This is the Bloomberg Surveillance Podcast. I'm Lisa A.
Bromwoyds, along with Tom Keane and Jonathan Farrow. Join us each day for insight from the best in economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. Right now, I am so pleased to say my colleague David Weston joined over with Bank of America Chair and CEO Brian Moinihan.
David, we are.
Joined now by Brian moynean. He is sharing CEO of Bank of America. Brian, thank you so much for joining us here at the end of the year.
David, it's great to have you here in happy holidays, and you can see our teammates out there working away on the trading floor here at one Brian Park.
Yeah, and we're going to go back to the trading floor because you had quite a year in trading. But first talk about the year overall. There have been a fair number of surprises given what some people expect at the beginning of the year. Certainly, stock Mark has done very very well. We had more interest rate hikes than we thought we would have. Unemployment has really held down pretty well, and we didn't have that recession so many
people thought we would. Now, I must say, when I talked to you throughout the year, you kept saying it kind of looks pretty strong. Some of your compatriots were saying, oh, no, hurricanes and tornadoes and things like that. So how'd you get it right?
Well, we just we just try to follow the data, and I think there were unexpected events. They're unexpected events in every year, you know, And so whether it's the regional banking crisis early on in the year, or whether it was another Hamas attack on Israel and October seventh, whether it was escalation and continuation Ukraine, whether it's attentions in China. These are all things that happen and they
go on all the time. But what we look at is what goes on in our core customer base, and we try to talk about what is going on as opposed to what could go on and plan for what could go on. And you know, that's been relatively strong and our team, you know, the spending continues even today.
At about four to five percent over.
Last year, half the growth rate of twenty two to twenty one, showing the consumer has slowed down, consistent with inflation getting under control, consistent with you know, the using the rate structure to choke off some of the activity.
And it's happened.
But overall it's been a decent year and the economy's grown, unemployment stayed low, and the bank's done very well.
Let's talk about the consumer. You are the largest consumer banking operation in the country. We are in the middle towards the end now the holiay season. What are you seeing there? I knew until now I was holding up pretty well. Where is it right now the consumer as of today?
Sure?
So, if you looked at it November of twenty three over November of twenty two, and this is across about three or four hundred billion dollars a month of activity customer spending money out of their accounts, that was up about four and a half percent. So far in December it's holding about the same and again that's about half the rate it was growing at last year at this time versus the year prior. And that's because the overactivity is slowing down what's been interesting is this broaden out
to all things. There were these periodic things since the pandemic. First people hold up and bought stuff with their house. Then they started to go out and travel some. Then they went to restaurants. Then they had another set of travel, different kind of travel, international travel, and then they got to concerts and things. That's all through The system is spending kind of evenly across. Retail stores are doing fine.
Online sales are strong. You know, they're all two three percent flatish two four percent, depending on what it is. So everything's kind of normalized for the US consumer and how they're spending money. They are in very good shape. They have money in and accounts, they're employed, and the
wages are growing. It doesn't mean inflation didn't affect certain parts of the American public hard, but in general, when unemployment rate's still in the mid threes to mid upper threes, that is a very strong place for the consumer.
But it has slowed down.
You say they're in good shape. That's why I was going to ask you, they're spending money, can they afford it? What are you seeing in terms of their bank balances? I believe those have come down some how, fast are they coming down.
So it's a little bit of two different types of customers. For consumers that had a lot of access cash, of course, when the rate they could get on that cash one from twenty five basis points to five percent plus, guess what it did.
It moved the market.
So the very upper balances of consumer and our wealth manager customers move the market. But if you look at the consumers that the accounts are more than money come in and out, they're still sitting with multiples of what they had pre pandemic. So a cohort of consumers I had between two and five thousand dollars in their account's pre pandemic average about thirty two to thirty four hundred.
They're now still sitting with about thirteen thousand accounts. It has come down from a peak of thirteen four down to about twelve eight, so it's come down a bit, but still much higher than it was before. That's due to all the stimulus and stuff, and then holding on to that. Where they go next is going to be launching question. They've slowed down their spending because things got more expensive. They slow down their spending because they got
worried a little bit worried about their job. They slowed down their spending because the rates on car loans or all the things became more expensive. But they're still spending more than they did last year. And that's a decent setup for a soft landing.
Are you seeing any softness and consumer credit? I mean, are you seeing bounces go up, delinquencies go up?
Well, bounce has gone up in credit cards back to where they were pre pandemic for us in the industry, and people are like, oh my gosh, up above that even that, But if adjusted for the size of the economy, they're actually still down, and so the consumer capacity bar is strong.
Mortgaged mortgages are all locked in low rates that the best asset for a lot of households is actually their low interest cost liability.
It's mixing two different things on a balance sheet, but the reality is is a three percent mortgage is an asset for people right now because it means they are payments to have it moved.
So that's good news.
The home equity borrowings are down for US from thirty billion to twenty some billion. That means that they're not using that equin in your house enters more equity in your house. On the credit cards, the delinquencies are really consistent within nineteen and everybody says, well, it's back to nineteen was one of the best credit years in the company's history, in the industry's credit history. So that's a very strong place, and so we feel good about.
Consumer credit as long as the employment levels stay there.
It's a little hard to believe that you'd have it now lower FICO scores. You hear people talk about a little more noise, but the general consumer is basically a prime borrower and they're doing fine.
What about the commercial side, You're very big in middle market, smaller and medium sized enterprises. Is there loan and demand? What's the sentiment there?
So, you know, if you think about the consumer, we keep growing customers, keep growing house or keep growing this company. If you think about in the commercial we keep growing customers. There is more logos as that our teammates called, you know, companies that we do business with a record number this year. The thing about it is they're not using their lines as much. So the loan balance growth on a commercial side has been a.
Little bit sluggish, little bit flatish.
Looks like it a bounced around on low single DIGITSUS quarter.
Now, why is that happening?
Line usage before the pandemic for middle market clients was forty percent, dropped to thirty percent, got back up to thirty six percent, and then fell a cup hundred basin points. Why would companies borrow less at this point? They're worried about final demand. It's also a lot more expensive, So the FED is having the impact, which is a loan that was like three percent four percent is now seven to eight you know, seven to eight percent people think
about using it. So the line uses is down, meaning that not beings aggressive buying equipment or hiring people or extending inventories, mostly because they're worried about.
Economy sawing down.
And when we say a soft landing, it doesn't mean the economy goes into recession.
It says no.
But what our team is saying Cannabis browning plot and researching is that we're slowing from almost a four to five percent growth rate to one percent growth rate is still a major slowdown, and the business community is wrestling with that right now, trying to get that balance right.
One of the big surprises this year came toward the end of the year with the FED decision and then the news conference with Jpile that really signaled, at least to most of us, Yeah, they're really seriously considering rate cuts. It looks like they're coming next year. Were you surprising? Why do you think they did it? Do you think they're seeing data about the economy that is slowing faster than we appreciate.
Yeah, so let's talk about our economics. Tell me and we feed in. We have the number one research team in the business, and Kansas and the team do a great job. Basically, they just shifted yesterday literally and they moved to more rate cuts.
In twenty four.
But the real key was what do they see in the economy, And they basically have moved from a half a percent growth rate annualized for the first three quarters next year up above one percent. They've softened their soft landing, let's just say that. And by doing that, they've said when the FED is seeing inflation slow as fast as it is, they basically think we get down to the low twos inflation by the year and next year twenty five, and it carries into twenty five. The FED needs to
bring the rate structure down. They're saying, basically two hundred basis points of rate cuts one hundred next year and one hundred and twenty five, which still leaves you at three and a quarter to three and a half. Now, the last time we were fundamentally at that rate structure was almost was eighteen years ago by time we get there, so we've had a long stretch of very low rates except for what happened very recently, and so that fueled a lot of activity, and now the rate structure can
be fundamentally higher. It's more structurally sound, and the Fed is pivot is it's not really pivot to say we got to normalize this because we're seeing the economy and the inflation come in. Not done yet, but all indications are doing there and everything we can see that consumer spending is consistent with a two percent inflation economy. That level of spending growth in our customers was where it was in seventeen eighteen nineteen when the FED raised rates to bring the economy back and sink.
So the stock market did pretty well this year up until that Fed decision, and then it's off to the races.
Since then.
Your trading desk has done particularly well this year to give us a sense of where it is. Right now, Are you going to finish the year as strongly as you have been going the quarter so far?
Well, you can from your lips to their ears. So they've got a few weeks left now. They're doing fine. We said that they be up up year every year, which is kind of countered the trend in the market.
They Jimmy DeMar and the team have done a great job.
And what's interesting, it's rounded out and it's fixed income, its equities, and it's much more consistent. They've I'm not quite sure it's exactly true, but basically have made money
every single trading day this year. And so there's been volatility, there's been news, there's been this, and they and that's because they have a balance in the business in a way that goes through We increase the size of the business three or four years ago under Tom Montag's leadership and Jimmy's leadership, and that's born fruit and they are keep gaining market share and they're doing a great job.
So I'm glad you raised because three or four years ago I was here with you at Back of America and you said, you know what, you're going to have to devote more capital, more people into that business. You did it, you seem to you having success going forward. Is there yet more capital that you're going to allocate into trading.
Yeah, as long as they can get the returns. You know, at the end of the day, our return on equities you have fifteen percent of the company this business because all of regularly in the capital is a little lower in that but is well bubber cost of capital. As long as they can keep deployment, We'll keep pushing capital because it's a great business in great format, and we're gaining market share honestly across the world, and it's a global business so it can access much deeper client base.
And team's done a great job, so they'll keep getting more commitments consistent with them being able to get the returns on them.
One last one, Brian, are you concerned at all of the markets maybe overreacting to what they heard from shairpo.
I think he's got this challenge that you know he was, you know, the Fed in our own mission it was late to cutting off inflation.
Now he's been a careful.
Not to be late to stop cutting off inflation, and the market's going to have and flow.
But I think people have to be a little careful. This is trading talk.
This is you know, the ten year moving around between you know, three ninety and four fifty four seventy. It's not the real kind. Real economy is still heavily impacted by the overall rate level is very restrictive, and it's still coming through the system. Against that, we still have a lot of stimulus coming through the system, you know, the infrastructure, build a chipsack to IRA.
Those are all still coming through the system.
So that's a tuggle where he's up against it, but overall we believe he's engineer soft landing through the interest rate environment.
Brian, thank you so much. As Brian moynahan, he's chair and CEO of Bank of America.
This is a conversation that to me caps off one of the most fascinating periods of FED history and economic history that I've ever seen. Rich Clarida, a former FED Vice chair, as well as Columbia University professor and PIMCO Global Economic Advisor, as well as renowned singer. Rich Clarida, thank you so much for being here in person. I just want to start with what you make of the past week FED Chair Powell's comments and the market's reaction.
Well, the chairs comments took me by surprise, and he had a difficult mission because it's the last meeting of the year, natural to look ahead. But yes, I thought both the press conference and the FMC statement were more dubvish than I expected. You know, there is a soft landing base case. We're all hoping for it, and I think the markets are really focused on that. He didn't say mission accomplished. I'm not sure if he thinks mission accomplished,
but that's being interpreted that way. And of course, as you've mentioned on air, we've had a little bit of pushback recently, so we're all now trying to assess, you know, what message they would like to deliver.
Well, that's exactly what I wanted to ask you. What do you make of the pushback?
Well, I think the delicate challenge, and we've discussed this on the show in the past, is a tug of war between their guidance and market pricing. You know, part of the reason LISA inflation is expected to come down next year to two points something is because financial conditions have tightened. Well as the markets think mission accomplished. In rate cuts, six cuts are coming in next year devil ease conditions. That makes it less likely that inflation comes down.
So it's a tricky point right now for the FED.
Do you think that Fed Shair Powell made a mistake.
I don't think so. I think I think he was reflecting his committee, and I think in the press conference sometimes chairs concerted distance themselves, and I think he was embracing the baseline view. But there is a risk case as well, and I think perhaps some of the pushback is to remind folks about those other scenarios.
Mary Daily, in a Wall Street Journal discussion yesterday, came out and said, even if the FED cuts rates by three times next year, the Fed's benchmark rate will still be quite restrictive. Even if in that scenario, And then you want to say, we have to be forward looking and make sure that we don't give people price stability but take away jobs.
Is this a new emphasis for the Fed?
Well, Lisa, I think at the margin it is because I think inflation was so high for so long. I think the FED effectively had a single mandate for a couple of years. We got to get inflation lower. The federal course has a dual mandate. But I do think and I, of course work closely with Mary. I'm a big fan of her. I do think the issue is here is that the Committee itself emphasizes financial conditions. Indeed, financial conditions made an appearance in the November statement and
reappeared in December. It is true that one element is the real funds rate, but other financial conditions are easy, which, as we said, makes it less likely that inflation does come.
Down, which raises this question about whether you are right the two point something kind of view of inflation is kind of what the FED is embracing right now in order not to jeopardize the labor market.
Is that what your sense is, Well, I've always thought that two points something would be the point at which they start to think about cutting, So that is playing out in their projection.
I do believe down to the individual there are nineteen of them. They all want inflation to get to two, and I do agree with them that if they hold off cutting rates at all until inflation gets to two, they're probably going to overshoot. But the timing is delicate, and I think there is a you know, there's a risk case on both sides. But I do think they are emphasizing now the dual mandate more than they have been.
Do you think it's because they're seeing something that other people aren't, or they're at least emphasizing in their own data some of the weakness that maybe is overlooked by people who are piling into the market.
I'm not really sure of that. I think it's important for them. You know, the FED was criticized a lot in twenty twenty one and twenty twenty two for being behind the curve. I think it's appropriate to step back and acknowledge the progress and disinflation, and I think they're seeing that, but I think there's still still a ways to go, and I think in particular, the labor market may require more adjustment than they're factoring in.
Sorry, no, it's all right. I'll let you get breath.
It's a confusing moment for all of us, and I'm wondering if you think it helps or hurts the cause to see the FED come out feed show j Powell with one message and then Austin Goolsby saying, you guys, I'm surprised by a reaction and hearing from John william saying we're not really talking about rate cuts.
That's you know, that's not that's not something you'd like to see coming out of a of a meeting. I think the market reaction easing financial conditions is something that they are trying to push back against. I don't know how successful that they they can be.
However, do you think that easing and financial conditions does have ultimately an inflationary impact?
Right now?
Well, to the to the to the same extent that if you titan financial conditions, it lowers inflation if they're if they're eased on a sustainable basis, credit spreads are type borrowing cost or lower valuations are up at the margin. It supports demand and if you think there's a demand piece to inflation, then yes, So.
Right now, do you think that it is potentially concerning encounter to what the FED is looking for? Given the all in feeling and frankly, I mean we just heard this morning the FED shot the bears. The FED wants to make people happy.
I was bearished, but now I'm really bullish. I mean, is this a positive thing?
Well, look, I'm very convinced that the power FED will do what it takes. I think that the communications challenges, which were substantial in twenty twenty three maybe even more substantial in twenty twenty four.
There's been speculation from a number of guests that there is a political element to this, that the calendar is tricky. Yeah, for the Federal Reserve, considering that heading into November everything is going to be really politicized. Do you buy any of that argument that would encourage them to make a move earlier in the year.
Look, the history shows, in fact, I checked before I came on ear the FED has actually adjusted rates in most presidential election years. In fact, they cut rates in ninety two and cut rates in eight although for other reasons, and they've hiked rates as well in election years. So historically, the FED doesn't let the political calendar dictate the outcome
at the margin. Could it influence timing, say between a June move and a September move, I'm not sure, but I think that the number of rate adjustments we get next year will be the adjustments that the Committee thinks is appropriate given the economy.
Given that we are talking about the politicization, do you think that this jeopardizes some of the credibility of the FED, given that so many people have come on here and speculated, and we don't have any ability to basically know or not know. But is there some other consequence of just that speculation.
I really don't think so, Lisa. In the end, the FED will be judged by returning to price stability and ideally doing so at minimal cost to the labor market. And so I think the fedes credibility and the animal rise and fall with delivering price stability.
When you talk about the potential for a reacceleration of inflation and a stickiness, do you see that coming through the services sector in a material way? Which areas of the economy could we see a more material reignition?
Yeah, so I think, I think exactly so. I think goods goods prices are now falling, so we've had goods disinflation deflation. The service sector typically lags behind. I would also say, I think the real where the rubber will hit the road, Lisa, is in the labor market. So we've had a substantial adjustment in the labor market without any rise in unemployment.
And that is great.
I will say. My good friend and former colleague Chris Waller nailed that back in the summer of twenty twenty two, so that's wonderful. I do think however, that you cannot have two percent price inflation target if wages are going up four or five percent, which is where we are now. So I think I would be if I were there, I'd be looking at the labor market adjustment as well
as the services sector as well. You know, one of the measures, which is core services x housing, has basically not adjusted at all in the last several months, so still elevated.
A lot of people are talking about how the economic data has been really positive, and how the FED has been doing a good job, and how we have seen unemployment stay low even with inflation coming down.
Why do you think people feel so bad?
Well, I think there's a distinction, and it's certainly one I've thought about and written about. Economists tend to focus on inflation, that's the change in prices, but individuals in the economy tend to think about the level of prices. So even if inflation returns to two percent, the level of things going to the grocery store, going to the movies, rent on your apartment, those numbers are all, you know, a lot higher than they were four four years ago.
So I think when inflation's low and stable, we tend to ignore that but when we've had a big move in the level of prices, I think it does create more concern among households than you may infer just by looking at the inflation data.
I want to ask you though, also about the housing marketing. You mentioned rents being higher. We just got housing starts and building permits come in higher than expected.
We do see some of the.
Treasury rally pair back, which is what you would expect. Does the high price of homes, in addition to the lack of any volumes, also create some sort of real dampening effect sentiment? Well.
I think the high valuation for homes obviously makes the people who own homes happier, but there's a distributional consequence, especially for younger parts of the population, Folks in their twenties and thirties who have not yet acquired that first home, and whatever they thought about the cost of ownership three or four years ago, it's a lot higher. But there's a huge wealth effect, positive wealth effect for folks who own homes. Presumably they're happy about that.
Well, but it raises this question about what this does longer term to the inflation dynamic, but also to sentiment, particularly for younger individuals who haven't gotten in.
Yeah, well it does. And I think that this is an unusual period, Lisa, in the sense that because so many folks refinanced into low rate mortgages in the prior decade, the FED, including when I was there, it was doing to support the mortgage market, and because these are fifteen and thirty or fixed rate mortgages, it is having this effect on supply that may be with us for a while.
We're we're here with Richard Clarita of PIMCO, formerly FED Vice chair. We are going to be having a conversation with my colleague David Weston with Brian moynihan of Bank of America, and I do want to get your take, rich on whether you are seeing the stability in banks as one reason why a soft landing can materialize. Right, that's sort of one tailwist tailwind to a lot.
Of this rally that was not there.
Say in March, Lisa, absolutely, you know, the global financial crisis triggered a major rethink of the way that we regulate and supervised banks in the US as a whole. If you look at all the banks, they have lots of capital, lots of liquidity, and Indeed, in twenty twenty, when we were going through the dark days of the pandemic,
you know, banks were a source of stability and increasing lending. Absolutely, I do think it's an important reason to think of the banking system as supporting the economy and not being a headwind.
Rich Clarida, thank you so much for taking the time, as always be wonderful to get your insights.
Chris Heisei joins US now chief Investment Officer and Maryland Bank of America Private Bank. Chris, let's start here with the dream, the story for next year, if you will. This is the story. So inflation's going to keep coming down, growth is going to be okay, the Federal Reserve is going to cut interest rates, and the equity market's going
to keep it exploding higher. So that's the story. Can you tell us how expensive is that story now for next year given them rany we've had in the last two months.
Well, it appears expensive because how fast it's been priced in, But we have a long way to go. There's still a lot of cash on the sidelines, not just from an investor perspective, institutional and private client, but also the corporate cash still earning a very healthy return at the short end of the curve.
That's keeping more margins wide.
And with the debt structure in the corporate markets right now, overall, their liabilities are still low, so we can chunk out some very solid earnings here. And Lisa was talking about this echo of inflation. I think that's the perfect way to think about it.
There are echoes. There's going to be a lot of echoes about are we having us offt landing.
There will be pockets of bumpiness and that'll keep investors a little bit still concerned. Right now, the wall of worry, you know, maybe a little bit lower than normal, but that wall doesn't go away. That wall ends up rising a little bit as we get into next year.
There's like five bricks left in it. Chris, I'm not sure what you're talking about. What bears are left.
Well, there's a lot of bears.
They'll come out of the cuvered again and out of the cave as soon as you see one bad number either on the earnings front, in the inflation front, or something like that, and that will actually cause some second guessing. But we think there's a lot of room to go here. We're out out of the woods. And we have a lot of work to do, but we're not fully priced in.
So Chris, you're saying that the the Bears still exist, You're just not one of them. After hearing from Jason Trent at the FED shot the Bears and from Avy Sheffeld that Palace press conference reminded us that the Fed's ultimate goal is not price stability and full employment, but rather to.
Make people happy.
So, in other words, how much can people remain bearish with a Fed that essentially has a big put and they're putting it in.
Well, I think the bears got very frustrated this past year, and rightfully so.
They expected hertings to decline. They expected stickiness on inflation.
The number one surprise for most people was that inflation came down as sharp as it already has. That really shouldn't have been a surprise when you had quantitative tightening plus all the hikes that went through. Now, granted, the FED did add a lot of liquidity to the program, to the markets itself that helped grease the train tracks, But overall, what we've noticed is this, the bears ultimately
go away for a while. They come back after you start to see some of consternation in some of the economic data.
Europe could surprise to the downside.
We don't know what China's growth it's going to be, and that could be exported to the United States.
So we're still going to.
Grow below trend and everyone's happy right now and the drum beat of soft landing is there. But as soon as you get some bumpiness, the market will pull back a little bit, probably.
Late January early February, and we.
Think that that is a buying opportunity because it's all about earnings next year.
Chris, I got to say, I knew what you were going to say before you said it, because that's what everyone's saying in January. Were going to get turbulence and buy the dip. And so at a certain point, this really is exact same setup that we had this year, which was when you get a decline by the dip.
We didn't really get a decline.
We did a little bit and people just came in gangbusters. Is this by the dip going to be the broadening out that we see now? Is this basically the playbook for next year?
Just a little bit premature?
Yeah, So the bulls are beating the drum on the megatech still in some cases that makes sense because that's the area of healthiest balance sheets, high quality. But the question is going to become how much can they surprise about the earnings expectations. But the broadening out of the market is the one area that some are now starting
to warm up to. They've been left for dead much of the rest of the market, particularly small caps and value overall, we think the next story, beginning already this past month, carrying into next year, for the next five years, the leadership are those areas predominantly because of their underpriced movement versus the large quality, high quality area of the market, not just this past year, but over the past quite
a few number of years last. But not at least I'd say this, Lisa, those bears in terms of what they're looking at right now, they're looking at the what could be versus the what is, and the ultimately when that conclusion doesn't come through, about what could be stickiness or resumption.
Of inflation or much lower maybe.
The negative leading economic indicators indicate lower growth, negative growth, that's what could be versus what is and what the data is telling us.
Chris, you mentioned a small camps. We've started to see that participation. In the last few months, smo caps started to do Wow. The banks have absolutely ripped. There's one area of the stock market that hasn't participated. It's been left for debt. It's been the energy stocks, the energy names. As we've seen this Randy play out double digit percentage point gains on the S and P five hundred. Energy
is negative on the SMP. Chris, what's behind that and what changes that story if it's all into next year.
Yeah, Jonathan, And this was in the face of basically a year's worth of gain in a month and a half. You really think about the broad market itself, small caps, the rest of the market outside the Magnificent seven rallied over twelve thirteen percent from the Flatlin level and they've actually outperformed. But the one sector, as you said, energy high free cash flow, actually better balancing. Some people think, I think there's a growth worry there for the energy sector.
We've been overweight. The energy sector has not worked this year.
We expect that angle in terms of investor is looking for free cash flow again to start to come in. But it's all about the oil price right now. It's weakness in Europe it's the below trend growth in the US. It's a lot of stories of a cloud hanging over what traditionally would be an area that you would hunt for is particularly when financials are working. You would think that some of the other areas like energy would but
right now it's pushed off the blodder. It's not on the buying bladder of a lot of the asset managers, and they're waiting for signs at oil prices are going to come back up again, Chris.
When you talk with it clients, how willing are they to actually deploy cash right now? How much are they feeling the holiday season of bullishness.
Just two months ago, it was all about what's around the corner too.
Actually, for any extra rally.
Now it's all about, Okay, where should I be as it relates to the market. Not significant enthusiasm because the geopolitical curve and volatility is still there as you talked about before in the Red Sea, but ultimately heading into next year, the common question is always how should we be positioned? Now it's about how how much and when should I be adding to areas of equities and longer duration fixed income.
We talked about it in the summer. We talked about it again.
In the ball no one throws up a flare gun, no one rings the bell when that's going to happen.
There's always a surprise that comes in. That surprise came with the Fed pivot, particularly Powell.
We expect a couple more surprises to the upside early next year.
The psychology of Marcus, it's just phenomenal. Chris Heise, Chris, thank you, sir. Enjoyed the Christmas break of Marridon. Bank of America Private Bank. Let's get to the bond markets. Sabatra Jeaffer, head of US Ray Strategy as sockjen Stra, I want to talk about your call on the bond market.
It's refreshing.
It's not super bearish, it's not super bullish. It's just neutral. Sapetra, Why is it neutral?
Well into your end, I think we've already seen a very large rally in ties in just the last few weeks, so it doesn't make any sense.
For the market to continue to rally.
From your on, we think that the bond market, at least over the near drum, is going to lose some momentum given the fact that we're priced nearly for six cuts for net year, so.
That seems a little bit dramatic.
I think our view is that the Fed will deliver a height starting in May, but a March straight cut definitely seems a little bit premature at the current time. As you were discussing earlier, John, you're looking at an outlook where finacial conditions have eased quite dramatically.
Inflation is coming down very nicely.
Gas prices or oil prices in general have declined quite meaningfully, so the consumer is still relatively strong. So the risk here is that we might see a resurgence in services SAT inflation.
Let's build on that a little bit more. Where would that leaves a call on the yield curve because traditionally, when we're talking about maybe the end of cycle, maybe the st have a right, cunning, right game, you'd get that bull stake and come through the curve. Savantra, what's the core for you and the team now through next year.
So our call in our outlook that we published in the end of November was that the first move would be towards a bull flattener with the front end pegg and the long end rally.
But that hasn't happened.
The market has priced in a lot of cuts in a very short amount of time. But the long long end is also rally So the Tuesday's part of the of the Yelk curve is still quite inverted. You are going to see that disinvert and steepen out with the you know as we progress, but that's going to be more of a mid twenty twenty four story. When the FED starts to cut rates aggressively, you're going to see
that you know curves steeping out. So for now, I think that inversion is very much in play because investors are getting back into the bond market in a big way.
Across the curve. You're seeing this for.
More trade play out, and that that would mean that with the front end pegg to FED expectationations, investors are going to also buy the long end.
I was struck by the Bank of America Global fund manager survey that showed people really going out of cash and into bonds. Cash was cut to a two year low and people were the most overweight bonds in fifteen years. Have we already seen the rotation out of cash out of money market funds that would have transpired given the potential for rate cuts.
Well, I think that what you're seeing is an asset allocation towards bonds given the fat that you know, people have concluded that bond yields have topped around tens Around five percent is as high as it gets. If that's the case, you're going to get the best yield you've
ever had in the last couple of decades. So it makes sense to allocate into bonds as well as perhaps all the assets, but bonds first, because the sequencing, the way it's going to work is, you know, as the Fed prepares to cut rates, the economy slows down, you're going to see bonds rally for and then we do see a recession like we're expecting at South Gen by the middle of next year, then you should see some weakness inequities, and then you'll see the acid allocation into equities.
But that's really not how it's playing on.
There's just a lot of cash in the system six trillion or so close.
To that in money market funds, and.
That cash is just being reallocated into other assets where you could potentially get higher returns over the longer run.
So can you give us a sense of how much lower you think ten year yields are going to end next year given the fact that there still is a lot of cash to flow into bonds, and you do expect weakness in the economy.
So you know, our call for tenure yels is for tends to get around three seventy five by the middle of next year. And the reason for that is is because we think that the US economy goes into recession, so we do see more room for ten yure years to to rally. I mean, granted, when we put out these forecasting years, we're close to five percent, so three seventy five seem like a stretch, but we're almost.
There in a very short amount of time.
So yeah, we could we see you know, ten years dip below three cent fad perhaps, But really, the core story that I think that I'm sticking with is the fact that the sort of turned premium build up that we saw over the last you know, i'd say since August to the end.
Of October, that story is still very much in play.
You're seeing the supply demand imbalances continuing to plague the market. You know, you're seeing tailed options. There's just not as much demand for treasuries as we've seen in.
The past, and the Fed you know, our.
Call is that the FED is going to continue to do QT not just into the end of twenty twenty four, but also into twenty twenty five. So given that sort of dynamic, it makes sense if you start seeing a build up in term premiere once the FED starts cutting rates and the economy starts to stabilize.
So bet, this was excellent, just fantastical here from you, Thank you Savatar Jape of selk gent On. This bond market joining us right now from the Atlantic Council is anam world. Allan. This is a big, big story. Traffic going through the SEUs Canal, the Red Sea grinding to a hole. Can you walk us through the additional time that's required if you can't go through that and you need to go around the southern tip of Africa? What are we talking about here?
Yeah, it seems that we're talking about an additional twelve to fourteen days of travel time to go around Africa. But that's not the only issue here. We're also talking about increased fuel for ships.
A longer trip for the crews on board.
It's going to cost more, they're going to emit more carbon and so this isn't just you know, it's not safe for the SEUs Canal is closed.
We've had that before.
This is a very significant journey, and it's particularly important right now because it used to be that Europe was getting a lot of it's oil from Russia. That's not happening now and it's relying a lot more on oil from the Middle East. And so if that oil can't go through the Suez Canal, then now we're talking an extra twelve to fourteen day trip around Africa. And it also cuts out the Siumed pipeline because that pipeline is accessible. Also, you have to go through the Red Sea to access
that pipeline as well. So essentially only you can get Saudi oil if it leaves the west coast of Saudi Arabia, which isn't a place where that much oil leaves Saudi Arabia. That can get to the Suez Canal or the Siumed pipeline without a threat of Houti activity, but otherwise everybody else is stuck.
So if this was twenty twenty one, this would be dreadful twenty twenty two chaos. We'd be talking about higher prices and inflation spiraling down of control. In twenty twenty three. It just feels like supply chains are a better place, and then can you describe them all? We in a better place.
Yeah, we're definitely in a better place. This is not We're not going to see oil shortages. We're not going to see gas lines. You know, during the Suez Canal crisis in nineteen fifty six, that's what we saw when the Suez Canal was closed. We also didn't have at that time the very large crude carrier, which were these massive crude oil carriers which they basically invented in order to take crude oil around Africa so that they could
get enough to Europe. So we've got that now, So we're not talking devastation, but we are talking about increased time at a time when we've already got increased time to get oil shipments to Europe, and we're talking about increased costs.
Are you surprised that we haven't seen more of a pop and oil prices as a result, Ellen.
You know, I'm not that surprised because this is something that's been going on for a while and it's only recently i think escalated to the point where tankers and shipping companies that are not direct connected with any kind of Israeli interests are getting concerned and are making moves. So I think that the market has kind of been anticipating this for a bit of time, and then you've also got these overall kind of economic issues waiting on
the market. I think that maybe they should be more concerned, especially because the idea that suddenly the US Defense Secretary is only now setting up a commission to deal with this that doesn't bode.
Well, and there are questions around what that commission can actually do, what they are willing to do, and what exactly the conversations are between the US and Riad, for example, which might have more influence over the.
Hoo Thies than say Canada.
So how much from your perspective do you think that the right people are involved in these conversations, and do you have a sense of what the potential allies in the region might be willing and able to do.
I think that rio I would love nothing more than a green light from the United States to just bomb the heck out of the hoo these in Yemen. I don't think they're going to get that. I think the real issue here is where is getting this technology and these drones to buzz these ships and cause these issues. And that's the answer to that is Iran. And when you look at the likelihood of maybe a US Iranian confrontation over this, that's not something I think the US
is willing to risk. So the question is really what kind of show of force is the United States and potentially an international coalition because a safe passage in the seas, essentially freedom of the seas is an international issue. This is not just a US issue or a US British issue. This is really an international issue that China should be concerned about, Korea and we've got everyone should be much
more concerned about this than they are. But the question is who's going to actually put put the muscle where it needs to be and I'm not sure that we're seeing willingness to do that.
You touched on potential losers. I believe you mentioned European importers. Can we talk about winners? Who wins from this situation?
Allan Africa. I'm sure that South Africa is absolutely thrilled to see lots of increased traffic at its ports in an extra tilt to fourteen day trip sealers. They're going to want to stop they're going to want to, you know, have a break, They're going to want to go, you know, on land. And so I think Africa is definitely a winner here because they're seeing a lot more traffic and
that means they can charge for it. I do think that Egypt is a huge loser here that really can't be overlooked because if we're seeing a lot less traffic in the Sewers Canal, they're losing money over this, and a lot of money.
And just to finish on prices oil versus gas, Is it a bigger issue for one versus the other or the same?
I don't think so, because also when we talk about oil going through the Suez Canal, we often talk about it in terms of petroleum products. Overall, we're not really differentiating between crude oil and products here. So I think it's it's all, it's all tied.
In allan, thank you, I appreciate the update. Want to watch a developing story over the last week for sure, Alan Weld at the Atlantic Council.
Subscribe to the.
Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot com, the iHeartRadio app tune In.
And the Bloomberg Business app.
You can watch us live on Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz, and this is Bloomberg