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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. 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. So we get to
the ve on Wall Street this morning. This is what it sounds like. Stephen Arthur Federated writing, we're maintaining our outlook for more modest but volatile, positive single digit returns in US Starstream twenty twenty seven. Steve joins us now for more. Steve, Welcome to the program. I read the recent note let's work through it. Do you still believe this is just another brick in a so called climbable wall of worry?
Well, jarthan there's a fine line between a wall of worry and a brick wall. So for the moment, we think it's still another brick but as you guys have been highlighting, it really is a matter of.
How long this goes on.
The market is trying to look through the valley here, you know, to the other side of the valley, and you can see that in the shape of the Eel curve. You can see it in the shape of the vall curve of the futures market, you know, oil energy futures. I think the spot oil is about ten dollars higher right now than the future's price of oil at bround sixty seven. Same way, you know with with the volatility index. The you know, the vall out on the outside of
the curve is down in the low twenties. The thing is, it's still higher than it was at the beginning of the year, both volatility and oil.
Even if you go out.
More, you know further, which is what the market stocks are pricing off of.
I mean, we've talked about this on your show.
That oil market is a spot market that has to trade commodities on a daily basis. This stock market is looking at the future price a while, and you know that price is lower. But the longer this goes on, the future and the presence start to combine. So I think You're right to be focusing on how long this lasts, and the market is trying to look through this. It's fortunate that we cut our target price on the S and P prior to this whole thing happening.
That was just pure luck, I suppose.
But the reason we did that was we did anticipate to be some kind of a correction, and we're kind of setting.
The levels at which we would re.
Enter the market with new cash because I think you know, if your target on the S and P is lower, which it is for us, you know, you need a little more upside before you're going to step in, especially to a situation like this. So for now, we're holding firm. We're watching events just like you are and waiting to see even when the end comes nearer.
One thing is sure.
It's going to.
End, you know, that's not a question.
The question is how long it's either going to end with a regime change or it's going to end, you know, with some sort of ceasefire and a kind of hobbled Iranian regime. But one way or the other, this will end.
Steve, you said that the one challenge to your relatively constructive view for the year ahead of single digit returns until twenty twenty seven was sustained levels of ninety dollars or above of crude. I'm just wondering, what does sustained mean? How long does it have to remain above ninety dollars for you to materially change your view.
Yeah, I don't know that we have a precise number of days, Lisa, but you know, somewhere probably in the two to three month range. You know, if you had ninety dollars that long, you're going to have two impacts that are going to have to cause us and I think others to up their economic outlook in terms of the growth rate. We're still at three percent growth this year, and we've got earnings very very strong this year and next.
But you know, if you go three months or so, you're going to really start to impact economic activity, particularly on the low end of the consumption bandwagon, if you will, which is kind of where we were expecting a recovery this year because of all the things going on with the one big beautiful.
Bill and the lawyer goes on.
The higher the risk that this one time price impulse gets kind of normalized and fed into a broader inflation in the economy, which then takes off the table the eight cuts that we have in our forecast. As you know, we've got two or three cuts out there over the next twelve months, which we think we're still on track for. But if oil stays up this, you know, for two or three months, maybe the people started asking for raises against that price, and then it bleeds into a broader inflation.
Hi, Stave, I just want to deal with the word defensive gets thrown around a lot. Being defensive means different things at different times, and it's highly dependent on the shock. There are times when tech has defensive quality staples, the usual one, but this foe is different. What is defensive in a moment like this one, we think.
Defensive is some of these hard asset companies. We were talking about this when I was on the show last time, you know, in more in the value space, and certain like defense companies are defensive right now because they're hard asset companies that also are seeing good, strong top line growth for obvious reasons. Energy companies are big stocks in the value indices form of companies, strong dividends, broad you know, broadly diversified, and well defended.
You know, product modes if you will.
So it's it's these companies that are very broadly diversified, as reliant on you know, where the market is valued, have a good dividend yield, and in a single digit return environment, dividendials of four percent three percent start to look more attractive. If the market's going up twenty percent, no one cares about the dividendials. So I think those are the kind of defensive areas that we like here. We like them coming into this. They've actually underperformed, some
of them, not all. I mean the financials are also in the value and the seas they've underperformed obviously, But you know, we like those areas here, especially coming out of this. Provide it we don't have to take another haircut to our economic growth.
Stay with US multile index Savanance coming up off to this, let's tend to the federal serve. The Republican Senates a Tom Tillis prising FENCH nominee Kevin Walsh following their meeting yesterday, but not wavering on his promise to block any FED nominations until the criminal pro into the current chair Jpow ends. The former Sam Lewis FED president Jim Ballad joins us now for more, Jim, welcome to the program. Set the stage. How difficult a moment is this for an incoming FED share.
Yeah, so you've got to get through the nomination process first. And as I as I understand it anyway, I don't think anything's going to happen. So nobody is going to be on the FED board anytime soon. The way this is going, the administration will have to come to some kind of deal. They don't seem to be talking about that. So I think it's stalled for now.
It's the second time we've had to deal with this, Jim. Before it was largely in the President's hands, and for whatever reason, Biden stalled. He stilled, he stored, and waited a long long time to reselect, renominate chair power for a second term. And some people, even people who were on the committe at the time. So that's what stopped this FEDER reserve from hiking quick enough to respond to the energy crisis and the inflation pandemic shock coming out
of the pandemic. Now, Jim, I just wondered this time around how critical this moment actually is with a frenchile labor market and pressure once again on inflation, coming from energy.
Well, it's always critical, always lots of lots of interesting things going on. I would say about this shock, it's not like the seventies. I mean, this is of course, this is going to bring up you know, hearkening back to the seventies. But the US is a leading oil producer today and weren't at that time. So I think the recession threat from this shock is probably smaller than it would have otherwise been because you've got the supply side kind of offsetting demand.
Destruction that could occur.
So so I think and then on the inflation side, well, you know, the FED looks through or press shocks anyway, they look at core inflation. So there's only a small effect on core inflation from this. So it's really whether inflation expectations would start to rise because markets would start to think that the FED was going to accommodate this shock, which is what happened in the seventies. I don't think that committees in much of a mood to do that.
So I think it's a different situation. Even though this is a really big shock, it's a different situation than what we saw earlier in the post war era.
Jim what gives you confidence that there's enough momentum in the underlying economy to make this not an issue of demand destruction, not an issue of the consumer increasingly crimped.
Yeah, I just think, you know, the shock would hit the US economy and that would be you know, gas prices are certainly something that we all pay every day, so that has acted like a tax in the past. But you've also got a supply side, you know, being the world's leading oil producer, which is offsetting some of that. I would also say that we've you know, we've seen actually higher oil prices in the past if I recall collect correctly in two thousand and eight, and in real terms,
that would be over two hundred dollars a barrel. So that's a very different scenario. Markets are right to focus on, well, how long would this conflict continue to go on?
You know, US could withdraw at.
Any point saying it's declare victory and withdrawal.
So we'll we'll see what happens here.
We see Jim expectations over at the ECB as well as the Bank of England for a potential rate hike. Increasingly priced and in response to higher oil prices.
Do you think that.
People will start thinking about the same here in the US.
I don't know if they go that far. I think more would have to happen before they go that far. I think the more likely scenarios that they just stay on hold longer than they otherwise would have in order to send a signal that they want to keep inflation under control. But again, it's the inflation expectations probably that matter more.
Than the oil price movements directly.
Well, we already see airlines across Europe and Asia increasing fares. They're raising the fuel surcharges given what's going on in the war. Also in America, we are farmed to table society. All of our food comes because of petrol and gasoline on trucks. Isn't that going to be a problem for this Federal Reserve? Not just the fact that gasoline prices this morning are closer to four dollars a gallon than three.
Yeah, I mean, it's going to be a problem for headline inflation, but you know, the committee looks at core inflation. So the whole point of that is to say that they're not going to react to movements in food and energy prices that can be pretty transitory and have historically been pretty transitory, so that what they want is the underlying trend in inflation.
And you can look at.
Core PC inflation, which the Committee likes, or Dallas fed trim med inflation, which throws out some of the high and low price changes that occur in the price change distribution.
So sure, yeah, people are really paying these things.
It really does matter, Yes, but when you're trying to make policy for the medium term, you've better look through some of it.
Stay with us more Bloomberg surveillance Coming up after this. The IEA considering a record release of emergency or reserves to easearch and crude costs. This coming as German and Japanese officials announced plans to release part of their own
national reserves. Samantha the cohead of Global Commodities research at Golment Sechs writing, because the straight up Homers flows data unnoisy and the broader situation remains fluid, We've not changed our oil price forecast, but estimate the large upset I risk in longer disruption scenarios. Sam joined us for more. Sam, good morning, what's your assessment of where we are right now? Never mind the pr effort coming from officials at the moment, what's this disruption currently look like.
Yeah, so we're losing about fifteen point four million barres a day of supply from the region. If this release goes through, and it looks like it will, it can offset that by about let's say two and a half. Well, the fastest ever release that we've had from the group was at a pace of two and a half, So you can talk about a three to four hundred million barre release, but it's not going to be all at once matching the pace one to one to the loss.
So on that we are.
Still likely to be losing over ten million bears a day of oil from the market.
So when they say four hundred, someone like you, here's to two point five per day.
Yeah, because at least that's what we observed in the past. What is the mac space that they've released, So you can't really count on anything bigger than that.
It might happen. We have to wait and see.
But based on what we've seen on net, we're still going to be losing a lot of oil day by day, and it matters because what the market is looking at is Okay, here's the size of the shock. This can reduce the size of the shock a little bit, but still it's a very large shock. So if it continues for long enough, that's when prices go back to that kind of panic mode of demand destruction. You know, when we cross one hundred dollars a barrow. To me, that's
the signal being sent. It's like, oh, we can't manage this fast enough, so we need to destroy demand a little bit faster.
This release can slow this down a little bit. I think Lisa was just.
Mentioning this that, you know, it keeps the curve a little bit more more managed.
But when we saw the headline come out of four hundred million barrels a day, actually we saw prices take back up a little bit. Is the market panicking that policy makers think this is going.
To last a lot longer. I don't think it's a panic yet. I don't call it that.
But remember yesterday we also had a little bit of conflicting headlines as to whether the US head escorted a thinker or not.
So I think the rebounding.
Prices that we saw late yesterday might.
Have been associated with that.
Oh so, the flow through hormos is not really improving, And to be fair, the data that we have seen so far, even.
Though it is noisy and it is revised.
All the time, so far, it does suggest that flows through hormones have not really improved.
When it comes to some of that misinformation that we're seeing, How does it make it that much harder for traders for the market to position?
It creates a lot of volatility.
The past two days are a perfect illustration of that, because again I think the uncertainty on duration makes such a big difference. If this is a one month's shock, and we know ahead of time it's a one month shock, okay, we get the release, we upset most if not all of it. India can access some of the sanctions barrels from Russia as well.
We're actually okay by the end of the year.
There's no panic, there's no demand destruction needed. But if it's a one month shop, but we don't know that yet, the market has to price in the risk that.
It might be two months, it might be three months.
So that sense of urgency to destroy a little bit more of the man now to avoid inventor is going to critically low levels shows up a little more. So this is what keeps us from above one hundred now below one hundred. Maybe this is going to be overseeing more confidence. Oh but the flows are still low and then you're hit with this release from the IA. Okay, so maybe the piece of drawdown in stocks is not quite as fast. So to your point, it keeps the
market guessing. What are we trying to manage here? So the two aspects of it that we're going to be tracking day by day Number one the volumes, what is the disruption every day? And what can be offset by these releases?
That's number one? But number two, how long is this going to? Asked?
Where is that confidence that this can be contained within a month versus say two or three months, in which case the market needs to hedge against much bigger disruptions.
I'm struck by the dissonance between the financialization of some of these futures contracts and the physical world, which takes time, is messy, needs to be restarted, has time lag. I'm just wondering, based on what we've heard so far about closures or stoppage, is how long you think it will take to restart some of the production that has already been taken offline.
Yeah, you have a little over six million bears a day already down from production oil of crude oil in the region.
We estimate that.
If it were to restart today, it would take about four weeks to get back to normal.
Four weeks. Four weeks.
So, I guess, how are people saying if this resolves in the next week, there won't be a prolonged increase risk premium on oil prices.
I guess.
Can we just say that from here on now we can average eighty dollars a barrel or eighty five dollars a barrel for the.
Rest of the year if it ends in a week, let alone longer. Yeah, it's a good point.
We have to remember that going into this year, the market wasn't a surplus, so we are coming from a position of comfortable levels of inventories. Inventories in OCD they had been at pretty average levels going into the shop wasn't low. If you look at usspr okay, it was on the low side, but overall commercial stocks were pretty average.
China strategic reserves are higher than normal. So we came in okay in stocks and with a surplus, and now we're eating away into that surplus and getting potentially into
a death sits. So yes, to your point, there is a sustained impact on storage, but especially if we do get the release from the IA, that can be moderated over time, so that storage won't look that comfortable for a few weeks, but over enough months, say five, six, seven months, where that release from the IA ends, then you can be back at a more comfortable position.
Sam Lisa told about the time it takes. Can we sit on that just for an extra bit? The difference between cutting production and shutting in production? What's the difference between those two headlines and why is it so significant?
So the way that we think about it, it's more the difference between stopping exports and stopping production. So for example, if I stop exports today, but I have spare capacity on my inventories, then I can just stockpile stock, buy stock bio. When the chaos calms down, I can just send that back to the market. So you're delaying volumes
as opposed to losing them. But when you're shutting in production, when you actually halt your production because you don't have work to put it, then that's production lost.
This is the Bloomberg Survendans 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 Easton. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.