,

5:00

and that is the merchandise trade statistic

5:02

of w t O today was absolutely

5:05

stunning. It's a one percent two

5:07

thousand twenty three growth statistic from

5:10

merchandise trade. Clearly globally, that

5:12

does not get it done. What does

5:14

that statistic mean for Americans,

5:19

as you discussed in your prior segment,

5:21

not as much because we're still we're

5:24

a large, relatively closed economy.

5:26

Strong appreciations in the dollar like

5:28

we have will slow the economy down

5:30

through the trade balance. But that's

5:33

a relatively narrow channel for us.

5:35

It's certainly not as large as it is for other

5:37

developed economies like Europe, the UK,

5:40

Australia, uh and and so

5:42

forth. And what I would say is what

5:44

it what it implies is a very weak global

5:47

growth backdrop, including outside

5:49

the U S, which we all know, and

5:51

that actually tends to help the US because

5:54

it brings lower energy prices on

5:56

on net and gasoline prices fall, so the

5:58

U S gets a windfall on the con sumerside,

6:01

even though a strong dollar and weak global

6:03

growth is a drag through trade. So it's a more

6:05

complicated picture when it comes to the US.

6:07

So I might let's net this out. You've got a recession

6:09

call on America, on the American economy,

6:12

can you just tell me on balance? Are you moving

6:14

that forward? You're pushing that out our

6:16

things develop in we

6:19

uh. We pushed it out to begin

6:21

in Q one. We I originally had things slowing

6:24

down in the fourth quarter of the year as data

6:26

earlier this year we're kind of pointing to that,

6:28

but then things picked up here in the summer in the fall,

6:30

I moved it out to begin in the first half

6:33

of of next year. At the moment,

6:35

I haven't changed that. I think trends in recent

6:37

weeks the FED shifted being

6:39

serious and lifting its policy rate,

6:42

and the tightening and financial conditions that

6:44

that's developed. That's that's left me comfortable

6:47

with something around Q one or in the first

6:49

half of next year. But that's when we have it starting

6:51

just around it out. What about duration and depth Mike,

6:53

beyond the start point. I

6:56

you know, we I spread it out over three quarters

6:59

in part to signal a little uncertainty

7:02

about start depth and

7:04

in duration. And we have the unemployment rate

7:06

rising, you know, a little above five per cent,

7:08

so a little more than than the FED would have it

7:11

um But I think kind of in the first three

7:13

quarters of next year as when we're likely to see

7:15

our peaks softness and the cut stot when Mike,

7:19

December of This is what's

7:21

interesting about the The reason I'm not I'm

7:23

not sitting sitting here saying you've got a crystal ball. That's

7:25

not why I've asked you those questions. It's interesting

7:28

to me that you've got three quarters of recession

7:30

and the cuts don't start until the very end

7:33

of the year. Mike, Is that original?

7:35

Because uh

7:40

so, the the idea behind that is the terminal

7:42

rates about the labor market. But cuts are

7:44

about inflation, and so when

7:46

do they shift to a more balanced reaction function

7:49

they I think, you know, every time

7:51

inflation comes in higher, it gives them a worse starting

7:53

point. So it just takes a while for

7:55

for that to show through. But yes,

7:58

but it's consistent with the idea that we're

8:00

going to have to accept some pain in the domestic economy

8:03

to bring inflation down. Um

8:06

so yeah, it's it's an odd situation,

8:08

but it's a FED right now that's saying we

8:10

need the economy to slow to help

8:12

us on the inflation side. So it's a different setting

8:15

for them. Fascinating, Mike, just wonderful.

8:17

It's been brilliant reading your stuff since you've got to be of a

8:19

it's going to have you with us. Sis Mornic, thank you, mikeeping

8:21

their Bank America

8:27

right now we do better. I have no idea why he's

8:29

not in the OPEC plus meeting. At the table.

8:31

Christian Maylock joins us now from JP Morgan,

8:34

who's really been definitive on

8:37

the how we get to a permanent

8:39

hundred dollars of barrel plus.

8:41

We've seen the demand questions Ed Morrison's

8:43

City group gaming out nicely.

8:46

Christian, seventy eight dollars a barrel and

8:48

suddenly we are higher. What

8:50

is a single distinction that drives us

8:53

to a hundred and twenty dollars a barrel nice

8:57

vacapacity in short turns on. I

8:59

mean we were seeing being repricing of oil

9:01

to the marginal barrel, and it's away from

9:03

opec um. I know it sounds controversial to say

9:06

that on a day like OPEC meeting, it's away

9:08

from OPEC and is getting back into control of the majors

9:10

who represent somewhere between the

9:13

world's oil and they're not spending. They're

9:15

not investing at these levels, which

9:18

then begs the question what price will they spend?

9:20

Will they grow their production um

9:22

and reinvest into those long term projects.

9:24

And I think we're going to move a significantly higher

9:27

price, which in some ways is potentially

9:29

what is trying to do today. They're trying to defend

9:32

the front end, but the backing, the trying

9:35

of OPEC. I have the memory of six

9:38

oil plunging. Here's

9:40

my quick mathematics. How close

9:42

is the cartel to a

9:45

night six? I

9:47

think in terms of how close they are that will all

9:50

depend on how demand responds

9:52

to the current price. And we

9:55

know that they're arguably looking for a higher price,

9:57

potentially closer to where their fiscal break evens

9:59

are. Ultimately, it's not just the break

10:01

even of the countries. It's also what they want in

10:04

terms of defending social reform, and

10:06

we know there's a lot of issues at the moment with the high energy prices,

10:09

So that price level versus

10:11

what the US wants suggests there's

10:13

arguably a price war that's emerging

10:15

between these two continents. But in the end,

10:18

if demand can respond

10:20

at which

10:22

is our house view, then I don't necessarily

10:24

see um demand

10:27

collapsing, and then it's all about supply. It's

10:29

a supply driven crisis, which is ultimately

10:31

where our super cycle thesis projects for the

10:33

next five or seven years. Where are we in terms of

10:35

the US as a swing producer at this point,

10:38

given the lack of investment in the shale

10:40

patch and just generally throughout the energy sector.

10:43

Shale, it's it's interesting. It's like you've sort

10:45

it's been dismantled, parts of

10:47

rusted, you put it back together again. It's just not as

10:49

effective in terms of productivity, in terms

10:52

of production volumes. And

10:54

ultimately they've got

10:56

used to return in cash and getting more popular

10:59

with wall streets, so have to sort of think about

11:01

what price do they need to cover their all their capex,

11:04

all their cash return as well as

11:06

a price they can necessarily see much

11:08

bigger volumes of growth with all the money

11:10

in the world, and that's much higher as closer

11:13

to So we're not seeing

11:15

as much volume growth this year, close

11:17

to seven nfousand barrels similar

11:19

to next year, and I think that's the key. So

11:22

right now, if you're not seeing production increase and

11:24

you're actually seeing production cuts at OPEC

11:26

plus, where does the marginal

11:28

stop gap come in? Right We talked about the Strategic

11:31

Petroleum Reserve and how much the US has already

11:33

drawn down on some of those reserves,

11:35

the speculation that they could tap them yet again

11:38

during them further in response to

11:40

some sort of two million barrel production

11:42

cut today, is that bullet

11:45

gone? Is it used? Absolutely?

11:48

I think it's used. And you know, I love to web jewels

11:50

and we all the world is short energy right

11:52

across all fuels. And that's what we've been

11:55

talking through this year and with

11:58

you, and I think the key here is if the marge, your

12:00

jewel, if you like, is is oil.

12:02

Then so they're like saying to your customers a couple of good

12:05

news and bad news. The good news is of good oil, you

12:07

know, still got some energy, and the bad news, you can have to pay

12:09

a lot more for it as a ventured to come down,

12:11

and that silver bullet from the US is

12:13

done. It ultimately becomes who's

12:16

up for taking those barrels at the high price? Christian

12:18

and your definitive report of I'm gonna

12:20

say seven eight months ago, you give

12:22

a fair share to E s G two

12:25

synthetics, to the other things we're gonna do

12:27

for energy besides oil. Give

12:30

us your sense of the E s G event

12:34

given a war in Ukraine. Is it forever

12:37

altered? Is it shifted? I

12:40

think what we're going to see is ultimately an upgrade

12:42

of bad code to good code in

12:44

this sector and alter. What I mean by that is the sector.

12:47

We did some work last week and doing a bottom up

12:50

version of that Jewels report for companies and

12:52

the industry. The European US majors

12:55

represent roughly twenty percent of

12:57

the world's energy and jewels

13:00

across all fuels, not just oil,

13:02

gas, hydrogen, etceteran. So the key here

13:04

is I think what the E s G event ultimately

13:07

will revolve to is more of a hybrid

13:10

of recognized position. Is a function

13:12

of this sector delivering

13:14

energy on a lower carbon footprint. But ultimately

13:17

delivering energy so that we don't compromise

13:19

security, and I think that will change

13:21

the optics and redefine the

13:23

sector's role. Energy transition is opposed to being

13:25

simply you know, in the penalty

13:27

ball. Christian May with truly a

13:30

definitive report, controversial report

13:32

earlier this year advancing a theme

13:34

to higher oil Pricess Nagozia

13:47

kanjo Iwala is Director General

13:49

of the World Trade Organization. She brings

13:52

absolutely bulletproof Harvard and m

13:54

I T economics to the massive

13:56

task of a w t O finding

13:59

a place within international institutions.

14:02

They founded about six months ago with

14:04

a single best call on global

14:07

slowdown of any of the institutions.

14:09

All you need to know is dr okonjo

14:12

Iwala and w t O was way

14:14

out front. Director General,

14:16

thank you for joining Bloomberg this morning. I'll

14:19

get to the headline. You say, merchandise

14:21

trade is going to slow down

14:23

off the proverbial cliff to one percent

14:26

in two thousand twenty three. What

14:29

does that mean for the developed world? What

14:31

does it mean for your Nigeria and emerging

14:33

markets? Well,

14:35

thank you very much for having us. Yes,

14:38

we'll just release that podcast and it's looking

14:41

quite green, a little more

14:43

green than we had thought, a

14:45

real slowdown. And it's

14:48

happening for several reasons. Of

14:50

course, the the the higher energy

14:52

prizes in in Europe arising

14:55

from the war in Ukraine a big factor in

14:57

this, and the squeeze on household

14:59

spent, didn't the monitor policy

15:01

tightening and various developed countries

15:04

that are happening, and even emergine markets

15:07

also explaining to this,

15:10

and and so a whole

15:12

variety of factors. What does

15:14

this mean? It means that we're

15:17

looking at a situation in which global

15:19

slowdown is going to sweeze ouselves

15:22

even more sweets businesses, and

15:25

what we may be edging intrough a

15:27

recession, if not globally at the general

15:30

Because of time, I must interrupt and be

15:32

rude, but I'm going to do it because this question

15:34

is so important. Is J Powell

15:37

is central banker to the world impinging

15:40

on global slowdown? Are the central

15:43

banks moving in the wrong direction? What's

15:45

your advice? Off the chalkboards at

15:47

the Massachusetts Institute of Technology.

15:52

It's very difficult. J. Power

15:54

is in the top position, whether

15:57

to continue tightening, whether

15:59

you over root if you do that because

16:01

of looking at lagging indicators. Um,

16:04

it's very difficult to give advice to central

16:06

bankers now, um, but there's

16:08

no doubt that something has to be done

16:10

about inflation. We just

16:13

have to watch and see. So it's not too

16:15

edging to an overshoot, but probably from

16:18

me to give you all advice

16:20

on how to run monitored policy

16:22

and go see how much this China factor into

16:25

your outlooks. How much does the potential

16:27

for them to open up from a zero COVID

16:29

policy or emerge from some of

16:31

the downturn that they've experienced factor

16:34

in or not to this forecast.

16:37

It factors in considerable Linked to the

16:39

broadcast I've mentioned the one

16:41

you're doing, had mentioned the monetory title

16:44

about China is another big factor

16:46

of course. Uh, the COVID slowed

16:48

down and what it means, um,

16:51

whether it's going to continue and we're going

16:53

to have other lockdowns. It's a big

16:56

factor if China's economy continues

16:58

to slow the way as seeing that

17:00

will have a big impact on what happens to the world

17:02

economy. As you know, and I really here for

17:05

developing countries and imagine Mark go

17:08

see. Just to sort of broaden out, we've been talking

17:10

about how we're witnessing a sea change were

17:12

suddenly governments cannot finance themselves

17:15

with deficits the way that they have before, particularly

17:17

developed markets and central bankers

17:20

cannot fuel growth by

17:22

just lowering rates. How do you take

17:24

that into consideration for not only this

17:26

year's projection, but projection for

17:28

growth over the next decade. Well,

17:33

it obvious me, it's very very difficult.

17:35

What we are saying we're seeing in our projections

17:37

is to remend us uncertainty that

17:40

I can I can tell you is what is really

17:42

making it difficult to predict. You've never

17:44

seen this amount of certainty when

17:47

we do our podcasts before. But

17:49

what we do see is that this so certainty

17:51

is tending to risk on the downside.

17:54

So that is really impacting and we

17:58

need to look at what what come we do to

18:00

turn things around. How can we

18:03

slow down inflationary prejus

18:05

whilst looking for truls

18:07

that can help us restore group. So,

18:10

um, it's very difficult to predict. That's

18:12

too much uncertain in the Director

18:15

General, thank you for being with us today and

18:18

go see conwell that of the WT

18:25

I have to say that w T I came out Yeah, pretty

18:27

much in front most of those organizations. Now there

18:29

it is, and it's a backdrop there one percent again

18:31

for two thousand twenty three and merchandise trade.

18:34

Toni Caricenzi has these numbers tattooed

18:36

to his brain. He's with PIMCO and his truly

18:38

expert in the short term space in the

18:40

bond market. What does fixed income

18:42

due, Tony, given a global recession

18:45

and certainly from w t O a

18:48

trade recession, the

18:51

BODO market is starting to think about that possibility

18:54

and these yields therefore making a

18:56

propitious time for investors in attractive

18:58

period bond markets, thinking

19:00

the economies will weaken. They're not sure,

19:03

so there's some risk premium, you could say,

19:06

in prices of various assets,

19:08

equities in particular. So

19:10

I think it's just the uncertainty factor that's

19:12

keeping markets on

19:15

edge, because we're not sure about

19:17

how inflation will evolve in particular.

19:20

But as long as there's vigilance by central banks,

19:22

and there will be it seems vocal

19:25

arrest style in in the United

19:27

States, for example, it's highly likely

19:29

that the inflation rate will decline,

19:31

there will be disinflation, the bond

19:33

market will look increasingly attractive

19:36

to investors especially if the

19:38

w t O type scenario where global

19:40

trade vines shrink as much as they expect,

19:43

I mean strength relative to well, let's cut

19:45

to the chase as pim Co extending duration

19:47

or you're loading the boat on how yield this morning, Tony,

19:51

PIMCO has been underweight duration for some time.

19:53

We've been reducing that. We've

19:56

been we'd rather keep it close to neutral.

19:58

Remember when you're thinking about the Asian interest rate sensitivity,

20:02

you're you're talking about a directional

20:04

strategy. If you open up the Frank

20:06

for Boseige book on

20:08

bond investing, you see there's a lot

20:11

more to do than simply bet on the direction of interest

20:13

rates. And that's what PAMCO is trying to do right

20:15

now. Just try to stay up in quality

20:18

and try to not make directional best to look

20:20

for assets that we think would

20:22

bend but not break in a time of procession

20:24

and with stand lots of different

20:26

types of economic outcomes. But

20:28

all that said, duration underway

20:31

slight underweight given the recent drop

20:34

and yield slight underweight

20:36

might make sense. But remember Tom

20:39

the Bloomberg advocate has a duration

20:41

of six point six years, meaning I yields

20:43

moved a percentage point uh that

20:46

the investor would lose six and a half point

20:49

so slight underweight would it be much? You

20:51

said something interesting, A slight underweight? Does that imply,

20:53

hi, Tony, does that imply from your perspective

20:56

that we have not yet seen peak yields. It's

20:59

different called to say there's a wide range

21:01

of scenarios, but yields today are

21:04

closer to their long term averages, and that makes

21:06

it a very attractive time to be

21:08

investing. For one. Secondly,

21:10

the yields and the Bloomberg aggregate

21:12

today, which is a compilation by the way, for those

21:14

who don't know of treasuries, mortgages,

21:17

corporates, and a bunch of other securities.

21:19

It yields today the yield is four point

21:21

six. Now, how does that compare historically?

21:24

Very good? It's closer to long term averages. That's

21:27

one reason why bonds look quite attractive today.

21:29

Secondly, where do you think the inflation

21:31

rates headed? Bond market seems to think into

21:34

the low twos eventually, so

21:36

that yield high fours looks

21:38

attractive on that basis. And finally, this

21:40

time alluded if economy

21:42

is weakend there's a chance for capital gains

21:45

in fixed income now, and so one

21:47

doesn't want to miss out on that, And so you

21:49

have to question, are you really

21:51

interested in timing the diversification

21:54

benefits of bonds, which, of

21:56

course this year haven't been quite apparent, but we

21:58

think we'll assert themselves over time. How

22:00

much are you seeing, Tony, a lot of just

22:03

mom and pop investors pile into

22:06

short term treasuries for the first time in a

22:08

long time. How much are you seeing those

22:10

cash investments really balloon

22:12

in a way that feels sticky to you, that will

22:14

transform the rest of the markets, because that is

22:16

money not going to equities, not

22:19

going to hire your bonds. I

22:21

recently took a trip to Asia, Korea,

22:24

Singapore, Thailand. Lots of investors

22:27

there. Today I'll travel to San Francisco

22:29

from New York. Been traveling a lot, seeing

22:31

lots of clients talking to him on zoom, etcetera.

22:34

Seems like the wagons are circling, but of course, as

22:36

you could see by the global fund flows,

22:38

investors are still leering.

22:41

All that said, investors seem to be willing

22:43

to move into the center of what we would call

22:45

the concentric circle for investing.

22:48

The concentric circle would be would

22:50

have the riskless securities

22:52

treasuries at the center and the most risky

22:54

securities at the perimeter. So investors

22:57

are seeming to want to move toward the sent

23:00

of that concentric circle and will slowly

23:02

work their way out when they gain confidence

23:04

and take lots of things and lots of scenarios.

23:07

Of course, you can envision that cause

23:09

it to occur, but they're not in place yet. A

23:11

Tony echoes some triples, say on secure debt for

23:13

sale, Um, what kind of interest

23:16

would you offer on a triple, say, social media

23:18

company struggling

23:20

for direction? What do you reckon

23:22

the cut of the areas that bates on the concentric

23:25

circle. Think of a solar

23:27

system and the concentric circle looks like that.

23:29

That's like going way out to the

23:31

outer perimeter of the system. So and that's

23:34

a risky gambit right now,

23:36

given the uncertainties about economic growth

23:38

and cash flows. Because at the end, at the end

23:40

of the day, what a bond ofstor cares about

23:43

is cash flow. Getting is a herror,

23:45

it's money back, and of course

23:47

in a dour economic serials

23:49

it becomes uncertain. Very

23:52

diplomatic, Tony, thank you, So it was very

23:57

This is the Bloomberg Surveillance Podcast.

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