Bloomberg Surveillance TV: April 18, 2024

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App.

Tim joins us Now. Tim, wonderful to see you.

Good war and good to see you.

You know, it was really interesting when I was reading your notes. You talk about how usually it's something of a sleepy affair, people kind of get together. Yeah, some dude bureaucratic kinds of you know, hubbub. This is different why geo political risks.

People are concerned at war in Europe, war in the Middle East, which could grow tensions in the Asia Pacific. So it feels like a very dangerous world. We'll keep making illusions to the nineteen thirties. I think that's probably overdone, but so certainly something we should consider.

Part of the.

Problem with some of these discussions is it's very hard to know how to prepare for something where it's a very bipolar kind of outcome. Are people actually hedging that kind of risk, particularly with the respect of the areas that might get hit hardest in the economy as a results.

Yeah, everyone's preparing because you just don't know. The uncertainty just overwhelms all calculations. You know, the economy is good, as you noted, growth.

Is exceeding what was expected this year.

The US economy's humming right along. So from just a growth perspective, we're exceeding expectations.

But people are still nervous.

Is the US economy too good in terms of it's so good here that it's dealing with some pretty frock consequences around the world.

Well, I don't think it ever be too good.

I think there is other.

Countries looking at saying how can we replicate that?

Why aren't we doing what the US is doing?

The US consumer continues to power aheads, so I think there's something to be.

Said for that.

Maybe lessons be drawn from the US.

The US is doing more of industrial policy, especially fiscal policy, lose fiscal policy. The IMF report has talked about this. Do you hear other countries saying, well, if we're not going to have as robust global free trade, that's the direction we need to lean into.

Well, I would hope we go back to a robust global free trade.

I think that's the right answer.

The fiscal deficit six percent GDP is not sustainable. There is a lot of fiscal support. Debt and deficits are part of the conversation this week. I think there's a lot of concern about where we're going to be and the sustainability. I don't think it's sustainable, but right now it's providing a real pulse to the economy.

So let's take a step back and talk about what the main issues are the financial firms are looking at and actually trying to hedge against as they prepare for this more dangerous world in a whole host of different ways. You point to oil in particular and saying that it could surge forty percent globally next year or even this year.

Now our business, our firms are in the risk management business. They're all looking at different scenarios and have for some time. It's not a surprise that oil prices could surge, but it's energy prices generally, And that goes back to industrial policy. If you want to support manufacturing, energy price is one of the most important component input to manufacturing. So it's not just throwing more fiscal dollars at a certain sector. Is how do you get energy prices at appropriate level.

I hear you talking about how they're prepared for it. They're the risk mitigation business. We hear that in a host of different ways. Does that mean that you don't see the likelihood of some sort of banking crisis or some sort of banking kerfuffle, whatever you want to call it, akin to what we saw even last March, just simply because they are prepared for higher interest rates, they are prepared for higher oil prices, they are prepared for a potential slowdown.

Now, the system is highly capitalized, you have tremendous amount liquidy, very good risk management systems. What we saw a year ago is pretty idiosyncratic. So I feel pretty good where the industry is. But we're all every day, we're spent an entire week scenarioing out different risks. So we are trying to think through what are the array of possible downside outcomes.

One risk that you mentioned when you talk about geopol politics that I thought was fascinating you talked about the US election and that that was actually one of the geopolitical risks that a lot of people were looking at. What are people expecting from a Trump presidency two point zero in terms of either deregulation? Is that really the case?

Can you game that out?

Sure?

I just did a nine city, seventeen day tour across Europe's the first question out of everyone's mouth what's going to happen in November fifth, two hundred and one days from today, And the concern is what is a Trump administration? I think actually it'll be business friendly. I do think there's protectionism. I do think we'll see tariffs and non tariff barriers. I don't think we'll see deregulation for our industry.

I think that's coming gone.

So I think there's a lot of potential chaotic outcomes just the uncertainty of what a Trump two point zero would look like.

What kind of tariffs do you actually see potentially happening? They talk about a ten percent wall, and all tariffs come all imports coming to the United States, and then sixty percent on Chinese imports.

Yeah, I do it.

I think I think it's a part of a negotiation, right.

I think that's the opening bid.

But I do think there's a proclivity to believe that somehow The biggest challenge we have in the United States is are global imbalance the external imbalance, and we need to solve that particular equation. I don't think that's the problem, and I think you'd end up doing some really bad policy in pursuit of an objective which I think is of secondary nature.

But whether or not it's Trump or Biden, you see the direction of travel the same when it comes to potentially more tariffs on.

Certainly on China.

China is on the ballot your respective of who's elected, who's running, Yes, which rais is the.

Question for banks, and this is something that we've heard and seen quite significantly. If you're an international bank, do you get into China, do you expand your presence or do you really curtail it? A more significant way. So yesterday Morgan Stanley pulling out a couple of its bankers from the region.

Yeah.

I think it depends on the institution.

You see, some institutions are doubling down in others who what d're on. It really depends on your risk profile, your appetite for risk, and.

Where you're located.

I think I'd be cautious being in China, but certainly you can't walk away from the second largest economy in the world. You have to be there and your client want you there, so I think you.

Do so cautiously.

So this raises this question because we keep talking about how this is a whole new world and there is an increasingly protectionist kind of feel at this IMF meeting, and this feeling that free trade isn't as good as it really was thought up to be. Is that the same tone that you're hearing from the members of the If it's.

A concern that we're hearing, My industry tends to be for free trade, flow of capital, free flow of data, free ideas, right, we think that's how you optimize growth, But we don't hear that coming out.

Of political capitals.

Do you hear politicians who think they can micro manage their economies into a better outcome.

I think that's a huge mistake.

So what's the biggest risk then right now? Is it the politicians?

Well, it's the politician and misallocation of capital which won't show up for years, but we can end up wasting a lot of capital and pursuing sort of pipe dreams of politicians who think they can outsmart the markets.

So we're here for the IMF's free meetings. How does the IMF as an institution do you think really guide the global economy and companies that you work with, Well, they.

Can provide some intellectual framework, analytical framework, which is if you choose a this is b happens. So I think showing trade offs. I think trying to hold the sector the global.

Economies are honest.

You've got finance minister, central banker sitting around the table. They can be voices of reason, they can talk to the political leaders. Ultimately, it's about political leaders taking political decisions this morning.

And I can't let you go without asking this because it's something that's very much on my mind. Vanguard came out and said, if you see treasure yields go up to four seventy five, they'll easily pop to five. We have Jonathan Pringle pingle over at UBS saying that the FED could hike rates to six and a half percent next year. Could banks withstand that?

I think, well, I don't think we're going to see a rate hike, but I don't think rates are going down either, and I haven't thought that for some time. I think race are going to see where they are. You know, the FED has done a really remarkable job in inflation.

But it feels a little sticky.

We saw Governor Bowman last night talk about the stickiness.

The last mile was always going to be hard.

I don't know why it's a surprise, but I think we'll get there with time.

Well, that seems to be the tone that we're hearing from the Federal Reserve as well. Tim Adam, CEO of the A thank you so much, Dutch Central Bank President, EASYB Governing Council member Class Canot joins US now and Governor President, all of the different ways that you weigh in European central bank policy, what a moment. How much are you looking to US policy to determine how far the EASYB can go on its own?

Well, obviously monetary policy always takes place in a global context. But at the same time, we're not the thirteenth Federal District.

We have our own monetary policy.

We have our own set of outlooks, economic outlook, inflation outlook, and as Christine already alluded to, some of the fundamental drivers of inflation have developed quite differently in the US than in the Euro Area. So we have our own monetary policy to do that. Monetary policy, I think is testimony of the fact that we're increasingly confident with the disentflation process that we have been seeing and that we

So you mentioned the b word bumps, and this is something we hear a lot. What kind of bumps would you have to see to not cut rates in June?

Well, bumps that would lead me to fundamentally change my assessment of the ongoing this inflation process. And I think the projections that we have are pretty clear that we are moving toward reaching our target two percent inflation over the medium term in the remainder.

Of this year course of twenty twenty five.

But there are risks surrounding such projections, but increasingly these risks are becoming more balanced.

Upside risks, I think, em.

Andate predominantly from the labor market, and then it's not just about wages.

It's about wages.

In combination with very slow productivity growth. So a major difference with the US and the question about the capacity of firms profit margins to absorb any increase in unit labor costs that might come from this combination of wage wages and productivity growth. That's the assessment we need to make. That's a risk on the upside. At the same time, we also don't want to undershoot our inflation target. We

So.

Right now, the market's pricing in twenty five basis point cut in June and then two more of the range of the year.

You're basically on board with that.

If everything stays the same, well, I'm not uncomfortable with such market pricing, but At the same time, we don't pre commit where data depend that we go meeting by meeting. We of course we have a picture of where we think the underlying movement is within the data. But we will have new data points well every month on inflation, every quarter on the labor market, and that will continue to inform our decisions beyond June.

Well, what would make you rethink what you have right now in terms of that path? Is it the geopolitical concerns? I'm trying to understand what would make the easy be changed path or how would they respond to, say, an oil price shock.

Yeah, well, an oil price shock obviously will lift inflation, that is absolutely true. But the question for us is the oil price shock of enough significance to trigger second round of facts? And there's an important difference here today with twenty twenty two. In twenty twenty two, all inflation items will go up. We're going up, and we had the energy price shock as the consequence of Russia's unjustifiable.

Invasion of Ukraine.

Now, if we have an oil shock, it will be against the backdrop of general disinflation in all the other factors. So the likelihood of significant second round effects I would argue is smaller, but it is clearly something to monitor.

It's clearly something to keep in mind.

So you're willing to potentially look through it.

If it continues to be confined to energy prices only. Yes, as soon as I get indication that it broadens into the consumer basket into more traditional goods and services inflation, then the answer would turn no.

Something that people have speculated is that the ECB might be willing to also look through depreciation of the euro in response to recuts at a time where the FED is not cutting, as long as there isn't an oil price shock. So let's say that there isn't an oil price shock, would you be willing to accept parody with the euro and the dollar all things being equal, It's fine.

Well, the exchange right in and of itself is not a target of our policy, so I account comment on specific levels of the exchange. It's one input into our overall assessment of the inflation outlook. It's clearly that a depreciating currency would lead to additionally important inflation at the same time, if the reason for that is tighter one of the policy in the US, higher bond yields in the US, that would also spill over to the Euro Area and we would have tighter financial conditions in the

A very difficult question. Some people are speculating that high rates are actually helping inflation continue because people are earning more and then they're able to refuel that into the economy, and that low rates actually were depressive of inflation.

Do you believe that? No, I don't believe that at all.

I think it runs counter two decades of empirical evidence. And if you want to run to see what the consequences are of running such an experiment.

Look at Turkey, right. I mean, that's where the experiment was brought to.

Life, and I don't think that that's seen as a paragon of central banking success.

Central Bank President ECV, Governing Council Member Class Cannod, thank you so much for being with us.

Really appreciate it.

With the pingle of UBS, he came out with a call that was nuanced, and I think that that's the important way of putting it, and I want.

To start there, you talk about how.

Your base case is two rate cuts, but you made headlines by talking about the possibility for the FED to raise rates to six.

And a half percent next year.

Put those two stories together, please explain, well.

I mean the stories are I mean, I hate to admit that they are somewhat born out of our own forecast errors, right right, So I think there's an element of needing to be humble here, But I mean, the basic fact is growth has surprised persistently, you know, for the last year more essentially, And you know, we think about the central Bank, we're all focused on inflation. They're

Extraordinary number.

But even if it's still running at this two forty four average pace, eventually the unemployment rate is going to start moving lower. And that seems pretty inconsistent with two percent inflation. At some point the Central Bank may think they need to do something about it.

Are you basically saying that if inflation doesn't come under control, if that's going to have to break something.

This isn't even about breaking something. I mean, this is like going from two forty four to something closer to trend. I mean they it's really an extraordinary pace of growth.

It's persistent for a.

While, and they might think that they need to break something in order to solve this sort of I've been calling a sort of the last half mile problem, like if they're stuck at two and a half.

But I think if growth is going to.

Be three percent GDP growth and two fifty on payrolls, I mean, they're just I think they're going to end up coming to the realization that that is not going to allow them to achieve price stability.

We here from Michelle Bowman last night saying keep things policy is restrictive, but maybe time will tell if it's restrictive enough. When you see these kind of numbers in this kind of market and you have a probability, even though it's small, you do are putting in probability of a hike.

Do you think the FED is restrictive?

Well, I do think the FED is restrictive, But I have to say I've been thinking the FED is restrictive, and at the same time, I'm still not seeing the kind of slow down I would have expected. I mean, you do see some evidence of restrictiveness. I mean equipment investment, I mean a lot of different types of business fixed investment have been pretty weak. You know what that looks like. It's the effect of higher interest rates restraining that activity.

But overall, when.

You're watching consumption growth at the pace we've had, it, it's very to cult to think.

That, well, you know what is is the neutral rate?

Really the zero point six and the SEP So we've started thinking about a short run neutral rate, But I will say it's hard to identify these things in models.

It's hard to come up with a point estimate.

So the FED and we are really feeling our way forward, and I think as we feel our way forward, I mean, if growth is just going to remain super strong, at some point they might realize they need higher rates to kind of you know, tame the economic conditions that would engineer a path to two percent.

But back to your base case, you did push back your timing though, the first cut to September.

A lot of people are saying, siptet right, Yeah, no.

No, we did, only laughing because we got the CPI and I actually published the rate call change faster than we published our CPI.

Right now, Well, why are you even having two cuts if this is what you're talking about, Well.

We're having we have two cuts because we do think the economy is going to slow.

I mean we're.

Looking at an expansion where the sources of growth have been relatively now. So we look at twenty twenty three and we think there was a big impetus from fiscal policy, and we think we're seeing that fade both in the pace of manufacturing plant.

Construction that was supported by the Chips.

Act and the IRA, you know, as well as sort of what we're seeing in public infrastructure investment for example. And we're also seeing a fair amount of hardship in households, and we think that that is the recipe for a slower second half. But we've been thinking that that's a recipe for slowing and the upper twenty percent of the income distribution remains a wash in cash, liquid assets and high levels of wealth.

So I think that Emory was going to September and this question around.

Politics, co oh yeah, because.

So here we are people are saying, you know, can we actually get a September rate, given the fact that we have one of the more contentious elections that we've had in a very long time.

How do you push back and say.

Okay, the economic fundamentals determine that this is the way to go, the FED will just do it.

Is that really realistic?

And the climate we're in.

I think it is.

I think it does put the onus on their communications to explain why it's unfolding. But when we look back at history, you know, we sort of analyze the September moves. I mean, we can debate whether or not the start of a cycle is different than an ongoing cycle, but they do move in plenty of Septembers with it or within three months of a presidential election.

I just think their communications have been.

Such that they've laid out this plan. They've been telling everybody that. I don't think it would be particularly surprising if the data started to go their way they're communicating it. I think November would be a challenge two days after the presidential election. I mean, could you imagine waiting and then doing that?

So I do think the.

Odds of November should be pretty low to start an easing cycle, but I think September is probably okay.

Jonathan Pingle of UBS, Thank you.

This is the Bloomberg Sevenans podcast, bringing you the best in markets, economics, angio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine a Eastern Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the bloom Blog terminal and the Bloomberg Business app.

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