'Bloomberg Surveillance Simulcast' Full Show 10/11/2022
Hard landing is very likely because the labor market has gotten too tight. This is an environment where the bond market vigilantes a bad joke. You are seeing spread ski wide and ski stinky. The Fed is with the jobs report is really indicating that they'll probably continue on hiking in a more aggressive fashion.
I think there's worse to come for the market. Unfortunately, this is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz life from New York City for our audience worldwide. Good morning. Good morning.
This is Bloomberg Surveillance. I'm Jonathan Ferro together this morning with Greg Peters of PJM. Lisa Abramowicz is coming up a little bit later with some special guests, including Apollo's Jims out are looking forward to their futures right now, down about 1 per cent on the S&P 500.
Greg, perfect timing because we've got a lot to talk about in this bond market. The Bank of England busy the last couple of days. What you make of what we've seen this morning? Well, I see the Bank of England continuing to have their back against the wall. They have no choice in the manner
they're trying to deal with this political situation that's reverberating across this system. LDA is the new acronym De Jure. And so I just think they're stuck and you're setting up for a showdown. I think that's the story you're setting up for a showdown as you basically have the program ending Kuti beginning again and the budget being due on the same day. But as you say, that it's a fad. We've got a date for the showdown, haven't we? October 14th is the first date. Grace gonna be with us through the hour on a lot of this. Greg, this is what they said in their statement. The bank plans to end these operations
and cease all gilt purchases on Friday, the 14th of October. Do you expect to wake up Monday morning and see this continue? You know, any time you draw a line in the sand, that's generally a bad idea, right? The Maginot Line. I think they're drawing. And so I really worry about that as the markets will test them. And I think most investors believe that
this is a program that has to continue. Whether they stayed otherwise or not. Some tension in this bond market. Equity futures, as I say, down about one full percentage point are wet for the price action. For you briefly, the Treasury market, the cash treasury market reopening in America with yields higher, equities down, yields up. How many times have we talked about that? Equities down 1 per cent. And it was look, a little something like
this on a 10 year treasury, on a 10 year right now on my screen, it would tie up by 7 basis points up to about 395 eleven on a US 10 year. And the affects market Eurodollar unchanged at 96 99. Call it 97. Crude down by about two point six per cent, 88 dollars in about 74 cents. Greg, I got to pick up on the move in
euro dollar. We're not going anywhere this morning, but this two points. Attention in the global bond market wants to get market. The others, Italy yesterday briefly through 250, Italy over Germany. And we put out this story about possibly a mutualisation of debt, the effort to offset some of the pain on the energy front. Can you tell me how much tension you're
seeing plant in the European bond market? Not not a tremendous amount as of yet. I mean, that is the tension point that a story that was kind of about yesterday. The Germans tried to dismiss that at the same time, threw some cold water on that. Jonathan, I'm sorry to say, but ultimately it just shows with higher rates, fiscal issues. The ECB has the same challenges as the VOA as they have to keep together. They have to keep funding liquid across all the different jurisdictions across Europe.
You know, easy acronym in the U.K. We can talk about the acronym in Europe, TPA transmission protection instrument not activated right now. You expect that to be activated pretty soon.
I think once again, you draw a line in the sand, the markets will test it. And so I think as we enter the cold winter months, I think that pressure will likely ramp up and you'll see you'll you'll see that get activated one way, shape or form. Details matter until we're all wondering what that means. Jonathan And so once again, the markets will test that as the ISE Dani Burger. Justin Carver is joining us now, the
head of U.S. Macro Strategy, EMU FTSE George. I'd love your thoughts on the U.K. First of all, think one conversation we've all had over the last few weeks is how unique these problems are to the U.K., the potential for spillover from the U.K. to the global bond market. Can you walk us St George? Those two particular standpoints. Good morning, John. Yes, definitely the bond vigilantes have shown up first in the U.K.
market, but with it they can't drag the ball global race. I think that's the big issue here that we've had years for, you know, this QE policy globally set and anchored rates globally. U.S. markets benefited from the back end of it. And now, you know, we're clearly going to see what happens. The U.K., I think, you know, for the U.S., the Fed has a similar problem, too.
But we've had two attempts in the last three, four months of trying to call the pivot. The pivot team has zero. And in the roaring bear, it's hard to right now. I think that the bears are going to win, at least for the next couple of weeks. George in Japan this morning, we put out the headline about 40 minutes ago.
The 10 year bond in Japan hasn't traded for three days for the first time since nineteen ninety nine. George, can you even call some of these bond markets markets? Definitely to open up and get more liquidity, that's for sure. And I do think that, you know, that's just give it another example of just how, you know, when you get so involved, intertwined in your markets, it's hard to kind of pull yourself out.
Hey, George, it's Greg. Good to see you. Well, how do you how do you see the correlations playing out or the near term? So one of the challenges that we have in the bond market is that as a bond market of one. So, you know, before this all kind of started, you'd have, you know, allocations in one market versus the other. Today it seems like one. How do you see that playing out or the near term? And do you see that breaking? I think at some point does break, but I think the Fed is leading the charge, but although I think, you know, we've seen a global rise in short rates, at some point there's going to be a kind of a splitting off between the central banks around the world in the Fed probably keeps going forward.
And, you know, the beauty in the ECB is going to have to kind of run out of fuel and then it can really keep going further. So I think the correlations will shift further to the back end of a 10 year sector plus where you have real risks of Big Bear steepening over the course of the fourth quarter. And then and then how do you see the ECB being challenged over the winter? Jonathan, I we're talking about it right before he got on. Do you see that being a real part of the risk factor heading into the winter? Well, if there's any sort of bank that can actually turn maybe not dovish, but could point to it sooner, is the ECB going to have a child between, you know, really thinking about growth versus inflation? And that fight? And considering that, you know, growth is really going to decelerate, it hasn't decelerating in Europe. The ECB be the one that can't go across first. Doesn't mean that they're done tightening, but it could be a two stage tightening cycle where they have to get through the winter and then pick up the pieces in the spring.
We've got to talk about tradeoffs. Then Vice Chair Brainard came out yesterday with a long speech ready for us. So you don't have to, George. I'm sure you did anyway.
This is what Brainard had to say. Greg, I'd love your thoughts on this as well. In this environment, a sharp decrease in risk sentiment or other risk event that may be difficult to anticipate could be amplified, especially given fragile liquidity in core financial markets in some countries. She went on to say the realization of these risk could pose challenging tradeoffs of policy.
What are the policy tradeoffs if you're doing this right now? Is this a decision between getting inflation down and maintaining financial stability? Is it one or the other? Can you do both at the same time? Greg, I think it's really hard to do both. And I think what the market has missed throughout the course of this year is that the Fed and central banks globally are fighting inflation. This is very different than what we've seen over the past many decades. And I think financial stability has also been kind of thrown in for a quarter. The Fed put another couple of things.
So like functioning markets is what matters to central bankers, not that prices are lower necessarily. Right. And so I think, you know, this is just another kind of spin on traders and investors hoping to get bailed out by central banks. Might be 2018 then. What was the difference between now and 2018? Because last time they backed off and said it was about functioning markets, the markets weren't functioning. What's the difference between now and what happened in late 2018? I don't know, it's a good question, I mean, it's all a blur. 2018 sounds like three three lifetimes ago, three decades.
But I think, you know, 2020 is a better example, actually. Marshall 2020. The reason why the Fed stepped in initially was because the markets were completely broken. So you could not trade US treasuries and we're not quite there yet.
So liquidity is impinged in the Treasury market? Absolutely. We just talked about GDP is not trading for two straight days. That seems to be common practice there now. So I think central banks are focus on function, not pricing. George, do we have a market functioning issue that this Fed needs to respond to any time soon? I mean, look at the U.S. markets.
They're still functioning, but liquidity is kind of dire. And, you know, sizing trades are probably keeping scaled down and also heading into the end of the year. And after such a tough year that we've had and you would expect a of bear down risk anyway and balance sheets are scarce. So I think we are the toughest spot in
the year. So if liquidity risks were to get worse here, I think, yes, it would matter. But at the end of the day, which markets does the Fed really care about? It's really the bond market is the foundation of everything. You're the repo markets. And the Fed has a lot of tools to put in place since both the Kobe crisis and financial crisis. So I think the pilot, the first line of defense, hold and see how that would work before they would actually pivot it anytime soon. One last question for you both on this.
And George, first to you is the tenure of ISE again? Every time we get close to 4 percent, we go to that level, then backed away. We're kind of getting close to that level again, up 7 basis points today and back to 390 fight. Look at me. I think we're at the top spot. I'd be more concerned about equities than I am about bonds at this point. I think that bonds could benefit from one last flight to quality type move. I don't think it prevents the Fed, but
if we have another kind of equity move down 5 10 percent in the coming weeks and bonds will rally on that. And then the question is, does the Fed blink? I don't think there will a judge. Thank you, sir. As always, Chocolate George can converse there. AM USGA.
Greg, your thoughts on that by leaning a little bit into the 10 year into the 30 year space? Well, so I think we're closer to the end than beginning the state. The obvious. Yeah. And so about 4 percent. And where real rates are. Does does present value. Will you be able to time it? Absolutely not.
I think you need to see the crashing of of the front end. I think you need to see rhetoric change all these types of things, but you are getting close to it. And so I see a lot more value, let's say, in the U.S. Treasury market than I do and some of
the credit markets. So on mornings like this morning with the screens we've got in front of us right now, your Bloomberg, Mike Bloomberg. What are you doing on a morning like this morning, Rick? Well, still early, Jonathan. I'm still watching it. But. But no, I mean, you have to take a longer term view in this market.
I think trading this market is incredibly difficult. So, yeah, you modulate here and there, but you have to have a North Star view in our North Star view is that there is value, but we're not getting kind of chopped up and just brought in. So I think you have to be disciplined. You can't just kind of wash your screens as it just makes you mad. 395 31, watching the screens and get mad this morning the whole time by 7 basis points. Greg Peters of PJM sticking with us through the hour. In the next hour, we'll catch up with CAC Chowdhury of BlackRock. We'll also be catching up with Mohamed
El-Erian, who will be with us through the seven o'clock hour to break down some of these issues in just a moment. We're here from Maria Tadeo over in Brussels on the potential, the possibility for maybe a joint DFAT debt effort in Europe and potentially a lot more cold water to come from the Germans, from New York City this morning. Good morning. Equity futures are lower by about one
full percentage point. This is pulling back. Keeping you up to date with news from around the world with the first word. I'm Lisa Mateo. Group of Seven leaders are scheduled today to hold a call during which Russia strikes on civilian targets are set to top the agenda. Russian leader Vladimir Putin has said
the fresh assault was a retaliation for explosions on a multi-billion dollar bridge connecting Russia to Crimea. Ukraine has not claimed responsibility for that incident. We traded near the highest level in more than three months as Russian President Vladimir Putin threatened more missile strikes across Ukraine. The escalation has sparked more fears at harvest and transport in the country will be cut even further. The agreement over the Black Sea export corridor comes up for renewal next month. The heads of the IMF and World Bank are
warning of rising risk of global recession. IMF managing director Kristalina Georgieva says higher interest rates are adding to debt pressures on developing nations. She says about a third of the world economy will enter recession this year or next. And Bloomberg has learned the U.K. is pushing ahead with plans to set a cap on the revenues of renewable power producers. Government officials held talks with
energy companies on a mechanism similar to the one proposed in the EU. The move would limit revenues and channel the funds to help struggling consumers. And more allegations in the Elon Musk and Twitter battle. Bloomberg has learned that just before the billionaire revived his proposal to buy the social media company, he accused Twitter of ordering a whistleblower to destroy evidence. According to court filings, Peters at GO said he burned 10 handwritten notebooks and deleted 100 computer files at the request of managers as part of a seven point eight million dollar severance package. Global news 24 hours a day on air and on Bloomberg Quicktake.
I'm Lisa Mateo. This is Bloomberg. There is the risk and the real danger of a world recession next year. The advanced economies are slowing in Europe. Debt levels for the developing countries are getting more and more burdensome.
The rise in interest rates puts added weight on it and inflation is still a major problem for for everyone, but especially for the poor. David Malpass, that the World Bank president alongside the IMF managing director, Christine, that got gains in the last 24 hours alongside me through this act. Right? Peter speech in Jonathan Ferro CAC. When the IMF and World Bank start saying get do you start to get the itch to lean the other way? Yeah, well, history definitely tells you right us the case is very concurrent forecasting, I think. But but it just speaks to just how much
negativity like this is a recession that's been talked about for the past nine months and the data aren't quite there yet. So I think we have another six months before, you know, things start to play out potentially. So this has been what we call a slow moving train wreck. And and the IMF and World Bank just getting on board is just testament to a slow moving train wreck over in Italy as well. Ten year yields in Italy this morning up
another 12 basis points back to 474. Big round trip in the last 24 hours. Our story in the last day or so that Germany is going to back join EU debt for loans to ease the energy crisis. Got a little bit of pushback from the German government in the last day or so, the last 12 hours. Maria Tadeo joins us now. Bloomberg Europe correspondent out of
Brussels, Maria. Walk me through the German response to our story, suggesting that they're ready to back joint EU debt for loans to ease the energy situation. Well, Jonathan, you have one source that doesn't go on the record and says the German government is not aware of this plan. But I think you need to take a step back
and see how the German government operates at this stage. This is a three party coalition. Of course, a Bloomberg story mentioned. That is all of Schultz, the German chancellor, who had, well, a change of heart after he met with European leaders last week. What I can tell you is that for a week, something has been cooking in the behind the scenes across Europe. There was a lot of pushback to the
initial 200 billion euro stimulus plan that Germany put out in the Eurogroup. You could hear a number of countries very openly saying we will need some type of joint response. Otherwise, this is going to be each nation to their own devices. And therefore, there's going to be a problem when it comes to the fiscal capacity. And then with the German chancellor met with European leaders last week. Well, he heard the same message. There was also a lot of criticism that
Germany did not coordinate well. The Germany did not have a lot of communication. What I would say, though, is that we're at a stage where this is an open debate, where there's an actual behind the scenes tension in terms of how to respond to the energy crisis and do a join me. This is not going to go away.
And if you ask me, the choreography from now on will be listened to. Energy ministers today wait for the European Commission to put something on paper. And then this time next week, European leaders will have to decide on something, whether this is join dad, whether it's a price gap. I think that remains to be seen. But there is a debate. Well, let's talk about the approach to
that debate. Is over loans or grants. Now, this we have to make very clear, because we've never talked about a recovery fund. If you go back in time and again, you have to allow me 30 seconds of very technical talk show here.
But if you go back to 2020. This was the recovery found. There was the wow moment for the European Union. They went jointly triple A rated debt to the market and then distributed that in grants and loans. What we're talking about here is a plan that came before the recovery fund that was known as the Schwab, but everyone forgot about it because it was eclipsed by the big fund. Now, the idea here is that as the EU, you go to the market triple A rated, you lock better funding costs and then you get that two member states, but they will have to pay back. The only difference is that if you're
elderly, you probably want to do it at that rate and not have to do it independently on the market because you're not going to be able to lock such an advantageous rate. That is where the debate is that nobody is talking about a recovery fund 2.0. We have to be very precise about this. You want to catch up with you embrace it out of Brussels on the latest effort.
Greatest that get it done for you. Is that enough to put a lid on things over in Italy if this gets finalized? It helps. Absolutely helps. Definitely allays a major fear that the
markets have where the ECB will lose control and the ability of these peripheral countries to fund themselves at a time where they need the funding. So I think this absolutely helps. And the closer you get Europe together as a fiscal union, the better off we are. How do you compare what's happening now to, say, 10 years ago when the epicenter, the catalyst for the crisis was on the periphery and now arguably the epicenter? This is in Germany? Greg, that's quite a change. It is a change, and I think it matters. And we can kind of think cynically about it, of course.
But what it is a process that I think pulls the core to the periphery and said the other way around. And maybe, just perhaps, Germany seeing the value of having a more fiscal union and aligned European Union. Does that present opportunity in Europe in a way that perhaps that wasn't an opportunity before we got the whatever it takes a moment, which frankly, I think so. I would think so.
I mean, if you go back, you know, Europe was trading as a single marketplace that obviously blew apart and it continues to be quite fractured. But I think it takes less pressure off. Just call Italy and puts more pressure on Germany and all sequel. That's not such a bad thing. So it's 475 a good think on a tenure for you and a team. It's not something you'd buy for. For Germany, for Italy, 9 0.
For Germany, I think it's 475 an outfit for Italy right now. You know, once again, I think it's too early. Right. The challenge. I think investors have is the extreme volatility. And so we're focused on gilts, of course. Right. And it swung 100 basis points in the
day. But it's happening all over. And so it's hard to really put a stake in the ground. So the volleys so extreme, I think it keeps capital out. So you need to dampen the vol, which is what I think these programs do and central banks tried to do. And then investors start to enter the.
I've been so surprised by how ambitious the ECB has been in the last couple of months. We're having another conversation about a 75 basis point. I can, Greg, if I go back to the conversations we'd have in the pandemic. I think if you'd asked me, I was pretty open about it at the time. I was seriously sitting there thinking we could go another full cycle without a rate hike from the ECB.
I wasn't alone. The people were saying the same thing. And here we are talking about 75 again at the end of this month. Do you think that's doable without causing some real issues? I think it is. And I think the ECB has been allowed to get out of the trap. Right. Look at what's going on in Japan. Right.
So, you know, the the Bill J is stuck. Right. And they're stuck as far as the eye can see. And I think there has clear implications.
So I think the ECB is using this as an opportunity to normalize rates, as I think, you know, history will shine a very unfavorable light on negative rates. And I think they're trying to get as much room as they can. So when things do slow, they can cut again. Are we leaving behind this era? There are some people who believe we're just gonna return to it in a couple of years time. You think we are firmly leaving behind this era? I think so. I think so. I think we're moving out of this central
bank dominant phase, that era. Like I said, I think history is going to look back on that and go, God. That's a really bad idea. You're destroying savers. You're in straw.
You're destroying insurance companies. Look at the fallout on the elder ISE side. Right. That's just a artifact of the change in policy and how difficult they they had it over the past number years. Let's hope we can get to a better destination. It's certainly painful making the transition right now. Andrew Holland, host the city is going to be joining us shortly. Andrew is looking for another 75 basis
point hike from this Federal Reserve and they start in November. Coming up, Andrew Holland has the city alongside Annmarie Horden AMH. DC In the next hour, we'll catch up with Mohammed al Shery Ahn right here around a table in New York City. Yields up, stocks down. How many times have we said that? Live from New York City this morning. Good morning to all.
Here's the price action on the S&P 500, on the Nasdaq. We are lower. Negative. Down by nine cents on the S&P and the Nasdaq 100.
We're down by nine tenths of one percent. Also, equity is down, yields higher to cents in 30, shaping up as follows on a 10 year, up by 6 basis points, approaching 4 percent all over again at 394 49 on a 10 year maturity at the front end on a two year not far off the highs of a year up another basis point, let's call it 132 or rather call it 432 before you get too excited. 432 431, 83 yields higher. The euro looks something like this. Euro dollar clinging on, hold on unchanged to about 97 and 97 0 5 unchanged going into the ECB later this month with some calls for a 75 basis point hike from the European Central Bank. The ECB speaks still to come. The Fed speak front and center in the last 24 hours. We heard from the Chicago Fed president, Charles Evans.
Take a listen to what he had to say. So the reserve is committed to returning inflation to its 2 percent average goal to do so, I expect we will need to raise rates further and then to hold that stands for a while. Of course, the exact path forward for policy will depend on the evolution of the economy and risks to the outlook. Its comments got some people excited that just maybe a pivot was around the corner.
Goldman Sachs pushing back this morning. The team over there and writes in the following. With gasoline prices on the rise until a broader set of macro data suggests more material weakness in the economy, they go on to say we were generally lean against markets, dovish repricing of the Fed. Greg, this drives you nuts, doesn't it? I mean, how many times have we done this in the last three or four months? It does. Hope springs eternal. Jonathan Right. And so I think the marketers have been looking for any window of change and pivot, and they just don't think it's there. I think the most important point in that
speech was average inflation. It's not 2 percent, it's average. And so I think that gives you more room. And so I don't think they're going to be completely dogmatic to get to 2 percent. It has to be 2 percent ish or maybe a
two handle. But the average thing is what really I picked up. And they've done a lot in six months. And Vice Chair Brainard in a speech yesterday reflected on some of that 300 basis points of tightening at six months. And she went through a list of things, the two year, three, four percent for the first time since 2007, the 10 year near the highest level, said a decade.
Mortgage rates have doubled. This year, they reflected on what's happened with the dollar, the Fed's broad dollar index. Appreciate it. Eleven percent, they believe it's a lot of tightening in the pipeline. Greg and I just wanted the risk that they've already overdone it. Do you think there is a risk? They've already overdone it? I think so.
I mean, you know, the Fed believes that it's a financially driven economy. So there's a much more immediate impact on rate hikes than what they've experienced in the past. And so time will tell whether that's true or not. But they've done a lot already. You're starting to see fractures in the mortgage market and the housing market. And so my suspicion is that they want to get, you know, another hundred and let's call it just for good measure and then they'll reset and see where things shake out. Citi thinks there's 75 of that coming at
the next meeting. Andrew Holland, host of Citi, joined us right now, the chief U.S. economist. Andrew, let's start there. Why another 75 for you in the next month? So I think it really goes back to what you were just discussing, that the Fed has two issues here. One is in economic fundamentals issue and there.
That's right. There's been a lot of progress in terms of tightening financial conditions, probably further to go, a lot of that's already priced in. But then they also separately have a communication issue. And I think that's what they're managing. And that's what you see in some of those comments from Evans and from Brainerd, where, yes, of course, as interest rates get higher and you get into a range that may be more restrictive, you start thinking about should you slow down, should you pause? The issue is from a communications perspective, how do you explain to markets and the public that you still have resolve in fighting inflation if you're slowing down rate hikes or you're pausing rate hikes and it ultimately goes back to the data, is the data going to give the Fed flexibility to do that? Will we see CPI slowing down? Well, we see a job market that's loosening. So I think that's what they're really
watching now. Are we seeing any of those things? And the two things that you mentioned? I think you can argue in labor markets, we maybe saw the first sign of some loosening and you heard Vice Chair Brainerd talk about this yesterday where we had job openings come off meaningfully. So we had a ratio of about 2 job openings to every one unemployed individual.
Historically, normal ratio would be maybe 1 one point one that came down to one point seven openings to every one unemployed individual. So it's moving in the right direction for the Fed if they want to see some of that excess demand coming off. However, the level one point seven openings to every one unemployed individual. I mean, just intuitively, that's a lot of excess demand for labor that's still out there. And Andrew, we have a big release this
week, CPI. Is there a level that you think shakes markets confidence one way or the other? So consensus, I think is a point. One annualized. Is there one number or do we need several numbers of a certain trend to really kind of move. Fed rhetoric? Yeah. Hi, Greg. I think it really is going to come down
to where does that core monthly inflation number come in? That's what we saw last month where it was a stronger, clearer reading. And Brian talked about this yesterday, caught goods in particular, stayed strong. There's a pretty broad consensus that core goods prices should be coming off. Until recently, at least, we had commodity prices that were moving lower used car prices that looked like they should move lower. We've seen that in the wholesale prices. So we're really watching that core goods component in the release to see if that slows down. Right now we look at that core CPI inflation month on month. We have that at Citi at zero point five
percent month on month consensus around zero point four percent month on month. If you saw that slow down to zero point two or even zero point three, that would be a signal in the markets that maybe you're getting some easing in price pressure. I think, though, the risks are actually still to the upside that maybe we'll see that zero point four, even zero point five. Like we're projecting. Andrew picks up on that quote as well from vice champ Ryan.
She said there was ample room for marching re compression to produce goods inflation as demand Co's supply constraint cease and Imitrex increase. Andrew, tell me the part of inflation that's actually going to be stickier and then crack and I can have a conversation about what that means for corporate profits. So I would take this back to the labor market. I think like I was saying, there are reasons to think that core goods inflation might slow down a bit.
If I look at services, labor intensive services, and then I go back to that job market where we have one point seven job openings for every one unemployed individual, we have wage growth, according to the Atlanta Fed wage tracker, that's still running upwards of six point seven percent year on year. Average hourly earnings a little bit slower, but still well above levels that would be consistent with 2 percent inflation. That's what I really worry about, persistent inflationary pressure.
You'll have some pressure and rents also and shelter prices. That's basically lagged effects from price increases that we've seen in the past. But in the past, but really non shelter services and the tight labor market is where I would be most concerned about persistent inflationary pressure. Greg, we often talk about the S&P 500 and whether the Federal Reserve has a price target.
I wonder if I've got to stock it, because right now you've got the vice chair telling us that there's ample room for marching re compression, isn't it? Basically the Fed telling you that earnings in corporate America are going to come down? Yes, but she's not wrong either, because you're looking at record profit margins well above anything we've seen on a long term trend basis. And so there is ample room. Right. And so, you know, our expectation is profit margins to come down. I've been saying that for over a decade. But, you know, from labor costs increases, just input costs generally on the rise and revenues slated to come down.
And keep in mind, Jonathan, that corporate help put on all this low cost debt. That's a good news, bad news story. The good news is when you know the operating leverage is working in your favor, you. You have ample profits, and when that reverses, it goes the other way. So I think there is more of a downside deceleration or acceleration to the downside than anticipated. Andrew, just final question from me to you. This 75 basis point hike in November, is that the last one of the cycle? It may be, it may be, and that's where it comes back to.
Does the Fed get that flexibility from the data? I think if you see margin compression like you were just talking about, if you see goods inflation, that's slowing. If we see a job market that looks like it showing some signs of loosening, that would give the Fed at least the signs that it needs to see to start that process of slowing down. If you don't see those things that I think that's the risk, we could get another 75 basis points at subsequent meetings.
I'm sure the market will price a payment somewhere in between at some point in our future. Andrew, thank you. Andrew Holland, host over a city looking for 75 from the Fed next month. That decision will come a week before the midterms.
I am a standing RTS joins us right now. Amery talked to us about a month ahead. Well, we just had some insight last night, Jonathan, about the Senate race in Ohio. This is Senator Portman seat and very much. This is Ohio that's turn red.
Over the past two elections, the voting for Donald Trump twice. But if you look at one, 538 is saying they're saying that this race is actually getting very, very close. And you had this debate with J.D. Vans and then Congressman Tim Ryan. And Jonathan, the top issues we've seen across the polls really came out in this debate.
You had Congressman Ryan talking Vance, an extremist. Abortion was one of those issues. At the same time, you saw the congressman actually say distancing himself from the White House, saying that President Biden shouldn't run again, said that the vice president was wrong about saying that the southern border was secure.
So you see these issues coming up again in a very hotly contested race. That's Ohio. And you're going to see more of these debates to give you an insight of what's going on within the country.
I would also like to point out what's going on in Nevada, because there's an issue that is affecting the White House right now, and that's obviously the concern of rising oil prices and what that means for gas prices. And what you see is that potentially Republicans can flip Nevada and a huge issue there is inflation and that is gas prices, the national average. Jonathan, for gas prices right now is still under four dollars a gallon. It's a three, three dollars and 92 cents around an average nationally in Nevada.
The average is north of five dollars a gallon. This was a key issue when you look at some of these western states. And we'll catch up again in the next hour. Looking forward to Emory down in Washington, D.C.
for ninety two, three ninety two, rather, the national average right now. Rick, we start to see the same problems from the summer come back again. We are we we we are in the timing's really quite poor from from the Democrat side. So higher prices operation midterms next month. I'm waiting to see what they can do about this one, whether they tap the EPA on a bigger fashion.
Once again, Covid Covid. Heck, they had a researcher, ADF man looking forward to that conversation. Coming up next on the program, with equity futures down eight tenths of one percent on the S&P.
Live from New York, this is pulling back. Keeping you up to date with news from around the world with the first word. I'm Lisa Mateo. Reports have emerged of Iranian oil
workers joining protests which have continued over the death of a 22 year old woman last month who was in custody of the so-called morality police. Now, unverified social media videos showed dozens of laborers and uniform workers marching. Israel and Lebanon have reached what's being called an historic agreement to settle their maritime dispute, according to Israeli Prime Minister Yair Lapid s office in a text message. His office said the deal will, quote, strengthen Israel's security, inject billions into Israel's economy and ensure the stability of the country's northern border. Malaysia is heading for early elections
this year after Prime Minister Ismail Sabri Yakov announced the disillusion of parliament. His ruling UMNO party is seeking to strengthen its position following a run of successful local polls and a budget for next year that lowers taxes. And the leader says the election commission will decide on the date of the vote, which must be held within 60 days. Mercedes Benz sales rose by more than a fifth during the third quarter. Piercing through ongoing supply chain
bottlenecks and increasingly negative economic outlook as consumers battled surging inflation. The luxury automaker delivered nearly five hundred eighteen thousand vehicles globally in the third quarter, up 21 percent compared to the same period a year ago, with demand in China leading strong growth. Global news 24 hours a day on air and on Bloomberg Quicktake powered by more than twenty seven hundred journalists and analysts in more than 120 countries. I'm Lisa Matteo. This is Bloomberg. China's on the way back. That's a big move in the right direction. We probably will see the market trend
towards 100 dollars, but I don't see it returning to 130 dollars where it was at the beginning of the Ukraine crisis. I'll be over that. Check in on the energy situation. The senior strategist at Mizuho Americas, like from New York City this morning. Good morning. Here's the state of play.
I'm sure the equity market bulls would love the bond market just to stay close. But that's not how this works. Yields up again by six basis points, the 394 49 on a U.S. tenure in the equity market where yields go. You know, we get the equity market is go in, yields up, stocks down, equities down by eight cents of one per cent, crude down a little bit down by two point four per cent to eighty eight, 94.
The theme of the last couple of weeks on the commodity market, we've got a bounce, a rally once again kind of CAC joins us now, the head of researcher E.D., an F man, kind of. Let's start there. I think a lot of people wanted to park this story as something that happened a year ago. And it's going to start to fade a little bit more. Is back on the agenda white? You know, I think CAC. Well, why did it stopped fading? I think that was because the move, the mood of the sentiment basically moved away from inflationary fears, which is very pro commodities to recession fears which are anti commodities. And so I think you start to see a
wholesale risk off. The dollar was strong. Nobody wanted to invest in commodities. And then last week or so, we saw to see partly a retraction in the dollar. But importantly, we start to see an escalation in the Ukrainian war. And I think what that has done is
brought back to attention the fact that this powerhouse, which is Ukraine and Russia, they are such a big supplier of food and energy commodities that anything can go wrong overnight. And I think they just realize that actually stocks are not that comfortable across the commodity space. And if you see further supply disruptions from this region, suddenly the supply demand balances can go up. Right. And this is when things become a little bit scary again. Kind of is sentiment or something more real? Is this something that you saw take place over the weekend that will actually disrupt supply? Well, the way the missiles were targeted, it did seem to be that Russia was targeting some of the energy energy facilities of Ukraine. I think that is a strategic issue and I think it's worrying because obviously if Ukrainian people then have to flee the country and move to Europe in order to seek energy, they become essentially energy refugees. What we saw in Europe the last year or
so, we've been seeing a huge influx of Ukrainian refugees which have pushed up demand for food. Now, we might see the same thing for energy at a time when European energy is really there's just not enough to go around. So I think that is a key issue. And I think we just know that Europe is so vulnerable right now to any kind of supply disruption out that Russia and Ukraine is just another one at the top. Now, the kind of based on what you're saying right now. And I'd love to wrap things up with the
following question. Do you see a material risk that these kind of price moves might be sticky, that some people think even in a decelerating economy? Yes, and possibly yes, because although we do have a recession, fears ahead and that in itself can lead to demand destruction not just for energy but also for Sudden Foods, particularly food price, drastic ones. I think ultimately. Commodities are staples. You can't do without them. And I think suddenly the supply side risks are just too intense right now. Today's we go into the winter period. I think it's just entrenched in everything, whether it's food production or manufacturing or transportation.
Everything is underlying by house and high energy prices going because I think that inevitably that means is sticky. You're not going to see prices normalize back to where we were over a year ago. I think that is not going to happen. And suddenly, as long as supply side with other banks doesn't seem to be now, I think that is definitely DAX that kind of. Thank you. Always good to catch up. Kind of like that of a D and F man on the latest in the commodity markets.
Fun. Final thoughts now with Greg. Participate in Greg Festival. Thanks for being with us for an hour. Thanks for having me. CPI on Thursday. How sticky is this story going to be? We've talked about peak fat. We've had a park that once again talked about peak inflation. Had to park that about five different times in the last twelve months or so.
Are we gonna make the same mistake again? I think inflation is incredibly difficult to forecast the state, the obvious. And so I wouldn't be surprised by another misreading. But I think ultimately what we're seeing month after month is a broadening out and the stickiness that we didn't anticipate. And I also think it's important to look at it globally. So this is not just a U.S.
issue. This is a global issue. And there's different reasons that's driving it. So. So I believe that inflation's a little more stickier than what's being forecasted. The forward market is still really quite, quite enthusiastic around inflation coming down. And I think the story, Jonathan, over
the next six or nine months is the stickiness of that inflationary thing, even if it does come off the peak. Is it really going to be a straight line down to 2 percent, so so we could have 4 5 percent inflation and be in a recession? That would be a really bad outcome. If you're a central banker and that's the risk on the table. And so if that's the case, I think central bankers have to lean on it even harder. Right. If you throw the economy into a recession and inflation remains high, you fail on both fronts. So to me, that means you don't pause. You actually lean harder into it. How does the bond market trade in that
world? Poorly. I mean, the worst case scenario for the bond market is stagflation, often natural assets. Right. And that's what we're witnessing this year. And so of that still pervasive into next year, then I think you'll have much of the same story next year as you do this year. We've gone through ranger markets this morning together on your screen on mine, and you've talked a lot about where the opportunities might be. But each and every time you've said not yet need to be patient here, what are you waiting for? What specifically are you waiting for? What are the preconditions that you and the team get around the table and think about? And we're just not there yet.
What are you waiting for? Yeah, I mean, look, I am much more enthusiastic around the opportunity set today than I was six months ago. Nine months ago. Right. If you go back to when the 10 years are 50 basis points, where was the opportunity going forward? Right. It was well short, obviously. But. But, you know, we're definitely seeing a lot of value created.
We're seeing lots of disruption. And so we are excited about micro parts of the market. So if you look at what's happening with the LDA situation, there's lots of interesting securities for sale at distressed types of prices. Those are the things we're focused on, these broad macro calls, just a really difficult.
Normally they're even more difficult today. So we're seeing lots of value idiosyncratic, Ali. You know, we are bond pickers at the end of the day. But I think making a massive call on rates and overall kind of beta market is really difficult. You know, going to force you to make a massive call on rates right now. If I buy the tenure here, am I happy I did in twelve months, maybe not 12, but 18 that two years? Absolutely. Greg, Peter is a peach.
And Greg, this was fun. Thank you. Thank you. We should kick Tom out again and do this again. We should.
I would be all for that. Looking for Mike Collins and a team as well. Have a peach in party or something at 6am a.m. Enjoyed that. Greg VIX. Thank you, sir. Looking forward to seeing you again. Thank you.
Mohamed El-Erian is going to join us in the next hour. Looking forward to that. He'll be with us through the next 60 minutes. We'll catch up with a range of guests, including the deputy prime minister of Spain. We'll talk to the Spanish about what they think about a plan that's been circulating around Europe. Germany is kind of pushed back against.
Futures are down by about three quarters of one per cent on the S&P 500, where equities are going nowhere. Yields are they're up by six basis points on a 10 year, 393. Eighty eight euro dollar is unchanged at about 97. And crude is lower by two point four per cent eighty 88 dollars and about ninety seven cents. On radio, seen on TV. This is Bloomberg. Hard landing is very likely because the labor market has gotten too tight.
This is an environment where the bond market vigilantes are bad. We're seeing spreads stay wide and stay sticky. The Fed is with the jobs report is really indicating that they'll probably continue on hiking in a more aggressive fashion.
I think there's worse to come for the market. Unfortunately, this is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. The bond vigilantes are back alive from New York City for our audience worldwide.
Good morning. Good morning. This is Bloomberg Surveillance on TV and radio alongside Mohammed al Shery Ahn for the next hour. I'm Jonathan Ferro. Equity futures down seven tenths of one per cent.
Mohammed, this is special. The vigilantes are back in the bond market and the central banks across the problems, haven't they? They have. Not only are they needing to balance growth and inflation, but this financial stability on top, it's a three dimensional. To challenge that is actually very tricky. Do you think they're going to have to
tolerate higher inflation? There will be a thing we talk about through the next 60 minutes, but is that ultimately where this is heading? Ultimately, ultimately, ultimately, three ultimately is. Yes. That's where it's heading. But on the way there, they're going to stick to the 2 percent. You talked about that better destination a few times over the last couple of weeks. What is that destination? First, we exit artificial finance, which has created a lot of damage and which we are going to spend a lot of time trying to overcome.
That's a really important we need genuine finance as opposed to artificial finance. And secondly, we're going to focus more than ever on economic growth and economic growth are sustainable. That's what better place to be than where we've been. We'll discuss this with CAC Chandra of BlackRock imminently going into that conversation. Equity futures look like this on the S&P were down six tenths of one percent. This positive correlation between bonds
and stocks is not going anywhere. Equities down, treasuries down, yields higher by 5 basis points to 3, 92, 86 on a 10 year equities lower by six tenths of one percent. Euro dollar, euro Shery Ahn a bit of strength here at 97 19 positive two tenths of one per cent and crude.
A little bit of weakness are 88 dollars and 96 cents. We're missing promote today. She's over at the Greenwich Economic Forum and Lisa joins us right now. Morning, Lisa. Hey, John. And I want to say I couldn't handle the parish there, so I just decided to take a cruise down the Long Island Sound and contemplate this new regime change and perhaps also the mad switch. I'm not going to be in studio to speak with Mohamed El-Erian and sob together about what's going on. We are going to be having some
incredible conversations today. You know, we have policymakers meeting in Washington, D.C. to talk about how they are featuring higher inflation, how they're combating that in the face of slowing growth. Here is what do you do as an investor? Who is the marginal buyer? We're going to speak with Jim Zelizer of Apollo. We're also speaking with Lawrence Golub of Gallup Capital, Ned Lamont, the Connecticut governor. Coming up here and then later in the
day, Ray D'Alessio, of course, of Bridgewater, the co chief investment officer, Kathy Wood of Aachen, fast and kept a year of areas capital. This question of at what point is this a buy? At what point are we looking at something that actually offers value if you're a bond vigilante? Are you there yet? Are you happy with what you're seeing? And John kind of answers the question of. OK, what's the trigger point? Or we start to realize this new reality and people start to say, yay, we're getting yield again. Yeah, we're getting yield again. Potentially, maybe. Lisa, thank you. Awesome. And let the record show the league support the Mets. Mohammed and I didn't.
I know, but I'm glad she's not here because I do think we would solve together. Commiserate. Oh, totally. We would make each other cry even more. You support the Jets that she supports the Giants. I can live with that. You can live with that. How can we get on over the weekend for both teams? For both teams, the Giants to the Giants to that came back in the Red Riding. Mr. Rogers, is that right?
Yes. You're proud of my football, and I'm very proud of football knowledge. Grandma will catch up in the next hour. Looking forward to around the table with Mohammed and I for the next 10 minutes or so. Gabi Chowdhury of BlackRock. Gary, thank you for coming in. Let's talk about market functioning if we get to market functioning problem. Good morning to both of you.
It's great to be here. So market functioning problem in the US, we haven't really seen it, especially when we compare it to what's happening in the UK. I will say, you know, given my seat and looking at ETF and looking at Asia is trading, we have seen a huge amount of volume in ETF trading. You know, there are days when we get up to about 43 percent of the equity market trading in ETF and I think there is something to take away from that. And that means that people are looking
for liquidity and going where they can find it. So is there a challenge yet? No. Can there be, especially as we go into your end with the quantitative tightening in process? That could for sure. And I think the Fed has to be very cognizant of where you anticipate in pockets of stress at the moment. So at the moment, I would say that, you know, for the full for almost all of the year, you know, we have thought about interest rates moving up. And only now are we getting to some level of especially in the longer end of the Gulf.
So dense 15s, 20s, 30s, which may be looking a little bit more interesting to people. So to the extent that a lot of investors come back into the interest rate market, a lot of investors come back into the long end of the curve and then we see bond outflows. Then we see foreign investors, Japanese investors sort of flee away from the market because of hedging costs. I think there could be some stress
there. I don't actually expect that to be any massive stresses in the front end of the market or even in the credit market, because I think the balance sheets of most of these companies look very good. So staying up in quality makes a lot of sense.
And I would also say that, you know, we started talking about liquidity going into Iran. I'd be very cautious about how the market trades, keep a strong eye on the repo markets, but are we looking in the right places? So when I hear you say we're not seeing stress in the ETF space, we're not seeing we're not going to see stress because fundamentals are basically sound for most companies. I agree on both. But that's not where stress originates. Stress central region is in the periphery. Yeah. It then contaminates technicals, technicals then cascade through the market.
Next thing you know, even markets with strong fundamentals are disrupted. So if you look at the periphery, don't you start seeing serious stress developing there? Yeah. And I think that's why when I started this conversation, I was like in the U.S., you know, it's obviously we're in a much better place. I think when we go out to Europe and we are looking at periphery in Europe, I think that could suddenly be the case. I think there's a lot of doubts about how they're going to come out of this energy crisis and how they're going to do, especially with interest rates climbing higher. So, yes, some stress could occur there. I'll also say that unfortunately, we're
often not able to pinpoint the stress. Exactly right. This isn't going to be the housing market stress that we had in the crisis just because it happened the last time. I think there will be new areas of stress in the market. I think I know one of the things that
we'll be looking at is market functioning and how bonds and equities trade between now and the end of the year. And we'll be looking at what it costs to finance things. I think that's what will give us some indication. So the top question I get asked and I want to posit to you is when we have inflation concern. When you have a growth concern and now
we have a market, potentially a market function concern, where should we hide? Where do we go? How do you get risk mitigation into a portfolio? What do we tell people? Yeah, it's a good question. And it's been a hard year for market participants, for investors with bonds. Not really giving us that balanced. I think the good news are a little bit of good news is that at least the front end of the curve, the closer and closer we get to that four and a half a percent in the US markets can potentially be a place to hide. I do think the closer we get with us to your treasury is getting you for 4.5 percent with front end IAG getting you over 5 percent. I think those are creating some pockets of opportunities.
I'll also say that within the equity markets, there are areas that you're supposed to gravitate towards. And you know, we've talked about this even since our media in July, where energy markets and energy equities, not so much energy as a commodity, but energy equities. Given the balance sheets of the companies, given the cash flow, given the earnings that we're going to see, I think is another area that could potentially do well, could be that inflationary hedge for you. And I would also say that infrastructure probably when we think about inflation, hedge infrastructure. Given the backdrop of potential policy
support that's coming its way, it could be another. But broadly, would I? But by long duration today, not quite yet. But I think the front end of fixed income markets, high quality fixed income markets are beginning to look attractive. And the last one and this is my
favorite. I've spent my life looking at inflation linked bonds, but the very front end and again, looking at two years and shorter, that has cheapened up significantly some pressure from U.K. I'd say that would make a little bit of sense because some competition for the Bank of England be bond linked has to Mohammed. You brought something up that I think is really important for many people has been super frustrating, massively frustrating.
The positive correlation between equities and bonds, is it price that changes that story t
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