Surveillance: Certain Recession with Laidler

see some hope this bond route maybe easing. This is a key ingredient for any equity recovery. Before we get to talking about whether this is positive or not for risk assets, can you tell me why you think bond yields may well be peaking this time. I think it's difficult to see real yields just continuing to head the moon at a time when all your inflation lead indicators

are rolling over, where recession risks are spiking. I think the disconnectus is in there, and I think given where real and nominal yields got to, and on the flip side, given where valuations and sentiment have got to, I think that risk rewards set up is very, very interesting but given that if the third is going to retrace some of its pretty harkish statements, what does that mean in

terms of earnings. We've heard this from Mike Wilson, We've heard this from Muhammadalarian that be careful what you wish for, because if the Fed does retrace, that means that things are really bad and we have no prey set in. I think this is too earlier comment. This feels a little bit like Graham Pop day right. I think the setup is very similar to where we were before the big sort of June rally. I think the market is sniffing out. It's sort of top of the Fed cycle.

I think bond yields have overshot and are now coming down. And I think to your point on earnings, we're going into third quarter earning season. Wait yet again, expectations are very very negative, and I think this is an attractive set up. I think I think we're just gonna leap over this sort of low bar and breathe a little bit of a side relief. Then I want to go to your huge track record and three cycles of getting the market rate, and I want to go to Lisa's

gloom yesterday. I want to go to nodes of revenue guesses. What it comes in the down to is with the slowing economy, everybody's going to try to guess revenues at the top line, given are the economic mumbo John, what are the nodes of revenue guests? Is gonna do? I think this is all sort of fair versus reality. I think markets, I mean, we're down, earnings expectations have actually fallen quite a lot, I would argue, um, and not

all recessions are created equal. I mean, granted, we're almost certainly going into a recession, at least outside of Asia. But this is not two thousand seven, This is not This is I think in a much more plain vanilla central bank driven recession. And I think that is given where we are, I think that's actually pretty investable. That's a two percentage point GDP pea trough four. That's the kind of earnings expect pations where I think you're at

least halfway there. Again, I think where markets and sentiments of valuations are at this point, I think the bigger risk is being out not sorry, has been out not in Okay, So given all of that, just quickly here, how much are you buying with your conviction. I mean it basically, are you loading up the truck. I think we're building a bottom, right. I think this is a U shaped recovery, not a V. I think the fair has told us quite clearly that you know, they're going

to stay the course until something breaks. What hey, stuff, Maybe study be starting to break. We don't need the top of the FED cycle. We just need a little bit of visibility that it may be coming in the next sort of four or five months, and the fens just not going to keep hiking here. I think all the lead indicators are telling that. So I'm comfortable enough

saying we're building a bottom. So I'm fully invested. I'm certainly tilted a bit more to The defensive risk is still pretty high, but I'm absolutely nibbling at that sort of quology risk that's sort of big tech, you know, discounted small caps. I mean, the more this goes on, the closer we get to inflation definitively coming down. Um, I think you want to be raising the wrist budget into that. Ben Nagler, thank you, sir. Thank Jordan Rochester

would probably get army Birmingham, Birmingham. I did, okay at Jordan's at hometown. Boy, if you work from Birmingham, Yeah, Jordan Rochester joins us Nouf from Birmingham right now, Effect strategy Nomura Jordan. I want to go to the news of the day, which is the Bank of Australia blink. There's no question about that. Maybe it's a new trend, maybe it's not. If the banks start blinking like they did. And I think Kimberra is that Canberra? Canberra and Canberra?

What does that mean for foreign exchange? What does that mean for your call on the dollar? I think that's everything, Tom. Are we going to have more central blanks blink? When it comes to the r b A, it stands out as one of the central banks with a mortgage market where most mortgages are variable, they're floating, so they do react to what's happening in rates markets today in those housing markets for everybody, not just the marginal house purchaser.

Where in the US with ten year thirty year fixes, in the UK with two and five, in Europe with ten year fixes, the impact of these rate hikes come through with a different lag. In the UK it's faster. In the US it's much slower, and of course the marginal buyers sets the price. So in even even in the US, your your last guest was talking about the

slowdown house prices. But I think when it comes to the FED, when it comes to other central banks, they're still gonna be looking at inflation nowhere near their targets. But what's going on right now in markets is people are asking the question, oh, are we gonna listen to what the Bank of England experienced last week? Will the FED? Will the ECB think twice about what they're doing, just in case we have a financial contagent risk that's building

up with rates moving as quickly as they are. So I think right now it's all about mood music rather than actual action from anyone like the FED or the e c B. I think central banks will still be hawkish, Inflation will still be stronger than they want, But right now we're in that sort of quiet space where we're all thinking, is the UK and as the r B A are they both Canary in the coal mine sort of situation? Jordan, I sentially skeptical. So you've fade in

this move. It's not what you're recommended to clients. I think. I mean you mentioned temper set move and rule one oh one, and I kind of broke that is, don't chase flash crashes. And basically that's what we had in Sterling after the mini budget. Huge moves, five percent moves lower. Typically when you have that, everybody gets very convinced it's the right trade, becomes very consensus, and then policy makers react and then you have mean reversion on that reaction,

and that's what's happened. But in the u K's case, the reaction has been really timid. So just reducing the top rate tax from the forty five pence tax cost nothing. Really, it's two billion pounds. We're talking a hundred billion for their energy package overall over its lifetime, so there's two billions of rounding error for the for fiscal sustainability. So for me, this is all about mood music the UK showing that perhaps they're not gonna be a z les

when it comes to fiscal policy making. But if you take the facts as they are, everything's the same apart from that two billion pounds spending. So I am skeptical, John, and I also think core inflation in the US will remain stickier than what all of our leading indicators for headline inflation signals. Because commodity prices are soft, everyone says

peek inflation. I agree with that, but core inflation will be stronger than you think because look at job openings in the US, they're just ridiculously high and they're not falling enough to say that we're having a weaker labor market. So this all feeds into the FED not being happy where things are, and this this softness in US yields,

I don't think it will last. So Jordan, we were talking to Tom Sasuras of Strategus, a bird company, earlier, and he was talking about how the price action that you've seen in ten year treasuries and two year treasuries indicates stability, indicates price discovery in a way that we have not seen in years. Is the same true for your FX market? With the pound rallying ten off of an incredible swoon. I think most of that is poor

liquidity positioning in sterling being very one way. And then we had the rebalancing of the month then and we gotta remember as well, this pension situation meant that the amount of flows going through in the UK were huge, So it's kind of hard to say that is this a fundamental price discovery that's going on. Or is this just everybody being one way and pensions being bailed out by the bank against que program which comes to an end in less than two weeks, So we have to

watch out for that cliff edge. What happens to the UK rates market one that's once a QUB program comes to an end. I think price discovery is still in effect. The US has everything the world needs. It has oil, it has energy exports. The Europeans don't have either of those things. And a key difference when they imported that natural gas from Russia, it was priced in euros. Not anymore, it's in llergy, it's in dollars. So there's a fundamental terms of trade shift that points to euro being at

ninety cents by the end of this year. During let me make clearer, and I'm not trying to sell the mirror on this, but when the l d I scandal was breaking, I used a Numurror research report from two thousand eighteen Jordan. It was scary accurate about what the mess would be in the British pension market. Jordan. Where's

the trade opportunity right now? I mean, where where's the big figure opportunity right now, everything considered, I think where we are today, I think we've got this dollar softness facts to lower US yields. It's backed up by mood music, the I s M being weaker, potential for China having this marathon and masks being taken off of that marathon, all kind of mood music stuff, not fundamental game changes. We've got NFP coming up on Friday. I suspect we'll

have a strong average earlier earnings number. I think the job's data will will still hold up the growth on that side, So I think folks will be surprised again by US jobs not slowing down as they expect from all the growth signals we have. And then we've got CPI the week after, so I think really the trade is to fade this dollar weakness. It looks like everything we saw in May what looks at what we saw

in guests. We had these kind of big draw downs and the long dollar trade, but the trend is still there. So you wrote to ninety cable to parity and below, Jordan, can you just congratulate Tom for saying Birmingham and not Birmingham working. I'm working. We've been working on this Jordan. Next is the Bromi access. So if you can say the right mates, I want to go up to the and Harborne and have a truthful, full English, full English

up there's different. That was an authentic Bromi accent from Jordan, Rochester with you, Mura Jordan, thank you. Right now she has one of the greatest parchment streams in the United Kingdom from Edinburgh to London School of Economics with real expertise on China. The chief Economists Lombard Free Obamas joins us right now for you just to start. Are we in global recession? I think we're heading that way. I

didn't think we're quite there in the US. China is probably coming out of its recession, but still very weak and not coming not really going to get its reopening boost until h one of next year. The real problem is is Europe, and I think this is this is um what's what's moving markets at the moment as well, that there's something much wider going on here than just the kind of the if I can use the term slightly cat candid delivery of the of the of the

fiscal policy response in the UK. I look three at the news flow and clearly Australia blinking is important. What are the ramifications for other central banks, including ECB, that rb A just decides enough. Yeah. I think what's happening here is that there's there's a global shift towards a higher returns environment, but you can't get there all in one go um that the real economy just can't can't

handle it. And there are these sort of powder keggs of um financial accelerators that have been left behind by the period of low yields in the twenty tens. So trying to get from the twenty tens level of yields to a pre global financial crisis level of yield which is where we think we ultimately will be ending up over the twenties, trying to do that in one mini cycle, which is the COVID cycle, is is just too much for the real economy and for and for financial markets.

So I think what we start to see now is that QUEI comes back in in a very different guise from how it did in the twenty tens. It's much more of the sort of the badget response to try to provide liquidity um where necessary in order to prevent yields from rising. More rapidly rather than to try to keep yields from from shifting lower. And I think the underlying forces here are much much wider than than the kind of the narrative, at least around the UK UM suggests.

What's what's happening here is that there's been a redirection of funds in favor of of the energy firms, in favor of of of Russia really and UM and the non for so all fuel firms. And what that does is you're you're handing funds to companies and countries that are much more likely to want to invest them than they were in the in the recipients of those funds in the in the twenty tens well from in that process,

you're dragging yields higher. There's a lot there, And I want to just hone in on one thing that you said, the quantitative easing this time around is going to look very different. Does that mean that you think the quantitative tightening is over and they were entering a new quantitative easing cycle of trying to reduce the pace of bound ye yield increases. I think in as far as the UK goes, yes, I would say that the quant stative easing is is sort of dead before it gets off

the off the ground. And yeah, the the quantitative tightening, thank you m the quantitative tightening just doesn't doesn't really get off the ground. That you get this kind of QUEI that is is not the same flavor as the as the twenty tens, and it's there to prevent yields from rising too too rapidly um and that that is

is probably the case for for Europe as well. Where where if anything, more worried than we are about about the UK, with Germany already having suggested that they're going to go alone on the on the fiscal front um, where does that leave countries like like Italy um, where we'd be much more worried about those kind of structural

issues starting to to re arise in the euro Area. Therefore, you get the move back to to the t p I, which can very easily translate into something similar to to what the Bank of England is doing with regards to its kind of short term new flavor q e UM. So it's a very different flavor of monetary policy since since the since the twenty tents. How much is this a European story and how much is this a global story.

I mean Tom was talking about the RBA blinking raising just twenty five basis points rather than a bigger rate hike that was expected overnight. How much is this the example rather than a story of specific nations facing specific inflationary pressures. I think there are now so many different idiosyncratic problems that are arising at the same time that we can say that something systemic is actually going on. The European trouble. Europe is definitely at the center of this.

I would definitely point out problems in China that can arise, perhaps not till after the reopening, so therefore into the second half of of of next year, but I would definitely point that out as a structural turning points for for China as well. And I think because of of this kind of updraw in in yields that the fiscal authorities are very much are very much leaning against. You've

got this battle for for funds. That really speaks to the longer term secular trends that have just been sort of fast forwarded by this energy energy shock, that deterioration

of of the geopolitical environment and the natural environment. These are all factors that are kind of nasty cost push for inflation factors that that speak to um the need for higher returns, and that the likelihood of higher returns in the in the twenties, and we're just seeing the fast forwarding of that in the in the short term. But I think it does lead to to capitulation on central banks, first in the form of pushing back against the financial accelerators, as we've seen in the in the

UK and the pension funds fiasco. But then in the case of Europe, as a result of the slowdown in in growth. Yes, governments are are supporting their economies through fiscal spending, but that the cost of doing that, there's no free lunch. The cost of doing that is that yields are much higher, so you're getting the spending on energy,

but it's happening at a higher higher yield. And therefore the property market in the UK and and the and yields more broadly are starting to tighten financial conditions and tamp down on growth in in that map and that fashion, so central banks turned from worrying about inflation UM in Europe to worrying about to worrying about the financial accelerators, and then growth UM and and therefore you get the

capitulation in that sense. I think in the US we are in a very different position here because inflation is more embedded UM, and therefore the policy response has to be still focused on inflation. Is the heritage of TS. Lombard Freyer. I mean, model out how they get to two Given that a huge body of people say that's an impossible event, do you just assume they get to five percent or four percent and then recalibrate. I think that's probably where we're getting too further down the line

that they will eventually explicitly or implicitly revert inflation. Inflation targets higher um, just because there are so many secular forces that are pointing in favor of higher inflation, and not all of them being kind of cost push inflation. There's also this change in the relationship in global labor markets and credit as well that that suggests that China is no longer a cap on on wage growth in

developed markets. Therefore, you have faster wage growth, you also have faster faster credit growth than Both of those things are inflationary. So leaning against that means it's you're kind of accepting this politically unacceptable idea of a much higher

unemployment rate in order to get inflation back down again. UM. But I think in the shorter term with the FED that the point that I would get across is that there's there's too much reliance on on leading indicators that are simply monitoring what the costs are doing, and that the demand supply imbalance in in UM in in the US, both in terms of the goods market still both in terms of the labor market UM is still great enough that you've got this underlying heat in the in demand

in the in the economy UM. And therefore, while the rest of the world has good prospects for a slow down in inflation, I'm still worried that you get upside surprises in inflation in the US because margins have that have greater room to expand on the back of demand still remaining relatively strong. So we're very much looking out for that US recession coming through because that's the kind of the key the key turning point for the FED. But it doesn't seem like we're quite there yet. Frans,

thank you for being with us this morning. Frank Bemish of Tis Lampard, just Britiant. It is October which means we must speak with Paul Sky, founder and lead analyst at Sanky Research, who was ignoring his conversation. Paul Sankey is decades of experience in oil and knows in October there is Vienna and there's also Park Lane, a string of hotels in London where the elite meet degreed in

the oil community, as they do beginning today. It is the well the energy executive of the years from Cutter will pass on that, but far more CEOs together and the rest Paul is a consensus opinion that oil will rise back into the hundreds. Yeah, I think so. I mean that the first consensus is that will get a million barrel to day cut from Okay tomorrow and what people here are saying will be a brief meeting. I

was told that the decisions already taken. I was actually hoping that they would take some time and argue a bit so I'd get a chance to get out to Dianna towards the end of the week. But evidently the decision will come tomorrow. That should be I think a

million barrel. They cut a bit about half of that probably time actually delivered, but it's still enough to tighten what's effectively a market imbalance in Q four, so any cut will effectively served to raise prices the elite meat degree at the Intercontinental Hotel or at the Dorchester where umbrellas in their drink. But is it just about Saudi Arabia, Arabia and Russia. Well, I have to say I've got to wear black tie tonight for the for the award dinner.

To my media help with the boats, eie there, that's yeah. I mean we had we had the CEO of Around Cooke talking very eloquently, Japeman Burden of Shell also very eloquent. We had protesters outside the Intercontinental yelling in my ear as I walked in. But the problem is the protesters don't really have a coherent solution. In fact, nobody does, and that's that's one of the issues. A couple of

interesting points from Shell. For instance, he said that this quarter alone, China is adding more cold production than the entirety of Shell's energy product, and so essentially, in one quarter, China grows coal by the entire size of Shell. And again talking about the CEO of Aronco again talking about lack of spec capacity and how demand is remaining strong. So again further to your first question, it's all pointing towards higher prices basically, and that's really the crux of

the matter. How much is this potential cut of a million barrels really an issue of a lack of capacity rather than the appearance of lack of demand. And how much pushback will OPEC plus get from the United States from Europe saying we need lower prices at this point to steve off a crisis. Why are you effectively causing an increase in prices, are potentially slating the groundwork for

that going forward. Well, Lizzy made a great point which I'll come back to you, But firstly, I think the Saudis have enjoyed a hundred dollar oil, and you know, I would rather be closer to a hundred than too eighty. So that's point one. Point two that you made is that they're so tight on spec capacity that they may well feel that, you know, to rest their fields a bit, to give themselves some more breathing room. A cut is

a good thing. The outside chance was that there'd be a major quota renegotiation, but it doesn't sound like that's happening. These guys are still using eighteen quotas, which are just completely nonsensical now in terms of things like Nigeria and Angola's just not even close to their quotas. But I don't think there's going to be that kind of agreement. I think it will be a pretty strong cut decision led by Saudi U a fifteen minute mating, of course,

fifteen minutes or more for this mating. More than fifteen I think you know that those ones were just rubber stamps. But it may be. I think, well, I was again, I was hoping it would be it would take longer than than a day and roll into Thursday Friday. It sounds like we'll get a decision tomorrow and before the markets in the US tomorrow. Yeah, it could be. There we go. Paul sank you, Thank you, sir. I'm going to see a Paul Sanky there. Thank you. Research. This

is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live week days 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