Bloomberg Markets Full Show (06/30/2022)

Bloomberg Markets Full Show (06/30/2022)

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From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. It is 30 minutes into the US trading day on this Thursday June 30th. Here are the top market stories that we're following for you at this hour. Goodbye. The first half of 2022. The S&P suffers its worst half to a year since 1970 while energy and yields saw your playbook for the rest of the year. And recession fears mount. Consumer spending slows as prices stay high. Markets are depressed in a rate cut by the Fed in 2023. And OPEC's gamble OPEC's plus will add oil to the market in August. While investors start to question how much more oil the Saudis can get out of the ground and for how long. We're going to speak

to Ed Morris Citi Global head of Commodities Research from New York. I'm Alix Steel Mykonos in London. Guy Johnson. Welcome to Bloomberg Markets Guy. In some ways it feels like the market is taking the Fed very seriously. They are going to dampen down any kind of demand and we're already seeing that in the data and you're seeing that reflected in bond yields and the equity market. Yes. Actually broke itself today. Massive bid in the bond market which I think is fascinating. I wonder whether that's some of the quarter and flows month and flows making their way through into the system. But nevertheless there is plenty to think about. We have a decision out of the Supreme Court the final big one that we are waiting for. It relates to the EPA. Let's get the details. We go

now to the Supreme Court and Bloomberg's Emily Wilkins. Emily what do we know. So we know that this was a major ruling and we're still waiting for details on exactly how big it is going to be. We know that this is certainly going to have an impact on what President Biden can do in actually getting his climate agenda done. This is over concerns on whether the EPA can regulate emissions from power plants. And the question is exactly how far the Supreme Court is going to wind up going today. I mean they could go to the point where this is going to not only impact the EPA but numerous federal agencies and really

put limits on what a president's going to be able to get done. So Emily to dig into the reading here. So the Supreme Court is curbing the EPA Climate Authority. It says that the EPA cannot seek a shift to cleaner sources of power. And this really goes to the legality of what the Clean Air Act can really do. Does it regularly within your fence and

what your emissions are or can it regulate what kind of energy you have to use. And it appears that this potential decision is weighing against doing anything outside your fence. And that is really going to really limit what the Biden administration is going to be able to do. We've already seen their climate agenda stumble in getting through Congress. It's

not clear that Democrats are going to be able to move anything and certainly not clear they're going to be able to do so after the November elections which are supposed to be in the favor of Republicans. And so this could be make it very very difficult for Biden to move forward with his climate goals. And it could really impact how the U.S. and to a certain extent how the US's allies see the U.S. in approaching climate. Well let's just talk about that. We were in Glasgow not that long ago. The US was that it was setting some pretty ambitious targets. Where does the rest of the world's now go if the United States cannot follow. Well one of the things that President Biden wanted to do when he got into office was to kind of bring the U.S. back as a leader on climate in the world stage. And so you saw him re-engage with

the Paris Accords re begin to talk about climate. But if he doesn't have a Congress that's behind him on this and he no longer has the ability to do some of these major and significant regulations through the EPA that's really going to limit what the US is able to do and in which case allies might look in the US and say well if they're not going to commit to sort of this some of these higher goals that were planned why should we follow along with them. And let's face some context here. This is West Virginia versus the EPA. And just for some background. So back in 2009 the Trump administration replaced the Clean

Power Plan with one that really weakened what the EPA and what power generators had to do. Now a group of states sued to block that Trump plan. And that is what this lawsuit is about. They won. And now West Virginia is repealing that lawsuit. So siding with West Virginia in essence is allowing a weaker Trump measures to continue forward. This is a 6 3 ruling. And the interpretation with far reaching means that the U.S. Clean Air Act is likely to keep the administration for imposing the type of wide ranging emissions that the EPA had tried to do. Emily I think this also begs the question is this that the Clean Air Act

is not the right vehicle for the EPA to impose restrictions or does this mean the EPA cannot at all impose restrictions. Because therein lies a very big distinction in the authority of what the EPA can do. Absolutely. I mean certainly the EPA was given authority from Congress under this Clean Air Act under laws that were passed decades ago. What this really really questioned and I actually spoke with West Virginia's attorney general about this. He said it's not so much about climate for him. It's more about really the separation of the different branches of Congress that

Congress is the one that makes the laws. And so if Congress wants to regulate something that needs to be from Congress not from an executive agency like the EPA. So when I spoke with him he really framed this in terms of a sort of whole of government. How does government work. How do Americans get their laws and their regulations. How much is from Congress and how much are from federal agencies. So for him that's really what this whole entire lawsuit was about really just a change time just a little bit. The president speaking in Madrid a few moments ago at the NATO summit saying

that he backs filibuster changes to restore abortion rights. What's the situation in the Senate. How much authority is he likely to have there in order to make such a change. Well certainly it's a huge announcement from President Biden. He is one of sort of the very old school way of looking at things. He wasn't really in support of banning the filibuster or

abolishing the filibuster the way that many progressives in his party called for of course exactly what this means. It might not mean too much because it's not just Biden. It's actually senators now who have to agree to overturn the filibuster. And we've seen numerous senators and Senator Joe Manchin but certainly other senators as well who said that they do not want to eliminate the filibuster. They're worried about what it could mean. And Republicans take over the Senate and they want to make sure that that precedent is in place. It's unclear if Biden changing tact on this will change some of the thoughts and

opinions we have already seen. Senator Joe Manchin perspective on this change. He actually voted against a bill that would codify Roe versus Wade in May. But then after the Supreme Court ruling came out with a statement saying that he would now support such legislation to do so. So we know that they have 50 votes but they still need to deal with that filibuster. And at this point it does mean something that the president came out and called for it. But we really have to pay close attention now to what Senator Manchin and other senators want because it's going to take all 50 of them all 50 Democratic senators to agree to actually change that filibuster. Emily Wilkins Bloomberg governments outside the Supreme Court.

Thank you very much indeed. Let us return to our Question of the Day. This issue of when the Fed will actually start to cut rates. That is the question we're trying to figure out. And basically implicit within that is the idea that we are going to have a recession probably in in the interim. How deep will that recession be and will that recession be deep enough to drive inflation out of the system. Bloomberg's international economics and policy correspondent Mike McKee joining us first up to discuss this from a market perspective. We bring in pretty good sir Bloomberg market correspondent. Mike let's talk about this. The market is pricing the possibility of 50 basis points of cuts next year. Given the data we're seeing at the moment and the

uncertainty the that exists where are we. No understanding of how quick this cycle is going to be. This hiking cycle is going to be on whether or not the recession will be sufficient to deal with the inflation problem. Well the way you phrase the question guy I want to point to a quote from Jay Powell yesterday at that centrist conference where he said we now know a lot more about what we don't know about inflation. And that's kind of the situation here. We are seeing signs that some inflationary aspects even on the headline side are rolling over. Crude oil has been down for a couple of weeks now. And now we see weak

prices falling on this idea that maybe the Russians are going to let some of the Ukrainian wheat out. And so therefore we might see by next year inflation come down to a livable level. But if you go back and look at what inflation and here we are showing on the screen what inflation was like. It has. It had been flat for years. For decades really. Now all of a sudden it jumps up. They want to go back to flat. So they'll keep the pressure on. But they may be able to let it let it come down a little bit. Take take some of the income the rate rises away but still keep them off zero. Well

pretty for the market. This is a huge whipsaw. I mean literally three weeks ago it was the they can get this under control. And if they cannot get it's under control. And if they can get it under control again are you really seeing that within the markets when we pricing right now. Well it's interesting because when we talk about recession cuts we don't really or I say rate cuts. We don't really talk about that isn't even an option. Because then the idea is here is that you want to tackle inflation and honestly we want to hit that recession even harder. But basically you're looking at the markets. I do this

through euro dollar spreads which essentially for a non bond geek audience is essentially what's pricing in the rate changes or rate expectations in the next 12 months. Right now you're looking at it down by about 53 basis points. In fact what they're saying that in the next 12 months you are going to see the Federal Reserve cut rates and actually go lower and lower. And this is significant because it's not saying that this is happening immediately. It's saying that this is happening essentially in the summer of 2023. Whether or not. That's right. Of course we know this pricing changes all the time but at least that was slated for now. Mike what signal will the Fed be looking for to make the decision that it feels that it can cut

rates. Is it that we are seeing the GDP numbers slowing down a growth slowing down. Is it that they now see their models predicting that we'll get back down to target launch trajectory to target down to 2 percent. What I'm wondering is if what clues should we be looking for. I looked at today's P.C. number which did show a slight deceleration in inflation. What should we be

looking for to understand how the Fed's reaction function is going to work during this period. Well you may just want to create your own model and put a lot of numbers into it because that's that's what the Fed is going to be looking at. The P.C. inflation core basis did fall a little bit. And I mentioned that we're seeing some inputs drop in price over the last month. But that's got to continue. The market is going to price as Alex

was just saying they're going to play price with a lot of volatility month over month as we see data come in and the federally makes their predictions once a quarter. So there's always going to be something of a disconnect there. But the Fed wants to see the economy slowing down and not just in any particular area. Manufacturing slowing consumer spending slowing and hiring slowing a bit. They don't want a recession where the unemployment rate goes up big but they do expect unemployment to rise a little bit. If all those things are happening and inflation's going down then they can take their foot off the gas

pedal or the brake I guess is the official pedal that we're using right now. But until they see a broad based slowdown they're going to be holding back. So that's sort of what the model that we should all be using which is like to throw a dart at a board or something greedy for the for the impaired investors. What are they doing what it wants liquidity or like

right now what are flows doing like end of quarter. And this big question hanging over all of us. Well those big questions hang over all of us for about six months now. It's been driving this idea that you need to have this repricing in the market. And it's a repricing that doesn't just go back to the gains. We've sciences 2020. It goes back even further to 2019 even where you

did see that tech acceleration. I will say though absent fathers we're looking at what the end of the quarter is what the end of even these first half of the year is. A lot of this looks like 1962. Give me a second here. 1962 was I mean we weren't all around then but known for the Cuban Missile Crisis. So it's not necessarily the recession talk but you also have this kind of Cold War ask in the background here. And 1962 and ninth straight month of decline in the stock market only for it to get reversed by the end of the Cuban Missile Crisis. I wonder how much of that pivot point is really the recession talk or the Fed as opposed to perhaps an end to the war in Ukraine.

All right guys thanks a lot. Really appreciate. Thanks for jumping in there. Bloomberg's Michael McKee and critic Gupta. I don't think I was even alive in 62. I'm putting it out there. All right. Coming up I was just waiting for that huh. Coming up a little future rate hikes mean for the credit market. You at the inside look. Our Jonathan Levine chief investment officer of Bain Capital Credit and co managing partner of Bain Capital is next. This is Bloomberg. The Boston Pops Fireworks Spectacular is back in Boston and Bloomberg will make sure you don't miss a second of the fireworks Tuesday. And special appearances by superstar Chaka Khan Grammy and Tony winner Heather Headley and the voice winner have. Come on. Plus Middlesex Vice and drums and the Tanglewood Festival chorus. It all starts July 4th at 8:00 p.m. Eastern

right here on Bloomberg Television and Radio. The path back to 2 percent inflation while still retaining sustaining a strong labor market. We believe we can do that. That is our aim. The bigger mistake to make. Let's put it that way would be to fail to restore price stability. If we see

greater persistence of inflation a second round effects then we will act more forcefully. Thus we respond to the shock. We will. We want to have those options on the table. I don't think that we're going to go back to that environment of low inflation as the uncertainty will clear in on various accounts. We will have to certainly be less gradual. That was of course Fed Chair Jay Power. Bank of England Governor Andrew Bailey and ECB President Christine Lagarde speaking at century yesterday.

The ECB get together. They were moderated of course by Bloomberg's Francine Lacqua. What a fantastic conversation that was. Where do we go from here. Is the question. What is our degree of certainty about what the journey is going to look like. Jonathan Levine Bain Capital a credit CIO and Bain Capital co managing

partner joins us now here on sets. Jonathan so fantastic to catch up with you. You always have words of wisdom and you've always told me that I shouldn't predict. I should analyze. How easy is it to analyze right now. How easy is it to get a handle on what is happening. Because to be honest we were joking before about the 1960s. I probably haven't been as confused this

confused in a very very long time. So a pleasure to be here. Appreciate your having me on. There is a lot to analyze. And one of the things when you do analysis is to make sure that you have relevant data consistent data series in a broad spectrum of things. You're looking at inflation as you talked about earlier. It isn't a single thing it's the sum

total of a bunch of other things. And one of the things we're looking at is different components. What is going on in the overall economy. What are we seeing in our portfolio companies. Yep. And we're not reacting to a data point. We're looking at data series. And sometimes you know people think they have to zig zag and sometimes it just makes sense to stand still and watch what's happening and make sure that if your analysis if you're confused when you don't have to invest in anything until you figure out what you think the right value is the right direction is. But to you better build in more margin of safety

and you better understand where your analysis could be wrong and how it could be wrong. So Jonathan how can you do that if we don't have you have to have a call on whether or not the biggest risk is inflation or recession in order to do that. Well. Well I'm not sure you have to have a call on those things as compared to making sure that you are buying things that you can own through those things happening that are well capitalized enough to be able to survive both an economic downturn or inflation. And I realize the obvious come back to that as well. Then you're

gonna buy much fewer things. And that's probably true. The second thing is it's all about valuation. When I look at credit spreads they're obviously wider than they have been. If they are predicting a high and elevated level of defaults. If we buy credit today and let's say the cumulative default rate expected is 20 percent over the next five years and there's only 12 percent defaults well then that was a good purchase because you bought at a good valuation and therefore we're trying to have way wider margins than we've ever had before. And where we think that inflation could destroy a company or it can't survive

through a recession. Those are probably things we're gonna take a pass on right now. There's no need to be a hero. No need to be a hero. But it is an investable market. I believe it is an investable area. Where are you. Where do you see the pockets of opportunity. So many people come on and stand there because you want to buy infrastructure you want to buy healthcare you want to buy those safe areas of the market. Is that the only place I should be looking. No I think that as you think about it there's a couple of things one of our part of our investment style particularly in our our private business is is we are investing in companies where we can have an impact where we can help companies with growth with cost structures with strategic move. So asking yourself can I still do those things with a given company particularly in industries that are out of favor. Secondly it's all it is somewhat about valuation. Am I buying at a level that if I'm not

completely right on to your call. But this company is more valuable dis positively in five years. If we get the earnings right. If we get the strategic direction right and we don't over it. And then lastly you know. You see particularly in credit markets but you see it in all markets that in times of high confusion people overpay for quality and that in and of itself is is is risky that if everybody flocks to the same asset class and you're gonna wind up Holt somebody is gonna wind up holding the bag when it all trades down. So we really are taking a much more micro company by company industry by industry approach and not being prescriptive that this is unenforced the bull and everybody should go piling here. So Jonathan what kind of then distressed cycle do you think that we're going to see. Like what kind of bankruptcies. How is this different from an away kind of

scenario. What do you have to run from. And then where does that create the opportunity. So I think that the characteristics of the companies that are that are going to have troubles are a few. One is they're going to be levered to growth of some sort and they imagine revenue growth but not cost growth or they imagine some incredible outsized perfect economy. Two capital structures are overweighted to bank loans. So the last few turns of bank loans are riskier than they have been before. 3 There could be situations that are for lack of a better word a little chaotic

because documentation isn't as good as it used to be. And therefore you want to make sure you fully understand where you are in the capital structure. Who the other constituents are. And don't just assume well I'm in the bank loan and that's just like a bank loan was in 0 8. And then lastly I think there's gonna be a real focus on real businesses with that have a reason to exist that you would want to be associated with three years from now and five years from now and not just nine months. Oh this is just a blip. It's a good company with a bad capital structure that'll clean itself up immediately. I think you have

to have the mindset of being in it for the long run. Are you already seeing the opportunity starting to emerge. The big question in public markets right now is we've seen the valuation change. So we've seen that leg of the market downturn. Now do we get to the earnings. Recession starts to really still kind of come through. Are you seeing that in the companies that you're looking at. The companies that you're managing in the companies the or analyzing all you already started see the effects of higher rates potentially slowing growth already starting to have an impact. Where are we in the cycle at the moment. So the maturity wall is actually quite low. And given that you know large syndicated

companies large largely do not have covenants. They have some runway. The people who are going to get in trouble and are getting in trouble now are companies or business models that have gone for growth that rely on access to the capital markets in the future. Or even worse access to capital markets had high valuations. And we are starting to have conversations with some of firms preemptively almost where they are thinking about OK. We have these companies that may be running out of out of money but we don't want to put equity in. How would you approach them. So they're gonna try to avoid the default does that. So I just

jump in. Does that mean that there is the opportunity when other options dry up that may be actually private capital can come in. Just talk me through how quickly that can happen in some of these scenarios. You know and and this is a relatively new area but there's a lot of tech firms that have no debt that are you know I've done the round the DB round the C round. And they're not designed to either be cash flow positive yet and never anticipated having to do down rounds. There's real enterprise value there's real technology. There may be real customer bases in some of these. And therefore for the first time they may look

at some prop private capital at the top of the capital stack to get them through the crisis to get them through this time of uncertainty until they can have traditional access to capital markets. We did this once or twice during the 90 days that the markets were off on Covid there. But we think that this is an area where a lot of growth firms so you know growth equity are going to be looking to find non-equity sources of capital. And then secondly there are people who are embarked on big CapEx plans. Real business is thoughtfully done where the costs of what they are building are just way way way out of whack. And they're going to have to find different sources of capital to help pay for for those projects. It was interesting to get the analysis Jonathan. Such a pleasure to see you. Thanks for stopping by to see us here in London next

time you're here. Please do the same thing again. Pleasure. Thank you. Jonathan Levine. Bain Capital Credit. See I owe industry analysis. Coming up U.S. consumer spending kills inflation remaining elevated. We're going to get more on exactly what was in today's inflation data and what Sharry founder founder and president of Inflation Insights is going to be joining us next to break those numbers down and give us a clue as to how that reaction function over the Fed is going to be working with this data as they plug it in. That's next. This is Bloomberg.

We're an hour into US trading session. It looks like it's gonna be an ugly session here with denim as a full two percentage points for the S&P Abigail Doolittle is tracking some of those moves for us. Abigail. Yeah a bit of a brutal day Alex. A brutal end to a brutal first half of 2022. In fact right now the S&P 500 down twenty one point four percent on the year and it is at thirty seven hundred forty eight. As you can see below thirty seven sixty for ninety. It is the

worst first half going back to 1962. Above that level it'll be the first worst half since I believe nineteen seventy four. So either way we're looking at the worst first half of the S&P 500 in decades as investors simply sell off stocks. That's true too for the Russell 2000 worst first half ever. The Sox and the all world index down sharply. So it's interesting because this is a much worse first half than 2020. Who knew. But that's where we're at right now at least as for some of the worst sectors. Not surprisingly it has to do with some of the mega cap tech names. We take a look at the sectors on the year massive massive

declines down about 30 percent for the likes of tech telecom discretionary think Apple Twitter Amazon Facebook Microsoft they're all in these indexes. The big index heavyweights. As for one of the concerns inflation. If we take a look at what's going on for inflation there is some hope that maybe maybe inflation has peaked. Here we have a number of different measures of inflation including P C E P E deflator and then a five year break even a look ahead at inflation. And you can see that all are sharply higher. But coming off the peak let's see whether or not that

trend continues. That could have something to do with our next board which of course has to do with the potential recession that everybody's talking about because the S&P 500 of course a forecasting tool is looking out suggesting that the recession economists are talking about could be happening. These are two truly economically sensitive sectors of the industrial metals and the auto and commodity sector. You can see both down sharply on the year suggesting that investors guy think that yes the recession that folks are talking about could be ahead. Yeah but how deep will it be and will it be enough to get the

inflation that we're also concerned about out of the system. That's the question that I still with. We don't know. The answer to the 70s were a series of inflation waves. Are we ultimately gonna go back in that direction because that wasn't a good place to be. So let's talk about the data today. Clearly a firm focus on the core PCI number of inflation adjusted consumer spending in the United States states. The data we got earlier. Well it was down in May. That's the first time that has happened this year. We are seeing persistently high inflation and that clearly is feeding through into household budgets. So is this mild debt

going to enough really to change direction over at the Fed. Omar Sharif founder and president of Inflation Insights joins us now. Your reaction to the data. It was a little off expectations but not by much. No I mean quite honestly. I think for the most part I was very much in line. Especially the inflation numbers.

But is it enough to change course with the Fed. I highly doubt it at this point. You've got a slowdown in inflation in the PRC but CPI still remains incredibly high. Sure. Paula said it's not really time for nuance tweaks inflation. They want to see it going one way which is lower. And you know just having a B C sort of sticking out a 4 percent annualized right now I don't think that's going to be enough to get the Fed to change worse in terms of their rate hikes the balance of this year. American

we dig a little deeper and get nerdy here on what actually where do we see prices cool. And is that cooling sustainable. And where do we see an increase in prices. And is that increase sustainable. Yes so we're starting to see some moderation and as I know you've reported on sort of some of the inventory overhanging items like furniture and household furnishings. That's starting to bite a little bit in the inflation numbers some more recently. But the CPI and the P.C. we started to see a pretty market stepped down. That's that's a series have been growing at almost 1 percent per month over the last year. It's gone down to close to flat in our last month. So there's an area we're seeing some pulling up used cars or at least at the P.C. day. You're starting to see some moderation there as well. And I think in

the CPI next month going forward we should start to see that cool as well. So in some of these good sectors we are seeing some cooling occurring and I think you'll start to see that in airfares. Luckily over the summer as well. About what people care about now is gas and groceries. The core is great. And yes over the long term it probably is the place to look in terms of understanding deeper inflation trends. Right now it's headline inflation that the average consumer is having a problem with. Is the core the right place therefore to look in terms of understanding the direction of policy.

Yeah I think that's a great point. And you're right it should actually be the headline. I think your Powell sort of made this pivot. A couple of press conferences go actually when he started his press conference by basically saying that he wanted to speak directly to the American people. He said that the Fed understood the hardships that inflation was causing. And you can't understand the hardships without knowing what gas and food are doing. And so the headline rate until CPI is about eight point

six percent which by the way I think next month is going to go up to about eight point eight. And on the P.C. side it's still well over 6 percent. So if you're looking at those measures and you're the Fed you know it's great that the purposely is slowed down to 4 but the headline is still unacceptably high. And I think that's another reason given this part of the Fed's pivot their focus on expectations that you'll continue to see them ratchet ahead with 75 dips in July and likely a couple of 50s before closing out the year getting us into that kind of three. Twenty five. It's been range by your read on how what kind of demand destruction can we expect in that scenario that you're painting.

Yeah I mean we've only just begun to see some of it. And of course in the housing market more recently you know yesterday in the ISE ISE data you saw of were running around 600000 below sort of the norm in terms of gasoline consumption right now. I don't know if that energy demand destruction. Certainly seems like high prices are starting to put a bit of a cap on on gasoline demand as well. But I think for a lot of these items that you know household durables some items larger goods or wire financing including autos you're going to start to see some of those numbers come down. We're starting to see and used car

sales as well. So I think these areas where going to rates obviously bite at those areas are already starting to cool and expect you'll see more moderation as the year goes on. I mean the question I'm trying to understand at the moment is how deep does the recession need to be in order to drive the inflation that we are being plagued with right now out of the system. What are your thoughts on the. Yeah. You know honestly I don't know that we should necessarily need to you know induce a recession to get some of this inflation number. Some these inflation figures lower I mean in some respects. They are going to be headed lower partly because

we are seeing some catch up in supply. Some catch up on the inventory side. And in fact we're seeing some a lot of deflation came from the German goods. Part of the economy. And we are seeing a lot of that moderation starting to occur. Now you know it's obviously wage early to declare victory but I think we're going to keep seeing inflation moderate on that front in the second half of this year. And I think on the surface is Brian quite frankly. You have one big item in shelter which is obviously going to continue to sort of pick up given the lags in the data. But I really see broad based services inflation sort

of beyond what we're seeing in shelter. We've had a bit of a pickup in airfares. I think that's going to come down. So I'm not really the camper says hey look we've got to get a recession to get inflation lower. I think some of the hikes that that is already sort of John Tucker are starting to have an impact in helping to bring these numbers lower. So what do you think clear and convincing evidence means for the Fed to guys point. I'm trying to understand the need to be just a trajectory to get to 2 percent. Do we need to come down fast enough that we have confidence that inflation can some point get to 2 percent. What do you through the qualifiers will be for the Fed to be convinced.

Yeah. So I think first of all it's it's inflation. Realize the actual data getting down to sort of inch to two and a half percent type range for several months in a row. So you know even now for example we're talking with a purpose slowing down. We're still running at 4 percent annually. So I think you want to get back down to around at least two and a half percent type number for the Fed to feel more comfortable. You're going to you're going to want to see several prints in a row of that occurring. And then I think obviously they want to see some moderation here in terms of some of these supply chain issues. So you're going to want to see that easing up delivery times for example are starting to already come down. And some of the regional factory

data you're going to want to see that continue to feel better about the idea that hey supply chains may not be as big of an issue in terms of Michigan inflation going forward. But I think the realized numbers have to come down to about least to two and a half. I think your projections have to also sort of say that inflation over the next year looks like it's going to be kind of in that range as well. So I think those are the two most important factors but also supply chain. You're going to have to see some cooling of that as well. I mean we listen to Jay Power Christine Legarde Andrew Bailey

speaking yesterday at center in Portugal talking about this idea that we are in a new paradigm now for inflation. It may not be completely new but it's certainly new to many of us. And that is that this era of persistently low inflation is now over. Would you agree with that. I think it's a little too early to say that. I mean look we've had a couple of decades of you know this environment of low inflation. We've had about a year and some change of high inflation. You know people sort of forget I know it seems like inflation has been running at 8 percent for for a long time but

this really only began in the spring of 2021. I mean April May June of 2021 was really when you saw the big pop in the inflation data as durable goods spending really increase a wee bit. You know we've had this high inflation for about 14 15 months or so. It's likely going to take another roughly year if not a little bit more for us to sort of wash this out of the system. In my opinion. But I don't think after one year or even half of data that you can sort of discount what we've seen in terms of persistently lower inflation over the last you know call it 20 25 years. So I don't know that it's a new paradigm.

You know I couldn't be proven wrong but I suspect it'll be a long time before we can really look back at this and say whether or not there was some sort of paradigm shift. But in my opinion it's just way too early to call that right now. You have to wonder to Omara I know we're really jumping the gun on this but it is there a way that the inflation we're seeing potentially makes a disinflationary environment. We have been in worse. And then all of a sudden the supply chains for chips went crazy. So therefore now everyone's trying to make a lot more chips and eventually that cyclical and they'll be deflationary. You can make an argument. The same thing will be said for pockets of energy. Look at certain retailers like a target in a Wal-Mart. They stocked up things they thought people wanted. It didn't work out. They have to discount it. And I'm wondering like in two years will the after effect be much more severe on the downside.

Yes I sure don't even know if we have to wait two years to see some of that I think I suspect you're going to see a lot of it later on this summer. And to your point. You talked about Wal-Mart Target to the world. We've heard all the stories about inventory going up 30 40 percent versus last year. And you're already seeing the discounting occur as I mentioned earlier. Household furnishings home furnishings things of that nature are already starting to see price cuts. You know we're going into a period where Amazon's prime day is coming up in a couple of weeks. We're going to go through a summer of I think heavily

discounted items durables for consumers. So I do think some of that buildup with over ordering you know a prepping in case supply chains continue to be a problem is going to really help bring down some of that durables inflation in the second half of this year. I don't even think you can have to wait that long to see it in the data. Omar look we really appreciate game a deep dive into inflation with the Yvonne Man Sharif a founder and president of Inflation Insights. Thank you very much. All right. Let's get back to that breaking news at the top of the hour. The Supreme Court curbs the EPA authority and that deal is a pretty big blow to President Biden's climate goals. When you break down the implications of that ruling next. This is Bloomberg. This is Bloomberg Markets Emily Chang up to you're looking at a live shot of the principal room coming up at home and the founder and chairman of Evercore ISI joining Bloomberg TV at a New York Times. This is Bloomberg.

Keeping you up to date with news from around the world is the best read. I'm wish you could get to China's Xi Jinping has made his first trip outside the mainland in almost 900 days. She traveled to Hong Kong calling the city reborn since he last visited five years ago. His comments when apparent reference to the sweeping security law Beijing imposed back in 2020 that crushed dissent. She is marking the 25th anniversary of Chinese rule in the form of British colony. Here in New York police are searching for the suspect in the shooting death of a woman missing a baby in a stroller. It happened last night on Manhattan's Upper East Side. The killer was described as a male who was wearing a black sweatshirt and black pants.

Congresswoman Liz Cheney has warned her fellow Republicans that they must choose between former President Trump or the Constitution. She says they cannot be loyal to both. In a speech in California Cheney called the former president a domestic threat. The country has never faced before Cheney as vice chair of the committee that is investigating the attack on the capital. Global news 24 hours a day on air and on Bloomberg Quicktake powered by more than twenty seven hundred journalists and analysts and more than 120 countries and which could get to swim back Alex. All right. Thanks so much. Ready guys. Let's get a quick market check here because we're really picking up a little bit of steam to the downside. The S&P is now up by one point seven percent. In fact where we're trading right now we're actually looking at the worst half of this of a year since 1962.

Let's say that again 1962 worst half of the start of a year for the S&P. The NASDAQ 100 obviously getting beat up quite a bit. You're looking at the worst starts in twenty two thousand and two of the big coming into the bond market. And on the front and you're seeing even more money kind of come in here as we're reassessing how long the Fed can actually be hiking rates for them when they want to mean to cut lower yields. Not enough to help any kind of bit into the into tech particularly consumer discretionary are getting really taken out. Guy we had that weaker consumer spending data. We're clearly seeing the issue of higher prices affect spending and that is definitely reflected within the stock market.

That 3 percent line on the US 10 year I find fascinating. We just have a little look below. It's them. It's been a real barrier for the market that 3 percent area a significant push below it. Would do I think at this point be quite significant. It's going to be insane to see whether the market struggles to do that. But as you say you're seeing money coming in at the front end. You're seeing it really around the world as well. It's not just the US. We're seeing this German 10 year yields of 16 basis points today. Italy 30 basis points. France 12 13 basis points the UK 12 basis points. These are really big moves. Some

of it's Alex it's going to be quarter a month and all of that kind of stuff getting rolled in. But nevertheless these this is this is a significant amount of flow that we're seeing back into the bond market today as everybody tries to understand what kind of recession we're going to see and what kind of reaction we're going to get from central banks as a result of it. How deep will it be where everybody is now. We're gonna get a mild recession. That seems to be consensus. But it wasn't that long ago that if

we're saying we weren't going to get a recession now it's mild we get to severe and now we're talking about rate cuts. That was a totally different narrative than just like 48 hours ago. And the cuts are moving up now in a 20 23. But definitely we have to see how we settle out at the end of this trading day and sort of kick off a shortened week next week here in the US. That's going

to sort of deal with volume and liquidity a bit differently. So it's going to be a little while to we're able to get a clean read I think on the markets. And let's get back to that breaking news that we had earlier in the hour. The Supreme Court is restricting the EPA ability to curb greenhouse gas emissions from power plants. A major blow to President Biden's climate agenda. For more we want to welcome Brandon Barnes of Bloomberg Intelligence who is a senior litigation analyst there. Brandon without getting too in the weeds. What was the case about and where the Supreme Court rule. Yeah I think you can defecate in the weeds with four different cases coming in together et cetera. But the really this is about base. You know can EPA

regulate greenhouse gases at coal fired at fossil fuel powered power plants. And how can they do that with competing rules going that way. And basically what the court said is you know EPA you tried to go too far when you were pushing the states to generation shift. You were trying to push the states away from those fuel sources into renewables into other ways to do this. Having credit programs. And now we're back into Trump's role which was the Affordable Clean Energy Act and that is now the operative rule. And so we're in that status where you can regulate a power plant at the stack and that's about it.

Certainly expect that to be changed by the Bush administration as soon as they kind of come up with the next proposal. So so is the bull now backing Congress's and the Senate's. Area if we were to see the legislative pass of government now deciding that it wants to beef up the rules that the EPA operates under the authority that it has is it still possible to deliver these kinds of rules and change the climate trajectory guy. That's right. I think I mean assuming Congress would act that is the pathway that the court outlined. Right. They basically said EPA you can't go this far because Congress hasn't

told you you're allowed to go this far as it's what they're calling the major questions doctrine. It's why we got a lot of interest from clients on this why this was going to be more far reaching across a number of different agencies in the federal government. Certainly Congress can speak directly to this. That's part of the court case. As they said look Congress has spoken directly to the cap and trade program by not passing it over a number of years. And that's exactly why we're in this place right now. So what I'm also going to understand is is the tool and the arm with which the EPA was trying to regulate the types of energy. The question where the EPA in general. So can the EPA be be tasked to create another tool that isn't the Clean Air Act to then try and regulate emissions. Or is the EPA just like toast. No I think this is more limited than what maybe some

of the headlines are saying. This is really about EPA. You can't use this particular piece of this statute to then pass this particular rule that does this. EPA can still go about its business doing regulations. It can still regulate greenhouse gases. It just can't do it in this manner which is so-called going outside the fence line. Basically you can't go beyond regulating single sources. You can't force a state to do that. Where does this leave this idea that you can. Which is what

Europe is doing set aggressive targets without the necessary technology already being in place to achieve those targets in order to spur innovation. Certainly technology forcing is a function of what the EPA tries to do with its performance standards. And that is still in play. That's part of actually the Trump rule that's in comes back into effect now. That s rule as I mentioned. And actually it's it's more about technology that's available now for these different

sources and how they can put him in place. Now what's not available which is interesting. It's gonna be a credit program which we think is a net negative for renewables because that would have been a nice subsidy from the higher pollution producers in each one of these states. I'll go back to Congress seems to be the takeaway. Brandon great stuff. Thank you very much indeed for the analysis the deep dive into what is happening here. Brandon Bonds at Bloomberg Intelligence. This is Bloomberg.

So it's been a bumpy six months and the last day of that six months is proving to be just as bumpy. So this is what the price action looks like right now. European equities stand by. One point eight per cent were trading for 0 5 nearly 4 0 6 on the stock 600. I'm told by the technicians you want to watch out for around 4 0 3. But we're down by seven points today. So it's a

fairly chunky move. The action. I think though is interesting here but more interesting here. Look at what is happening in the bond market. Really big bed coming through into bonds today. Last six months we've gone negative 17 basis points up to one point seven basis points one point seven percent. It's been an amazing move an amazing journey that we've been on. We're kind

of mid range right now but as you can see 14 basis points and 15 basis points down today is already big bed coming back in and the euro's coming back. Actually interesting enough this afternoon when I 453 is where we are now trading again. Keep an eye around the kind of 1 0 3 level ensuring that we're seeing a little bit of symmetry there. But certainly there's a lot of people with some downside projections that still push the euro even further down from here which then feeds into that inflation narrative coming up on the European close. What are we going to talk about John. Phil CEO of BNP Paribas is going to be joining us C.M. the CEO of BNP Paribas USA. I should probably just clarify that is going to be joining us in the next hour. Really

looking forward to that. Conversation closes next. This is Bloomberg.

2022-07-04 11:02

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