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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie 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.
Here's the latest crude climbing ast. Hey Ron says some terms of the ceasefire have been violated. The energy shock rippling through the global economy. Joining us now, I'm so pleased to say, is OECD chief economist Stefano Scarpetta. Stefano, thank you so much forgetting for making some time. How much are you looking at a dampening effect on the global economy as a result of what's going on in the Middle East?
Of course that there is a lot of uncertainty. We just publish our interim Economic Outlook on the twenty sixth of November, and basically if on the twenty eighth of February, before the war in Iran, would have actually rised upward the projection for global GDP growth for twenty six by zero point three percentage point. All of that was shaped off because of the impact of the war and the crisis in the Middle East, and the increase of course
in energy prices. Now, the recent announcement of the cease fire, if it is implemented, if this means of course reopen the Strait of Ormont's, and we have seen already in the impact on the price of oil, would have sort of a sort of effect on the economy. And we see already a reduction in the price of oil. But of course a lot of ifs here because these have to be maintained, the cease fire and we have to
see exactly vessels getting through the Strait of Ormontes. So unfortunately we had to revise a basically our projection by all the increase that would have happened if it was not because of the world how.
Much are Europe and Asian nations dispunfortunately affected by the fact that oil prices are likely to remain significantly higher, even if there is some sort of conclusion at least in the north in the near term to this conflict. No.
Indeed, of course Asia in general and Europe are more affected by the highking price of oil and gas, in particular the Asian countries, but I think even within the Asia region there are significant differences because two countries that depend heavily on oil getting through the Strait of Ormos, like Korea and Japan, they have large reserves, while other countries in the region Indonesia Thailand have much smaller reserves, so they are more exposed of the hiking price than
the other two countries. Europe forces also dependent on gas coming from the Strait of Wormos, so is of course more exposed. What matters really is the duration of these increase in oil prices and gas prices, and of course whether or not they have been damaged to the infrastructure in the region, in Iran and other neighboring countries, because of course repairing the damages may take long, and this may actually have an impact on the profile of oil and gas prices going forward.
When a consideration, when do you know you can no longer just look through this and actually there's going to be structural changes and permanent shifts.
Well that's a good question, depends again on for how long the price will stay high. We have seen short term responses in many countries of the UECD, including the support to consumer and to firms to face this high energy price. We have seen that in Europe basically in most of the UCD countries, the early measures that have been introduced has been way to basically reduce the increasing
price at the gas station and for the companies. But of course these are very expensive, so they cannot be prolonged for too long, and our recommendation is to try to move as quickly as possible to more target measure. It actually provides support to consumers most affected by the increasing energy prices and actually to the firms that depend more by energy. So this is I think is our recommendation.
Then of course there might be some ration, and we have learned through the COVID crisis that does some telework actually may reduce sort of the consumption of energy. And I think these are also implemented by a number of countries.
Indeed, well, do remember countries have the fiscal capacity to fight us.
That's a very good question, because of course the physical capacity is limited, and that's one more reason why we are recommended to move into target measure and actually temporary measures, because of course what happened in the twenty two energy crisis was some of the prices support measures were kept for too long and this led of course to significant
public spending in this area. So there is a need to targeting, and there is also a need to already introduce sunset closest whereby if the price go down then this measure will be removed quickly.
Stay with us. More PLEMPAC surveillance coming up after this.
Here's a view from Wall Street this morning. Bob Michael of JP Morgan Azset Management, writing, the market is starting to unwind the tail risk associated with a global economy that would have to live with oil above one hundred dollars for a protracted period. Bob joins is now in our New York studios, which is a wonderful thing. Bob, great to see you.
Happy to be here.
Do you think that it's appropriate to remove some of the wagers on oil being below one hundred dollars a barrel for a protracted period of time.
Well, that's a complicated question. I think the best answer is we can live with oil one hundred dollars a barrel for a while. I think what the administration has done a good job of doing to us over the last year plus is to train us and we look for signs of when is the rhetoric at a high, but they're starting to look for an exit and we're starting to see that now, and I think that's why
the markets are so optimistic. If we go back to Tariff, if we think about Greenland, if we think about Venezuela. At some point the rhetoric is very high, but the administration finds an off ramp and exits. And I challenge you to tell me that all three of those things have been buttoned up. They're all still going on in the background, and it feels like we're on the same kind of off ramp here. That's pretty good for the markets.
So yesterday we saw people have faith in the idea that the escalation in rhetoric at least had peaked and we at least are coming.
To that off ramp.
It's almost exactly following the timeframe a Liberation Day last year. I'm just wondering whether you think it's viable in an ongoing fashion, even during some of the question marks around how durable.
The ceasefire really is.
So we do. Because there's been significant repricing across markets, especially in the bond market, investors are caught a little bit offside. For an actual off ramp, I don't know that you need a cease fire for the entire two week period. You probably need one for the back half of the next four eight hours, enough time for everyone to meet in Islamaba and to iron out details of
what an off ramp could look like. And then I think over the next month, we're going to see this in the distant rear view mirror, even if oil stays at one hundred dollars a barrel, because it's going to take time to get the fiscal oil to where it's needed.
So you think these Islamban talks are real incredible.
I think they are. I think they're essential for the administration. If they're genuinely looking for an off rep it sounds like for the last three weeks they've been looking for that. I feel Vance is on his way there, the Israelis will be there and something will come out of them.
But when it comes to this gap between the Iranians and the United States, they don't agree on anything, right.
Now right, everyone, It's classic bargaining. You want this, somebody else wants that. You'll find a way to meet in the middle. There are lots of things that the US can do. Yesterday I listened to General Kine. He declared victory. You listen to events, he declared victory. They've already started the process of saying, look, the primary mission was to mitigate a nuclear threat. We've done that. We'd like the straight open We'll see if we can get to that.
If not, we supply enough of our own oil. We'll just move on.
So with fixed income, what does by the dip mean? Because we've seen that certainly in credit, with investor grade credit spreads moving down below at one point where they were right before the war took place. We just heard earlier this morning Keith Lerner talking about how he went wholesale into yal bonds because he sees opportunity. Now. Is it more the credit risk side, or is it more the government bond side. With expectations and inflation will ultimately continue on its downward path.
It's everything. It's just an acceptance that investors are under allocated to fixed income. Equities have bubbled higher for them over the years, They've allocated a lot to alternatives. They're looking for opportunities to get into fixed income. I've been in Houston for the last couple of days meeting with clients. They don't want to miss this backup in yields. They want to get into the bond market. It starts with where is fair value? I think the FED is in
hibernation mode. I like that. I like a three and five eighths percent FED funds rate. It's solid. It leaves it at about zero on a real basis. If you deflate it by headline inflation, that's okay. It also leaves yield in the bond market. The two years should be within touching distance of that. It's probably about ten, fifteen to twenty basis points too high. And the ten year, we think with a three and five eighths percent FED funds rate either side of four percent, you're a little
bit over four and a quarter. That looks okay, and Keith is right. Credit spreads are attractive. All the problem credits had financed themselves in the private credit market is that a separate problem. Is that all part of of the same credit problem we'll see over the next eighteen months. But for now, the bond market looks pretty good. It held in phenomenally well over the last six weeks, and investors don't want to miss this opportunity the way they did last year with Liberation Day.
Well neither do companies.
Right, we're seeing a rash of bond deals coming to market, a lot of issue ince. We saw the most issuance ever globally for corporates in March, and now it seems like anytime there's a window.
And hasn't it gone well?
It has gone incredibly well, and all of the dead sales have been oversubscribed.
To Yes, I tell you, well, it's also there's money there. It tells you that we in the bond market look at corporate earnings, we look at profitability, we look at leverage, and we're.
Okay, given that.
Isn't there a dissonance between the belief that inflation will go down over time?
Will also seeing.
The animal spirits come back to markets with so much money still available and people looking or even one hundred dollars a barrel in terms of oil prices, saying consumers can withstand that. Listening to Ed Bashion over at Delta 're optimistic. We're seeing customers absorb the higher prices. I mean, can't you bake in higher inflation? Doesn't have to be one or the other animal spirits or potentially a bid into duration.
Well, I think we've crossed that divide. I think we in the markets accept that a two percent inflation target is a myth. We haven't been there in half a decade. It didn't feel comfortable when we try to get there, and we were printing one point seven to one point eight. It's too low for an economy the size and complexity of the US two and a half feels like the new two percent. And we're a little bit above that because we've got transitory inflation because of the energy shock
that too may or may not fade. But I look at our analysis, I read Mike Faroli stuff a lot. Even with where energy is and the probabilities of this being extended, we've got inflation if you look at headline and core, between three and a half and three percent for this year, but we have real GDP at about
two and a quarter percent. So what we're saying is this economy can absorb higher inflation than two percent, even inflation around three percent, And the FED probably doesn't do anything because they went into the last meeting still a little bit concerned about the labor market. Now they're probably more balanced, so they're going to sit on their heads.
Stay with us. Mulblinbeg Savannan's coming.
Up off to this. We think, thankfully at this point, I think have a ceasefire thanks to the leadership of the present United States. We have the Iranians promising to open the streets of four moves, and we have a negotiation that's supposed to start this weekend. That's the truth. I think it's a good first step. We're going to see if we can make more progress here in the day's to come. I'm optimistic that the Iranians are going to be smart, that they're going to negotiate in good faith.
Here's the latest. Vice President Vance gearing up to lead direct talks with Iran on Saturday. With fighting in the Middle East threatening to derail an already fragile ceasefire, Former Deputy National Security Advisor Victoria Coats writing, the odds of Iran sticking for the full two weeks is pretty small in my book.
Victoria joins us.
Now, Victoria, thank you so much for being with us. So what are you gleaning so far from a pretty uneasy ceasefire, if you could even call it that, for twenty four hours, beset by attacks and a lot of arguments between both sides.
Yes, this is a pretty dicey period. And this is standard for this kind of arrangement. If you think back to the Gaza War, the early ceasefires were extremely delicate. There was a lot of pushing at the edges by both sides, and it took a long time to get to a durable deal under President Trump last fall. So I think we're going to see a similar kind of
jocking for position here. But the interesting thing here is that the Ranians really don't have any cards beside the Strait of Homoots, And one thing.
I've noticed is that it's going to be a declining.
Asset for them because the entire region is talking about ways going forward they can circumvent the strait. So Iran's going to try to play that card as hard as they can right now.
Get as much as they can out of it.
But I think their ability to do that going forward is going to be quite limited.
Victoria when it comes to the strait being open as normal, but with these strings attached the Iranians basically making sure you have to have a payment, whether it's yuan or bitcoin. Would that be a success for the United States, Yes, there would be more of an uptick of vessels, but that means Aron fully controls this key waterway.
Now, I think that's absolutely what we're going to be working on going forward. And what you're seeing the Iranians do is essentially a function like a mafia group. They're trying to shap down the rest of the world to get energy out of the Gulf. And so yes, they are demanding crypto payments, which is kind of comical, but as I said before, I think their ability to do that long term is not going to be there for them. And the other thing it shows us is that they
are desperate for money at this point. They their economy is absolutely on the rocks, and they've shut down their internet for now thirty five thirty six days. So nobody's done that before, and I don't think anyone's really forecasted the kind of damage that that's done to that economy. And what happens when they open it back up. What are the Iranians going to do when suddenly, you know, the ATMs are full again, that kind of thing. It's really a very difficult situation for them. So I think
they're thinking very short term right now. They're just thinking, how do we get cash out of the strait of hormones so we can survive another day.
This is no leverage that they hold. How do you think they're going to use this at the negotiating table on Saturday? What would be acceptable to the States?
Well, that's the thing is this is all they have. This is their leverage.
Otherwise their ability to inflict term on the United States, their neighbors on Israel is getting more and more limited.
That was really the point of Operation etpnic.
Fury was degrade their ability to inflict that harm and also their ability to reconstitute it. And the Secretary of War and the Chairman of the Joint Chiefs yesterday laid out a very detailed case about how that ability to reconstitute their missiles to restart their nuclear program had really been destroyed.
So all they really have is the straight right now.
And as I said, that's a declining asset for them, So they don't have a lot of cards. And I think that's the point that the Vice President and the special envoys will be making to them.
Victoria can a post weekend off ramp for the administration include leaving the Strait of Hormuz in control of the Iranians if they accept US dollars and some conditions about how the funds are used.
In terms of accepting US dollars as tolls, yes, it's toll, I mean that is certainly something, although I actually would prefer them not to have dollars. I think the economic leverage is the other really strong point the Vice President's going to have in his pocket. You know, the Iranians can't restart their economy without broad sanctions relief.
I mean, that's just not going to happen.
I don't see China doing anything material to help them economically, and they've alienated countries like Qatar who might have been willing to help them in the past past. And I think it's notable that Katar went to the United Nations yesterday and said they want to hold the Iranians economically liable for the damage that was done to their oil field during the war. Very interesting development there. So I
would prefer not to give them dollars. That's that's a nice hard currency for them, So I don't I wouldn't really see that as a give point for Victoria.
It was sort of interesting to me that Bob brought that up because a lot of people are talking about China may be coming closer to Iran and the petro dollar becoming the petro yuan. This idea that they could enter into the primary relationship considering their role as the major buyer right now from the Middle East. Do you think that that is exaggerated and that frankly, Iran has no friends and that there isn't necessarily any push towards China in that kind of material way.
Well, that's what it has been for the last five six years that China has been the primary buyer. They've bought in yuan, and then the Iranians can use that currency to buy things from the Chinese.
So it sets up a nice little loop for China, and that has been the case.
It hasn't made a lot of people in Washington happy, but it's not that great of a threat to us because I don't see anybody else. I don't see the Saudis or the Kuwaitis, or the Amortis or the Qatari's particularly interested in taking you on for their product.
So if it's just Iran and.
That that loop is keeping her on out largely of the broader global economy, that doesn't make me all that unhappy.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. 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.