Messy Markets, Bloomberg Surveillance 9/16/2022
Core inflation keeps rising keeps surprising. The Fed's going to lose its case to keep raising rates maybe sooner than we think. We're still leaning towards seventy five just because I'm not sure Paul wants to shock. And I think the bigger issue may be for the Fed and they won't believe it but it's the strength of the dollar. If you start to push back into strong
dollar you're effectively saying the Fed should be hiking rates aggressively. That is a problem in itself. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz. What a messy market. Live from London for our audience
worldwide. Good morning. Good morning. This is Bloomberg Surveillance on TV and radio alongside Tom Keene and Lisa Abramowicz. Some Jonathan Ferro equity futures lower yields higher T.K.
that dollar a whole lot. Strong need to put the scale right away is correlated. Move the dollars there. Jane Foley to come up will be authoritative on this. What's important John. 200 business days of the year.
This is one of the five most correlated grim days. Guess what. I heard it from FedEx yields up at the front end for seven straight days to t. Case point. Companies steins come out and warn about the environment. So they are worried about the slowdown that they're seeing in activity and the slowdown in business confidence. But just to put that scope that scale
and scope for the two year yield it's risen just on one full percentage point re 90 since the end of July. That is basically increasing by one third for this benchmark. And now we're talking about 4 percent potentially. Deutsche Bank and Malice at a. Thank you Matt for reaching out
yesterday. Rates at 5 percent close to next year. That's their call now. Four point nine percent as the drought rate. But the market is not that far away. Right now the market's pricing in 4.5 percent by March next year.
Fed funds up some mortgage costs. You've seen that 6 percent 6 percent on average on a 30. Talking about the real ramifications are not the fancy financial stuff we'll talk about all through the day six point two percent of the mortgage. I did some of the myth of Ben great dot.com. And here's the math. You need a much higher income to make your housing dream happen and you're not going to get it. So you're going to rent. What's that going to do to rents nationwide.
What's it gonna take to GROSS Brahma. What is it going to take to rent. You've brought that up. If you can't afford to buy what do you do. And what's gonna happen to shadow costs
over the next several Haidi Lun is that instead of selling particular I think we're going have a little look at Sterling to explain why he keeps thinking about a meltdown there. And actually that's actually an incredibly important story. But to that rent picture it will increase rents in the short term. This has been the issue because people can't afford to buy. So increases demand on the rental side and cause a moment of silence for pound sterling. T.K. 113. Let's.
One thirty. Let's pause. We make jokes about it. Folks with John Farrell did a twenty eight hour day the day of Brexit. This is not where Sterling was when you were no announcing Brexit and you were somewhere else having a drink.
And I'll real sausage. I'm aware we've talked about it a few times. Nice fruit. This took out the lows of Brexit. This took out the lows of a pandemic. We did that in the last week or so which account the lows of the last week or so. Now we're talking about 113 and all of a sudden once again looking ahead to the Bank of England next week. If that's seventy five from the Fed set to do it again next week. Seventy five from the ECB.
Do we get seventy five from Governor Bailey and the central bank around the corner. And will that help. Right. I mean will that really support Sterling. That's responding to an economic
backdrop. That's really questionable. And I have to just note that this break beneath 114 is coming on Black Wednesday. Nineteen ninety two the anniversary of that is today. And that really highlights where we are. Full circle we're going to stay on that story.
Know remember that some nights in 92 that's when the Bank of England's aura was banned in the effort referred to as Black Wednesday. You know what you refer to as source and Druckenmiller Day. Yeah. This Stan Druckenmiller did a great job on that. No we got to get to our stuff. Well you did start the day to check where stuff.
So I'm going to start with yields up at the long end and at the front end as well. To you your tie for seventh straight session. We went through three sixty three three seventy three. I took three nights a ten year that's
threatening to take out the highs of the year 347 on a 10 year up a couple of basis points to yields up dollar stronger euro dollar negative by a third of one per cent ninety nine 7c and futures for ammo futures down one per cent on the S&P. Yeah and there's a real reason why. I mean if you take a look at real rates also real yields that I know that Tom has been really on this it's climbing to the highest since 2018. There is not a big argument for why there should be a great deal of optimism right at this moment with peak hawkishness if we are at peak.
Caution hawkishness. All right. Today is day two of China's Xi Jinping and Russia's Vladimir Putin meeting. What did you call it. Time A.. I mean I cater to the convention if the dictators and Thompson. That was to me. I to be sacked.
All right. Well yesterday Vladimir Putin said that he understands Beijing's questions and concerns about the Ukraine invasion which was actually pretty interesting considering that they haven't really shown public disagreement. It's clear that China has had some problems with with with Russia's approach. And so this really raises the questions. I'm watching this particularly closely 815. And this is going to be a great
interview. Columbia's finance minister Jose Antonio Campo is going to be joining us here on television and on radio. How do they deal with a dollar that's this strong and the World Bank raised this alarm. This is one of the biggest issues. What does this do to the rest of the world. This is a huge concern. And I want to hear how different central banks around the world are thinking about this.
And at 10:00 a.m. we get University of Michigan sentiment survey for the month of September. Remember when it used to be University of Michigan sentiment survey Friday and we ignored it.
Well I mean. We're ignoring it now. Right. It's not necessarily going to be that significant but we're expecting it to increase.
Sentiment is getting better. Is that a good thing. I don't think it changes anything for the Fed next week does it. Well but if they're said to make improvements. Doesn't this actually just give the Fed more confidence to go in a story yesterday with claims claims it wants it to 30.
Yeah. Just how dramatically lower than people had expected. The latter may leave a mark. Better as well. Yeah. Implied by lower anyway. James Foley effect strategy. Rabobank. Long wait for all of us what we get on
for the next two hours we will get on along with Jane Foley. I can guarantee you that kind of ethics strategy. Robert. Thanks Jane.
The significance of a 113 on Sterling. Can we start there. Well it's very significant as Lisa talked about 1992 and Sterling being forced out of the MRM. And you know we're not thinking about that story this morning. The first thing that came to my mind was the current account position of the UK because if you've got a current account deficit and don't forget the UK deficit as a percentage of GDP right now at record levels it's much worse than it was in 1992. But if you have a deficit really you're exposing your country to more of the whims of of non domestic investors. And if they do not like the fundamentals that they see your currency is going to adjust lower.
Now right now I think that's something which has been happening to the pound you know for a while. The market doesn't like the growth story. It doesn't like the Brexit story and it doesn't like the fact that the tax cuts that are coming from the new prime minister could really push the that the public finances into two numbers that people just don't like that sterling is vulnerable. And that current account position really exposes the UK. Now of course a lot of the story is dollar strength but there was certainly sterling weakness in here. And one thing that we did see earlier in the year is interest rate hikes. Couldn't it couldn't pull the paint out
of the hole to Lisa's point to Lisa's point as well as 75 basis points me offer that much protection. Some may be but not all. Chris Jihye Lee the FTSE with a brilliant short essay pulling the United Kingdom back to I believe 1972 74. And Mr. Barber the complete failed plan then is this Chancellor of the Exchequer going down in flames with a growth model that's undoable. Well certainly the market is extremely skeptical. I mean he's he's been talking about a growth target for the UK to two and a half percent. Nobody really expected that that can
happen. So you're talking about tax cuts which will give it a bit of a boost. But actually what investors want to see are measures that aren't going to prove productivity and growth and potential output not just a quick fix from tax cuts. So investors are skeptical and that is what the government is facing and that is what the government today appears to be ignoring. It's a sterling story. It's a Chinese yuan story. There are specific stories about weakness.
But on the other side it's very much a dollar story especially as we're pricing in such high potential Fed funds rate next year. What is your sense of when things break of when at the stronger dollar creates weakness that becomes hard for all of these other central banks and these economies to get out from under. I think you could probably already argue that the strength of the dollar is already pushing half of the economy of the world economy under the bus. You know it is very very difficult. And I think we see this already for a long time in emerging markets.
So many interest rate hikes there to try and protect their currencies. Look at just Korea. There was a level. Well you see it. I don't think that's a particularly logical because if you have a central bank putting up interest rates you know you've got to say well a strong dollar is a byproduct of that policy.
So why then come in on the other hand and say well we're going to weaken this country. It's not logical. So maybe we're we're talking about some sort of plaza thing maybe next year when the Fed is confident that it has got inflation under control but it's a negative feedback loop. And I think off from the rest of the world into the US economy the Fed has to respond to. Well I mean I don't know whether the Fed has to respond to it because after all that the Fed's in a primary objective is domestic inflation and domestic employment. Should it address it. You know I don't know. You know that's another question.
But certainly there is a feedback loop into the US dollar because as the rest of the world weakens as emerging markets weaken. People tend to buy the dollar. Yeah. And so if you're if you're buying the dollar because the strong dollar is worsening the environment for the rest of the world is you've got this negative. This gets by.
And I absolutely say you know what is going to break it. I think it's only going to break maybe in the next year when the Fed thinks you know what we can come down and we've got a handle on a medium term inflation expect until then. Let's talk about some levels and squeeze this in. Cable standing against the U.S.
dollar 113 euro dollar in at around parity dollar China 3 7. Do you think it is some big moves from here or is this kind of it. I don't think it's hit yet. We're thinking ninety five on your
dollar. I mean we've got a horrible winter to come but for Europe. Yeah. You know energy price crisis you know rationing is that will. Well Preston. I think perhaps not.
Are going to. Intellectual Joel Weber will the far right get it. You know that's that's perhaps you know that the next potential trigger for it for the euro in just a few weeks time. On cable I take it now is one of nine people are out there talking about parity. We dismiss that you know. No I don't think we can dismiss it. It's not our target. But you know it depends very much on the US dollar.
So you know these are still nasty numbers to Carmen. And right now you know I think the dollar strength was a stay until you can honestly answer the question well what else are you going to buy for the best part of 10 years. I think it's fair to say foreign exchange was kind of boring. And it's not boring anymore. Not at all. No Jane great to catch up. Jamie Scarlet Fu Yvonne Man rather bank. What a moment. Hey guys to have a serious conversation about parity on cable.
Not to say it's going to get there but the fact that's part of the conversation in a way that I don't think it's ever been a part of the conversation. Eurodollar at 95 and people hear that and they're like yeah sure I'm used to those kind of numbers now. It's an idea. In Rochester that gets people's attention.
Tom Keene as James Foley said this goes back to Major in 1992 which is a chance to look at all the time the timeline you're back to where we are. Lisa mentioned to his 30s back to 2000 to is looking at 4 percent. I think what we're witnessing now and Joe Weisenthal I think it was out on Twitter who said this just the end of the zero interest rate policy world getting absolutely obliterated in the last 12 months.
And it's really messy and it probably is going to get messier. And that's really the feeling. Andrew Sheets on that of Morgan Stanley. He'll join us in the next hour live from London. This is Bloomberg. Keeping you up to date with news from
around the world with the first word. I'm Lisa Mateo. The economy in China showed signs of recovery last month. Industrial production retail sales and fixed assets in the asset investment all grew faster than expected. Meanwhile the urban jobless rate fell. Beijing had rolled out stimulus measures to counter a slowdown. Still a property market slump and Kobe lockdowns are weighing on the outlook in Germany. The government has begun what may be a
series of historic takeovers to try to avert a collapse of the energy industry. Regulators are taking control of Russian oil major Rosneft. German oil refineries. Germany is also nearing a decision to
takeover universe and two other large gas importers. More than 100000 workers will decide whether there's a new labor agreement with U.S. railroads or a strike. They will vote on the tentative deal reached on Thursday. The agreement increases wages and includes a compromise on sick days. A timetable for voting hasn't been released. It's probably it's a potentially worrying sign for the global economy.
FedEx has withdrawn its earnings forecast due to worsening business conditions. The package delivery giant pointed to weakness in Asia and challenges in Europe. FedEx is taking immediate steps to cut costs including parking some aircrafts cutting workers hours and closing more than 90 FedEx office locations.
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. Today is a win. I mean this it's really a win for
America. Together we reached an agreement to reach an agreement that would keep our critical rail system working and avoid disruptions of our economy. The president of the United States. Live from London. This is Bloomberg Surveillance. And here's your price action. It's messy out there.
Futures down 1 percent on the S&P 500. Down on the week down on the day. And the bond market yields up another 2 basis points on a 10 year 346. Sixty nine. This dollar a lot stronger off the back of yields which is much higher. You're right. Dollar ninety nine seventy. Negative a third of 1 per cent pound
sterling 113 handle. If you've been a wife in a market for a month. Welcome back. A 113 handle. This came from Michael Hand over at Bank
of America. I look I think he wrote this just for Lisa. This is what he said. Yes it's fashion week for Nouveau Uber bars.
But inflation shock ain't over. What you make of that. Look I do think that there is this feeling that right now everybody is waking up to the possibility of much faster rate hikes. And that has been the theme of this entire week. And really the question I would keep repeating this I sound like I'm just I repeat here not a record but this idea of yes I actually know a lot of leaving prior. The question is I'm just going to keep going whether we have fully priced in the weakness in earnings.
What we saw from FedEx. Yeah that comes along with higher rates and a Fed dead set on crimping some of them. And they're going to push back and go to the stock market which Emily Wilkins cares about. John this is about a growth scare coming off the FedEx announcement particularly for international audience including in London here. FedEx is a foundational company on the
spirit of America. It's almost John a nominal GDP proxy. And that announcement is what tilted this market to further Brando like that which I know tell me you follow super closely. And something we've all watched this year is REITs snap higher and it could a snap lower. And Mike Wilson of Morgan Stanley his
wealth. Now take Mike Wilson of Morgan Stanley. Saying Thanks very Wilson. We moved from the right shock. You move towards the earnings shock and some people will be asking whether this headline is the beginning of that story. Thank you. CORNISH for putting that up. FedEx down 20 percent recently. The free market. Absolutely terrible.
Yeah. Let's do this. Let's bring in Emily Wilkins. Bloomberg government going to rip up the scripture as we can. Emily every president and particularly
Republican presidents understand the stock market. The market in general is a huge political item to Democrats. And does this president care about the stock market. Biden does care about the stock market. I think when you see the stock market that can go to a lot of different things. Right. What presidents care about are what
Americans care about. What Americans care about is exactly how much money they're spending. Are they spending more money than they're taking in. Are their raises matching up with
inflation. Right now that's really not the case. Democrats know it. Democrats know it's a problem. The CPI numbers this week were not good for them. They've been trying to avoid it by talking about the low unemployment numbers. They've been trying to avoid it by talking about gas prices. But the fact of the matter is any hope that they had last month that we were going to see inflation come on down before the November midterms really seems to be slipping away at this point.
Emily really into this difficult week certainly in London we see a Bank of England independence tested by a new government that trusts government. Revisit the independence that Jerome Powell has right now. What is the strength of the Powell independence at this point. President Biden has been very very conscientious to try to make sure that agencies that have traditionally operated in an independent manner do so.
If you remember his predecessor like to get a little bit more involved in those regards. The Bidens really tried to say hands off here let we trust in J. Powell. We're going to let him do his thing. Remember he did get re-elected to the
position with bipartisan support from senators. And so he is in a bit of a strong place right now as far as operating as far as what he is able to do. Certainly there's a sense at least with Congress and the White House is that there's really only so much they can do to bring prices down and make major shifts in the market. They can pass bills that have names like the Inflation Reduction Act.
But in reality a lot of this is out of Democrats hands right now. And so they are relying on the Fed. They are hoping that they are going to be able to provide that that soft landing that's been talked about. Emily this White House has a very difficult message to sell at a time especially after yesterday where they were celebrating unions they were celebrating collective labor agreements and the idea of getting higher wages. And then on the flip side this concern about how high inflation is and to Tom's point questioning whether the Fed has to curtail that and what their role really is this in this how is it being borne out in public sentiment when it comes to the whole union negotiations and the push for organized labor. Well certainly there's been a big shift in how labor is being viewed.
You have a worker. Right now the advantage is a lot of the times with the workers and with unions. You've seen that in Starbucks you are seeing it in rail. And I think we need to make sure that
we're putting a little bit of asterisk on the whole rail debate. Yes union leaders and industry leaders did come to an agreement after a 20 hour marathon session but we're not done yet. The workers have to approve it. We've got 12 different unions. We've got one hundred twenty five thousand workers. And not all of them are going to be
happy with this agreement. We already know that it doesn't have any sick days even though it does have some more flexibility for a leave of absence. If someone needs medical care but this isn't exactly everything that they wanted. And I think there is still a question mark as to whether or not we're going to be facing a similar problem in a couple weeks from now if a lot of these rail workers do not agree to this. What to to what was hashed out by union and industry leaders. Emily Wilkins thank you. Down in Washington D.C.
the world's attention. The financial markets will turn to Washington D.C. and the Federal Reserve in about a week from now. We're going to catch up with this man right here. I have to say I'm pretty excited about doing this. Yes we'll get the Fed decision. And then straight afterwards you'll hear from vice chair former vice chair Richard Clara. Bloomberg Surveillance on TV and radio
after the decision. And Tom we got one better if you can't go one better. He's going to join us after the news conference. Very general very cool and very very important. This is the former dean of Columbia Economics. He is a first rate monetary pro with tangible published research. He and a guy named Gertler on the high
ground John on the math genius of a thing called DST. He's an authority on what they got wrong and what they need to do to fix some of the beauty of the last 2 1/2 months. And Primo. We've shared this opinion. I know is that when you're a former Fed
official you seem to speak your mind just a little bit more than the current Fed officials. He got full Bill Dudley right. That's the question. I don't see you know 5 percent interest rates and that they're far behind and they're living a fantasy land. Are we going to get that kind of conversation from him or we get a more deliberate nuanced fed like talk about restraint.
Are you worried that we might go in that direction. I'm just telling you to see all these academics what you're going to hear is they have only one path and that is data dependency. They have to wait. Matt Miller. Edit this morning a Matt Miller on that data dependence. Tell my friend Deutsche Bank. And by the way that's going to wipe from the show with us. Next week we'll keep returning to his
cold four point nine percent Fed funds next year for them. That as I say. Yeah exactly. And as you pointed out this market's not too far away. That's the shocking thing. How much be the price to the right risk.
What are you doing Tom. And that's sending stocks a lot richer. The museum goes down and I find someone who is not rich by the way didn't fire. But coming a lot from London. This is Bloomberg Surveillance and it's
the price action lower on the equity market down nine tenths of one per cent yields higher on a 10 year by 2 basis points 346. Eighty nine at a two year up again for a seventh straight session. That's the two year 10 year yield to hire for a seventh consecutive week. That's interested to make three forty six eighty nine at a time when so many people lined up to say the highs in June were the highs of the year.
I wonder how many people Lisa. Well it's I could nibble at that time of year if we get back to 350 and we came close a little bit earlier. There still are a number of people who are saying that we're close to the highs but there are a greater number of people starting to raise questions about what kind of structural inflation there will be and whether the central banks will have the conviction to get back down to those target levels of play. So yields up across the board and studied weaker the dollar stronger. Take a look at cable cable one 13 city out in the last 24 hours speaking to the team here at Bloomberg and making the the obvious point. But I'm sure it'll resonate with many of you.
You can't buy fixed income because the Fed is hiking interest rates. You can't buy stocks because they're tightening financial conditions. And the only thing seemingly for many people to buy time is the US dollar to stay in cash. Sterling. What's that say. Ninety two.
Retail doesn't have that. The people listening and watching here that are just worried about retirement funds. Where do you hide. And one of the themes of last two weeks
is this idea of scale. There's no place to scale too. You've got a few choices and that's it. So the consensus view is everything we just said. Is it time to leave the lead the other way. Are you worried about your head getting
ripped off and Michael Barr of Bank of America was sent just that. Not sure it's consensus. And yes a fund manager survey says all of the above. But we think if you make new highs on
yields you're going to make new lows on stocks. You put it really well. We're watching. We're same jokes. We're putting things into a new regime where rates are going to be high where we have debt that is pinpointed to some of these low rates. You cannot make these sorts of just move
against the consensus kind of bets on their face. We can study folks quickly here. Consider West Texas Intermediate. It's seventy nine dollars a barrel. We're not there yet. Five now but we're getting there rapidly.
Something for the American audience right now on Europe and its impact on America. Sandra Feldman joins us chief economist from the Netherlands with ABN Amro Center. Thank you so much for joining us this morning. I want to talk about the rate flexibility that Europe has given a dramatically different animal spirit nominal GDP than America. I don't buy the template. Powell can do seventy five beeps. Then Legarde can do seventy five beeps. They're not the same economies are they.
No not at all. I'm glad that you mentioned that actually because sometimes that's Mitt over. And so what we're seeing in Europe is an energy crisis that is clearly still intensifying. And for us what we're actually expected to see in the coming months is that there's going to be a fall in real incomes that we haven't seen in decades. And and and that means that GDP is
already expected to contract from the fourth quarter. And then on June 4th and into 2023 at a much deeper level than in the U.S.. And of course fundamental driver of all this is also very different because this is an important energy inflation that is driving the whole problem.
And so the room for the ECB and basically did the arguments that it's having are also very different. At the same time it doesn't result in a very steep hiking path. And I guess there's no way around. All right Sandra one of the things I find and this is my chart of the years nominal GDP certain U.S. dollars for U.S. Europe and Japan and basically Europe flatlined since two thousand nine. Is there a risk here even if it's in a more elevated level of Europe getting into a euro sclerosis of 10 and 15 years where it's not assumed a number of years down the road they can get a late 90s pop that that will not occur.
Well that's actually a very complex question. But and I think that the what what what a risk that we're seeing indeed is that we might actually look at a eurozone economy which is getting into a quite at times recession. But at the same time it's not going to have the recovery for example that we saw after Covid.
So it might be kind of a sluggish period after that as well. And then of course all the dangerous around stagflation and all that is is coming to mind that Dennis Kailey Leinz at. It's not normal. You said that you expect a deep
recession both in the eurozone as well as the United Kingdom. What does that look like when it comes to unemployment rates. Well actually unemployment rates have been rather low in Europe and actually also in the UK. So one of the issues that debt rescue facing is an economy and its capacity constraints. And that is also part of the nation's story. So if you think about you know did did tradeoff between trying to tame inflation while trying not to cause a recession.
Well one thing you could say is that if there's any moment where a recession and the pain of a recession is in a sense limited in terms of people getting unemployed it's now because we're having overheated labor markets at least in the UK and in the north of Europe in the south of Europe it is different. So I'm and that's in Europe always a concern that there is this is said periphery and poor different dynamics going on. Well to that point how high can the ECB raise rates before it becomes a real problem. When you watch the Italian yields when you watch the Spanish yield when you watch the Greek yields we think now that that the 75 basis points in September will be followed by 75 in in October and then and potentially another 50 in December. And that will mean we will be at a run and run turn the rate of 2 percent and that will be the peak. And of course the risks of of of spreads widening is huge.
And therefore also these has introduced this kind of new instrument. Yeah. Senator what is the strength of core Europe theory as regards the ECB. How linked is Germany to the Netherlands
to Austria etc.. How tight is that linkage to a Bundesbank heritage. And in terms of ECB policy do you mean or do you mean in terms of the economy. Yes. ECB policy. Well what you can clearly see that the hawks have taken over at the ECB. Right.
So and so if you look at the distribution of hugs from stocks in that then definitely there is a hawkish tilt going on. And at the same time I think the arguments are that the argument the arguments will be going in the same direction whether you're a hawk or not. So this this inflation situation is so extreme you just have to hike. There's no way around it. Sandra what if what a catch up. I spent another 75 basis point move. It was me a few months ago thinking
maybe the full rate hockey cycle for the ECB would amount to about 75 basis points and they've got to have one go. That's the change we're talking about. It's amazing. We used to think of a 25 basis point rate hike is radical. Now it's your basic point. It's basically base case. Now people are talking about a 1 percent
rate hike and then others saying a whole lot of you guys are moving too quickly and could break something. And this is sort of the relative to some of the conversations we've heard in the last couple days. Do they become overcome by events off of a FedEx announcement of some you know as we talked to Sander about their to fill up and off the idea of a run rate of sluggish GDP where everyone's like you a model in two years we're going to see a lift. Says who. What's on. Let's go based on their forecasts.
They're not forecasting a recession. So they want to talk about overcome by events might be overcome by reality might be a story for the CCP because every other economists we're speaking to say can you think of anyone right now not forecasting a recession apart from the ECB now in the eurozone. No I struggle. Good point. And even the CEO of Deutsche Bank. Right Christine saving came out and said sure. Obviously there's going to be accepted and the ECB comes out says not good. The change we've seen least at the front
end in Germany I think it's been remarkable. The first of August if he got back to the shop you're looking at 27 basis points maybe on the first trading day of August on a German two year German to you right now somewhat. Fifty nine. That's what five six weeks later. Yeah. There's a lot of work done at the front end of the yield curve not just in the states. We talked about the two year treasury on
the Bund as well. Very important on a lovely Friday in New York and around the Wall Street world. The pros worry about the calculus of rate of change and the rate of change of the rate of change. And those right now are grim. I I'm more optimistic.
But the fact is the calculus right now is really ugly. And that's why I was glad we had Danny Blanchflower on yesterday from Dartmouth. You could have predicted the tone that he would take but he's get into increasing company.
It's not just for example the likes of Jeff Gundlach who came out and said that he actually prefers that the central bank the Federal Reserve raise only by 25 basis points. But you're seeing the World Bank come out and say this is going to break the world. There will be a global recession because of what's happening. And these are some of the questions where do you go if you have to be a faith based on what the reality is saying is that inflation is hot and things are still going along just fine. How far away are the October meetings of the IMF. It seems like months from now nine months. I agree with you.
I mean this Federal Reserve meeting is felt like it's taken months to get to. We're all waiting for a couple of CPI reports a couple of payroll jobs. It did take a question many people are asking. I think we have to get better at asking our guests this question too. Is this Fed being emboldened by a lagging indicator. The labor market. I think it's a great question.
Are they being emboldened right now by a government also that's basically saying inflation is at the forefront. And that's why I keep saying if consumer sentiment hangs in doesn't that and both of them further. Right. Even though this is a lagging effect of when some of these interest rate hikes start to take effect in the actual economy let's have you if we get more strikes consumer sentiments not going to hold out for much longer in this country anyway. It's rolled over pretty aggressively already in the U.K.
Tom a headline just moments ago. Rail drivers at twelve railway companies travel. Twelve rail companies. Tom on strike from October 1st. So we talked about how it's all going to pause right here of morning in this country. And then it's back. It's back to business and a business
anchor. Thank you so much for bringing this up. Yesterday I believe it was it's a blur of folks who travel but I believe it was yesterday was a first day. I felt like the middle 70s in at least four years. Doesn't repeat but it runs it. Exactly. Those poetic. That was a nice bit like wind and fire. Well even that original song should we play tunes. Let's do different James when we come
back. You got the rights to play that music right. I'm just figuring it out in real time. That's literally what we did. It's the floor manager Sarah straight away. You guys got the rights to that. I think it's going to come out to the governor of Florida is going to fly me to the doctor. James Scarlet Fu is going to join us shortly from London. This is pulling back.
Having so much fun keeping you up today with news from around the world with the first word. I'm Lisa Matteo in Ukraine. Was it. President Vladimir Zelinsky says a mass grave has been found in a city that Russian troops abandoned last week. More information is expected today after a visit by journalists.
Meanwhile President Biden says the U.S. will give Ukraine as much as six hundred million dollars in additional weapons and ammunition. The aid will come from existing stockpiles. Retired federal court judge has been named as special master to review 11000 documents seized at Donald Trump's Florida home.
The special master has until November 30th to complete the review. Meanwhile the judge in the case has refused a government request to use documents with classified markings in a criminal investigation in Europe. New car sales rose for the first time in 13 months.
Registrations increase three point four percent in August. Mercedes Benz was among the best performers with a 16 percent rise. But the good news for many automakers may not last long. Record inflation and unprecedented energy crisis threaten to discourage buyers. Apple is counting on upscale shoppers to make the latest iPhone a hit when it goes on sale today.
The iPhone 14 lineup reserves the best features for the high end role models costing at least 1000 dollars now based on preorder sales. That strategy is working. Consumers have turned the most expensive new iPhone into the most popular version 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 Mateo.
This is Bloomberg. I am very supportive of the idea of an oil price cap in general for Russian oil. We are working on amending the sanctions package that is required for this new proposal. And we know that we have to be fast on that one. And of course sanctions always need unanimity.
So Amanda Lang that the European Commission president live from London. This is Bloomberg Surveillance equity market healing just a little bit but still down negative lower by three quarters of 1 percent on S&P 500 time. My couple of basis points on a 10 year 346.
Eighty nine dollar negative two tenths of one percent and ninety 80. Couple of things to pick out the two year the front end of the Treasury curve through 390 early on this morning. Thank you Lisa. I'm getting used to seeing sterling 113 knots here at 3 9. Yesterday Tom kept saying when do we start playing the 4 percent to you were here like 3 9 playing. And this was one day yesterday you were like. We're not there yet. Today it was no more than 4 percent items over at Deutsche Bank.
We're gonna give you more data today as we always do. But particularly I want to frame again a 200 business days of the year. This is one of the five days. It's truly ginormous. And I want to mention Joel Weber hasn't moved which is Yemen hasn't moved. It's locked out of fear that they may actually do something about their busted auction where they have to do something about that yoga 2012 story.
But you know to extrapolate out you know to be one forty five forty six it's now down to 143 level just because of the effect. Do you think we're get to that point where it starts to buy. Yeah I think I do. I think on this art on Friday we welcome
all of you worldwide. And of course here in London a most somber week. And we move to the funeral of the queen on Monday as well right now on international relations on the Shanghai Five. Tina Fordham joins us founder geopolitical strategist for Fordham Global Foresight. This could be a one hour conversation. Tina I'm going to distill it into the Shanghai Five and then there's the Moscow one.
How lonely is ready Mr. Putin into this weekend. It's been awkward for him right. I mean I think the the image that captured it for me were the leaders of the Shanghai Cooperation Agreement standing and Putin standing a little bit on his tiptoes.
I do that all the time. Well you know this is this is the leader who took his country into a special invasion massively miscalculated and is now starting to feel not only blowback and setbacks on the battlefield but almost incomprehensibly for Putin has been in power for for so long now calls for his resignation. Usually when a leader goes on a foreign trip it's to you know it's a photo opportunity. It's an opportunity to distract and deflect and take some nice photos. And Putin ends up looking a bit apologetic.
Russia ends up feeling like a kind of a vassal state to China. I sense from the serious tone you're taking. You think this is more than just a diplomatic dance. Can you think of the immediate policy implications from something like this. So this is the kind of thing that is important for market participants but not a game changer. Right. It's it's you know diplomatic mood music.
We're in a period an inflection period right. Where by there is a rebalancing. If you are turkey certainly if you are China but also other countries that weren't represented at the at the Shanghai Cooperation Agreement like India Saudi South Africa Brazil et cetera you're watching to see what China does with Russia. How Russia fares in terms of the costs that are imposed for this conflict. Because any kind of a sense of a new revival of the old Cold War Non-Aligned Movement is looking pretty bad now that Russia has taken such a pasting.
Although there is a sense that Vladimir Putin has been backed into a corner. And what's the consequence going to be with the whole Ukrainian conflict. Will he go harder in other areas. What does he do to save face if he's willing to stand on his tippy toes the image that you basically put. What's the policy implication of that. What are the potential ramifications
from his position currently. Well so this idea of a you know a kind of an authoritarian leader with with nuclear weapons being backed into a corner is a very concerning scenario. When we look at Putin's past behavior and remember that he's taken Russia into conflicts in Syria in Georgia and now in Ukraine to twice in Ukraine. He does tend to double down. But most of the military strategists that I talked to don't think that he's likely to use a tactical nuclear weapon. And the shorthand is is t n W or.
A chemical weapon. But we see all this activity shelling around Ukraine's nuclear plant. And so the risks of an accident are are there. How concerning is it that there was some sort of meeting of minds about Taiwan from China Russia backing China's vision of Taiwan as part of that nation. How does that sort of affect your view
of what's likely to play out there. Well as we sort of talk about hard power soft power signaling all this international relations terminology that's that's really in focus here. The attempt is clearly to signal that they in the powers assembled their support the Chinese one China policy including Taiwan. Now behind the scenes a lot of military
intelligence types think that what China has taken away from the way that Russia's fared in the Ukraine conflict is it needs to move sooner rather than later in Taiwan because that window of opportunity if indeed there is one is narrowing. You are one of the few truly have a trans-Atlantic understanding in their encyclopedic on the international relations of the United Kingdom. Charles a third today will travel to Wales as you travel to others. Fifteen hundred miles I'm told just in
the last number of days. How you know is this United Kingdom under Charles third. Well you're here at a fascinating time right. And I'm a dual U.S. U.K. citizen. I've been here for 20 years. And so I have that thing that immigrants
have kind of seeing seeing things in more than one context which is really helpful. I have to say though I'm an analyst and not a kind of a monarchist or an A.I. or anything else. And I look at this as through my U.S. political science hat. And I see that the U.K. has something that we don't have in the U.S. right now where we have low trust in all institutions from the media to the Supreme Court.
Only the military U.S. military is trusted. You can you know pass the support for the monarchy amongst different age groups. But even a majority of so-called ethnic minorities support the monarchy as an institution. The way I think about it is how this played out during the pandemic where in the US we had kind of viral videos of people in Costco saying they're not going to wear a mask because it's a violation of human rights. We just didn't have that here and we just didn't wear masks. That's not exactly true. But what political scientists call
social cohesion and that's the willingness to follow rules. You've got people queuing for the queue. It's extraordinary. I sense it totally non American wasn't politicized here in the way it was in the United States. My impression. Well and that's what polarization will do. It's considered more of these are kind of forces of nature almost. Now there will be changes as a result of this transition of power to Kim Charles the third. No doubt about it but not abrupt once.
I wasn't in a strange position because I was in both London and New York and the pandemic I was in London. If I saw someone in Moscow I wasn't like Democrat. And then I saw someone without one. I thought Republican was not about anyway.
Here in London you just chose to wear one or not to wear one without any real political affiliation behind it. I just said so it's not Tom Keene is fronting for us to move over here and bring the whole Shery Ahn. You were trying to push for that to sort of for the liberals.
I never looked back at. Core inflation keeps rising keep surprising. The Fed's going to lose its case to keep raising rates maybe sooner than we think. We're still leaning towards seventy five just because I am not sure Paul wanted to shock. And I think the bigger issue may be for the Fed and they won't believe it but it's the strength of the dollar. If you start to push back into strong dollar you're effectively saying the Fed should be hiking rates as aggressively as a problem in itself. This is Bloomberg Surveillance with Tom
Keene Jonathan Ferro and Lisa Abramowicz. Wind and fire would be a great soundtrack for the price action. Do you think just thoroughly depressing. Fire down their equity futures down 7 cents. Live from London this morning.
Good morning. Good morning for our audience worldwide. This is Bloomberg Surveillance live on TV and radio alongside Tom Keene and Lisa Abramowicz. Some Jonathan Ferro taking equity to lower the dollar. Straka yields higher at the front end. We had a little look at 390 on a two year. Little bit. Right.
Well we're at 390 right now. It just slipped over the Bloomberg terminal. There we are. And what's important here folks is out of 200 business days of the year. This is one of the five that matter. This is a correlated mass.
We can talk about it all through the show. A wonderful guest qualified to talk about the correlations that are going on John. And almost without Phil everything's linked together correlated mess with a real world impact and consequences whether it's mortgage rates a 6 percent lead and we can talk about that later or FedEx. FedEx comes out and says sorry guidance was wrong and stocks down 20 percent in the premarket. So this is the big issue right. How many more of these do we have to go.
And you were saying this earlier. This is Mike Wilson's world. This is what he's been predicting and this is what a lot of people have been saying. You're just too bearish. Look what they have been doing. But if FedEx the new norm as we take a
look at the consequences of some of these rate we're experiencing the rate shock. Tom is the only shock up next. Well the earnings shock will also be a revenue shock. And this is this this is you know the soup is the word and it doesn't really fit here. But the bottom line is inflation's
moving. We don't know. The real economy's moving. We don't know. And so you've got a complete mystery in the last week about what revenue will be. Yeah it comes down the income statement
too. Anyway you want to define earnings and cash flow. No mystery about this right now. This equity market heading south. Slow it down. Negative three quarters of one percent on the S&P 500. Bit a little bit better than when we got to where we were earlier.
Yields are high by a couple of basis points on a 10 year 346. Sixty nine cents euro dollar ninety nine eighty seven negative a tenth of 1 percent. That the dollar fighting just a little bit again in the last hour or so. So not as brutal as when we first came into the office. Well Thomas that's how I got here.
On the U.S. market 6:00 a.m. I know you if I at breakfast what stormed out of the hotel stopped at the hotel when I talked about this. This is for is upset about the service. No no I was not. That's not true. This is important and this is a metaphor for all of you in America is the same in London. You got two hundred and thirteen thousand claims and you've got a restaurant supposed to have six people there and they had two. I was picking up the pieces they did for him but they did. They said you're his boss.
I said you know. And they said take some pastries for him and cheer him up. So I throw in some try some pastry tip you'll have. No. I can't do it for those you in radio. I'm in a big tray like the other
waiters. John brought over a full English. It was great chocolate crust. Anyway futures are down a tenths of one percent brown low yields are high by company basis points. All right. Talk to the brave for you. Tom Keene stormed out of breakfast today as they turned for dinner.
No. Today day two of FTSE China's Xi Jinping and Russia's Vladimir Putin meeting yesterday. I find this fascinating. Vladimir Putin said that he understands
Beijing's concerns and questions about the Ukraine invasion. Basically acknowledging that it was controversial splitting these two allies that had made a pledge ahead of the pandemic that promised to increasingly get close ties together 815. And this. I am faceted for Columbia's finance minister. Jose Antonio Campos is gonna be joining Bloomberg Surveillance to talk about the ramifications of the Fed's rate hiking cycle and the rest of the world. How does Columbia respond. How do they raise rates and continue to
raise rates at a time when they have to deal with yes inflation above 10 percent. But also the consequences of a strong dollar and threats to their economy. And at 10:00 AM we get a sense of how we feel. University of Michigan sentiment survey for September. How do you feel.
I don't know. They're about to ISE 600 people on the phone to find out who you really feel that this survey is. The survey surveys. I mean it's I think this is interesting because will it be a good news story if people feel good. Probably not because they'll get the Fed that much more ammunition to say look things are actually I don't think they look at these surveys.
They told us they I don't think. I don't think they will declare it or will say they're driven by math and models. And I don't think they look at the climate is going to speak for himself. Next week on the Fed. I look forward to that. Can I tell you it's so great to have people alongside us.
Andrew Sheets one of them just dropped by from Morgan Stanley the chief cross asset strategist. Andrew it's good to see you Mr. Sheets. We can't buy this equity market. Well thanks. It's nice to be with you. It's nice to be with you in person. Look this is an equity market and I
think over the next month is still dealing with a real crucible of challenges. We are into the thick of what we think is going to be a disappointing earnings revision lower. That's a key view of my colleague Michael Wilson in the US. My colleague Graham Secor here in Europe. I think this is still a period where it's going to be very difficult for the Fed to sound anything other than hawkish given these upside surprises to inflation. And then on the geopolitical. Right it's too soon to get any think real developments in terms of changes in China policy and still a lot of uncertainty into European energy policy heading into winter. So we think it's still too soon
especially with rates rising especially in the front end and think investors should stay cautious. And we think that cash will outperform a lot of assets. There is at Brown University a fabulous tradition of differential geometry Cornell and Brown on the high ground on that. And it all comes down to calculus. Are you frightened by the rates of change right now in the second derivative as well. Well I think the biggest change that I
think the market is going to have to adjust to is you investors over the last twelve years which is a quite long period of time have known mostly rates of zero or less than zero on cash. So Taleb said this on on Twitter yesterday. He said it's like physics without gravity. Are we going to use gravity again.
I think we're getting used to gravity. I think we're seeing a real large adjustment. So if you think about the S&P 500 having an earnings yield of about five point nine percent and you know one to five year corporate bonds having a yield of four point nine percent that is an enormous convergence in ask across asset yields.
And so and that's a shift we haven't seen for for 12 years. So I think that's an adjustment that is truly different and that the market's going to have to make some make some adjustments. There's a difference between more downside and risk assets and something breaking and something that becomes a systemic issue that is a fissure and that is rapid. When does something break as we take a look at that pace of change particularly with the front end rate.
Yes at least I think that's such a great point because I think ironically here the fact that stuff is good you not breaking means that the Fed can and likely will do more. You know I think we see banks with very healthy balance sheets. We see consumers and corporates with healthy balance sheets. The low rates of last two years allowed a lot of Americans to refinance into the low 30 year fixed rate mortgages which means their largest liability their highest cost is almost immune from the rate hikes. And so that strength I think means that
the market is sending the Fed signals. You can keep going. We haven't yet hit that point. Words disorderly. So what is that point. I mean can they get up to the Deutsche
Bank call a four point nine percent on a Fed funds rate and still have things be sanguine enough to give them some confidence that they can stay there for a while. Well so we don't think rates will get that high. But we do think that the skew is that they will continue to press higher and go for longer. And again I think the Fed is is having a real challenge right in hockey terms. They are trying to skate to the puck. And we don't know exactly what the delay
between you know a rate hike today and the impact on the economy is going to be. And so this is a real real uncertainty. I think the market was hopeful that we would get some relief that inflation would start heading in the right direction and that would buy the Fed some time. But I think it's quite clear with that sticky core inflation they just cannot pivot yet. And then the skew is skewed statistics onset and type Gretzky is that what that was like. That got to me. So I'm going to cheer up here and not get the spelling right on that banner.
I mean I saw Gretzky actually do this is absolute. I knew that I'd get out of here because he was playing the Buffalo Sabres and Perot and Gretzky did exactly what you said. Jerome Jerome Powell is no. Wayne Gretzky is.
Well I do think what you're dealing with is if you ask a lot of economists. Right there's not an agreement on what that delay between a rate hike today is on the economy. And then I think there's still very divergent camps theoretically. Right.
I think there's a camp and we heard this last year the Fed can never hike very much because there's so much debt in the economy. They'll never hike more than 1 or 2 percent versus will. Actually maybe companies and households have termed out so much debt at super low rates that the sensitivity is lower. And I think this is a real question that interest kind of don't really know until it makes contact with the economy.
So actually became I a the last crisis in 0 8 0 9. And you all remember the projections for high yields every single year. High yields high yields never materialized. Yields went lower. Do you sense it's that kind of story in reverse that we haven't quite fully capitulated on this view of a low interest rate. Well that we just seem to think that this is an anomaly and we gone back to where we were before.
I think there's still some of that. And I think the real rate is a very interesting debate where real rates are still quite low in the US in the Eurozone in the U.K. They have not yet gone back to kind of just the pre GFC level let alone kind of the higher levels we saw in the 90s. So I think there's still room for the market to readjust especially as you see a healthy household healthy corporate balance sheets more capital expenditure that again could point to a kind of higher somewhat higher neutral n