Powell Speaks Again | Bloomberg Surveillance 03/08/2023
Leading indicators continue to signal a recession, indeed. They say that recessions should be happening right about now. This is clearly an economy that's proving to be more resilient than a lot of people expected. I think people came into this year feeling as if the recession was inevitable and that no longer is the case. We see the market getting down to thirty four hundred, but then potentially flatlining through the second half of the year. We do think that equities can drop
lower, but for us it would take a lot to see those October lows again. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz as well. That shook things up. A life from New York City this morning. Good morning. Good morning for audience worldwide on TV and radio.
This is Bloomberg Surveillance alongside Tom Keene and Lisa Abramowicz. Some Jonathan Ferro futures up two tenths of one per cent on the S&P T.K. on a two year we have 5 per cent and a Fed share opening the door to a 50 basis point move this month. I think a huge part of our views are on
top of this story. It was such a shock to see in. The real question is, did we see this coming? I did not for longer. I think we all saw that coming based on the Fed communication when I did not see coming.
Is him opening the door so wide to increase in the pace. Again, we were thinking step down, step down, 25, 25, 25, 25. Then bank is open to 50. Everything we talk about for the next three hours, Lisa is highly dependent. I would say at the mercy of what we see
Friday morning and what we see next week in CPI. This is a new level of data dependence. Not only did he come out and open up the door to a faster pace of rate hikes, but you asked the question last week, will he sort of revisit the disinflationary process and whether it has really started? Not only did he basically suggest that hadn't started, but he said that daddy had been revised completely up, ended their view. They've been completely surprised.
And, oh, by the way, we got to go hard and we're not that restrict. And so you did have pregnancy, Ebrahim rivalry writing at Citigroup, obviously looking at stronger dollar, thinking we've come a long way on stronger dollar, John. I'll do that in the data first. But he really talked about the new data dependency that's out there and that we've really never seen this level of intensified due to dependency to me. John, what's important? I don't want to do the numbers Dani Burger down. But the fact is, when you look at the numbers of these spreads, it's we've never seen this spread after spread. Well, let's get to those numbers right now.
Equity futures shaping up as follows on the S&P trying to bounce for positive two tenths of one per cent. We snapped a three day winning streak. It snapped at heart in yesterday's session. The S&P down by one point six per cent. Here's your yield on a 10 year.
It hasn't done a lot. 397, 36, the action has taken place at a front end to the curve, a two year, three, five per cent to stands negative 106 basis points. The last time we saw that, Lisa, 1981, the early 80s. People are wondering what is a historical analog to this moment. We get another round of Jay Powell. He is back on the hill for day two of testimony, this time in front of the House Financial Services Committee. We also hear from Richmond Fed President
Thomas Bach. And two hours earlier at 8 a.m., will he revisit after yesterday or just simply double down and say we're open to anything? We have no idea what's going on, but inflation is still a problem today. We also get a Bank of Canada rate decision at 10:00 a.m. This to me is really interesting because
they've signaled a divergence from the U.S., possibly a pause in their rate hiking cycle. Given what's going on with the U.S., what does that do to the loonie? What does that do to the currencies of banks that want to move back from some of the rate hiking cycle that they're in if the U.S. is going as quickly as Fed Chair Jay
Powell hinted at today? As far as the data dependence goes, does ADP matter? I would guess not, but maybe it will, because we're in this new moment of dependency, 815 a.m., but the U.S. jolts job openings data. That's going to be really interesting, Tony. And do we get an ongoing acceleration in the number of job openings? Again, massive data, difficult to pass through the accuracy lagging. And yet the market will trade entirely on each of these data points as they come out because nobody else has a better guide. And then it's on to payrolls on Friday. There's one man responsible for the price action of the last 24 hours is the chairman of the Federal Reserve. The latest economic data have come in
stronger than expected. Nothing about the data suggests to me that we've taken too much. Inflationary pressures are running higher than expected. We have more work to do. We're very far from our from our price stability mandate.
We'd be prepared to increase the pace of rate hikes. The ultimate level of interest rates is likely to be to be higher than previously anticipated. The process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. We will stay the course until the job is done. J.J. Pound a different tone to that compared to what we heard from him in the news conference a month or so ago.
Fantastic exchange with a Democratic senator from Massachusetts as well. Senator Warren will play a little bit later on in the hour. Let's get straight to it with Frances Donald, the global chief economist and strategist at Manulife Investment Management. Frances, an easy one. What did you make of that? That's not an easy one, John, because there's a lot of passel through there, but the main takeaway for me is, yes, we could talk about terminal rate estimates and the pace of hikes. But what I'm hearing is just more data dependence and myopic data dependence can always be dangerous.
But it's particularly problematic in an environment where we have weather distortions, seasonal adjustment distortions, low survey responses. We're in data that is really having trouble setting us a clear signal, at least over the long term. And I'm concerned that we're going to see markets that are overreacting to data points at a false decision and potentially even a central bank that's moving too quickly and making big policy changes. Even the communication off of data that I think is going to be very bumpy in the next three to six months.
Frances, with the shock that we saw yesterday, does disinflation come to the rescue? Can we get a rapidity of sharply lower inflation? You know, I think the Fed may not be focused on specifically some of those traditional inflation measures, but that rise we've seen in inflation expectations and market based measures. That's what's keeping me up at night that is moving in the wrong direction. Now, it's countered by inflation expectations among consumers that are still going lower. And I'm hoping that the Fed is focusing on those long term inflation expectations which are coming down quite a bit. One of my bigger concerns is this summer we're probably going to lose some of the disinflation momentum that's largely going to be base effects. So this downward momentum that we've seen is probably going to stall. That's when we're going to start hearing
those words like stagflation come back. And if we haven't seen some slowdown in jobs by then, a Fed that's going to stay hawkish through the summer after what was wrought yesterday, is it walking back Wednesday? I mean, you see come out today to the house and change the tune a little bit. The only way we're going to walk back this pricing for the March meeting is what we see in the jobs data. And that's few days. And when I say jobs data. I mean, we've got jobless claims, we've got job openings, we've got challengers, ADP, NFP, it's a veritable buffet of jobs data that's going to be coming through.
And no one number is going to be, I think, more important than some of those stories, especially in an environment where we're really trying to dig deeper. We've got to look at private sector jobs data right now, people looking at job postings on things like LinkedIn. And indeed, if you want to understand what the Fed is going to be doing a year, two years from now, which I think is even more important than the March meeting, you got to be looking at all of the data available and really making sure that you understand the comprehensive story behind it. Francis, I understand what a bind Fed
chair Jay Powell is and how unique this moment is. And yet the flip flopping of his messages is jarring. It's jarring for markets in his jarring for people who are trying to get a sense of what the compass is for this Federal Reserve.
Do you think that that in and of itself is detrimental or advantageous, given that that uncertainty actually creates some of the market conditions that are potentially tighter than they'd otherwise be? Well, it certainly makes our job harder, at least have, because instead of saying, well, they've provided forward guidance and we can kind of rest on our laurels for six months, we have to be a lot more flexible when it comes to the data that's coming in. But there is a lot of short termism in this industry and financial media. When you're an economist, you're always looking for what is the next big story. And I don't want to miss that inflection point. But problematically, we have a lot of
data that's moving, you know, two steps forward, one steps back and getting dangerous to extrapolate too far in the future. We have portfolios that are trading tactically and they need to be moving off of that. But if you're a longer term investor, a lot of this is noise that's distracting from the signal. You need to be focusing 12 to 18 months or even in some cases, we have to produce five year forecasts to tell us where our strategic portfolio should be positioned over the very long term. And so some of this focus on the Fed
moving back and forth in a month to month basis. It's not valuable to investors and sometimes it can actually be distracting, in some cases even dangerous. Where do you think the market is getting the economy from right now? I'm not sure the market's getting the economy wrong again. It depends on your timeframe. So Q1 is certainly much stronger than many people expected that consumers holding in strong.
But the challenge comes back to and I've heard a lot of your guests talk about this. Where are we going to be? Down the road. And it is very difficult to discount the probability of a recession 12 to 18 months from now. So if we're talking about the next three months. Sure. There's no problem in saying this economy is stronger than we expected in November and December.
But if you want to argue for no recession, you have to discount almost every single leading indicator that has very reliably predicted a recession later in the year for 12 to 18 months. You can try to do that. We have a very different labor market. We have excess savings. But for my view, it's a very hard sell. One thing you can't say is that the
leads and lags in this economy may be different than what we've previously expected. But I would just really focus on your timelines. Are you talking about the economy in the next three months solid or you're talking about the 18 month outlook? I think a lot of strategists, including myself, need to work on really being clear about their timelines for their forecasts, Francis, and their degree of confidence around each time. You have more confidence about where we'll be in six months than maybe where we'll be next week after CPI.
Oh, absolutely. And I think that's actually the game is what does the economy look like 12 to 18 months from now? Actually, I'm concerned about that. I think it's going to look a little more stagflation area than we'd be comfortable with.
I'm less concerned about a technical recession. We know the playbook to trade recessions. We know what those look like. Historically, I'm more concerned about
18 months from now. We've been in a very slow growth environment for pretty extended period of time and we have inflation stuck around 3 to 4 percent. And problematically in inflation that's rested in the system that's still there is likely to be less interest rate sensitive than the inflation that we've managed to kind of dissipate over this period of time. So this word stagflation does lots of ways to define it. There's lots of ways people can talk about it. I think that's going to be more of a
theme for us moving forward than we thought it was going to be even just a few months ago. Francis, wonderful, as always, to get your perspective. Great to see you, Francis. Down at the Manulife Investment Management Credit to Mohammed Shery Ahn, who came out before the last Fed decision and said this Fed should go 50, said that if they went 25, they'd risk a flip flop. And here we are. Mohammed published last night in
Bloomberg opinion. He said this is the new dilemma for Chairman Powell. Validate the market, move in the process NIKKEI in an embarrassing fashion of forward guidance provided just a month ago or stick with that guidance, a fall further behind in the battle against inflation. And joining him is James Bullard of St. Lewis. The fugitive from Indiana.
He's a free thinker. And John, between his regime and research of, I'm going to say, 70 years ago. In his latest effort to say, let's get it done quickly, Bullard is OUTFRONT on the dialogue. I would agree. I think Mohamed El-Erian highlights this really important point that is there a risk, is there a policy error embedded in a lack of direction in violently swinging approaches to monetary policy from one month to another and perceptions to the reality is at hand, right? I mean, is there something that undermines confidence and sort of the morning that markets have traditionally looked at, or is this sort of an inevitability of this moment? Jim Mamet's point, it was too early to embrace this it disinflationary narrative. That's what he thought the risk ultimately was.
And I made the point yesterday, what kind of narrative did you have to begin with if it got broken with one month's worth of data? What does that tell you about how strong your argument was in the first place? It's a tricky moment. He also massively I mean, the revisions also I mean, but again, this is like messy data sort of pinch. Everything could change again on Friday and probably well to see to ensure unchartered territory. That's true. It's so very smart. Said that yesterday. Sarah Hunt coming up in the next hour. Looking forward to that from Alpine.
Saxon works in about 48 minutes time. Keeping you up to date with the news from around the world with the first word. I'm Lisa Mateo. Bond traders have boosted bets at the
Federal Reserve will speed up the pace of interest rate increases. That's after Fed chair Jerome Powell testified before a Senate committee. Powell told lawmakers he's ready for a faster monetary tightening if economic data justifies it. Interest rate swaps indicate traders see
a half point hike is more likely this month. The euro area economy failed to expand at the end of 2022. Worse than expected performances in Germany and Ireland helped pull down initial growth. Reading's gross domestic product was unchanged during the final three months of the year. Germany's economy, the continent's largest, shrank by four tenths of one percent in the former Soviet Republic of Georgia.
Riot police used tear gas and water cannons to disperse protesters unhappy over a so-called foreign agents bill. The measure would curb the influence of groups that rely on funding from the U.S. and Europe. Critics fear Georgia is sliding away
from the EU and NATO and is increasingly pro-Russian. The German sports shoemaker Adidas has slashed its dividend and shaken up management. New CEO Bjorn Goldin is personally replacing the heads of global brands. There is no word of what Adidas will do with a one point three billion dollars of unsold Yeezy gear.
The company halted sales after cutting ties with the rapper known as Game Global News, powered by more than twenty seven hundred journalists and analysts in over 120 countries. I'm Lisa Matteo and this is Bloomberg. That's goal is to slow inflation if you get your projections. Do you know how many people who are currently working, going about their lives will lose their jobs? Inflation is extremely high and it's hurting the working people of this country badly.
All of them, not just 2 million, but all of them are suffering under high inflation. And putting 2 million people out of work is just part of the cost and they just have to bear it while working people be better off. If if we just walk away from our jobs and inflation rebounds by 16 percent, fantastic exchange between Massachusetts Senator Elizabeth Warren and a Fed chair.
J. Pound and I have to say, that's more than just their tour in drama. There's a lot of information involved in that exchange. And I would go back to the Jackson Hole speech in Wyoming from the Fed chair. A failure to restore price stability would mean far greater pain. That was the original argument.
I think there's a sense from certain senators I'd want to sit here and speak for the Democratic senator from Massachusetts. But there is a sense from certain senators and you can see it, that they feel like this Fed reserve is being somewhat intellectually dishonest about where this is going. Are they really going to put unemployment up without causing a recession? Is that not the costs that they need to pay the price we all need to pay to get inflation back down towards Tom Keene? And I think it's a sense from a lot of people that they're not being very open and honest about that. We don't talk before the show, and I'm thrilled you played that piece. I don't know if you did or Lisa did that or somebody else did that, but that's America right there. This is really, really important.
In defense of the senator from Massachusetts, a matter were known when no one knew who she was and she was just sitting there in a room quiet and silent. And she is very different from the Washington clock. There's a tension here. Right. And you feel fusillade underpinning some of the discussions with the Fed saying we have a blunt tool. This is our tool. We have to bring down inflation. And you guys have other tools talking about the debt ceiling, talking about other things. And Senator Warren saying, well, why are
you using this tool so aggressively? Do you really think that it's warranted? And right now, we don't even know how high the employment rate is not theoretical because the unemployment rate hasn't gone up, which is actually ironically a liability for whether or not you're on power or part of the fancy class. Elizabeth Warren was not. She's out of Houston and Rutgers. She clawed her way up to the absolute elite pillar of bankruptcy law, more than qualified to talk about the dynamics of the American economy. Anne-Marie Horton is as well our Bloomberg Washington correspondent. That was really some moment Anne-Marie hauled in and really sums up Main Street and Wall Street. Who won the day. Yeah.
It's a moment I actually Tom. I was the one that asked for that exchange to be requested because you see Powell immediately jump on Senator Warren and say, well, this is, as Lisa says, the only tool I have. Would it be better off that we have higher inflation? Remember last time Powell was in front of lawmakers? Inflation was nearing 9 percent. So now he's in front of them. He was able to get inflation down a bit. The big concern on Capitol Hill, which you constantly heard yesterday, was what does this mean for the labor market? Also, what do higher rates mean for people who are trying to pay their mortgages or they're trying to buy homes? This is something that was tenuously brought up to Jerome Powell yesterday, and it was a difficult one. But as Michael McKee said yesterday, this is a 70. This is where his remarks have a 72 hour
shelf life, because we really need to see what comes out Friday morning. But the culture of Washington. You've got somebody Warren herself says she grew up on the ragged edge of the middle class.
Jerome Paul had every advantage with qualified parents and such. Georgetown Prep, Princeton and on and on. Who won the day there? Who's winning the day in Washington, Main Street or fancy Wall Street? I think it depends who you ask. I think yesterday, though, Main Street won the questions constantly on drone power were about the struggles of everyday Americans, whether or not it was a Republican or a Democrat, asking a lot of these questions. I mean, there was a host of other issues that were put forward to Jay Powell that obviously both sides were trying to play politics, whether it was about capital requirements of banks. Clearly, the bank lobbyists have been
working overtime the past few weeks because that was brought up a number of times from Republicans or whether or not the Fed should be involved when it comes to climate change, what they think about the debt ceiling, as well as who should be his number two, because there's a growing chorus that thinks it really needs to be, for the first time ever, a Latino PAC. But when it comes to how this Fed is acting, many Democrats and Republicans are concerned that a lot of Democrats are up for re-election in 2024, including the chair of that committee, Sherrod Brown, because in 2024, the worry and the risk is that there'll be a high unemployment rate and potentially a recession. NYSE I'm looking right now at a 10 year yield that's still hovering around 4 percent. Granted, it did not go up significantly yesterday in tandem with a two year yield, which is why we're seeing that inversion.
But it raises questions for longer term borrowing costs for the United States. How much was that sort of underpinning some of the discussion and the concern that you could start to see deficits really pick up disproportionately in response to what we're seeing in the bond market? I mean, this these concerns a lot of lawmakers brought up when it comes to higher interest rates. They are concerned, although you did have one senator say that he thought he had a hell of a deal, a 10 percent interest rate when he bought his first house in the late 1990s. And since then, rates have actually been quite low. But these are these are concerns across the political spectrum. And this is their moment where politicians have their chance to ask the Fed chair how he sees this playing out. But a lot of questions remain when it
comes to the deficit. We're going to hear from the president tomorrow on his plan and how he thinks he could bring down the deficit. And at the same time, make sure that these entitlement programs like Medicare and Social Security remain solvent. But, of course, we know that all of these things the president going to talk about tomorrow really don't have any legs in getting through Congress. And this is the reason why yesterday when he proposed this tax on income above four hundred thousand dollars, a lot of people didn't even talk about it because we just assumed to be dead in the water. Is it?
I mean, is it basically dead in the water or is there's increasing support for this type of proposal? No, no, no. This. This is dead in the water. Remember the last Congress the Democrats had control of the House and the Senate and they were there still Trump area tax cuts that have lived through a Democratic Senate, House and White House and they still were unable to even close the carried interest loophole that benefits Wall Street.
So if you think that this Congress that now the Republicans have control of the House is going to be able to get through any tax hikes. They're dreaming. It's not going to happen. I'll take 90s house prices at a 10 percent mortgage any day of the week. When you take a 90s house price, that's that's the key point, right? I mean, how mine is my entire housing market changed and gotten valued much higher, radically. As a result of the mortgage rates when they were in a massive way, Crimea River, anyone who bought a house, you know, 30 years ago stopped. Stop.
Amari, thank you. Washington, D.C., nice. Thank you very much. Just wonderful. I'm going to see more of that. Chairman Power day two in front of the House Financial Services Committee a little bit later. Does somebody does handlers or whatever? And I mean, we're in a constructive way to say, let's walk back the tone a little bit. I don't have a strong opinion. My opinion is the market spoke.
And, you know, we haven't talked enough for a body that across all these spreads user stories. When it's in your opening testimony time, it's pretty deliberate. And clearly, yes, it had a lot of thought put into it. I'll go with it. Is it highly dependent on Friday next week? Absolutely. And I think maybe he knows that, too. This market's going to price it back out.
We get disappointed payrolls and a CPI that comes in beneath below expectations. Nothing that happened in this market would derail his message. I mean, some people could say, well, what if something broke? Well, nothing broke. In fact, you saw one and a half percent decline on the S&P. You could argue it's surprising it wasn't even more.
We're talking suddenly the real realization that six percent interest rates might not be out of the picture. Rick Reeder of BlackRock saying that he doesn't think that that's without over the realm of possibility, the fact that we did not see more of a decline and that we're trying to eke out gains today. I you a lot about where we are. Yeah, I was surprised. Not so much. The Dow down 500 points, but the VIX really didn't move all that much. I thought we'd see a greeter move in equities given 100 beeps and two's turns. I will say this, though, on the fifth date, there's two interesting points there.
Not just that he opened the door for a lot of people on the south side. He appeared to lower the bar for it as well. I think there's a sense already on Wall Street that 50 might be an option if you get another blow out figure on payrolls on Friday. Now, the takeaway seems to be you get around two hundred three intra K.. This door is still wide open. CPI comes in at point four percent.
In fact, Matt Miller and I went back and forth yesterday evening over at Deutsche Bank and Matt said 300000 on payrolls is what they're looking for, zero point four percent on core CPI next week. If we get that, this market's going to go with 50. And if the market goes with 50, the Fed is likely to follow through. Andrew Holland, has the city raised an interesting one as well? If they don't go 50 now, they got a bit of a problem, haven't they? Absolutely.
Ease financial conditions. And where does that leave them in this fight against inflation? The Bloomberg financial conditions at that point, 3 3, it became more accommodative yesterday. I did not expect that when I got up from the survivors.
I'm not surprised by that. I left the number myself. Thomas, that actually what to say? Yes. Right now it's point 3 3. But the answer is we want more accommodative as we go into this data. I'm not sure I'd call this bond market accommodative at the front end of the curve right now. That's for sure term. This is Bloomberg.
Where do you start in this market after yesterday? Let's start with equities. Your stock market looks like this futures. I don't think we can even call this a bounce up two tenths of one per cent on the S&P and the Nasdaq up a third of 1 per cent to Lisa's point, a one point six per cent move lower on the S&P 500. That's pretty resilient compared to what we saw in the bond market. Look at these Tencent, 30 year to year through 5 per cent for the first time since 2007. This is basically had now a 100 basis point move off the lows of FAP. Second, a 100 basis point move at the
front end of the curve on a two year and you've now got two year, 10 year inversion breaking through 100 basis points. The curve has not been this inverted since nineteen eighty one. It's been that long. If you look at the rest of the curve, the 30 has really not done much at all. 387, 30.
That screams a hard landing in the last 24 hours. The affects market eurodollar DAX. Why just had his best day go in back to early November of last year. Euro dollar back in one of five territory one of 537. A negative one tenth of 1 per cent on the session. T.K., as we look at not just higher for longer, but faster as well, faster as well as faster, how do we get back to where we've got to get back to? And the answer is, John, I'm going to go to what the pros go to, which is the real yield.
And the answer is the inflation adjusted yield is maybe the one thing we can latch on to with all the uncertainty and the confusion that we have. I did a very careful study after Bloomberg today of the five year, not the 10 year, which is the vanilla real year, the five year in closer real yield, John. And if you go back to before the chaos, it was roughly on a moving average basis to point 1 3 percent. We're now at one point seventy eight percent. We've made a lot of it back. But there's more to go to get to the
goal that the Jerome Powell, the governor of the Bank of England, Lagarde and the rest, while we're not there yet. Lisa mentioned Rick Reed with BlackRock. Rick Reed opening the door to suggest I'm not saying it's his base case, but at least floating the idea that perhaps we could go to six. The reason he's suggesting that is because we're finding out through this process that maybe this economy is a lot more resilient, less interest rate sensitive than we all thought it was twelve months ago.
And with that in mind, some to your chart, if you would set 1 per cent twelve months ago, some people would push back and said we can't take one per cent positive real yields. And here we are, some looking at two. We have lived here before. And I do want to emphasize that people that are more quiescent are seeing a high inflation, solves high inflation.
And let's remind ourselves, in the chaos to Friday at age 30 that there's people like Anaheim and David Rosenberg and others, it's a service sector. Inflation will flatten and then we'll come in and decent flight with the goods and disinflation we're seeing right now. They wish it was that simple, don't they? They don't know that the central banks, they don't know the time. They're also incredibly concerned about the psychology of higher inflation becoming entrenched. Yes. And that's something that they worry about. And I imagine they believe the clock is
ticking, too, which speaks to this. The point rate, get up, get to affectionately respect restrictive as fast as you can. I'd sit here and say, well, where is she? What district do they have any idea? And radio. Jan, you don't see this, folks. We've got the two turns banner up on TV. Jan a negative a hundred and seven beeps. Yeah, like that was supposed to be like back to school this fall.
It's early 80s stuff. It's it's nuts. That's where we are. Let's do this now. We do it with someone steeped in economic history when you're at the University of Bath. As John Farrell says that you need
history, you go over and look at the Roman ruins. Sharon Bell has done that with Goldman Sachs, European equity strategist this morning. How did Goldman Sachs off the London desk synthesize yesterday's festivities in Washington? Sharon, how did Goldman Sachs London adjust? Oh, I I agree with your comments, I feel that the adjustment we've seen in markets has been quite small, given the news that we have from Powell that, you know, their view would be that they need to tighten a bit further anyway in order to to to push those inflationary trends down and stop inflation becoming a bit more embedded. We've increased by 25 basis points of
view on where the Fed terminal rate will be. We expect them to keep hiking all the way through to July. We're now looking for five and a half to five and three quarters. So I've been a bit surprised at the lack of reaction. I guess you could say yes, risk risky assets like equities. I saw that yesterday in the VIX really not moving right now, nineteen point five down. It's got a 21 22 feel we're not there.
So within equities. Sure. And when you talk to Peter about how you buy for Kate equities, given what is going to come, is a profit making, a non profit making? What are the factors that matter and want to own in equities? It's tricky. We think equity returns from here will be quite low because you've got this kind of non ideal environment. You've got rates going up and you don't have a lot of progress on earnings. So that combination is not brilliant. Generally for equity markets and
valuation, particularly the US market still looks quite expensive. So where do you go in Europe? Probably looks a little bit better than the US because you are you're seeing growth pick up in China with the reopening of Europe has a lot of exposure to Asia and China. And also Europe has lower value stocks too, which suffer less and a higher rate environment.
So I would be looking at all value ends at the market. Commodities have been a little bit left behind in all of this as well. I would've expected a stronger commodities market year to date, we think as global demand picks up later in the year. In particular with China reopening, you'll see commodity prices rise again, perhaps some stocks exposed to that and then more value areas like financials.
Sharon has the trade with respect to European equities already been played out, especially because we've already seen the reopening kind of enthusiasm around China. And we just got data kind of throwing some cold water on this, feeling that perhaps the eurozone could avoid some sort of recession or stagflation with the eurozone economy failing to grow in the fourth quarter. Yeah, I don't think Europe is going to run away with fantastic growth. And I do agree with you. European markets have done well year to date, but I think there is a big difference between Europe and the US. And that is valuation. U.S. companies trade on average. The S&P trades on about 18 times. PE Europe trades on 12 to 13 times PE.
So there's this big gap between the two. I think that you will not pricing so much into European equities even with the rally we've had year to date. The other thing to note is European earnings have been quite resilient. So the fourth quarter earnings season was quite good. Yes, the economy may not be all that strong, but the earnings of European companies have been reasonably resilient. So that resilience and low valuation makes us feel a little bit more positive. But I don't want to overemphasize this
point. We have very low returns in Europe to equities this year. How vulnerable are some of the big corporations in Europe to a euro that could depreciate if the US truly does surprise to the upside with respect to the piece and to the level of rate hikes? Yep. And I think it's a tricky one, isn't it? Because you could say euro depreciation is good for European companies that very, very global in their mix. Only 40 percent of their sales are domestic to Europe, 60 percent are outside. A lot of that is dollar earnings.
So if the dollar is going up, you're making much more earnings when you translate that back into euros. So fantastic. But actually, generally, you're totally right. There's a positive correlation between European equities and the euro.
The euro's going up. People are more risk gone. They believe that growth is gonna be better in Europe and they tend to invest in European assets. Shery Ahn. There's a drinking game when I ask this question.
So get your tang out right now here. And it's real simple here. I see higher inflation. Maybe I see some GDP growth, maybe like what we see in Japan, which sums up to a more vibrant nominal GDP. Does that fall over to a missed revenue? Guess where revenues do better than your modeling? And that does seem to have been the case, although I wouldn't just say revenues, margins have held up much better than we expected and that our models would've predicted last year.
So we've been surprised on both counts that the top line has been a bit better than expected. I agree that's related to nominal growth, but companies have been able to pass on a lot of the cost, additional cost that they've been seeing through to the consumers, whether that be businesses or other businesses, all or households, consumers. So margins have been a bit more robust as well. And I think that's been a bit of a surprise to us in Europe particularly.
So I think if it's at this point about European earnings being a little bit more resilient, being very, very global in their nature, those things are good. But of course, what's unhelpful is, is rising interest rates. Gerard, before I let you go, you talk about the exposure to Europe, to the reopening in China, and we talk about this as a positive for growth.
And at the same time, here in the U.S., we talk all about this geopolitical risk. It's sort of a catchall phrase that people use used. You talk about the increasingly fiery rhetoric between the U.S. and China.
How do you express concern about some sort of regulatory pushback in companies in Europe that are very exposed to China that could get hit by some of this? Or do you just basically shrug it off and say it won't happen? Yeah, look, I think that there is a view generally that having a cut, a wide international spread is not such a bad thing. You get you know, some economies are growing, some economies are weakening, and you've got a broad spread of exposure. But having just purely a China exposure pocket, that does leave you very open to geopolitical risk, to China to supply chain risk, et cetera.
So people are aware of that. I think most of the companies with exposure to China are very global in that mix. So they're not just solely focused on China. Sharon, wonderful to hear from you again. Sharon Bell of Goldman. Sharon.
Thank you. So let's a few times to Sharon over the last few months. But remember, she joined the program a number of months ago and said, get long European banks.
And I put that face, that face way. You know, I'm like, what are you talking about? You are a Korean bank. I don't felt any less than average. And so I pulled that face a few times over the years. And often the individual becomes right. And I have to take it back and say that face wasn't deserved. Bank stocks in Europe are up more than 20 percent year to date.
They have ripped off a lot of last summer. It's been phenomenal to see. I don't have a strong call on what they do from here. But let's be clear, on a ratio basis and with the ample dividend, their approach is still way below the American profit making and dominant banks. I think we've got to talk about
surveillance entertainment here. And I think on the commercial banks, we got to go big, little like the sports programs. Would you like to do? I'd like to have a camera on us or even have the ads and silent. Okay.
So they can hear. Would you like is the lineup before the show and seeing as well? No, I don't want to do that. They don't need my full attention. I think I'm pulling out. You're in Europe for that suggestion. You know, where we sort of all shake
hands before the game starts? What do we think about it? I think I'm just thinking about doing sort of a sport type broadcast. Would we shake hands with each other? Yeah, yeah, yeah. Introduce a gaggle of what was a high. Go. What was the highlight yesterday? What? Anna Hahn making clear to Mercedes is gonna do better in Saudi Arabia. She's a Lewis Hamilton fan. Yeah, me, me, me.
I mean, that's what the show's about F1 overload at the moment on this program. Forno Yeah, that's right. Christian NASDAQ. Christian Horner Road. So Tom enough as knows his car enough
from RBC Capital Markets. Looking forward to catching up with her on foreign exchange. Big move in a US dollar yesterday. Dollar stronger euro dollar back to 1 0 5. The bond market is just where the entertainment is. Depends where you are in equities. Where do you find fund entertaining or not? I guess close to 4 per cent on a 10 year. We really didn't do much on a 10 year
yield yesterday. The heavy lifting at the front end of the curve, the two year through 5 per cent for the first time since 2007. This morning we add some more weight to is up around about 3 basis points coming into Chairman Power Day 2 yesterday in front of the Senate Banking Committee. A little bit later this morning, 10 a.m. Eastern Time in front of the House Financial Services Committee. That's coming up a little bit later.
Keeping you up to date with news from around the world with the first word. I'm Lisa Matteo. In less than five weeks, Federal Reserve Chair Jerome Powell has changed his tune.
On February 1st, Powell said the displaced and process had begun. But on Tuesday, he told a Senate committee the on ultimate level of interest rates is likely to be higher than anticipated. Powell said he's ready for a faster monetary tightening if economic data justifies it in the UK. Chancellor of the Exchequer.
Jeremy Hunt may give companies extra tax relief on investment spending months looking for measures to boost economic growth in his spring budget. He's under pressure to act because Britain's flagship corporate tax break expires on April 1st. Ukraine says at a European Union proposal to buy one point one billion dollars of ammunition isn't enough.
The country's defense minister says Ukrainian forces need about four times as much. The EU's defence ministers have given their cautious backing to sending ammunition, ammunition to Ukraine from existing stock. The White House says endorse a bill in Congress that could give the president authority to ban or force a sale of ticktock that could break a deadlock over how to address privacy concerns around the popular Chinese owned app. The bill doesn't mention ticktock, but
the video sharing app is the clear target. It has about 100 million users in the U.S. and Silver Gate Capital is in talks with U.S.
regulators on ways to salvage the troubled crypto friendly bank. Bloomberg has learned one possible option. FDIC officials are discussing includes lining up crypto industry investors to help Silver Gate shore up its liquidity. Regulators arrived at the firm's La
Hoya, California offices last week. Global news power by more than twenty seven hundred journalists and analysts in over 120 countries. I'm Lisa Mateo and this is Bloomberg.
I think the Goldilocks scenario that we see is the least probable of the outcomes is really what the market's been pricing the start this year. The US equity market, it's this idea that we do get this gradual fading of inflation and the Fed are able to engineer this no landing or a soft landing. We still get robust growth. We don't get a collapse in margins. We still expect to see a recession this year. Economists have pushed that back one
quarter from Q2 to Q3. That was great there, although the US head of equity and derivative strategy. Absolutely. I think he it yesterday. So Greg and a team are looking for 575 on rates. That's car wreck Adonis coal, which is
south of that in terms of what we're pricing for the peak rate and this rate hike in cycle so far. And he's looking at 30 400 on the S&P 500 year end. I mean, we got close yesterday, but was still a while away, aren't we? The S&P 500 Dani Burger to your point, Brammer, you said a couple of times already this morning, I think a lot of people will sit here and say, you know what, that resonates with me. We saw a big move in the bond market. Some real milestones that we haven't hit in decades. Looking at that yield curve inversion, a two year, three, five percent for the first time since 0 7, and yet equities down one point six percent. And I looked at high yield spreads at a
close yesterday, nine dead flat, totally unchanged. Why? Basically, people I honestly can't explain it honestly. If I gave you a real explanation, I'd be lying. There is a feeling that perhaps this economy is more resilient to higher rates. And if that's the case, then you could see rates go higher without a comment.
It'll be our turn in the economy. And actually HSBC pointing this out. If you take a look at 10 year yields south of 4 percent, that's indicating a soft landing. That's indicating that rates remain higher, that we're not going to crash in some sort of phenomenal way. And they're looking for those yields to go down because they think that's perhaps too optimistic. Jonah, break.
You said something really, really important in all this. I said a lot of things they share. Some of it, though, is that there's a way over here. Be selective here. T.K., I'm going to be selective here. John Nelson, what you need to know this
morning, folks, in this true turmoil as we go to the chairman's further comments today, we further steep and this morning, I think that's not in the zygotes this morning as we move forward from the shock of yesterday to further inversion. Yeah, another three basis points yet. I know this curve is inverted by another three basis points. Deeper, deeper inversion. Some 1 0 7 0 2 stands, one of seven.
Look at that. And when prayer misery came on the show from today, a number of months ago and said negative 58 laugh aloud. Wow, negative 50. Negative 50. Sounds crazy. Where's the equity market going to be?
An FBI negative 107 basis points on a two year versus the 10 year shot at IRA Jersey who also extended out from something that was measured 60, 70 beeps, 80, 90, you know, 100 basis points. And the difference between the two in the 10 year, it is a perfect time to talk to Elsa lingo. Yes. Global herd of perfect strategy at RBC, but far more schooled on the interdependencies, the dynamics of our major central banks. Also, an open question as you try to figure out what to write about this weekend. How linked are the central banks right now? Oh, it's a great question, Tom, because actually that's one thing that really stands out about some of the moves here to date. In relative terms, we haven't actually
seen particularly big moves. A lot of this is happening in sync. So you have the Fed being with the ECB being repriced, even have the Bank of Japan being repriced. It does make for a very interesting market where most of the cues for effects are coming from asset class into place rather than relative movements. Does the dollar move up higher U.S.
interest rates? I need to own dollars. Can we see a foreign flood into a strong dollar trade? So we've got a framework we've been using for more than a year now that we find really helpful in predicting asset class and currency movements. And it's really thinking about the interplay between bonds and equities.
So when we see bonds and equities selling off together, as we did for a lot of last year, as we did in February, we tend to see very strong dollar environment equally bonds. Next is rallying together. The tail end of 2020 to start this year is weakness for the US dollar. And when you're in this kind of no man's land, you end up just going for more.
This relative value trades and that fact, which is where we are at the moment. I fear for the Bank of Canada today. I'll say it's actually probably one of the more interesting aspects of today amid a slew of news items, because if Bank of Canada does come out and do as expected and pose a retaking cycle, this could potentially be really negative for their currency. How closely are you watching this in terms of under seeing the pressure that the Fed is putting on other central banks right now? It's a great question, Lisa, because I think a lot of people expect the Bank of Canada to have to follow the Fed almost slavishly, given the very strong economic ties between the US and Canada.
And yet sometimes the U.S. actually does the work for the Canadians. And so they almost have to do a little bit less at the margin. And yes, the currency may take a hit as a result. But Ford Cup to large degree has been priced for that force from the bank. We only really have one more hike in the forward curve at the moment. So I don't think it should be too big a
shock to currency markets. If the Bank of Canada does stick to that conditional pause for now, if that's the case and on the margins, do you just see more dollar strength going forward, then? Perhaps people have been expecting not just versus the Canadian loonie, but also with respect to what we see with the euro, with what we saw back to what we see in particular over in Asia, where a lot of the re-opening trade has already been priced in. Yeah. So, you know, we did start the year when bearishness on the dollar was very popular. We did start the year perhaps a little bit more cautious. We were looking for some dollar weakness in Q1, probably not quite as much as we saw.
And yet as the year plays out, it's hard to really get carried away by the bearish dollar trend. That's not to say, well, massive dollar bulls. It's just I don't think 2023 is going to be the mirror image of 2022. You know, whereas last year was all about strong dollars, this year for me is not all about we really much more nuanced than that. And to really make a decision on that. I think you have to get into the individual currencies.
We still like dollar yen higher. We still like a card crosses rather than just outright dollars given the sort of no man's land. There's Chuck that you're talking about with the dollar and also the idea of an economy that likely will deteriorate near the end of the year. How concerned are you about the developing world, especially given the scarcity of dollars and some of the concerns that if it coming to light over the past few months? It's an interesting moment, right, because we had the announcement of the weekend from Chinese authorities setting a growth target that was suddenly at the low end of people's expectations around 5 percent. Suddenly, no payback for the weakness in growth we saw last year. Trade data earlier this week from China.
Again, not seeing signs of that big import boom that some were expecting. Still early days, but it doesn't look like a picture where the rest of the world is going to be booming in growth and it's just the US slowing down in isolation. So a number of months ago, I was in London and asked a very simple question to a lot of guests. I said, who's going to hike more this year, the ECB or the Fed? The consensus was overwhelming. Pretty much everyone said the ECB. So where are you on that question now? It's a great question, isn't it? I mean, don't get me wrong, these 2B still have a lot of work to do as well. But I think I know you and I have discussed this before on the show.
John Jason Kelly. The fact is that the US was significantly stronger heading into the pandemic. It delivered more in terms of stimulus, both fiscal and monetary and its cyclically stronger coming out of the pandemic.
Yes, it has tightened a lot more than the ECB. But there's a good reason for that. The ECB was not in the same position as the Fed at the start of this year. I said genius of RTS kind of skirted that question just ahead of its own time.
I mean, I don't blame. It was really slow and I don't blame. I was going to push my lord in Brussels. It's really difficult to answer right now if Holtzman of the Austrian Central Bank has his way back on another 200 basis points at the ECB, I'm not sure that's where the consensus says. But the idea we get close to six of the Fed Reserve found kind of crazy a couple of months ago. It doesn't feel as crazy anymore.
I'm not saying it's base case for people, but certainly the probability around that view has shifted. Abraham, robbery, Citigroup, the level of data dependency is off the chart. We have never seen it because you were making a joke about it this morning. But on a theory basis, this is uncharted
territory. There is no theory right now. Let's just wait for the Dani Burger. You know what we're not talking about today? Long and variable lags. Nobody is talking about long and variable actions that happened yesterday. A. There is a feeling of a lack of patience, right? There hasn't been the progress made. You are seeing revisions to the upside, not what this Federal Reserve wants to see.
That patience is off the table. So all of a sudden you have to start wondering, okay, well then is the balance of risks going too far at that point? Because they're not considering that at this point. He touched on it briefly yesterday in the testimony. I think your point is worth considering
that 12 months ago, I don't think we've even had the anniversary of the first rate hike yet, have we? I think it's 12 months ago we were still at zero and we were still doing QE only twelve months later. I think the shift has happened because people thought with price in higher rates in the past three to the red economy be faster than it's turned out. And certainly the rate sensitive parts of this economy, you can see it is just not spreading yet. Spreading through in quite the same way.
And it's not consistent. I mean, yesterday we saw a big pop in used car prices in some measure is the biggest part going back to 2009 and a month over month basis. This is sort of a re inflation of some of the good sectors that previously had been the source of the disinflationary process. This is confusing.
So how do you come up with some sort of sense of whether we're making progress on diminishing inflation? Yeah, I'm with Thomas Waldo. This can all change. Friday monarch Toyota will be going to be on March 14th, which is when CPI comes out more 831 31 Eastern Time. Just a minute after that. Do you think that's more important, the jobs? I think inflation right now is more important job because I have no idea what the revisions to that shock. Half a million. Yes.
I have no idea what the revisions in other story changes. You get big revisions to the Netherlands like, oh, Paul Allen. Okay. Mark Gurman has been missing a Michael McKee Emily Chang up a tenth on the S&P. Coming up, Sarah Hunt of Alpine Saxon Woods.
Leading indicators continue to signal a recession, indeed, they say that recessions should be happening right about now. This is clearly an economy that's proving to be more resilient than a lot of people expected. I think people came into this year feeling as if the recession was inevitable and that no longer is the case. We see the market getting down to four hundred, but then potentially flatlining through the second half of the year.
We do think that equities can drop lower, but for us, it would take a lot to see those October lows again. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz Alo 5 percent. Allow me to introduce you to six life from New York City this morning.
Good morning. Good morning for audience worldwide on TV and radio. This is Bloomberg Surveillance. Equity futures up by a tenth of 1 per year to year yield through 5 per cent for the first time since 2007. And some some people out there thinking out loud, maybe this fad has to go to 6 Emma Chandra. Well, that's out there. And it was an adjustment yesterday. I don't know. John Wall was a tunnel for Forum Tunnel
3 a.m.. Who's counting here? And as we said earlier, the adjustment continues this morning as the headline. But how does the equity market adjust? I think that's a major mystery.
We'll discuss in this hour. We will talk about the resiliency of the equity market in the face of this 100 basis point, move it into the yield curve in a single month. This has happened really, really quickly. Now they talk. I don't want to use Chairman Paul Day. First of all, does he walk it back?
I have no idea. But what's interesting me to borrow from the great mathematician, Clifford Asner, Scarlet Fu of the hedge fund World and AQR, you see the divide between bond volatility and equity volatility. There's some noise there. I don't want to go into it.
I haven't had the third cup of Tang. You know what? It's massive. The way bonds are looking at this versus the way equities look, I'm going to say all week and into Friday morning and on to March 14th, everything we talk about is so highly dependent, Lisa, on payrolls on Friday and then CPI next week.
Highly dependent on the rate market. The stock market and the credit market. I have no clue because just to build on what you guys are talking about, the NASDAQ outperformed yesterday. The Nasdaq did better than the S&P. The tech heavy index that typically was the most sensitive to rates. What do you take away from this? I can't explain it.
I honestly, you pick your narrative. Maybe people are saying job cuts are a right sizing these companies that people have already priced in higher rates. Yeah, I don't know if I can believe whatever narrative people want to sell me because honestly, I don't really understand.
Let's see if that narrative stands up to the next five minutes. That's a fair point. All over the place. They swept through it for you. Equity futures still just about positive by a tenth of 1 percent on the S&P. The Fed chair spoke yesterday. He'll speak again this morning least. I'll give you the time of that in just a
moment. Just what is set in the bond market? Just for a se