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Terminal and the Bloomberg Business app. The EU. We'll be hoping this is the same political theater as twenty eighteen. I would argue that hope is not a plan, and Alan g imports won't address the size of the US trade deficit. But it's the best that EU have got to work with. Jordan, Welcome to the program Siran news or noise. When you read that statement, it's news because if you think about it, John, and Merry Christmas. By the way, I can see, if you think about it,
we've had come in winning the election. He targeted Canada and Mexico and China, and I noted to clients mysteriously absent on the rest of the world Europe, Japan, the rest of Asia, and he started to pick.
Them off one by one. As time has gone on, we've had India this week and now we've had the EU today. And as I've put in the note to clients, the tricky thing is if he's serious. If he's serious, the EU can definitely buy more LNG, but the problem is they won't at all be able to plug the deficit with the US just from LLERG alone. Oil might help as well, but I think oil is pretty much maxed out too. If you look at the LNG purchases the EU has made from the US, it's already half
of EU LNG imports. It's a fantastic achievement. And the exports of LERG from the US have been ramping up a lot over the past five years, but they can't double in the space of this one year period, I would say, And they're annuallyzing around twenty six billion dollars a year in what the EU buys from the US if it was to take all American LLERG exports. So it's just really difficult for the mass to add up.
So in answer your question, it's news if he's serious because the eu A won't be able to negotiate a deal on behalf of other members. Junker didn't have that power Arsen Ofvonderland now And what Junker did in twenty eighteen was a political charade. Really, it was a memorandum of understanding. It wasn't a trade deal. It was just a sort of loosely worded statement saying we'll buy more lerg and soybeans.
Or they have.
And Trump's still complaining the deficit has gotten wider since the EU has actually already increased their energy purchases.
So if he's serious, the.
Master doesn't add up and tariff's come into place. But I think perhaps John, he's giving them a way out to do the same they did in twenty eighteen of a memorandum of understanding, and maybe he avoids tariff in Europe to begin with. But it's all down to human decision at the end of the day.
John Jordan, Let's take this story and push it through through an exchange, as we often do. We've already had a five percent move on euro dollar week of euro through this year so far. Is this another reason in a long list of reasons to keep selling the euro Yea.
There's a long list of reason to keep saying that the Europe's like cats and dogs. You've got what's going on with the tariff situation, You've got what's going on with European macro. The industrial recession in Germany just keeps getting worse. In the short term, we've had services strength in Europe keep us in doubt about how far the ECB can cut rates. But I think the services sector will turn
lower next year. It's just so difficult for services to do well if you're laying off your manufacturing employees, as Germany and others are doing in Europe right now. So we've got one oh one so near parity in Eurojohn, But the key message from my side, John, is that's a view into January the twentieth, and I think the inauguration is an event risk in itself. It could be a day where we get a list of executive orders
in the afternoon from Donald Trump. If tariffs do not feature in that list, if he doesn't start a sort of investigation into raising tariffs on others, it could be a by the room of cell the fat moment. And that's why I think one oh one we price in maximum pain and then if it goes more smoothly, if there's not a significant tariff hike on day one of his present and see, perhaps it's mean reversion and this market likes to mean revert and the dollar sells off from there.
In the past, the dollar has sort of had a self correcting mechanism where if it gets too strong, things start to break and then suddenly weakness takes it over and there is this normalization. At what point do you see that risk coming into play?
Indeed, it ties to the f MC response function. Typically you have a big self in equities, the f MC kind of rides out for a bit, but when you have a ten percent draw down, they tend to circle wagons and reverse course. I think that could be the case. It feels a lot like twenty eighteen to me, Lisa.
Remember twenty eighteen, we had a pretty hawkish fed. We had a ten percent sell off in the S and P five hundred, and then we got to January and power changed is sort of mood music quite quickly in just public statements, and we had most of that sell off come back in the first part of January twenty nineteen, so we could be in for a case of that
sort of story. I'm not calling for a ten percent draw down, but that's the saw of pain threshold where you get the FED members responding and perhaps changing their language. But it's really difficult because the macro data supports are much more hawkish FED. We've long had a four percent terminal as our view at Mazoo before Trump won the election.
A lot of people joined us in that race to four percent once Trump was elected, but we're now pricing that pretty much perfectly in the rates curve, so it could be the case lead. So I think the risk reward is we actually price in a little bit more cuts than what's now in the market. I think we should be at least pricing a cup by March or June. There's about one cut by June, but March is around fifty to fifty, so we should see some curves steepening
on the back of it. Two tens looks really interesting here.
We've talked about two different issues or whether it's the tariffs and just the Donald Trump risk two potentially a weaker euro, stronger dollar, and then there's the FED response mechanism, which do you think is in the driver's seed?
Ugh, well, I think the Trump trade is in the driver's seat for everything in January. It all boils down to that. And then once we know that, once we know what's happening with tariffs.
It's done.
It's essentially the informations in the market, and then we go back to following what the inflation data says, what the GDP data says. And it's just difficult for the Fed to be dubbsh when you've got GDP at three percent and they're now casting even a bit higher than that. You've got inflation reaccelerating on the month of month numbers, and tying this into the LNG story. Have a look at natural gas prices at Henry Hub. They're at the
highst of the month. They're rising in fashion that could bring energy services CPI as a problem next year for the Fed. So all together, Trump's in the driving seat trying to push up LNG price at LERG exports push us up domestic prices. It's inflationary as a policy. And then you've got the situation with tariffs, which of course
are inflationary. I suspect they'll stagger the tariffs though over a year to try and reduce the knee jerk reaction from firms having to raise prices as soon as the news is out, and we're hoping to see or we're probably going to see FX depreciation in China and all those otherrencies such as euro to help offset the impact of any tariffs if they come in. So if you have the sixty percent tariff on China, that's a huge piece of news. That's definitely in the driving seat right now.
Last question, then, Jordan year Today, if I go on the screen on the Bloomberg terminal and have a look at where things are at the moment, everything in G ten is weaker against the US dollar, including the Japanese m with a ten percent move. When I do the same thing at the end of twenty twenty five, it's that screen gonna look any different.
Good question. I think it will look different. As I say, I think we actually get a dollar weakness by the end of next year, but it's dollar up for the next quarter and then down from Q two onwards. I think you will see the the end strength come back in as we're still in a rate hiking cyber from the Bank Japan, and you will see the economic data improve. I'm an optimist John for the second half of next year. We've got all this monetary easing, we've got the potential
for China fiscal stimulus in Q two. We should be seeing a week of dollar when that happens. So we've got euro bouncing back to one oh five. But it's such a mild rally. I'd focus more on the sort of story for the dollar right here and now.
Got it, Jordan, Merry Christmas, sir, thanks for everything this year. I appreciate it. Thank you, buddy, Jordan Rochester there of Mazumo Savantaria for SoC GEN with a surround a table sapantry Kamonic, good morning. I think before the Federal Reserve you had two is going down to something like three p fifty at the front end of the curve. Has that changed since you heard from Chairman Powell.
Three point fifty for the end of next year. So we don't really, I mean, we're we were anticipating. We are anticipating more cuts next year. You know, our economists surely haven't changed their call for the FED because we just don't have much by way of new information. Yes, the Fed, the Committee itself recalibrated to just two cuts
for next year. But there you know, the way the economy has been going, you should see a moderation in growth, you should see a moderation in employment, you should see a moderation in inflation. And under the circumstances, the event might be able to deliver four cuts. But as a rate strategist, I do my biases that they deliver less cuts. So the market is very very efficiently priced in for
a very benign policy path. But if they do deliver four cuts and aligned with our economists call, then the two year could end the year next year on three and a half percent.
Interesting.
We've had a robust debate around this table over the last few days about what was behind and what underpinned those changes to the forecastle of feder Reserve, the data or Trump. We're teasing out some of that information from officials on the FMC Mary Daily. The San Francisco FED president told us about an hour ago that for her it was the data, but for others it was clear. There was also about the policies. What is it for you? What are you basing your calls on?
So I think it's going to be a bit of both, and I think it's going to be a constant recalibration process as we get new information hitting the tapes, and there's going to be a lot of that three am tweets that we have to respond to next year, so we're all getting ready for of that. But you know, it's going to be quite difficult depending on how the tariffs are rolled out. I mean, last go around, tariffs were over a two year period and on you know,
sometimes on very specific products. This time this could be it could be much more of a sweeping terraff regime. So we're going to have to recalibrate as the data comes in. I mean the FED, I think, as we heard from from a chair power, some of the fair FED members are already incorporating some of the changes that could come down the pike, and others are not. And that's exactly what you're seeing among street economists.
What's your reaction function to the tweets?
You know, it's it's funny because I'm now mentally preparing myself to wake up in the morning to stuff that I was not prepared for and then having to react very quickly. And and our counterparts in Asia especially are looking forward to it because they can react to the volatility as it's happening because they're awake at three am New York time to to to respond to the incoming new So you know it's going to be it's going
to be interesting. It's it's just a paradigm shift to where we were between twenty sixteen and twenty twenty.
So things are going to get pretty noisy, right. I mean it's sort of a question of do you get more tactical or long term and how much is this increasingly a tactical market because of how obscured what's going on underneath actually is.
Yeah, I know it's going to be a very tactical market. We're going to have to constantly reculber. Just look at the last two days. We've gone back and forth on whether there's going to be government shutdown or not, based on information from either the Trump Aids or from Trump. So you're going to need to see that. It's going to be a lot of back and forth like that for the next you know, two years, and then perhaps in the next four years.
Things really are obvious if you just take the example of this morning, we've all woken up to this post from the present elect on truth, so so suggesting that if the Europeans don't close the trade deficit and buy more LERG, there'll be tariffs. I don't think it's clear what happens with that at all. The Europeans have already come out ahead of time and said we want to
buy the LNG. I think Collie Crook said a little bit earlier reference in one of our colleagues that they're pushing on an open door at the moment they want that to happen. Of course, there's an outstanding question whether it's enough to close the trade deficit, and whether if they don't, whether you actually get those tarifts. So I don't think anything's clear before you even begin to assess
how inflationary or not those tarifts would actually be. There is nothing cut and dry about twenty five and beyond.
Especially given the fact that even the reaction in markets, the reaction and the economy will look different, given that we're coming from a very different starting point. And I think about right now, you're talking about a government shutdown, and we did get a tweet from Donald Trump saying that let's set it down now before I get into office, because then that's on his head, not my head. And I'm just wondering what's the response to that in the fixed income market.
So I think that you're right in pointing out that the starting point is very, very different, And I'm really concerned about that from the inflation perspective, because you know, between twenty sixteen and twenty twenty, inflation was not a concern. I mean, we had like maybe a two year decade period when you know, core CPI, core PCE never really exceeded that two to two and a half percent level. Now our starting point is a lot higher. You're looking
at core PCE around two point eight percent. The economy is extraordinary vulnerable to inflationary shocks on the services side. So I think that that is really the game changer this time around, is that if you do see you know, tweets and the market reacts and things that it's going to be inflationary, then you're going to see these volatility and inflation expectations. So the break even market is not
really priced for that. So I'm expecting a lot more volatility inflation break evens next year because of the fact that we're in a very different inflation regime this time around, as opposed to back in you know, the Trump one point or timeframe.
Savantra, It's good to say it, Scredie, catch up. I appreciate it's time. Thank you, Savantra. Jampa of self check, Jim Carrot and Mooke and Stanley writes him, sell off inequities is healthy? Better to happen now when Yes, today equities are up more than twenty percent versus early January and stopped the year in a hole.
Jim joins us.
Now for more, Jim, welcome, buddy, It's good to see you. What's healthy about this?
Good morning? I'm sorry I didn't catch that.
What's healthy about this? Fourteen days and negative breadth on the S and P? What's healthy about it? Jim?
Yeah?
So, look, I mean, you know, the markets were technically very overbought. This sell off does not represent a change and trend. As you were saying earlier on the show, there's been a very heavy concentration in a very few names. That narrowness of breath has already started to widen out. But when you get these big adjustments, and you get these expectations of earnings still coming in good but maybe not as stellar as people had thought in the past, then I think you start to get the sell off.
Look I mean, the S and P five hundred was up about twenty seven percent on a year today basis, and we owed that to a very very few set of names.
This is now starting to broad out.
And as the market broadens out, what that means is that the former winners are going to start to decline a bit.
Doesn't mean it's the start of a bear market.
It just means that we're in an adjustment process of broadening out the markets, moving into sectors that are more MidCap orientated, which is our view that we think can potentially do better from an earning's growth perspective.
Jim, did anything change for you Wednesday afternoon when Sham and Poal finished speak.
In You know, it's kind of interesting, right because this is the dilemma for the market. All Powell basically did. Yes, he did announce a slower pace of rate cuts. The dots did move up fifty basis points across the curve. But guess what, that's exactly almost exactly what the market was expecting. If you looked at fedpund's futures prior to the meeting and then after the meeting, they were you know, I mean, they were a little bit higher, but they
weren't materially higher. I think what the market's reaction is here is it's really about the bond market, so effectively, where people are arting to get nervous is from a positioning standpoint. If you look at year to date returns in bonds, it's in the low single digits. It's around two to three percent, let's say for most of the
AG indices. If you get another twenty five basis point rise and yields between now and year end, which which is possible, and you get a widening of spreads, many bond investors are at risk of losing their whole year in the next two weeks.
That's not our forecast, that's not our.
Base case, but it does create this riskiness that you could get these extended sell offs in the market, yields rising, and that.
Could have a negative impact on equities.
So we have to put this into context and understand those technicals as well.
Jim, I'd like to dig a little bit more into that. At what point is that the reason why you're not buying bonds right now, even though they've sold off and generally you're optimistic about the disinflationary narrative, you still think you want to wait for a greater sell off. What's the point, what's the trigger for you to buy?
Yeah?
So look, I mean the place that we're looking to line up and buy, really our holiday shopping list is really going to go towards the equity market because we have to understand why is the FED willing to cut rates by less. It's probably because the economy is doing a bit better. That's good news for equities, right, So moving into midcaps, you know, active, over passive materials, more cyclicals, all of that. Now in bonds though, I think that at this level, I think this is this is an
area where bond yields can kind of hang out. I'm looking for an overshoot. I'm looking for bond yields ten year treasuries. Let's use that as a proxy to move up towards about four point seventy five percent before I would start to get long duration extend my positions in bonds, because at the end of the day, I still think the FED is going to cut a couple of times next year, which means that the upside in yield for
bonds is somewhat limited. And this is why when you look at a sixty forty portfolio or balanced portfolio inequities that it's not quite like twenty twenty two. There is some upside, potential upside stopping of yields. We're just not in the same cycle that we were back in twenty twenty two. So I think the setup right now going into twenty twenty five is much more healthy because it's giving you higher bond yields potentially wider spreads.
So therefore more value for twenty twenty five.
And you're getting a sell off in the equity market in areas that you maybe wanted to rebalance into in the first place, and here's your gift, here's your opportunity to do that.
So Jim, just putting this all together, it sounds like it's overly simplistic to say simply higher yields causes the sell off in the stock space, right, So it's not that that alone can make you perish, But that tied with the context, as John was pointing out, of the high flying aspects of the market. We're really the reason why this is a positioning move. It is not some sort of longer standing trend.
Is that right, That's right.
Yeah, So we don't see this as an economic fundamental change in right. We still think the labor market is reasonably strong. We still think that the retail sales data. I still think the broad economy is still doing okay. We do not have a recession forecasted into twenty twenty five.
The issue that we have in twenty twenty four, though, was that we had a significant acceleration in the earnings growth rate for many of these mag seven type companies in the top ten and much of the tech and we don't expect that kind of an acceleration in earnings
for those companies in twenty twenty five. So now, because there's such a high concentration of the index at this point, as their earnings slow to a more normalized pace, then that what that means is that is that there's a rotation that takes down the index because there's such a high weight in the index.
But then it gives you the opportunity.
To buy other segments of the market that are more cyclical, like materials industrials for example, that can actually have a better earnings growth rate going forward and potentially even a pe multiple expansion. So that's what twenty twenty five is about.
Jim, just ahead of this conversation, we talked about tours and slock an Apollo and the risk of a repeat of twenty twenty two. Could I get a little bit more color from you on that the risk of that actually developing stocks and bonds really struggling next year.
Yeah.
So in twenty twenty two, I mean, we started from a very low interest rate level, and the amount that rates could rise was quite significant. We were just earlier in the cycle in twenty twenty two, you know, for rates to rise at this point, we're probably later in the cycle. And in interest rates, yes, they can rise. I mean, there's no question if inflation starts to pick up. But we're also not at a point here where we expect inflation to be, you know, high single digits like
we did back then. Inflation is likely just to say, well, we're not going to get to target at two percent. Maybe we'll stay at two and a half percent, maybe we'll go to three. And the market's not yet forecasting rate hikes by the Fed, and so I think that's a big difference, you know, right there, in terms of the bond element to this. On the equity side, what we have to recognize is that in acceleration higher in
interest rates. We like what we got in twenty twenty two will bring down the present valuations of a lot of those equity assets.
If we're not.
Likely to get the same acceleration higher in interest rates in twenty twenty five as we did in twenty twenty two.
Then we think the earnings set up.
The earnings path for twenty twenty five might be a little bit more more muted, but.
Certainly still positive and still okay.
So I don't think the setup is quite the same as twenty twenty two right now.
Interesting, Jim, I appreciate your time. You've been a good friend of the program for the year, and a whole lot longth in that. Thank you, sir, Monday, Christmas and happy holidays, Jim, Karen, that have Morgan Stanley. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on Bloomberg TV weekday
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