Fed Fallout | Bloomberg Surveillance 03/23/2023
We're looking at what's happening among the banks and asking is there going to be some tightening in credit conditions? If we didn't have this banking crisis, then this would have been a more hawkish result. How much will depend on how successful they are at ring fencing and limiting spread from the current situation? The Fed doesn't want to look as if it's doing a U-turn quite yet. With inflation still running as hard as it is, the risk of a hard landing is higher now because the Fed isn't going to really know what's the appropriate policy to do. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. Split screens. Chaos in Washington, D.C.. Well, sir, that was yesterday. Live from New York City this morning. Good morning.
Good morning for our audience worldwide. This is Bloomberg Surveillance equity futures nicely positive upper half of 1 percent on the S&P 500. Lisa, this market got into a difficult moment at one point yesterday afternoon, but it wasn't about Chairman Powell. It was about the treasury secretary. That was what I found interesting. Triplett had an excellent job being
really boring, basically towing a line that really didn't disrupt anything and left the market in pretty good shape. And then Janet Yellen came out was like, yeah, about those deposits. Now they're not going. We haven't discussed it yet. We don't think that this is necessarily gonna be on the table. And all of a sudden you can interpret
those comments however you want. But the market clearly interpreted them as there was no backs up for deposits as she had basically hinted at earlier. And that had a pretty big impact as well as basis.
So earlier in the week, she possibly teed up using the systemic risk exception to make depositors whole. I think there's a key distinction here. There's a difference between doing that again and having blanket deposit insurance. I think the difficult part of this moment in this market yesterday is that the day before people misinterpreted those comments, the underlying meaning of what she was really trying to imply. She can't do that, though, on a longstanding basis without congressional support. And she was speaking to Congress. She was speaking to the Senate. I think that that's telling there isn't
the congressional will to make this happen. So if she's talking about what her proposal is, what I'm curious about is whether we end up with a legislative stalemate that she's trying to reflect in terms of what her capacity is. Tidjane Thiam. This was the point of tension for Secretary Yellen last week as well when she was on Capitol Hill testifying. She can't square the circle. At the same time, you can sit there and say, if we have these kind of troubles again and we think that there could be contagion, then we can have that systemic risk exception to make depositors whole. That's a big, big difference, a big, big difference between that and saying we're going to have blanket deposit insurance. The problem was for Chairman Power.
He comes out in the news conference at the very top and says deposits are safe, banks are safe, the system is robust. At the very same time, Secretary Yellen is saying that's the conflict between the two at the same time. That's really poor scheduling. You know, when Chairman Powers speaking, I don't have I don't know how this stuff works. I'm going to speak to him a little bit later and ask how do these kind of things get scheduled? And can't they just reschedule them when they find out that she's going to be speaking at the same time as the Fed chair? You would think and I don't know that scheduling either, but I'll just tell you, Steve, Chevron's take IBEX.
I thought it was quite funny. It's astounding that Yellen and Powell would have given contradictory messages on bank deposits at the same time. Powell essentially said that all deposits are safe. Yellen said. Hold my beer. You would have thought that they would have coordinated.
I mean, that really is the tough for the market. We talked about this yesterday. You'd think they had spoken to each other. Wouldn't you?
I mean, clearly, why wouldn't they've spoken to each other? The fact that they haven't. Doesn't exactly imbue you with incredible amounts of confidence that they have it all together was kind of bizarre yesterday. Futures bounced up this morning. So let's work through it. Equity futures up by half of one percent
on the S&P 500. Bonds look a little something like this. And the Treasury curve unchanged for once on a two year, three ninety four yesterday, about a 25 basis point hike from the Federal Reserve and a two year yield. Lisa dropped 20 basis points. And we heard from Fed Chair Jay Powell after a Michael McKee great question, that they had no rate cuts priced in. And the market saying, yes, you do. You have almost 100 basis points of rate cuts priced in. At least that is the market pricing right now. So you know what people are believing. I'll leave that up to people to decide
what's coming up. What's coming up is more central banks. We have Turkey and the Bank of England following Georges Bank and the Swiss National Bank. Swiss National Bank just rose raised rates by 50 basis points. 11:00 a.m. We hear from bank them. Bank of England's Catherine Mann. She's speaking at the Peterson Institute as a panelist.
The Bank of England expected to raise rates by an additional 25 basis points. And here's where I think we're going to start to see more divergence in the currency. More potential dollar weakness is what people are speculating, not incredibly. But if you start to see the Fed pulling back and European banks still seeing higher inflation further behind in terms of the retaking cycle, do you get this divergence where it's all systems are go on the retaking over in Europe and not so much in the U.S.? We haven't talked about this that much, but I think we showed 10 a.m. ticktock. CEO is coming before the House Energy
and Commerce Committee. John, you mentioned yesterday. What do we end up getting if we hear from politicians who just are basically using this as a campaign pitch point? There will be some tell, though, what the appetite is to actually do something on this front. I mean, I think it will be interesting to see what proposals he has. I'm surprised they haven't done anything already.
This is a hangover from the previous administration. Why it has taken so long. It's not popular. That's why I mean, I really I can't think of anything else. They advertise. They do campaign advertisements.
And take a look at what point can they basically square the circle if you want to use a similar type of analogy. And at 3:00 p.m., we hear again the redux of Treasury Secretary Janet Yellen. Will she clarify her comments after tanking banks DAX yesterday with her lack of support necessarily of ongoing deposit insurance? I am watching the KBW bank index today. Do we see some sort of reprieve yesterday? Ongoing concerns about First Republic PAC. W coming out saying if they got a line of credit that they saw 20 percent of their deposits withdrawn in the first part of this year, how do we stay that off, especially if Janet Yellen is kind of waffling and giving contradictory messages to what we hear from Jay Powell? You know, what we've learned in the last week, people thought that the ECB had delivered the playbook for Chairman Powell. That's not the playbook he reached for. We've learned that Credit Suisse is not a substitute for rate hikes at the ECB, but the financial instability in America is a substitute for rate hikes at the Fed Reserve. That's a key difference.
And to your point, you mentioned this a little bit earlier. That opens the door potentially for some divergence between what you expect from the ECB and what the Fed might deliver in the next couple of weeks. And there are a lot of questions that emerge from that. But that, to me is one of the big themes.
It's really a pivot point that's now. Joining us now in this equity market, John Stoll. First, the chief investment strategist at Oppenheimer Asset Management. Hey, John, great to catch up with you, sir. I mentioned this to the commercial
break. We to talk about exactly this. If the Fed backs away because things are breaking, you turned to me and that's bullish. Well, it's certainly not a bad thing. Let's let's put it that way. I think the market really respond to that information from Chair Powell. And I think that, you know, that was all
really doing quite well. Later on, we heard this from Secretary of Treasury Janet Yellen, and that kind of shook people up. But this is not uncommon. Times like this, the main thing, it's not so much what brings the market down is how quick the responses and a recognition investors need to realize not every response is going to be correct or exactly what they want to hear. But it's a process of working our way back out of another set of world wooded areas to speak this added wooded area. We're going to get out of somehow with rate cuts. That's what the market says.
The Fed says no. How much are you counting on rate cuts to have a more bullish outlook on how this emerges, how this develops, how he emerged in the woods of financial systemic issues? Great question. He's not really relying on rate cuts a heck of a lot near-term. I think the inflation is sticky and the Fed has to do something. Its credibility is still on the line,
but its credibility is always on the line, whether it's a rate hike cycle or a cutting cycle. But in this particular instance, having been behind the curve badly enough, so we had this inflation hit the 40 year highs. The way it had this is this is an important period. They've got to show that they can manage
both this as well as a crisis in confidence within the regional banks. And I think they can and I think they're very capable of doing it. But it doesn't mean they are infallible. They just have to work their way through a process. John, you've been a a bullish investor for quite a while. What does being a bull right now mean? What does it mean owning and what does it mean hoping for? Well, I think the main thing right now is, you know, we've just been building our positions in areas that we think will be rewarded.
And if I just take a look and I hate to give the bears, you know, some some areas they might hit, you know, if they get they get bogged down today at some point. But it's been terrific. We're all of a sudden CAC has become the new value story. There was a recognition all of a sudden that these we're not going back to the abacus or going get going back to the slide rule.
Technology is alive and well. Most important thing is it's got to be profitable. You know, positive cash flow is a good thing. But as well as that, it looks good for a
consumer discretionary that looks good for areas, good communication services, industrials. And this is the area where we like to invest, not play a little bit longer on the financials. Now, this is going to take to regain trust in terms of investors who are not players, but rather intermediate to longer term investors. It'll take more little to feel more relaxed about financials as it's cleared up. Well, we need the consumer to relax about financials before investors can relax about financials, John. Unique policy to act as a circuit breaker.
Do you think this financial stability, instability can end without blanket deposit insurance? You know, I think I think that the real definition is what will have to be perhaps a redefining about what that that maximum amount of a deposit that gets covered and then a anything over that would likely have to be paid by the depositor being over and having an overage versus what the covered amount is so that the taxpayer is not really on the hook for it. John, staffers of Oppenheimer Asset Management John, thank you. At least what you make of that. I just love that he didn't want to give anything to the Bears to chew on in any way, shape or form. So he talked about how it might take a little longer for tech to come back, which is basically like, you know, perhaps it will be Haidi Lun in the near-term. I will say, though, and he's talking about is probably the bookcase at a time where you still have optimism in the economy, you still have momentum and you still have a story of resilience.
And a lot of sectors that even if you get, you know, a rocky road over the long term, you could left Mark Gurman. Ask the question, if you can this end without blanket deposit insurance, can this financial instability end without it? It's a great question. I think without consolidation, mass consolidation and perhaps a greater degree of regulation. Here's a question with these banks and
word politicians rather have a greater degree of regulation that changes the business model and reduces the profitability case for lending, or would they rather provide a backstop to depositors in a way that they really haven't before? And those are really the two issues that they're dealing with. Either way, there has to be some policy change to revive the confidence that they're not going to be subject to this. I mean, Dean Fraser yesterday basically saying this is a new terrain. Given the speed of which Silicon Valley felt extra, regulation is guaranteed, isn't it? You would think so. But I can't imagine that a lot of people
are going to be really gung ho about that if that crimped their local regional bank. I mean, really, because these are very direct. It's like the Bundesbank in Germany. Every politician has wound its banks. They don't want to consolidate them in sort of the same in the US with regional banks. It's a nice analogy in comparison when you read that, it just made up made up on the spot. You're making things up and things are up. It's true as a good start in The Men and
I Slept for a week features right now the S&P positive four tenths of one percent. Brown is going to make things up for the next two hours. Yields 348 on a 10 year higher by 4 basis points. She is quick on her feet.
Keeping you up to date with news from around the world with the first word. I'm Lisa Mateo. Fed chair Jerome Powell made it clear that inflation is still the top concern of the central bank.
Less than two weeks after the second biggest bank failure in U.S. history, Powell advised that more Fed tightening may be in store following Wednesday's quarter point rate hike. Officials are betting that the bank turmoil won't turn into a broader financial meltdown. The Bank of England is likely to continue the quickest set of interest rate increases in three decades. Investors and economists expect to be a
way to raise the benchmark lending rate by a quarter point. Those expectations were solidified Wednesday when new data showed inflation climbing in the U.K. for the first time in four months. Treasury Secretary Janet Yellen says the U.S. is not considering blanket bank deposit insurance without working with Congress. Now, a Senate subcommittee had asked Yellen whether protections for all U.S.
deposits would require congressional approval. She also said that the heads of recently failed American banks should be held accountable. The U.S. fears that a war weary world may embrace China's Ukraine peace plan. This week, Jinping and Vladimir Putin discuss the proposals, which the U.S.
has still rejected. Still dismissing it outright could lead China. Argue to the nation's tired of the war that the U.S. isn't interested in peace.
Global news powered by more than twenty seven hundred journalists and analysts in over 120 countries. I'm Lisa Matteo and this is Bloomberg. Live from New York City this morning. Good morning to you. Well, equity futures right now on the S&P 500 positive by about a quarter of one per cent fading. Just a touch on the S&P 500 on the
NASDAQ were positive, eight tenths of one per cent a lift there after a big move again. And the Treasury curve yesterday down 20 basis points at a front end, even after a 25 basis point hike from the Federal Reserve. Because we are going who knows where. On the FOMC now, the median dot stayed unchanged at 5.1 percent from the
December projections. Looking out ahead in the latest projections for March and the March meeting from yesterday, your two year at the moment, three ninety five. So the S4 again were higher on the session by about a basis point, but much lower over the last month or so. The 10 year yield higher by three basis points 346 59. We're all fixated on the differences emerging now between the ECB and the Federal Reserve. Early on in the session, the euro 1 0 9 1 0 9 thirty against the dollar. Right now, 1 2 871 positive, about a
tenth of 1 percent. Rameau, I'm with you. This is one to watch here. The language from the guard. Nothing like the language from Chairman Power. This is a pivotal moment. I think this week what we really see a difference in tone between Chair Powell. What we heard last week from ECB is
Christine Legarde and all of the others ECB members have come out and said we still have a serious problem, inflation. And the fact that inflation data came in higher than expected yesterday from the United Kingdom really gives them a very difficult decision today at 8:00 a.m. Eastern, when they take a look at how much do they have to raise further to really curtail that momentum at a time when other areas are seeing some sort of disinflation.
That decision about 90 minutes away. Allow me to frame the different views around the Federal Reserve coming forward from here. Morgan Stanley, see and expect a final 25 basis point hike at the May meeting. They say it's going to be driven by another strong payroll print, sticky inflation. All of that good stuff or bad stuff. However, which way you see it, needless to say, a surge in bank funding pressures could alter that view as the Morgan Stanley view. This is Neil Dutta of Renmark. When uncertainty is high, policymakers
and to wait and see mode. We only get one jobs number between now and May. He says it's unlikely that's enough information to decide. I think this is the problem we have now.
The totality of the data in this data dependent nonsense that we talk about all the time. Dependent on what data? Now, I've joked over the last week. Does it include bank stocks? But seriously now the Federal Reserve has told you that financial instability is a substitute for rate hikes. To what extent? No one knows. They don't know either.
And they've admitted that. What does that mean for CPI when it comes in for payrolls, when it comes in on how we should adjust to these numbers? Is this issue still ongoing? Just don't mention it and it won't really be relevant. I think that honestly, I think that when you look at some of the analysis, they're saying there's going to be disinflation because you're going to get credit tightening. So this data all doesn't matter because it's all backward looking. How many more do we need to see before it matters again, before you start thinking about the other side of this? What's the risk? The binary risk of seeing the inflation potential over the longer term is suddenly surging upward because of a lack of conviction of going hard. Now, I think the Fed's essentially put a
number on this anyway. I do believe that because I said yesterday if we had the S&P two weeks ago, that median offer 23 was coming up, 50 basis points. That was my thought. The time I think everyone shared that belief to some extent you'd go from 5 1 to 550. They were basically telling us that it might have to lift the median. They might have to do more. Kashgar was running around St 540, so I think we could all agree on that.
The fact it's stayed the same is then basically turning you even though CPI was hot. Payrolls were decent. That we are going to say I think may be 50 basis points of tightening is coming from this financial instability. Okay. We're going to find out if that's true or not. Is a month long enough for you. You need to do you need three? Do you find that out by early May to make a call on what you need to do with monetary policy, the Fed's fandom? Sampson a really, really tough spot. I think when it comes to the next move and I would take it a step further, if they do wait a couple meetings, then what is the potential damage if they hike rates again, say, come September at a time when people are actually starting to see the effects take hold much more significantly, but inflation just hasn't come down enough. Here's the Francis Donald take over at
Manulife. Here's the quote from her. While the terminal rate is now more in line, the path for the rest of 2003 and into 2005 is substantially different. While Paul said that the base case did not include cuts, the market's base case certainly does.
Who's right? Francis Donald joins us now. Francis, do you think they're done? And welcome to the show. They might be done. Who knows? Could be another 25 basis points or nothing. But in the grand scheme of things, I don't think it really matters.
The market already has a coin cost for this next meeting. What matters and what actually shocks my economic and inflation model is not another 25 basis points or not. It's how fast they cut and when they start cutting. So the conversation is going to have to shift. I think in the next few weeks away from this next incremental leading towards what does the path to the next one to two years looks like. Because if the Fed is going to get its way, there is a significant mispricing. I suspect that the market is probably
going to have to price in more cuts moving forward. And the Fed is going to follow what drives that, the economic ties or further financial instability. The two and this was the big difference that you talked about, the difference between the ECB and the Fed, the ECB president, the guard told us there is no tension between the price stability and financial stability mandate. And even though Paul implied the banking system is sound, he also was very clear that they were incorporating real economic impact from the banking stress through the lending channel. So we know that this is going to dampen growth moving forward.
Indeed, anyone with an economic model. The day that we saw the first initial banking stress clued in, this is going to be a credit crunch and we have a playbook for that. It's not good. It leads to recessions. It has every single time.
Francis, we've heard from executive after executive. This is not a credit crunch. This isn't a credit problem. This is simply a liquidity mismatch. How do you say to them, you're wrong? This is going to become a credit problem, as it always has got to be. Issues vs.. No, you're right.
This is something that could be addressed with deposit insurance or other measures. I'd just pull out my charts from before the banking stress issues in which we already saw senior loan officers telling us that we were in a sizable tightening. This was happening before we experienced breaking stress. So even if you want to say the impact is nil, I could still, still prove to you that we are actually seeing a wide range. Obviously, that credit is falling back. And that's particularly important because the bull case for the US economy has been the consumer is strong and the consumer was being driven by re leveraging. If that slows or stalls, then we have a
momentum slowing. Is that Q1 Q2? Probably not. But our traditional leads and legs tell us that by Q4 of this year we're in a significant soft patch. So my issue as well, maybe the Fed goes 25 basis points or not? I think not at this juncture, but how quickly do they choose to respond? And it's possible that the hawkish team here is not the next leaning, but that they try to stay on pause as long as possible, given inflation in the soft patch is probably still a little uncomfortably high. From what I'm hearing, Francis, it seems like the threshold has gone way down for cutting rates, at least what you expect in the upcoming months.
How low do you expect the Fed to be able to cut rates given that there is a disinflationary effect from some sort of credit contraction? Well, that's right. We have playbooks for uncertainty shocks, which the banking system stress is. We have playbooks for credit crunches, but it's been a very long time.
Leaves us since we had a playbook for low growth, but inflation is still around 3 to 4 percent. The most important thing I heard from Chipotle yesterday was actually his reference to long term inflation expectations being anchored. And he said it was true for households, businesses, forecasters and markets. And that may be the direction that chair Paul Allen the Fed chooses to tilt towards, as we still see subsequently high inflation. So even if they come to the end of the year with 3 to 4 percent, they may be able to say, listen, the long run concerns about inflation expectations becoming the anchor, we no longer have those. We can tilt back towards the employment
side of our mandate because let's remember, the Fed does have a dual mandate. We just haven't talked about the employment side in a very long fight. John and I were talking about this earlier. Francis, do you think that rate cuts in this framework are going to be bullish, are going to be positive for risk assets? Well, traditionally, the context around rate cuts matters, but we've got to get through a recession first. I mean, there is a little bit of something we're seeing now where people are saying, well, we're leaving. Indicators of the leading indicators of
the leading indicators are positive, but that's jumping the gun a bit. We still have to go through a rereading of this economy to a lower growth environment, which we have lower earnings growth, less activity, an employment sharp, maybe jumping the gun just a bit more or a bit too much. If we get too bullish on rates at this juncture, given the context. Francis, thank you as always. Francis downward. They're just brilliant. I've read Manulife Investment Management. A lot of people said President Taggart
did a good job. A lot of people said Chairman Powell did a good job. They did two very different jobs. When you compare and contrast, Jay Powell came out and basically opened up the door to the market, retaining its view that perhaps it was done with the retaking cycle. That is effectively what they did by keeping the dollar where it was and by talking about where it was. It there could be a firming Joel Weber additional policy or policies that are ongoing increases and test. How many people do you think Google what
firming that yesterday went in the country? I thought that was a pretty elegant way of dealing with a complex issue on our match and it took a long, long time to come up with it. When they have their board meets a strengthening look, I truly believe they made they made what they thought was the best decision at the time. A great history is going to judge whether it is the optimal decision. And I said this yesterday, you can look like burns and you can look like trees. Shake it back away too soon. Inflation rips. You have to come back, then you look foolish or you end up hiking into a bigger crisis. So it's too early for me to say that
they've made the right decision. I don't know what the right decision actually is. We're gonna find out in the next few weeks. And that's what they were up against yesterday, trying to work out whether this truly was the right decision given what we're up against. I think they did a great job expressing deep uncertainty and a complete lack of conviction and a sense of what they believe and that other people have their own beliefs.
What I find interesting is that the market took this as a resounding endorsement of rate cuts. I mean, basically, that is the one takeaway is game on. And as France has done on the issues, talking about the question now is how far do they go at the rate cuts in this particular cycle if inflation doesn't come down from. They didn't hide it. We said has two weeks changed things? It's only been two weeks. They've told us that they think two weeks has changed things, that ultimately this will lead to tighter lending standards, that this is a substitute for rate hikes.
To what extent? We don't know. But that's the direction of travel for them. I said yesterday, is this disinflationary, the shock in America? They've basically told us they think it is. And to be fair, a lot of people agree with them. Right. I mean, they were reflecting what I would I would say is the consensus right now that things have changed in the past two weeks. And even if there is stability in the
financial system, there will be some sort of restriction of credit. Money is more expensive for some of these regional lenders that really punch above their weight when it comes to credit lending. John, to talk about streaming and sports, just briefly, you'll often hear me complain about not being able to fight football games in the United States because there are 20 different streaming platforms each with. Yes, yes. I've heard them each.
Each with a home, you know, peacock for the Premier League on a weekend home after the Champions League stuff. I've got no idea where any of us might be coming to a home near you. In the U.K., Apple is considering bidding for the streaming rights to a range of English football games, according to people familiar with the situation, a move that would snap up its sports ambitions and increase competition with Amazon Prime video. This coming from James Turner here at Bloomberg this morning. And love your hot take. So basically, you over in England, you're not escaping the Emily Chang handle.
I think Sky Sports Amazon has had a little dabble as well. So, you know, I don't I don't care who hosts it. I really don't. I just want to know where to go for certain games. Why couldn't it just be a menu? You know, you like I don't like football. I don't accept one app, find another rap and except one app and find another.
Someone right now is crafting a solution. I hope they do. Not just for me, but for everybody. Features on the S&P positive. A quarter of what per cent? From New York, this is Bloomberg. Keeping you up to date with news from around the world with the first word. I'm Lisa Mateo.
Worries over inflation trumped the recent banking turmoil as Fed chair Jerome Powell rejected the idea of rate cuts and said that more tightening may be ahead. Wednesday's quarter point rate hike comes less than two weeks after the second biggest bank failure in U.S. history. The swish Swiss National Bank raises interest rates by 50 basis points and indicated that there's more to come. The SNB signaled that inflation outweighs any concerns after the market reaction to the downfall of Credit Suisse.
Meanwhile, SNB chairman Thomas Jordan says that Swiss banks are not exposed to U.S. bank failures. Top executives at First Republic Bank have agreed to forgo their bonuses for 2023 and some other pay. The bank has lost more than 88 percent in market value this year, and it's grappling with a crisis in confidence in some regional banks. Washington and the banking industry have been trying to keep First Republic from becoming the next bank to collapse. It's a victory for Boeing in Japan, the nation's flagship carrier, Japan. Japan Airlines. It's agreed to buy 21 737 max jets.
Airbus was originally seen as the frontrunner for the sale of the 320 neo aircraft. The Boeing order is estimated to be worth about one billion dollars. And there's a late twist to the sale of world famous football club Manchester United. Bloomberg's learn that bidders have been granted extra time to come up with new offers. A guitar consortium has already raised its offer above its initial five point five billion dollar bid.
British billionaire Jim Ratcliffe first bid was below that. I'm Lisa Matteo. This is Bloomberg. The government does recognize that there is some volatility in the market, but we believe the UK financial system is fundamentally strong and UK banks are well capitalized. They now have core capital ratios that
are three times higher than before the 2008 global financial crisis. But we continue to monitor the situation carefully. Jeremy Hunt there at the U.K., the chancellor of the exchequer on the banking system in the United Kingdom. It seems to me they say if you're a
finance minister at treasury secretary, a chancellor, you've got to come out the moment it's say, how strong your banking system is. That's never good. That's not a good thing, especially when it's literally all over the world. You could see every central bank with the obligatory our banking system is sound. We are not the United States read between the lines. We don't have a regional banking crisis. We are well capitalised and all of the
above. The probably UK this week hasn't come for the financial system. It's come from the data inflation back to double digits. And I think this is the problem. But a central bank trying to back away from rate hikes. Alexi, you're confronted with the economic data again and they got slapped round the Facebook CPI at ten point four per cent. And this is the reason why really the theme of the moment is how much divergences are have to be from central banks that are dealing with inflation that in some places has picked out other places really hasn't.
And there really are a sense of differences between the different inflationary drivers in, say, the United Kingdom versus the US, looking for a move to 425 today from 4 per cent looking for a 25 basis point hike from the Bank of England. Joining us now is Jennifer McEwen, the chief global economist at Capital Economics and the former BHP economist as well. Jennifer, thanks for being with us. Let's start here. The best decision today. What is it? Oh, difficult one.
I think it probably is best to press on with another 25 basis point hike, just particular given those inflation data that we saw yesterday, the strength of food inflation and the effects that that's having on services inflation in the UK are a particular concern. But I think it's a much class closer call than than the markets seem seems to think the market pricing seems to imply at the moment it's worth remembering that its last meeting, which actually seems a very long time ago now, but at the start of February that the Bank of England was was the clearest of the major central banks in indicating that it was close to the end of its tightening cycle. That further tightening would depend on the data being stronger than expected, either on the inflation or activity front.
So I think it is a fairly close call. Do you think that even if they do hike by 25 basis points, Jennifer, that they will indicate sort of as Fed Chair Jay Powell did, at least this is how he was read in the markets that they are now at the end of the rate hiking cycle and now it's just a matter of when they start cutting? Yeah, I think it will be a fairly dovish tone, pretty similar to the to the one that we've seen from the Fed, actually, that the Bank of England a bit different in the quite a few of its rate hikes have been on the relatively dovish side. And I don't think this one will be any different to that. There are clearly big risks to the economy in the UK and those have intensified with the turmoil in the banking sector. There's got to be a good chance that credit conditions tighten much more aggressively in the months ahead. The Bank of England will very much have an eye on that and the possible implications for inflation in future. A lot of the commentary is trying to
separate the two things. And for now, I think central banks are trying to do that, too, and say that we're still serious about the inflation fight going to continue raising interest rates. But ultimately in the future, if credit conditions tighten, then that brings down inflation, too. So these two goals become aligned at
some point. Jennifer, every single central banker has tried to draw a distinction between their banking system and the one in the US, their banking system, and how it is much more secure than, say, those that could be subject to deposit outflows. What about in the United Kingdom, where there is a unique set of issues, particularly how tied to interest rates some of the mortgages and other debt really are were there just in real time? Yeah, well, I mean, it's worried about the banking system that it is very well capitalized, but that that doesn't really help you if there are massive deposit outflows, it doesn't matter what bank you are or how strong your position is, if your if your deposits leave and then you're in trouble.
What we've got to hope is that's the fact that capital ratios are relatively high, that the banks appear to be in good health, will prevent that loss of confidence that would leave early deposits to leave. Yes, the UK banking, the UK real economy is relatively exposed to to what's happening to interest rates for feed through should be relatively rapid. But there have been quite a shift in the UK from the variable rate mortgages on which we used to rely very strongly, unlike the US towards a bit more of fixed rates and longer term rates. So that pulse rate isn't quite as quick as it was, but that's a good thing and a bad thing in some sense.
That just makes you think that even more of the drag from the policy tightening that we've already seen is yet to come as it does start to feed through to the real economy. So that's just another reason really for that for the Bank of England to act with caution in fixed income, we'd call it a maturity. Well, you know this stuff. Jennifer, in high yield, we'd say, when does everyone have to face that moment where they have to go out there and issued debt because other things are maturing? Jennifer, is that that cliff edge moment with fixed rate mortgages? Is it a two year, three, five? What's the average one in the UK? Where is that moment? Yeah, I think it's around two years now. But where that moment is, is, you know,
extremely difficult to judge unless you know, the one everybody's mortgages disappearing and when they might decide to remortgage for reasons of their own. But our sense having having dug through the data is probably only around a third of the of the impact of policy. Tightening has already come and there's probably another two thirds to go if we assume that we get another hike today. And also that the effects of the previous policy tightening aren't all feeding through. This goes to the longer variable. Next question, are they longer, shorter
in the UK versus, say, the United States versus Europe? How do you think about that issue? Yeah, I think they're probably still shorter in the UK than they are in the US, partly because of the fact that we've been kind of very long term fixes on mortgages are not so common. But it's you know, it's it's it's massively uncertain. The other thing about these lags is that we know that that they're variable, they're quite long, but also they're very, very unclear. So the central banks are very much reliant on watching the data and watching what's going on, not just in the real economy, in inflation, but also in in financial markets and in the banking sector to judge just just what the effects of their previous tightening have been.
And I think the banking turmoil that we're seeing now is a clear indication of some of the effects of this past policy tightening, even though it was difficult to pinpoint in advance. Just just how it would play out. Jennifer, I think a lot of people would agree with you that the lags are shorter in the United Kingdom simply because of the structure of a lot of the dead. So is there a warning in that for what the potential ramifications for inflation could be, especially given the fact that we just saw an upside surprise in inflation in the United Kingdom, even after all of the hikes that have been implemented? Yes.
Yes. There's a warning and it's that the it's going to need to add up the caution, and I think that's probably one reason why. Although in terms of the inflation data, it was clearer that inflation was turning down in the US and you know, six weeks ago at the time of the bank's last meeting. And yet the Bank of England was the one that said more clearly that that it was reaching the end of this tightening cycle and that's coming loose will be very data dependent. So I think that's probably a reflection of this to some extent, that the fact that the Palestinian is relatively rapid, the economy's quite reliance on the banking sector, too. Jennifer, thanks for the insight.
Jennifer McKeown, though, of Capital Economics, about an hour and six minutes away from that bank giving them rate decision. The U.K. got so much attention. We're talking about France. We saw that mess playing out in Paris at the moment with all the strikes. Unbelievable. Forcing through a left, raising the retirement age from 62 to 64.
I was just looking at some of the news around French airports. One airport in Paris, the Civil Aviation Authority, asking the airlines to cut flights by 30 per cent by 30 per cent. And if you take a look at the cost of hotels, I feel like I'm sitting in some seats or I have to mention the cost of hotels in Paris. But, you know, everything is getting more expensive because there are fewer workers and there's fewer availability at a time when they kind of need the tourism. They need some of that to keep the growth going.
There is a question of why you're seeing so many more with strikes, so much more labor upheaval. What this means for wages, what this means for the stickiness of inflation at a time when perhaps, yes, it's being transmitted through monetary policy. But there are structural forces underneath the economy that we can't forget about that are prompting increases across the board in wages and in prices.
Well, I think actually it's it's the model, the French model, the socialist model, that right now, given what we're facing in this economy, they've got to make clear changes. And that's why it was forced through by macro. And the reason why I think people talk about the U.K. right now in tandem with this type of situation is because you're seeing strikes in the U.K. that you hadn't traditionally seen that are more akin to what you would see in France. You disagree, not just saying, you know,
we still pick up the trash in London. So you're not going to go London right now with heaps of London street tidy. It's clean. Do you feel that New York City, New York is pretty tidy. It's clean. Do you really feel that? It's pretty tidy. It's clean. Would you like me to say, hey, can I tell you something? Different thoughts on New York. It's come in waves.
You know, during the play, it was not always a problem in a way, you know? Anyway, moving on now, I do want to just say this. I was looking at synonyms for the word firming because I wonder if that's what the Federer's are dead as they basically relate. OK. Crystallize.
Amalgamate, coagulate. Like how do you sort of signal I sit there and do that. You think so? I'm told they the Bloomberg. No, I'm really not on the Bloomberg Quicktake have a blimp. But do you think that they actually go three words? I totally sit around the table. Still spend ages doing this. We're going to talk to Covid about it.
That's really nice to spend ages. I would enjoy that gel gel. Is that another word? Yes. This is a good show. It's really good. We're looking at what's happening among the banks and asking is there going to be some tightening in credit conditions? If we didn't have this banking crisis, then this would have been a more hawkish result. How much will depend on how successful they are at ring fencing and limiting spread from the current situation? The Fed doesn't want to look as if it's doing a U-turn quite yet. With inflation still running as hard as it is, the risk of a hard landing is higher now because the Fed isn't going to really know what's the appropriate policy to do.
This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. I texted him yesterday, said Darvish, like lost, it went nuts. I'm so pleased he's not here because he'd be gone insane as we talk about this. That's exactly what they just did. It's a double take, a double shake, 25 basis points. Enjoy the beach. Tom from New York City this morning. Good morning.
Good morning. Equity futures right now positive four tenths of one percent. Alongside Lisa Abramowicz, some Jonathan Ferro out all week. He's going to be back on Monday.
Lisa, it was a Darvish hike. He was 25. And quite clearly, I think there were pretty clear about the whole think that they believe the financial instability is a substitute for further tightening. Facts have changed and so did their expectations in terms of their rate path. At least that was how the market interpreted. And I do think that while they did push back against rate cuts, it seemed like the balance of risks shifted downward.
Basically, the chance of a hard landing seemed more clear in terms of what had what was happening with the banks. And rate cuts are now priced into the market pretty solidly. No DAX remark asking the right question. I think there's not much time between now and the May meeting. Sallie Mae first couple days at a month. Is that enough time to get enough incoming information to make a decision either way about hike in interest rates or not? Think you wait and see W which is why some people think maybe a pause in May regardless of how this plays out through the rest of this year. Yeah, I'm not willing to even go that
far. Because ultimately if we don't see any banks collapse and if we see some sort of stability, let's say we get the deposit insurance. I say today Janet Yellen goes to the house and says, you know what, we're gonna ensure all deposits are up to four million dollars and, you know, game on. Do they then go back and say, OK, well,
our preeminent concern still now is inflation at a time where the banking system seems pretty safe. You're talking about no landing again. Exactly. And CAC battery has only been two weeks. It's only been two weeks. But that base case has changed. Their base case has changed. The difficulty for investors right now,
I think Jeff Rosenberg yesterday put it really well where he was talking about the asymmetry of risks and how the terrorists are getting so much wider, where you could end up getting either much higher inflation on the back end or you could get a hard landing and rates going to 1 percent or 2 percent. So either way, you could have a very different picture and a very different thing. Jeff was right to point that out. And I think the phrase was something like the rest cuts both ways and the risk truly does cut both ways, which is why I thought it was pretty hard for the Fed to make what might be the right or wrong call 25 basis points. Wait and see is the right call. Wait and see. See how this plays out, because both of us have got no idea how this plays out in the next couple of weeks. I do just keep going back to Janet
Yellen, though, and what she was talking about in front of the Senate committee that she was speaking to about how we haven't even considered insuring all deposits, which seem to run counter everything. Everyone was saying at the same time that people were saying the banking system is safe and your deposits are safe. So how do they square that at a time when people are depending on some sort of resolution there as one of the linchpins for the economy to have a soft landing or just cool more gradual? So I make this point repeatedly through the morning. So forgive me if you've heard it before.
I make two points. One, I don't think she contradicted herself from earlier in the week. I really don't. I really don't. I think it's a massive difference between saying if a bank poses systemic risk and there could be contagion, then we will use the systemic risk exception to make all depositors whole. That's one point. There's a big difference between that
and then saying we're going to have blanket deposit insurance, massive difference, can drive a truck through those two things. There's no nuance there. That's a huge, huge difference. What surprised me yesterday about Janet's comments, not that she somehow contradicted a s from the day before. It's just the idea that they haven't even discussed it. That's what I don't understand. Are you telling me after two weeks of this, after seeing deposits flee, banks in trouble, that the Treasury, they haven't even had a discussion about blanket deposit insurance? Are we serious? This does seem to be a little misstep or over oversight.
There is also, though, this question of how do they push back against a market that has gained some solace from the idea of deposit insurance in a broader sense to solve the problem. Because right now people are saying a Band-Aid with just sort of swooping in and miraculously saving any bank that runs into issues isn't going to solve the problem over the long term at a time when there is a just completely different backdrop for the speed of which deposits can leave a bank. We've got a lot to work through in about 55 minutes. You're going to have a Bank of England rate decision looking for a hike there as well of 25 basis points.
They're very focused on the incoming information to like everyone, our CPI. Early this week in the U.K. north, a 10 percent less will go through the day ahead in just a moment, which for the price action, we are positive by about a half of 1 per cent on S&P 500 in the bond market. Big rally into the front and yesterday yields lower by 20 basis points even after that rate hike. Given that the median deal for 2023, the
projections of the Fed remain basically the same when it came to the dot plot for this year, at least. A lot to talk about elsewhere. Your tenure higher this morning by five basis points 348. Lisa, 348 84. You mentioned that the Bank of England is having a press conference today. The rate decision comes out at 8:00
a.m.. We're gonna be hearing from the Bank of England's Catherine Mann. She's speaking at 11:00 a.m. and I'm curious about this divergence. We've been talking about it all morning and we will continue doing it. Are we seeing a material shift from the
U.S. more on hold and other European nations in particular, continuing with some rate hikes and more uncertainty as to the path ahead with an eye toward perhaps further hiking? 10:00 a.m. Ticktock, CEO. She, too, is testifying before the House Energy and Commerce Committee. Very interesting to see whether we get some indication of the willingness of Congress members to potentially ban tech task force a sale, do something to insulate some of the data concerns that people have raised. At 3:00 p.m., we got a Janet Yellen redux.
She is heading back to testify before the House Appropriations Committee. Does she clarify her comments as she gives some sense of what the discussions have been, where she and power are on the same page? What the indications are for how they are going to solve a problem that has caused the KBW bank index to absolutely crater over the past couple of months. She can say deposits are safe. She can say that Shery Ahn say she thinks they are. She thinks the financial system is resilient. It's basically what the chairman suggests. And the Fed news conference, the one we
all want to know, is whether they'll drive forward with blanket deposit insurance on which he's asked about the policy. She can't square the circle. That's the spotlight right now. That's the point. Tension for this treasury secretary.
Got some information for you. Some breaking news that comes from Ford Motor Company predicting losses in its electric vehicle business will grow to three billion dollars this year. Let's frame the three billion dollars this year. The deficit would match its accumulated evey losses over the past two years. This story coming out just moments ago.
Lisa, the transition to TV, expensive, really expensive. And Ford is putting a number on it this morning, especially because at this point, people are still buying trucks that are fueled by gasoline. And so how do you end up switching to a more modern technology or something? That's the future when you don't have the clientele yet to back it up and the transition costs are expensive. The order book for some of these vehicles, though, pretty big, isn't it? I would agree. But the costs incurred by outfitting your whole factory is difficult to. That's not an overnight thing. You saw the struggles that the Tesla had
and they didn't have that legacy business to transition from. This is really difficult stuff. So that's the latest from Ford predicting losses in its evey unit, the business to grow to 3 billion this year, the deficit matching its accumulated evey losses over the past two years. Joining us now is Brasco, the CIO at HSBC Private Banking and Wealth Management in the Americas. Jose, let's start here. I've asked this question a few times. Is the Fed done from what you've heard yesterday, because this market is screaming, you are so darn.
You know, we don't think they are. I mean, if you look at what the Fed has said, they said they want to keep going and we're going to keep to those words. We think they're going to go in May and June and get us to five 50. And then we think they're going to be on hold for our economists, has them on hold for the better part of a year now. That's going to come under fire,
obviously, because, you know, the economy is going to weaken and we're going to see what happens with the fragility of the banking system that could change that one, that that course of action. How much confidence do you have in that view, given the fact that right now that goes completely against where the market is? Yeah, well, we've got them cutting rates, but not till next year, right? So that's the problem, I think. And I think, Lisa, you raise a key point there. The Fed is trying to walk a fine line here, right. They're trying to tighten on the one
hand and tighten conditions. Conditions are tightening in terms of financial conditions. But on the other side, they're trying to provide the liquidity that the banking system needs. And the liquidity seems to be the key word. So it is a fine line. They're walking.
And I think, you know, the market is anticipating a lot of rate cuts this year, but which are economists doesn't still thinks it it's off in the future. Is the investing proposal pretty much the same regardless of whether there is a banking stress that causes the Fed to cut rates or if the Fed doesn't see that kind of distress and continues with rate hikes and then holds for a year? Is it the same kind of outcome when it comes to where you want to put your money? No. No, not at all, and I think, you know, the first thing we have to get our hands around, arms around is what happens in the banking system in the short term. You talked it before. You put beyond you're talking about regional banks and what's going to happen there. And a good deal of money is left. Right.
And as a result, they're going to have to do something to attract that capital back. And therefore, we're looking for downward revisions to earnings in technology because of the obvious situation with the ECB and the banking system and financials. So we're looking for more downward revisions to earnings there. Well, given everything that's happened and I've got to put you on the spot, you've got to put money to work at these regional was investable without blanket deposit insurance at the moment. It's a great question. I think, you know, I think with what they said implicitly by not saying, well, I've heard the arguments, you know, is that they will insure banks that are in trouble. And I don't think that's going to work.
You're going to have to step to the plate, step up to the plate and either make a commitment or not make a commitment. And what they seem to be doing is it's piecemeal. And therefore, the market may push their hands and may force them to the table to make a commitment one way or another. So it's not. Yes, they are on a festival for now. Hi, Zach.
Well, no. Right. I mean, we're we're selective. Put it that way. You know, I think right now, yeah, we're telling most clients that, you know, stay away from the regional banks now because we think there's more downside. But yes, we think there is some room in the future. But for now. Yeah, we're very select. Interesting. How's that?
Thanks for that. Has a risk of that. If HSBC Lisa, difficult moment, isn't it, especially to make that go into those banks? We're not getting any certainty on policy. And so how do you even begin to come up with a base case of profitability if you don't know what the parameters are? What other parameters? What are the parameters right now? How wide is the band of outcomes right now? For 2023, it's about as wide as you can possibly get. You can either get some sort of deposit backstop that gives a real boost to these banks and all of a sudden they become the profit engines that they once were. Or you could end up with more regulation and concerns about deposit flight. So then what do you do with that? I said the longest is going to join us shortly, coming to a constructive on risk assets. Then it got into the month of March and
it became less constructive on risk assets. We'll talk to him about that. Let's say the longest of Invesco coming up very shortly. Equities up a half of 1 per cent, yields up 2 by 6 basis
2023-03-27 12:20
