'Bloomberg The Open' Full Show (09/29//2022)
We've got another three months of this flight from New York City this morning. Good morning. Good morning. This equity market down and down hard. The countdown to the open starts right now. Everything you need to get set for the start of us trading. This is Bloomberg the open with Jonathan
Ferro. Live from New York we begin with a big issue policy in conflict. You're printing money by buying long and bonds while you're tightening interest rates. These two things are in conflict. There's definitely attention that to put it mildly.
It's like having a foot on the brake and a foot on the accelerator. Suddenly the Bank of England finds itself in the ECB situation. It's about time frames. The book says Calm nerves. This they figure out how to use monetary policy to contain inflation and then some other measure to contain financial risk. But none of that has happened. You need to understand the importance of controlling inflation in the UK and it doesn't help us.
Central banks on a lot of the UK debt is inflation. So I just think we have to buckle up our seat belts even tighter. They're trying to manage a short term pressure and then move back to a long term objective. We're seeing you know the economics of
pandemonium. Joining us now to discuss this alliance Bernstein's Goshen Destiny found Zach GRIFFITHS of credit side. Zach first the first question can you tackle inflation and address financial instability at the same time. It's certainly difficult John. And it's been a huge move over the past couple of days but it makes sense from a financial market risk and financial market functioning perspective for the Bank of England to step in. But from a longer term monetary policy perspective it's really difficult to have them buying bonds now saying they're going to sell bonds later and think that's all going to work out with the flux in fiscal policy. So it's certainly a difficult hand for the BBC. I think making the move they did over
the past couple of days is the right one but it's going to be difficult to see how they proceed going forward. Question Can you achieve those two things simultaneously. Again I agree it's going to be a really really difficult look. We're in an environment where we're suffering from you know we spoke for years about is the Fed behind the curve.
I wrote that book two decades. Now I have never been sure what that meant but central banks in general are behind what they should have done. It's clear that in hindsight they should have started hiking way earlier and way faster. And we're kind of in a mess now.
And you know we order to get inflation under control. They're going to have to keep going. And we're probably going to continue to see contradictory things coming out of fiscal monetary authorities as their political pressures to cushion the short term.
But there's really no magic bullet here. I think we're in for a period of volatility in the period of weakness. We've seen intervention after intervention from the DOJ for the Bank of England. The ECB had to talk about what it would do to contain spreads even though they said to raise interest rates even said that the Chinese are threatening to intervene and people are asking the same question again. What would it take for the Fed to pivot for the Fed to blink.
This is what Mohamed El-Erian had to say. They're going to pivot for one of two reasons. If they pivot. One is because recession risk has become unacceptably high. Two is because we are very close to a
financial accident. Neither of these things are good for risk assets. Zach if that pivot saying because of financial instability or if that pivoting because of recession or any of those things bullish. No. In short I don't think so I think the policy responses are much different. And you've seen challenged liquidity in Treasury markets for quite a while now and I think that's even picked up as you've seen quantitative tightening pickup. So perhaps if they're concerned about
financial market turmoil or financial market functioning that would be enacted with a an adjustment in the balance sheet policy. I think that would be perhaps a reduction in the pace of acuity. I think it'd take a lot for them to end Kutty unless you have this huge increase in recession risk which I think they would initially make adjustments of policy with maybe pausing increases in the policy rate but probably keeping them still in restricted territory. It all depends on what happens with inflation. If it's still 4 or 5 percent and recession the risk is very high. I think they don't have any choice but
to at least maintain the policy rate and mildly restrictive territory. But there's gonna be a bifurcation in how they respond to those two very real risks. Gosh and this fails like lose lose a lot of people in this market a paralyzed by this. We heard from Max Counter of HSBC a number of weeks ago who basically said it's heads you win tails I lose. Question does it have to be that way. Is it bad bad bad. If they high CAC. But if they stop. Well it's certainly bad on the surface
but it always comes down to what's priced in. And you know some of the strongest returns we've seen in markets particularly equity markets have been when things feel really really bad. They felt really bad in 2002 and 2008 2011 with the European debt crisis during coded. The question is what's priced in. I will take slight issue. It's like Mohammed said. Are you saying that the federal Covid if we it becomes clear that the risk of recession is just too great. I think we're there already. I think that the odds of a quote unquote soft landing have really gone to close to zero here. There's going to be a question of how
much and the Fed is the Fed is has been clear they're going to keep on going and other central banks are going to as well. So there's really no getting out of the economic turmoil and growth is going to slow and weaken and even go negative particularly in Europe. But the question is how much is actually priced in right now on the equity side you've explained a lot of the decrease in PS and a sell off is was the change in long term interest rates. That really explains almost all of it.
I mean on the credit side it's a little bit more nuanced especially as most companies in the high yield market did not lever up their balance sheets over the past couple of years. No sign of pain in the labor market right now that's for sure. Jobless claims coming in really really strong. Katie Nice has more for us. Hi Katie. One hundred and ninety three thousand John one ninety three economists were looking for two hundred and fifteen thousand. So this was well short of estimates
actually the lowest number since April. So as you allude to we aren't really seeing real pain in the labor market yet. This is probably not the kind of data the Fed really wants to see when it is trying to engineer some more slack in the labor market. And of course we got plenty of backward looking data this morning as well. GDP down six tenths of a percent in the second quarter.
That was expected. But you have bigger than expected figures for PCG and core P.S. 2 percent and four point seven percent respectively. And on that point it's important to
differentiate the difference between the price pressures we are seeing in goods versus services because in goods they're coming down down two point six percent in these figures but services up four point six percent. That is where the wage pressure and the tightness of the labor market really is coming in to the picture. So the takeaway here is those inflationary pressures remain as the labor market is hanging in there.
And that of course is what the Fed is trying to chip away at. Which is why they say they're going to hike aggressively in the market has come in to price in those expectations. We're looking for 150 basis points of additional hikes by early next year 75 and November 50 in December another 25 in February. John. Candy lines a lot of work today. Thank you.
Thank you as always. Gosh. And last time you and I spoke early August you said we were too negative on growth too confident that inflation would fall. Is that still the case for you. STARTING POINT matters I think that the
markets certainly are very company. You look at where one year break evens out it's like two point four percent. So if you think the fight is going to continue to be at these elevated levels you can make a lot of money betting on it the other way. I think deflation is going to come down. There's no question you know housing is already starting to weaken with higher mortgage rates. The consumer is starting to pull back. We're going to see inflation come down. The question is how fast is it going to
come down. And quite frankly just like you know central banks were late to the game here in raising rates. Almost certainly they're going to be late to put the brakes on. That's just the way cycles work. It's not some magic that you change policy rate in the next month. The economy changes or inflation changes. There's a huge lag effect.
So I think the risk of quote unquote another policy mistake of going too far is there was that never mind central banks intervening markets are intervening. And we're seeing intervention by financial markets cracks emerging fractures in financial stability which are gonna slow these central banks down. And ultimately is it too much of a stretch to sit here today and say you know what I think we're gonna have to live with inflation high inflation for a little bit longer because of this.
Yeah there's some cracks showing. You're certainly seeing financial markets react to a lot of this macro volatility from central bank policy and to us. I think Gershwin made a great point that it's what's priced in. And I think there's a fair amount of risk priced in with respect to recession and slowing growth. And if you look at where the market is it's priced in a ton more in hikes by the Fed and other central banks over the past couple of weeks.
So when we think about what that means for our call for duration we're a little bit more comfortable getting long at these levels. And if you do think that risk might be even a little bit underappreciated in the wrong and then you could see yields coming down. When you when you see just how much yields have come up at this point it's starting to look a little bit more attractive certainly than it was even just a couple of weeks ago is that this isn't typically a question I would ask for someone who's talking about buying a 10 year treasury.
But how much volatility do you have to stomach. Hold a 10 year Treasury rate at the moment. It's a lot. And it might be too much for some. And I think that's an important consideration for financial markets broadly. You're going to see volatility for the foreseeable future as we look through this inflation data. And central banks have made it clear that they are on a path to tighten policy aggressively. And that's probably not going to change.
But exactly how much they have to do and how long they'll remain at these higher levels is the big question. And I think that's going to point to more volatility really across financial markets for at least the next six to nine months six to nine months more this question. Let's talk about high yield your world 550 on high yield spreads. You know what happened in late 2018 when we got to these kind of levels the Fed back to went back to white big time. No one's expecting that imminently. What do you do with 550 basis points worth the spread now. I think the first thing to point out is we're in a very different environment in 2018. You know we had the whole ENP sector
that was ready to restructure. We had the retail sector under a lot of pressure a lot of that's been cleansed out. You know a lot of restructurings the fault restructurings in 2020. And you know not because of any genius on the part of corporate executives but they were just so scared by Covid that they didn't do the normal things that you that you see during expansions of buying back shares and making acquisitions and otherwise spending on capital expenditure. So I think that there's a lot priced in to the high yield market. You know it's we've focused on spreads a lot and spreads are wider than average.
Now significantly are the media. But the other all in the yield approaching 10 percent. It's something that's getting started to look really really attractive to us especially on a risk adjusted basis versus equities. Question When you think about that though is that something you want to buy before you see the whites of the eyes off of recession before you get a real decent idea for what kind of debts we Covid see. I'd look at the history John is that
those that have the highest total returns and the best returns over time are those that that delve in when things look really really bad. As I said before all those time periods before you know the best time to jump in was when things looked the worst. Can I sit here and say that this is the absolute best time. Absolutely not.
We certainly could get a lot weaker. I do think that's what we try and focus our investors on is that if you buy today in Europe you wake up two years from now you're gonna be pretty happy that you did question distance out sacrifice. Sticking with us coming up on this program. The US commerce secretary with a message for the UK markets and the pound has permanent investors. Business people want to see world leaders taking inflation very seriously and it's hard to see that. In that conversation. Up next.
The policy of cutting taxes and simultaneously increasing spending isn't one that is going to fight inflation in the short term or put you in good stead for long term economic growth. Investors business people want to see world leaders taking inflation very seriously. And it's hard to see that this new government that was not a spoof. Find an administration expressing concern over the UK's economic strategy. Prime Minister Liz Truss pushing back. It's a difficult time. We're facing a global economic crisis
brought about by Putin's war in Ukraine. What was right is that Britain took decisive action to help people get through what is going to be a difficult winter. Team coverage starts right now. Flynn DAX Lizzie Borden in London. I am a standard DC armory. What a moment to have someone from this administration talk about fiscal policy in another country. Yeah. Interesting. Given the fact that they've had a number
of their own fiscal legislation when you look at also the American rescue plan and so on. What you're hearing right now. John Tucker Bloomberg News our colleagues are reporting is that there is some concern within the Treasury Department about the volatility in the financial markets and what that means if it bleeds over into the broader market or into other countries. Now Secretary Yellen would not direct the UK would not make comments directly about this head on. But you heard from the commerce secretary her colleague Gina Raimondo.
It was pretty sharp in terms of what she thought was an insinuating. This is a misguided approach. It also comes on the heel of a tweet from the president last week that talked about the fact that he said he was quote sick and tired of trickle down economic ideology.
The president and Liz. The prime minister United Kingdom clearly do not match up when it comes to ideology. The president does not think that cutting taxes and that that would eventually trickle down and boost economic growth. He does not think that works. And some in the UK took that as a criticism of this government and of trust in IBEX. Let's see we've got a party conference coming up for the Conservatives.
There's this lady satanic. It doesn't look like it but what might be embarrassing for less trust is that Russia's SU NOC isn't going across. He was vying for the leadership against her. He's going to stick it out in his Yorkshire constituency. And when I'm talking to his allies who backed him in the leadership campaign it doesn't look like they're going to Tory conference either because they just don't want to face the broadcast interviews where they have to stand up for these policies when it's become such a massive credibility issue. It's not just the US that's criticising UK fiscal policy it's the IMF is even some of his own informal economic advisers.
We had Gerard Lyons on the program the other day. Now he's saying that quite tank seems to have taken it too far taken his eye off the ball. Lizzie how is the central bank behind you and Threadneedle Street responding to allegations that they're facilitating what's taken place over the last week. I think this is precisely the reason that it took so long for the Bank of England to step in. But remember the reason. Well the intervention that they made was a financial stability intervention not a monetary policy intervention.
This is the thing that they're stressing and this is why it makes it look like they're moving in two different directions. I think you call that quantitative confusion because what we're happening as well as well as having quantitative easing on the one hand. Hugh Pell the chief economist has said that we can expect a significant move in November to respond to the inflation. And also of course there's all this pressure to get the pound up again. They're still talking about selling bonds at some point in the next month as well. I can't keep up. Lizzie thank you.
Great work as always alongside AMH. Lucy there in London Amery down in D.C.. Can you just pull up a chart just a board with let's say UK two year ten year 50 year 30 year throw all up there and look at the split. The divide here between the stuff that the Bank of England is buying right now in the gilt market operation announced yesterday and the stuff they're not touch in. So as 20 years plus in a secondary
market. That's the gilt market operation that we announced yesterday 30 year unchanged 50 year gilt yields down about 9 basis points 10 year to year. They're not in the market for that. The 10 year up 13 basis points to two year up 20. This operation ends in the middle of October. Zach GRIFFITHS what would happen if that operation does actually end in the middle of October. And we've not had a fiscal U-turn. It's hard to imagine anything good. John and I think that's something that's
going to be very much in focus over the next couple of weeks. It really seems like it's going to be a difficult situation for the baby to manage without a big change in the fiscal outlook. And so far we haven't heard anything of the sort. So the thought that they're going to end bond purchases in middle of October and start bond sales at the end of October. That seems almost impossible right now.
Is it almost impossible for them to wait for the next scheduled NPC meeting as well which is November 3rd. And we've all said it Zach. November 3rd feels like a lifetime away. It does. And the latest remarks out of Governor Bailey and other policymakers have been firm that they want to wait till that time period and I think having these financial market stability mechanisms in place maybe gives them that ability. But it's going to be it's going to feel like a very very long month and change to get there for them to adjust policy in response to this fiscal outlook.
Bob Miller of BlackRock had this to say. I'm going to share the quote with you so you can see the footprints of the gilt market all over the U.S. Treasury market in the past week. He went on to say The US bond market is being significantly degraded by non domestic factors.
Kirsten your thoughts on that. Does that resonate with you. The U.S. bond market is being significantly degraded by non domestic factors. I'm not sure exactly what he means by that but there's no question that you know foreign buyers are very often the marginal buyer and the other is part of the reason you would argue that rates are not harder than they would be given what the feds continue to do with the long end is that there's an insatiable demand for dollars out there.
Look I'm not going to paraphrase what what chair Powell said at one of his recent forget which which time it was that you know when it comes to inflation you know central banks around the world are kind of you know flying in the dark trying not to or moving around the dark trying not to run into any furniture. And I think you know November 3rd you said is a mile away I think. October 3rd is a mile away right now. You know when you don't really understand what the short term drivers are things you're just gonna let things sway you. You're going to get one number here one number that it's not going to give you a clear picture.
And you know to the extent I think fiscal and monetary authorities just the chances of making severe errors are high. I mean we can't even agree. You know no one even if we're well whether you know tax cuts are good or bad for the problem. So we're gonna continue to see a lot of volatility until it becomes clear that inflationary pressures are under control when that's going to be. My guess is sometime early next year. But the jury's out again.
And I think the saying was that when things are uncertain and you're in the dark you walk around carefully. I would say at the moment Zach they're sprinting around a dark room getting punched in the face. And Zach I just wonder how much further they can actually go given what's happening around the world. Yes. So I wonder how many punches you can take until you just have to sit down and call it. But I think that at the end of the day it really is going to come down to the economic data. And you know so far on the inflation front it hasn't been what they need to see. And I think Kirsten's point that they
respond so strongly to single data points that's going to be difficult for that to change in the near term. In July you had CPI somewhat disappoint. That feels like a lifetime ago. In August it came in way above expectations and that's what's on everyone's mind.
That seems to be what really filtered into the last FOMC meeting that the DAX came in even above where the market had repriced over 100 basis points over a course of a month. So it's really difficult to see how this volatility ends. And that's kind of the key. I think that when you have policy having to respond to such dire circumstances and every data point seems to matter so much more than it did let's say in the end of the last cycle where does the circuit breaker come from. I don't know. Cushions act to both the awesome to catch up. As always thank you. Equities negative this morning. Sterling was positive.
Now what a 933 on cable. Coming up the morning calls and later see a shot of Principal Global looking at a US recession next year as have base case scenario has. And pretty much everyone else is pulling back. He's down 1 percent here the morning call was first up.
UBS upgrading Kraft ties the neutral 34 dollar price target saying inflationary concerns are now priced into shares have a core upgrading First Solar to outperform 150 price target expecting the company to benefit from the Inflation Reduction Act. And finally Bank of America downgrading Apple to neutral citing risks from a stronger U.S. dollar and weaker consumer spending. Coming up just 48 hours remaining in a volatile third quarter. Joining us principal seem a shop around
the open about the open about just around a corner. Twenty three seconds away from the opening round this morning. Good morning to you. SNAP the six day losing streak only S&P 500 in yesterday's session with a big staff gains. So the S&P gone back to early August and then we start to take it away again. This morning we're down by about 1 percent on the S&P and the Nasdaq was down by about one point five. That's the opening battle.
The price action in the bond market. It looks a little something like this. A 10 year is up six or seven basis points. Your yield right now 380 VFX market you right. Delta not doing much. You right. Delta ninety seven. Thirty one in the commodity market.
Crude up by about zero point two percent. Crude eighty to thirty down at the open and found escapes and movies is cutting price out. Hey John let's kick off with the world's biggest company. We have Apple on track to fall for a second day. This follows a rare downgrade from Bank of America. You have analysts warning of weaker demand for smartphones and laptops. That of course follows a Bloomberg scoop
that Apple is backing off its plans to boost iPhone production. This year. Shares lower part two and a half percent. Moving on Alibaba also under pressure after some analysts action your JP Morgan cut its price target. Now cautious on the e-commerce giant's second quarter revenue outlook though there is some potential upside to earnings estimates shares slower.
There is some Shery Ahn to be found in Alcoa though you have shares popping along with aluminum prices. After Bloomberg reported that the LME plans to discuss a potential ban on Russian metals shares higher by about 6 percent. And finally we did get some fundamental news here for this meme Sock Bed Bath and Beyond. Its results were mostly in line with expectations.
They were pretty low. So that's good news. Shares a little bit higher after jumping as much as 5 percent earlier John. Aluminum is just not going to catch on in America. It doesn't work. It doesn't work.
It doesn't work. Katie thank you. Appreciate it as always. Good to see you. The Nasdaq 100 suffering this morning. Information technology on the S&P down by about four point one point four percent. If we get excited not full point something percent. One point four percent lower. Big.
How small. Happy. Hey John. Well yes big tech is selling off again after what may turn out to be a one day reprieve within a 30 percent bear market for the Nasdaq 100. Something that folks aren't talking about that much but that is how much the Nasdaq 100 is on down on the year. And of course this is yields are backing up again yesterday plunging in sympathy with the B.O. He was doing media hope that the Fed was going to somehow reverse from their hawkish tone but that really there's no indication to think that in fact as you know some of those gilt yields are backing up anyway. This means the Nasdaq 100 is
underperforming. So of course as yields go higher it makes everything look more expensive especially stocks especially the high growth stocks tighten liquidity. Again it makes everything especially the high growth momentum. Tech stocks go higher the year to date. We have the real yield round tripping it by more than 250 basis points.
The Nasdaq 100 again down about 30 percent on the year. At this point on pace for its worst year since 2008 a clear bear market matching the potential three down quarters in a row something we haven't seen since 2008 2009 making it even worse because it's not just about tightening liquidity John. It also has to do with the fact that technology and communications communications think Google Netflix technology of course Apple and some of the other chip makers they receive about 53 percent and 41 percent respectively of their revenues abroad.
That means that there's a 15 percent accounting effects that back. We of course heard about that with Microsoft pre announcing a couple of months ago it wasn't a big amount but it was not a great trend or a precursor. Plus if you think about it it makes the I.T. budgets of the European companies and other Asian companies buying. It gives them 15 percent less buying power probably puts the focus on need to have technology as opposed to nice to have technology.
Lots of headwinds for big tech sounds to talk about. Abbi thank you. Three minutes into the session with down by one point two percent on the S&P on the NASDAQ lower by one point five.
Just a note on Sterling appreciating for a third straight session now cable and about 1 0 9 70. We're up by three quarters of one percent on that currency in the range this week at the low 1 0 3 fifty in the Asian session Monday morning at the high just a moment ago. What I'm 979 that is quite a range on a G10 currency against the dollar. We'll talk more about that later. Taylor Riggs quite a range in the bond market as well this week too. Indeed.
And I want to welcome you to your second to last trading day of this third quarter as we think about what just a bloodbath really. This is bad. Take a look at the bond market John. It's actually the relative performer. It is only off. Twenty one percent or so as you can see there.
Small cap index of course off about twenty four percent there at the bottom of the screen given its correlation to dollar strength and being protected by some of the U.S. based assets of which are making up that index. And of course MSCI the big underperformer of that mall all of that falls into your world of bonds. I thought the equity market was volatile. You jumped ninety five basis points on a 30 year UK. Then you. Flying 100 basis points ISE nuts.
So you're trying to find some civility. 5 percent now. Today we're finding some stability. Three ninety three. Maybe this will be a little bit less volatile than we have seen the last few days. So buckle up. It is a wild ride and this really shows it.
We'll just talk about points not percent because the VIX is up 15 points 32. We're not getting the huge washout of 40 but the move in DAX huge volatility in the bond market. That has been the leading indicator. And then you have the G7 currencies as you mentioned the pound also giving us some volatile you know the rules of carnage Taylor that you to the Dow in points and you do know the VIX in percentage. Now just to make you sound more dramatic more disciplined. Thank you. Thank you as always.
Taylor Riggs. The Nasdaq 100 in the third quarter. This speaks to the volatility that site is talking about recording a massive reversal. Covid has more. Hi Kelly. Yeah of about 19 percent wiping out a 19
percent intra quarter gain. That is the biggest wipeout we have seen within any quarter on record. Absolutely huge. And of course we've seen a similar story in the broader S&P 500 as well in that it was okay in the beginning through July to mid August and then we rolled over in a material ways to where that leaves us as we head into the final two trading days of the quarter is set for a third straight quarter of declines. That is the biggest losing streak on a quarterly basis for the S&P 500 going all the way back to 2009. So we're talking financial crisis area and of course a lot of that pain in stocks and tech stocks in particular is from the bond market which Taylor was just speaking to as we have seen yields climbing in a massive way. For the second time in three quarters we have seen a more than full point move on the two year yield 115 basis points just in a three month period. And of course as you extend throughout
the curve those moves get a little smaller. But there's still notable I mean even the 30 year is up around 51 basis points. And the other big standout story over the last three months has been the dollar heading for its best quarter since 2016 at one point on pace for its best quarter since 2008 up about 6 percent from the start of July to now leaving every single currency and a Bloomberg but basket of expanded major currencies weaker against it on a quarterly basis. The euro.
The pound. The Emerging Markets Currency Index is what I'm showing here. But of course you could throw up the yen the yuan places where we have seen intervention to try and stem some of that weakness that the strong dollar is causing.
John Kennedy lines. Who's next. Been asking that question on surveillance away. Kenny thank you. Prince we'll see. Misha on the so far says this Financial markets have suffered a dreadful first half. Ravaged by severe commodity shock strict Covid lockdowns and one of the most aggressive Fed tightening cycles in recent history. The second half looks equally tough.
Saima I'm pleased to say joins us right now. Saima let's talk about a second half of the second half. More pain to come. Certainly I think the first half of the second half without a little bit more moderate. You know the first July half of August you had this almost really ridiculous optimism I say feeding into the market and this hope that the Fed and other central banks would capitulate to weak growth. And then that realization that actually there is just one focus in town and that is inflation has taken all the expectations back to to higher rates lower growth and of course lower earnings.
And now what. Pushing down the market. And it's not over yet. Same is good news. Bad news because that claims print about an hour ago below 200 K..
Got a lot of people thinking that it's good news bad news in the labor market. It absolutely is. And this is this is almost where I think strong labor market is going to be. The US is doing it as long as the labor market is strong. The Fed has just got further and further to go and they have to go so they can be engineering a hard landing. If it was the only way to pull out inflation.
So there's the stronger the labor market is the higher rates have to go. And of course the higher rates have to go the further things have to fall and their engineering financial instability as well. Other countries are contributing to that. Sima what kind of things do you expect to start to crack. Just a little bit more. We've seen it in the gilt market very very unique to what's happening in the U.K.
at the moment with fiscal policy pushing the other way against what the central bank's trying to achieve. But how many more cracks are you expecting to see him wearing in what. You know it's not true. I think in the last couple of weeks you do feel like this market frenzy is is going to really escalate. And at some point it's going to hit that point where you know other things are going to break. And as you said the gilt market it is specific to the U.K. that this is all driving in the same direction of concerns about inflation.
Governments may be trying to offset growth probably in the not so not in the right ways and in the U.K. But you can see that there is the same movement everywhere. Now we are looking really towards the dollar whereas that going to happen historically.
Every time the dollar has got to this point something has happened that some kind of intervention some kind of emerging market crisis a potential liquidity problems but not watching and then throw into the mix quantitative tightening. I do think that there's been a little bit of an underestimation of the impact that could have. So you're looking at really really tight liquidity conditions which is only gonna get worse into a slowing economy. Saima all the conflicts we're witnessing right now and let's start from the top of the pyramid the very top. The Federal Reserve against the rest of the world.
So set against it the way the ECB the dollar's dominant those two countries those central banks are trying to get a stronger currency can't get one within the UK. The conflict between fiscal policymakers monetary policymakers within the central bank the conflict between trying to preserve financial stability and trying to get inflation lower as well. See when we can talk about the risks associated with all of that conflict are there any opportunities out there off the back of it. It's a real question getting tougher and tougher and tougher. There are gonna be opportunities. You know they're really one small ones
to pinpoint you know things that can potentially work out well do well in a recession. The truth is that things are getting tighter and tighter and tighter as you said. So now for us for investors it's really about going increasing or liquidity.
Right. Because when that bottom comes. Given how far valuations have come down and certainly market there will be some fantastic opportunities when it comes. It will come very very quick and furiously. So we do think that if anything that you're thinking within your portfolio start to increase that liquidity because there will be opportunities that you need to take advantage of it. As of today you know we would be underweight equities. You're underweight credit real assets probably the one area that continues to stir up some opportunities. Things like listed infrastructure even
commodities. But as always you're taking it kind of a five or 10 year horizon. But really the number one message from us is increasing liquidity so that you are able to take advantage of the opportunities. NASDAQ RTS percent.
S&P down one point six percent in today's session about eleven minutes. And we've seen capitulation. I wouldn't call it that intervention from the Bank of England. We start to see just a little bit a
softening of the stance in China to China right now allowing some cities to cut the minimum first home loan rates. Sima who's next. Where do we start to see that. Just a little bit of a pivot. I'm not talking about the Fed. I'm just talking about elsewhere. NIKKEI where the most tensions are you know who's really really starting to struggle whereas the economy is starting to struggle fundamentally.
And I'm not talking about like a US recession which is we think can be short and shallow. This is going to be somewhere where households are really starting to struggle. And actually there will be a point where the tension gets too great and central banks will have to change strategy. But you have to pick out which the reasons it's not going to be in the US. Because I mean fortunately I should say the economic conditions are not that dire. You look to what a year. And actually I think that the ECB can
raise rates 75 basis points in the next meeting maybe another 50 or the one after that. But then you're really pushing up. Against economic tensions. So I'll be looking at everywhere but the US for some kind of capitulation. Italy what's up big time too. It's not just the Bank of England it's the ECB.
There's got to think long and hard about this stuff too. We're up 10 11 basis points on Italian 10 years year today. SMITH Thank you. See mission that yields up almost everywhere. The Italian senior the ECB talking about hiking rates. And Kuti wants a more Fed speak.
It's coming right up. The federal funds rate next year would increase to four and a half to form three quarters. It's pretty clear that everybody has in mind a continued increase until we get to that point. I'd say like March 2023 before the week is out. You'll hear from Mr Davy back in at famine and then talking again. And then Williams and a whole lot more. That's next.
This is Bloomberg's The Open I'm Lisa Mateo live in the principal room. Coming up can be bad enough. UK Secretary of State for International Trade. This is Bloomberg. The federal funds rate next year would increase to four and a half to form three quarters the median 19 percent. Nineteen four participants said it would be four in three four and a half to four three quarters. And if you had a look at the general pattern and I think it's pretty clear that everybody has in mind a continued increase until we get to that point. I'd say like March two thousand twenty
three will be at that point. Chicago Fed President Charles Evans there just one of many Fed officials taking center stage this week with markets remaining under pressure. Glenn Beck's at Harrison running quote Yes that pain you're feeling is intentional. It makes the Federal Reserve's job easier. I'm pleased to say that Harrison joins us right now.
Ed why does it make it so much easier. It makes it a lot easier because they need to get rates up in order to you know ease the economy make sure that the economy is moving in the direction they want. But you have to think about the political consequences here.
I mean the Fed which wasn't elected by the way is basically saying that it wants people to lose money. Or on the value of the homes that stock and bond markets throw people out of work in essence. And they reside in Washington obviously. So they have to walk a fine line. That's why I think that they're going to get to 4.5 percent and not much more despite what Charlie Evans just said. And I was having a really strange conversation this morning. And it is strange to sit there and say
that jobless claims below 200 K is bad news for the Fed. I'm not sure a lot of people in this country can get their hands around that at why for this fad. Good news in the labor market is bad news for them. Well you know it's the essence of their being behind the curve because you have three dichotomies here. You have the U.S. versus the rest of the world.
That's why we're seeing what's happening in the UK. We have financial markets versus the real economy. The real economy is doing just fine. But the financial markets are starting
to fall apart. You have retail and housing on the one side which is in recession and you have services which are doing just fine on the other side. This is the essence of Philip Charybdis course that we're on because they're behind the curve. So I think that we've actually hit peak hawkishness because of that dichotomy. I don't think that they get to 4.5 percent in 2022. I think that they you know despite what Evans was saying that they're going to get to 4 percent maybe four and a quarter and that's it because they have to slow the pace or something more important is going to break in the market. The negative feedback comes from
financial markets that we're actively seeing that in the U.K. and we are this wait that's for sure. For the ECB it could come from Italy. And is it international for this Fed. Is it something domestic as a liquidity
in the Treasury market. Can you identify where that circuit breaker might be for them. Yeah I think that when it's it's all the above in many ways really. You think about Cielo. You know there's not the uptake there. I think that that's one place to look for in the domestic economy. Another place to look for is housing.
We saw the numbers in terms of home sales pending home sales just plummeting to almost a record decline month on month. So these are the things that will tell them that we're already seeing. If they're not backward looking if they're forward looking they'll see this as this is going to eke out into the rest of the economy.
It's not going to just be retail and housing. It's going to also be increasingly services as well. So they're going to have to slow the pace. They can't do 75 basis points or they're going to have a financial accident. And if they manage to get you for a while. Thanks for being with us. Let's do again soon.
Don't be a stranger at Harrison on the latest history on why boy thinks this is going to go. One thing's for sure we're seeing a lot of blinking and a lot of intervention. This from Germany. Did you ever expect to hear this funny to borrow 200 billion euros to tackle surging gas prices. Finance Minister Christine Linder saying in a press conference we can put it no other way. We find ourselves in an energy war. We're written out from Brussels now for more. Good morning Maria.
How big is this effort going to be. Look it's huge it's 200 billion euros in new debt for a country like Germany where you know that's always a difficult conversation. But what it shows fundamentally one is that bad foreign policy comes with a price tag.
We see it today in the words of the German finance minister he concedes. Now we are in an energy war. And this plan which he calls an umbrella a shield for German consumers and households and businesses too is the response that the country is putting forward to Vladimir Putin's blackmail. Now there's a lot of questions around the implementation of this saying there's a lot of questions in terms of what this will do to demand destruction. That has been a key factor in the German economy.
But overall a lot of clouds for the German outlook. You have inflation now at 10 percent in an economy at the end of the year potentially in contraction. So yes this is big. It is significant. It also shows the magnitude of the problem. It shows that the German government is
now aware of the storm that's about to hit the country. But again there's a lot of question marks around this. And we've only seen the start of the autumn session where we're in September.
Jonathan we still have months to go before we get to December. So again a lot of clouds around this. Let's catch up tomorrow on this. The conversation continues. Maria Tadeo on the latest package out of
Germany yields up in Germany double digit inflation in Germany. The ECB is going to try and respond to it at the same time worry about what happens in Italy. Reminds me of what's happening in the U.K. at the moment up 71 points yesterday on the S&P down 71 points today not down 67. We've basically taken back yesterday's move on the Nasdaq 100 bit down by two point three percent with some sector price action isn't it. Yeah big round trip here in that NASDAQ 100 to you're just talking about John now at its lowest level since October of 2020 when there was a big tech wreck ahead of the election right now relative to the S&P 500 bearish action the worst day in two weeks. All 11 sectors down the tech index.
The tech sector is down the most discretionary. Real estate's in there too because of course those yields don't those dividends don't look as good with yields higher. But tech communication services most sectors down by more than 1 percent. So we're not getting a reprieve now on the month. It's also equally bearish more bearish. Not surprisingly all seven sectors are down the best sectors healthcare down two point one percent.
But the worst sectors it is real estate. And again that has to do with that the high dividend yield sector when yields are higher. Those dividends look less attractive. Energy down with oil materials down with
the sell off in commodities. And there's technology also down as yields are higher just less attractive. Thank you. Next on this program you're training Tyree. Yields up stocks down. Rinse and repeat. How many times have you heard me say that this year.
Twenty five minutes sent stocks down by one point eight percent on the S&P and announced that one hundred were down two point four percent in the bond market to tens and 30s. Yields pushing higher once again on a two year. Just short of 420 on a 10 year about 378 with the monster range on that particular maturity so far this week as the price action is the trading diary President Biden meeting with heads of Pacific Island nations at 3 p.m. Eastern.
The Fed speech continues. Mr. and Daley speaking throughout the day. And it's back in Brainerd Bauman Williams on Friday. And we ran out the week with PCI deflator personal income and spending numbers. And we'll get you match sentiment survey as well on Friday. From New York City. Thank you for choosing Bloomberg TV.
This was the countdown to the openness Bloomberg. From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. It's 30 minutes into the US trading day and here are the top market stories we're following for you this hour. Risk off returns to the markets from the
U.S. to the U.K. Investors are shrugging off support from the Bank of England and they're bracing for more volatility. And we're going to break down what's driving the market action with any silver one of RBC. Plus we'll speak with a former economic adviser to the U.K.
prime minister list. Trust actually doubles down on her fiscal plan and signals a U-turn on the horizon. And a trail of destruction hurricane in barrels across the United States leaving scores of people missing millions without power and billions of dollars in damages. We're going to go on the ground to Florida to bring you the latest. And from New York I'm Sonali Basak with my co-host in London. Guy Johnson Alix Steel is off today. Welcome to Bloomberg Markets Guy. That relief rally did not last very
long. I think we're absolutely flat sort of to day basis. I was just looking at its finale the FCX the S&P almost exactly flat. So we've come up. We've come down. But this speaks to what we're seeing at the moment isn't it. Incredibly with the markets and we're seeing it all over the place at the moment in a multitude of asset classes.
And this is where the risk lies. People just can't cope that risk models can't cope or allow them to cope with this kind of volatility. They sure can't cope with the volatility and you have to wonder how much leverage is left in the system. I know that we're gonna be talking a lot about that. Think about how many trade guys are just so crowded from equities to the dollar to treasury markets.
And that leaves a lot of people vulnerable. If we see another leg down. Absolutely. I think yesterday was emblematic of this challenge.
The last few days have been emblematic of this challenge here in the UK. There is leverage still in the system. It's not what you necessarily expect it to be. I think smarter people than me have figured out that there probably could be a problem in the mortgage market in the pension market here in the UK. But what it highlights is that there is
still leverage in the system and that leverage Campos sheep huge problems and do so very quickly. Xi Jinping and I were kicking around this a little bit earlier on trying to figure out what our question of the day is that after what we've seen over the last few sessions she not just alluded to how much leverage is left in this system and more precisely where is it. Joining us now to try and answer these questions playbooks Vincent Signorile and Bloomberg's Katie Greifeld. Katie the last couple of days the UK has
been the epicentre of the action and we've seen leverage and the impact that it can have. How much leverage is left in the financial system right now. It's a really good question. I went on a little bit of a wild goose chase trying to find you an answer this morning. If you look at margin debt which is a
pretty good measure of how much retail players have in terms of leverage it's still six hundred eighty seven billion dollars which is a lot but it's much lower than levels that we saw especially over the past two years. So it's still out there but it's come down a lot. That makes a lot of sense when you just think about the draw down that we've seen. When you think about more of the institutional players it's really really hard to judge. Anecdotally we have heard that a lot of people have been flushed out.
Maybe they've gone to cash. It's a scary market out there. So it's hard to judge. But there is a lot of fear as we get into maybe the second leg of this bear market that we could see more leverage fuel blow ups similar to our cargos that we saw a year or so ago.
And that's on the more extreme end of the spectrum on is more similar. And with the pensions in the U.K. you saw all that hit in leverage. And Vince you know the reality is more than 10 years of leverage is going to take a long time to unwind. So do you think that the market that is trying to get back in might find that that could be painful as more trades can still be unwound. Yeah I think I'm stepping in right now is definitely a painful trade. I mean the only people who I talked to who are really involved in this the day traders and that's because they're in and out. They're not long term players.
They're not buying now to hold for some time next year. NIKKEI there's been a lot of outflows. Lipper keeps these numbers from from funds both the high high yielding funds and the investment funds. There's probably a fair amount of money in cash but it's cash that's not really willing to be put put to use. And you guys were mentioning earlier the reversal from yesterday. I think that speaks of more positioning in the markets yesterday. We've seen a lot of trades stretched out
to two even three standard deviations. So yesterday was just a short squeeze based on you know not really news in a way for equity markets. That was more of a stability thing the Bank of England was doing for the fixed income markets. And then today we're seeing it just revert which is the sentiment of the market is still short.
The bigger picture though internationally was talking about this though Vince is that we are seeing a paradigm shift. We have had 10 years plus of interest rates low or falling. And the logical thing to do in that kind of environment is to gear up. We're now changing the pattern. We're now changing the model. I just. You've been through a number of these
crises. How long do you think it's going to take to shake leverage out of the system for everybody to unwind the positions that they have for that mentality to change. I think it's going to take the Fed pushing us into a recession. And I think that's very very highly likely. I mean we heard Bullard again today. We're going to hear more Fed speakers today. None of them are taking a foot off the gas.
They all are saying that rates are high and need to go higher. We heard it yesterday as well from a series of Fed speakers. I think the Fed is is you know we saw it this morning and inflation numbers higher again as well. Unfortunately. And so that's just going to gin them up and keep them pushing and pushing rates higher. The leverage will stop and the pain will stop. In a strange way when we get pushed into a recession because that'll take the Fed that will give the Fed pause.
We are headlines crossing the wire about where the NASDAQ is headed. And then it's not very pretty. The slump is extending to 3 percent reaching its lowest level since June 17th. And Katie on the sidelines here. You were talking to me about just yesterday people trying to get back in. How are those trades today being unwound
already. Not great knowledge quite honestly. I mean if you look at the ETF inflows we try to track very closely that a combined five billion dollars went into the Qs went into spy to Vince's point. Really. I think the Fed speak is going to rule the market over the next few days because if you think about what fueled that dip buying it was the Bank of England coming in intervening in the bond market sort of a reminder that central banks still have your back.
But the Fed we know is very intent on getting inflation down. That's going to be a painful process. You're seeing that in the price action this morning. Vince the both of your points that you talk about the Fed causing a recession. What we saw yesterday was the Bank of England switching from its monetary policy role to its financial stability role. Basically the grownups in the room said
yeah we've got to fix this. There's a big problem here. We need to take action. And I'm wondering whether or not we are approaching the point where other central banks are going to find that problem as well. Rates are going up very quickly.
US mortgage rates jumped to six point seven percent. That's the highest level since 2007. We are approaching potentially the point at which financial stability risk becomes more important than inflation risk. And I'm wondering how you think central
banks will deal with that and how the market will manage it. I think you make a really good point. And I think financial stability risk is probably a little bit closer here in the US than folks are pricing in. We've seen mortgages mortgage payments but basically doubled over the last two years four. And we're seeing it in home sales
dropping. We're seeing in just about every economic indicator is dropping. Even though the Fed is standing pat and pushing hard and raising rates they very much with a strong dollar could see a situation where they actually cause a fiscal crisis. We're going to get the next round of earnings coming out. And it's probably not going to be pretty for the large cap corporates who don't really hedge their effects exposure dollars at record highs.
That's going to hurt earnings. And we're going to see issues I think with individual leverage based on where rates are. And and you're going to see it in the housing market where this whole forbearance is done and landlords are trying to recoup gains by raising rents so aggressively. So people just can't afford what's coming down the pike. And that's going to cause some major
issues. Trouble ahead. Bloomberg Quicktake Greifeld and Vincent Signorile thank you so much for your time. And coming up next we're gonna dive deeper into the markets. What's underneath the surface.
What any rule. Silverman RBC Capital Markets equity derivatives strategist. She joins us on our Question of the Day next. This is Bloomberg.
2022-10-09 02:37
