Surveillance: BOE's Recession Warning (Podcast)

The chief investment strategist and head a global multi asset at Hero Price said, this is a tough moment for central banks and some people might say they've got themselves into this mess to some extent. For the UK, they face upside risk to inflation, potentially in downside risk to growth. You'll view on what policy is going to look like in that world and ultimately what it means for risk assets. Now,

the discussion on the UK is interesting. I like to look at a I call it the Bloomberg Surveillance measure, the five year five year forward. The five year five year forward inflation in the UK is at around four point seven percent. That's high, and compare that to the US, where the five year five year forward is at three point two percent. The signal I'm getting from this is that growth is even more fragile in the UK, and the view is that the BOE won't be able to

be as aggressive at the FED. And that also feeds into the weakness in the pound that you were just talking about. Well, the weakness and the pound actually help the economy or hurt the economy. Look, it can help in terms of exports for sure, but generally speaking it also feeds into inflation, which then forces the hand of the b o E as well, and then it gets complicated. Right. Look, I think if you step back, you look at the

big picture. Markets got drunk on liquidity post COVID and I know, Jonathan, you were talking about tom being out earlier this week and you mentioned a hangover. I don't know if that if that's the case, but right now we're going through a hangover in world capital markets and it's been remarkable in the sense of both stocks and bonds ring down at the same time. Sterling through Right now, folks, I'm gonna call an important level fifty one point two four five zero on week pound. We'll see if we

get there. Sebastian, with your book you on the high grounded tro price on this, John mentions, what's it mean for risk assets? What's it mean for stocks? Does the market valuation if we get a current set of currency depreciations off of these absolutely historic central bank moments, can the stock market adapt on valuation on multiples to sustain a level market or even a modest single digit bull market. Yeah,

really good question, Tom. Look, we entered the year position for this in our tactical portfolios underweight stocks and within bonds, underweight deray s. And what's interesting is we tend to be contrarians. We look at valuation opportunities, We look twelve months out, so normally we would be leaning in both stocks and bonds. And what's interesting is not what we're doing, is what we're not doing, Tom. We're actually buying back treasuries,

closing our underweights. We're not closing our under weights and stocks. And I said in surveillance back in November inflations the number one risk for markets. I continue to say this. Inflation is the number one risk for markets. And the key question that's debated on your show all the time is will the inflation shock lead to a recession? A

growth shock? Said? Great cans shop with you, sir as always Sebastian Page there at t rod Price with a DP, their chief economists wonderfully attuned to the dynamics of the American economy. Neili Richardson joins us. Right now, I'm looking at course cp I that John just mentioned, and I guess it's a pause that McKee just mentioned. We migrate from six point five to six point one percent on

the survey on core inflation. One percent of our audience and radio and TV thinks people like mckeeth, Ferrell, Keene and the rest are nuts saying that's a good trend. How much does that trend have to move down to where we can begin to relax? Hi, Tom, thanks for starting off with an easy question. I think we're going to stay on the edge of our seats until we see that core inflation moved down below three percent. I think that we can't take it as a foregone conclusion

that it moves down in a straight line either. Um. Many on your show have said that the Fed can only do so much, that this is a supply aside issue as much of it as a demand issue, and so we might see inflation bounds around even in the quarry. Uh And so comfort is I think of below three percent nearly. Do you think that people interpreted yesterday's press conference correctly? No, I don't. Um. I think that it was way too easy for the Fed, and I know that's part of their job. Their job is to make

it look easy. But it's not about what the market to do the day after the press conference is what the inflation does months from now, And we haven't seen it yet. And the numbers that might just read are are concerning productivity went down, wages went up, uh, And so that's not the place where the Fed wants to be. They want if wages are going up, it's because the economy is getting more productive, not because we have this super tight, unhealthy supply shortage. And I think that is

the concerned. Wages may not boost inflation, but wage growth keep it around a lot longer than anyone's expecting right now. Another thing that really a lot of people picked up on the j Pala said yesterday was that he really sees the core rate, uh, the target rate to still be around two to three percent in terms of how

far they will raise rates. Do you think that that's something we can take at face value or do you think that perhaps there is more willingness than perhaps was reflected to go beyond that into a tightening that perhaps was what people were pricing in earlier this week, but not now. Well, I think that that uh four now, in terms of the fundamentals which are strong and where

the Fed is guiding towards, I think that's appropriate. I'm always struck by this comparison with going from six to eleven versus where we are not now going from rock bottom zero to three. We're still in the school zone in terms of rate heights. We are not on the open highway. So I think what the Fed is is trying to say is that they can maneuver of soft landing. Given that we're starting from such a very low point

on the federal funds rate. You're on an Indiana universe, which I believe is a stomping ground of when James Bullard John Farrell says what your bullet will speak tomorrow and Indiana, folks is a really acclaimed interesting mathematics and economics, uh combine Nila. There's a different view out in Indiana. It's an optimism that America can heal and move on away from the elites on the East coast. Is that still in place. Can we technologically move on and move

forward like that Indiana optimism. I'll have to know Tom that Governor Waller is also and I U affiliate we have a good representation on the in the federal reserve system right now. Um. You know, I think that the optimism around innovation and product productivity is warranted. Um. That's what makes the wage gains good for the economy, That's what leads to profitability. Um. And we've seen a a big uptick and an innovation just to get through the pandemic.

A lot of things that were expected well into the future in terms of e commerce and I can a I automation have been pulled forward. So the question is can the economy build on that momentum on those games to keep that productivity moving forward? John, I love this that we have NILAN and I'm sorry, John, there's just not enough Midwest, you know, freshwater representation in the economic discussion. You get guys like your own Paul, who are a beast of finance on the East Coast. NATA, we have

to run, thank you. Then we did cost a little bit lighter. NATA richardson the of I d P. Thank you very much. We'll drive forward this story through the day on radio and television with Mark Chandler. His book Political Economy of Tomorrow looked at the astrology of the foreign exchange system. He's chief market strategist at Bannockburn. Mark, you're a great student of this. I want to go back too, I believe John Major and essentially the modern

collapse of the British financial system. Yes, there was a few other moments along the way, including Mervin King comparing contrast what is coming for Governor Bailey and what John Major dealt with in was sterling collapse. Yeah, so I remember the UK was part of the exchange rate mechanism that limited how much the Sterling could move. It had trouble keeping into that, maintaining that band. And now the UK had gotten its freedom not limited by that band,

and Sterling had collapsed. You know, yesterday Chairman Poulos talk that sort of like channeled Paul Looker. But I think it's really Bailey He's doing it. Despite what LEAs was saying, the UK spot the Bank of England's forecasting contraction in g DT next year and still gonna be stagnant in the hiking grates. And not only hiking rates, but they also announced that starting September they will begin starting off it's corporate bond foldings. Mark, What will be the lessons

here and this? I think folks of the Great Yan's Nordwig and Mark Chandler together on this, Mark Chandler, How does the ECB, in a more conservative block at the ECB is represented by the bundes Bank, how do they respond to what is we've seen this morning. I don't think that what happens in the Bank of England makes the ECB change their dynamics whatsoever. I do think the hawks have been pressing for a July rate hikes, but and the market, the swaps market had to priced in

about a twenty five basis point hike in July. But I think that this is this is scary in the sense that we saw that happen today with the staffew orders in Germany. We could then expected industrial output in trance Europe. You're up as a whole. It's not just the UK, but you're up as a whole. Looks to me like it's headed for her session. Is that being priced into the euro right now? Mark? Well, I think partly, but I think they really would trice into the euro

is how aggressive the FED is. I know a lot of people are critical to spend that there behind the curve, but I think that they're playing catchup. And it's not just it's not just that the federals behind the curve. Something wrong with the Federal Reserve. But look what happened Sweden, who said they were gonna have great Greeks. And it's the same thing that we've seen some other central banks,

like the Reserve. Think of Australia. I can wait. Even so I think that all the major central banks are behind the curve, partly because I want to stay in there. This thing that the pandemic and then the Russian invasion of Ukraine, and then the slowdown, the COVID sort of induced slowdown in China. It's just it's just more than anybody has would have expected. A ray of nothing in our experience. Let us prepare for this. A lot of people are talking about the potential for recession in Europe.

The Bank of England seeing a very high likelihood of recession in England and the United Kingdom in the face of these dynamics. In the US, there seems to be a consensus that that is not the near term forecast that there is so much of a momentum here underpinning the strength. Do you think that that's were stated or do you think that people can bet on that leading

to even more dollar strength. Well, I do think they will get some more dollar strength there, and I think that tomorrow we're gonna get the jobs to point the US and I see the falling a little bit, but we're still talking about three hundred tops three hundred eight increasing jobs. It's hard for me to hear your session with that, so I am very expensitive to this. We are going to have a slowed down. I should have just sive the same place later this year and into

next year, not so much an immediately. You know, in the next quarter two we did have that sharp contraction to one GDP, but that was really a statistical flues, right because of trade and inventory. What we what we kind of it's called final sales to domestic purchasers with the actually relatively robust number mark. I want to go back to how we were all weaned on this, because all of us began foreign exchange in banking by watching Julie Andrews and Mary Poppins. I mean let's be honest.

Dick Van Dyke stole the show and Mark Chandler, there's a view of the Bank of England. I mean, Pharrell grew up of this view of the Fidelity and Fiduciary Bank, which was the bank in the movie Mary Poppins. We have moved on from that from Mark, a new central bank that is supposed to have a new social construct. Is that social construct getting in the way of making

tough decisions? I don't know. I mean, he look what they just did, a hight rate six members, I mean they all voted in favor of actually six voted favor of the rate type, three of them one of the fifty basis point rate type. Knowing full well that the cost of living squeeze is going to be crushing the consumer and businesses in the UK. I don't know. I don't see this as as some kind of give back

to the social social consciousness. Where I sort of see that happening is really in Mexico, where yesterday Credit a MLO announced the pact with businesses to limit the price increased of like twenty four common products. Mark, we got to leave it there on short notice. Mark Channeler today with Bannock and I just love, love, love hit the tapestry, Lisa, that Mr Chandler puts to the history and the social

aspects of all this financial blather that we do. I would respectfully suggest folks to get every second of value we can hear that Benjamin Broadbent, Deputy Governor of the Bank of England X Goldman Sachs truly one of the giant lights of uh United Kingdom economics and Governor Bailey they would like to listen to Paul Sanky he is founder and lead analyst at Sanky Research with an absolutely

blistering note for a two hour conversation. Paul, I want to go to the nitty gritty of your expertise, which is you link Henry Hubb and l N G into a net gas explosion in price and profit. Discuss that well supply US production is not U reacting to high prices, so a lot of our normal elasticities are simply not there. And the other key one is that coal prices are

very high and cold inventories are very low. So the US prices you know, as you mentioned, has gone to eight dollars fifty per m and b t U, which is you know fifteen year high, and I've got clients that think it's going to twenty. So the reason obviously is that Europe is cutting off Russian gas and as a result they have to import as much energy as

they can. They were dependent on the spot market, so they don't have long term contracts and as a result, effectively they're having to buy L and G from a buyer, from someone who's already got the contract from Asia and then put in scale folks in net gas, we frame a two three, it's now eight and Mr Sanky just said we should enjoy at twenty. Paul Sankey, let's look at the United Kingdom and the United States galling to gas. And they understand there's taxes, and John rives a little

car over there. I get it, but it's four dollars fifty eight cents up to United Kingdom five dollars seventy nine cents. You say, the profits are out there for big oil like you've never seen in thirty years. It goes back to Urgan in the prize, the whole thing. What's a gal and a gas going to cost in three or five years? Well, I think we're gonna hold a hundred and cents to a hundred and fifty. We've we've wobbled below a hundred and ten, as you know

on Brent. But now we're back in the range that I anticipated after Russia, and the call was that it would be a quagmia in in Ukraine and that would over time. The longer that went on, the more Russian

oil and gaps we would lose. Now we're focused on May the ninth, for you know, the key dates in Russia where they celebrate the victory over the Nazis, and we're wondering what's going to happen, but that could be a key a key catalyst state whether or not Putin declares victory, whether or not he goes to all out you know, bombing. I don't know what he's going to do,

but we're watching that day carefully. But what we do know is that Russian oil and gas is now effectively gone from the market as far as you is concerned. And that's a very very big deal of the markets which were already tight as you know before this all kicked off. Well, all of this goes to how much can people keep betting on oil companies at a time when there's a lot of complaints especially on the regulatory and political side, about how much gas prices are going up,

how much oil prices are going up. Well. At the same time, there is this uncertain backdrop on the macroeconomic picture. Shall just reported a record profit. We've seen this time and time again. How much more upside is there in these companies given the fifty rally you're to date, given the fact that there is all of this regulatory scrutiny, you know, that's the number one concern of the clients,

so that you know. But the by side obviously is my clients, the investors in oils, so worried that the government won't tolerate The US government, for example, won't tolerate ten or twenty dollar Henry Hub gas because of the impact it will have on the US consumers. But you know, the government's very weak and they don't have an energy policy, and they have a couple of key senators, you know Joe Manson obviously, who oppose any kind of interference and markets.

And it's complicated to interfere in the gas market. It's a free market. These guys are selling gas directly by contract through processing hubs like Shanna Um, and you know, to to to shut that down as a government would be would be difficult without legislation, and legislation we think is very difficult. So I think, you know, much like the OPEC meeting that you just asked me about before we came on, they're kind of powerless. You know, there's not much they can do, and we're just at the

mercy of the market. And that's why it's such a crazy environment for the oils because you know, the money they're gonna make is going to be enormous and it will infuriate people. But what are you going to do about. It's been a nuts environment, that's for sure. Paul, Thank you as always, Bloody Paul, thank you that, thank you research.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live we do 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 In. This is Bloomberg