Bloomberg Markets Full Show (03/14/2022)
From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. It's 30 minutes into the U.S. trading day Monday March 14th. Here are the top stories we are following for you at this hour. The talks begin. Top officials from the United States and China have started the first high level in-person discussions since the war began in Ukraine. The conversation comes as the Biden administration seeks Beijing's help with Russian President Vladimir Putin. And another lockdown. China imposes restrictions on its tech hub of Shenzhen potentially inflicting the biggest coronavirus related blow to growth since a nationwide lockdown in 2020 if the rest of the world braces for further supply shocks. What does that mean for the markets. Well climbing yields bond sell offs then yields to the highest since July 20
19 as the insulation season the isolation of Russia up and commodity flows. And investors anticipate the start of a rate hike cycle from New York I'm pretty group that would Guy Johnson London Alix Steel is off. Welcome to Bloomberg Markets guys. So much to digest here. Whether it's China whether it's Russia. Commodity flows and of course the spotlight back on the Fed. This week. Absolutely and everything feels inflationary doesn't it. That story out of China feels inflationary what is happening with the commodity story. I appreciate that we're seeing lower oil prices today but generally that story feels inflationary too. The question that I'm trying to answer here and it kind of goes to
our question of the day what is the bond market really pricing right now is are we in a position where the Fed is going to be aggressive but not that aggressive because it's worried about causing an inflation. Or is it going to have to cause an inflation target because it's worried about a recession or is it gonna have to cause a recession in order basically to deal with inflation. I think that's what everybody is trying to get their arms around right now. And I'm getting really conflicting signals from various market participants. Let's try to get an answer to that question. Romaine Bostick co-host of Bloomberg Markets the close IRA Jersey chief U.S. rate strategist for Bloomberg Intelligence joining us now. IRA what are we pricing
in now. Yes were pricing in for basically eight full rate hikes over the next year and a half or so. And you know that means that the Federal Reserve is you know the market thinks that the Fed is going to go pretty quick here. And in fact we're still priced for basically a hike at every meeting this year and maybe you know a chance of a 50 basis point here at some point. I don't think that they'll be able to go quite that fast because of some
of the risks that you mentioned to the growth outlook. But for sure the market thinks that the Fed's going to hike and hike pretty aggressively. And let's bring you into the conversation here because we have to talk about the geopolitical tensions there. It wasn't too long ago where we saw the Fed the hawkish Fed can't take a back
seat for yield. And now that kind of driving the narrative when you make it. Well it took a backseat briefly here. We talk about where we were sort of in mid-February where you saw yields basically peek out at least on the 10 year above that 2 0 7 level. They dropped immediately after that because of the war in Ukraine because everyone thought the geopolitics would sort of overwhelm inflation. Well the problem now is that geopolitics are inflation. And of course the one in Ukraine has proven that inflation is not only a problem but probably a bigger problem than what it was before the war. And that's a big part of the reason why you're looking at yields right now making these moves higher. That's a big part of the reason Kristie while you're looking at our break evens the expectations 10 years out above 3 percent the expectations five years out. Right now at three
point six percent. Ruby what is stocks pricing. What are we. What is the stock market telling us. Is the stock market just a derivative of the bull market right now or is the stock market gone on a useful kind of signaling here. Stocks have remained relatively elevated through this. We come down quite a long way. But you look at where we are in historical terms. We haven't come down that far. So just give me a sense of what
you think the signal we're getting from stocks is are we going to get a recession. Are we not going to get a recession or earnings going to hold up or earnings not going to hold up. I think the general consensus based on the pricing is that earnings aren't going to hold up. It's now a question guy of how severe it's going to be. You think back a couple of months ago here there was a pretty strong negative correlation between the rising yields and the drop that we saw in stock prices. That
correlation is still there though not necessarily as strong as it was a couple of months ago. So I think when you see what happens on Wednesday with the Fed announcement it's really going to be about two things. What. Not just whether we get a rate hike but whether they decide to be a little bit more aggressive go with 50 basis points. That's being priced out right now. But whether they communicate that going forward that yes there is a real scenario that we could
see six seven eight hikes this year. And of course maybe a faster draw down of that balance sheet. IRA hop back in here into the conversation. I'm curious what this means. We're looking at things in terms of the commodity shock because it kind of seemed like for a second the geopolitical situation like Romain said was outweighing the hawkish Fed. Do we expect comments from Chairman Powell on simply what that commodity shock might look like and how long it might last. Well I don't think it will necessarily say how long it'll last rate Hill. He'll say that it's unclear that whenever you have these types
of risks that will continue to they'll continue to monitor the situation. But I think the answer to the question that he is likely to get asked like you just mentioned is you know that the Federal Reserve can only do so much. The Federal Reserve really controls the demand side of the balance sheet. So to guys point earlier when we were talking about what the Fed's going to do. The Fed basically can only drive us into a recession in order to get inflation lower because it can only stop demand. I was just looking this morning at the number of gallons of gasoline sold because of how high gasoline prices are at the pump. And those have come off very dramatically. In fact they're right at the lowest level that they've been about the last five
years. So. So these higher prices are already crimping demand and that's creating a tax on the consumer which is going to slow real GDP and real economic growth going forward. But until that starts to hit the job market the Fed is going to be feel it's OK to hike. Now once the job market turns around if you start to see job losses at some point and a slowing of wage growth that's when the Fed has to be really cautious. And that's why I think that the Fed ultimately is going to go a lot slower than what
the markets what the market's pricing for right now. Now what that means of course is that maybe two year yields are getting to a point where they're not going to be able to go up as quickly as they had been. But I still think you're going to see a 2 percent 2 percent to your yield at some point this year. Romain I'm curious about the point that IRA just made here. The fact that the Fed can't tackle those commodity prices. They're not tackling the supply issues. They're tackling the demand. Right. But I'm wondering if you kind of put the demand
destruction that you're seeing from commodity flows on top of the Fed trying to kind of control demand. At what point does that become a double whammy. And at what point does that become even bigger odds for a recession. Well I think this is what the Fed has to address and this is the conversation that's gonna be had on Tuesday and Wednesday is how do you sort of ease demand.
You don't want obviously destroy it in the sense of what the Fed is trying to do. How do you ease that in the face of I guess market forces that are already seem to be doing that right now. And to IRA's point to when you talk about some kind of the feed through into the stock market here. You keep an eye on some of those discretionary names. And I think that's where you're going to start to see most of the pain. We've seen it there already. Remember this isn't just about what you're paying at the gas pump. So what you're paying at the grocery store it's what you're paying to go out to eat.
That's what you're paying. When you go to the store to buy you know new pants for your kids. These are really already being felt. You see it anecdotally and it's eventually going to show up in the data. All right we're gonna get adult plot. We're going to get a A and economic outlook from the Fed this week. How big an upgrade do you think we're going to see in terms of the right picture from that dot plot. What is the Fed going to be signaling. It's come back to this point about the demand side of the economy how high the rates have to go do you think before we start to see a meaningful impact on the economy. Where do you think that point is. Do we need to get into positive real rates how high the nominal rates have to go before they start affecting the U.S. consumer
U.S. and U.S. industry. Well I have to say a couple of things about that. You know there's a lot of pieces to that question. But I think the big thing is we have to remember inflation on a year on year basis is going to be lower in nine months than it has been in the last couple of months. Rates are just base effects alone are going to
drive some of that. And certainly if oil prices even just stabilize right where they are now you're going to have inflation. That's going to be closer to 4 percent. Do we need to get real rates to the positive in order to feel the economic impacts of that. The answer is no. I think that we're already starting to see the economic impact of that. Certainly if you get mortgage rates that go up another 25 to 50 basis points you're really likely to see the housing market slow pretty substantially. I know there's some supply issues. There's not a lot of supply of houses on the market. But at the same time if if you can wind up getting mortgage rates that get close to 5 percent it's hard to see that not crimping demand on foot for the housing market. So there's a lot of pieces to the puzzle. So the Fed I think is going to what you're going to see in both the summary of economic projections and the dot plot is a wider dispersion of outcomes that members of the Fed think are going to happen to have people like like President Willard and Bullard say this say you're going to get significantly higher maybe interest rates in the out term maybe even three three and a half percent in some cases but then others that still think that the terminal rates going to be somewhere in the low 2 percent area. So I think that dispersion is going to be what
what is going to be the story for the summary of economic projections and the dot plot this month. Well lots to digest. Bloomberg's Romaine Bostick and ISE Jersey a Bloomberg intelligence. We thank you both so much for your time. Coming up we'll get investors take on our question of the day. What is the bond market really pricing. G squared private wealthy i l Victoria Green. Join us next. This is Bloomberg.
Let's get back to our question of the day what is the bond market really pricing in. Joining us now is Victoria Green. She squared Private Wealth CIO. It's an independent boutique investment advisory firm focused on ultra high net worth individuals with over half a billion dollars in a new M. Victoria. Thank you so much for joining us. Let's put that
question to you. What exactly is the bond market pricing in there. Certainly a lot to digest. Right now with the curve flattening as extremely as it has I think it's pricing in that look I think a recession is coming and gosh should be playing defense a little bit more than playing offense. You know I'll freely admit we came into this year as the father of dips but you can't be agnostic to this fundamental shift that's happened with the Russian war in Ukraine and the likelihood that sanctions are going to stick and inflation is going to be longer. We all thought inflation will peak here. He won Q2 and now he's pushing out inflation even further back. I mean your your break even now on a 10 year above
3 percent for the first time ever since 98. How do you position for a recession. Should you position for a recession. Should you position for a recession once it's arrived. I'm warning what history tells us Victoria about what stock investors in particular should be doing as they think about the possibility of and earning a recession coming. What is what is the right place to be. How do you sequence that story out.
So first off there's a lot of variables on the table here. So our sources are signals flashing that a recession is probably going to come. Yes but you haven't seen a lot of signals slip flop yet. PMI is still above 50. Unemployment rates at 3 8. That's very low but hasn't bottomed out yet. The curve is very close to inverting. I think that by 10 spreads now like 5 basis points but hasn't inverted. Yes you have all these signals on the precipice that could reverse. But right now we are thinking at this drag from the war the inflationary drag is going to come from economy is going to put pressure. So what do you do. I think you want to shore up your portfolios. I think you want to be in areas that are a little lower paid a little higher
quality. You want companies that are cash flow that have strong balance sheets you know ability to weather a little bit of a tighter market and not be so much and probably not trading at that value. You've got to be nice for me. It's for me. Yeah. We like the energy space still. I mean I know they've been on a great run but we think energy prices will remain high. You know we like on the big side the chevrons are a good place to be. We like the easier your Devon Energy. Honestly have a name though. Not a lot of people talk about as we like IBM as a great value tech stock. It doesn't mean you have to shun tech from your portfolio but you want to find things that have like I said stability quality not trading on an extreme multiple and generally looking around. No financials have come off a lot. I think you want to own the right financials right
now. We're bunkered a lot more in the US so we're looking at names that have a little less international exposure a little more U.S. domestic exposure for their revenues. Victoria we're seeing a little bit of green on the screen. We're talking about the equity market. Here is the bottom end from simply the sell off that we've seen that really hasn't let up since the start of the year. When you think. I mean I'm just happy to see green but I'm going to say let's
see if the green holds through close. That's always been killer for us right. Holding onto our gains. You close. I don't think the bottom coming in until we have a clear resolution of what's happening in Ukraine. And even our best case scenario that we get to a negotiating table on the conflict stops. Looks like we're probably going to keep sanctions on on Russia which is just going to make the inflation story even more difficult. I don't think the bottom is in yet. I think if you have a strong
stomach you know and we have any more extreme depths you might look to add to it. I don't think this is over yet. Victoria when we get a recession if we get a recession what does the Fed do at that point. Because. Yeah. Let's say we get one. What does the Fed do. Does the Fed want to lean in and make that recession easier i.e. reduce rates maybe do other things in terms of the policy that the policy tools that it has. Or is it going to look at that recession and say this is what is required we need to deal with the demand side in order to deal with the inflation as a result of which you're not going to get a quick response from the Fed when that recession comes. Yeah I think the Fed wants a time machine. I think the Fed wants to go back and start hiking last year. I think the Fed's in a horrible spot. They've gotta go. Inflation is rampant. Inflation
is going to stick. I'm still on the six hikes. I don't think the Fed is going to be dovish. I think they're going to run off their balance sheet. I think they feel like they have there. I think they know they're playing from behind at this point. So I think the people expecting the Fed to kind of run in and oh if we start slowing down will the Fed slow down. I feel like the Fed feels like they almost have to move enough to give all that cushion that they can come back down on rates when we hit an actual recession. And remember GDP is like two thirds the consumer. And so if this consumer is getting squeezed at the pump the consumer is certainly going to have less to spend elsewhere. Even they're getting squeezed at the pump the grocery store as your other guest had mentioned. So Fed I don't think he has any choice but to be hawkish and it's an unenviable position
to be in. So Victoria we've talked about the Fed. We've talked about Russia and Ukraine. The other major story this morning has simply been China's zero Covid policy the fact they've shut down their major technology hub. How much of there is a read through into the United States into the West from what's going on in China. It's going to bleed. I mean as they shut down chip factories I think Foxconn shut down and you're seeing that drive a little
bit on Apple and they certainly do supply a lot of things for us. So we have to be cautious of what a shutdown will do. I don't think I think the zero Covid policy is a smaller minority of the world. I think the rest of us have kind of decided to live with it as our policies. So I don't see lockdowns continuing to spread anywhere. But I do see that just making the
supply chain even worse. You know you just seem to have this confluence of factors. And you know between Russia getting frozen out of the market and China's kind of stealth freezing them out of the market and then concerned that China will get sanctioned if it side with Russia. You're talking about just making it harder to get parts. Victoria is all of this manageable. Or is there a danger that some of this becomes systemic. ISE Some of the problems we're experiencing right now could be a Russian default. It could be China having problems with its property sector. There's a whole range of potential things that could be systemic here. Do you think we could be heading towards a systemic events. And again is that something that's just a tail risk right now or is that creeping in from the tails.
Look I'm never a big fan of like the sky is falling and everything is going to be terrible I think the higher probability as these do work out without it the end of the world. Economically. You know there's different types of recessions you know the duration or the severity of it. I don't think this is an 0 8 type global meltdown. But you do need to see some cooler heads prevail. We'd like to see some progress. I think all of these problems could be fixable. So I don't think it's good for the world at all. I do. I mean it's sad for me. I don't like being bearish. It's just it feels wrong to bet against the world. And that's what it feels like when you say hey look there's risk in the market. But I think investors can bunker in. I don't think all stocks are created equal. We've seen not the gross value divide here. I don't think this means
you just need to sit in cash because there is a risk to cash in an inflationary environment. Absolutely. Inflation. Victoria. Great stuff. Thank you very much indeed. Victoria Green of JI Squared Private Wealth. Thank you very much indeed. What we've got coming up for you. The US is seeking China's help to end the war with Ukraine. We're gonna have the latest on the high level talks that are happening in Rome right now. We're expecting a briefing shortly. This is
Bloomberg. For the US and China holding their first high level in-person talks since Russia invaded Ukraine the Biden administration wants China to exert its influence over Moscow to end this war. Jake Sullivan might be briefing shortly. We should get a readout fairly soon. What should we expect from this conversation though. Let's go to Washington D.C. to find out. Bloomberg's Washington correspondent Amari Hall Dern. Joining us now. Amari what does the US wants out of these talks. Does it just want China not to help Russia or does it want China to actively talk Russia down i.e. find a way out of this. Well I think it'd be the latter guy but I think they're willing to take what they can get in this moment for them. Fred the
moment China has tried to remain somewhat neutral they haven't come out and condemned what Russia Russia's doing outright. But at the same time they've also have called for peace and they've held calls with Ukraine as well. I think a lot of focus will be on if there's any potential of China giving military assistance from the reporting over the weekend. U.S. officials saying that that is an ass that Putin has made to Beijing. But so far there's been no reporting or intel that China is actually following up on that. So I think this meeting comes at a critical time for the U.S. to be frank with Beijing on what they
would expect and for them would be putting the pressure on Putin to make sure that he knows that he would be crossing that line with really what is only closest ally right now. If he were to if he were to continue with this war and retouch to us a little bit about how you square united the United States own tensions with China we're talking about tariff tariffs that a trade war that's kind of ongoing in the background with their relationship with Russia in particular. How did those two conflicts kind of work together or work against each other. Well I think at this moment it might actually help the United States not the fact that they've had this trade conflict over the past few years. And that's likely going to continue. But when you look at trade even though Russia and China. Their trade had their trade between the two countries have reached new
heights since 2015. You talk look at military arms going from Russia to China even though China has some better technology that dwarfs what China has in trade between the European Union and the United States. And this is really telling what Secretary Raymundo said last week really putting chip makers on guard about usurping and going around U.S. sanctions to make sure
these Chinese companies know that they need to come in line with the sanctions regimes and they can't be seen helping President Putin. Headline coming through on the story that we're covering Russia may hold wheat corn rye barley exports. On March the 15th. This according to Interfax. We'll try get some details on what exactly is happening here. But that would have serious implications and ramifications certainly in North Africa and Egypt in places like that Amari. So the the cost of this is going to spread out and continue to be a global phenomenon. Which brings me to my last question here. The Chinese as you say are heavily interlinked into the global economy. If they provide a route for Russia to find its way back into the global economy there's a risk of secondary sanctions here. How clear is the US
going to be to China that it doesn't want to go down that road. Well I think Jake Sullivan over the weekend the president's national security adviser signaled that there have been these very direct conversations in private. And now just the fact that he is going to Rome meeting with a top Chinese diplomat I think proves that these conversations are going to be pretty direct face to face. I imagine that is what they are going to say to his Chinese counterpart. Well Bloomberg's Annmarie Horden and our Washington correspondent we thank you so much for your time. Coming up China orders a lockdown to one of the country's big tech centers. Companies like Apple will feel the pinch. We'll look at what this means for the country's growth prospects next.
This is Bloomberg. Within hours the U.S. trading session a little bit of green on screen Bloomberg's Abigail Doolittle is tracking the moves. Abbi what you watching. Well Kristie we do have some green on the screen for stocks. We at this point have stocks higher in the
premarket sharply higher. The S&P 500 the NASDAQ up more than 1 percent. Then a little bit of a dip right now. That S&P 500 up six tenths of 1 percent. This as oil falls WTI crude is down about 7 percent and at close to a hundred dollars a barrel. Not there yet but we could see that move lower as we've been talking about over the last week that typically when you see a huge surge up it often is unsustainable and will reverse to some degree. As for what else is moving in the market and what has been going on over the last six days really under the radar this massive backup in yields. We have been talking about it here. But relative to oil commodities stocks and everything else going on this thirty seven basis point six to a backup in the 10 year yield is really just incredible. This of course into the Fed meeting the decision on Wednesday at two point one percent the
highest since. I'm actually not sure what level but probably 20 19 I'm guessing. So you have this huge backup that suggests that the Fed is likely to do that one hike maybe more based on this huge move. But also another big story the China tech plunge. We've been following that over the last couple of days now down three days in a row. The Golden Dragon China Index down off of its lows. But nonetheless last week the worst week ever going back actually the worst week since 2008 the last three days the worst three days ever. And you can see that common Alibaba more pain. The question is will this China tech pain bleed into the
rest of the markets up top or looking at the stock 600 tech index along with the Nasdaq 100 in yellow. We're looking at that Golden Dragon index. And you can see it's an absolute plunge from its peak in February. All of that having to do a lot with Ali Baba and the Beijing crackdown on tech down. Seventy four percent. If that's not a bear market I don't know what is. But again there's a huge divide guy between the Nasdaq 100 and along with the stock. Six hundred tech index. Are we going to see a similar move. Hopefully not. But who knows. Yeah. Panda Bear. Again thank you very much indeed. Abiola
what's happening in these markets right now. That story relating to what is happening in China what is happening with Covid seems to be kind of reemerging onto the agenda right now. It's interesting actually compare and contrast JP Morgan masking and corporate offices to be voluntary. Now for all JP Morgan to end mandatory testing for unvaccinated staff. JP Morgan comments are staff in a memo on office measures. This is now being circulated. JP Morgan to resume hiring unvaccinated individuals from April the 4th here in the UK. The rules have largely gone in the United States. They're fading fairly fast. But in China
the zero code Covid policy is still in force and it's having a meaningful impact. China taking now some tough steps to deal with a doubling of Corona virus cases nationwide. It's now locking down the city of Shenzhen and forbidding people from leaving a province in the northeast part of the country just north of North Korea. Sam Brasilia Bloomberg Intelligence joins us now. Sam what is the long term trajectory here. It is clear that the vaccines in China aren't as effective. It is clear that they haven't broken the back of the virus. It is clear that this 0 Covid policy is going to have large economic impacts for quite
some time. What do you see China doing next. Is there a way out from this. Hi guy. I honestly don't see an easy way out of this. So there's let's say there's two things they can do. They can let it rip which is obviously not what their intention is that they did it. And then of course that has people sick people off work and enormous costs in terms of health care health and impact on people deaths etc. The vaccines do have some effectiveness but they're just not as good as what we've seen in the face of biotech. And there are no shots. And the other viral shots. So.
So that's one way which I don't think they're going to do with the other one is just keep doing it this way which of course will have a similar impact in that shut down cities shut down ports still don't function. And I just don't see how they can get out of this without resorting to some massive wave of vaccinations again. And they're letting it rip a little bit like New Zealand. Sam let's talk a little bit about your latter point here. The
idea that perhaps there needs to be another wave of vaccinations to make this a zero Covid policy. Oh just a little bit more functional. Do you see the likelihood of perhaps that fourth booster shot in China or even here in the United States. What does that look like. Yeah I think we should leave the West out of this conversation because the fourth shot I'm not convinced yet that there's really much need for it unless you're obviously having immuno suppressed situation or really elderly etc. There's no data that suggests to me yet that we need to go there and especially that the effect is short lived. Israel has already shown us in China what I think they need to do is not just any fourth shot. I think the data that RTS so far. Mexico
had some good data. Some of the other South American countries and some good data. If you combine a a shot for example from Pfizer and put it on top of what China's already used you got a really good effect. That's going to be interesting because they haven't approved any of those vaccines.
Stanford's only production possible Sam. Is that something that we have the scale of production to be able to do. How quickly could China if it was given the technology or be able to license it be able to ramp it up to that kind of level. You know the guy I don't be very quick here. China already has a regulatory filing for the biotech shot in their hands since summer last year. They can approve it probably a hundred million doses. The US has surplus doses. They could agree on a deal. I don't know how feasible that is or whether they want to do that. You do need this shots or sell them to them. I think the
government could do that. So you could get a few hundred million shots relatively relatively easily. Well Sam Fossella a Bloomberg intelligence we thank you so much of your time. How big of an impact will this have on China's economy though. Let's bring in Tom Erlich chief economist for Bloomberg Economics. Tom wonderful to have you. Let's talk a little bit about that impact. What is the read through of these kind of port shutdowns of these city shutdowns into essentially
China's bottom line. So I think there's there's three things going on here that we need to think about. So the first is the immediate negative impact of the fresh lockdowns that we've seen. Shenzhen is not a small part of China's economy. A major industrial center tech center port. Huge population. Shutting down Shenzhen is not zero
costs. The second piece of it is the big question. What happens next. In 2020 the shutdown will hand was a pre fingering of the shutdown of the entire Chinese economy. Is that going to happen this time. Don't have any good information on it but you don't shut down Shenzhen for nothing. If we have broader shutdowns clearly that's an additional drag on China's growth. With ripples for the rest of the world. The third big question which again is in the world of
speculation but what's the interaction here with Russia and Ukraine and U.S. sanctions. One of the big stories over the weekend was the idea that Russia has been asking China for military help. China has denied that. We'll see how that story plays out potentially in a nightmare. Worst case scenario we could have a situation where Covid fears are back for China. And China is somehow dragged into the US Ukraine Russia situation with implications for sanctions and for China's exports and their access to technology. What kind of sanctions would you expect. Would it be financial sanctions would it be the financial sector that was to be sanctioned. Do we have any model Tom for how this could be applied. One of
the most effective tools to be used against China were sanctions to be necessary. So I think we're still in the world. Breaking news and speculation on this one guy. So I'm kind of reluctant to go into too much detail. But if you think about what's happened to China in the last few years with sanctions on technology with tariffs on exports with the beginnings of financial decoupling de-listing of Chinese firms in the United States for example I think there are clearly some areas where if these stories turn out to be true and China is dragged into the Russia Ukraine U.S. situation then there are some avenues where existing controls could be expanded abhorrent. Tom I'm curious about the read through to the United States. I think one of the main stories has come about out on the back of this essentially shut down has been Foxconn and the impact on Apple's supply chain. What is the read through into American companies corporate America. Well China is the second biggest economy in the world. So bad news for China is no bad news for the rest of the world. And you
hit on one of the dynamics. China is a center for production and a driver of demand for some of the biggest U.S. companies from Apple to Nike to McDonald's. But the consequences go further than that. And the world continues to struggle with supply chains snarl ups. Well guess what. Shenzhen one of the world's busiest ports one of the world's busiest tech and industrial centers has just locked down. Clearly that is not good news for supply chains. And that has implications for the inflation outlook as well. Tom always smart analysis really appreciate your time. Thank you very much indeed. Tom Selleck of Bloomberg Economics on what is happening in China and potentially the implications for China
where it to be dragged in to the Ukrainian conflict. Coming up the war has already had an impact on supply chains. We've already started to see that coming through. We've now got this Chinese factor to think about in terms of Shenzhen. We're going to talk all about this next with the CEO of freight rates. Craig Fuller great analysis. You want to listen to this. It's up next.
This is Bolingbrook. This is Bloomberg Markets marriage could get better and you're looking at a live shot of the principal room. Coming up Pat Toomey the senator of Pennsylvania. That's happening on bounds apparent to OPM here in New York. This is Bloomberg.
Keeping you up to date with news from around the world is a buzz word. I'm asking you up to the British government is set to offer a new system for admitting refugees fleeing the war in Ukraine. After several weeks of criticism the new system includes payments to households accepting refugees. Cabinet member Michael Gove told the BBC he expects tens of thousands of Ukrainians will eventually be admitted. North Korea may test an ICBM as soon as this week. That's according to South Korea's Yonhap news agency reports. South Korea and the US have detected signs of an imminent test of an intercontinental ballistic missile. North Korea hasn't test launched an ICBM since 2017. And in sports pro football star Tom Brady changed his mind and
is not retiring after all. Brady said he will return for a 20 season and the National Football League. The Tampa Bay quarterback says he's realized his place is still on the field and not in the stands. He is 24 hours a day on air and on Bloomberg Quicktake powered by more than twenty seven hundred journalists and analysts and more than 120 countries. How much can get to this has been that guy. Thank you. What much indeed Rebecca. The number of container ships waiting off one of China's biggest ports is rising as the country doubles down on its Covid zero policy. The latest locked down in Shenzhen adds more delays to the string global supply chain. Chen Z is the fourth largest port in the world. Just to
give you a little bit of context here. This is a massive blow to the freight markets. Joining us now to discuss this is the founder CEO of Freight Waves which analyzes the data for this industry. Craig Fuller. Craig since then shutting down this is a massive port fourth largest in the world. How are you reading the implications. There's a lot of uncertainty. This is something we thought we were largely done with or that was behind us is the Covid impact. But China zero tolerance policy has reminded us that supply chains are still subject to massive disruptions and the
Covid element in supply chains is still ever present. If I remember back in the United States went underground here we really sort of treated it as an unresolvable and sort of gave up on trying to contain it and just went about our lives. China doesn't seem to operate that way or want to operate that way. And because of it I think well we'll see a large disruption to global supply chains. This is expected to spread and wouldn't expect it to spread if we've seen it. The precedent that was set
in the West and if it does and China decides to continue their zero tolerance policy it could have massive implications very similar to what we saw in early 2001. Craig can talk us through the timeline here if you do start to see the shutdown now in the ports. When does it kind of come back. When do you see the read through into the rest of the world. And where does that translate into things like shipping rates or trucking rates. Yeah it takes about six to eight weeks for when you see a shutdown for it to impact Western economies just because it takes a while for that freight to ship. The good news for the American freight market. Short term is that there is a lot of
still a bottlenecks and port at the ports. There's a lot of containers that are still available. So we we have some short term demand that will keep the freight market moving. But if this goes on for months or continues to be disrupted and we have fits and starts it could have profound impact. As you mentioned freight rates particularly those out of China it actually depress those rates. If we stopped if we start seeing ships not
hauling cargo but actually sitting at ports we'll see freight rates drop because there won't be any demand. And so we'll see the alternative short term really drop that long term. We also see a surge because a lot of those products will have there'll be a substantial backlog. So I think it all depends on how long and how
pervasive this is throughout the economy. Really will tell us whether this is a repeat of 2020 or a short term blip. Craig as we speak WTI crude the U.S. benchmark falling below 100 bucks a barrel. That's a 35 dollar swing this month. How is that kind of volatility impacting the freight industry. Diesel certainly a major factor here in Europe right now. What are you seeing. How much of this is kind of easy to pass on to the models cope with this kind of volatility. What impact is fuel having. Well the good news for the large trucking companies which have not had a lot of relief lately just because of the driver shortage and the lack of being a drivers is that they'll be able to pass these costs on to shippers people that are buying capacity.
So 75 to 80 percent of the capacity United States it sticks on the contracts and those contracts into a fuel surcharges. So a lot of those cost increases will be passed on to shippers and then ultimately consumers. ISE release the spot market. That's where the squeeze is. When you see this really high rapid increase in fuel prices is it squeezes out the owner operators which operate in the spot market. And there they did see a tremendous impact last week and over the last two weeks. And so
short term relief will be positive for the trucking industry. But we are seeing signs of a slowdown in freight demand. It's really in many ways caught us off guard because you normally expect shipping season to pick up in March. March is one of the best months in freight particularly the domestic service market. And that is not shown up this year. And so it's hard to understand what is causing that. But we are seeing a slowdown in freight and therefore spot rates
for those on our operators. They're not able to pass on those fuel surcharges to to shippers because they're simply just chasing the rate down. Craig what what's driven some of that commodity volatility you were just talking about has been of course those geopolitical tensions with Russia over the Russian invasion of Ukraine. Can you speak to a little bit about what that means for the shipping market in particular sort of specifically around the Black Sea area. Well I think any when you have disruptions and you see a lot of the agriculture commodities and other commodities energy related and just any of the mining commodities that come out of Ukraine and Russia that is has a tremendous impact on the global economy. But I think a lot of that is really European related.
We do see high increases in rates for these products and commodity prices really accelerate which impacts everybody. The good news for North America is that we're a net exporter of the items that are seeing these rapid increases whether it's agriculture or a lot of energy commodities. We are a large producer of those. So we in some ways that benefit particularly the freight market because a lot of the industrial activity in United States is tied to those commodities. So whether we're talking food or whether we're talking energy or energy related a lot of our industrial economy is actually benefits. When you see high demand. So in some ways but Craig it looks like it could have a net increase in demand in manufacturing in United States. And that is a positive development. But certainly that will have a tremendous impact on prices. It could create
an acceleration of inflation. All of that is has a negative impact on global markets. Craig if we don't see wheat corn rye etc being shipped out of Russia or Ukraine has to come I'm assuming to the markets that are currently serves from further away. Is there the seaborne capacity to do that. Is there the capability to pivot and bring in crops from elsewhere. Does the global sort of food supply chain how much flexibility does it have built in into it right
now. Well the good news is particularly we're looking at Europe being the most impacted is those. There is a an imbalance. There's more freight coming into the United States from Europe than there is going. The other ways that trade lean is actually wanted to be able to CASSIDY. And so the ships that are able to transport grains from the United
States into Europe actually have available capacity. And therefore I don't think it will be a capacity issue as it relates to freight out of the United States into Europe. So generally that's a positive. That's true as well as for Canada. And so North American being a supplier of these grains will actually be able to supply Europe with a dependable amount of supply. And shipping will not be a factor in disrupting that. All of this of course depends on how long this goes on and whether we see continuous outbreaks or an acceleration in geopolitical political tension that impacts all of it. But generally I think the U.S. and the Canadian agricultural markets and really all three of the Americas can handle it. And because
they tend to be particularly out of the U.S. tends to receive more freight from Europe than it sends out. It actually could in some ways balance those lanes. Well Craig Fuller it is fascinating to talk about this freight waves founder and CEO guy. I'm very curious about how this all
plays out because it it's crazy to think that there are going to be these kind of decline. We talk about commodities yet you heard what Craig said. There's simply the shipping market isn't quite digesting it in the way we would think they would. So I think the story on food is going to be the one that we're got to spend actually most of this year talking about particularly here in Europe. I think if you are going to see a failed crop effectively in Ukraine and then you're going to see Russia not
shipping grains around the world particularly into kind of key North African markets and areas like that that is going to be a hugely inflationary and potentially potentially societal impacts. So I think the we don't fully understand the implications. I hear what Craig saying about the fact that there is capacity to ship out of Canada etc. and the North American and North America more broadly. But nevertheless this is going to be inflationary. And we saw what happened last time. We saw ag prices going up as much as this. We got the Arab Spring. The impacts geopolitically don't be fully felt a year anyway. It's
got to be something that we get to spend a lot of time talking about. This is Bloomberg.
2022-03-16 06:54
