Surveillance: Bad Timing For Confidence Vote, Huddleston Says

starts in the House of Commons. It's going to be interesting to see kind of the body language that is being produced by Theresa May. Does she look relaxed? Does she look comfortable with what's going on? She has just got to her feet in the House of Commons. She does look actually reasonably relaxed. Um. It is worth pointing out that there is a theory floating around John that she has instigated this leadership challenge, that she has had some of her sort of colleagues close to her to

send letters in to make this happen. Because remember that if she wins said leadership challenge, she cannot be challenged for another year. So it's unclear at this point in time how we got to this point, but this afternoon we will start that process. We think it's going to be a vote that takes place sometime between six and eight pm, so starting roughly at one pm Eastern time, we are going to start to see that process unfolding. If she were to win, she would be secure for

another year. If she were to lose, well, that certainly opens Pandora's box, and Nmuror is talking about a circuit three pc drop in Sterling Guy. The easy part is triggering the vote. The tough part is getting the one votes needed to get the prime minister out. How likely is that um At the moment it seems as if most people are judging by the sort of the mathematics that Bloomberg is doing, she's certainly up too close to a hundred certains at this point in time to back.

So I think the challenge is an uphill one for those that would like to ouse Thereason May at this

point in time. And the e RG, the European Research Group, which is basically a collection of brexiteers, hadn't till last night struggled to get the necessary votes together or the letters sent in to Grand Brady of the nine two Committee of backbench MPs to make this happen, and that maybe speaks to the idea that they if they have struggled to get to the necessary forty eight letters, they would certainly struggle to get to the necessary number of MP votes to ouse the Prime Minister John a guy.

We've learned throughout this whole process not to rule anything out, but let's go with the base case that the Prime Minister survives the vote. Does it change an I think I there is a certainly an argument that says that this, from a political point of view, is a red herring.

A more significant development would be a vote of confidence, a parliamentary vote of confidence that would be generated by the man that is now on his feet in the House of Commons, Jeremy Corbyn, the leader of the Labor Party. And then that is something that I think the markets would react much more violently too. It is interesting today that we don't have a very violent reaction in assets. Sterling, for instance, is having what's known as an inside day.

It is trading within yesterday's price action range. The markets are not really reacting to today's news. I think if you were to see a parliamentary vote of no confidence which could trigger a general election, that would be a much more significant development. John Well the Prime Minister facing down questions in the House of Commons today. In fact, right now the Prime Minister ruling out a general election

also rulling out a second referendum as well. Guy, I have no We've got to run over to to Westminster, so we're gonna let you run. Thank you very much for dropping by the studio for us. I want to bring in Eric Nielsen now in any Credit Group chief economists who also joins us from our European headquarters in the city of London. Eric, good morning, to use a big, big list of issues in Europe for the Europeans. Where

does Brexit rank? No, good morning, Yeah, I was just I was just back from Berlin and uh and you would be surprised how slightly amused, confused and and and not top of the list issues that Brexit is in Berlin, Rome and Paris. Isn't that part of the problem for the Prime minister, especially now where the French have increasingly bigger domestic problems the Italians have had them for a while in Germany relative to the stability we've seen for a long time. Eric Germany has its own issues. Well,

I mean they would take that first. I actually think Germany in many ways looked like the most stable democracy about of any major countries. And we've just had a leadership change in the biggest party and the first contested one for about fifty years, and afterwards the three consistents congratulated to each other and and we're friends and moved off if to they sent you to be friends in politics, right,

so so so that's actually quite stable, I think. I think what your point is right in the sense that it's a problem for Britain. But the but the problem for Britain is that the euro EU twenty seven have been amazingly united, by any stretch of the imagination, through these two years from negotiations. EU twenty seven have been more united than the government or even the government party

inside Westminster. This is quite amazing, right, and that has obviously weakened to rais amazed hand tremendously and it has basically proven the Brexitiers arrogance of well German commagers needed are started out of all this completely nonsense. The Europeans and the Prime Minister, the Prime Minister essentially on a tour of the European capitals before this vote of confidence came up. Are do you see any chance of her

securing any concept since whatsoever from the Europeans, none of substance. Uh. They keep saying, well, we'll we'll help with the interpretation right there. We'll will help with some clarification, so of the political memorandum, not the not the treaty or not the the the agreement, the many other pages. So that will not be reopened. That's completely in conceivable in my opinion. But but they will find they would be happy to find some sort of wording that sort of helps a

little bit here and there maybe. But but to be honest, this is not anything of a nature that trades are making combat and they see, I got something better. It it is it's do you have a base case erk on what happens here? Oh? Yeah, we have to have a base case. And this is unfortunately, it's it's it's a tough one. I so I so I think she will survive. Her hand will be slightly strengthened because, as Guy said, now there can be no no challenge to

her for twelve months. And I think if you. If she wins today or tonight with just a decent majority, which I think is a quite likely outcome, then I think she has a little bit of a of a of a of a base on which to say to her party members, you have to vote for my deal. So I think actually the chance that her deals deal

comes through has increased a little bit. Big meeting on Thursday outside of all of this, and it's the European Central Bank Eric with President drugging, no change the policy expected. But I think that news conference is going to be fascinating. There is so much going on on the continent. What are you looking for? I'm looking for most and foremost

forward guidance on the reinvestment. It is when you think about the world today and there's somewhat weaker growth numbers in Germany and other parts of Europe, it's, by any stress of the imagination, unfortunate time to enjoy by the end of this month, right, So, so the but that's set in stone now, So what does he do to try to persuade us that the monitor policy stance is

not really tightened? Tightening it is in a sense, And I think the answer to that is a pretty fair and forward guidance that they will commit to reinvest the entire principle for at least say two or three years three years what defected, so but at least two years and maybe talk about some liquidity provision that t l

TR row extended before June or something. But but it's it's a tough one for the EASB now because the world is looking pretty nasty right there in the in the process of rolling off or ending the QUEUEI which is a very unfortunate Hey, Eric, great to catch you have with you so much. Govin on every Nelson any credit group chief economists wanting us out of the city of London. Let's look at something stable like the fixed income market. Pretty Emizabeth joins us this morning. Pretty good morning,

Hello morning, thanks for having me. We have a low yield regime. I've been watching two stands spread. I'm distracted here in London and I've been watching two stands spread go nowhere and yet some stability in the ten year two point eight nine percent. Do you have a bet right now on what price and yield will do so in the tenure um. I think we're in a range. We're really I think to eight two three. I mean I was planning the table when we were above three

percent that that was not sustained. I think there's enough growth headwinds with real rates rising and no evidence that structural growth in the US was higher. I wanted to fade the rising rates, and I would still fade the rising rates, but you know, we have repriced to FED significantly, so at this point to say rates are going lower, I think we need evidence that the U s economy is actually slowing, and we need evidence that the FED is going to continue to march on with gradual hikes

irrespectable of the tightening and financial conditions. Both of those, I would say, the US economy seems okay. All the US data may really have inflation today, but the data suggests the economy is still growing above potential. And I have to say the FED is sounding, um, you know, somewhat more cautious and talking about uncertainty, so I think the risk of policy mistake is somewhat lower. So I

think we stay stable. I mean, the Brexit thing is really being viewed as something that should affect guilts rather than treasuries. Um. But I think the FED next week ECB tomorrow, there's a there's a couple of events in the near term that could move it, but I think we stay somewhat range. Were dashes through December, but previous it's the last time we spoke to you. We've seen major change is not only in FED view, but in

the makeup of the yield market. Frankly the vaultil of the stock market, and you have the vix only two nine and within all of that you have to reframe a two thousand nineteen view. Let me cut to the chase. Do you just clip a coup pond in the bond market for next year or do you have to be defensive and those short duration or can you be opportunistic here? So I think yes, I think it's an opportunistic environment.

You have to be nimble. Um. I think you can certainly stay in the front end, but you know when when duration, when Daniel gets to three percent or higher, I think it it makes sense to extend some of that duration. But again just trade in a very opportunistic fashion because I think the market is dealing with higher

risk premiums in every asset class. Just because now the fair is at neutral, are very close to neutral, the risk of a policy mistake increases in real rates arising, So I think every asset last you have to be opportunistic. Not just in fixed income, I would say in credit, in equity, just because the time left pretty away in on the leverage loan idea, this is front and center for so many listeners. Is the extended part of your world, right.

I think there's a credit component, which you know, default rates are still very low, so our credit strategies still believe that as long as the economy is going above potential, the credit component is is fairly priced. It's the floating rate component. I think a lot of people bought leverage loans because the FED was going to continue to hike and the market wasn't pricing in as much in hikes.

I don't find that as attractive. Now we're at neutral, so we're talking to hike tree hikes at the most, and the market is already pricing into So I think you have to move away a little bit from leverage loans into thinking about duration because the fair is not on a preset path here, Thank you so much, Pretty miserable. It's too short today with two these securities. So we're

bringing out of Housan, bring him in from Vietnam. I'm told Patterson Institute for International you can this president formally of the Bank of England, and I'm always great to catch up with you. What do you reckon the conversations like on the MPC on Threatenato Street at the moment. Oh jeez, that's a really good question. I think that the MPC is trying to just watching the cable very very closely and they are trying to figure out how much the sticks versus being some intra day blip. And

what do you think it is, Adam. I think it's an intraday blip. Um the it's hard to disentangle. I mean, part of the reason Sterling and strengthened is because people are watching Corbin hunt his opportunity and there's so much anti Corbin sentments some huch for good reason that the part of the relief in Sterling is about Corbin and labor, not so much about Brexit and imposing I want you

to take a victory lap. You have been one very cautious about four or five six A twelve rate increases and you know, I look in two thousand eighteen hindsight, you look like a genius. Cut to the chase, the view forward for Chairman Paul the chase of my no

longer looking like the genius. It's it's going to be the market I think now priced it about right the head where somewhere north of one move in largest threas in the colleague Jason Firm and artickuting in the Wall Street Journal about two weeks ago that if it's a weird thing about his speech, Tom was the framed in terms of our star, in terms of the interest rate neutral interest rate, instead of in terms of the data. The data flow could have easily justified the pause. Not

so much. Well, I guess we're data, you know, and you call it that our start stuff as well. Let's go to John Ferrell. Can I go wonky with Dr Posen? John Williams Adam pose it and one of his ideas of what to do given low rates and permanently entrenched low terminal values is to target to nominal g d P. We target to inflation adjusted GDP for a host opposing like reasons, do we need to go back to the fifties and the sixties and target denominal growth plus an

inflation dynamic? Well, I think it's the right idea in the sense um that it's it's trying to take an account both pieces of the dual mandate, and it's trying to take into account that if you're undershooting on inflation, you've got to try to make that up. So in

those senses, I'm very sympathetic. The problem is, it's not clear to me either A that you have any easier time getting the desired result by simply saying you're targeting nominal GDP and B. If you end up with a nominal GDP target and say you get four percent inflation and one percent growth, that's supposed to be just as happy for you as four percent growth and one percent inflation. And I'm not sure that's politically sustainable. What is politically sustainable?

We've got to fed with a president critical of their approach. The the saw call them hawks, say we've got to get some lifted rates to develop an uh, not a substantial, a measured real yield. An actual inflation is just a yield to provide normal incentives within the business system. I mean,

where do you fall in that great conundrum? I fall in the great conundrum in the Unfortunately, the stop clocks of this President Trump happens to be right at the moment, which is there's good reason to wait and see before raising rates further. And they think, to the credit of the FOC so far they're not preventing themselves and doing what they think is right. I fear of looking like they're accommodating the president. John, is that a break exclusive

of surveillance break exclusive? I think I think we need to put that out. I do wonder whether it makes it a little bit more difficult just in terms of the optics to back away from the hikes you've planned when the president is putting so much pressure on you. No, John, absolutely, I think that's that's a concern um. And this has

always been the problem. Right when you're in a central bank, you you sometimes get caught up in the sort of how people perceive, what your perception is, what you're doing. It becomes this big circle. I think, unlike the Supreme Court, that the FOMC seems to be elite at the moment, just calling the balls and strikes as they come in.

Now you can critique that about they're not giving you enough forward looking guidance, but I actually was very sympathetic to Chair pals Uh decks a whole speech in which you back off that, Dr pos and you are one of our arch experts, not only German economics, but how it folds into the post World War two German experience. There was that image yesterday, or maybe it was the

day before. I'm losing track, folks. A prime minister may inner desperation with a chancellor miracle who is simply moving on. Do you look at this is a smooth transition for Germany to a new set of government or is it a true generational change? Wow, it's a really good question. Tom. To me, it is a true generational change in that

I don't know enough about a PK. Her her likely successor um, but it is a generational change in that you're going to have a group of people who neither grew up under the Soviets nor grew up in the post war glow of American occupation and beneficence. And so this is a Germany that is a generation that is totally either in Europe or in its own and that's going to be very difficult to manage. I think it is this real shift. I mean, it really hearkens back

to almost a seventeenth century Germany. I mean, as Dr Kissinger talks about it Westphalian Germany. It really hearkens back to that, doesn't it. Well. I mean, part of the point of Mr Kissinger's discussion of Westphalia is the idea

that you don't interfere past other people's borders. You you try to keep the borders strict, and you know that's going to be Essentially the question for Germany going forward is are they willing to allow enough interference internally so that they can exert a real EU influence because at some point that the bill does come due for Germany being hypocritical on the banking system and hypocritical and fiscal policies, I mean, the EU either there is this toll that

I know you and John and others have talked about that we're seeing with Macrome now that because Germany didn't mertle, didn't come through in the last year with Eurozone reforms, other people are distrusted now in the way they haven't for a while. And I'm posting great a cat sholing you as a wise Peterson Institute for International Economous President.

Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast plat Warm you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio