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Joining us now is Derek Halpenny on foreign exchange. It has been way too long since you otaman. He's just done a great job at MUFG for decades.
Derek, Let's go right to the dollar. With the tests that are.
Going on, is it dollar resilience that you observe.
Well when you consider the level of expectations that were surrounding inauguration day and day one Taruff's being implemented. Yes, I think the correction weaker when you consider the scale of dollar strength in Q four of last year, I think is still pretty moderate, and for obvious reasons. You know, I think you'd be a brave man to be selling
the dollar here. When he listened to Trump last night and the way he was talking about trade tariffs and how he loves them and all the advantages tariffs are coming. It's just it's just a matter of way.
You are experted flows what are the flows from the continent to America and vice versa, or from the Pacific RIM to America.
Well, well, speaking from an MUFG perspective, the Pacific RIM, you know, to Japan and both you know or sorry Japan to the United States from the Pacific RIM, and also in Europe, you know, there's definitely been reduced appetite for fixed income investments, and I think in that it partly reflects the increased cost of hedging for Japanese investors has curtailed their appetites because, as you know, Tom, there's an appetite for fixed income, but also hedging that to
some degree, and the cost of hedging I think has brought down overall the buying of fixed income in the United States. And it's even more obvious in Europe, where Japanese investors have been outright sellers, probably on political risk in France in particular, where we've seen some heavy selling of French bonds over the last couple of months.
It's interesting because Chris Fheron over at Strateiguez was pointing out yesterday that how if you're looking at the performers for technology stocks and how they peaked in July when the yen first Strengthen, if you're looking at the US dollar versus the Japanese yen still around that one fifty five level, what are you watching there and how does that kind of in relation to what we saw with China their AI model. What that means kind of more broadly when you're looking at this space.
Yeah, like we had an interesting move yesterday, like the Japanese yen was the clear out performer, and I think if you look at the cost of hedging going back to that point, and by that I mean just looking at three month money spreads, because a lot of Japanese
investors hedge on a three month rolling basis. You know, the cost of hedging is coming down, and it's coming down steadily, and as that happens, that obviously incentivize incentivizes Japanese investors to hedge moore, which is essentially yen buying.
And if that flow dynamic continues to gradually change, then I think you get back to the old traditional type moves that we might get where you have a risk off scenario, you have a drop in yields in the United States, and you have the Japanese yen outperforming like what we had yesterday, but you know, we still have quite a substantial spread. So of course today we've seen the en rewaken again, but I think the story is slowly changed.
But Derek, cut to the chase. Here, do you have a vector of disinflation and lower yields? We've got Ian Lingoln coming up here. He's in that camp. Michael will be with us and the Fed show tomorrow. I mean, Derek, are you still looking for a disinflationary tendency?
Yeah, well, certainly in terms of a global perspective, I'm quite optimistic on inflation, you know, and I think that the battle is effectively close to one. But from a
Japanese perspective, it's certainly different. And that's why I think that that story is going to continue, where the boj continue to raise rates, and then while the FED maybe in for a period of pause, the more favorable inflation backdrop, certainly by the second half of this year, is going to allow the Fed to continue or to restart cutting rates, and then that kind of spread dynamic becomes, you know,
more favorable for Japanese and strength. But certainly in terms of the broader inflation picture, I'm more optimistic.
Now.
Of course, we need to assess what Trump does in terms of trade tariffs.
Well, that's what I was going to ask you. Because the global battle is mostly one on inflation. What do you think is the biggest risk?
Well, yeah, like come to trade tarfs obviously, because it all depends on the aggressiveness of the trade tariffs that are implemented. Now, if you if you look right now at the moment at dollar CAD, look at dollar mechs, the moves that we've had in those currencies do not reflect expectations of an implementation of a twenty five percent trade tarff. So markets are still skeptical of Trump's willingness
to act aggressively given the near term inflation risks. If if we're wrong on that and he is much more aggressive and twenty five percent on what nearly one third of your imports would be very very substantial, then the inflation dynamic is obviously different very quickly.
Or what's your key pair to make big figure moves?
Jess Metton's got to pay back all the Texas A and m bettings she did where she went down in flames. What's what's the Derek Hallpenny pair where I can make some money over the next six months.
Well, we have a dollar peak story in about three to four months, So if I do it over that period, I think the dollar still has more strength to go, but obviously not against the Japanese yam. Like I mentioned, so like we think euro can still drop below posy assuming we do get this period of you know, some adoption of trade tariffs, the fed on holes probably until the summer, the ECB continuing to cuss. I think euro dollar is heading to Parsey and potentially below.
Derek, thank you so much. Derek Halpenny with us this morning with m UFG.
You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from seven to ten am Eastern. Listen on Apple Karplay and Android Otto with the Bloomberg Business app, or watch us live on YouTube.
This is a joy.
I'm going to spare the long Introdutch in the densest most read note and fixed income on Wall Street is with our question. Ian Lingoln he wandered through parchment at Yale University in Minnesota, a CFA and just absolutely iconic in terms of looking at raids. He holds court with BEMO Capital Markets. His compliance told me he is on speaking terms with Brian Belski. Belski started drinking at ten am yesterday. What did you do on the desk with
correlation here? Price down, yield up? Is Ian Lnoln buying ten years yesterday?
I do think that what we saw yesterday was the beginning of a repricing in of the safe haven quality of treasuries. We were reminded that there's more going on in the world than just tariffs, than just the Goldilocks economy. In fact, when things go wrong inequitizer in different parts of this system, we see a quick bid for treasuries, and that's what we saw. That's stabilizing bid.
You stole a line from Carly Simon that great song she had apprehension. The apprehension is out there yesterday.
I get that. But on a vecfter basis, with a FED.
Meeting tomorrow, can Ian Lingoln say the disinflationary trend is still in place.
The disinflationary trend is in place, but we're trading off of the potential for a forward reflationary one based on tariffs,
which frankly I think is somewhat overblown. At this point, we are going to enter into a period where the data is confusing for the FED because we'll have a floor in the realized inflation data as a function of the tariffs that presumably are going to be rolled out over the course of the next several quarters, and that's going to make it very difficult for the FED to get back to normal.
Do you have a magnitude adjustment of the tariff in that I guess we could. The line now is are going to ramp in tariffs. But does ian Lncoln make a distinction between three percent ish all in tariffs versus the magnitude the president's talking about. Those are two different stories, right.
They're two entirely different stories. However, I think the most important aspect is whether or not it's gradual or a one off adjustment, because if it's a one off adjustment, the Fed's going to look at that and say, that's.
A tax on the consumer.
Let's move forward.
If it's gradually brought in, which I can appreciate from a political perspective, you want to take the sticker shock out of higher prices. But that's an environment where the Fed's going to struggle to really break down the difference between true demand side inflation and tariff related inflation.
Looking at the tenure, obviously it came down pretty significantly yesterday, but up about two basis points around four or five five. But what a speculative net future positioning tell us about how investors are potentially shorting the tenure.
I think that this is the part of the cycle where it is a make or break moment for the bear steepening narrative, and that is that core short from the speculative community in tens and thirties that has been persistent throughout a lot of the cycle. I think that we're poised for a reversal. Everyone's been waiting for an opportunity to buy treasuries. They've been waiting for the proverbial dust to settle. Hasn't settled yet, but it's to some extent.
It's the opposite of what we've seen in the equity market, which is everyone's waiting for a moment to sell. Now people are waiting for a moment to add to treasuries.
Okay, they're going to add to treasuries, and we're going to get the second derive. The convexity is going to come in and yields are going to accelerate down it's away from your remit. But if tens and thirties move in an Ian Lincoln Way, do we get mortgage rate relief? Does the housing market, which we all agree is a train wreck, does it get some relief?
This year, I've been very surprised at how long the mortgage basis has stayed as high as it has and why is that?
Well?
I think to a large extent, because of the regional banking crisis. We lost some of the core buyers in the mortgage business, which are the regional banks. They are starting to come back. They're starting to come back slowly, and I think that will compress the mortgage basis, which will at a minimum put a cap in for mortgage rates. I don't think that we're going back to a pre pre pandemic reality for the mortgage space. Hopefully at one
point we will, but not at this stage. I think there's still plenty of work to be done.
So where do you think the neutral rate actually is? Since we're going to have the FED meeting tomorrow and the debate surrounding that, which is kind of like the million dollar question.
My key observation in that regard is that it's a moving target. It was certainly higher during the last several year, year and a half than I think the market was expecting it and the FED. I'll also note that the FED has moved up their longer run dot over the course of the last year, so they've indirected to directly acknowledge that it's fifty basis points higher at least. So that gets us to three percent. I would say it's probably three and a quarter or three and a half.
The only one I know in Lingo who could say the longer run dot and keep a straight face.
With BMO Capital Market.
It's an extended conversation, a trait for Global. Wall Street really can't say enough about it.
Reddigreen on the screen that vis comes in.
Under eighty Jess met in cool Com collected today its seventeen point eight zero yields MOVI, I I look at the ten year real yield. I only do that to impress the in Lincoln two point one five percent gone two twenty to two ten, we're back halfway on the real yield. I guess it's fear missing. I will leave it at that. Just save me here for Ian Lincoln.
Well, because of the backdrop, and you were mentioning about the new administration coming in in Washington under President Donald Trump. How is the market in the economy different now when he first was taken in in twenty seventeen versus what we're seeing at this point, and what does the bond market tell us about the direction of inflation.
In the economy.
Well, it is a decidedly different world than it was in the beginning of two thousand and seventeen when he first took the presidency or took over. But what we did see is what we are seeing is a inflationary trend that's higher on average, but moderating versus where it was a couple of years ago. We have a decidedly lower unemployment rate and the perception that we're in a Goldilock's economy that's going to continue in perpetuity. Now, that's
a different departure point. One observation I will make, though, is that a lot of the Trump related trade war initiatives that he put in place during his first presidency were not wholesale unlound, a lot of the tariffs persisted, a lot of that protectionism was already in earth is still in place, and so we're starting that process from a higher plateau, which does have more potentially negative ramifications for the global economy.
Look at ling in at all this, and the heart of the matter is we had a great disinflation, very low yields, negative rates.
We all know the drill.
Is now normal within the historic span that you are expert at. Are we back to like these are normal interest rates for Kimberly Clark or the Bank of Montreal and everybody else, Lisa Matteil, Is this normal.
If we look historically. It's very tempting to say, look, we're back towards the averages, we're back at normal. But the reality is that as the real economy has evolved over the course of the last two or three decades, we have become accustomed to lower real yields and lower nominal yields. So I'll argue that we're still at the
upper end, or the restrictive part of the cycle. And the nuance is that during the pandemic, everyone including corporations, we're able to lock in extremely low long term financing rack of mortgages, and we're still working through that buffer to absorb higher inflation or to drive consumption. When that gives that's when we'll realize how tight policy is.
Okay, so a year from now, where's the ten year yield? Let's just start with that.
Well, we're certainly going to be trading with a three handle by the beginning of next year.
If somebody in the other day shocked me from Peyton, Riegal lot in La jeff Cleveland, Jeffrey Cleveland saying a three sixty, I about fell off my chair and Lncoln's not three sixty right, you're at three eighty three ninety.
Yeah, I think we could easily at this time next year, we could easily be in a range between let's call it three sixty five and three ninety five.
I don't think how do we get there?
Brian Belski's I'm going i'd with Brian Belski, Brian, thanks for watching YouTube.
He's going to ask, and how we get there? What's the hew?
The FED is going to be successful in their ability or in their endeavor to re establish christ stability. That brings forward inflation expectations down. Even if real rates stay roughly where we are. We could compress tenure break evens from two sixty to one ninety five or two hundred basis points, and that gets us right up against four percent.
Right now, okay, for the non global washteon, I'm going to translate that is the inflation adjusted.
Yield even with stability.
The other parts of the yield structure are price up yield down, right, I do. Okay, there, I only got to payos alone.
Well, actually, look at the tenure. I mean it was around three six back in September. Obviously a lot of things have transpired since then, but that wasn't that long ago to your point, So how do you think it kind of builds on that?
Well, we were at in let's call it three four thirty two four forty recently, and that that was with break evens at two ten. All we need to do is get forward expectations of inflation to price out the Trump reflation trade and start to price in the potential for economic damage to be done from a global trade bark.
Does that happen soon as because the rents, OER and the rest of the housing complex, or is it the price of eggs finally comes in.
I think at the end of the day, what we see is the supercore measure of inflation, which is core services excluding rent and OER, that printed at just point two in December and there's so there's downward potential yet to be realized there. I think we could very easily see that because that's has the high correlation with realized
wages and the employment market. While ostensibly on strong footing, does we're at at the point where we would expect to see further job reduction and an increase in the unemployment rate? You have to be realized. I'll be the first acknowledge that if.
You could ask FED chair pal a question at his press conference tomorrow, what would it be?
I would never ask that question.
Well, the biggest question on my mind, and the one that I suspect that the chair would be unwilling to answer, is we see the dispersion of the dot plot, which dot is yours? What's the chair thinking?
But there's not. Come on, they're not going to answer that question. Are we done with the dots?
I've been asking this since Richard Berner was at Morgan Stalley and we're both going mental about the dots? Are we done with the dot experiment? And do you get any value out of it?
So?
I think that that's a very very interesting observation because the FED has tried so hard to de emphasize the value of the dots and their forward predictive qualities. But at the end of the day, the algos and the CTAs they need something to trade.
They need why do we care about them?
We care about the efficacy of America based on a dual mandate.
We don't care about the roulette.
Wheel of the CTA machine, Monroe Trout because Jim Bullard, who used to work at the St. Louis, why don't we give a damn about CTAs when we're trying to create public policy here with the Fed?
Well, I don't think that the Fed cares as much about the dots as the market does. And the market only cares about the dots because we need something to trade. When they updated SEP hits and we're not going to trade the growth numbers. We're not going to trade the inflation numbers because they're always overly optimistic, and they assume that the Fed's doing their job.
And we won't get the dots this time because they're quarterly, so we won't get them again until March.
So there you go. How do we get rid of the dots? A wise one?
So I will argue that there has been a very concerted effort to increase transparency over the course of the last twenty years by monetary policy makers the FED, but globally that hasn't necessarily translated through to the best outcome. There's a case to be made for less transparency, for speaking a little bit less, given a little bit less forward guidance, and dropping the dots. I think could be
a reasonable first step towards that objective. I don't think they'll do it, but I could argue that they might.
Well, that's an interesting point because the communication with the Federal Reserve has changed so much, even coming out of the housing crisis with Bernaki, there used to not be pet press conferences after these statements, especially when Greenspan was FED chair, and now once Pale came into play. Would you started having them after every meeting, not even every
other meeting? So how do you think what would be the sort of way that they would communicate less because it seems like the markets want to know every little detail.
I think that the first step towards a more unified communityication process would be to be a bit more sparing on how the regional banking presidents speak and how the non core members of the f mc are able to air their views as it were. I don't think again, I don't think that's going to happen, but a convergence of thinking right, it would be a big key on the messaging side.
But again I'm busting your chops.
But we're getting a huge response on YouTube. Thank you so much. I can't say enough folks about Ian Lncoln is someone out.
On YouTube set.
He's the only one that makes the complexities of what Frank Forbosey rought somehow in the King's English. Ian lingoln Is with BEMO Capital Markets can't say enough about his morning note.
Look for that.
Get that from the Bank of Montreal BMO Capital Markets.
This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on Apple Corplay and Android Auto with the Bloomberg Business app. You can all listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
We start strong with see much Cheap Global Strategist Principal Asset Management. We're going to try to talk to her without mentioning deep seek.
And all the rest of it. Seman.
When you see a shock like we saw yesterday for measured conservative three year time span.
Do you buy the dip? Do you take a long lunch? What do you do?
Hi?
Tom?
Yeah, Look, yesterday was a tough day, mainly.
Because there's so much uncertainty.
I mean, that's something that I think is we've had time to digest the impact, which makes it a little bit easier for investors.
But I think, you know, giving it the jury is still out. It is a big question.
You know, We've had so much money go into money market funds in the last we'll continue to go into into money market funds over the last couple of months. And when we speak to people, you know, the thing that they keep saying, well have you keep saying is that they're really concerned about equity valuations. Is this really the time to go in, particularly when they look at tech valuations and this so look, they're really really frothy.
So after today, is it a buying opportunity for mag seven or do they you know, kind of keep a step back. And I think that the uncertainty still keeps them on the sidelines with regards to big tech, but it probably does improve the outlook for a broadening.
Of that investment space.
So I think you're going to see people come back in seeing that the productivity gains for the US economy for a number of your sectors, and globally of course that there are other opportunities. So I think it's almost like a pivot into different areas of the market, which actually should be healthier.
I look seen at all this and I look at people and money market funds in the surveillance exuberant meter.
Isn't ringing a bell?
Are we exuberant now into this FED meeting or is there a leadness to desire to own equities?
I would say that there's not that much exuberance, maybe because there's so much uncertainty. I think everyone is in agreement that the economy is looking pretty robust, the prospects of recession are very very far out, which should mean
good ends growth for twenty twenty five. But I think that when you have so much uncertainty you know, firstly where the tariffs, what's going to have with the fiscal space, and now of course with deep seek, it's a difficult time I think for divestors to really put that exuberance to use, even if the macro backdrop is very constructive.
Speaking of buying, the dip vand of research put out some data on retail investors specifically, and they bought a record amount of Nvidia stock during the sell off that we did see on Monday. So, Sima, when you're speaking with your clients, how are you advising them to position?
So what we're saying is Ella this is this is a time when you really do emphasize not just global diversification, but diversification across sectors. There has been so much FOMO over the last couple of years. Investors who really didn't get into the MAC seven have been waiting there and so you know, if they've had anything, they've put that money to work in big tech. Now, I think this really does accelerate the point that global diversification is key.
Valuations maybe a lot of across the space, and some places still look expensive, but that's not a reason to avoid them.
So places like India, Japan we continue to like.
And then of course you know there have been some tactical opportunities in Europe and of course.
China now, so I think that's key.
But also looking beyond the big tech, so sectors within the financial space particularly, we think are looking strong and potentially within industrials if you do start to see this manufacturing kind of green shoots start.
To take off. So I think that's what we're invising investors.
This isn't the time to sit back in cash, but you start to recognize that there are opportunities outside the spaces that everyone's been very much limited to over the last few years.
There's been so much criticism over the past two years in this bull run about broadening rally. If you look at the SPW, the eco weight index for the S and P five hundred was marginally yesterday compared to one and a half percent drop in the S and P five hundred, and then of course another strong breathday with fifty seven percent of the New York Stack exchange higher
training there. So when you're thinking about the broadening type rally, where do you see as far as when it comes to earnings growth and how they could translate to stock performance over the next year.
Yeah, And I would say that the fact that that broadening of the rally, which has been spoken about so much as the last couple of us, hasn't really taken off, has just added to this kind of idea that actually, look the only thing to do is the big tech. So I think that that it hasn't helped, but you know, we do think this is this is going to be
a fairly good year. So in terms of spaces, one of our favorites continue to be financials, you know, from a macrospace, because you've got a strong economy but a positiveylcup. Just so from a fundamental perspective, financials.
Do loo good. And then you add in the deregulation that we're expecting to come through in twenty twenty five, but it looks like quite a resounding case for financials at this point.
See, I've got to be quick.
What kind of financials are the attraction that you see you out there? I mean, is that I load the boat on JP Morgan? Or is it big banks? Is it regionals? Am I buying?
Paris? What am I doing?
So we think the US big banks are still good byes and you know they're expensive, but of course we've ever seen the FEUs. Expensive doesn't mean that there's going to be a correction. We also actually like some of the European banking space fundamentally not as strong, but actually have been very much unliked and from evaluation perspective looking pretty interesting.
Okay, Sema, thank you so much, greatly appreciate it. Today's Sema Show with Principal Asset Management.
This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on Applecarplay and Android Auto with the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal.
The daily look at the front page is of Lisa Matteo moment, Lisa, what do you have?
Okay, So there used to be the social media trend. People would show off everything they bought, right, they would call it a haul, and they'd show off all these things they're doing. The kids were going crazy with it, showing off things that like Target and Amazon. Well, now there's a new trend. I'm excited for it because my daughter will spend less of my money. It's called no buy twenty twenty five. So they're not buying. That's the whole different trend of it. So they're making list of
items that they won't buy. Some are promising to buy, like these non essential things that they used to buy all the time. But it's not just kids though. It's adults too, like they're cutting back on the hair treatment's manicures streaming platforms. So this is a new thing. People wanting to not spend as much in twenty twenty five as they did in twenty twenty four.
What's a hair treatment?
A hair coloring, blow dry? It costs very much. This is a very expensive upkeep.
It's just the hair treatment thing is the biggest racket going see.
I see it as light.
I look in the phone and there's multiple We're very treatment were we're really gonna spend less?
What do you think?
I feel like you should try it?
Yeah, Taylor, what's that?
Bless to the Tiffany store. There you go. So someone who did not get this no fine memo was Taylor Swift because she's all over this, has been this insider. She had the Foo you talked about it, Yes, Siad, the Louis Vuton retails. The whole thing had to tell about sixty eight thousand dollars. Wow, there is a complete breakdown.
But the thing that stands out it was kind of controversial because she had the monogram jacket, which is different because it used to be this quiet luxury trend and now she just put it all out there, and it was Louis Vauton everything and branding, branding, branding, branding. So they're saying she's going to spark back this loud luxury trend instead.
But I wonder about it in the sense that so many people I know feel they can't wear luxury because of crime.
This is serious. I didn't think about it, think about that stuff.
And I just wonder, you know, I noticed the tailor outfit. It was wait, let me rephrase that it was it.
Was noticed in the house, yes, but I really wonder.
The jacket was five thousand dollars alone.
Wow.
Wow, she's looking at that, she's she's like a.
Nice all right, since we're talking luxury. This was in Fortune magazine. Kind of interesting because it talks about Disney World and they're calling it actually a luxury experience because it's become this you know, tiered price and scale, add on fees, it's becoming unaffordable to just the average American family. So it really breaks down the price. You got to read. It's pretty interesting, but over the last ten years, Disney World ticket price has grown at almost nine times the
rate of inflation. So a family of four, seven hundred and sixty six dollars pre tax for four one day peak season tickets. And they're talking about the perks. It doesn't include the extra perks like you need the lightning pass if you want to skip the line, the extended evening hour past that. Really the halves can afford in. The have nots just can't. So it's just keeps.
Track of this. Yeah, you know, I don't really it is me.
It's it's a lot. I think, goodness, my kids are old right now and I don't have to go through this, but it's a lot. Parents are talking about it. It's ridiculous. They're saying Universal Studios is going to cost like one hundred less if you go to Busch Garden's gonna save your family like three hundred dollars. It's just paying for the name. Yeah, Mickey Milk.
Well, thank you so much, Lisa, to tell you on the newspapers today.
This is the Bloomberg Surveillance podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday seven to ten am Easter and on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also Watch US live every weekday on YouTube and always on the Bloomberg terminal