Earnings Week | Bloomberg Surveillance 10/10/2022
The Fed is kind of entrenched themselves and like no matter what happens we're going to do it. They're raising rates extremely quickly in order to fight inflation. Yes monetary policy operates with a lag. So we're waiting on those legs. We do expect the markets remain volatile. You know these rallies that we're seeing we continue to expect them to say we are walking a knife's edge difference between soft and hard landing. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz live from New York City for our audience worldwide.
Good morning. Good morning. This is Bloomberg Surveillance on TV and radio alongside Lisa Abramowicz. Sam Jonathan Ferro features negative a tenth of 1 per cent on the S&P this week. Rameau.
It's sort of our CPI is it. I mean it's CPI. It's also earnings. It's also University of Michigan sentiment on Friday. Come on. Yes. OK.
CPI is going to be the big event. But there's a lot of other issues that need to take that open as well. Thank you Mitch. Well there was a moment there was a brief moment when we examine that there's as the key as a key issue. Now honestly CPI will be incredibly important in particular with core inflation. How much does it rise. Do we get that year over year increase
with some of the basic facts out taking over with a core reading even if you do have peak inflation. And the headline CPI CPI hijacks the conversation around the Federal Reserve's next move or 75 or whether it's 50 on the earnings front. JP Morgan kicked things off on Friday morning. I think we've had warnings this morning from Morgan Stanley from David Kostin over at Goldman Sachs. Everybody just chop chop chop cutting them governance to earnings season. The Y is going to be interesting. How much is this a currency adjusted
issue. How much is this. A dollar actually exacting a lot of pain over international companies. About 30 percent of revenues from U.S. companies come from international
commerce. How much does that get really cramped and push people toward more domestic leaning companies. This is an increasing theme that I'm seeing in some of the notes the outlook for global growth. The numbers that come from Tom Selleck
on the team appear at Bloomberg Economics three point one per cent for this year. It's 2022 2.5 per cent in 2023. Just decelerates in the next twelve months. Where is the growth going to come from. That's the problem. European recession this year the US in recession next year seems to be the base case for so many people. And then China right.
The elephant in the room over over the weekend came out with some debt data that was negative. Right. They opened up they reopened and they showed that some of their services data actually decelerated declined at the fastest pace going back for a month. So even though you do have a situation where perhaps the US is hanging in there the rest the world really isn't that node of growth that's going to come out was good news bad news Friday. Yeah yeah yeah yeah.
Yeah I mean I hate doing it too because it's so simplistic and what does it actually mean. But the bottom line is the more the economy has momentum the more the Fed will have to do. Bottom line bottom line for now and then we start talking about the the why the Fed is backing off the backing off because of supply side positive evolutions on the supply side. That's a good thing that backing off because they need to damage demand or they need to. They've done that already. I think that's problematic. OK. It is problematic.
The reason why I mentioned earnings as incredibly important in addition to CPI. Yes I agree with you. CPI is the main event this week but earnings reason why it took particular minutes. Thanks. Well what. No. No I'm not.
That's undermine your premise. I do think it is CPI week of October. But I do think there is an issue with earnings. How much is the strong dollar impacting earnings in a negative way that's going to cause the Fed to say wait a second. Suddenly the dollar isn't just your problem it's also our problem. When does that become a bigger part of the conversation. How much does earnings really trigger that at a time when yes you want to see weakness but you don't want to see it decimation of an economy where you do have a lag effect of some of the rate hikes we've already had. He saw some Bernanke showing the Nobel
Prize in economics. It's like you know you're going to you're going to die very way from CPI. I'm going to throw you under the bus to talk about Bernanke. I mean I think that right now the Nobel Prizes are becoming increasingly political. What is the political message from Ben Bernanke who said this is a political decision. What is the decision to have somebody who has a high profile policymaker win a major prize in economics.
I'm just curious about that. I wonder if it's premature since we're unwinding the QE of the last 10 years right now whether we should wait before we dole these out which is the reason why I'm saying it's highly political. It's sort of this question of someone who is still active and their policies are still very present in the public discourse. That becomes a more politicized prize. I mean I think that these are all
fantastic behemoth minds in the economics profession but they are incredibly polarizing when they have such direct effect on current economic theory and academic reality. We agree with each other. Futures unchanged on the S&P were down about a tenth of 1 percent. A real drama here in the bond market. The US Treasury market closed for Columbus Day looking at a German bond yield which is down by around about 4 basis points. The bond yield two point one five
percent on a 10 year tenure yield in Germany. Just like the 10 year Treasury yield climbing for 10 consecutive weeks. Ridiculous euro dollar 97 euro dollar 97 and negative four tenths of one per cent and crude. After a monster rally last week crude is down about a half of one per cent WTI last week Lisa of sixteen and a half percent. And we heard over the weekend Janet
Yellen speaking on a number of different outlets talking about how negative this was for the world and possibly for what happens in November. What I'm watching today I mean this is going to be a really important week. It is CPI week. And to your point that you start the show out with. Yes it is that. I just also think it's important to look at earnings today.
We have an incredible amount of speakers because nothing else is happening in the bond market is closed. And so why even show up. Fed speak includes Chicago Fed President Charlie Evans at 9 a.m. Fed vice chair Lael Brainard at 1:00 p.m.
Both are speaking at the NABE conference in Chicago. ECB speak IT chief economist Philip Lane speaking at 9am and at the online ECB conference on Monetary Policy. Very curious to hear what their take is especially whether they start to price in recession. Considering that everyone basically says it's a base case in Europe but they are still not including that in their forecasts. And today the 2022 annual meetings of the IMF and World Bank kick off in Washington from 830 to nine. There is going to be a conversation with IMF managing director Kristalina Georgieva and World Bank President David Marr pass. I'm curious to see how much the focus
really turns to the developing world. That's what we heard over the weekend from Janet Yellen saying they're incredibly concerned about emerging markets in the face of the strong dollar but also in the face of some of these economic headwinds that usually hurt the lowest income nations the most people really going after him about climate change aren't they. At the moment I don't understand exactly how this is becoming a traction. I mean just to sort of a show because he basically came out and questioned some some aspects of climate change and then people called for him to step down.
And then he pushed back and said look I didn't know enough to really be saying at any point people saying you're just hiding an agenda. The whole point is how politicized some of these bodies that have to be providing important aid at a time of real change. I think nominated to the World Bank by the former administration ultimately picked by the Trump administration and this seems to be some tension over it with the current administration. And that seems to be the elephant in the room isn't it. What's wrong with it is someone turning around is saying I'm not an expert in something. What's wrong with them. When did that become a problem.
And again this goes to this issue of politicizing bodies that have to act internationally and the US as a leader at a time when it is splintered and it is divided and it becomes a real challenge at a time when there needs to be some sort of leadership to handle the next crisis and refreshing for someone to turn around and say I'm not going to talk about it. I'm not an expert in it. But it's kind of refreshing isn't it. I'm not an expert in it. An expert in it either. Linda Russell isn't either. She is on the markets though senior equity strategist at Federated Hermes. Linda fantastic catch up with you. Let's talk about energy. Sixteen point five percent move on crude
last week. The underlying commodity at a massive move. The energy equities have had a massive year. Why are you sticking with them. Linda. Well good morning. Thanks for having me today. Yes we've been really bulls on the
energy patch for several years now and the the earnings. First of all speak for themselves. This is what's really been driving the market in terms of the earnings is the energy patch itself.
So if you look at the valuations of energy stocks they are as cheap as they've been for really over 30 years on a P E basis. So they're inexpensive versus the versus the momentum that they have. And whatever pullback we saw earlier this year was for concerns of a global economic recession. And that has to fight with the supply problems. They have to pick your side there. And we pick the supply side. Linda how much are you looking at more small caps or domestically oriented U.S. companies in the face of some of the
headwinds from the strong dollar. Yes I know the strong dollar is is a big problem but it's the multinational companies are the strongest possessed position ones. Those are the ones that you would own heading into an economic slowdown or into a recession. Small caps. We like small caps and they're not exposed. As you've said to a strong dollar but that is basically an early cycle play. So we really are more in favor of large
cap stocks. They're still the ones that are that are generating the highest profit margins are gushing cash. And even in the face of what's been a very strong rise already in the dollar.
We're all fingers crossed that this advance the dollar will at least slow down and maybe pull back some. For us the biggest concern with the dollar is what is requiring other central banks to do in terms of tightening that when they're their own economies are looking to head into potentially severe recessions and then a financial accident. Linda this is going to be a tremendous week.
We were just talking about CPI coming out on Thursday in the United States. We also have earnings kicking off on Friday. What will be the most important thing for you in terms of how you plan to adjust your allocations heading into year end.
Well you know I think that that the Fed is with with the jobs report has is really indicating that they'll probably continue on hiking in a more aggressive fashion. So the next thing to really worry about is the CPI in particular and that core part of the CPI where a third of it is the owners equivalent rent. We've seen prices increasing dramatically whether it's rent or for purchase. And lots of talk about a recession in the housing market and about house prices coming down. But indeed the vacancy rate for rental or for home for home purchases is at a 40 year low.
That's still very very strong. CPI will be extremely important. It'll be important also to watch retail sales of course Amazon Prime days of this week as well. We think that the consumer is extremely strong. So you know just over the weekend I'm reading the economy's weirdly resilient. It's not weird. People have jobs. They've got a lot of jobs.
They've got a lot of money in their pockets. That's what really gets us going as consumers. If we have a job we do. Linda that's the good news. Thank you for being with us. Linda so Linda does so that a federated mess on this equity market on the economy as well between the match today.
Well we can all work on it didn't have didn't happen. I've got to help. My my my sons were actually at the gate when the guy came home late. You know being really angry. And who are they angry at. Just like the state of the world.
I mean I know that you're situation and how there is cheating and that kind of you. No no no that was cheating. Well let me suggest that was the suggestion of cheating. And it was just I checked his act. They checked his ears but it was in the sixth inning. So there was time for it to wear off. Heard all about ISE. Now you're suggesting all your children are my children. I'm not.
I just. I'm not. That's right. Okay. So he was pitching so well with all the Mets fans.
Assume he was cheating. Right. Right. Children may be a cup for IBEX fans but I'm not an expert. We're allowing path. We're allowing the view of 10 year olds to shape the narrative on baseball and 13 year old and a 13 year affair. Good. That's encouraging to the markets. Actually maybe David Rainey the next out of the bay from Blue Asset Management. You and I both futures negative from New
York. This is playing back. Keeping you up to date with news from around the world with the first word. I'm Lisa Matteo. Russia had given other Ukrainian cities
today in what appeared to be the most intense missile barrage since the opening days of the war. Infrastructure facilities in eight regions were hit. The attacks came after Vladimir Putin blamed Ukraine for an explosion on a key bridge link between the Russian mainland and Crimea. Ukraine hasn't claimed responsibility but within hours it commemorated the blast with a new postage stamp. In the U.K. Chancellor of the Exchequer Quasi Qua Tang is taking steps to calm financial markets following a turbulent period for Tang will announce his medium term fiscal strategy and economic forecasts on October 30 first. That's more than three weeks before he
had originally planned. In Germany an advisory group is urging the government to subsidize as much as 80 percent of natural gas consumption for households and companies early next year. It would be a part of a one hundred ninety four billion dollar aid package. The German government will review the recommendations and issue a decision in the coming weeks. Former Federal Reserve chair Ben
Bernanke he is one of three people to share this year's Nobel Prize in economics. Bernanke. Douglas Diamond and Phillip did beg were honored for their research on banks and economic crises. The three will share a nine hundred thousand dollar word 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. I'm Lisa Matteo. This is Bloomberg.
Even Powell have gone from looking for a soft landing to a soft landing. For now talking about pain and that is the problem. That is the cost of a Federal Reserve being like. Not only does it have to overcome inflation but it has to restore its credibility. So yes I fear that we risk a very high
probability of a damaging recession. Duckworth totally avoidable. Mohammed Al Shery Ahn Bloomberg opinion columnist and president of Queens College Cambridge and CBS over the weekend and New York Mets fan as well loves the Jets too. And the Jets actually won over the weekend. Yeah they did. That's the good news right. The bad news is that my kids are Giants fans as he asked that Giants. Okay. So they don't have any potential in his comments that were really fascinating over the weekend. His comments were always fascinating.
That's great. Basically saying how avoidable this was that the Fed made an error that is going to be incredibly painful to potentially remedy. And that's reason why I pushed back a little bit about the politicization of prior Fed officials. As you said very rightly time John. We have not seen the legacy of this particular policy with respect to monetary easing and quantitative easing. It's just not clear what their legacy will actually be.
Two mistakes for a lot of people. The first one is that they were late and the second one is that they might overdo it. And that's the problem so many people have. Every research piece that I read after Friday's jobs report just said 75 basis points now done. Here we go again. And people saying the jobs report indicates a pretty a quick cooling. So at what point is there this push pull of acknowledging the weakening data or at least the weakening around the edges in an economy that could allow the Fed to move a little more slowly but they don't want to make the same mistake.
So they're going to keep the pedal on the gas in terms of how quickly they decelerate. Can we talk about the UK briefly. Bringing forward its fiscal announcement to the end of this month alongside the Obama forecast as well. Halloween who scheduled it for Halloween. I'm sure they've got a good reason for it. But can you imagine what the front page of the newspapers are going to look like. Yeah Spidey. What is wrong with these communications
departments of these governments. I just don't get it at all. I you know I can't I'm not an expert. It doesn't make sense. They're using that over and over again. So I think it's perfect for an expert in either. But that just seems it's ridiculous. And honestly bringing it forward is spooky enough for the markets because clearly they're going to basically be caving to what the market is saying.
But second of all to wait that long. And then to wait for that day. I mean they're basically just setting themselves up for ridicule. Going to be the whole our. But it's not scary at all so AMH. Down in D.C.
I Bloomberg Washington correspondent joins us now. Amery what dreadful pictures over the weekend in Ukraine through Crimea. What's going on now AMH. And how is this administration responding. It's it's incredibly dreadful and devastating the pictures coming out of Ukraine especially especially this morning Jonathan Ky. This is a lot of civilians that are being targeted by these missile strikes. We don't have a statement yet from the
administration on what we're seeing just newly this morning from from the ground in Ukraine. But what we can expect according to President Zelinsky who's been working the phones he recently this morning was on the phone with German chancellor of Schultz. Germany holds the presidency of the G7 meeting. It does seem like there will be an urgent gathering virtually of these leaders and how they're going to respond. What you can expect the Ukrainians are going to ask for obviously is more weapons. Maybe now what we're seeing they'll ask for potentially another no fly zone is something we haven't really heard about.
But this was a huge target for the Ukrainians and a goal of theirs and an aim of theirs to ask for when the war first began. Of course back in February in RI what counts as a major escalation in this war and why does it matter. It's a great question. I think at this moment what we've been talking about in terms of a major escalation was the fact that Putin of course had been brandishing the idea of using nuclear weapons. And we've heard over the weekend from
the National Security Council's Admiral General Kirby who's their spokesperson talking about the fact that there would be severe consequences if Putin were to do this. But what it does look like you're seeing now on the ground is almost a tit for tat. Putin has said that it was the Ukrainians that blew up this bridge and blast on the bridge that connects Russia to Crimea. We shouldn't note that this bridge is incredibly important to Putin Putin not just tactically for Russia in terms of getting supplies to his troops in Crimea but also personally in 2016. He said this is a historical mission for Russia. It was a dream of his to unite Russia with Crimea. And then in 2018 when that bridge opened
he personally opened it by driving a truck down that bridge. And then what do you have two days later. A barrage that we have not seen since the beginning of this war on Kiev. And also the fact that Putin has now put in place a single general this operation. And this is a general that led Russian troops in Syria when they absolutely destroyed Aleppo.
So you can imagine the scenes that may be coming out of Ukraine in the next few days. Mary just final word on Ipek if we can. GUEST after guest over the weekend and over the last week that came from the administration on various networks including on this one on TV and radio said the same thing that disappointed in OPEC. What options do they actually have. Well they definitely are disappointed.
You're four weeks out from the midterm elections and gas prices still remain top of voters minds. There's not a lot they can do in glass. They want to tap the SPRO again. But remember the SPRO right now we're at right stocks as low as from the 1980s. But Jonathan politically you already see Roxana and also Senator Blumenthal writing last night in Politico an opinion piece that they are gonna offer by camera legislation to stop immediately U.S. arms sales to Saudi Arabia. So potentially the response may be towards Saudi Arabia in particular and less so. The U.S.
has a lot of weight right now in terms of oil. There's also The Wall Street Journal reporting maybe that they'll live some sanctions on Venezuela. So it does seem that we have a few tools to use but they're probably not what they wanted as their first primary tool in the toolbox. MH Thank you.
Down in D.C. Brent crude right now 97 31. Sullivan fully realized the fallout from last week halfway on the oil front. So Lisa Joel Weber both from a market perspective as well as from a political perspective Emory talking about a possible repercussions for Saudi Arabia from the United States. My question is why we haven't
necessarily seen a price surge in crude. There is a question about whether there is some reality to the decline in demand that we have not necessarily seen yet. But is this also the alliance with Russia. Right this sort of discussion of the possible caps on the oil prices as being enough of a inconvenience or an uncertainty that it would necessitate this kind of action. And I I wonder how much that sort of
playing into the backdrop if you strip out the politics on those tremendously difficult to do that. But if you are the cartel OPEC plus I'm sure they love to call themselves that if you are RTX plus and you are looking at all these warnings about decelerates in economic growth in the United States and worldwide then does it make sense to pull back on output and perhaps it does. If you don't have much spare capacity. Well but that's the key issue. The spare capacity how much is that the real story and actually speaks to much higher prices regardless of what they say in terms of their output targets. They just don't have the ability to pump it and they want to save it for when there is really an unnecessary sort of features on the S&P 500 this morning. Slightly negative life in New York. This is pulling back.
Live from New York City this morning. Good morning to you all. Here's the price action this Monday morning on the S&P 500 slightly negative. Through much of the day so far on the S&P with down a third of one per cent on the Nasdaq with down a half of 1 per cent last week. Last week even with the three days of
losses to end the week still just about managed to grind out a week of gains in the bond market. Treasuries are closed for Columbus Day. We'll have a look at the German bond market for you. Two cents and Thursday's yields unchanged on a German 10 year at about 2 19 over the last 10 weeks. Yields have been climbing higher on a German 10 year. We have gone from about 82 basis points 10 weeks ago to more than 2 percent right now. And I have to tell you the Italian 10 year 474 and the spread between the German and the Italian 10 year at the way into the year now leads to 255 to get back to 2020 for a level bigger than that.
And people are expecting a 75 basis point rate hike from the ECB at their next meeting. This really just shows how dramatic the turnaround has been. And basically making the negative yielding regime extinct save for what's happening in Japan. And that's a huge huge about face considering where we were just a year ago. Is the euro starting to trade on spreads. Take a look at euro dollar euro dollar
negative by four tenths of one per cent just about holding on to ninety seven. Lisa do you think spreads are starting to matter for a single currency going into the ECB and a couple of weeks later they have to. Because if the ECB is concerned about financial stability in Italy in closing that spread that gap then perhaps there won't be as aggressive in terms of how much they tighten which would be not necessarily supportive maybe for the euro. But again what does the ECB have. What effect they have on yields right now based on the idea that a lot of it's trading on the economic prospects the more the ECB takes while previously perhaps bullish for the euro might not be if that means weaker growth going forward. Dani Burger Italy might have a problem
in the weeks to come. The UK's got one already. Dani Burger joins us now out of London. Danny walk us through the latest moves from the bank having to do something about this bond market. Yeah I've been trying to think of the analogy for this and I think I've got it John but it might be a little bit sloppy. Essentially the bill is just like pouring in an entire bottle of booze into the punchbowl just before taking it away.
So we're still getting the end of this long term bond buying program on Friday but they've doubled the amount of this daily auction. The problem is is does that stop this pension doing loop if nobody uses it and no one has really been using it. I mean people have. But the maximum has been 40 billion dollars. They've only bought five billion pounds I should say pounds worth of debt although dollar pound basically the same now. So there's that issue. Perhaps the more interesting thing
they've done then is put this new short term funding facility into the works. It's set to expire at least for now on November 10th. So that allows banks to draw down more cash put up collateral. That also could take the form of corporate bonds once again in this effort to get that cash instead of having to do a fire sale thus creating this doom loop we've seen. Do we have a better sequence of events on the calendar now with October 30. Won't in the day in the diary for the
fiscal event and then November 3rd the Bank of England. Well I mean October 30 first is also the day that Kuti is supposed to start. So it's still an extremely difficult calendar. If we get the bill we they stop buying bonds this Friday come the thirty first.
Yes there's more calm there's more hope considering that the Obama budget has been moved up to the thirty first. The fiscal event moved there as well. But but again it could be a day of extreme volatility. If the baby is starting to do Kuti on the same day we're gonna get this budget was still lots of question marks surrounding it.
Danny how much pressure is there to move the budget up yet again to October 16th or October 14th around the time of this expiration of the current bond purchasing program. I mean huge pressure considering it is a bond market that continues to sell off. We've seen the long end of the curve retrace about half of the rally we saw since the bill we stepped in. It is a market that is extremely still worried about what happens after Friday if they have to wait until the thirty first for both Kutty and that budget.
Again I go back to this. It's still a very challenging timeline and considering quasi courting is in D.C. meeting with other central bank chiefs meeting with the IMF who has criticized them. The pressure is going to be on. Danny thank you. Wonderful as always. Dani Burger. And a London from Bloomberg.
The 10 year gilt yield up by around about 10 basis points at least at the 30 year up by 14. This hasn't necessarily ended the crisis in some of the pensions. And this a lot of people are talking about how there is a massive trade that's still being unwound with some of the pensions that tried to match their liabilities and hedge out risk that are being up ended. How much they can do this at an easy pace rates. It's not about staving off the declines in some of these long bond prices. It's about how do you control it from a financial stability standpoint. I don't understand the difference
completely. Marcus Ashworth Michael Bloomberg opinion columnist joins us right now. Marcus your thoughts on what we got from the Bank of England earlier today. Well I think that was a necessary move. I don't see any clear facts. I'm not quite sure. I totally agree with what John is saying that Brad Stone is not a policy I don't want to go to because they think they've increased the amount that they're going to buy. But that's just the nominal thing. I don't think we'll see anything like 10 billion or even 5 billion because you did point out the bank was able 5 billion so far throw you know half of the process. I think they're just trying to assuage
as many people as possible that they are on top of it with regards to people needing to sell the backstop that they're not in the mood as it was starting to sort out the gaming of it. Well I'm not a Haidi Lun party piling in there now ironing out a repair facility not at least on the month. People who put in corporate bonds all things rather than just guilds doing their best. However October 31 the world date for the government to put on it. Is this right.
We're not just Kuti is active duty is supposed to start again which must be delayed by buying to be known. That's clearly right on their doorstep that none of that one at the same time is a big Guildhall. And that week and only three or four days later we've got both the Fed and the Bank of England's decision on interest rates. It's a terrible week. Sorrell either October 31 had better be what the market wants from quasi content. Otherwise we have a week of absolute nightmare.
Marcus How much is the Bank of England's setting the tone for what's going to happen at the European Central Bank with backing away from perhaps quantitative tightening or at least coming up with some quantitative buying in addition to quantitative letting it roll off. I don't think the ECB will be taking much stock of what the Bank of England and other than they know not to mess past with quantitative tightening this year at least they had a meeting last week where they started to think about talking about it but I bet you they just pushed it off into his foreign long grass. They must be calm. Do not touch quantitative tightening. The ECB must surely be the message. The Bank of England had happened to them. What's the difference right now. Markets between prices declining and a financial stability risk.
Oh well that's a very thing. I think that the US Fed used to be we'd be paying much more attention with the volatility in the MOVE index. We can clearly see a big active Constantini coming down the pipe here from the Fed that they've gotten very careful that conflating interest rate hikes at the same time as big concert timing is an experiment we've never really seen before. And clearly the very sensitive nature of the UK market which several thought that was a safe boring bet shows you that this is a very very difficult situation to do. At the same time I hope they understand that the financial stability is as just a part of their mandate as controlling inflation. Marcus you said something interest in a few minutes ago.
You said they better bring what the market wants to see. Marcus what do you think the market actually wants to see from the chancellor. Well they want to see some funded spending and indeed cuts to what exactly they expect over a three and probably more likely to than I think five years as to how they're going to balance the budget and the numbers add up and they're believable.
And at one stroke you counselor I think would to a big railway line for a hundred billion pounds. That would solve that problem. But that causes bigger problems elsewhere. You can't just cut health spend. You can't just cancel or keep what welfare benefits on a lower level. They've got to do something which is sustainable and show that all the numbers with the large are they their wants do not just this year. Much more important next year as well.
Huge borrowing expected next year for Amanda Lang. That's the real reason why gilts are worried at the moment. And I think they need to have an ability to show that they have spending plans which makes sense with their with their debt raising the markets. Some of the announcements that the chancellor made a number of Fridays ago have been widely ridiculed. I just wonder how many people in about twelve months time will actually be pushing for some of these initiatives. Again Marcus because the economy's going to roll over.
Well this is but there's no irony. I mean some of the stuff that he suggested would have been great perhaps the year's time once they got there. But the homework clearly out pregnancy. Are these going to make sense. And their priorities were I think a about face.
But there are a lot more things that need to be done some things that they reverse particularly resistant acts corporate tax hikes and obviously the national insurance rate makes sense. But I mean I equally think they've got to bring over along with them. And that's the whole presentation of what was could have been a good plan was completely missed misguided and that unfortunate that paying the price will don't match the bond market. John don't mess with the bond market. Is that the message to Italy as well. Most certainly. And they've got away. Why they got something like 250 billion to refinance next year with interest rates now up from what one and a half maybe four and a half that cost is going through the roof. So yes very much.
It has to pay very close attention to how you finance yourself and bond markets. They need a bit of respect for 75. You said it Marcus. Thank you. Marcus Ashworth I think we all respect the bond market after the move to the last couple of weeks. The move to the last 12 months 475 on
the Italian 10 year. The spreads the widest for the year so far versus Germany. That's a significant move especially at a time when you have a government that wants to do more and spend more. But it's constrained by not only the European Commission and what their terms are but also with respect to the bond market right now the bond market saying you don't have a lot of leeway to borrow more. When does the ECB look to do something about this in a bigger way.
That's the reason why I ask this question. I mean the Bank of England perhaps are not looking at that situation as completely analogous. However there is this issue that you cannot engage in quantitative tightening. And do you get something we've been talking about extensively.
Do you get quantitative easing and monetary policy tightening. It's bizarre. But what is the other option right now. And that's what we heard about this eight years of targeted buying. What's the political ramification for targeted buying of Italian bonds. Does Italy actually have more leeway because of what Germany is doing right now with some of their borrowing and what's going on with their energy situation. Andrew Balls of PIMCO is going to join
me a little bit later 94 Eastern Time around the open about PIMCO. Always talk about maintaining some dry powder liquidity providers in times of stress not liquidity demands. I wonder if they've been buying gilts over the last month. I wonder if they've stepped in to buy
Italy yet. Do you buy. Do you catch a falling knife. I guess that's just a resounding in my head because right now it has been a falling knife. But if you stepped into gilts when they camped out pretty well haven't you. For now although it depends on what kind of policy response there can be and what kind of proverbial margin calls there are around the world.
Something that I was reading a bit about over the weekend giving them away my line of questioning to Andrew if you're watching so they can prepare my Rishaad Salamat futures down about a third of 1 percent of the S&P. From New York this is Bloomberg. Keeping you up to date with news from around the world with the first word. Matteo in Ukraine today Russian missiles struck keys and a number of other cities.
It appears to have been the most intense missile barrage since the opening days of the war. Ukrainian officials say that energy facilities were among the targets. The attacks came after Vladimir Putin blamed Ukraine for an explosion that damaged a key bridge to Crimea.
Bridge was meant to symbolize the prominence of Russia's annexation of the region. Former Federal Reserve chair Ben Bernanke and two U.S. based colleagues share this year's Nobel Prize in economics. Bernanke's Douglas Diamond and Phillip Day Vig were honored for their research on banks and economic crises.
The Nobel Prize committee says that three improve the understanding of the role of banks as well as how to regulate financial markets. The Bank of England has expanded its emergency support for the U.K. bond market. Its new steps to support guilt beyond this week are designed to broaden purchases. The bill we started the bond buying last month after market turmoil caused by the government's unfunded tax cuts. A mega yacht linked to one of Russia's richest men has docked in Hong Kong's harbour.
And that's led the US to warn the city that assisting sanctioned individuals could threaten its status as a financial hub. The yacht called Nord is tied to Alexi Morticia who was sanctioned by the EU US and UK following Russia's invasion of Ukraine. 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.
I'm Lisa Matteo. This is Bloomberg. With the Federal Reserve's inflation mandate inflation is much too high. Understanding where energy prices are going where food prices are going where commodity prices are going it's very very important to ISE as it is to all Americans. Gary Neel Kashkari there the Minneapolis Fed president much more from him no doubt through the week alongside a host of other Fed speakers including the vice chair Brainard. Coming up a little bit later a check in on the price action for you. Equity futures slightly negative on the S&P 500 down a third of one per cent yields unchanged in the German bond market yields unchanged at about 220 on a 10 year higher in Italy by 4 basis points to 475.
Keep talking about the spread between Germany and Italy. We have gapped out in a major way. Lisa in fact were trading higher above all of the QE years. 254 to 54 is the spread right now. So the yield the 10 year yield if you look at the Q QE years of say 15 16 17 18 19 20 21 we were never trading up here.
You got to go all the way back to about 2013 to see the Italian yield. We've seen a spread this wide in the last couple of years saw that in the pandemic. But the actual yield in Italy you've got to go back a number of years which really comes on the heels of a number of discussions from ECB officials including class not earlier today where he was saying he sees two consecutive meetings of significant rate moves. How much is the requirement. Very high for them to come out. And some more details about what they plan to do to support peripheral bond yields at a time when they're really seeing yields that we have not seen as you said in a very long time. Just remember euro crisis at the peak of that thing we had a seven handle on Italian tenure.
OK. Sure. But when we have the whatever it takes speech in a summer 2012 six handle. So I just want to state that you know we're not at those kinds of levels on a 10 year Joel Weber. How much do you look at these comparisons as valid considering how much debt has been issued issued since then are at incredibly low yields that we need to get refinanced. Right. I mean this idea that it is different to
have a 6 or 7 percent yield today than say in 2010. I do wonder whether you've got some unique issues though in Europe whereby some of these governments have done a lot of hard work over the last 10 years particularly on the maturity profile of some of the debt. They've all locked in low interest rates pushed them out here. There's a lot of credit markets who when you actually see the stress when is the maturity will kick in. And what you hear back from many people is not in the next 12 months. And if that's the case then perhaps
central banks can afford to go much higher before it becomes a problem because there is this sort of built in resiliency. It's a good point with respect to government debt at least in Europe. But when you're focused on Europe just the the low growth profile of the years to come. You do wonder how viable some of those models are with 5 percent interest rates on its debt as that starts to get priced in a little bit more especially as you have to plug the gap from some of the energy crisis that a lot of these nations are facing and you see some of the fiscal spend spending that's come up as a result. Probably all you can talk to us about energy joins us now Energy Future senior strategist and executive director at Mizuho. Bob you said you're not a big believer in the OPEC plus 2 million barrel production cut. What you mean by that.
Well I think they will see only about one to one point one one point two million barrels and cuts that are actually made in this peak production cut deal. You'll see Saudi Arabia cut. They're good for the word united out of RAM rights. Same thing. But there's a lot of folks and a lot of countries in OPEC that are under producing for size.
They're not going to cut production further. Russia is basically around one point three below the existing quota going into the OPEC meeting. Nigeria was about a hundred thousand barrels below. Angola was 400000 barrels below.
They're not going to cut any further. And a lot of the other participating countries are happy just to stay where they were. They're not going to go out and pull back on production today. They're just going to do their best to stay where they are.
This struggling to be where they are. So I would see I would expect to see Saudis cut. I expect to see a cut for about one point one million barrels. Given the lack of spare capacity Bob why
are prices not higher. Demand is really the issue here. I think that's another one that though park folks missed a little bit. The problem is not supply the but the problem is demand. We are here. The dollar is higher for starters. That is the reverse correlation to recruit to the barrel to crude oil.
Higher the dollar the less dollar it takes us to make to buy a barrel of crude oil. The China situation is very negative for for OPEC. That's a big piece of the demand puzzle that's been taken off the off the table. So until that comes back you're not
going to get. We're not going to return to one hundred and thirty dollars like we were in March. But you also have the global economy teetering on the brink of a global recession here. That's a demand event.
Cutting barrels is not going to make a big difference there. Bob on October 16th the People's Party Congress National Congress over in China is going to kick off. And a lot of people are looking at this as a threshold moment after which perhaps the 0 Covid policy could be lifted in some capacity. What would happen if you didn't see a softening especially as we've heard pushback from other officials recently about how unsustainable this policy really is. If you come out you see that red headline on the Bloomberg terminal that's going to definitely see the price go up a little bit here.
We probably would trade towards if China's on the way back. And that's a big move in the right direction. We probably will see the market trade towards 100 dollars but I don't see it returning to 130 dollars where it was at the beginning of the Ukraine crisis. So yes that would be. That's a big piece. That would be a big demand construction event.
It would be very positive for the market. But above and beyond that with the Fed still likely to increase the rate situation by 75 basis points next meeting 50 the one after that. I mean they're purposely pulling back on the global economy. So it's it's going to leave a mark. Hey Bob. Thank you sir. As always Bob York author of Mizuho America's Bank of America's Might Gape and on Friday after the payrolls report.
Lisa. No pivot for you know pivot for you. The message from the team now pivot for you know pivot for you. It is really reverse. Oprah Winfrey.
But this was basically the message from every single central white central bank and Wall Street bank out there are basically saying this is not going to give the Fed any ability to move away from some of the rate hiking plans. And that has been basically the theme. Right. And so at what point does it really go back to the conversation that we were having at the beginning of the hour which is how are they going to go much further than perhaps they need to in order to rein in an economy with policy that has a lag effect but isn't necessarily going to really show the consequences for a number of months if not longer. One question I've asked is whether the labor market data overstates the strength of the economy elsewhere. Most people agree with that. The labor market data looks really robust. You can find pockets of weakness all over the place.
That's the reason why I wonder if earnings are going to be the main event of this week. If we see the earnings move much more quickly than we had previously expected we see this in a number of different sectors. We've seen that from forward revisions downward for earnings guidance. There already have been revisions downward on Wall Street. But have they been enough.
And if we start to see them come in more rapidly how does that sort of briefly feed into this narrative especially when there is the affects component especially when there is this ability and this inability to pass along the costs that you had seen in previous in previous months and quarters. David Kostin talked about the dollar story right over Goldman 30 percent of all U.S. corporate earnings derived from international sales. It's a problem isn't it. And you're seeing this as multinational companies across the board. The RBC put out estimates of how much sales are expected to decline because of just a few things particularly in the manufacturing sector in the industrial sectors features on the S&P 500 by run about a third of 1 percent. Live from New York City this morning. Good morning to all.
David Riley's coming up from Blue Bay. Looking forward to that conversation looking to have a little chat about this European bond market with Italian yields climbing just a little bit higher. This is Bloomberg. The Fed is kind of entrenched themselves and no matter what happens we're going to do it. They're raising rates extremely quickly
in order to fight inflation. Yes monetary policy operates with a lag. So we're waiting on those legs. We do expect the markets remain volatile. You know these rallies that we're seeing we continue to expect them to say we are walking a knife's edge difference between soft and hard landing. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz.
We start every week. Same big week coming up. Big week coming up as a big week coming up. Life in New York City this morning. Good morning. Good morning for an audience worldwide. This is Bloomberg Surveillance on TV and radio alongside Lisa Abramowicz. Some Jonathan Ferro CAC believe is going to come back with us in a couple of days time.
Futures were down about a third of 1 per cent on the S&P. There's a big week coming up. This actually is I mean really like this. This one actually is a very big week
because we've got CPI. We also have earnings. We also have University of Michigan sentiment. That is just for you John. But we also have the IMF and all of these meetings these confluence of events sort of capped off by the end of the week. This expectation of what's going to
happen with the Bank of England they did push it out. But still there is this feeling this drumbeat into something monumental heading into your Emma Chandra. Morgan Stanley had this to say to kick off the week. Here's the quote from him last week packed in a year's worth of volatility both up and down as the market battle between deteriorating fundamentals and supporting technicals continues.
Ultimately he says fundamentals prevail. And Lisa it could take longer than we would like is the conclusion. And the other conclusion is this has been really building on what he's been talking about all year.
And now other members of the Wall Street analysts community are really getting on board. They're basically saying the same thing. And you're starting to see on the ground evidence that they are correct with facts coming out on Friday yet again with some expectation of deteriorating demand. You're seeing this across the board in both the tax sectors as well as the retail. How much how important is Apple going to be later this month when we start to understand how much this is not just a semiconductor story but a demand for small electronic device story. And this really will be huge for a
company that is such a big proportion of the overall lower the bar for them didn't we. A couple of weeks ago when we came out with our report and said the demand for the iPhone was faltering. How many times we played that game with Apple then Apple came out on earnings day and kind of knocking at the park. So you think that basically demand isn't falling off. I'm not saying that but I'm just saying
we've been surprised in the past when it comes to that particular name Joel Weber. So this is one of the big questions that I have because what we've seen as disappointing earnings earnings guidance has been met with incredible punishment in the stock market. We've seen incredible moves in these names. Are people building in the expectation that they will surprise to the upside. What happens if you get a name that accounts for such a significant portion of the overall index plunged massively just in one day.
Mark Gurman. The worry I have is not around Apple it's around the FedEx's of this world. And the reason I would worry about that is just how quickly the cycle seems to be moving lower based on their communication. They were surprised on it. They seem repeatedly surprised by it. And I'm just wondering if that's going to be the theme for this. This started with Chris Half with Wells Fargo for me when Chris came out a number of months ago and said wait pause. That weakness you expect first half of
2003. And then when we started to get this news from FedEx and other companies too he moved that forward pretty quickly pretty aggressively and so did a lot of other banks. What does the Fed do with that though especially if you don't necessarily see a deceleration in core inflation which you're not necessarily going to see because again it is a lagging indicator in terms of how quickly some of these base effects can really take effect particularly with the rental rental unit component of this particular CPI. Read Dani Burger Rock and a hard place. I was in a recession. The base case on Wall Street. Yeah. Why are we still seeing notes that say
things like 40 percent chance. And then you have this scenario analysis around the equity market and it says at the bottom like this is our base case. But if we go into recession was that not the base case. It's a good question. And what does it mean in terms of how deep that recession is. Remember we were discussing that
somehow. That's not part of the discussion anymore. I shall Dani Burger. Yeah exactly. The other aspect of this that sort of is the other side of just the question you're asking is you're seeing sentiment at least in the surveys a. dramatically. And yet when you look at positioning people are still bullish overwhelmingly for equities or you know it really has not cohere around the same kind of way as you would expect given just how bearish sentiment is in the futures right now down 10 points on the S&P. We're down about a quarter of one per
cent upward through the price action for you in the bond market. Remember the Treasury market closed for Columbus Day looking at the German bond market basically unchanged on a 10 year at 220 not unchanged in Italy. Will pick up on that in just a moment. Euro Dollar Lisa 96 handle on euro dollar 96 94. Negative half of 1 per cent. And is this an energy story. Is this a question about what they have to do with respect to the Italian yields in terms of coming in with some sort of easing a lot of questions on a day where you're getting sort of thin trading at least for the bond market. Enclosed in the US today we are looking
at a host of speak particularly Fed speak because when there is an other events there is always Fed speak including Chicago Fed President Charlie Evans at 9 a.m. and Vice Vice Chair Lael Brainard at 1:00 p.m.. I'm particularly interested to hear what they are Brainard has to say about some of the international concerns.
When does the dollar become the U.S. problem. I think that's going to be a theme this week especially into earnings. There's ISE weren't going to be some discussions out of the ECB. We heard from Klaus not earlier today. We do hear from chief economist Philip Lane speaking at 9am a.m. on the online ECB conference on monetary
policy. And John you were asking when do we get a recession as a base case on Wall Street for the US. When does recession become a base case for the ECB considering that it already is the base case for four houses across Europe and across the US.
I mean who does not think there is going to be a recession in Europe right now. I think it's bizarre. We got to this point where central bank forecasts are just aspirational seems to be what they want the data to be. And I guess they feel like if the data isn't well they think it's going to be in two years time. That's somehow a credit for a credibility failure that they need to do better than they're doing.
I think the other worry is the self-fulfilling aspect of it. The policymakers believe they stopped forecasting something. They could shape the events that they anticipate. And I understand that. But I think at this point the Bank of England stunned at how their hands up and said this is why I think this is going best case based cases is a recession.
You'd expect the ECB to follow. And we could talk more about this. And maybe it actually adds to credibility when they say at the IMF meetings are the annual meetings are kicking off the IMF and World Bank in Washington D.C. We hear from David Malpass and Kristalina Georgieva later this morning and throughout the week. David Rutledge joins us now. Chief investment strategist at Blue Bay
Asset Management. David I've got a German Italian 10 year spread about 255 on my screen. David when does that get problematic for this ECB. I think it gets problematic for the ECB
in terms of potentially even triggering speculation around the CPI. Once we get to sort of spreads closer to sort of 300 and you know all in yields then would be closer to sort of five and a half percent on the 10 year pay. And I think we're a little way away from that kind of key is going to be the Italian budget at the end of at the end of this week. And hopefully they've taken a bit of a lesson from the experience of the UK government where I think there's been a huge cut of policy credibility crisis in the UK and that ultimately was the trigger for the sell off in gilts and that then spilled over into other markets and credit problems with UK pension funds and FDI investment. But I think the key takeaway hopefully that policymakers in Rome have taken is you know this is an environment where the bond market vigilantes are back and you kind of go down a fiscal easing route or unsustainable fiscal path at your peril.
Well David the old playbook of the last 10 years used to be get to these levels by him. Fine because the ECB has got to step in and stop them from going any higher. If we put that playbook in the trash can we do something else now. Well I think in terms of the so-called eurozone periphery then you know I think the ECB you know does really kind of take out the kind of extreme sort of left tail. I think they have indicated with TBI that you know they will and are able to intervene to prevent that kind of sort of extreme event and sort of some kind of self-fulfilling liquidity crisis that drives up spreads to unsustainable levels. But I think we are in a regime change more generally where we've gone from a situation where
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