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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. Let's get to view on Wall Street this morning, Joe Cancarves and MUFG writing the impact from the war will likely turn out to be even more damaging than the tariff shark, especially considering that the US jobs market and consumers are already on shaky ground. George joins us now for more. George, good monic, Good morning. Let's start with Lisa's world the auction soff two year, soft, five year, seven year auction coming up a little bit later.
What do you think is behind the weakness and demand for US government debt right now?
Look, I think it's a repricing that's happened globally on the rate side, the US treasury market really lagged everything else, and this, you know, this sort of concern around like what is the new steady state for interest rates and heading into the end of the month, end of the quarter type environment. These auctions usually do well, and the fact that they're you know, under pressure, does kind of show that there's been some sort of kind of buyer pull back.
Mohamad al Adim wrote in the FT earlier this week about goal flows and the importance of the golf is a source of capital, not just a source of energy. It's something happening with those goal flows in respect to what we've seen so far in the auctions looks.
It's hard to tell with public data and just you know where we stand things right now. In general, fire and flows could be impacted, you know, the longer this persists, and that's that's really the big issue here.
Is there also a question around institutional credibility. What kind of fiscal response there's going to be to this. I've noticed that a lot of the increase in benchmark rates in the US have come from really not at all from inflation expectations. What's the read through in terms of what the appetite for dead is internationally.
Yeah, absolutely so, Yeah, that's a great point. The fact that we've seen real rates, especially out beyond the five year point in the curve, so the ten year in the thirty year has largely been a real rate move, you potentially capturing this sort of fiscal concern. We've been here before. We've seen this before in the times past. When there's a risk of more supply coming down the pike,
you know, the bomb market does discount it. But we've also seen the two yearself a decent amount, so we've seen a level shift higher that's also infiltrated out the curve. I think it's early days, but yes, I am conservative fiscal outlook in general, and I'm usually more of a fiscal hawk than and more of a central bank above. But I do think that it's more inflation and then the fear that we're going to have to address this with more supply down the road.
The reason why we're focusing on the auctions is because it's the front lines of real concern that we're seeing that hasn't really been represented through broader markets. There hasn't been this sort of capitulation to the fear that we can represent on any given days, we try to extrapolate out story. Why do you think there hasn't been that sort of fear trade, that sort of wash out that so many people have been talking about.
I mean the two years going from three point four to close to four percent, I mean, that's pretty much I think as qualifies as a wash how you know, I think that's a pretty big move and really repricing, realigning positioning, if you're if your motus operandi from this point, for until we get some sort of conclusion on this conflict is to trade small and to be very tactical. It's hard to really come in with conviction.
Committing capital in this market. It's almost impossible. I think that's been a feature of this week, not just around this table, but a lot of people in this market, Bramo, after what we saw earlier this week, particularly on Monday morning, this is a really difficult moment for a lot of people.
Not just the economic bankdrop. That's shaky enough things are French out at the moment, but going get into the weekend not knowing which way this can go when the risk on either side is so large, I'm not sure what you're meant to do in this moment.
You're meant to sit on your hands and try to take long term positions, which is the reason why you see people not have conviction. Right now you're talking about two risk. There also is no way to get an edge the whole idea. And this is why I say it's playing blackjack or it's playing slot machines. It's not playing poker where you can kind of gauge and calibrate
the potential probabilities. How do you have any sense of that, especially if you think maybe the other guy has better edge than you do.
Have you ever seen it like this before? George, you're an experience guy. You've seen many markets, many market Rejames. What's this one?
Yeah?
I mean it's unique. It has a lot of different elements to it. I've always thought, you know, down the line, after years of accumulating all the death that we've had, after really kind of relying on governments to be like the real backstop of everything, that ultimately would come down to something like this, it becomes geopolitical, where you know, like this is the new chess game that we're playing.
This is different though central banks don't seem to have a role in this moment. We're used to that, and that's why I think what Jeff Curry of Carlile said on this show just last week is so important. You can't print miracles, molecules, you can't print barrels. The central bank bank stop, the anchor isn't there for this market. This is different though, No, clearly, I.
Mean, like we don't even know the full extent of the show. Waves are still coming down the pike from this the closure of the straight up formulas, right, I mean like that, I think that's the unusual optimism that somehow it's all going to turn around with this. We can't just turn on a light switch.
Stay with us, multple impex. Savannah's coming up off to this.
Let me have another threat, another warning from the White House this morning, the President on truth social saying that Iran needs to make a deal, make it fast, or it will not be pretty. He says, before it is too late, because once that happens, there is no turning back. Yesterday, Jonathan I was with the President covering him part of the press pool. He called what was going on with
this war an excursion into hell. Clearly he is weighing his options this morning to try to understand exactly what is going on in the political ramifications as well domestically. John Lieber joined us, of course from the Eurasia Group. John, thank you so much for your time this morning. I'd love to just get your reaction to early this morning before the market's open. There in it with this latest threat to the Iranians, they better get serious before it's two eight.
I think he wants this war to stop, and he's recognizing that he's in a bit of a challenge. So gas presses are headed over four dollars a gallon, and his approval rating is headed to below forty points, and that's not a good place for the president to be.
So he knows he needs to get out of this war, and he knows that he can't get out of it alone, because even if the US stops bombing, if he's in a situation where the Iranians are the only ones who are able to get oil or other products out of the straight of horror moves, that's a bad outcome for
the world economy. So he's got to do something to change the game right now to get the Iranians to open up the straight and these threats I think are his way of trying to do that, because I don't think the Iranians are in a mood and negotiate right now.
Do you think the talk of diplomacy potentially reports of the Vice President jd Vance going to Islamabad to maybe meet with Iranian negotiators, is that real or do you think that's just a distraction while the President and the DoD get their personnel on the ground.
Don't I mean, I think it is real in the sense that there are people who are trying to set up talks and mediate talks. The Pakistanis are involved. Steve Wikoff has been involved in talking to the Iranians, but I don't know if these are going to go anywhere, and I don't know if the Iranians right now have the incentive that they need in order to show up at these talks and make a good faith effort. He also got to remember that the Iranians of zero reason
to trust the United States. Here they got attacked from their perspective, they got attacked by America while they were in the middle of negotiating a nuclear deal. And what guarantees do they have that the US and Israel is not attack them again while they're negotiating a peace deal.
It is a metron election here. You mentioned gas price, is also the fact that there doesn't seem to be an appetite for boots on the ground in Congress. What kind of pushback do you think we could see You were an advisor to Senator Mitch McConnell. What kind of pushback do you think we could see, not from Democrats but from his own party.
Yeah, I think the pushback to putting American troops at risk here is going to be enormous. And if that's what it takes for Trump to de escalate this war, is to get troops on the ground, seize the Iranian oil, seize some Iranian territory, and potentially expose thousands of Marines to hostile fire from the Iranians who have lots of drones and missiles that they can turn away from the UAE in Saudi and focus on American forces, which the Iranians,
of course would be happy to do. I think that's a huge problem for President Trump, and I don't think that's really a viable option for him right now. Maybe in a few weeks he sees that as the only path out of it here, but there's going to be a lot of blowback on Capitol Hill and from the American public to committing these troops, and so it just doesn't leave him with great choices.
Where does that leave the two hundred billion dollars the Pentagon is asking Congress to sign up for.
The Democrats are treating that two hundred billion dollars like the authorization for use of force in the Iraq War, which they later came to regret because that authorization of the use of force had been used to create these forever wars that cost trillions of dollars and got America bogged down for two decades, and so the Democrats don't want to vote for it. I think that's a tall
order to get that two hundred billion right now. It'll happen probably eventually, maybe at the end of the year when they have to do appropriations bills, but I don't or Republicans have the option, of course, of doing a party line reconciliation bill, which introduces a whole other bunch of complexities, because you're going to have people that want to do tax You're going to have people that want to cut spending, and I think that's ultimately going to be a huge problem for Trump.
If the President decides to take this action. Axios outlined what potentially some of the strategic goals of that would be this quote final blow. Wouldn't the Iranians just tell the Houthies we need to create more chaos for the Americans. We need to drive up oil prices higher. While they're now engrossed with the Strait of Hormuz, the huthiechannew close bob El Mundeb and close the Red Sea.
They could try it. The Iranian influence in the region is waning. I think all the proxy groups are seeing that. Right now, Iran's not what they used to be. I mean, Iran does have a lot of money coming in their coffers. But our understanding is that the Huthis are asking for money from the Saudis to stay out of this war, and the Saudis are happy to pay that for right now. That could change over time. The Iranians could make them
an offer they can't refuse. But I think the Huthis right now, we think stay out of this war because they it's in their interests to not attack their neighbor.
Speaking of the midterm elections, speaking of the present waying his options the Wall Street Journal this morning, so that Trump is telling close associates he wants to avoid a protracted war in Iran if he takes this decision to send in troops to potentially seize an island or make sure the military is there to try to clean the Straight of Hormoves, some more vessels can go through a mind sweepers and the likes Won't that mean we are now running the Straight of Hormuz and this becomes a
protractive environment. Absolutely.
I don't think there's any easy way to get out of this war right now. If the US de escalates unilaterally. The your audience have proven that they control the straight and they can let friends and family through, and they can let shipments that are going to the United States or from its.
Allies friends of family for two million dollars, you know, whatever.
The discount is. Yeah, you get a nice little rate on your ship that's going through. But I think that this is a there's just no way out of this, So you can take it by force, but then you're committing yourself to probably months or longer of US presence in the region and again exposing a lot of American troops to missile fire, which is not going to be popular.
Here, we're four dollars a gallon of gasoline. What does he do with we at five?
I think he pauses. I think he's got to say I'm done. You know, I expect the Iranians open the straight and that's the easiest action for him to take. It's the least risky action. It's a long run strategic loss for the United States, and it puts a stronger position than when they started this more. But I don't see what choice he.
Has stay with US Multbleinberg surveillance coming up after this energy price shocks fueling snackflation FIS. We'll move on the OECD predicting average G twenty inflation will jump to four
percent while anticipating lower than expected global growth. The organization releasing a new outlook this morning, writing persistent disruptions to exports from the Middle East could trigger more extensive repricing in financial marks THEE see the secondary General Mattias Coman joins us now for Morematis, thanks for making some time
for us this morning. Can we just start with how difficult it might have been to be put together a forecast in a moment like this, How complex was it for you and the team?
Well, you know, obviously the level of uncertainty is extremely high, and so what we do in these circumstances is use technical assumptions. I mean, you know, the key factor of course here, you know, relates to the energy supply and the energy price shock. So you know, the technical assumption that we have used as the basis for our projections is essentially aligned with the future markets pricings as I
stood on twenty March. Now, the truth is we can't predict how much longer the conflict will last or how much worse it could get. So I mean, we really don't have much choice but to use a baseline scenario. And of course, but we've also included a worst guise scenario in our report today. There clearly is a level of quite a significant level of downside risk to ourtlook.
Today, Mattias. The inflation component of this is the piece that we can focus on now, and then we can turn to growth. There are some people who believe the potential for second order effects is low because the economies aren't as strong as they were, and maybe balance sheets for consumers aren't as well built resilient right now as they were coming out of the pandemic. Mattias, where do you stand on that? I remember the first time we met,
you were part of the Australian government. You know these things, well, how to run a treasury? Do these governments have the fiscal space to respond to this energy shock and provide the fiscal support the consumers might be looking for.
Well, I mean that levels across the world are elevated and including because of some of the fiscal responses in the wake of the COVID pandemic, but also you know, structural pressures on spending around the world. But you know, in terms of the inflation story now, I mean the story really is different in different parts of the world. And I mean in terms of the impact of the energy price shock and the flow and that hasn't I mean,
you know, some are more directly exposed than others. I mean here the direct exposure you know, is probably more into the Asian markets and to the Asia Pacific. But you know, in other areas like Europe, you know, for example, I mean, the effect, the price effect is more indirect. But I mean there is an impact on global prices. When we look at the United States. I mean, in the United States, the reason we say what we're saying
about inflation is there. I mean, we do actually see that the liber market remains relatively tight, and you know, in the context of now this energy this global energy price shock, and also the delight effects still of some of the tariff price effects, but also the impact on the liber market of slowing net migration. I mean, we do think that there is a combination of factors there that is likely to have a bearing on the inflation outlook the United States.
Mitias, We've been trying to wrap our heads around the idea that the ECB and the Bank of England are now expected to hike rates several times, even potentially this year in response to inflationary pressures at the same time that you and many others are down growthing, their downgrading their growth prospects. At what point do you see the necessity to hike rates as torpedoing any potential growth going forward, forcing you to lower expectations further on growth.
Well, look, I mean there's obviously now different factors impacting the inflation outlook, and that is going to have a bearing on the response of central banks. I mean, it is it is it is you know, of course true. I mean, our current expectation is that the energy price effect will be temporary and as such, I mean, you know, central banks of course would be able to tag that into account. And there is a softening in liber markets and an economic outlook in some economies around the world.
But I mean, in the end, but we are signed to central banks, is that I need to continue to focus, you know, very closely on the data as it evolves, and be very prudent to ensure that, you know, inflation expectations are well anchored and that the inflation outlook you know, is as they would want it to be.
Do you see Matias a real concern about runaway inflation globally? I mean, this ultimately is the real question. Do you think that this shock is similar to what we saw in twenty twenty one, twenty twenty two, especially because inflation has been above the targets for quite a while.
But I mean, inflation prior to this, you know, lightest shock was on a downward path, and you know, we were certainly expecting that in most G twenty economies, you know, inflation was going to get back within the central bank target range by the end of this year sometime next year. But you know this, this now you know clearly is having a material impact. I mean we are expecting or we have upgraded our inflation o woutlook for this year about globally by one point two percent, looking across the
G twenty economies. I should say, now you know, it remains to be seen. As we've said at the beginning of this conversation, we don't know what we don't know. I mean, we don't know how much longer this conflict we last. We don't know how much worse it could get. And I mean there's there's significant downside risk, but there's also upside risk or upseide opportunity. I mean, things could turn out better than what we're fearing.
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