Bloomberg Surveillance TV: April 8, 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

I think that's well phrased, because it's starting to feel a little bit like deja vu. Month by month we're pointing it just one factor or one or two small one off sub indices that are giving an upside surprise and giving us a zero point three percent monthly gain instead of zero point two. Well, if you get twelve months of those, it adds up to three three point two percent inflation, not two percent inflation, and that whack a mole sense is come back in just like it did.

All let's take it a little taper into that as well. The consensus I think on Wall Street at the moment is that you can surprise, or rather you can embrace this supply side story. Growth is non inflation rate.

At the moment.

I think cham and Pow shares that too. Laura, what's the biggest challenge to that view right now?

I think the challenge is it's not just CPI. We're starting to see it's been a month and a half now of inflation upside surprises from producer prices, from commodity prices moving higher. The ISM manufacturing price sub index hit the highest in two and a half years. So it's not just consumer prices. It's really sort of seeping and bubbling up from a lot of different places. And listen, services prices are stickier.

I think that's the issue. And again it's not just rent.

So you know, you're seeing a nuanced story around inflation.

I think, unlike the growth.

Side of the economy, everyone again there's more consensus around the fact that we're in good shape. On the inflation, there's still a wide range of consensus. And what is surprising is Powell, you know, interest in dismissing the latest data.

Again, there's no urgency to cut rates. So the fact that he still seems.

So intent on that path, I think is causing a bunch of us to wonder what the conviction behind the rate cut is at this juncture.

Maybe this is the reason why Laura, you said also not higher for longer, but a renormalization of interest rates to the nineteen nineties and two thousands. The tenure retests five percent at some time this year. What do you think is a trigger for that, given that everything we've seen so far, we're still quite a bit aways from that.

We're still aways from it, Lisa, but I think that we're on that trajectory. It's the higher inflation numbers, it's those very strong growth numbers, it's the productivity numbers that look fairly solid, and then I think there's this supply side issue in treasuries that's just not going to go away no matter what you changed with the mix of funding. At the end of the day, if we're not going to have a recession, the yield curve should normalize, and

I'm old enough to remember the last time we got five percent ten year yields and people were talking about something breaking and bank failures and commercial real estate falling.

Out of bed.

We're basically taking that off the table now and saying, this is an economy that can handle that.

No, it was no problem that I am.

Because I think that this time last year when we touched five percent, it was the speed at which inflation at which interest rates.

Moved up so fast.

I make the comparison if somebody from warm weather moves to New York in the middle of winter, there's going to be a very unpleasant shock, and you're going to kind of freeze up. But the second winner, the third winner, you kind of get used to it, and you're out and about doing everything.

That you would be doing normally.

I think that's the right comparison here. The longer that we're at these interest rates, the more that will price in this into the cost of refinancing, the cost of buying a home, and the cost of emina activity. I think, you know, all of that will normalize. It was just the shock of the speed of the move We're moving there gradually now. I don't think it's going to be as much of a problem for markets to digest.

If the economy is fine and well and good, and these surgical rate cuts you have about two or three priced in, Are you actually prepared to pair them back to potentially one or none?

I am, and I've been sort of, you know, on the fence about saying that I don't think two or three rate cuts are needed. I just think it's what the Fed seems to have.

Conviction they will deliver.

I think that look markets today, financial conditions, credit conditions. I don't think that we need these rate cuts. At the end of the day, you're looking at a world with higher interest rates offering US rich suite of alternative investments away from traditional equities. I think markets have digested these higher interest rates just fine.

Laura. Can I just say that it's winter eight or nine and no, I have not adapted, Laura Rank, Thank you, JP Morgan's jack manly saying this. Things are still looking pretty good for the equity market. The US economy is doing so well that investors should be exuberant. Maybe things are a little too rich now, but I think it's entirely possible that the market season right the way through that Jack come police to say, it's with us around

Well, we're talking about, like you said, Lisa, right, the economy doing well for all the right reasons, the rate environment changing for all the right reasons. That employment report was pretty significant, John, that you had mentioned very strong gains, very low unemployment rate, but not the pop and.

Wages that we would have feared.

I think this week, to answer that question that you guys were talking about earlier, inflation is probably the most important thing to be paying attention to. At least that's

Of central banks.

The FED can't do a whole lot about it, and so hopefully they see right through it.

That's how I'm thinking about.

So this is not because you don't to talk about JP Morgan results on Friday at trevious inflation, We'll talk about inflation ZPI. Do you buy into this non inflation regrowth story that so many people are embracing, not just last Friday, but over the last few months.

I do buy into it, frankly. I mean, I think a lot of what's going on with inflation today can be linked very closely to the level of interest rates. You slice and dice, and whether you're looking at the headline number, you're looking at the core number, you're removing the goods equation.

So much of it has to do with the rate environment.

It's shelter on the headline side of things, it's automobile insurance on the sort of core services side of things. Both of these things are going to be direct reflections of the interest rate environment. I think we're in this really kind of funny, peculiar chicken in the egg type situation where you're not going to see meaningful downward pressure on inflation until you see meaningful downward pressure on shelter costs.

Mortgage.

Mortgages come down to a more reasonable level, and supply comes back online because people are willing to step into that market. So I see through a little bit of that stuff. I don't think the inflation is something to be worried about right now.

Just to underscore what you just said, do you think the rates where they are are inherently inflationary?

I think so.

I mean, it's so funny because if you think about where inflation was two years ago, right we're talking about twenty twenty two, we're looking at scarcity issues. We're looking at shortages of energy, shortages of food, shortages.

Of finished goods, all these things.

Related to Russia, Ukraine, China still embracing zero COVID. We crushed inflation from nine to one to three zero in a twelve month span, and it had literally nothing to do with interest rates, purely to do with supply chain issues getting better.

Now.

The stuff that's here right now, that's the stickier stuff. That's the more complicated stuff. That's the stuff that's tied directly to interest rates. So I think the path from nine to three easy. The path from three to two that's a lot more complicated. And hey, we've seen plenty of evidence over the last six, seven, eight months in those points.

So does this leave you buying bonds and buying stocks because you think that ultimately the Fed's going to cut rates and that's going to be positive for yields since it's inherently disinflationary to cut rates because higher rates are inflationary.

Weird environment, right, Yeah, I.

Looks like a tongue twister right there.

You know, when I think about fixed income, I have to acknowledge there is a lot of short term uncertainty about the direction of interest rates right now.

We just don't.

Really know how the data are going to continue to play out. The FED elected to not course correct at its most recent meeting. They held onto that seventy five basis point cut narrative this year, but they may change their tune a few months from now. I'm not sure. In bonds, I like the upside downside sort of risk reward profile there where even if I am a little bit too early, and even if yields do back up a little bit more, as long as I'm not way out on the curve, I don't really have a whole

Bit too high.

But we are looking at this sort of broadening out of the recovery as the earning story gets better for the have notts of twenty twenty three, and I think that makes me constructive on it.

What he do?

What does broadening out mean to you? Some people think it's sort of within the S and P five hundred away from the dominant seven stocks of last year. Others say it's look abroad. Other people it might be going from large to small. What does it mean to you?

I'll tell you of those three, John, it's the first one you know. When it comes to the broadening out of the recovery.

It's sort of.

Overly simplistic, perhaps, but I think it is important that investors remember that there are another four hundred and ninety three plus names in the S and P five hundred that no one's really talking a whole lot about that have only just now started to pick up from a price perspective, that are trading at reasonable valuations, that are punching above their weight class from an earnings contribution perspective.

I'm not particularly interested in that.

If I buy the EM Index, a third of that's going to be stayed owned enterprises, I'm not particularly interested in that either. So if you're going there You've got to be very specific.

We have a huge upswinging commodities. How do you want to potentially expose yourself to that?

The huge upswinging commodities could result in short term outperformance from those commodity producing emerging markets. But that is not why I own EM. I don't own EM for the commodity play. I own EM for the manufacturing play, for the growth of the middle class, the demographics, all that leading into consumption, into production of physical goods and even services. The commodity story is not what's exciting for me about EM long term.

So if I'm looking for.

Commodity exposure, I want to clip that coupon and maybe get a little bit of price action in there as well.

I like the higher quality stuff. I even like US energy producers.

I think it's a shorter term play there too, because there's.

Not a whole lot of capex.

We're eventually going to have to drill more if we want to pump more of this stuff, and I'm not quite sure if that's in the cards right now. But for where things are at the moment, energy companies are making money hand over fist, and they are returning a lot of it back to you, the shareholder, So it's a it's a pretty good environment.

Before we leg you go, Jack, he said something that was pretty radical, this idea that high interest rates are actually inflationary for the economy.

How do people agree with you?

I get a lot of questioned looks when I say that when when I'm speaking to clients. But I think if you if you break it down, it starts to make a little bit more sense.

I mean, in particular on the shelter side of things.

The Fed has raised interest rates notionally to crush inflation. That's the whole point of this thing, right, But by raising interest rates, they have made borrowing costs across the curve higher, which in turn has made mortgage rates go up considerably, which has forced any sort of would be home buyer who can no longer afford to purchase a home into the rental market. And rental inflation has actually stayed quite robust. And rent is what feeds through into CPI.

But first blush. I get a lot of I get a lot of hunt. You're sure about that kind of views?

We heard that from sofas as well from over at Oppenheim work. He was talking about the idea that that is really the key to bringing home prices lower is potentially lowering mortgage rates.

He was telling us about his ten percent mortgage.

Wasn't it thousand dollars really bad?

To Terris Manhattan?

Poor guy?

Exactly?

Seriously, Jack, good to see you. Gant you, sir, Jack Manley of JP Morgan Adam, I'm pleased to say it's with us. This line that came from Medmore Selen. Ninety dollars would be the perfect number if it would be stable for a long period. Ellen, you're making an interesting point. How difficult it is it for that number to be stable for long period?

Yeah?

I think it's very difficult to be stable for long periods because once that number seems like it's here to stay, as opposed to just a spike due to say a geopolitical occurrence or an environmental occurrence.

You've got, you start to.

Get really really uptight and ants consumer nations. India is going to be upset, China's going to be upset, not to even mention the Biden administration, which is going to be very upset if we see this going on all through the summer. That could damage their election chances so much because for some reason, American voters really associate gasoline prices with the political party that's.

In power currently.

There's really no there isn't really a reason for this, but it's really a really prevailing.

Element amongst the American electorate.

And so if the ninety dollars stays, it really could become a problem. And OPEK is going to have a very very hard time resisting the pressure both to put more barrels on the market, especially Saudi Arabia that's already got these extra voluntary cuts beyond what they're required to do under their quotas.

So we're gonna have to at some point. It sounds like you're saying sea supply either come from the Saudi's or potentially an spr release. At what price level do you think the Kingdom steps in.

I think that they don't sitpit necessarily at a price level, but they respond to pressure. I think if they see prices going much above ninety dollars a barrow, then I'd see them them step in. I think that they are also looking at their demand.

They're going to want to see what kind of orders.

They're getting from Asia, especially because they don't want to see that drop off. And if it looks like their oil is getting too expensive for their Asian customers, I think could we would see them potentially start to put together a price increase at the next OPEC meeting.

Okay, so let's talk about the potential production increase.

Let's talk about the potential use, then potential use of the SPR well below the highs join the Obama administration, but we're still at I think three hundred and sixty million barrels that this SPR holds. The Biden administration could have a meaningful tap of the SPR before the election.

No, well, I think that's a really difficult thing to do, because, first of all, they've already tapped into the SPR earlier and there was a lot of pushback, especially because a lot of that oil got exported to China or to other countries and it wasn't necessarily used domestically. And the purpose of the SPR is not to just lower gasoline prices because they happened to be too high, or they happen to be too high than what they.

Prefer for an election.

The purpose is really to have this in store in case there is a geopolitical event that is preventing oil from getting to the United States or to other countries, or there's a hurricane, for example.

That could take out production in the Gulf of Mexico.

We saw SPR releases after there was a significant time where production in the Gulf of Mexico is out due to a hurricane.

And if the Biden administration starts.

Releasing the SPR just because gasleen prices are a little too high, then they're setting both a difficult precedent.

Because then when are they going to refill this.

They've really got to refill it constantly if they're going to be using it. Plus, the summer months and are coming, hurricane season is coming, and hurricane season is strongest in September and October, which is going to be right before the election. They may want to save the SPR basically in case they need it.

For that time.

Adam, when you are energy exports, what is the appropriate level of the SPR, What do you think it should be.

That's a really good question. I think that that question.

Is kind of not so relevant because we're technically members of the IA, and the IA has a certain in order to be a member, you have to maintain a certain amount in your SPR because a certain amount of your consumption.

So I think it's it's it's a tough call.

You really should maintain I think more than you would think, because you don't want to screw up all your exports by suddenly deciding, oh, hey, we got to halt exports because.

We need this domestically. You don't want to have to do that.

And so it's a good idea to maintain a good amount in your SPR to be used in the event of some kind of embargo, stoppage, you know, natural disaster, and not to just use it because gasline prices are fifty cents per gallon higher than you think.

They should be.

It reminds me of the conversation about the fed eleum. We talk about what the FED should do, but it's to talk about what it will do. You know, at the end of the day, you and I could talk about this. We probably agree on the same things regards to the SBI and how it should be used. It's how it is being used that I think is more important. Here do you anticipate they will be draining that SPI going into the election.

I think that that really depends on where oil prices go.

I think if OPEC decides to increase.

Production at the June meeting, there's a lot less like flihood that they'll drain the spr They're not going to refill it until it's below I think seventy five dollars a barrel. But if OPEC does increase production, I don't think we're going to see that.

They'll also probably try to.

Push American oil producers to increase production, which is something that I don't think they're going to be very receptive to. Given how much pressure they've had, basically on every other respect, and how much vilification they've had at the hands of the Biden administration. They're going to do what they think is best for their business at this point, regardless of what the administration says.

They're two points in there, Saudi Arabia's response to oil prices, especially heading into the election, and US producers. Let's start with Saudi Arabia. Since you wrote the book on the Saudi family, how willing are they going to be to help President Biden heading into this election?

That's a good question.

I think that they're not going to be that willing, and they're going to want a lot in response. That doesn't mean that they are totally unwilling, especially if they

When it comes to the domestic picture, how much more can the US produce? How quickly can they act as a swing producer after already pumping thirteen million.

Barrels a day.

That's a really good question. I definitely think production could be higher. The question is that something that they think is a good idea. Now the US is really a swing producer because it's oil production is not centralized. We've got all sorts of different companies doing what they think is best. And what they've been saying is best for them for a while is not to drill that.

Many more wells. Yes, each well, they're getting a.

Lot more productivity out of those wells, but they are not interested in spending a lot of money drilling new wells.

Especially if interest rates stay high and.

Inflation continues, They're not going to want to spend more money.

They may try to get something.

Out of the Biden administration, like approvals for new drilling in the Gulf of Mexico, for example. It's possible that they could use that leverage, especially if they think that Biden is going to be re elected.

Interesting Ellen, thank you, We've got to leave you there allan weldare if they lancing Council and the author of sambi Ing. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, antient politics. You can watch the show live on Bloomberg TV weekday mornings from six am 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.