Surveillance: Central Banks Wake Up

Investment Institute. John, I've been following your research. You're writing, you know I do, and I'm pleased you writing on something that I don't think enough people are thinking about the appropriate time horizon to bring inflation back to target with the circumstances to backdrop that we have at the moment, John, What is it? And why aren't we talking enough about it? There used to be I'm all school, I guess, but there used to be a two key principles under lying

monetary policy. One was that, you know, you need to be thoughtful about the link with tradeoffs and being deliberate around that, and the other was about being forward looking. Um. Those two principles seem to be pretty much absent from the current discussion. UM, and I think that speaks to the horizons. Here we're dealing with a massive shock that is more of a supply and nature, and that leads to uh, you know, you just we're just talking about

how much GDP cost we need to go through. We think the g because it's pretty significant if we want to bring inflation down to too quickly. It's a two percent of GDP UM, you know, recession type we need to to go to in in in short order. Um. That's a very brutal cost. And nowhere in the discussion right now you see this explicitly being acknowledged, being discussed or hearing from Central Bengal. And how do you want

to navigate that? You know, we used to think that in the face of the shock, you would take longer to bring inflation back to target. Nobody is really making this argument, Jean, I want you to talk about the asymmetry is there of strong dollar versus week doll? Now we have strong dollar. I'm not going to ask you for a level and your Canada and loney one thirty two, but one is the asymmetric differences of a bold strong dollar versus a week dollar. Reality, we don't have that

right now. We have strong dollar. It seems new. Yeah, I think, I think, you know. I mean we always break that down in terms of what we think is that the key driver think of the currency being driven typically by two broad regimes. In my view, one is uh, interest rate differentials and the other is um the broad risk on risk of global sentiment. Um. I think we're in a world now that is mostly driven by overall

risk sentiments. So I see the gyration being about whether we are we are risk averse, which tends to bid provide a bid to the US dollar, and that when that wins, we see some weekending. So I think we haven't seen the full implication of this world yet. The pressure is gonna put globally um. Um. You know Canada is one place, but like emerging markets um, so that hasn't really played out yet. Um. And I think that's

that's where here. I wanted to go there because Ozzie and is out wanting to have standard deviations, which is a rare occurrence. Tell me of the Pacific rim risks that we face now or are they in some way protected from the tumult in the Western world? Uh? No, no one is protected, but I think there's there's own grown kind of headwinds right that we see. Uh, you know, we were just talking about lockdowns in China, so the

poll of growth there, it certainly has been challenged. We've we've been neutral on on the region for for some time now as a result of this um and I think a global recession or slowdown that would be significant. We'll have some rippling effect there as well. So I think we see these the part of the transmission of the slowdown through the impact call of growth. It is your good morning from London. What are they? Good afternoon?

Even now it's time catching up with me. What are the monetary policy lags that we need to keep in mind when you're talking about the tining of policy as you are there and talking about the time horizons ever which we should be correcting inflation. What are the lags

in policy that you have in focus? I mean, I'm thinking here about the US, so so we in general, I think we're still in the world where like monetary policy works with at least like you know, a year to two year of like eighteen months is the is the number you would get from typically if you pin me you to one number. I think that still is the case in this one and I would argue that um, it might be even more delayed because the interest rate here is not the cure for the source of the

inflation we're we're experiencing. UM. So we will need to basically crush the interest rate, since it'sive part of the economy, which is not the culprit of the inflation at this point, to really upset the other inflation pressures. And so that needs to work its way through the system. None of the rate heights we've seen so far are really containing inflation. We're getting now to the phase where it's going to be restrictive. It will have an impact, but that's gonna

be about the twenty tw our story really, UM. And that's why I think we see a lot of optics of central bank talking tough on inflation. But this is really optics and politics ventilation, not really the economics of inflation. So Sean, let's talk about what it would take for you to get bullish on the security market. San, What you need to say, we need to see a couple

of things. Right. I think now we're equities UH and UH generally are reflecting a path of policy tightening UH that is more than is in line with what we think will materialize. So um, you know, Jackson hole as I think crush any hopes of backing off from hiking intention soon. I think equities are starting to reflect that properly. The part of is not yet in the price is

um the earnings story. And you know, we think we're gonna see a recession early twenty twenty three, uh in in the US, but it's it's happening earlier and deeper in Europe and that is not reflected in the in the eity price. So to be to turn in bullish, which will be the big call to make over the next few months, is when we're gonna gonna be able to start to look through the size of this reception.

I have more handle on this. And the second is when we get to the point where we get some sense that central banks are waking up to the damage that has been caused and are starting to take that into account. So what are we gonna see to see start to see sign of that. I think will be now in a position to really talk about a version of a pivot or slowing down or stopping. And when we once we have visibility on this, then I think that's gonna be a more positive, backrupt and will catch

up soon on it. John, really deeply thoughtful stuff. We appreciate it. Jomp Off on that Flee flank Rock Investment Institute. It is a crisis in Germany, it is a crisis, and Edwards, United Kingdom, and it goes to is John mentioned the grid Francisco Blanche. I've seen endless, endless studies Davos. You could fill up the promenade with all the fancy studies about what to do. Why can't we fix this energy crisis? Why can't we fix the global grid of

electricity and hydrocarbons? Well, Uh, Tom, You've you've kind of burning a lot of issues into a single question. But I think I think the best answer that I can give you is the uncertainty that we have created in terms of what the future demand for energy looks like. UM. If you if you start with the international energy agencies UH scenarios for for the conronization, UM, there's a huge gap between the business as usual scenario, the aggressive scenario,

or the zero scenario. And it's really hard to tell which way we're gonna go into whether global coal demand is going to collapse or maybe it's going to hold in a little bit or maybe oil demand will collapse or maybe won't. And I think, um, the same thing applies to electricity, right, Um, so all that's kind of really different, making it very difficult for companies to make a decision and in terms of how to allocate their capital. And then of course we've had the Russia Ukraine situation

which has made things a lot worse. UM surveillance research Francisco is that you and Sevita Supermanian are actually on speaking terms at Bank of America. She has provides stunning leadership in the quantitative aspects of E s G. When you have a cup of coffee with her, can you state that E s G is here to stay or is it dead? With the war in Ukraine? Look, I mean I think he s she is here to stay

in most people's minds. I think that's true for investors, true for governments, which which I think ultimately means for a lot of a lot of the pieces of the energy sector you're talking about, like how how you fix them, I think you're gonna have to end up with a lot more government involvement. We've seen it already in Germany and in France with with the takeover of UNIPAWER and e d F. I think we'll see just a lot

more participation of governments generally. Um Even when you look at oil and gas investments OPEC this time around, particularly the Gulf Corporation Council countries have actually been leading investment reactive to other parts of the world. Um So, so I think I think governments are just going to get a lot more involved in in the energy space on on a forward basis um to to essentially get us

through the current mess. Francisco, do you think climate change has become a convenient excuse for some of the challenge which we faced right now when a lot of it is about investment and lack thereof a lack of planning. And I understand we've had a big shock this year, but I think that's a convenient excuse in the minds of many people Francisco, that we've tried to transition too fast, too quickly and move away from fossil fuels without a more resilient plan in place. Which one is it? Look?

I mean, I think I think the the climate change data that we're getting every day really points to the urgency of doing something about the carbonate missions that we have on on a daily basis. We are warming up the planet very quickly, and we've seen that in Pakistan more recently with pretty catastrophic outcomes. We've seen a complete drop in in water restaoirts in in the Alps as well, which is leading to two lower rare levels across Europe.

So I think climate change is real. We're seeing one of the biggest routes I think is I think you guys put that out recently. In Europe we have the biggest rather in five hundred years UM, So you're having a lot of a lot of data points out there that really suggests that the climate change is happening very quickly, and and that's further straining our our energy system as

it would now. I do think we wouldn't be in the current situation if we hadn't been losing as much Russian energy as we have over the course of the past six months, Right, Francisco, Can I ask you about proposals in Europe to cap gas prices and what you think is that I suppose to my guests earlier, and this goes to what you were saying there about relying on Russian energy, I spoied to with guests earlier who said she doesn't want to see a cap on gas prices.

She thinks fiscal stimulus should just be given to those who are struggling to pay because with with a cap, you don't have quite such a strong price signal, and we need that to make the transitions and the investments that you talk about. I I think that's completely wrong. I mean, I think you need to put a bit of a cap on the price of gas, and you need to bring Remember, the price of gas is setting the marginal price of electricity, right, so let's say that.

Let's say that you know, if the price of electricity is a thousand euros a mega at hour, you're not really incentivizing anything at that price point. Um and and and there is a clear market failure that I think, UM. I think um she should encourage governments to take action here. Um and And again it's pretty simple stuff. I mean, you're you're above two hundred years of mega at our most European industrials cannot operate, right, So when you're at the faust inuris a mega at hour, this is past

beyond the point of the Aman destruction. Um and And it's also as the point of supply increases of vernal energy in the future. You don't need a thousand US and may our encourage wind or solar power. You need a much much lower number. So I think I think governments are taking the right steps to try to cap the price of the price of gas um and and again it's going to be a subsidy for sure, um.

But I do think that the consequences of not tackling the current shortage of gas and Europe could be devastating to both consumers and industry over the course of the next of the next six months. Remember, you're probably destroying about about five percent of European uh power gas and power demand every month with this kind of price levels we were seeing here, and this is just massive numbers. Francisco that and I think we still fully internalized and

recognized how bad this is gonna be. Francisco Blanche, the of Bank American Global Research. Francisco, you one of the best. We appreciate your time. Rubella Feruki joins US chief US economist high Frequency Economics. Oh, he's channeling the inner national views of Carl Weinberg. Rebel and bring it back to America and bring it back to what matters, which is in the A d P Report Wages Clock seven, what will we see on a wage spiral tomorrow? Good morning,

Thanks for having me. What we're expecting to see is you know, still elevated to wage gains. You know, maybe a slide take up. Uh, you know, still a five handle on your your changes in average early earnings. You know. The central point of this is what are we seeing on supply? And we really are not seeing any relief on supply. The participation rate has gone down. If you look at the civilian labor force, it's declined in three of the last four months, and that is where the

stresses lie. And you know, without that and without any relief on wage gains, you know, the FED is going to remain focused on these things and really the trajectory is not going to change at all. Uh. You know, on tomorrow's numbers, I find the analysis of the FED action and this goes to crush carry of Minneapolis, US. But a FED action to desire to move the unemployment rate higher to be way too simple. What's the complex

part of that analysis matters for our viewers and listeners. Well, I mean what we're seeing right now is severe dislocations in the labor market right, and we're seeing supply and demand imbalances. Does the FED necessarily want to see the unemployment trade go up? No, absolutely not not. I mean that's not what central banks want. But you know, in this instance, you know, we keep hearing about a tight labor market and J. Powell has said a labor market

that is, you know, tied to an unhealthy level. So that's what we're trying to figure out. How can this FED, you know, orchestrate rate hiking cycle where there's still positive growth but and you know, unemployment goes up but not by much. And I think the best case for them is that, uh, you know, you do you know, the demand side is so strong that you're going to see limited and uh increase in layoffs. But I'm not really sure that that is really possible. Okay, we'll be a

good morning from London. You talked about participation having dropped off, and clearly during COVID and the immediate aftermath, it was obvious why that was. What's your analysis now of why participation is so poor? There are similarities with the UK market and it's clear why it's why it's poor here, But what's the story in the US. I mean, what we're seeing is you know, elevated retirements that really contributed in a large way. We still have people who are

suffering the effects of COVID. Excuse me, we's still affecting, you know, being affected by the effects of COVID, and you're still seeing you know, some challenges, uh in terms of you know, primary prime age participation, in terms of childcare issues, health issues, elder care issues. So those still those things are still you know, persisting, and it's really

not clear that we're going to see any relief. What we did see last time around was you know, as we were going into in two thousand nineteen before the COVID crisis, what we saw as people strong labor market did draw people back into the labor force. And that's what the federally is looking for. That strong job growth, high inflation, you know, the lower of higher wages. Maybe that is where the relief comes in. But really that's not something that is part of a base case scenario anymore.

You know, we've been expecting for participation to go up and we really haven't seen it. So if we want job wipings to come down, it has to come from from unemployment, has to come from from layoffs, then REBELA, Well, not necessarily. We do think that demand for labor is going to go down. But you know, we're trying to figure out why are layoffs so low? Is it just that demand is strong? Or is it that companies are also reluctant. You know that they've they've suffered, you know,

for you know, persistent shortages. So are they just hanging onto their workforce? Are they just reluctant to lettle of the workers? Rebell? Here's the mystery question right now? What is non firm payrolls normal number? It used to be two hundred and we'd model out one fifty. We all got that wrong. That was a great wrong call of a decade. We're now rocking two hundred three hundred thousand three per months. What's normal? It's very difficult to assess

what this labor market is. You know, what what normal is where we're going to balance out? If we look at the numbers, you know, break even is probably around a hundred thousand. Maybe it's like really but yeah, exactly. And but again, you know, we are basing our analysis on things that prevailed before the before the pandemic. So

it's really difficult to assess. Right now. What we're seeing is you know, extremely solid job growth um and also I mean it's it's really not tying in with the concept of you know economy that has really you know, just flattened out in the first half of the year. But you know what's what's appearing now is companies still uh, you know, adding to the workforce and the unemployment rate at historical laws maybe even said to go down a

little bit more. And you know, a fact that is facing a huge challenge Rebeta a massive challenge and not just a fat The a c BA has a challenge of his son, Rebeta fury that high frequency economics. It's a rare and beautiful thing. John, she's here for what, John? Is this like a two hour interviewer? Could we could? We could do it? Here's what you need to know. In one a young boy named Mick Jagger went to the London School of Economics and went down in flames

and mathematics. Tracy Alloway followed on from Mick Jagger and actually got through the rigorous math course to get your way along at LC and went on to a sterling journalism career include work working Mr Wisenthal and Adlats and she joins us here on the aerospace engineer from Minneapolis. He's talking about, Oh, the interesting thing about cash car is that he's transformed from the fed's biggest dove into the biggest talk And he says it's because he's been

watching the data. Data didn't come in quite the way he thought it would, so like Kines, he changed his mind. Right, So that's the interesting thing about him at the moment. I look at this, Tracy. What's so important here is what of the monetary pro stinc It was Clarada and now it's maybe John Williams and a few others. What do they think of presidents shooting from the hip. That's

quite a question what I will say. You know, Jonathan kind of alluded to this about the interview that we had with cash Cary where he was talking about how he welcomed that stock reaction, stocks actually going down, So following Jackson hole, I cannot believe that markets were so surprised. You have had a FED, and you've had central bankers on the FED talking about how they want financial conditions to tighten for months and months and months and a

component of financial conditions. Of course, it's stocks financial conditions. They need stocks slower, then he spreads wider. Tracy, what was the biggest piece of pushback you had against that? Because I was watching all the commentary of a Twitter the people who were surprised, and you and I who were surprised about them being surprised. What was the biggest piece of pushback that you saw from this interview. There were a lot of people talking about how the FED

said the quiet part out loud. But these are the same people who would make jokes about how the FED only wants to push up asset prices for the past five or ten years. Right, If the FED only wants to push up asset prices, then they can have situations where they also want to push them down. Now is arguably one of those times the FED is explicitly telling you that it needs financial conditions to tighten in order

to get a grip on inflation. The components of financial conditions got things like mortgage spreads, bonds, and of course stocks, So I'm not entirely sure why people were so surprised, Hi, Tracy, it was a really fascinating conversation that you had with him. I mean, if he wants, I can find you mentioned the other ways you get sites of financial conditions. Do we have a sense of which of the elements the

FED would prefer? I mean we've got Cashgarian saying stocks doesn't mind if they go down, but that's not quite the same thing as saying, you know, you really want them to drop. Yeah. Well, I think the big question in markets right now is why, even with all this FED jaw boning, why financial conditions haven't tightened more, Why our investors, I guess dragging their feet when it comes to this issue. Does the FED have a preference on

exactly what moves the most? I think it doesn't want to see anything break in the financial market, doesn't necessarily want to cut off capital inflows. It doesn't want to see a seize up in the credit market, which is something that we almost saw over the summer. But that said, it still wants something to happen. And the longer this sort of tension, the standoff between investors and the FED goes on, the more likely we are to see a big move from the central Bank that actually gets us there.

And that was really interesting in the context of what we've saw from UBS and those around credit markets just in the last twenty four hours saying credit markets are simply not pricing in enough a chance of a recession. We saw this from UBS. They said, credit markets, by their analysis, are just giving it a chance, when actually they think it should be pricing in for a much higher chance that we get a recession in the U S.

Maybe this is the mismatch that that you're talking about. Yeah, this is kind of the amazing thing about the credit market at the moment. So you look at something like high old spreads, so risk premiums on junk graded bonds. These are the things that are supposed to show concerns about a looming recession first, and we are far far from those levels. I think it's something like eight hundred basis points on the high yield index. Were at like

four fifty right now. And then you have other people who are saying, well, don't look at junk bonds because the junk bond market has changed so much over the years. You know, it's mostly double B rated debt now, it's far from what it used to be. Look at something like leverage loans. These are the floating rate loans that junk graded companies took out on mass for the past

five years. They're supposedly very risky, or there are some people in the market that think they're very risky, and so those are where the first signs of stress could show up. But even if you look at the s M P L S T A leverage loan index were at something like nine on the cash level. Now eight

five is generally considered distressed. When you were at the kind of of sacred art in Tokyo a million years ago, used to sneak into the Imperial bar at the Imperial Hotel the front, How did you know that has it? What does Japan do? As JP Morgan says, there could be a one yen. Everybody's standing around in the West going no big deal. I don't buy it. Well, this is the other big question that I have about the FED right now, and I actually asked Kari about this.

What happens to the rest of the world when you are raising rates at the fastest pace in decades. We've already seen the dollar appreciate considerably. We haven't necessarily seen us financial conditions move as much as we might expect, but we know that financial conditions elsewhere in the world are tightening. That seems like a problem for me. When you're talking about economies, you know, Europe, emerging markets to some extent Japan that are now experiencing an energy crisis,

and everything is priced in dollars. The FETE is heaping more pain on the rest of the world. The U s economy is relatively resilient right now, but at some point you're going to get that boomerang effect that's what Cashkari called it, where it comes back and it impacts the US economy. Interesting, trit Cee, it's been too long. It's the podcast stat right now. It's out right now. Check out all thoughts. I was talking with Promo gotta

have it come on. I was talking with Tom and you know he was actually our first guest when we launched the podcast. Five the downhill from that or uphill from that? Up there, up uphill Tricey on the way Joe Weston could do far you can do it all football and that is already downhill. Tom, I think they want some expertise on markets, not on football. At the weekend.

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