Surveillance: $100 Oil with JP Morgan's Malek

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And my house is almost nothing on our guests.

On my coffee table in my living room, there is a one hundred page plus researcher report from JP Morgan eighteen months ago which brilliantly plays out the demand dynamics of what we don't talking us about, which is emerging markets joining us now, Christian Malick, Global Heat of Energy, STRATUMY, JP Morgan, COVID dot in Away.

Let's just be honest, China shutdown gotten Away.

Do you reaffirm what you said eighteen months ago about the durability of demand.

In em for sure?

Actually, I think it's always good to be here again and on demand. What I'd say is that I think we're actually stronger in demand growth on a medium term than we thought you were. And the main reason is that when you look at all the fuels in the world, particularly the clean energy fuels. In the second edition of that report, we showed that the system the distribution of that energy will basically fail the generation of lean energy. So you've got all these duels being generated, you can't

I mean, I mean we can spend an hour with you and as duels focus as a physics estimate of energy and the thermone dynamics and ev vehicles and all there.

But I'm not going there this morning.

What I will say is you got to get traditional hydrocarbons from Saudi Arabian such through the straight to Malaca and up the Pacific Ring.

Is that model still in place? Absolutely?

And in fact, when we think about Sadi share of demand growth, and we've written about this extensively, you know a few years ago that ultimately with the industry retreating in terms of investments in oil. What we'll see is SADI share of demand growth going up to between fifty to sixty percent of all demand growth by twenty thirty. Now, just to give you perspective on that, the average was eleven percent the last thirty years. The low was four

Do presidential politics matter, given the crude production in America is close to a record at the moment.

I think it does in the sense that you could potentially push for more investments in shale.

But the issue of shale, and it sort of.

Goes back years five or six years ago, were all wondering how is it when all prices go off, we see so many barrels just turning.

Up, blowing up, lots and lots of wells.

That was fine then, but we sort of what you saw now, you've seeing productivity slow. So as a result of the way that was fragged, well dated, showing us that productivity is now slowing. So even if we said right, go drill, baby, drill right and in lots of investments, even if banks were to turn around and say listen, will finance you, the issue is the wells themselves. It's not magic dust you just throw over wells. That slow down is happening, and the marginal cost is going up.

Looking at prices now ninety four on Brent, looking at the bond market, yield to push in five percent, five twenty two year and four fifty out of ten year, conversation we're having in the bond market is what is the new normal?

Is it the old normal?

What's the conversation like in the commodity market, what's the new normal for commodity prices?

Given everything you've just told us.

Well, I love the way you talk about because I think that before in our in terms of we were very bullished and then we sort of took time out this year. We're very barish in December and we've basically gone back to bullish, So we're sort of we've been quite tactical that before and after its rates. The flow of capital into new or supply is just not what it was like in the last thirty years. You had

So when you talk about opek being the big swing factor, we've been hearing a lot that Saudi Arabia and what they decide to produce is really going to determine whether things stay at one hundred, whether things stay at ninety, or whether things stay below. Do you reject that? Do you think that that sort of a simplistic way of looking at it? And in the near term they have less control than people give them credit.

Well, it's a question that's very, very very they have control.

They have to have control.

I think ultimately the size have played their cards very well and done a fantastic job managing the volatility and oil. Right With that in mind, if they're taking great share of demand growth, they have a sort of fiducial duty to make sure they're stabilizing the price. So people talk

For me to the right. Now.

That's the reason why I think it's one hundred and not one hundred and ten. Right, You think that that's where they're going to kind of cap it. But what about say Russia and the fact that they just banned exports of gasoline.

And things of that nature.

Are there other areas that could kind of go against what we're seeing from Saudi.

I think other areas will be demand, and I think we're in demand discovery. I mean, everyone's got a view. What price does demand? We've looked at historic analysis, and one hundred or oil is not that expensive. In fact, it's sort of closest or sevent soil of real Again before and after it's higher rates, you've got higher rates. And therefore, what's the real sort of level of normalized price the market demand the.

World can acclimatize to. We don't know.

We think one hundred and ten hundred and twenty is fine, and therefore at that price, if we started to see massive demand destruction, we're wrong. That's the point where I suspect Saudi and Rush will have to sort of manage that downside once again.

So the message this morning is buckle up, buckle.

Up, buckle up, very long, very bullish, but be very tactical when you get positioned in.

That's quite something, Takay it is.

There's a lot.

You know, this is really important that the people we talk to they all have different views. We heard that from mister Morris's city group, different from mister Mail, like a JP Morgan, and you got to respect the density of the granularity rather Johan, that these people study something where we just go, well, Brent's ninety two and that just doesn't get it done.

It's way more grand.

You're about to do that right now. Brent's ninety four.

Thanks Christ, Thank you of JP Morgan on the latest and the commodity market.

Joining us right now with the most important interview of the day, because when it's like this, you triangulate to foreign exchange.

Jordan Rochester's G ten epix strategists and Murra. I got one basic question.

I'm told I can't get back on the plane and go back to New York unless they get a one nineteen print and sterling. How quick is Prime Minister Suna going to get me to a one nineteen sterling.

That's something that could happen before your end. The moves aren't as rock and rollers last year, though. We haven't got a Liz Trust versus a Lettus moment right now to kind of get you that move lower. But we were at one eighteen in March earlier earlier this year, so it's very possible that one nineteen we could be talking the next six weeks.

You're a parity call.

Earlier this week on this program, Jane Foley wrap our Banks, she said, maybe where are you on that?

Now?

I was going to say, is that the call?

It's definitely a maybe, but that that requires your next guest to tell us about oil, Christian Amic. So if oil goes to one hundred, okay, we get to one oh five maybe one o four in euro but to get down to parity, we need that energy squeeze that will hit that trade bands. Because what's happened. The euro Area's got a lovely current account service once again thanks to lower natural guests, so we need a cold weather forecas froctile.

So things need to go wrong in Europe. We've done enough on the US side. That's not where the surprise comes from for you, I.

Think, so the US in the next two CPI prints, what's going to be interesting is oil's up seven percent this month, but gasoline futures are down, so we're not going to get a really hot CPI print on headline that we got for last month. We've got zero point six month a month. The next month could just be zero point two for headline. But if gasoline futures weren't a spike back, we get another hot CPI for the US,

In general, we talk about dollar strength right now, is it a dollar story or is it everything else story being weak?

Oh, it's bothally, So the dollars strong because we've had a basically reinflation. We've had not just energy prices going back up, but these UAW strikes. We're interesting seeing some signals that car inflation could come back. So it's really hard for the market to look for a dubbish fed right now, especially with continuing claims falling lower once again. So we're not seeing any material job layoffs in the US, and then that's the US side. In Europe, it's horrendous

What's the level of strength for the dollar where it becomes truly disruptive.

Well, in terms of the disruption, we're already getting close to those levels, as John said, parity in euro that would be a disruptive level for sure.

Oil.

I want to talk a little bit more about Croute and the move we've seen. You said that maybe if something goes wrong with gas, what about Brent and WTI? What about that we're already in the nineties on Brent. Doesn't that change things for Europe?

It already has, it already has That's why I think the first half of this year and energy was weak. I thought that we could see euro finished a year higher, but that's completely changed. I didn't expect Brent to go above ninety. Well you changed from one fifteen to one oh five on the euro right, Brent move for sure,

Could be used.

So that was a bit odd given we thought you Wade a shifted a little bit more hawkish with his article from two about two weeks ago. And then the main problem for dolly En is it's quite easy to say cost to carry is very expensive to be long the ends, so therefore don't buy it. But you've got the Ministry of Finance threatening FX intervention risk and we've even had softer words from US Treasury Secretary of Yellen

So in other words, we can take a look at the yen and just say that nobody wants to bet against the central bank, and nobody wants to bet against foreign intervention that they're likely to deploy, but it has nothing to do with the differential at this point between the monetary particiesly.

Has everything to do with the differential.

And if the MF thret of intervention wasn't there, we would be closer to one fifty right now. If the idea of the boj turning hawkish wasn't there, we'd be closer to one fifty. But because of that threat, people are being reluctant to get into that trade.

But if you were to look at.

The cost of carry, it's even higher than what it was last year when we were at these exact same levels.

Belisa, it's deja vus.

I was in September, New York, in New York hours the Ministry of Finance came in and intervened at Dollian around one fifty.

It feels a bit like deja VU's.

People are just bit reluctant.

Here.

You and I are in the same page.

First thing in the morning I do was I look at swissy frank different pairs to four decimal points, to just see when a Swiss Frank in his signal strength. You say, Switzerland stakey is a place chf sek swissy stacky is a trade to play here for long Swiss Frank.

Why will the Swiss frank strength. Let's start with that.

Yeah, absolutely, so we always have our main dollar views, our sterling views. But then you have to talk about RV and what we're talking about here, Tom is long Switzerland, short Sweden. Now, Switzerland has seen massive appreciation of its currency over the past year, but I think that's a trend that carries on. We're going through a period of an adjustment for Switzerland. Last year, before they started raising rates,

Okay, I'll go with that, except the SMB to me's almost a sovereign wealth fund with the equity ownership they have and particularly the load de bode.

Position and Apple as well.

Does their equity stub within the central Bank Does that preclude usual strong Swiss dynamics.

I think the SMB has just taking the view that we're happy to take a loss on our FX reserves. And in fact what they're doing is they're selling their foreigner holdings as well, so they're actually consistent sellers of They're eighty percent bonds, twenty percent inequities, so the largest part will be in the fixed income space. But we've seen eleven billion of intervention per month from the Swiss give me.

A level and euroswissly the core pair there at the word point nine five point ninety four.

It's easier to trade this Swiss stocky than EuroSwiss EuroSwiss.

I've actually stayed out of it.

It's one of the most non macro currency pairs in the G.

Ten EuroSwiss Swissy stocky. It's the most London thing I've heard all week.

Well, you know, I mean, it's it's real, man. We've got to bring these people in.

I mean, there are days General Levy and I got Rochester here, and you know, we got to bring our FX people in. They start me, you know, go start me today. They watch in Singapore every evening.

That's very killed, and they watch me and.

There popa FX trades and Singapore off what we're blathering about. So I got to go to Rochester here to get some romance in it.

Can we just finish Mayfair and look at a Ferrari?

So that's Sweden versus Switzerland on the Swiss side, that haven currency on that growth slowed down, you think money is going to go back there? Who else is in that bucket? Because it used to be Japan?

What else is the good question?

Yeah, it's it is Euro.

That's kind of why the Euro hasn't been rock and roll. So you're asking me about the one o five down to parrot of you. We've got better trades to do. Short sterling versus the dollars, a better trade. The way we're playing euro is short euro versus CAD. But the reason I mentioned Euro is because we are having banking repatriation. For a long time, German banks, French banks had negative interst rates.

American corporates asking for money let's go for it.

Let's lend abroad that's now reversing because they've got positive yields up.

Do you have a level on DXY where you go omg, you wake up in London and go wow d X y one oh seven, one ten? What's what's the prism you have of DXY where things change?

Well by what what do you mean? So for the Fed for it to have an impact.

Mean for us, for people trading the market got.

Ten seconds to give us a number before one tent.

There you go, that's that's what we're scaring one ten Jordan, Thank you, Jord and roast of Numa.

Swissy Stacking.

Sarah Melick with US now chief investment officer at Nuven. Sarah, though fear is out priced down yield up. Should we be in a sense of panic or frenzy or caution or is this a.

Normal adjustment that we will survive.

Well, there's two issues the market needs to suggest to and that's what's going on with the economy and what's going on with race. The economic soft lending narrative is definitely being challenged and the markets had started to price that in.

So that's what the markets are adjusting to rates.

Of course, interest rates higher for longer, inflation higher for longer, all of that together is going to be a headwind for the markets.

Also, we think long term a lot of cash still on.

The sidelines, So I don't think the bull market's over, but short term you do need to be a little bit cautious. The two areas we like our technology stocks and dividend growers. Technology stocks still less correlated to economic growth, so I think they can have a rebound from here, and the dividend growers is an area the market that's really underperformed here today, and they tend to perform well in markets that have that are going down, so they

Sarah, what you just said is actually incredibly controversial today. It might not have been controversial two weeks ago, but today, basically you're going against everything that everyone is saying. At a time you have tech go going down to such a degree and leading the declines. So how is tech defensive at a time when they potentially could be interest

Well, let's start with semiconductors, which is an area that we like. September tends to be their seasonally worst month in terms of performance.

So not surprised to see that they peaked out in about July.

But if you look at the tailwinds for semis and software, which is our two favorite areas of technology. First of all, artificial intelligence, we don't think that it's hype, it's a real trend. It did get a little bit crowded, but I think it'll last for many years. Second, inflation has been increasing because of energy prices, which we think will moderate after the huge upswing that we've seen.

And then continued services.

Spending, which has been around for a while that continues to moderate. Another tailwind for technology sucks and interest rates. We see the FED basically one and done from here. One more rate hike. What got priced out of the market next year was two rate cuts. We didn't expect rate cuts for twenty twenty four. But as the FED positive again, I think these are all positives or tech stocks.

Of the way.

Also, looking at portfolio managers, they generally were underweight to some of these megacap techtocks coming into this year, so you could see a lot of people stepping in for catching up.

To get their waiting in their portfolios to the right level.

And then clients are holding still about twenty five percent of their portfolios and cash that at some point needs to come back into the markets.

Does it though, I mean this is sort of the key question. Does it if you're earning five percent on it? Actually maybe it looks pretty good. And there's a question about whether we've actually seen the effects of rates that are now the highest going back more than a decade two thousand and seven, two thousand and six, depending on which denomination you look at. Are you saying that these are rates that we can live at that basically we have seen the effects and they haven't been too bad.

Yeah.

I think what clients learned this year was there was an opportunity cost for holding cash is when inflation is at the levels that it was, and the markets have done what they've done, you know, year to date, even though they've moderated a bit in the last couple of months. Markets are still well above cash here to date, so there's an opportunity costs for holding onto that cash. So

Sarah, this discussion on technology is so absolutely critical, a huge body of retails taking the story. If institutional is not now the gloom is rates up. There's a duration argument about technology.

I get it.

Where in the income statement will you see tech superiority, Are they going to outperform on revenue growth or do you go down where they surprise with a better marginal free cash flow And.

The answer is all of the above.

In the sense that the good news for software companies is they don't need to rely on pricing power, and as inflation does continue to moderate, which we think that it will take, software companies are less effective by having to lower their prices because and hold on to pricing power.

Margins are important for tech sucks.

You thought saw that with Meta this year, where they were ahead of the curve in terms of cutting costs and preserving their margins, and other companies have followed, which is important too. And then strong free cash flow growers. You look at Broadcom right now as a company that we like, strong free cashal ability to buy it back up to like nine billion in shares. VMware is going to add free cashload to their model. So all the above for these companies.

Lisa's buying a new iPhone today at Covent Garden, Syrus should should be also acquiring Apple shares at the margin.

Apple as a company we've not been as bullish on for many reasons. Number one is the post COVID normalization of their unit growth I think is going to be an issue for them.

And even with the uppers of the iPhones.

I'm a user of an iPhone myself, but uppers have been pretty incremental recently, so they're not as exciting.

I'm glad Lisa as excited about it though.

And also their next big product is VR, which has a very high price point, so I think those could be struggles for Apples, which has got you premium multiple as people that's been a consensus holding for many investors.

I just want to set the records straight and Tom, they know this. I am not a line waiter. I am not someone who's some sort of rabid enthusiast. I cracked my phone, so at some point I'm gonna have to get a new photo garden lined up there.

Oh my god, is Lisa bradits lence? Yeah, so let's move on.

Sara.

I'm curious though, just as we sort of take a look at the whole week, is sixty forty still profoundly challenged at a time where we're seeing bond sell off at the same time intended with stocks.

And it was challenged in twenty twenty two.

I think twenty twenty three's had had a better return for the sixty forty forty portfolio, but it taught us a lesson about diversification and alternatives. An area we really like outside of the traditional sixty forty is private credit. It also tends to be resilient to an economic slowdown, and that's really important right now is owning areas of in your portfolio that are less successible to economics slowdowns can continue to grow. You know, I did also have

Well yeah, I got to go with Katie Frankie. But well I love what Taylor's been doing with the National I mean she and Antonov, what they've done has been extraordinary.

She's gonna with a needle on GDP.

I mean, can Olivia go out there and move the same needle.

You're asking him?

I'm not engaging, That's what was that a question for Sarah?

No, it was for you. Didn't try to just compare. She's ignoring me.

Thank god, we needed a voice near the end of our sojourn to provide balance and of you forward.

There's no one in London that.

Can do that like Janet Henry, Global Chief Economy for the Hong Kong and Shanghai Banking Corporation wired into Asia.

Literally like no one we talked to. You've got a lovely view. And then there's China.

What does HSBC, with all of your context, say about the stability and the economic recovery of China.

HSBC has a perhaps more balanced view of China than some of the hysteria that hit the markets. Yes, not so long ago. I think we're not going to get any quick answers one way or the other on China, and we need to learn to live with that.

You know.

Financial markets always want to know with certainty where things are going to be in two years time, and they want to price it today. The fact is, in China, what we have seen recently is some signs of stabilization in the economy. Industrial production showed some improvement, Retail sales showed some improvement. Credit data is showing some improvement. Are there still major challenges in the property sector. Yes, and we are seeing a gradual rollout of policy stimulus that

Yes.

This is a multi year story of ongoing stabilization and the next round will be structural reforms to deliver the long promised higher quality of growth.

And monthly and three monthly annualizing. Within your research note, we see a disinflationary tinge that dovetails. Was Steve Major's long term conviction of price up yield down that's been tested the last seventy two hours. Do you guys stand with a disinflationary tendency which filters in to lower yield well.

From an RCER economic perspective, for the last two years, tom As you know, I've been talking about a deterioration in the growth inflation tradeoff, a different mix of lower growth higher inflation, and that probably requires a different policy rate level than we were used to in a pre pandemic era. Yes, we have some disinflation, but there are plenty of risks out there. Even the Fed's goldilocks view that they set out at the FOMC, the level of

Changed, Janet?

From your perspective, the relationship between the labor market and price pressure just based on those forecasts and chair and power and self hesitant to ascribe a narrative to a median projection.

But let's have that conversation anyway. We have done over the last couple of days.

They're essentially saying we can get inflation down to two with unemployment not climbing much above four percent.

What do we learn from that.

We've learned that they are extrapolating what's happened so far right now. Yes, so you're right. I mean, it's remarkable. We've never been in the recession camp. We've been in the more protracted slow down, the rolling recession camp, a couple of years of sub trend kind of growth. But now the Fed has overtaken us on the unemployment rate. You know, we only had unemployment at four percent by the end of the year, but we've got at four

So people who go on the Federal Reserve website and they open up the summary of economic projections, should they view them as foe casts or respirations?

What are they they should view them? Obviously that every central bank, given their inflation targets, their inflation priorities, that is their primary goal and they will do what is required to get there. Obviously, what we got in the FED projections, and to some extent we've got in another central bank projections as well, is that they're almost willing

Are you basically saying what we're seeing this week in markets is a sea change about our understanding of central bank's patients. With such high inflation that they will tolerate it for quite a bit longer, and that means it will become more entrenched in a way that people previously had not expected.

I'm not saying that they will tolerate it staying at these levels, and they certainly will not tolerate any signs that it's reigniting, whether that's from wage pressures or elsewhere. They need to see further progress. They need to be confident that that progress is going to continue. And obviously financial markets at the first sign that maybe a central bank is done, is celebrating the fact that the next

The game theory that you just laid out, does that mean that the yields that we're seeing now are finally self fulfilling and will actually create or faster the tight credit conditions that are necessary to get to the FEDS, and that they're central bank scores? I mean, in other words, do you think that these are sustainable or do you think that this is what we need to get lower?

I think how financial markets react, obviously, I'm just the macroeconomist, will be a function of what central banks obviously do. But the central bank is trying to tighten financial conditions, is trying to slow demand. They still think by slowing demand they can impact on inflation and ensure that the inflation continues to slow. But we keep talking about that all of the uncertainty that are still out there we've got a renewed inflation volatility, not least from oil and

I have to ask this question.

It's with immense respect for what HSBC, like Bloomberg went through with COVID. I mean, we've heard from the quarantines of HSBC in the travels during COVID and China.

You walk out of the Bloomberg building.

In Hong Kong, you go across that historic tramway and there's one Queen's Center you're building your place. It's the foundation of Hong Kong finance. What's the stereotype right now? We most get wrong about the new Hong Kong.

That is a very broad question.

That's a friday.

It is a Friday. But actually, you know, as an economist, I always think that sometimes we think about countries, you know, obviously as an economist, and I love it that people want to talk about countries, they want to talk about central banks. But a lot of the things that happen, whether it is in Hong Kong, whether it's in Dubai, whether it's in London, whether it's in New York, is

So you are trying to us in trouble. That's what you're trying to do.

My Hong Kong, are you homecore?

Absolutely, As someone that's lived in Hong Kong for five years, I'm still a homegouryist.

Or are you done on that subject?

I think it's important. I think HSBC Steve Major, great, Janet Henry. These people have a prison in there. You know all the stereotype blatherer we deal with are Steve Engel.

Since we're causing trouble, Miss David Blame, I'm miss David bloom.

Yeah, he's truble, he was great.

Names Trouble's trum. JOHNA. Henrick, thank you appreciate it's going to say.

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Resing the Haste