'Bloomberg Surveillance Simulcast' Full Show 10/17/2022
You have a situation in the UK where I'd call it a crisis of confidence, fiscal and monetary policy appeared to be moving in completely opposite directions. The Bank of England is having to try and manage the chaos that the government has been creating in the bond market. The bond market vigilantes are back. What we had in UK really is symptomatic
of what is happening elsewhere. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. Here we go again live from New York City for our audience worldwide. Good morning. Good morning. This is Bloomberg Surveillance on TV and radio alongside Tom Keene and Lisa Rabbit. Some Jonathan Ferro with equity futures
T.K. up a little more than 1 percent. You're going to see same week, same whatever. I wasn't going to say that's going to work on Bloomberg Radio worldwide. What an extraordinary week. Joe, we start up with the same surprise that we've heard all the news in the United Kingdom.
And you can brief us and you know it better than me. John, to me, all I need to know is I got restriction, restriction, restriction on the screen. The Bloomberg Financial Conditions Index is where it's been every moment except the beginning of a super volatile last week hit Jigs of SOC Gen on the UK last morning. Lisa, your love this line to good bye crisis.
Hello, recession. The vigilantes, when we heard from the chancellor a little bit later this morning. So he's we talked about this last week. Who blinks it is, of course, the blinking of the fiscal policymakers with a new regime. Jeremy Hunt going to be speaking today. We'll go through all of that. But the key question is, what can he do to really restore credibility for this administration at a time when there still is a huge risk premium baked into both the gilt market as well as the pound? And dare I say, on a technical basis, Mike Wilson of Morgan Stanley almost on the edge of constructive this morning, guys.
Lisa, I just almost there technically is sort of the keyword and basically is hang like things get good and then they're not really, really bad is basically saying there could be a 16 percent rally. And then you look at the downside and it's pretty dire until companies fully confess or a recession officially arrives. Bank of America, some later are saying some of the research notes are really, really interesting, John, to stagger to November 2nd. I would say this comes off the Washington meetings. Is everybody in America is focused on the inflation story, the recession story, and that the rest of the world's focused on dollar liquidity and the shortage of dollars. And you see it deep in the Bloomberg screen. There is a tension on a Monday morning
that wasn't there a week. Let's work through the price action just briefly for you this Monday morning. A start with the equity market. We are elevated on the S&P 500 futures higher by a little more than one full percentage point. The volatility yesterday just absolutely
ridiculous or rather on Friday. The volatility in a football yesterday, an incredible time. Tom, did you catch City Liverpool? I saw it. And, you know, I can't translate it.
But the Liverpool defense was world class. Van Dyke finally had a good CAC stepped up. We'll touch on that later. Yields come in six or seven basis points on a year, starts 394 87. We can discuss them later. Euro stronger euro dollar ninety seven fifty and crude Rameau. Eighty 577 are by little more than a tenth of one per cent.
Call it two tenths of one per cent higher. Yeah. Thanks so much. So what I'm looking at right now, of course, 830, we get some economic data. But before then, we're looking at Jeremy Hunt and we could potentially happen when he starts speaking in about a half an hour time and then again to the House of Commons at around ten thirty Eastern. What does he say?
To give some support. There had been a lot of discussion over the weekend. Different talk shows and he had been pretty encouraging. We are seeing a bit of a dip in yields across all maturities. Is it enough if you take a look at how we've performed year to date? Yields are still incredibly high and the pound is still incredibly low relative to the dollar, incredibly weak, even though you have seen a bit of a bounce on the heels of this.
Then we do get more earnings. Bank of America earnings out around 645 a 830 AM. We get the earnings call. Do they give the same kind of constructive feel that we heard from JP Morgan or do they give more of a sense of the consumer a little bit more strained? I mean, we're not seeing that yet right now. Bank record shares up two and a half percent in the premarket and 838. And we get U.S. October manufacturing data as well as what we're getting with the Empire Manufacturing. How much do we get a sense of a deceleration, a rapid deceleration in inflation and in activity at a time when this really is a tea leaf? That is probably the first real data that we get out of October. The second economic surprise index,
John, this is interesting to me. It's been trending upward. We've actually seen positive surprises. Is that a good thing or a bad thing for economists that want to see this economy roll over sooner so the Fed doesn't have to do quite as much? Did you see you mentioned Friday? Yeah, that was concerning. You got the chairman of the Federal Reserve says to look at it. Some said we look at it.
University much can one year consumer inflation expectations, five point one per cent unanchored on the lessons on the lift here. And this is these words that float around credibility. And the idea of anchored on include these 14 flavors. There's 14 different opinions I'm going to lean on other than to say usually I ignore University of Michigan. And I understand right now it's got of. Laurie Covid joins us now, the head of U.S. equity strategy at RBC Capital Markets. Laurie, wasn't a pat 3Q earnings.
It was about gone. It's a full Q and beyond. What are we learning so far? So, look, I think if so far in reporting season, John, I've been a little bit disappointed that it sounded a lot like the last couple reporting season. So we're hearing things like the tone around labor is improving a little bit. Not seeing any major cracks yet in terms of either the consumer or demand, but companies are battening down the hatches and getting ready for choppier time. So at least there's that. But I think that in terms of, you know, if you wanted the earnings Band-Aid ripped off, and that's what a lot of investors have been telling me so far. What I'm hearing is I don't know if we're gonna get it this reporting season. I think we may have to wait till
February, March to get that. Laurie, you and Ben later on the same page, Ben later starts up by saying the first ever so slight glance here at earnings are less bad start. And then you talk about moving to high quality define what high quality is is a comfortable place to be.
So high quality is a factor discussion that I have with a lot of investors. If you talk to your average portfolio manager, small cap or large cap, especially in the small cap space, odds are they've done some sort of back test that tells them that things like positive earnings and high are a weak outperform over time. So come invest with me because. That's right. Although I run. And so what we're starting to see is that after a summer in which the low quality starts so negative. Earners highly shorted names on negative
ROIC, low ROIC. Those names were actually working pretty well coming off the June low on a relative basis. And what we're seeing now is that more of the high quality version, right. Positive earners, the higher we the lowly shorted names are starting to work, which frankly, Tom, is a silver lining heading into the end of the year because that actually bodes well for active manager department.
To me, Lori, this goes to the risk free rate returning here and maybe it has to do with big combinations like Kroger and Albertson. But all of a sudden the zombies have to report as what we're really talking about here is not high quality, but that all of a sudden it's zombie November. I think that's a fair way to look at it, Tom.
But, you know, I would also say it depends on your definition of zombie a little bit. I think that in general, when you're going into sort of a lower growth, uncertain time, investors do cling to those higher quality names. And typically those are the ones that do come through managed through challenging situations a little bit better. So I think that, you know, investors are sort of circling, circling, not closing the ranks and really just clinging to what's worked over time. And there's a lot of PMS say to me, you're not going to get beaten up by sticking to your philosophy. Where you're going to get beaten up is
if you underperform when you've deviated from your philosophy. Lori, how much could you see the S&P getting to that? Thirty two hundred level, which is the base case for Mike Wilson over at Morgan Stanley. Even with some of the constructive feel that you have in select names in select industries.
So I think it's a great question. Lisa and I and I understand why that number is important. You know, when I talk to my friends in the technical strategy community, they'll often say, thirty five hundred thirty two hundred are kind of the next big battlegrounds. And I see that as well from a fundamental perspective.
Thirty five hundred is your median recession draw down a 27 percent draw down from peak. But if the market starts to think that the Fed is not going to be able to pull that off and that we're going to price in something more challenging from an economic perspective, an average drawdown is about 32 percent from in a recession going back to the 30s. That takes you to that 30, 200 mark. And if you go back to the pandemic, Lee, so we lost 34 percent peak to trough. And so I think that 30, 200 mark, if 35 doesn't hold, I think 32 hundred is the next natural place to go. But it's hard for me to imagine we go too much lower than that just because in the face of the pandemic, I mean, frankly, when life was on the line and there was just a massive uncertainty ahead of investors, that's only as bad as the market fell. So I think 30 200 is a good place to
look if thirty five hundred doesn't hold. Thirty five hundred is proving to be a major battleground here for that reason. Lori, how how hard is it to convince some of your clients to be optimistic, to be constructive when there is this high likelihood of that psychological level on the index? I think that what's interesting is I talk to people about it from a positioning perspective. What is the next big thing that you need to do? And I show them my charts basically showing that defensives are at peak valuation relative to those cyclicals and secular growth.
And I tell them, you know, I've been traveling around the country pretty nonstop since June. And I tell them, you know, everyone I talked to has plenty of defense. They've cleaned up their portfolios. They own as much staples or utilities as they're ever going to own. The next thing to do is to go on offense.
And that really resonates with a lot of people because they know from that experience over the summer. Going back to the conversation with Tom about quality, when the low quality stuff started to move, that is not where they were position and that's where they started to see some underperformance in their portfolio. So I think people understand that if you're a longer term investor, eventually the tide will turn. And frankly, there's just not a lot. People need to do anymore. On the defensive side. They're already there. Laurie, wonderful to catch up with you. Laurie, canvass seen it there on the
latest in this market from RBC, the latest from the UK. Just getting this from the chancellor. The measures announced today will raise 32 billion sterling the UK to shorten universal energy support to April 2023. So the chancellor in the UK just shortening the duration of the support they'll offer to offset some of the pain and energy to April 2023 to scrap the plan to cut income tax indefinitely. That from the chancellor. More difficult decisions are coming on spending.
So, Tom, this isn't just a U-turn. This is a massive change in terms of who is running the Treasury and what they're doing. Sterling with a pump here. John, right away from a 112 50 to a 133 nice pub breaking out to 114 would be a huge deal. It must be something wrong, he said this morning.
Some when he said good bye. Crisis. Hello, recession. These kind of initiatives are arguably going to get us there quicker because I was away. John, you and I barely talk. Wait, we barely talk anyways. But besides that, this guy ran the Olympics.
What does it mean to you that the chancellor of the Exchequer is the guy that did the very success, didn't know that London Olympics? I mean, he's a trivia, this trivia. But to me, my God, that's going to be the toughest job going to run an Olympics. So he's like Mr Organization, right? You think he could run a marathon right now? The reason asked that, Tom, is because it hit me. I wonder how long he'll be in the job. I think that's funny. Do I do I think that's idea how long this prime minister will be in the job. So for this prime minister right now, Tom, just seems to me and Lisa, please weigh in, that this is the phrase we used on Friday that you have a prime minister in office, but not in power.
And these headlines this morning kind of confirm that. Yeah, a lot of people comparing her tenure to the shelf life of lettuce. That's one of the, you know, a race. I think one newspaper in the UK has to win a race. It's got a picture of her framed in a
letter trust counter RTS to see what lasts longer. Safe Scheffer onto the next hour, 7:00 a.m. Eastern Time. Looking forward to that.
Futures up on the S&P by more than 1 percent from New York City, Guy Johnson out of London. Coming up shortly. This is pulling back. Keeping you up to date with news from around the world with the first word news. I'm Leon Guarantees. Ukraine's government says Russia has
launched kamikaze drones this morning. The explosions hit the center of Kiev, damaging several residential homes. There was a second strike on the capital in a week in Luxembourg. European Union foreign ministers are due
to agree on the launch of a new mission to train around 15000 Ukrainian personnel in the EU and sign off on an additional 487 million dollars in weapons financing. Now, EU nations have agreed to a new package of sanctions on Iran over human rights violations relating to the death of a young Iranian woman who died in police custody after allegedly flouting strict Islamic dress codes. Australia's foreign minister says the package targets eleven Iranian people and four entities responsible for serious human rights violations. Last month, a deadly protests erupted in Iran in response to the woman's death. Mercedes is broadening its battery powered lineup with a new sports utility vehicle.
The aim is to take on Tesla's model. Why the carmaker's latest step to go all electric by the end of the decade. The AQ E SUV is the fourth model to use Mercedes dedicated Eby platform. Now, we did speak to the CEO who says the energy crisis may hasten the move in renewables. Europe in particular in particular will be challenged in the next two, maybe three years. And we're working on fixing that, especially Germany that's been dependent on gas coming from Russia.
So there's a lot of activity to deal with this short to midterm challenge. But if we go look a little bit longer mid to long term, I think this may even be a catalyst to go quicker into renewables. Global news, 24 hours a day on air and on Bloomberg Quicktake, powered by more than 20, 700 journalists and analysts and more than one hundred and twenty countries. We will not hesitate to raise interest rates to meet the inflation targets.
And as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps fought in August. Governor Bailey, Teen Gaddafi next decision for the Bank of England in early November. Live from New York City this morning. Good morning. Is the price action for you when the S&P
500 elevated in kick in higher on the S&P bouncing back again this morning by one point to nine per cent, yields heading south lower negative 9 basis points on a 10 year 393 and sterling a 113 handle. Again, cable the pound against the US dollar 113 0 for positive by a little more than one per cent. And I wouldn't just call this a U-turn. This goes beyond that. Tom Keene from the new chancellor, Mr. Hunt, over in London, making plans to reverse pretty much everything and shorten the energy support program from two years down to just through April 2023. The Bloomberg Financial Conditions Index
for the United Kingdom. Jonas absolutely original. It shows the bizarreness of the moment. And I think we've got a Dave dive into it. I'm going to do it on a political urn with Guy Johnson. Joining us now in London, because John's a lot, lot more up to speed on this than I am. Guy, can you explain the politics here? Is the chancellor of the Exchequer running for office? Yes.
Yeah, that's a that's not a radio answer guy. We got to do better than that. It doesn't work on Bloomberg Radio. He's running for office. They're all running for office. It is open season. Everybody is now running for office in the UK. Penny Morton's running for office. Where you an running for office? Jeremy Hunt is running for office.
It is open season on less trusts. The real problem here, Tom, I'm being I'm joking with you because. Because it is. It is amazing to watch. I can't quite believe my eyes, but I find myself in a situation where I actually struggle to to to wonder whether or not they can make it stick, though, because here's the problem. Can you change leaders again without a general election? Can you credibly do that? And I think that is going to be a question that increasingly becomes relevance as the days progress. We have a relatively positive outcome from the markets this morning. That will by Liz Truss.
Jeremy Hunt, until the thirty first, if things calm down beyond, then maybe this kind of atmosphere calms down. And actually there is a view taken that she needs can survive a little bit longer than that. We've got around two and a half years until the next general election. The Tory MP are not going to want to bring that forward. If the chaos continues. Yes, she's definitely gone. And that certainly looks like the base case at the moment.
But I wouldn't rule out her remaining either. I think I think Liz Truss is running for prime minister as well at the moment. Okay. Let's get to November 3rd and this bank
having that go through the policies that have just been announced. And walk us through what this is going to mean for Governor Bailey when he sits down with a team in a few weeks time. Let's look at pricing this morning, John. So the front tends come down, let's call
it circa 50 basis points. So we're back. I mean, sort have been wrong about this this morning. I am alive. We're basically back down to, let's call it circa 100 bets for the next meeting. So that's kind of where we were pre many budgets. We priced out quite a lot.
The front end basically has moved down in year quite aggressively, but probably doesn't go any further. The market is still pricing a terminal rate of 5 to 5.5, 6 per cent. So we've still got a long way to go on the front end. So this looks like a sort of tactical
rally here this morning. But the base case is still that the Bank of England has to do a lot. It probably just isn't pricing a very aggressive move that potentially would have had to announce where this chaos to to have had to continue. And we haven't had basically a large reversal on the unfunded budget, John. So that is kind of where we are just
looking at the Bloomberg now less than a hundred seventy five bits of Bowie Heights now price by year end versus two eighty only a few days ago. So that's the kind of the move we're seeing. But whether it goes any further, particularly at the front end, looks doubtful at this kind of stay at this kind of level at this stage. John Micklethwait. Now, given the fact you're talking about everyone under the sun running for office and that this is open season, there is a question about the credibility of Jeremy Hunt at this point as he basically undoes everything that Liz Truss put out there as her platform. How much credibility is there in the markets and why other policy makers that this will stick, that this is truly going to be the policy going forward? I think this probably will stick. Lisa.
And the reason for it sticking is the market reaction, the market that terrified of the markets down in Westminster once again. Westminster is terrified of the city. That is now what is happening. So you get a positive reaction, probably is a tick in the box for this policy. He's maybe gone a little bit further than some had anticipated and certain level in certain areas. And he is indicating that there are further painful cuts still to come. He hasn't.
It looks like he's going to shorten up the duration of the energy relief package. That's going to happen. We've already heard the the announcements on corporation tax and some of the other taxes that were going to change. I would say that this is now looking like it is the policy, the policy of this sort of bash for growth, for qualifying and trust put forward is has been completely reversed. We talked on Friday about the fact that that we wanted the UK needed a more sensible approach given the market reaction that we saw before and afterwards.
This new policy will be seen as the more sensible a guy looking forward to catching up a little bit later, Guy Johnson out of London on Chancellor Hunt's big U-turn and promising even more. I go back to that line from Kit herself, Jan, from early this morning, the title of his morning, No Good Bye Crisis Hallow Recession of Vigilantes. When the vigilantes Tom Keene, they were unimportant inside the cliche of the edge you're doing, you know, the bond vigilantes. It's the equity barn currency and commodity vigilantes. And I'd really look after messaging in Washington that I heard particularly off Mike, that the currency vigilantes, what we're going to do about those available to swap lines and those that are not available, you wonder, are the United Kingdom fits the precedent of the president.
The United States weighing in on the situation, the U.K. as well. Some they've not been scared of doing that, saying that the plan to cut taxes on the wealthy was not a good idea. And he wasn't the only person who said it was wrong. Yeah, I go with that. I just did some math here on the
Bloomberg Financial Conditions Index in the United States as a general statement back 20 years is more restrictive right now than Governor Bailey. I don't know what to make of that. Can I just throw this in there? On tax policy in the U.K. versus the US, the top bracket here, 37 percent for federal income tax. When you start paying that 540 in and
around 540000, you know, when you start to pay 40 percent in the UK, 50000 sterling, 50 percent or sterling, I'm not sure the president of the United States is in the greatest position to talk about how much the wealthiest pack in taxes. It's a highly progressive tax code in the United States, and it's something the Social Democrats in the United States don't really don't really communicate to the electorate very well. The European model is based on getting many more people to pay a lot more in taxes, not just France, for not just the upper upper echelon upper echelons of society. That's that's a major difference. That is just not discussed on on this side of the Atlantic.
I think it's true. And it's, again, the shift from a yurt over to where we are now and that, as you say, it's much more progressive. And of course, the Trump tax cuts, he everybody thinks of the politics. They were popular. Ibrahim Gambari is going to join us very
shortly on city and the what you call the effect vigilantes, the effort. This is my major motion from my Hang Seng World Bank. The effects vigilantes are out there with a vengeance.
Look at you. And this morning we haven't even talked about it. 140 eat 60s. The other thing the president said, Lisa, I'm not worried about the dollar. I'm worried about the rest of the world. But the rest of the world is worried about the dollar. Well, yeah, but the US isn't worried
about the dollar as much and they don't really care as much about the rest of the world. So Chase Square that I'm pretty confused by that futures this morning and the S&P confused up by one point. So I'm always confused. They got it done against the dollar. Just in the next day. I saw DAX. I saw that was a good game for some real baseball.
Live from New York City this morning. Good morning. Getting a bounce this Monday morning on the S&P 500. Here's the price action for you. When the S&P elevated futures pushing higher on the S&P and on the NASDAQ two up by one point thirty five per cent on the Nasdaq 100 on the S&P 500 up by one point two percent. Snapshot of the Treasury market for you, Suze Tans and Thursday's yields lower by 8 basis points on a 10 year, 393, 85 through 450 on a two year last week. What a move that was. We backtrack with that five or six basis
points, the 443 90 on the week last week, two year yields climbing for six straight weeks. Your tenure yield climbing for maybe even eleven. Can you get your head around the eleven knocks? Eleven weeks of a ten year yields have been climb. I can't get my head around as in Lisa. Help me here quickly with the mortgage 30 year mortgage rate, I can't get my head around six point nine percent. I think of the average. And it comes because you are seeing this expectation. Jim Bullard, we haven't mentioned this yet over the weekend was talking about the likelihood of a four point seventy five percent Fed funds rate by the end of this year, that he sees that as a possibility.
That is a game changer for someone who really has been out front. So the conversation he teed up, which was interesting, is that you used the December decision to bring Ken what you want to do in 2013. Agree perhaps in to front load December. We'll see. We've got a lot of data between now and then. Got a lot of headlines to throw into the UK market for you as well.
Look at gilts. Look at sterling. Yields come down by 38 basis points on a U.K. 30 year, down 36 on a U.K. 10 year. These are truly historic moves in the gilt market off the back of a couple of headlines from the chancellor. Several, the backtracking on pretty much all of the tax cut plans. The support they were going to offer
individuals for offsetting some of the pain in the energy market are going to tighten up the duration of that support as well. And ultimately, some of the communicating. Is this more to come? There's more to come. And the standard deviation study was an agonising seven standard deviation or are now down to about 2.5 standard deviation. Still tension there, but nothing like what we saw. The research piece of the weekend and foreign exchange, everyone robbery wrote it. He is global head of Facts Analysis.
Citigroup was thrilled he could join us after his attendance in Washington. Abraham, what I noticed in Washington is little focus on central banks and maximum focus on dollar liquidity. Among the flush countries and the ones more challenged, how critical is a dollar shortage worldwide? Well, I would say the dollar was the talk of the town and in Washington. But the message that we came away with was actually a little bit different.
We we did come away thinking the Fed is still the central focus. And when it comes to the dollar, there's a lot of concern. But really, the center isn't very much that could be done about it unless the Fed is going to be off its unique focus on inflation at present. And when it comes to foreign exchange markets, it's much of a concern as they are right now. They seem to be operating in a relatively orderly way. So, yes, if it's funding, markets have
started to show some signs of concern, but we're not nearly at a point where policy interventions are likely to be imminent. I've got to go to the media room. What does the what does the Bank of Japan, the ministry of Finance, do in Japan with their unique experience? What is the reality of a second interventions efficacy after a failed first intervention? Well, we expect more of the same. So we think that second intervention is is going to come likely very soon. Could be as early as today. And we saw the rhetoric ramp up late on Friday. And at the same time, we've got Governor Kuroda reassert that Japan was different, that more monetary easing was required to bring inflation back up.
So we see no reason for the efficacy to change in the Japanese case. And therefore, we do think that just as in the first case, dollar yen would come down once you see those signs of intervention and then it will creep right back up as U.S. rates go back up. Well, Ebrahim, some people say I sort of failed intervention the first time around. Their goal was simply to slow the pace of the depreciation of the yen versus the dollar. If that's the case, whereas the new red line in the sand, this idea of when they will get really concerned and have to rethink a whole host of issues.
Is it 150? Is it 160? Is it 180? So I have sympathy with that statement. So we think there is no clearly defined red line, but if there is one. It's probably defined by the politics or when inflation starts to credibly be above above 2 percent. And that is certainly north of 160 on
that latter criteria. And we don't think the politics will probably become acute before then. So it's quite a long way away from here. And until then, there is a cashier in New York said himself that it was Dolly and will be 30 handled in the year two handles in a day that was raising those concerns. It was about the pace of appreciation
and dollar, yen, not the level. So we don't see a line in the sand anywhere close to the current. So perhaps as the future crisis of the current crisis or perhaps has been somewhat averted, as in the United Kingdom, where we're going to be hearing from Jeremy Hunt a couple of times throughout the day, trying to stave off some of the pain that we saw over the past few weeks, volatility. How much credence do you give to this
idea of foreign investors coming back to the U.K. at a time when the bond vigilantes, if they're one that means a sooner and potentially deeper recession? So we think the bar for foreign investors to return to the UK en masse is very high. And at the heart of that, I would quote what we think are probably the two most relevant statistics an 8 percent current account deficit, which I think reflects some of the broader challenges the UK is facing and real interest rates that are still just about negative and certainly 1 to 2 percent below those in the US. So I think in that kind of environment, the bar for foreign investors to see major appeal in the UK is incredibly high.
There was something a room to talk to Robin Rajan, a booth school of former leader of the Indian Central Bank, about the flow realities of emerging markets. Is it like the 90s for emerging markets right now? Well, I would say there is a there's a lot of optimism, maybe a touch of complacency when it comes to the large emerging markets at present. And if you take for an exchange as an example, the appreciation of the dollar has been much more extensive against the developed markets than it's been against emerging markets. So at present, we see more concerned about frontier markets, a lot less about the emerging markets. But what one of the issues I'm concerned with is that that could change it. Maybe there's a bit too much complacency that the large emerging markets are in a better position on the balance sheet side economically to some degree, even even for inflation. So we're concerned.
But the base case is that maybe we have to watch some of the developed markets like the U.K. A, but more closely that there's all this market available. Ibrahim, whereas a trader can make money on into Q4. I mean, forget about the IMF 60000 feet stuff. Going to make some money in the next 90
days. So we think it's more of the same. So that that that pattern of higher global interest rates, lower equity prices and a stronger dollar we think will continue into year end. And there are these balance sheet pressures that make that even more likely. So in foreign exchange, we see further dollar upside again, in particular the risky point currencies.
So, for example, continue to be short. The Australian dollar against the US dollar. We think has promise into the end of the year. Just to be clear, to elaborate a little bit on that point, is the faith in a stronger dollar from here predicated on this idea that the Federal Reserve is going to raise rates close to 5 percent by early next year? Or is it predicated on the idea that the economic data coming in will continue to be strong and that is the reason for these rate hikes that really it's the resilience of the economy rather than the rate hikes themselves. The two are related, but I would put more weight on on the Fed. And those rate hikes and that is because they do reflect to some degree the economic performance of the US.
But the central driver of dollar strength has been the decline in asset prices around the world. And for that fed interest rates in U.S., real rates are the primary driver. So both matter. But it's more about the Fed right now than about U.S. growth. Abraham, always wonderful to hear from you, sir. Ibrahim Gambari, the offsets, the range that we've had on Sterling on cable over the last few weeks, it's just been phenomenal. One of 350 at the lows on cable.
That was back on September 25th. And this morning, Tom, briefly back through 113 right now, 112, 70, again, that frames it out that we're not back opened done study where it breaks out 118, 120 out of nowhere. It is, but we're nowhere near that word reversal. And I think that's evident across every feature of this debate. Let's see what we get from the Bank of England governor, maybe a little bit later in November, November 3rd. There was talk of 100 basis points, 125
with this budget. Does he have to go as far as fast as people thought he did just weeks ago? The market is saying no. The market right now is pricing in a slower pace of rate hikes.
But Andrew Bailey has underwhelmed the market at several consecutive. Bank of England meetings in terms of how far he went. And will he have to do better than that this time around? Because you could say that we staved off. We got a cap on our high yields could go or how low or a floor for how low the pound could go. Still, though, as you point out, the levels are a far cry from what they were just weeks ago.
And the risk premium built in for some of this uncertainty, as you pointed out yesterday, is going to be something that stays around for the county for discuss and stunning assets. This one time mentioned one aspect of this announcement from the chancellor that jumps out to me that I think at some point we'll have to revisit. In fact, we know we will. April 2023 is when the support for the energy situation will end. And I wonder if you have to revisit again that Tom Keene. So that's a really important point. Is this a single winter issue? Exactly. And you've been good on this, too.
Am I right, John, that in a lot of Europe they're already looking at as a to enter the original plan was a couple of years. So we were already planning for, say, two years if. But London really not doing that. Not now. They've reversed that plan. And in Europe, I think we're all states have that conversation a much bigger way.
Not one winter, maybe several Dani Burger. And the problem is, is that how much investment could happen if the bond vigilantes are back? And I keep going back to this and it's about Europe, but it's also the U.S. where suddenly, as we have 22 days to the midterm elections, Social Security and Medicare spending is a massive issue because where do you get the money to spend on some of these issues, whether it's energy or anything else, at a time when the cost of financing is so high? I can't think of the last time this happened, some of the thinking back maybe to the eurozone crisis and pushing out Berlusconi in Italy when when the markets basically forced the government to push people out and do something this big in a G7 economy. Again, the sea changers are getting back
to a risk free rate. We're getting back to the G and Gravity has Taleb talks about. And this is when you have that, John. I mean, it's like Italy or it's like that. Can I talk about another restructuring just to talk about it later. Shery Ahn Rajan to join us tonight, 8:00 hour.
Goldman Sachs is on the edge of trust. Solomon is like, don't lose trust. Should people actually. I don't know what's going on there, but this is a really big deal for global Wall Street in New York, Wall Street.
It's a Goldman Sachs risk do over a reshuffle of individuals. What about at so much for a corporate restructure in terms of actually letting go of maybe initiatives that you have started and they're not going so well below the radar? And a Shery Ahn Rajan is saying this should be above the radar. The risk is the Goldman Sachs consumer bank of failure. Marcus. Marcus, you can call it that if you want to. I'm not sure it's a big deal. I think we get Goldman numbers tomorrow, don't we? Yeah.
Bank of America numbers could be due any moment now. Coming up in a few minutes, features right now of 1 percent on the S&P without him. Back from New York, this is Bloomberg. Keeping you up to date with news from around the world with a first world news. I'm Liane Karen's newly appointed UK Chancellor of the Exchequer, Jeremy Hunt. Set up plants have tried to bring order to the UK public finances and reassure markets after Let's Trust his economic programme triggered weeks of turmoil.
He announced a further rollback on some of the tax cuts planned by trusts and a shortening of a planned universal energy support. No government can control markets, but every government can give certainty about the sustainability of public finances, and that is one of the many factors that influence how markets behave. And for that reason, although the Prime Minister and I are both committed to cutting corporation tax. On Friday, she listened to concerns about the mini budget and confirmed we will not proceed with a cut to corporation tax announced. Meanwhile, Hunt will address parliament with more details later. Now, China told that state owned gas importers to stop selling LNG to energy starved buyers in Europe and Asia in order to ensure its own supply for the winter heating season.
State owned importers have been reselling LNG to Europe, offering some relief. Forecasters for a small gas supply deficit are likely to have spurred the move by Beijing Global News 24 hours a day on air and on Bloomberg Quicktake, powered by more than twenty seven hundred journalists and analysts and more than one hundred and twenty countries. The guarantees? This is Bloomberg. Whether the committee would want to pull some proposed or thought of policy rate increases from 2023 into the December meeting. I think that's a judgment. It's premature to make the Fed ready to
go again in November, perhaps by another 75 basis points. That was Tim Pull out of the St. Lewis Fed. These banks making money from these rate hikes. Sonali Basak joins us now for more Jason Kelly Bank of America. Just months ago, moments ago, you do see the same thing we've been seeing at the other banks. You see a rise in net interest income above expectations, but you do see provisions for loan losses higher by about 150 million or so more than Wall Street had expected.
Very clean numbers here. They have clean trading figures relative to Wall Street's expectations. Met on a beat on fic, met on equities, reported zero days of trading losses. That says value at risk is broadly rising across the industry and keeping expenses broadly in line. So let's see how Wall Street continues to react.
They've got a little jump in their shares on Friday after J.P. Morgan reported. Are these numbers enough to keep Wall Street happy? We are seeing about a two and a 2.5
percent gain premarket trading from Bank of America. Now, if we are perspective, what's the most adorable aspect here? We talk about loan loss provisions, not that much higher than what they had expected. Right. And they really actually blew it out when it came to equity trading as well, which was unusual for the other banks. Yeah, it is unusual. And then you look at what is going wrong and fixed. I would also say, because the question is roll forward, how much of a overhang will that be? They are starting to see some cracks in credit and mortgages. We've been talking about this. Is that going to start to hurt in future quarters really quickly here also.
Charge offs from the prior quarter declined. So help the consumer very quickly in their great power point and get the best in class PowerPoint and the stuff in consumer banking. They have 44 percent more Zell transactions than written checks. I know you haven't written a check in 10 years. I'm still writing down a day on digital banking. Is the win here for these banks? It is a win.
And it's also very political because are they keeping that branch headcount alive as they grow digitally? They're being asked by lawmakers. And again, Jamie Dimon, answer the question Friday. Are they going to increase those savings rates for consumers as they go? This is a huge issue. Chanel ISE, thank you so much. And we're going to speak now with one of the experts here on your future of banking. And this dovetails into JP Morgan and
Bank of America. Thomas Moore showed us chief executive officer of KBW, Keefe, Bruyette Woods, of course, with Stifel and is absolutely definitive on the pulse of American banking. Small, mid, super regional, super, super mom showed in the big banks as well.
Thomas showed. When do they capitulate and realize the future is digital banking? Well, that's that's happening right now right in front of us. I think what was remarkable during the Covid period was how much digital engagement there was. And we've been watching very carefully to see if it would slip back after Covid came to it. Thankfully came to an end. That hasn't happened. Digital engagement is up. That's good. We think it's going to be good for
consumers. It's going to take friction out at most. In fact, that's going to help with expenses with these big bang make. Tom, I know you're not involved in the Kroger Albertsons deal. Maybe it's a little bit outside your remit, but there we are with finally a new risk free rate. Finally, we've got the math back to what it was. Are there zombie banks to be merged?
We think consolidation will restart. Historically speaking, when things are orderly is one. Consolidation in banking slows down. Stock prices have been very volatile. A lot of concern about the economy. My expectation is as soon as things settle down and get orderly again, we're going to see consolidation happen because scale is working in the banking industry. And a lot of is what you talked about earlier revolving around the ability to invest in technology. And that's one of the themes in this industry.
Tom, Tom Kean mentioned this whole question of consolidation and mergers and acquisitions. And I wonder about some of the debt, the financing for some of these acquisitions that were arranged earlier this year. The banks are still hanging on, too. How concerned are you?
Based on the increase in loan loss provisions, in the sense that perhaps it's not all in there about this being a potential risk in the future? The reality is, is that asset marks, which is what you're talking about, which is what are the valuations of commitments that were made more of a while ago? Asset marks have been negative for the banking industry is they've been really across the board in finance. And so we would expect that there would be negative marks and things like that, as well as, frankly, the bond holdings that's been happening. And that's really one of the themes. That's why we think during this Bank American conference call that's coming up, there's gonna be a lot of talk about tangible capital and other capital ratios. And frankly, bank America was our expectation they were going to improve their capital ratios and being a very strong position.
So the reason why these banks have been carrying as much capital as they have so they can withstand easily things like you just asked about loan marks. So we would expect there will be negative loan marks. But we also believe that the banking industry is well capitalized and can handle it. Top right now, we're seeing shares of Bank of America above 3 percent in premarket trading. Who do you think's going to be the winner and who do you think's going to be the loser? If this earning season is the banks that have a lot of net interest income, it's almost like a continuum. If you've got a big investment banking operation, you're under pressure.
Just so you know, our analysts are looking for down fifty five percent in total across the board investment banking revenues for the third quarter, but only down 2 percent linked quarter. So it suggests to us the year over year pain is real. However, we think we're bouncing a new level as a regional bank. If you're one of the big super regionals, are they? They're in the second quarter, we believe, of a fourth quarter run where they're going to show 20 percent year over year net interest income growth. That really has not happened in my career. And so it is very, very strong on the
revenue side. That's wonderful to hear from you, sir. It's good to catch up. Thomas Show of KBW is still cut by three point five percent. What we seen take from the banks in the last couple of days is the benefits from higher interest rates.
Well, you're arguably going to see in the coming quarters is the harm done by higher interest rates when the economy starts to soften a whole lot more to see that rumor goes real heritage. You're looking at fic and looking at banking and all that. I'm looking at what you and I talked to Moynihan about in Davos, just the grinding grind of consumer banking.
And as Michaud just said here, I'm looking at double digit loan growth, double digit this, double digit that on the revenue side and the grinding consumer side. This is a constructive school. That's great because you get to pass on higher interest rates, the business, consumer loans, and somehow we'll survive. My answer to the deposit base, pretty good news. But what we start to see crack in the last week or so, I should note, you can speak to this auto loan origination, mortgage origination.
That's the side of things where you can start to say things punching the other way they should do. And I also took a quick look at the presentation. You see credit card delinquency 30 days overdue, taking higher as well. And the credit card business is really where you're seeing a lot of these banks punch a lot higher in the net interest income and the loans that they're making there. This is what's interesting about this moment.
Some of the banks are telling you kind of what we already knew, the economy is OK. In the third quarter. It was all right. But we're preparing because we think in the next couple of quarters it's going to get worse. We didn't go to the showed on this, though, but with the Goldman Sachs restructuring, Natarajan wrote about it today. You wonder about traditional banking. Moreover, Goldman Sachs kind of economy
is how much is the restructuring going to be, and you read to me what a Goldman Sachs kind of economy has slack of consumer banking. I mean, they. They did it. Shery Ahn Marcus Einfeld Proposition Live And so much of this was about lowering Goldman's cost of funding and diversifying Goldman Sachs. But 60 to 70 percent still comes from IBM trading. What are you gonna do? It's almost an.
Marcus is a failure. That's all he wants to know. Jihye Lee isn't going to go on the record. Some Italian. Absolutely.
It's not happening. Not happening. Steve Schaeffer wrote in the next hour. A federated firm is Steve might go there. T.K. futures on the S&P 500 up more than 1 percent.
Live from New York, this is Bloomberg. Under the circumstances, the Fed's going to keep continue to raise rates aggressively. They see the need to go down. I think the Fed is going to continue to be on this path for quite a few months. I definitely think we'll see another 75 basis point move in November.
The more aggressive they get, the more you're going to bring recession. Fear is the primary fear over inflation because of the Fed overdoing this. We're going to end up back where we were 10 years ago. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. Live from New York City this morning. Good morning. Good morning for our audience worldwide on TV and radio. This is Bloomberg Surveillance alongside
Tom Keene and Lisa Abramowicz. Some Jonathan Ferro features up by more than 1 percent NIKKEI. I've got to say actually a pretty interesting session already this morning, particularly in foreign exchange. I thought we picked up right off the last number of weeks where you have to look not at equities, bonds, currencies, commodities with the holistic whole and the euro foreign exchange as a litmus paper that we've got front and center is a yen running away, one forty eight point eight, five. All you need to know if you don't keep score on yen is that is troubling for the leadership of Japan inching closer and closer to 150. I can tell you.
Sterling breaking down a little bit earlier this morning as well. Cable the pound against the U.S. dollar 112 79. Call it 112, 80. Lisa, briefly, 113.
Basically, the market has one and the power of the market right now. Who was it who said if they come back, they want to come back as the bond market after the day. Mr. Kamala Harris, Mr. Carville, how much is that what we're seeing right now and how far can that go? Is it just United Kingdom or does this go further at a time when suddenly there is a rate that people have to pay to borrow money because you've got a U-turn from the chancellor on a range of tax cuts. He's also done something on energy. He shorten the duration of the support
that he will offer to the UK consumer having a blast out on Twitter moments ago, bringing up a really important point, some on this. And I think this is going to get a lot more attention. The UK government has admitted in having ISE opinion it does not have the money to subsidise energy consumption for everyone beyond six months from April 23 onward. Many voters will feel the pain of high gas and electricity prices. He goes on to say, Tom, it may be local
politics, but it has implications for Ukraine. Well, I'll go with that. And what really upsets me here is ex China, where there's clearly a slowdown witnessed the GDP ISE. Where would Brent crude be now if you had a legitimate Asian demand? And the answer is the UK at one 10 on a one to one time. Brent, coincidental that you think that they have the big meeting over in China in the third quarter GDP number is just a late night.
I think that that was kicked into the long grass for that, actually. And basically people are expecting in general the economy to come in with the slowest pace, one of the slowest pieces ever, three point three percent is the economist view for growth. The GDP survey ever heard. This was from all areas represented GDP as a global recession. We're there to handle. We're talking we're talking about to
start now for 2012. I don't know that. Excuse me. I've been down to Martins, to Everett in Georgetown. You weren't listening to what they had
to say on the forecast engines. I bet you were. Futures right now on the S&P 500 spiked French onion soup from. Sure, that's delicious. It's best in Washington.
Was was more than one per cent on a S&P 500 low by 7 basis points 394 46. Talked a lot about the 10 year climb. Two consecutive weeks. Well, I'm not used to those yields. I look at them on the screen.
It's like from an eight to see the front end, the two year three, 450 last week, just up, up and away. Rameau. I mean, honestly and this again goes to this question of is Jim Bullard really the new tea leaf on the Fed, saying that four point seventy five percent could be the Fed funds rate as of the end of this year. We'll get more from Jeremy Hunt, the UK's new chancellor of the Exchequer. He has already released his statement earlier, but he is going speak with the House of Commons at ten thirty a.m. Eastern.
How much more clarity do we get on some of these plans like or what kind of triggers there could be to extend some of this aid and how much this is more prevalent? How much are they going to cut spending? Right now, we are seeing 30 year yields in the UK come down. You are seeing the pound strengthen. But really going forward, how much can you get strengthening in the pound when you are kind of guaranteeing a recession and now potentially a deep one if you don't have fiscal spending as a relief valve? We did get Bank of America earnings. We get the earnings call at about 830 a AM.
How much can they speak to the forward look in terms of what kinds of credit cracks, what kinds of problems with delinquencies, what their threshold will be for lending at a time when possibly consumers will not have as much to repay their loans. And at 830 AM, we get U.S. Empire Manufacturing going back to where are we in this cycle? Right. People are expecting some sort of material slowdown in manufacturing, that it was the front of the inflation and the boom won't be at the front of the other side.
What happens if it's not? Because we have seen, John, so many economic surprises to the upside, which really has been treated as bad news for a market concerned about effect. Lisa, thank you. Brian Moynihan over at Bank of America on the economy, singer resilient consumer with cash to spare. The one thing that's jumped out for all of us, I think over the last couple of days, time point for the bank numbers, the provision for credit losses. So that's eight hundred ninety eight million dollars over a BFA for the third quarter.
The estimate was 766 point one. I think the direction of travel here, Tom tells the story. It's there and it's always there when you have some form of slowdown in GDP. We've got that slowdown in place. I think there is a cautious. Or even a broom or gloom element to the bank financial story. But the other side is the efficiency
they're getting from digital banking. And more showed said earlier. Thomas Short of KBW, a steel company is Thomas showed said is well said about why is said for a single company these days. I don't I don't I don't know. It's like Bloomberg Surveillance official Farrow Company. Take it out. I think Mike Mike might take issue with that. All right. Steve Schaeffer joins us now.
He's a multi asset solutions at Federated Emmy's. Steve, we've had some earnings over the last couple of weeks and I love your response to them. What takes you right? What catches your eye? Yeah. Look, I think you guys are touching on it.
It's a consumer that's still relatively strong. But with risk ahead on the credit side, and I think that's what we're seeing this cycle is being defined not by its severity but by its duration. And what you're seeing is that despite credit card balances being very high, despite consumers having eaten into savings, despite wealth having been destroyed. Consumers really still aren't worried
about losing their jobs. And so they're still hanging in there. And this is all taking longer to play out. I think they will crack. But I think those cracks are to come in. Twenty three is not necessarily right here now. Steve Shiver on Utah. Remember the zombies?
But one Stephen off does as I do, great, great singles from the 60s as well. Let's talk about Stephen. Often the zombie companies right now, are the zombie companies going to roll up with this new rate regime? I think you're certainly gonna have a lot of pressure on it, because what we've seen and I think what the UK has tested and shown is that the old system of simile. So, you know, stimulating your way out of any kind of recession or financial market pain isn't being allowed.
The inflation is holding you at bay there. And so you're in the scenario where you're going to have a slowdown, you're going to have pressure, you can have credit cracks. And the federal government and central banks can't come to the rescue as quickly or as easily as they have had historically.
That's why this is a I think, a long, drawn out, multi quarter economic downturn, not something that's going to reverse quickly. I was reading through your notes, Steve, and I pictured a big mattress that was stuffed full of dollar bills and that was the entirety of it. Is that really what you're doing or is there sort of a more nuanced approach? Well, it's much more nuanced than that, right? You don't want it. You certainly don't put your cash under the mattress. You know, you want invested cash.
Now, I'm not endorsing Tom's triple levered cash,