Surveillance: 2022 Growth With Porcelli

Gregory Staples joins us to stays with DWS barely described his career out of Columbia Economics with Mutual of New York and also with Deutsche Bank with a tenure of duty there as well. Greg honored to have you on with us today. Buried in your note is the shock of shocks. This is something John Farrell's provided leadership on within the media, and that is the German yield and the id yeah that we may finally get a positive ten year German yield back to the normality of early

two thousand nineteen. What will that signal to Europe? What will that signal to the fixed income markets? You know, Tom, thanks for the comments. It's gonna be pretty tricky. What's interesting today, of course, is that the global sell off and rates that started in the U S seems to

be spreading globally. And yes, indeed the tenure boot was last trading positive I think in April of two thousand and nineteen, more within a stone throw of that right now, and we think it truly gets there, you know, until the the u c B actually starts to move away from their p E p P program and their A p P program they're actively doing quantitative using. It's gonna be hard for European fixed income rates to go much higher than that. My money is going to flow into

the higher yielding US. But I do think that there's a potential for a basis between US ten ures and tenure boots to go. Is why does two dred basis points you know right now where maybe at one and certainly they're much north of that. It's going to be hard because of the flows come out of Europe into the United States. This is so so so important, folks. It's not as simplistic the dynamics here, not the static analysis,

the dynamic analysis. What is the behavior greg as we move to a higher yield regime describe those flows in the decision tree that people make when they step into the market given higher yield. Well from a global perspective, of course, there with the question is do they want to take currency risk? And the currency hedging component of is is very significant. You're not gonna go naked currency if you feel like you're going to give up on the currency trade, which you get on yield suffer has

actually been pretty positive. You're able to still invest in US dollar and head your currency risk and come up with something that's considerably above what you're getting from global rates. So I think as long as that holds, it's going to suppress the U S rates from going too high too quickly. I think what's interesting over in Europe is they're not just facing higher inflation, but obviously underneath that

support for the Italian government deficits. It's not as if the ECB can immediately step away from their programs because if they do, they potentially put Italian BTPs into some risk as to who it's going to take that debt down as well. So the flow is where do you get the highest deeld globally and our currency hedged basis right now, that's the United States, Greg, can you walk me through your expectations for the e CP, say against the Federal Reserve. This FEN looks like it's ready to

go in March. Does that make it harder easier for the CCP to wait? I think it makes it very much harder. I mean, I think inflation is still rising over in in Germany. We saw some prints today that make you think the economy there is is coming out pretty pretty strongly. So the code for the the CP for so long has been continue to support the markets with open market purchases, continue to have a negative policy rate.

They're going to be under some considerable pressure in two to lift the p E p P. I think that's going to happen in March. And then the question is to what degree did they taper down the open market purchases going forward under the APP program. I think they've got to consider accelerating and given what Defen has been doing full basis points away from that zero level on a German ten year As you know, Greg, just the experience of US all over the last ten years looking

at European debt markets. It's what happens in Italy that counts here now in America we're talking about the prospect of time of financial conditions and the ability or inability of the Federal Reserve to step back. Does the ECB have any capacity to maintain easy financing conditions for places like Italy, and do they move away and ultimately does this European bond market trade like a sovereign or a credit greg which one within the Europe that's a very

very good question. To what degree can they pull back and not destabilize the periphery Italy in particular, And it's going to be difficult, difficult, difficult to do. I think it's gonna be next to the two. Obviously, there's the sovereigns in the northern countries. It's the sovereigns as they try and nationalize the DAD and some of those programs that they instituted after the COVID spread through their last year.

But they're still concerned about what Italy is going to be able to do if indeed the CCP pulls back from their purchases, that part of the market becomes a credit. Just want to watch for a close line. Greg gonna catch ups the grows staples there of DWS Group joining us now to discuss Sema Sha, chief vlobal market strategist of Principal Global Investors. Seema, it's one day. It's one day of a pretty violent move lower on the nav stack and in particular pocket to this market off the

back of what we saw in the FED minutes. Is that one day a flavor of what we can expect in two. I think it gives us an insight into the kind of volatility that we should anticipate going into two. You know, we have, of course, we have inflation still very much elevated, so that's putting through some of the concerns that we had in one right into two. And then on top of that, of course we have all of the FED moves. You're getting tapering, you're getting rate

high because potentially balancily runoff all in one year. So of course this is going to be a volatile year, and I think investors have to be really prepared for the kind of movies that we have to we might be soon, Sema, within your very thought, all note, there's not the idea of a surprise of two thousand and twenty two, which would be a more resilient higher inflation. Are we changing our probabilities right now? And do we need to game in with a nominal rate move a

more resilient higher inflation. Yeah. It's interesting with the inflation story. You know, we do see inflation coming down from the levels that we've become accustomed to in the last two or three months. But at the same time, although it's coming down, we're still likely to see inflation settling at a level which is higher than what we've seen over the last ten years. Right. So this is a kind of the above the two percent target, and it's something

that the Fed inevitably has got to respond to. Um. And when we think about inflation, I think from an investment perspective, the key story here is, as you were saying before, it's about real rates. You know, what has happened to that. One of the debates that we have on our team time and time again is will we ever, you know, will the Fed really permit real yields to get back into positive territory and how the markets respond

We go through this time and time again. Um. And you know, of course recently with this jump up in real yields, is it's a question which is maybe getting a little bit closer. Okay, but let's take it to principal global in your institutional client, Tell if we get some form of final movement and real yields even to a lesser negative for even excuse me, the plague a positive statistic sema. If we get that move what does it mean for earnings in the animal spirits or corporations?

Don't they do pretty well in a higher nominal yield environment? You know this, It's such I'm glad you said this point, because look, when we think about ectily is are going to think about rates, but we're also going to think about earnings. And the outlook that we have for two is still a very solid recovery. It's still a very

strong economic environment. We can look at the labor market performance, we look at the demand, the continuous demold, and actually we do see supply constraints easing through the years of manufacturing should hopefully get a bit of a boost come into the second half of the year. So with all of that in mind, actually earnings growth stays positive. It's not as strong as one certainly, but it's still quite positive.

And against that backdrop, you may not see exuties doing extremely well, but we do continue to see positive returns based of that still solid and its recovery CMA. This is the reason why so many people are hiding out in the reflationary stocks, in particular the banks and other

some consumer discressionaries as well. When do you lean against the mood right now and catch the falling knife that is big tech, especially after hedge funds just had the most violent pout of selling for the past four sessions going back more than ten years in Golbyn Sack's data. Yeah, you know, so we have continued to hold um some of our overweight positions to big tech. We have been really in favor of making cut tech for a while.

We continue to hold onto that even us conditions for tech become more challenging and we have to we have to recognize the look bond deals are biased higher. We don't think they're going to move significantly higher. And this is key because we do see inflation coming down through this year to a two and a half or several level. We're definitely not see it. They're kind of five continuing throughout this year. Um, So we we have that forecast. Now as we're thinking through big tech, we have to

at the cyclical environment as well. You know that the work from home that kind of thing it's gone. So actually the cyclical environment is not in favor of big tech. But from an investment perspective, we also have to think about the long term and you want to be looking at companies which have got those big balan sheets and

can continue to deliver earnings. So we actually still think it makes sense to have an allocation to big tech somethin not as big as we've had in recent years, but we still think it's an air of defense within the portfolio, which makes sense in a year which continues to be challenging. But at the same time, look mega cap, whether it's growth, whether it's value. I think that's what's key um and with rising heels and maybe that actually mega very large banks is probably the area that we

could see some rotation towards this. Yeah, seem can we finish on a tricky one? What would you buy and hold through the rest of this year? The FOOTS one D or the SMP five hundred Sea of principal Global Investors? Thank you. Tom Pauselli joins us now the chief US

economist at RBC Capital Markets. Tom, I just want you to spend a moment to describe how strange this moment is for this Federal Reserve a conversation about accelerating balance sheet reduction just as they're still building up the balance sheet and buying bonds through March. Tom makes sense of it all for us. Yeah, well, first of all, good morning, good to see you all. Um. You know, look, I

would say that it is it strange. I mean, you know, I think I think we all need to keep in mind something we have a sample of one, right, I mean, we write, you know, the words, they did this one other time. It's not like we have a rich history of Hey, this is how it's happened in the past. I mean, they didn't one other time. And that one other time I think was wildly different in terms of the economic backdrop than than what we're enduring right now.

And I think that's the that's the difference. So it may seem like stark contrast um their approach, but so is the economic backdrop. So I I don't I don't

know that we should be so over overly surprised by this. Well, we should be looking at the data, that's what they say, although it's unclear what data they have been looking at for the past six months that suddenly liked their pivot recently, and as we march toward that job's figure tomorrow, I mean, as we marched toward the jobs figure tomorrow, I do wonder if there is a threshold at which, if the participation rate does not increase, or the job's number is

a very big one, if that could actually force the Fed's hand earlier, or if it's not necessarily going to be that impactful. Yeah, I mean, look, I yeah, it's a it's a great question, and Lissa, I think, um, you know, the way you framed it, I think is perfect. Um, the way you set up this question is perfect. Look, you know the I think we all sort of appreciator, hopefully we will appreciate that the pair will report has been plagued by a seasonal adjustment issues or sampling issues,

whatever the issue might be. I think we all recognize that there's some, um uh, you know, a bit of an additional quirkiness to what was already a pretty quirky report. What we do know is that a DP just printed eight hundred thousand jobs, right, Um, you know, the an assortment of different labor market metrics, including the claims data that just came out, continue to drive home. But the

labor market is tight. I mean there's you know, there's really no way to get the sort of the meaningfully higher wage profile that we have in place than to have a really tight labor market. So with older respected tomorrow's report, I don't know that it really makes a difference in the world. UM. I think what we know is that the preponderance of data UM from the labor

market perspective really drives home. Tight labor markets are here, wage pressures will continue, UM, And I think that's the thing that will keep the Fed engaged in part what you just said is important. Do you think that markets are under appreciating how much wages you think will rise later this year? Yeah? Look, you know one of the things that that that we've said, and we just wrote this in our Year Ahead, is you know what what some of the pressure that we're seeing from a wage

perspective will actually ease. Now, I want to be clear on what that means, right, and a nuanced idea we're running right now. If you just there's countless measures of wages. One of them is averagarily learnings. I happen to hate that measure, but everyone seems to know it. So let's talk about that that right now is running around a six percent page. What we think happens as the year progresses, as you know, as sort of you know, look, it's

gonna be a slower growth year. UM. It's still gonna be a really good year, but it's gonna be slower growth verst last year. UM. And so what we expect is going to happen is that some of the heat will come out of um a job opening space, which will take something heat out of wages. Wages will still remain elevated, and I want to be very very clear on that. But they're not gonna be running at a six percent page. We think that they'll probably be running

closer to a four or five percent page. Again, I think that that's a very important nuanced idea that needs to be sort of understood. You're still looking at a really good labor backdrop, labor that's gonna tighten over the coming um a year relative to where we are now. But think about this pair overport right, This is again another great example we have been printing one on Assuming you know, the number comes in close to what we're

predicting for tomorrow. We averaged what five and fifty thousand jobs per month in one, which is a staggering number. Obviously, given you know what has happened, it's not that surprising. But as we look at twenty two, you're not gonna average fifty jobs. You're probably gonna average half of that um per month over the over the years. So I think that's again another important way of thinking about where

we are from the labor market perspective time. Your initial acclaim was on analysis of the wage growth in the many wage growth of America. What's the character of our wage growth this time around when you look at labor ability to negotiate a higher wage, the almost social aspects, so that what's the character of our two thousand twenty

five wage growth? Yeah, so you know, one of the things that you know, as as I look at two is a little too far far from me in the forecast, but but in the current, in the in the sort of the current context and over the course of the year, and I think you've been into next year. I think

it's very fair. You know. One of the things that's been very interesting is if you look at the sort of the wage pressures that are in different segments of the labor backdrop, and there's again, countless ways of capturing the essence of that. I think one way of looking at that is to look at job leavers first, job stairs UM, and I think this sort of doves tails dovetails with the conversation you all were having a little earlier.

You know, it's been it's interesting to see, right, it's you know, do people have um the ability to sort of demand more from a wage perspective. I mean, on the face of it, they do, because if you look at what job leavers, people that leave a job to take another job, if you look at their their wage rate UM in percentage terms relative to job stayers. So people who stay um, the levers are are their wage rate is running a full percentage point more. UM. So

I do. I do think that there's real scope for wage pressures to remain fairly elevated. In the context of again everything that we're talking about, you do, you are going to have a tight little type. It's not like we're waiting for tight labor market. It's it's already here. And I would argue it's been here. There's something we've been talking about for for for quite a number of

months now. I mean, we we've put out quite a number of metrics that show some internal metrics that really show that labor market is tight, and we expect that that will remain that way over the balance of the year. So I think there's real scope for wage pressures to remain incredibly bulliant, even if some of the heat comes off a bit relative to where we are now. Tell me you produce some of our favorite research on the

economy here in America. Thank you, SURF a band with US tempo selling of MBC capital markets coming into that Prince Tomorrow. We've been trying to find excellence in medical voices and we do that now with Christian Brier. He's with Johns Hopkins University, truly expert on Thailand and expert on the epidemiology of frontier economies. Dr Bryer, honor that

you could attend with us today. There is a point, Dr Brier, where there is a divide, and I would say the divide was a textbook Morrison and Boyd in organic chemistry, and there was a modest book in biochemistry called Lenninger's bio chim. Rachel will Lynsky picked up Lenninger's bio chim at Washington University long ago and is at a sterling career in vaccination. Let me cut to the chase. Is the head of the CDC. Is her job in

jeopardy this morning because of the communication that we've seen. Well, I can't really comment on her job in jeopardy with the administration. I do think that they really need to do more coordination and across the government, across the administration, and the CDC leader has important roles to play in that, but isn't and shouldn't be the chief voice of the policy decision. She needs really to be the scientific surveillance,

data driven voice. Uh and uh. And I think that that as we all know, we've been living through an enormous surge with a very infectious virus. The guidance has changed, it needs to change. But the communications from the administration as a whole in challenging this is critical because the United Kingdom has provided leadership by Jettison as a general statement, PCR, are you suggesting in the coming hours or may I say days, that well, you'll see the US follow suit

in Jettison PCR certitude. Well, uh that I I don't know for sure that that is going to happen. I think that there is some evidence that's emerging about some of the tests not picking up O macron, And we have to remember that the way that O macron was first really detected in South Africa was because of its variants on PCR testing there. It's just such a very

variant virus um. The early studies that are suggesting the rapid tests may not pick it up as efficiently are not yet peer reviewed and they're relatively small, but that's something we're really paying close attention to because of course, people are relying on rapid testing at home to make all kinds of decisions. Dr Byro, how close are we from your estimations of getting more rapid tests and making them available since this does seem to be the key aspect kind of uh locking the hands of the CDC

to recommend that everybody get these before they emerge from isolation. Yeah. Yeah, we were concerned a couple of weeks ago that the increase in testing and the availability and the administration's planned to make them free and more widely available was not going to happen in time to deal with the holiday is and the post holiday curves that we're seeing. And

unfortunately that's exactly what's happened. So, uh, the estimate is roughly that by the third or fourth week of January we should be coming out of this testing shortage, but that again is not going to be in time to deal with the post holiday waves of infection that we're seeing.

So we're going to have about two weeks where people are still going to be frustrated, we won't have enough tests, are going to be critical if you give me, if you jumping in, So because we have a couple of minutes left, you've touched on I think the heart of the problem for a lot of people when they listen to the CDC, am I listening to the science? Or am I listening to some version, some convoluted version of

behavioral psychology. At the very start of this pandemic, we were told the mass weren't that useful because we didn't have that many masks, And now we're being told we don't need to test out of isolation and learn. Behold, we don't have many tests. And I'm trying to work out whether the policy is shaped by scarce resources or science. Which one is it? Doctor? Is this policy dictated by scarce resources or science? Well, I'm afraid you're quite right,

that it's a mixed picture. Um, and that that I think is part of the challenge with the communications. You want it to be driven by science, but they're also has been as kind of try to balance. The administration has been trying to balance what the American people will tolerate. Uh. And Uh. You know a great example of this is that Tom alluded earlier to our lower testing rates than other countries. That is really true. We're still only at

about sixty two sixty fully vaccinated. So what do we do about mandating which many people would say the science supports, but the politics of mandating vaccines in this country are very challenging. Uh. And so that balance is what you

expect an administration of government to do. But what we want to see from the c d C, of course, is not that they are taking those political calculations, but rather that they are really looking at what what is the best evidence, and tracking that evidence as it changes and communicating that indeed, Uh, there are going to be changes. Like we've seen with amaricron. It is way more infectious, probably twice as infectious as delta, but it does appear

to be producing less serious disease. The hospitals are jammed. We are back on emergency standing here in Maryland and in Baltimore, but the I c u s are not as crowded and the people in intensive care are unvaccinated. That hasn't changed. That's still the science. Doctor. Thank you said you'll feel one. This is always vie until we appreciate your time and of course the hot work that you do every single day, Doctor Chris byre that of

John's helpkins Leland Miller. I've got fancy questions on the electrical rate of China, of country of cities, and this and that. Forget about it. All we care about is in counting twenty nine days. There's an Olympics in Beijing. As you look at the Beijing Olympics, what's the key thing you are launching for politically for the Chinese elite, Well, it always comes down to whether she is embarrassed or not. And no one wants to embarrass sheet because it's bad

for their health. So they are going to be uh putting in restrictions that don't you know, on a level no one's ever seen before. They don't want any bad news. They're expecting some outbreaks. But I guess that means grabbing someone and throwing them in a room and for the next fourteen days afterwards. You know, they don't want bad news.

The news coming out of the Olympics has to be the Chinese Communist Party ran a tight ship and there were no disasters and and so that's that's what they're expecting, and that's what they better see. What does the backdrop of the Beijing economy, and for that matter, the larger Beijing economy is we have these Olympics is a thumb

up or thumbdown on the animal spirit of the region. Well, it's interesting you term your question that way, because you know, the Beijing economy is looking a little bit different than the Chinese economy really large right now. You know, usually you see when we look at this from a regional perspective, you see the coasts having one type of performance and the peripheries having another type of performance. It's very rare that we see coastal provinces diverge dramatically. But but that's

what we're seeing right now. You know, the closer you are to Beijing, the closer you are to you should pin, the worse the performances. The more the COVID crackdowns are and it's it's it's really really tight. You know, Guangdong doing much better, Beijing not doing well at all. So I think this is in preparation for the fact that

everybody is so nervous about the Olympics. Well, and when you talk about the COVID zero policy, how does China ever realistically open its borders if they maintain it, And

what's going to press its hand to finally give up? Well, Look, I think either you know, COVID gets brought under control on a global, global basis, and the pill works the you know, some vaccine just cures COVID for the most part, it turns into a seasonal flu or you know, the government gets past the Olympics, gets past the party Congress at the end of the year, when when she will get you know, re coordinated for yet another term or or or life term. Uh, and then they have less

to worry about. So maybe they open up a bit because they value the economic issues more than they do the you know, the COVID, the COVID one policy, zero COVID policy. So a lot of things can happen, but it's gonna be very difficult to change course in the coming months. Considering how important the end of the year is. One of the reasons why I always love speaking with you, Leland is you have the on the ground facts about the different economic policies that we hear from Chinese officials.

We've heard that they are talking about easing policy. We've heard that they want to expand lending a little bit to support the development the housing development UH sector. As we see all of the turmoil there, you're saying, it's not actually happening. Can you give us a sense of what is happening in terms of tightness of their policy. Everyone's getting ahead of themselves because you know, one was an extremely tight year. Two is a politically sensitive year.

You have the Olympics, you have particularly the Party Congress, so everyone sort of knows the policy isn't gonna get eased one way or another, maybe modeling or not. And they're getting ahead of themselves. They want to be the first one to announce, whether it's a media publication or a self side pamphlet on Wall Street saying, look, easing is happening. Look at easy. It's not happening yet, Now

do we expect it? Sure, they're gonna have to boost sentiment sometime in two if they don't like the data, things are gonna have to get better. But right now we're looking at borrowing numbers which are similar to the lows of We're seeing pent up demand numbers which are similar to the lows of one, which are the lowest levels we've ever seen in the history of the China based book survey. So the idea property too. We saw a little bit of easy in November and they reversed

in December. So this idea that people can say, look, there's easy going on because we expect easy, it's not happening yet. Leela Miller, I want to go back to your work at Oxford, were the wonderful Steve Saying is truly expert in the culture of the fabric of Hong Kong. If you were to advise our listeners and viewers who are Western banks, what would you say them about where Hong Kong will be in five years and how they

need to adapt. Well, all the problems with Hong Kong, basically that it's being taken over by mainland China and becoming just to their Chinese colony, have been exacerbated by COVID with with these quarantines and so you know, you can't talk to someone who's going unless you're Jamie Diamond. You can't talk to anyone who goes in and out of Hong Kong and isn't being driven crazy with these quarantine rules. Uh, it's it's not a way to do business.

So the the island has a has a historically important position geographically, it's important. But there's no way that Hong Kong is gonna be disimportant in five years. It's it's it's it's declining every year. You know. It's it's it's becoming two Chinese. It's becoming too closed, it's too hard to travel to. Uh. It's it's a sad said story. L La Milla. Thank you, sir as always just fantastic in science of what's happening in the world. Second launched

Economy the China Basebook, Lie La Milla. This is the Bloomberg Surveying on podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast, on Apple Podcast, SoundCloud, Bloomberg dot com, and of course on the Terminal. I'm Tom Keene, and this is Bloomberg.