Surveillance: Bonds are Back, says Schneider

the Bloomberg Terminal, and the Bloomberg Business App. Jerome Schneider, I think he inherited Bill Gross's Monroe Trader out at PIMCO, does the short term ballet there with a four point eight seven percent to your yield and joins us this morning. Just an open question on your desk, what is the focal point within the short term space. There's a couple of vocal points clearly the topic and topic to yours, you know, simply that cash it back, bonds are back,

yields are higher. We can find a lot of attraction simply being at the front of yolkurf. That's that's sort of a no known but them. The minutia, which really investors and savers need to think about is the fact that depository rates are low. They need to be incentivized to really look at that move out of one and two percent depository rates out the curve, even into t builds short term strategies to your notes things like that.

The second thing is is that clearly the FED is data dependent, but that's also going to create an involving process. Not necessarily that now that we're approaching the five point four five point five percent terminal rate that people expect, but more importantly that the cutting mechanism is focused less on supporting growth, and that goes for the ECB two as well tom as well, focused on the supporting growth,

but focusing on fighting inflation. We know that, and that's a fundamental change compared to where we've been over the past few decades in terms of that. And the final thing really to think about is don't necessarily be worried about liquidity conditions in the near term. There's plenty of excess reserves around in this system and etc. But the higher nominal rates that we are experiencing within the broader economy are going to have reverberations in corporate credit within

various structures and we're going to see that proliferate. So investors need to be thinking about how to go about maintaining their degrees of freedom, high degrees of liquidity, and more importantly, embracing these higher yields, which simply are going to be a much more acceptable place to be over the next year or so as we sort of continue to romanticize going from, you know, effectively the deflationary utopia that we once were in just a few weeks ago,

to the inflationary dystopia. Maybe that's a strong word that we're possibly embarking on at this point in time. This is a process takes a while. Whenever I speak to you or see you now, I just think, which you run? Must be so so busy. How long does this take for people to shift and get away from their bank accounts, which like off your zero and come to you and give you the money. Well, for the short term desk at PIMCO, it's very quick because we try to optimize

between all these mechanisms. But for the investor, even the most sophisticated institutional investor, they're really not moving as quickly as you would expect. And there's actually pretty big diversions. Sure, a lot of retail investors are now focused on the high amounts of sitting in their accounts. They're well aware of yields where they are today. That's making an attraction to be that bonds are back is a well known thought process over the past few months, but the reality

is is that it's still an evolutionary process. It does take time. The higher yields that we're sitting here talking about today, even a four percent ten year note, is a relatively new phenomenon, especially in history in the post GFC world, So we need to think about the construction of portfolios in a much more widespread, widespread criteria than simply the past six weeks. And that's really what we're

going to do. So this is much more protracted evaluation of how to create a different investment approach over the medium term. One phrase that has cropped up over the last couple of weeks is reinvestment risk, just the idea that if you go short, too short, maybe miss the window to really take these yields and bake them in much longer. How do you advocate for where people should be on the curve in the treasury mark. It's probably a measured response, quite honestly, and you have to think

about it. You can look at it from an economic point of view, where's the neutral rate of where's where a neutral rate's going to be. There's inflationary expectations that come into them into that as well, and so if you think inflation is going to be higher, you have to think where the neutral rate should be, which obviously affects where you think you should be buying duration buying bonds, and that of itself is a point to your point.

More microscopically, it cuts both ways, quite honestly, John, When you think about it, the two year note actually has a negative return so far this year, and if you bought it, you know, at the end of last year or to today, it's actually a negative return. If you think about it, well, it does yield almost five percent at this point in time, so that is attractive. So it also beckons what is your horizon? What is your

investment horizon? What is your purpose as liquidity management? Is that something to plan for the buying a house over the next two or three years. Even though mortgage rates are highed, there's a variety of circumstances. So understanding and matching your investment needs with the investment itself is actually important, and that's probably going to be the main driver of how much are where an interest rate curve you you

end up buying. At this point in time, people are trying to game out ostantially higher rates as we see ongoing surprises with respect to inflation data. How disruptive would it be if rates were to rise substantially more from here? Well, you obviously have a different framework in play, and I think again to reemphasize, the framework is not necessarily supporting growth at this point in time. It's fighting inflation at

this point in time, something very different. So it's going to be a bit of a long and dusty road to that destination. We should expect a little bit more volatility. We've clearly witnessed that over the past few weeks. Ultimately, it's a question whether the FED takes the high road or the low road proverbly and literally with rates and

understand where it's ultimately going to go. So, if you did have a shock to the system of another few hundred basis point of rates, sure, what we would recommend and you would see is that the risk adversion you would have would be focused on the center of those concentric circles of risk that we have at PEMCO, meaning the safest areas, and the outer realms of those concentric circles would move wider in terms of price and spread and yield to compensate for that. And what I suggested

where we are now is a gentle recalibration. What you're suggesting by moving to those higher rates is a more methodical, very drastic rationalization of return expectations, risk assumptions, spread assumptions. So there is there is very much, you know, a recalibration that would go on tightening conditions and you might actually see some breakage at that point in time. But I also think that what you're hearing clearly from the FED is the process which is going to be a

digestive situation where they're going to digest the data. And the market has rationalized over the past few weeks, not necessarily that there's a lot of more rate hikes to come, but there's less cuts to come, and there's a big difference in that. So even at PIMCO, we've shifted our expectations of a recession this year, push possibly pushing that out to twenty twenty four, so modest growth in two twenty three, perhaps pushing that out to twenty twenty four.

That's something that actually creates a longer road for the FED to really rationalized decisions, be more data dependent, fortunately or unfortunately, and maybe doesn't necessarily create that shock to the system that you're suggesting. So I'm you're going to stick with us, But to say up in the next segment, high phlonga, we all get the higher piece of this. You've just touched on the plonger bit of it. Where are you on the forlonga bit of it? How long full? Yeah?

And I think that's really putting it. You're going to have ultimately when you see PCE core specifically coming down, and you might not actually get that data until late this year and early next year. So the longer is an eternity. It's maybe just a pensive thought process which puts us well into twenty twenty four. It is a joy to have Jerome Schneider with us with PIMCO. Undiscovered Jerome. This week was what I'm gonna call the IDEs of October.

I know you run your short term portfolio off lunar astrology, but not the IDEs of March. But the Bloomberg Total Return Index reached a low in October of last year, priced down, yield up very quietly this week we slipped below the December The history here between October and now, is there a possibility we retest priced down yield up that we saw in October? And what will be the consequences to your short term paper now that you divulge

the secret of the short term desk at PIMCO. I'm embarrassed fund, but at the reality is is that there's one thing very different in the calculus today than October yield.

When you think about total return, whether it's a short term bond fund, a total term bond fund, income, it's the composition of capital appreciation plus yield, and that yield and carry component is worth five hundred plus basis points depending on the type of strategy at this point in time, That in of itself can alleviate a lot of the capital appreciation or depreciation. To say so, when I said before, be careful owning the two year note because it's actually

a negative total return this year. Yes, we're looking at a microcosum of a couple of months. In general, if you're holding it to maturity, you will make those yields. But there's different ways to manage your interest rate exposure and interestrate exposures, the sensitivities right where I wanted to go, and I want to play it off Mandalorian because I know at PIMCO, when they make a successful trade, they go,

this is the way. But the answer is you and Chris z are the only two people on the planet that read FIBOZI cover to cover and to keep it real simple, here do I gather a ten year success by taking five two year tranches out? Is that where we are right now in terms of retail clients. Grab the two year and trunch it out five times. I think when investors are looking to do is simply navigate the next one to two years of uncertainty in the macroeconomics.

And typically you're having an inflection point. You owe equities. You own equities because you believe that there is a rate stabilization and inflation understanding that is going to be stable for the next empteen years, and that inevitably owning inequity is effectively owning a long duration bond with some given profitability, earnings and obviously risk free rate assumptions baked in.

What we ultimately want to think about, though, is investors have had a lot of reinvestment to do over the past few years, and then they were faced with uncertainty, wars, pandemics. These are all factors that really change the psychology of investors that we have to think about things that we haven't seen in many years. In fact, many traders today on Wall Street, young people haven't seen many of the phenomenon that we are witnessing today. Even positive rates as

an obvious example, inflationary expectations in the general population. These are things that we haven't seen in forty plus years. So the calculus is ripe for a pause. It means that traditional mechanisms for just simply earning interest put the baton firmly in the hand of savers, and it doesn't necessarily mean you me to make these bold predictions in terms of taking a lot of risk at this point

in time. Having some optionality, just like the FED, is exactly what investors want to do at this point in time. When you talk about optionality. People have gotten a little bit hysterical this week, and I admit that I understand why this feeling that maybe we have totally underestimated inflation and how sticky it is globally. What central banks have to do, what a terminal rate actually looks like there

has been a reset this week. What gives you the Pimco confidence that we're not at that point that the market's gotten ahead of itself right now, that the Fed doesn't need to do that much more, It just needs to pause, and that the data that's coming in shows progress even if the headline big numbers aren't necessarily screaming that message. Yea. We are actually debating this next week at pimcoone an arcyclical form which we look at the next year or so view of where we're headed for

the economy. I think one of the healthy debates in there is not necessarily just where the neutral rate would be and where their interest or inflation expectations come down, but really how sticky they are going to remain. And I think unfortunately we are on this long road and we are not necessarily knowing where the end of that road is going to be. So the consequences the Fed's going to probably remain unhold. They're going to be faced with pc core PCs that are well above that two

percent number. We don't necessarily see that coming down until twenty twenty four, possibly twenty five at the earliest. So the consequences is that there is a lot of unknowns right now, and that's perfectly fine, and investors unfortunately have to be prepared for that uncertainty as a result. So what we want to do and as a practitioner, is prepare portfolios for that resiliency that we think is going to be necessary to survive the insority the next few years.

So can you give us a sneak peek into that committee brawl and this sort of discussion what the range of views looks like in terms of terminal rates, in terms of inflation over the longer term. Yeah, I wouldn't necessarily give the depiction of an economic gladiator set, but

it is. It is like it is effectively a healthy debate, and we put all these variables and we want to effectively understand how portfolios can behave in a variety of circumstances left tail, right tail, and then ultimately rationalize it in this higher rate environment. As an example, when we actually think about this environment right now, we're faced with

the multitude of things which create different levels of uncertainty. However, higher rates create different outcomes than zero or near zero or even negative rates, So we have to think about the construction and that confidence. We think that, as I said previously, that we're not necessarily going to see a recession, you know, in two twenty three, it might get pushed

to twenty twenty four. That and of itself puts us in this situation where the Fed probably has a little bit longer runway to be on that holder building period for a little bit longer. Here, it doesn't necessarily create saying that this is fair value right this second. There's clearly curve construction, curve considerations where the ten year note is, which involves term premiums, and that's obviously a factor whether

you want to be in the REDCNY. But a four percent ten ye note, five percent to your note, those are very different constructions of owning duration, owning bonds, which makes it a very interesting environment. This this goes to the herder what we were talking about two hours ago, which is suddenly you get a higher rate, you get some inflation, you get some nominal GDP, and things actually work out better. Giving Powell and Laguard breathing room, this

is transformational. I'm not sure anything about what's happening right now gives panel to God breathing room back what's happening Canno with actually recently all right? Was that correction are correct? Sur corrections rare? Thank you, it's good to see you, undimcut. Lindsay Piggs is on her fourth we do with the architect on the blowout of the kitchen in Wisconsin and joins us today here in New York chief economist at Steple. What's the mood of the consumer? I mean, is there

in New York here? We clearly get this effervescence that's out there. The residents are packed, etc. You know the drill as well. Is it legit nationwide? Well, it's interesting because we did see that pop and consumer activity at the start of the year, but at the same time, we saw consumer confidence tick down at the start of the year. So it doesn't appear as if the consumer

is increasingly confident in their financial footing. It appears more as if we're seeing the consumer's last stand, if you will, As households are drawing down the very last of savings, they're ramping up credit card debt. Now this doesn't mean that it's a one month off. We could see continued strength then in February, maybe even March, but this is not a lasting trend of robust activity on the consumer part.

So some people will push back inevitably since that's what the market is doing, pushing back against your view and saying, well, if you look at all of the inflation data, it's come in surprisingly hot again and again. What can give us confidence that is that this is just the last gasp before a more protracted disinflation and more protracted decline. Oh, I don't think we have the confidence right now, and certainly from the Fed's point of view, we're not seeing

that in the inflation data. So they're going to have to see a market decline in consumer activity translating into then significant job destruction in order to see confidence in the sense that wage pressures are coming down. Now. Earlier we were talking about services, and for the FED, that's where the focus lies in core services, excluded housing. They want to see that proxy for the wage price spiral

show improvement, and we just haven't seen that yet. So while we are confident that is the FED continues to raise rates, the economy will slow, and by extension, the consumer will slow, there's still a considerable amount of work left to be done. Let's talk about long and variable lags. This question around when we'll start to see the bulk of some of the rate rises that already have taken place.

Tom was talking about that Dallas FED survey on housing potentially declining by twenty percent in valuations as a response in a response to what we're seeing in mortgage rates. Can you talk about how long those lags are before we start to see some sort of repricing based in the fact that people aren't moving around. They've got locked in mortgage rates that are very low and they're not

moving well. Traditionally, the impact from earlier policy metrics take about six to nine months to filter into financial markets, but now, arguably that lag is much shorter. If you think about all of the transparency that we have with the FED. We didn't have a press conference at every FED meeting in the past. We didn't have a summary

of economic projections every quarter. We didn't have every FETE official taking the stage at every opportunity to explain not only what the FED has done, but what they're going to do. So arguably there's an anticipatory nature of financial market reactions, and I do think that has significantly reduced the lag, or the need for the FED to pause

and take a look back. One of microeconomic foundations here is just as one example, oversupply solves oversupply, and to carry it over doctor Terry Weisman who was with us with mcquarie earlier, and he said high inflation can solve high inflation. Oliver Chen at TD Cowen published moments ago that he observes costco seeing finally food disinflation in America.

Does high inflation solve high inflation? It could on the supply side, but on the demand side, what we're seeing is this lingering imbalance between labor demand and labor supply, and that will not be solved by high inflation. That becomes the wage price spiral that the FED so greatly fears, where high inflation leads to even higher inflation. So for the Fed, I don't think simply standing by the wayside and allowing natural markets to clear itself will be a

long term solution. Do you think it's realistic that the Fed could get to six percent in the FED funds rate? Absolutely? That has been our long standing call for the terminal rate. Absolutely. Okay, So at what point do they sort of signal that to markets? Because that is significantly above where the market has retraced too, and we have seen a big repricing this week. What kicks them up to that level? Well, I think they're slowly making their way, but they don't

want to overpromise in terms of the terminal rate. If in fact inflation does so, excuse me, does show market improvement. But given the fact that the market and the FED consistently underestimates the sticky nature of inflation, what we've seen is the FED consistently revised higher. Their forecast now two hundred and thirty basis points higher than that initial forecast

in March of last year. Might help me here. You know, we've got a huge formula one weekend and we were so honored to have Christian Horner where this from Red Bull with us on Monday after the race. Did I miss the memo that we have to dress Ferrari today? Did I miss? Did I miss the memo? I mean it's just like it's like Red Wow on radio. We have two lovely ladies in red I mean, yeah, I just love dressing Ferrari is fine and they're all Ferrari. Mark, you listen to this. What do you think of this?

What do you think of this? Inflation solves high inflation. Well, I mean that's an old line about the cure for high commodity prices is high commodity prices, because then it brings more people in more supply, and so prices come down. And I think that's probably what's going to happen eventually. The question is how long it takes for inflation to come down, and how sticky it is, and how much the Fed thinks it can affect that by continuing to

raise interest rates. Their view is they're pretty close to restrictive enough. They're not sure if they're restrictive. Ye, yet they're right on the line. So do they go to six percent? I think it'd be a slow process for them to do that and to talk about it, because, as Lindsay says, you don't want to overpromise, and indrices, well, why didn't you go to six percent if suddenly we

see things to start to turn around? But Lindsay, I don't want to go back to something to Jerome Schneider was talking about if Pimco that if we were to get to six percent, that would perhaps get us that much closer to a hard landing. Right that then further the Fed has to go. The more you're almost securing

a very difficult situation for this economy. Is that what you're saying that that's almost the base case for you at a time when a lot of people might be pushing back their accession calls but not necessarily increasing the depth of them. I think if we do get to a six percent rate and have to hold at six percent,

I think we're increasing the probability of a hard landing. If, however, the FED pushes up to six percent, realizes that they're sufficiently restrictive, and then come back to a five five and a half percent range, we may be able to mitigate some of the depth or duration of the downturn. But from the FEDS point of view, a period of pain is not only likely but necessary for the economy

reinstate price stability. But to that point, Tom, and you're right to that point, lindsay, what kind of damage do we see to housing valuations that haven't been gamed into the Dallas FEDS point? We're going to see a significant decline appsolutely. But remember when we talk about this housing market cycle, I think it's a very maybe superficial analysis to assume that because it's the most interest rate sensitive sector of the economy. As the FED raises rates, the

housing market falls off a cliff. This time around, we went into the cycle with a multi year deficit in terms of housing stock, and so even with demand coming off of peaks and supply arguably coming off the lows, we still have a disconnect in the market that should provide somewhat of a floor to this housing market cycle, even if we continue to see downward momentum from here. There's an interesting thing going on in the housing markets

too that I was talking to some FED officials. They've been surprised by that a lot of builders are subsidizing mortgage loans right now. They're doing buy downs for people because they want to keep the business going. And we saw a little bit of something like that with Automo Wheels coming out of the Great Financial Crisis, where the auto companies offered zero percent loans and kept people buying cars.

So it may be a little harder to model out what's going to happen in the housing industry if people are going to buy you into it. One of the most complicated environments I could possibly imagine. Lindsay Pegska of CFL, thank you so much for being here. Michael McKey as always wonderful to get your comments. Katy Kamitski joins NA chief Reset strategist to Alpha Simplex. Katie, you have been phenomenal for the whole of last year and then into

this year. Katie, everyone's turned around. I say, everyone, you know where I'm coming with this. A lot of people turned around and said, it's the year of bonds, get long fixed income, and you went shut stay shure, Ksey, Why well, let's just focus on the fact that inflation is looking stickier, and if we look at last year, I think we like to see it this way, is that the stock market and the bond market don't agree. Right now. The stock market things everything's great. The bond

market that says, this could be dangerous. Look at the curve. It's inverted. We could have problems. So we think last year the bond market was right. This year it's a little gear. We're seeing that the bond market is looking a little weaker in the sense that stock market is looking positive, saying hey, wait a minute, we might pause.

Either way, we're not there, which means that even if the stock market's right and we pause, we could see the end of the curve steep and severely, and that would cause negative trends in the long end of the curve. Or if the bond market's right and we're looking in a recession and deflationary environment, then you're also looking at

higher rates, at least in the short term. So bonds are definitely looking tricky this year, even though many a little bit more about this short then where across the curve is that short, more pronounces it spread evenly, Is it a specific pocket pop point of that yield curve, Well, generally it's pretty much short across the board across global economies, and that in some sense tells you that we have farther to go in terms of raising rates to either get to a point where we can find inflation get

it to be less sticky, or we get to a situation where central bankers throw up their hands and say we're going to tolerate a higher inflation level. And either of those is going to be very tricky for fixed cash flows, which means that bond signals in general remain short on the technical side, even though the fundamental side, many people are starting to get interested. Katie, Let's have fun on Friday. Let's channel Wells Wilder who invented so much of this in nineteen seventy eight. I know you

named your dog average to range, Katie. The answer is there's been a magnificent trend of higher yield. I was shocked to go to the Bloomberg and under one technical study ad x DMI see that A the trends in place and we're really in a good position to continue the trend out there. How do you use that kind of mumbo jumbo to stay in a trend once you've profited. Well, that's a good point. I mean, I'll be honest. January

was a period where we saw consolidation. People thought yields were not going to go higher, And it's really about balancing the long term and term views. And what we've seen is longer term views are saying we're in a secular move towards higher rates, and we're not there yet. I think the equity market also likes to be quick to say that things are over so I think it's really about balancing multiple perspectives and seeing things over time

as opposed to reacting too quickly. What are you looking for, Katie to unwind too short bet on rates? Well, I think The biggest is if the stock market wins, aka, if central bankers step back like we saw commentary yesterday and say wait a minute, we're going to tolerate more inflation. What that means is that you're going to see a

steepening of the curve. So you're going to see sort of the bottom of the short end of the short end of the curve, So shorter term rates will be stickier, and then you'll start to see people actually take on higher yields and then bond. But that's going to mean that longer term yields are gonna have to go up to compensate for that risk over longer terms. So I think that's where you're going to see the shorts disappearing

on the short end of the curve. You're gonna still see some strong signals on the long end of the curve as the market moves to a higher inflation tolerance environment. Katie, can you talk a little bit about the long end and where you see the range, because right now we have a growing number of bond strategists saying that we possibly are at the peaks, and you're suggesting we're far

from them. How far well? I think it will definitely be a situation if we had a healthy yield curve which we could see, and we were to tolerate higher inflation, you could imagine that you had the longer term rates going up several percent above what you see on the

two year. I mean that would sort of symbolize a very stable environment with higher inflation, whereas I don't think you're seeing that yet, but that would be an environment where basically we give up on trying to find inflation down to two and thus the risk premium on the longer end has to go up and you have to get a longer yield if you don't expect yields to go up or inflation to go down in the longer term. Katy, you've just been phenomenal. Thanks for being with a sismonic shadow.

And let's cant shout more often, Katy Kamiskia of Alpha Simplex. Terry Weisman is out of Vasser and out of Harvard. We had the privilege of being in the same corridors. Is Benjamin Freedman. I'm going to go back right now to the gentleman strategist at Macquarie, to Benjamin Freedman's great the consequences the moral consequences of growth. I want you to sum up today where we are, and that is

the consequences of pandemic stimulus that include that broadening inflation. Yeah, in some respect, what policymakers did during the pandemic has turned out to be a disaster. I think that what they were thinking was they were looking back on the past ten years and saw very little relationship between unemployment

and inflation. They saw, as a result of the big increase in monetary balances coming out of the GFC, really no inflation, and they thought they could effectively repeat that experiment, and it's been proven to be wrong. I think it was wrong this time around because it wasn't just a monetary experiment. It was an experiment combined with a fiscal experiment. In other words, excessive fiscal spending not just in the Western world, but across the developed markets and the emerging markets.

At the same time expansive monetary policy in the emerging market and developed markets. So we have a global inflation problem as a result of this. The good news, if there is any is that there are you know, there are ways to stop inflations. There were really two ways. In fact, one of them is to tighten monetary policy for the other the other way, Interestingly enough, it is actually to let the inflation happen, because when you do that,

real monetary balances start to shrink. And when real monetary balances shrink, the consumer feels squeezed. And you can see that in the US data right if you look at real monetary balances measured by commercial deposits should say bank deposits commercial banks in the US, they're almost back to their trend level. Part of that is the quantitative tightening that we've seen over the last few months, but most

of that is the inflation that's already happened. In other words, by virtue of having inflation, you eventually slow down and reduce the real balances and the consumer feels squeeze. One of the reasons why I think that we're going to see a resumption of the trend in disinflation in the US is for that very reason. Europe, on the other hand, is another story. They're just starting their QT. Let's go

to Chicago on this. How do you overlay? As you mentioned, the monetary balance is how do you overlay as stunning increase and then stunning decline we've seen in M two. God, Milton Friedman on us right now? Is that of value to you to see M two as such a plunge? It is, And I have to admit that, you know, posted GFC, I might have been one of those who

thought that money was no longer important. I might have abandoned the old monitoris view coming out of the University of Chicago because the data simply didn't didn't support it. The correlations didn't support it, the trends didn't support it. But now we see a resumption of validity in the monit to a story that money does matter. And we probably got to a point where those real monetary balances in the US got to about twenty percent above the

trend line. Well guess what that would necessary? That would you know, you know, back of the envelope, That would imply that we're going to see a twenty percent increase in prices over and above the trend line for CPI. It's not so far from where we've gotten to, right um. And But but again, the good news is that it's being unwound here certainly not in other places, but in

the US it is. So let's talk about the unwinding process, because there has been percolating on the peripherise this question of unwinding the balance sheet about the ECB and the US more quickly than people have previously thought, that that will be the primary tool over the next nine to twelve months, rather than rate hikes. How much higher does that push longer and rates both in the US and

in Europe. Well, you can you can say that by virtue of quant tightening, we were going to see the central banks no longer buying bonds and eventually potentially even selling their bonds. But that that's running up against the other problem, which is the problem of a slowing economy. And I'm not exactly sure which is going to dominate, but I think for the next three to six months, we're probably going to see lower yields in the US, not higher yields. I know this is not necessarily the

vogue thing to say right now. The ten year yield just reach a cyclical high of four point one yesterday, but keep in mind. My view is that we're going to see a slowdown in the US economy in the next few months, and it will be significant. I think in many sectors we're already seeing it. Technology is certainly in a recessionary environment right now, all new economy sectors are finance potentially as well housing certainly, so that's going to broaden. And I think we're looking at peak ten

year yields right now. I think they're going to start heading down over the next three to six months. Not by a lot, mind you. Okay, but this has important implications for a yield curve that has been deeply inverted. And does this mean that it gets even more so substantially more inverted. Potentially, yes, But keep in mind it

depends how you measure that inversion. If it's two's to tens, and by the time we rolled you three months from now, you know the fattest signaling that's about to stop hiking rates, well, that inversion may stop on a TuS to tens basis, it may still persist on a three month to ten year yield curve basis. So it's Terry, what I'm hearing from you is that right, differentials between Europe the Anonis states could narrow and if they do, web with that

leaf phone exchange, So that's that's absolutely right. You could see higher yields in Europe still because they've been late to addressing the inflation issue, and inflation is higher there on top of that. And I would make even a case that the esoteric truth out there is that the European economy is actually stronger than the US economy right now. Yes,

believe it or not, it may very well be. Look at the PMIS this morning on the services side, they there's a potential that they come in in line with the US. Remember, Europe is coming out of its funk that it experienced in Q four by virtue of the of the winter emergency. It has China backing it up

all of a sudden with its stimulus. It's very possible that the European economy is doing a little bit better than the US right now in terms of growth, and that all supports higher yields in the Euro Area versus the US, at least on a relative basis twenty seconds. How long could Europe remain stronger economically than the US in your view, well until we finally start to see some real tightening by the ECB, and we haven't seen

that yet. I mean, you know, if Tom was talking about nine percent inflation headline basis in the Euro Area, the deposit rates two and a half, I mean those are the kind of negative real rates that you would expect from a rogue central bank a Turkey for example. I hate to use that term, but I can't find

a better one. At this point, it looks blotically. You can make a case that the ECB has gotten rogue and it's just finally starting to get back inst It's really, it's only really since December that Christine Lagarde has really

emphasized the need to address the inflation issue. And I think it was that time, you know, just really two months ago the she, you know, to her credit, started to realize that this was there was a broadening of the inflation December was strung and then we had the last mate, which was kind of developed where she said that risks around the inflation outlook had become more balanced.

I wonder if that gets revised. I meant structurally, there are a bunch of problems that are point to higher inflation in your area as well, right, I mean, you know Cornell University as an institute that does fantastic work on just tracking labor action, labor strikes in the US. Well, guess what it peaked in the summer. Yes, Since then, labor has become less agitated in the US, less active, less strike oriented, different than in Europe right now. Look

at the UK, they're worried about more strikes. Francis just getting through a wave of them right now. Wage pressures are higher in your area right now than the r in US. Was not that case in the summer. It is the case against the club. I got to squeeze it in again. You're at tull'st one of six. Everything you've said just screamed stronger Europe doesn't stronger euro So

what's your talk is? Yeah, for the next for the next two or three or four months into the middle of the year, I think we get back up to that one ten level in the Europe Okay, right, Yeah, nothing too dramatic, nothing too dramatic. Remember, if the world goes into recession, that tends to be good for the dollars. You have to consider that's going to offset that, that that upward pressure on these terry. This was great, just fantastic,

my pleasure, your perspective, pretty original. Right now. I've got to say, yeah, you're a consensus stronger than the US actually, or they've heard that a couple of times in the last twenty four hours. I hope Europe better than the US. Thank I love it. I'm not sure pressing the card would have left that this morning, Terry Wassman mcquore, Terry, thank you, just wonderful. Subscribe to the Bloomberg Surveillance Podcasts on Apple, Spotify, and anywhere else you get your podcasts.

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