Surveillance: Big Week for Central Banks

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With us around the table, you've got a sneak peak of there. Sandrew Bors, Global Fixed Incomes CIO at PIMCO. Andrew, good morning, good to be here, thanks for ten year. Fantastic to be with you. Four thirty four on a ten year yield this morning. To build on what Lisa said, is this a moment in time, bye bye bye, lock it in before it goes away?

Or can we live with this?

So I think it looks pretty attractive. We're in the middle of our forum discussions which we had in London as well, actually, so we're still talking about this with the investor.

It's a head start, but it looks it looks.

Pretty attractive here if you have a high quality bond fund five six percent yield in US dollars with more credit kind of seven percent maybe seven and a half percent yield, This looks very attractive. Equities have done very well this year. Looking forward, you know, six and a half five and a half percent type yield for a bond fund looks very good to us.

There are two points here. One is does this look attractive now? And the second is where is the next rate? Where does the move come from? Is it higher or is it lower? But two different discussions right how sticky this is going to be?

How big is the.

Argument right now? In some of these meetings at PIMCO.

Well, I think you were talking about real yields and I was nodding. When you look at real yields and look at long term history, it's starting to look attractive. Here. We had this period after two thousand and eight quantity of easing and at all of that and depressed real yields. But you're now seeing real yields its attractive levels and nominal yields I was quoting before, look pretty good to us.

Critical question for PIMCO, and it's not only the heritage of PIMPO from Bill and Muhammad forward. A great call you people made a number of years ago. You've got the advantage of the former Vince chairman, Richard Claired, I believe.

Darkens the door.

I can just see balls and clarity in a debate over where we're going to reset on our start, and almost on a global our start.

Do you sense within all the.

Great work you do, Andrew, that we're going to reset in a new rate regime, something that.

We've never experienced before.

So I think it's an interesting debate. Rich and I tend to agree, and on this point that as you look forward beyond this inflation episode, the cyclical rise in policy rates we've seen, there's good reasons to think that our star neutral rates are at the low levels that we've seen for the last several years. We'll see this in the fed's projections this week, but that the chances are the FED we'll also see two and a half

I'd say, does the guard Heaven our start? Does you wait to have an our star? Dare I say, does Bailey have an our star?

They all have their They all have the variations on this.

I think, you know, the FED maybe is a bit happier to talk about it sometimes. But again, looking at bund yields now, even in Japan, you are getting too levels in terms of you know, the ten year yield where it's starting to look more interesting control for volatility return per unit of volatility, and it becomes a little bit once we get beyond the YCC, once we get

We don't spend nearly enough time talking about this.

How different this regime is to the regime of the last decade before the pandemic.

How different is it for you and the team?

What have you had to change just in terms of approach away from zero rates and QY forever towards potentially the Bank of Japan hike and interest rates the you see be going too levels. I never thought they'd get to I thought maybe they go back to zero, but here we are at four percent.

How different is this view and the team? Well, I think it's very different. And I think as a bond manager you like to see these high yields at the front end of the curve. It becomes really interesting the relative value at the front end of the curve. You know, zero yields, Remember those something that hopefully we've consigned to history. I think one important thing looking forward different to the

What about in credit though, I mean, given the fact that you're looking at greater vulnerability to an oil price shock, or a unionization shock, or a technological shock, some of these things that become that much more important when you're cushion is that much smaller.

So I think, I mean, I think the baseline for credit looks fine. I think credits should do well in an environment where you avoid the tails. Not just about recession but you know, real recession, not just a technical recess. And on the upside case, if inflation is coming back inter line with that fairly benign middle path, then credit should be fine. From our perspective, though we want to

Good to us in terms of the next few years.

Andrew always a privilege, thank you, sir, Andrew Ball, that of Pincott.

What we're gonna do right now, this is really important.

We're trying to piece together with a trip to London the credit conference will be doing on Thursday. We're really trying to piece together twenty twenty four. They're the political conventions in America and that.

But front center for Bramo, John.

And myself is we need tickets to the Paris Olympics. The only reason he's with us now with AXA Investments Paris, Gilmoek is with us here give us an update right now, mister McCraw axe in the Paris boom you're going to see can Paris get any more boomier than it is now? Off the Olympics next summer?

Right, it's looking good.

I guess toysm is helping it lost So yeah, I mean the city's having a good run. Gus is going to continue to tell the Olympics. Now, the country around Paris it can be a bit more complicated. We have good first half of the year. Things are starting to look a bit more complicated. So there's a lot of positivity at the moment in France because if you compare yourself to Germany, things are so much better. Even the

This is really important because I think to our listeners and viewers, particularly in America, when we say we went to France, we went to three R and D small wrapped around Notre Dame and the wonderful repair of that cathedral. We don't have a real picture here of the greater European economy. We just see the boom of European tourism. Separate the European tourism from your caution and the rest of the European economy.

Yeah, I mean the definitely the weakness in the euro is helping from the point of view, so tharism is actually a function of of that weakness, the rebound in the US, I think the appetite for traveling to Europe at the moment, but even in the most tourism sensitive countries in the year Zone, it's what fifteen to twenty percent of GDP at most, and the rest is, you know, the usual stuff that is dependent on either world demand in the generic sense of the meaning, or on constant spending.

It takes us to the ECB.

So let's be slightly provocative in this question three shate two thousand and eight three twenty eleven. Should we add leguard September twenty twenty three to those.

Well, they're trying hard not to fall in that trap, because actually, if you compare this with either weight and with twenty eleven, there was not a great sense of quotient at the time when they actually hike, and there was a sort of self righteousness. So we are definitely

But the entire.

Bloody language from from Crinstila Gal last week was about, yes, they're now selling the long for the high for long sorry, but in terms of further hikes, we've probably done. And I think yes, what happened in a way to what happened in twenty eleven must be on their minds, and even the Hawks are getting a bit less vocal.

I would say I've noticed the same thing.

It begs the question about what we can learn from the European experience on the other side of the Atlantic. Do you think the rounding lessons you see Germany essentially go into recession and inflation is still a problem. Growth in Europe essentially stagnate and inflation is still a problem. It's softer growth the cure for what we're experiencing at the moment.

Well, I know that lots of economists, clearly myself have been wrong on that for the last year. But history would tell you that it's very, very very hard to get this inflation without proper pain in the reread economy, especially when inflation is no longer about exhausgenous forces and

The years and average down.

But you want to heal inflation, especially when it started to get entrenched in wage negotiations, you probably need to engineer some sort of softening of demand. There is not a lot in the textbook that would tell you otherwise.

Ispletely different than the US when it comes to how well it can withstand the oil shock, or just perhaps the oil price is going back to something more normal on an inflation adjusted basis.

Well, our big problem for the last two years has been gas rather than rather than than oil. But on average we tend to be more sensitive to old shocks than the US for complicated reasons, due to the fact that even if we are less oil intensive than the US, the actual price of a gallon of gas in Europe is much higher than in the US, and people are probably more sensitive to that particular item. But it were if it was just about oil prices, I don't think

Of that and gas.

And we went through last winter much more positively than what was expected. We need to do it again this winter, and to some extents being our control.

Which feeds into the whole discussion of wage virals, especially in light of some of the labor movement that we've seen in the US but also around the world. Maybe taking a page from Europe, if anything, how much do you think that that's more noise than signal or vice versa in terms of wages staying sticky and labor power continuing to be stronger than it has been.

I think there's something profound happening there is there has been an outside change in the balance of power between employees and employers.

And it's very trivial to say that.

But in Europe, where we have in most countries a collective wedge bargaining system, what we tend to have is more inertia in the way wages react. In the US, you could make the case that wage accelerate when people actually can leverage the job opportunities and go back to their employer and ask for a pair raise. It's not really the way it works in Europe, and some of it obviously happens, but most of the pay increases here

Okay, eight ways to go here.

But just because the time then, can you stay Europe has vaulted beyond eurosclerosis?

I think clear.

I think in many cases what we have is sort of magnified version of what happens in the US in terms of demographic changes, for instance, we are a sort of more acute version of what.

Is going to happen in the US anyway.

But one point on which I think Europe at the moment is doing better than.

The US, it's on participation.

The big positive.

Right now in Europe is that our participation rate is rising and has been rising through the pandemic, is today much higher than it was before COVID. It's exactly the opposite of what's been happening in the US. Even if there has been a catch up. Recently, we've put more young people, more older people back to work. And basically I think we are benefiting from structural reforms which have been pushed through in Europe for the last twenty thirty years.

Jill, that is a bright spot. Thanks for famous, Jill Maak of ACA Investment Managers the Jeff you joined US now Senior market strategistic bim Y Mallan, Good.

Morning, Jeff.

I appreciate it's going to see it yields at five percent at the front end, pushing cycle highs on a ten year Dare I say it is this the new normal?

Are we getting comfortable with this?

Well, let's go back to Tom's point about real yields. Okay, you can deflate via CPI headline CPI. What if we deflate nominal yields by wage gains or potential wage gains. So then if you take the twenty percent or between twenty and forty percent real wages, sorry, nominal wage gains if realized, then real yields actually are very very negative still,

What is the XA accessign real yield?

So here we are two percent, and I've done some fancy man I get to two point two zero.

Maybe I'm still here at two.

Percent, whatever it is, there's a length of this new real yield where's attention point out in the next.

So basically you have to identify where potential GDP growth is medium to longer term growth in the US. If that's a headline number, nonmal number, you know, three to four percent, then find your inflation target. Then if it's still two percent, right, then real yields you still need to get to two to three.

To go on Nerdy on a Monday, our mind is gr we at a risk here where the interest rate becomes less than the small g is bland charted and stiglets, among others, worry about.

I'm glad you brought up Blanche because I want to bring up another paper between him and chairburn nankey. So when when does this become uprom.

Nerd fast over on the port side of the desk.

Favorite part of the morning.

In terms of wages versus price spiral, and with the ore prices going where they are right now, you get a price spiral according to that paper when labor markets are tight, so here are the unions making the gamble or the determination in manufacturing, labor markets are still very tightline and the US which raises.

A question is this signal or noise? Because this is yes, it is down tight. Though on the margins you're seeing signs that you are getting some sort of labor market softening. Is this the last gas because John was asking of labor market power or is this something else? It does have a stickier nature.

On a broader basis, this does feel like a last as if I do if I look at things globally. But on the other hand, you know, I'm FX guy. At the end of the day, relatives, it's all about the relative differentials. I think US labor market's all tight up compared to what we have.

In Europe right now.

So on that note alone, probably labor has more bargaining power in the US compared.

To in Europe.

Does that mean dollar weakness?

I would say, you know, a short term your dollar strength here, that's still going to be in play because that puts the FED on more vigilant footing, you know, to borrow an ECB phrase.

But you know, Net, I.

Think they're pretty much sure that is in the price right now. So let's see where we're going to.

Be very creche of you, Jeff, Let's talk about POW on Wednesday. On Wednesday, we get a set of projections. Most people assume that for twenty twenty three, when we look at revised growth figures, they're going up. When we look at revised inflation figures, they're going down. What does twenty twenty four look like for you and the team?

I saw twenty twenty four. It's less about are they going to hike further? It's more about how long do US rates and state where they are? And that is you know what the boj will be looking at and what Dara, so you didn't mention central Bank of Brazil, central Bank of Turkey, and the Central Bank of South Africa, the Swiss, they're all deciding and when they look at their nominal effective exchange rates, they'll all be looking at the FED. How long can the Fed projection keep the

Called is that.

Dollar problem bigger in Europe right now?

For you than am?

I think that dollar problem is bigger here because em a crossboard. If you look at a Brazil, for example, much higher at real rates, so they've got the buffer.

Europe does not, Argie even surprised US with a low five year growth view. Suddenly oil ninety four for Jeff, you where is the price of brand? That's a tip point that really accentuates that global slowdown.

Let's look at the individual markets.

For example, China's at a slow down already, no matter what China, unless you're looking at a real reacceleration in China, which is nor the base case to five or six percent.

Then you get into a demand.

Issue top of a supply issue that becomes a problem globally, and then that could be a certain point. But right now, if it's just the US alone and given the US energy to independence, I think it's much more manageable.

I'm glad you mentioned China. The Wall Street Journal had this big expose China might be weaker than you think, and to focus talked about focusing on the housing market. Other people have said, including Lelynn Miller of the China Beige Book, that from a US perspective, this is what people want to see, but it's not actually what's happening on the ground that there's actually a great deal of strength. Having been in China a couple of times recently, what's your view.

So domestically, I thought consumption was firm selves there about three weeks ago. People were spending you know, some of the key torus sites in like in Ciano Terra Cotta Warriors, it was basically in a several rows behind before you could actually obvious soldiers there. But then on the way out look at Beijing Airport, you know, just in a barely any international flights coming out, so that high tiker consumption items.

I think now that's a bit more of a problem at this point.

Going back to the real estate market and the close linkages, and it's the financial system in China. Stabilizing the real estate market means stabilizing the financial system actually the trust and framework shadow banking for example, So you know, that's where I think they are doing the right thing. But ultimately, how much more downsie can you price in relative pricing? I think it's very limited.

Do you partition China and the domestic balance sheet challenges even after Changdu or do you drag that into the more international analysis of Ritmanby and the rest.

Do you partition or not?

So I think at this point China's pretty much SOLF financed. We look at and flow data.

International financing for China's growth is very very limited right now. So it's about domestic financial stability, and then the transmission is if things go all right, can that drag down international growth further?

We've got to squeeze this in Jeff, we're in Europe.

There is an ev battle taking place, and to a greater extent, I think the transition to EVS is at the epicenter the heart of this conversation with u AW and the Detroit three. At the moment, are we heading towards just massive tariffs for auto imports in places like Europe?

If you ask me two weeks ago, I would have said no, But I think something changed the immuna quart ocean.

What do you think changed?

I think for the first time in three or four years, Chinese came back and European manufacturers looked at how farther over behind, not just in terms of cars battery technology, and realize this is much more pressing than we thought. And you saw the reaction.

German manufacturers are scared of what's coming out of China.

Absolutely, and China saw this in advance. That's why they want to build in Hungary near battery factories, and they want to build assembly plants in France as well. But even then, with that kind of cooperative approach, you're seeing the backlash already, and then you're seeing the backlash of the backlash from Beijing. So this is going to get in now.

This is only one industry, yeah, but do you think there's broader things at play here that ultimately influence things like flows that contribute to calls in foreign exchange.

I think medium to longer term, let's look at the chip industry as well, that's going to feature heavily in terms of flows into Asia, into Europe. But the importance to employment, especially in Germany and also that Eastern Europe that feeds into the German supply chain. I think this is and politically speaking that this is absolutely going to be central to Europe.

Jeff, this was fantastic.

Right to kick off the weight with you here in London, Jeff, you there fbny men at.

Right now, we're going to survive American politics.

Gregory Villier briefs this morning, Chief US Policy Strategistic AGF greg and I Wanhington posts they talk about five ideological factions of the Republican Party.

I didn't know that. Do you actually buy the idea.

Given labor unrest in America, given a possible government shutdown, that mister McCarthy's dealing with five ideological factions?

Oh at least, yeah, it's it's it's quite a spectacle. Right now, he's on really thin ice.

Tom.

I don't think he can get a deal before the October one deadline. So we do have a shutdown. I call it shutdown light because it's not going to be the end.

Of the world.

We're not going to kill social Security and Medicare benefits. But if you want to go to a national park, you're out of luck. And I I think the shutdown is going to last for quite a while.

Is there a shutdown in Detroit? What I find stark is the imagery and the great coverage by Bloomberg on this. You know, I see them picketing and there's like seven people out front. It looks like a lineup of Denny's waiting to get in. I mean, is this like a real strike of labor like you and I remember, or is it sort of kind of like pretend?

Yeah, it's not like what we remember that everybody went out and he didn't selectively target factories. But I think there have been some sign of progress. I think Ford has been the most conciliatory, and I think that the elephant in the room obviously is Joe Biden. I think Biden knows that Michigan has sixteen electoral votes, and I think Biden will be influential in the final agreement.

What will that entail?

Do we have a sense of what it will take to get it done, and what that means for the viability of auto manufacturers that have traditionally added to the GDP and really fostered a lot of strength in the Midwest.

Yeah, I think it will have to be close to thirty percent in wages forty percents out of the question, but I think the number will creep up. They may go back to more defined pensions, They may have less than a forty hour work week. It will be generous, and it will add to the perception that wages are sticky for the federal Reserve. I think sticky wages are going to be around for quite a while.

Does this pressure just sort of uniting the two ideas? Does this pressure lawmakers to try to get a budget deal done just to avoid the extra hit on that front, especially at a time where there might be some agreement on things like border control between the Republicans and Democrats.

I tell you, Lisa, these people are on a different planet from you and me. They are fighting these parochial fights knowing they're going to lose. I mean, it's quite clear that this compromise over the weekend would never make it through the Senate. I'm not even sure it would make it through the House. So we're going to go through this exercise, and sadly, I think this drags on right into the holiday season, maybe after the holiday season, before we get a deal.

Greg, you're going to turn the script once again over the weekend, lots of discussion about the president's age. I think all of our listeners and viewers are sort of exhausted by the debate. But I want to know the valier timeline to where I get an LBJ announcement. Like March of nineteen sixty eight, you and I were sitting on the couch watching the Bruins lose when that happened. How do we get Joe Biden out to where LBJ was in March of sixty eight.

I don't think he realizes there's a problem. More and more Democrats I talked to almost all of them, as a matter of fact, say they would like to see Biden step down. Two problems. Number One, he is delusional and he doesn't think there is a problem. Number Two, there is no logical successor. That's the problem for the party.

To the polls screen, Greg, that is a problem absolutely.

I mean about seventy percent of Democrats say they would prefer a different nominee. I mean that I've never seen a gap like that, so you could have more pressure, you know. The other thing guys I should mention is that filing deadlines are fast approaching. By late October early November, it's too late to file, So any talk about some last minute rescue for the party I think is unwarranted.

Greg, before you run, before you go. If you heard about that missing F thirty five, have you read the story on that.

Missing What.

F thirty five fighter jet gone missing?

I'm the Carolinus. Yeah, yeah, Greg, what on.

Earth is going on? How does the military lose in F thirty five?

I know it's quite a story, and yeah, I think it's going to get bigger.

Great valueah of AJF. Thank you sir.

Let us move on and Rita enjoys us to save us here from the ballpark, co founder, head of research and Energy aspects and critically joins us this morning from Canada, which is an oil producer, and Rita within your racket, within your industry, are they looking at this as a surge that can ebb or is there a feeling, you know, within the macro petroleum.

Business that this is a new pricing to stay.

Well, it's still early, it's not even five am here, so I don't know how they're feeling. But if I had to guess Tom, I would say they are all going to be very happy. I mean, of course, there's well Petroleum Congress over here, Ministers from all around the

Right, what is a representation or tone of China? Is the marginal demand elephant in the room at the Congress?

Is China there in a big way?

I think there is going to be presence for sure, and I think again the dichotomy between Chinese macro and Chinese all demand is definitely going to come up, something we've been highlighting for some time now because in the West and Western analysts keep looking at the Chinese micro data and saying, well, ail demand hasn't been performing yet aldemand has actually been hitting record highs because it's become more consumer oriented. Plus, China's got some strategic petroleum reserve

What's the pressure on Prince Abdulaziz today, who's going to be speaking, I believe around ten am Eastern time at the Calgary conference, to really increase production, especially if this is being driven in part by demand, not just their supply cuds.

Well, I think he's been very clear that, look, there still is a lot of uncertainty, be it from the FED itself or even China, all the kind of noise that's coming around, and he has to be one thousand percent confident, I would say, not even one hundred percent that there are not going to be any of these you know, prices with the FED for instance, and it's a bit of a chicken and egg, right if all prices go up, what does the FED do? As you guys have been talking about as well. But I think

It's a really interesting confluence of events at the United Nations. They're holding a conference right now or a lot of the focus is going to be unsustainable energy and moving away from fossil fuels. You have electric vehicles taking over. That is underpinning some of the discussions with the UAW. How much is that underpinning Saudi Arabia's decision to cut production to get more profits now before some of these groups phase out fossil fuels before they've become less of a focus later on.

Or you could argue that goes both ways. Lisa right. I've also heard the argument that that's why other countries want to flood them market and make sure they don't have stranded assets afterwards. I don't think OPEC plus policy works like that. We've written about this as well, that ultimately South the Arabian most OPEC countries are revenue optimizers.

A'mer going to send timeline of an oil vector? I guess in June or July of seventy something up to ninety four fifty one right now? Is that just a continued vector up? Do you see ninety five, ninety six, ninety seven, et cetera, et cetera, et cetera.

Yeah, if you remember, tom our price forecast for Q four was an average of ninety two dollars for Rent. So I think we've we've kind of hit it now. So the question is, but look, an average of ninety two does allow oil prices to go to a hundred? We're going to We're putting out a piece later today which is calling for one hundred dollars by Halloween for Brent.

Yes.

The triple digit by Halloween is amurates? Is that just a marketing mechanism? Just you know, triple digit something about it.

It just rhymes right, hundred by Halloween. That's why I know I'm joking, but it's no.

I think.

Look, fundamentals are very very strong right now, but also positioning, and that's one thing we shouldn't miss. A lot of hedge funds are very under positioned and crude because of the macro concerns. Now we are seeing quite a bit of passive money come back as well, so I think the combination of that could actually lead to a temporary

Weeks, only five dollars away. Right now, I'm ready to thank you. I'm ready to send Avanergy as space.

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