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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
Terminal and the Bloomberg Business App. We begin with our top story, the latest CPI print, boosting expectations for a twenty five basis point cup from the Fed next week. Mohammad al Erin of Queen's College, Cambridge, writing on X that he sees a quote ankorless paradigm, one that is crying out for the stabilization influence that usually comes from a dominant economic narrative rather than the current ping pong one and or forward policy guidance as opposed to this
era of excessive data dependency. Muhammad has a lot to say. It's whether it's the next few hours to say it. Muhammed, good morning to see it. Good morning, John, fantastic catch up with you, sir, particularly your observation yesterday about what was developing in the bomb market at the front end of the curve, the swings we saw on the two year. Can you share your observations with our audience right now? What was that about?
So we saw a twenty basis points round trip in the two year. Twenty basis points. That's a lot for that maturity, and we learned two things. One is that we have excessive data point dependence. All that happened yesterday in the Infation report, as people know, is that monthly core came slightly harder than expected. Everything else was aligned,
and yet we moved ten basis points up. And then we discovered a second technical, which is money on the sideline being put to work quickly, and that I think is our reality, is that we don't have a dominant economic view, so we get swung all over. But the stabilizer right now is this technical of cash on the sideline. Now, financial conditions are good stabilizers with two very important qualifications. They are volatile and they have as much perception as reality.
So we are going to continue with this volatile world until we restore either dominant economic paradigm or we saw the power forward policy guidance.
You could argue that even in the face of all of this volatility, it shows how strong the economic system is that there wasn't some sort of significant disruption. Isn't that sort of the ultimate stress test, that when the benchmark rate swings around by twenty basis points you don't see any massive selling, why is it more pernicious than it might seem on the surface.
So I do think the financial system has been strengthened, and in particular the banks, and we are in a much better place than we were in the past. So you don't get the massive balance sheet effects. You don't get the sort of virtuous cycles good the cycles good
or bad that can happen from that. But don't forget that we are the benchmark for the rest of the world, and we cause quite a few spillovers that the rest of the world says, you know what, enough, now we've had enough of this, Please get you act together.
I was surprised to at Jackson Hall to your point, there wasn't more of a discussion, at least not out loud, about what the neutral rate is. Essentially that sort of paradigm shift that you're looking for, some sort of real discussion of what this Federal Reserve is willing to accept in terms of inflation and a benchmark rate that'said. It sounds like they just don't agree on one, So how can they come up with one if they don't really
have that certainty? And frankly, if the market can't agree on one either, is it better just to have one even if it's wrong.
So as usual, you're getting me to front run my financial times of a tomorrow.
That's what you hear films.
So I think, Lisa, you're absolutely right. But it's not just that we don't know what the destination is. We don't know what the journey is. We don't know what risk mitigation mindset actually means operationally. And also there's disagreement as how quickly will FED official go from backward looking data dependence to forward leaning. So we have these disagreement both within the FOMC and also between the market and the end what seems to be the consensus if there
is one on the FED. So this is for me, it's a fascinating time, but it is also a very confusing time.
So amongst all this confusion. What do you want to hear from J Powell next week?
So what I'd like to hear and what I expect to hear is that he's going to come by twenty five basis points. Beyond that, It's more what I'd like to hear than what I expect to hear. I'd like to get a sense of where he thinks the neutral rate is. I'd like to get a sense of where he sees the balance of risks. The market right now has modeled the FED as a single mandate FED maximum employment. FED official tell us no, no, no, we do mandate FED.
Let's not forget the inflation component. I'd like to know where he is on this.
Do you want to hear more descent within the Fed?
Yeah, I would like to. I mean, I admire the Bank of England. The last decision was five to four. You had a situation where it was six to one. I think that's important because that conveys the uncertainty. Yes, they should have more discent. I think they viewed dissent as weakness. Most of us view descent as having a really important information content that has to be priced into markets.
I remember a series of votes at the Bank of England maybe a decade or so ago. I'm sure you remember this too, when the committee was out voting King a governor. King was leading the Central Bank. Think of the time. He wanted to increase QE and you had people on the MPC voting against him. Not only that, there were more people voting against him than voting with him. That's a scenario we don't see at the Federal Reserve. You had a warning coming into the September meeting, and
I remember it at the start of summer. You wanted them to reduce interest rates in July, but you acknowledged that the difference between going into September versus July wasn't that great. But you had one fear if we got one hot CPI print, they might get distracted. Was that what we got yesterday? How distracted might they be?
I don't think that much, because it was just one element in a broadly consistent data release that certainly was very close to consensus forecast. But if we had missed on headline, if we had missed on care, if the base effects weren't as favorable as they are right now, you would have seen a total mess in the marketplace. So That was my concern is that, as much as they don't want to admit it, they are not just
data dependent. There's single point data dependent, and that's pretty scary for policy setting.
That's certainly how the market sees it, because it guarded the conversation away from fifty and back to Worlds twenty five. How do you think they'll look to frame this rate cup when they deliver it a week yesterday. Will they call it a mid cycle adjustment? Will they say it's the beginning of a journey back to neutral? Whatever neutral is? How do you think they can frame this decision?
I suspect it will be what's called the Douvish twenty five base points, which means this is the first of many, and we may we may be inclined to go even more if the labor market weakens. There was this phrase in the Jackson Hole speech that was really important. We don't want to see the label market get any weaker. That is a very strong statement from the FED chair. Whether everybody else is there, we don't know.
Let's say they do what you want and they come out, they see this is what neutral is. This is our journey, this is our mandate, This is what we're going to do. How much have they lost control of the plot anyway, just simply because there are other factors at play. You think about, for example, fiscal coming out and potentially disrupting things, Think about international investment with an auction that's necessarily negative,
that kind of forces their hand. How much do they have ability to set the narrative with such a prescriptive tone right now?
So they certainly should be incorporating fiscal They must be doing this. They certainly should be incorporating q QT. I mean, we haven't talked about qt QT is ongoing on there. They should certainly should should be doing that, and that should be reflected in what they say. I hope they're doing this internally. I just think they got so burnt in twenty twenty one because they did take a forward leaning view and they were completely wrong that they don't want to make another mistake.
What if they say this is a victimless crime. We're not seeing a problem from this that essentially they're getting it right and the markets are generally you hear traders actually say Ashley Powell is doing a pretty good job, so why should they change it? What would your argument be, Well.
First We'll go back to the amount of volatility we've had in fixed income. It has been unusual, Lisa, I know.
I know, I watched it every day. We were talking yesterday.
It was crazy, okay, And that has adverse external effects. It undermines also the credibility of the US as the benchmark for many others, and we are in a world in which countries are building little pipes around the US. We don't want to enable that process further. That's the first issue. The second issue is we have a major reconciliation in our future. We have the treasury part of the fixed income market that is signaling quite a high
probability of recession. We have the credit part of the fixed income market that is signaling a very high probability of a soft lending. Now, if liquidity doesn't reconcile these two things, there's going to be even more volatility in this marketplace, and at some point volatility spills back to the real economy. And the only thing keeping this real economy going right now is deliver market.
I'm sitting here laughing because we need to clarify what you said. Market participants that think Powell are doing a great job, they're the bullish once. Let's be very clear about that. Accually are still their all time highs. If we weren't there, I think they'd have something different to say about where we were.
Maybe they're data point to pedant as well.
There's data pointment is the S and P five hundred. You mentioned where the bond market is and where markets are and how their price they want to pick up on the amount of demand we've seen for some issuance. We had a Guild issue last week, Record order Book had an Italian issue this week, Record order Book. We've seen a similar dynamic in US high grade corporate debt in America, particularly last week's he very busy days, lots
of demand. Credit spread said very very tight. Can you reconcile what each part of the fixed income market is talentis right now and whether you can make sense of it?
And we had yesterday a treasury auction with massive indirect demand. I can only reconcile it by the tone of cash US on the sideline and the fear that if you don't get into and lock indust rates now, you will lose interest income in the future. So every time we have a backup in rates, people wash back in I mean yesterday's dynamic was fascinating for me, that the speed of the round trip was significant.
We've seen it a few times in the last week. Muhammad, We're lucky to have you says similar reaction to this, and cross Server. It's a Lindsay pie of stephol Lindsay your thoughts on the data this morning, the data yesterday this morning, and how this sets us up for the Federal Reserve next week.
Well, I think coupled with you yesterday's hotter than expected read on the core CPI this morning slightly hotter than expected read on the PPI.
It's not enough to.
Negate the Fed's intentions to open the door for rate cuts next week, but it is a welcomed reminder of the Fed's ongoing focus on inflation, as price stability is not yet met and with this lingering uncertainty on evenness in terms of the disinflationary trend, I think this underscores the Fed's need to remain on a very patient, tempered approach as we do embark on this policy pathway back
towards neutral. Now the market has seemingly removed the expectations for a larger, more aggressive fifty basis point cut next week, but I would argue it was never really on the table. If the FED did take that more aggressive move, I think that would send the wrong signal to investors, or investors would interpret it that incorrectly as the FED maybe taking an intention to rapidly reverse us back to an
accommodative stance. But at this point with the econ me still solid, slowing but still solid, I think the Fed's intentions is simply to remove policy firming and get us back to a more neutral state in terms of policy.
So lindsay, let's go beyond next week. I completely agree with you. The FED has been stressing to the markets we are a dual mandate central bank, and the market has been responding, no, you're not, your single mandate central bank.
And the employment part is critical. So now that the data has reminded us that they should remain a dual mandate central bank, how do you see the west of the curve, in particular, what's fristained all the way out to September of next year evolve in the next few weeks.
Well, I do think investors got ahead of themselves, and I think the downward momentum that we've seen on the longer end does have some wiggle rooms, some room to reverse course, not necessarily push us back to earlier highs that we saw at the start of the year, but certainly gain at least ten twenty basis points on the tenure, putting us back into line with a more realistic pathway of the Fed's trajectory back to neutral. Again, I do think a base case is twenty five basis point cuts
and not necessarily at every meeting. The FED is going to remain data dependent, and if we see inflation stumble for back to back months as we saw in yesterday's in today's reading, I think they're very likely and very willing to skip a meeting. And so I do think that again, the market's expectation for this rapid reduction back to neutral or even falling below the neutral range by mid of next year, is well beyond what the FED is realistically willing to do.
Lindsay, what in the specifics of the inflation data gives you pause about just how much inflation is coming down? In other words, what are the sticky components that you worry most about.
One of the biggest worries is the housing component, and we saw that in yesterday's a CPI report, one of the primary drivers of that hotter than expected read. If we continue to see the shelter component rise or rise above expectations given the sizeable weighting that housing has, not just in the CPI, but even in the PCE, that's going to be very difficult for the FED to maintain a two percent target or achieve that two percent target on a sustainable basis. So housing is one of those
very sticky components that we're focused in on. That being said, even when we do strip out housing and we look at one of the more narrow measures of inflation, the supercore, so we're talking core services excluding housing, we still see that that's a read above four percent, so more than
double the feds intended target. So there are still a number of underlying components and underlying measures that are not yet cooperating quite as much as the FED would like, as they are nearing presumably that first round rate cut next week.
Lindsay, we've got to leave it that appreciate it, LINDSAYPX that stathl Let's ask pri did you come right at taivy securities that question right now? Perd You welcome to the show. I'm sure you heard that question from Mohammad. Your thoughts on it plays, Oh.
Thank you, so yes, easib as expected right now and I think, as you mentioned, this is the key question. If they are seeing inflation to be at target in twenty twenty five, why this slow approach? I think from ECB's perspective, the question right now is pretty but basically the wage inflation and which is actually standing at five point one percent, and this is much about what we have seen in the twenty nineteen level, which was around
two percent. So so far, Laggard has always talked about this WPP model, which is wages, productivity and profit margins, and I think that's where she will be asked, is productivity actually increasing that can help to reduce these wages, which doesn't seem the case right now, So I think yes, definitely a very key question for Laguard right now is if you are seeing inflation at target, why is this five percent in wage inflation still being so sticky and
why are they not cutting rates more aggressively?
In UWPP, she will be speaking today in the context of the Drug Report, and the Drug Report basically says without major policy actions that aim at improving the way the economy functions, there are no productivity gains that can be sustained. Do you agree with that view?
Yes, no, totally. I think even when you look at the weakness in Germany, it's more for structural weakness and not a cyclical weakness. So cutting rates does not help German growth. And I think I do agree with Graggy's model and that we do need that investment, that productivity coming from Europe. But we also know that that's a
long process that cannot happen in one day. And I think ECB at this state really needs to think about do they just go by the survey data which are basically suggesting that wages will reduce aggressively in twenty twenty five six, or they stick to the current heard data which tells you that if pages are very sticky.
What do you think would happened in markets? And I'm wondering about the market reaction function in addition to the ECP reaction function. What would happen in markets if Christie mcgoth came out and talked about a more aggressive rate cutting pass, particularly the time where the euro is baking in sort of the FED and the ECP moving in Tanda.
So again, if they tell us more aggressive path, yes, the front end rallies, we are not prime. We were pricing in one and a half rate cuts, so possibly going closer to two. But we also know the time until the October meeting is basically five weeks, so there's nothing much that's changing right now from ECB's data perspective, So I think they would have a big downside risk to grow at this meeting, which doesn't seem the case when we read the statement, So I doubt they are
going to be very open about the October cut. But what is more like is ECB sounding more optimistic about reaching the inflation targets, especially given the fact that global growth is actually a negative right now across the board, especially when we look at US and China, which means markets should start pricing more cuts and more aggressive form of cuts in twenty twenty five and pull forward this neutral rate which is around two.
Percent, which how difficult is the guard's job in the sense that inflation is quite different while you look at Central Europe or the periphery.
Yeah, no, that is the key issue for ECB. I think when it comes to EACP, they do have to take Europe as aggregate, So even if German growth is minus zero point three, they still need to actually look at the entire euro growth which is still above stagnation. So this is a tricky job as long as financial conditions are seen across the board, which has been the
case since twenty twenty. I think ECB will not go a country by country, but look at the total target because even like when you said, in Europe, creation negotiations work very differently from country to country, so they cannot actually say by October they'll have the right number of wages for the entire euro area. So I think they do need to work more on surveys and Europe as a whole.
Poga, We've got to leavey there. We appreciate it. Pog, you come around there. Of TD Security, Michael Shout joins US now as Ion Asset Management. Michael, good morning to you, sir. Good morning base case. At the moment, the doves won't get their fifty, can they achieve the same outcome by leaning very heavily on the top plot.
Yeah, I mean I think we'll probably see a big dispersion in the dot plot. You know, at this week's meeting, I think that's the way that people are going to really say, you know, we think we should be doing more, we think we should be we think we should be doing less. And then the sort of third part of this is which way is j Powell going to lean when he talks publicly following the meeting. Is he going to be, you know, pointing towards the doves or you know, more in the middle of a pack.
So too far off questions immediately one is giving you expectations of more dispersion or right to look at the median.
Or not?
And second, isn't it obvious which way Chair Powell is going to lean?
I would probably say no and no, you know, you know, it's it's really not clear, you know, which side is going to really dominate. I think it's not clear exactly who the doves are and who who the hawks are. I think Powell sensibly is trying to steer a middle path between both bodies, and I think he's happy to jump ship to the left or the right, depending on what you know. He's probably the most data driven part of the FED.
You think it's unclear what he says or it's unclear how much they cut by.
Oh, I think he'll be very clear. He'll be very clear that he doesn't know exactly what they're going to do, and he's going to wait until he gets the information and to tell him what he should be doing. I mean, I think it's going to be very clear about that, But what the outcome is is going to be extremely unclear.
We were talking earlier about how this fusual reserve doesn't have this sort of overarching framework of the destination and the journey that we have going forward. I wonder if as an investor you do can you have that clarity if you don't get it for them with this sort of conviction that the FED will ultimately follow whatever it is that you're seeing that is not with any extra data that everybody else doesn't have.
No, you know, I think the FED, all things being equal, is going to start to cut and is going to put us on a path for a gradual a gradual easing. But the bigger question in my mind is what's actually happening in the underlying economy. And when you see members of the FED almost having to make up words to describe it, there's a long piece using the term equipoise. It's a very weird it's a very weird environment.
So noticed that John Williams has got a phosaurus. I thought it was saying yes, yes, I was impressed. I was to say, ex repose is somebody who tries too hard to make a point, But maybe maybe I shouldn't anyway. You know, it's a very strange economy because a lot of the strength that we had, a lot of the overheating that we've had, has gone away, but it hasn't really been replaced by any obvious weakness.
The labor market is. I haven't seen a labor market like this with no real underlying growth, no real power to it, and yet absolutely no deterioration and initial claims yet again this week confirmed that nobody's hiring, but nobody's firing. So it's really the way that that gets resolved that ultimately matters much more than what the FED does. The FED is going to be responsive to that outcome. I don't think it's going to cause it one way or yeah.
I'll attempt to be direct. Then what are you buying?
I still think precious medals come out here. I think they're the way that you play a policy mistake. I think you know, if effed is is a little bit too too on the easy side and tries to get ahead of things. I think precious medals really over winners.
The policy mistake then, just to be very clear, is amazing too much correct. Interesting, Michael. Thank you, sir Michael Schau of ION. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angio 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.