Surveillance: China Challenges With Citi’s Morse (Podcast)

natural gas. This perfect storm shall pass, this market should loosen up later on. It just walk us through the current thinking at City compared to the consensus view that I'm sure it's giving you some pushback at the moment. Well, our natural gas, we're getting a significant amount of perspect The issue that we see is where markets are loosening up.

And remember we're dealing with a problem that's in the power generating sector, not at the moment, in the transportation sector, not in buildings, not in industrial processes, are agricultural processes, but very much, very specific to fuels. In the power gen sector. We're seeing Germany, excuse me, China actually going all out for coal. They are already looking at producing thirteen and a half percent more coal this year than

last year. They're adding a hundred million tons of domestic production this year and in the following two years each another hundred million tons. That's going to displace imports into China, making coal available for the rest of the world. And at the same time they're reducing their imports of natural gas unit date their way down. They have other supplies of natural gas other than lerg imports. They have pipeline gas from Uzbekistan, a big jump in pipeline gas from Russia.

Their domestic production of gas went up around six or seven percent last year, it's going to go up eight percent this year. And they just simply need less natural gas that's gonna loosen up markets provide a significant amount for Europe. So what we see happening is a progressive reduction in where European UH and global gas prices are and along with that gas prices in the US. How much do you factor in at some sort of ban

or overall embargo on Russian gas imports to Germany. We actually think that's a very low likelihood on both sides. UH and if Germany is not gonna use its fetail power, and the EU hungry certainly will. So we don't think there's going to be an overall EU European community agreement on not pulling in natural gas or oil from from Russia. And we don't think the Russian is gonna pull back

because uh, income is better than no income. We actually think that, And that's another kind of controversial point that where Russia is now, the volumes of Russia's now exploiting of natural gas could go down, but they also could go up. There's tolerance in the contracts with European countries to add on above the taker pay contracts that they have and if they added on what they could by contract, assuming that the rouble payment issue is dealt with, which

we think it would be. Uh. Actually more gas means lower prices, and we get if we get the volume right, it's lower revenue for Russia. So it's another it's another strategy that maybe not politically satisfactory, but it could actually work. For so long, many months now, we've been focused on the supply equation, on how tight supply is. Now the conversation shifting back it seems more so toward demand, especially when you see a Chinese economy that is looking incredibly

weak in the face of persistent COVID zero policy. How are you thinking about China and the demand story, not just for fuels, but also the medals as well. Well, it's not just China demand or other countries as well, but for China it looks as though demand is down more than a million dollars a day to day. It doesn't look like that's gonna come back anytime soon. We think they're gonna keep the the blockage on international travel

through the end of the year. So there there is much less room for growth from China than people had thought. Certainly not the seven hundred thousand barrels a day of growth that the OPEC Secretariat has been thinking that's gonna come from China. We think it's going to be negative growth for the year. Maybe not a million barrels a day under year on year, but but a negative number.

And it's also the US where where we've we've not seen demand increasing at the degree to which we would Indeed, for the last four weeks on a four week moving average, US gasoline demand is lower than any year in the last five except for that deep cut in demand during part of the deepest part of the pandemic. So US demand has actually stalled out, just as Chinese demand has has been reduced. European demand is going to be lower,

Emergency market demand is going to be lower. Uh, it would not be surprised and to see significant projections going down for where demand is going for the rest of the year. Just finished on. Supply in the US has been creeping up recently, and where do you see that topping up? Topping out? It's about eleven point nine million barrels a day at the moment. Yeah, and that's nine a day year on year, by the way, Um, we think it's going to keep growing at this rate through

the end of the year. So if we add all liquids, including natural gas liquids, we've just raised our outlook for US production to be one point four million barrels a day year on year deck deck. We think it will be getting very close to that thirteen million barrels a day that we saw in the winter of and the momentum that's built from that should be adding another million barrels a day in twenty three. So uh, we think that you know, one of the reasons for type markets

has been that drop in US production. But US production is coming back very strongly even and would be even without the encouragement of the US government. And thank you, sir for catching out with this this morning with a bit of a different view on several topics that most of citsy you ain't seen nothing yet. And what we have seen, at least overnight was that manufacturing and non serve and services sector in China plunge to the lowest

since February of twenty This is the reported data. How bad are things getting as you start to get all of these shutdowns that are locking up the major economic engines of the second biggest economy in the world. Leland Miller tracts that on the ground, international CEO of the China Beige Book, Leland, how bad have things gotten economically in China? Not an official level, but the unofficial nuts

and bolts surveys that you do in the in the mainland. Well, April was the first period in which the lockdowns really affected growth in a major way. And you know what we saw from that was not just a tickdown you know in Shanghai or tickdown in Beijing. We saw widespread slowdown everywhere, and pretty intensively so it was not just services at retail flailing like what happened at the beginning of the you know, COVID shutdowns in China, where manufacturing

is kept up and running. The big thing now is that manufacturing is being hit hard. Factories are being shut down by the lockdowns, not not the outbreaks, but the lockdowns, and so you no longer have manufacturing pushing growth forward. At the same time retail services and all these other sectors are flailing. So you've got widespread weakness right now, and and there's no there's no definitive timeline for when

this will end. What's your impression of the proposals that the Chinese authorities have put out there to potentially combat some of this weakness, given the fact that even if they, for example, have construction projects, who's going to be able to go out there and actually do them if they're locked down. Well, this this is what we've really been

stressing for the past several weeks. Uh, there is definitely worry uh coming out of Beijing in terms of in terms of not just what the growth is going to be, but how you have a plausible story around they're not being flailing flailing results and and and flailing growth and flailing overall governance performance. So there's talk and this is why you know, you saw the conversation move last week

from monetary stimulus to to moving into fiscal stimulus. All out fiscal stimulos, we're gonna beat the USA and in g d P. But like you said, if you're locking down all these major cities, if you're closing down the arteries between them, how do you do fiscal stimulus in a meaningful way? And so I think a lot of what you're seeing right now is still rara rhetoric. It doesn't mean they're not going to move more and more into into the fiscal side. We've seen that in our

data for for some time now. But the idea that they're going to all out stimulus, they're going to recreate some of the conditions in previous party conditions year, it's way too early to make that jump, alright. So it's talking the talk versus actually walking the walk to large part to this point, Leland, Something else that authorities have talked about, though, is wrapping up the regulatory crackdowns on

industries like technology. Do you think that actually will come to fruition and what difference will that make it might? But but here's here's what investors really need to take note of. Uh. They are scrambling right now to send positive signals to markets, which is why you're seeing positive signals about a compromise over audits and delisting issues. You're seeing uh, you know, positive signals about the regulatory crackdown ending.

You're seeing positive signals about fiscal stimulus coming. It doesn't mean any of that is gonna happen. I don't think any of this was part of their original trajectory for policy going into the Party Congress. So they're saying this and they're increasing sentiment. They may cut people to run into the stock market for the fifteenth time this year. But are they actually doing this? You know, it's it's

it's too early to tell on this stuff. I think markets are getting ahead of themselves thinking that a pivot has already happened. Well, and of course you have seen some money coming back into Chinese equities, but still has been absolutely brutal, and it does seem like that in large part is where policymakers are focused. We're also looking though leland at a Chinese juan at its weakest against the dollar since November of how much weaker can it

get before Beijing starts to get really uncomfortable. Well, look, the want all my all my friends who do for X are excited about this because big, big movements and again in big moments you want. But you know, the U want has been range bound for for years and years and years and and and there are political numbers where they will not go past uh, you know, ultimately seven, but that may even be six seven in the short

term because they're trying to maintain stability here. The importance is you're not seeing that you want to fall off a cliff. You're seeing a supercharged dollar because of what you're seeing around the world, weakness in the euro uh, you know, weakness in in in the end, weakness in the want now, so you're you're not actually you're not actually seeing a r wan disintegrate. You're seeing a dollar and so there is not a a rush to try

to do something about this. There's again, stability is the mandate. Stability is within within about within about Leland. We're hearing from officials that we're looking to a four or perhaps five handle on GDP this year. What realistically is the GDP that you expect for China. Mm, look, sorry I missed that. What what GDP do you think is realistic

in China? Not the official one but the actual one. Uh. Look, if they can get lockdowns under control in the coming weeks, then they're going to still shoot for for four plus. You still have Chinese economists right now talking about five and a half, which is which is rather silly. If they're shut down for all of May, then the question is is there a plausible enough story for for guiding

this over too? So I think what they want to do is they want to be able to claim that no matter how bad things get, they're still going to report four. It just quite a question how whether the lockdowns allow the optics for them to be able to announce that. Leland Miller of China Beige Book, thank you so much. We always love having you on and to hear your insights and the more unofficial estimate of what things are are happening in terms of the momentum in China.

It's the big question for our audience at the moment. Did Tom Kane take off because the red silks lost to the Orioles so now goes on to say they destroyed the Red Sox, just curious because he has no problem bashing the birds from Baltimore. Will he discuss the big loss t k is on day two of a hangover. On day three of a hangover, when he's forced to come back into work, I'm going to ask him about

the Red Sox. Kylie, all right, you do that forward to look forward to his reaction his Tots one though I can't believe I call Spurs tots, but his football team one. So he's a happy man. You can et it. Let's get to junior manual I've ever caught Jillian. Your view is that this is a market of stocks. It's

not about the index. Walk me three, you're thinking, so look, going back to this whole idea of a rising cost of capital is clearly the combination of yields moving higher and inflation moving out of a twenty five year range has changed. The correlation between stocks and bonds. Risk on risk off doesn't exist anymore. Now it is risk on risk one and lately risk off risk off, and in that kind of environment, interest stingly enough, with volatility where

it is, correlation has been low. Picking stocks wins the day. It's no longer longer an index game, and from our point of view, there's a whole group of stocks out there who actually have had their earnings estimates revised higher and still have you know, a situation where they've been crushed year to date. Uh And that's where the attractiveness

lies for us. Okay, So these are specific stocks. First of all, can you mentioned which ones you see the biggest opportunities in Well, we'll say it's it's across the salou The semiconductors have been hit very, very hard in general, and actually if you go back to last week, there was several which had in an in a season of

very poor earnings responses, had good earnings responses. The home builders is literally the group that everyone loves to hate right now, huge short interest there um and you know, to us any sign not even that rates are peaking, but that the level of ascent of rates is likely to moderate, which I think if Pale gives the market what it wants, you get to see that those are the places we think are worth a look. Do you think that there have been pockets of capitulation already in

this market? Is that basically what you're saying? Uh? So, profitless tech is certainly close to capitulation. But again, in a rising cost of capital environment, it doesn't necessarily mean that there's a bye, because if you look out one to three years, clearly refinancing is a more difficult concept

going forward. But the problem here is, particularly when you think about this week, is it's very difficult to explain to the public that negative GDP print along with the large inflation numbers, and the public is the one that disproportionately owns fang, which has been hurt in recent weeks. Well, talking of the public, Julian, let's talk about the consumer, which by and large seems like it's holding in there, is tolerating higher prices, is allowing companies to exercise pricing

power and retain margin. Do you expect that that's going to continue to be the narrative as we move forward through the remainder of this year. So we had AVERQUI s I s I do really on the ground survey work literally day to day and week to week, and Ed Hyman's work is try as we might to find material weakening. We don't see it. And so it's our view that if you look at sort of years like twenty sixteen, the last time that an exogenous shock like

China weakening spilled over into the US. It derailed the consumer very briefly and then just kept on going. And that's what we see at Julian before we run away. The conclusion of your thoughts picking stocks wins the day, Yes, and no, Julian, it's very, very difficult to pick stocks. Michael Packman pointed out that the average draw down of the average stock on the SMP five dred twenty one

to draw down on the SMP's thirteen point five. Judy, and what do you say to people who maybe don't have the skill set to pick stocks or the track record to do so, and don't want to pay up the phase to see if someone's going to be successful or not for a very tricky twelve months. Do we really want to give up on the index just now? So? I think what you do is you really need to

take a different sort of look. First of all, it's our view that given the likelihood that you're still going to get above trend, and remember trend pre pandemic was two percent growth, that you're going to get above trend growth in the US this year and next. You're gonna get rising rates. You're going to have to stand high inflation, you want to tilt towards value. Value has outperformed this year after fifteen years of underperformance. We think that continues.

But John, look, the fact is is that nothing lasts forever, and index exposure has really literally one the day for fifteen, perhaps twenty years. We think that good active management, and this is where you got to do your research, is going to look very attractive going for you know the problem people have that Judy, and they've heard that over the last fifteen years, and then passive one the day.

You know where I'm coming from that people have just heard this so many times that is this really the regime change? Is it finally here? Well? And I would argue that that it is simply because if you think about it again, we've had two other regime changes that people probably hadn't thought that could happen in the last twenty five years. That is a bond market that is now reversed its bullish trend and is arguably having yields headed higher um as well as an inflation breakout, and

we think these things cause a rethink of the investment landscape. Julian, awesome having you in the building as well as you exit the building, so weather New York City, Jinetman, you would have a core our site. Kathy boss Jansits the chief US financial economists for the Economics. Kathy, we love catching up with you. Let's get straight to Wednesday that news conference. What do you expect to hear from Sham

and Pale? Thanks John, happy to be with you. Well, I think we're gonna have to rely on the forward guidance and any tweaks to the policy statement because we're not going to begin revised GDP or inflation or those infamous UM interest rate that plot estimates. So um. You know, it really does come down to the messaging and any type of forward guidance UM he provides. I think he is going to remain very hawkish. Um. They're very worried

about inflation. They see wage pressures picking up. Um. So fifty basis points done the deal for Wednesday, and and our view is probably another fifty basis points in June. We don't think they're quite ready to go seventy five, although you know, I know the markets have been flirting with that. Kathy, what do you think has the more potential, the most potential to move markets the Wednesday FED meeting or the Friday Perils Report. I would I would bet

on the FED eating um. You know, payroll should be slid um. You know, the wage data probably actually takes front center um, you know, in terms of what's most important of the data, maybe also the labor force participation rate, because of view is at least our view is that as labor force um conditions continue to improve, that's gonna pull more workers into the labor force. You need that

to keep a cap on wages going forward. So I think it'll really the FED right now sets the stage um for the financial markets and really also for the economy. Peleey ansked a really good question earlier about what the bigger consequence from the China lockdowns would be for the U S economy, whether it would be faster inflation or slower growth, and the answer, unfortunately is probably some dose of both of them. How are you viewing this as with respect to the FED and how much more difficult

it makes their decision? Definitely makes it more difficult. It's it's another stagflationary shock, even if we're not in staging fflation per se, because we have stronger growth um and momentum thankfully for the US still looks very good. The consumer spending data on Friday showed the consumers can actually outspend inflation um only by two tenths, but that's significant because as it gives us a solid handoff the consumer

spending in in Q two UM. That all said, the FEDS looking at still strong domestic demand backdrop UH, supply chains are not correcting as you highlighted, as quickly as we all thought or hoped um. And and on top of that you have wages um picking up a bit. So that's just going to keep them in a hawkiche mood and they're gonna hope that they contain inflation without you know, killing off the business expansion. Well, Kathy, to your point on the consumer, that's not just something we're

getting out of the economic data. You're hearing it from a large part of corporate America as well, that the consumer is hanging in there and is tolerant of higher prices. I'm wondering how long that can remain the case, and if the American can sumer and the support from it is actually going to allow and support the FED and landing softly, we think it can last for quite a bit. At least through UM this year. UM. The household balanty it's really strong. Right. You have aggregate savings that were

built up during the pandemic. Uh, they've tapped into a little bit. I mean, we estimate somewhere around forty billion, but they built up two point seven trillion UM. Leverage and debt is quite low UM. And you have the wealth gains from housing and even the equity market, even though it's faltering a little bit as of late, and that still gives a powerful wealth effects. So we think it carries us at least through this year and even into next year. But that's it's really good to depend

on the Fed. If if they have to drive rates much higher, UM, you know, let's say three or four percent, that's not what we think. We think it's somewhere over you know, to sixty or so on the Fed fund rate. But if they get higher than that, because inflation stickier, that's gonna be really difficult for the consumer and also for businesses. How is your thinking on the balance sheet evolved, Kathy?

And do you think that what we hear from the Federal Reserve on Wednesday on that for an in particular, can hold any surprises I think they'd rather not surprise us on that front. There's so much uncertainty around the rate forecast and outlook, they want to keep it as boring as possible. Of course, we know they've struggled to do that. It's not as boring as watching page dry um. So we we expect that they'll, you know, ramp up

the balance sheet reduction. They'll start off with maybe you know, thirty billion in treasuries, fillion in mortgage backed securities and eventually get to somewhere around which is what they floated right in the FOMC minutes, and and it's largely what the market store expecting looking at the moving real yields taking place this morning, the high of the year happening right now. On a closing basis, Lisa, on real yield, it's just about positive, just about positive. We did that intro,

I think in the last couple of weeks. We did that in today. But at the same time, people are looking for this being a more sustained move, and we haven't seen a more prolonged decline zero point zero one five four. This is actually interesting because it's been so deeply negative and was more than negative one percent lower than negative one percent. As recently as March. This move has been dramatic as people really assess how tight the FED would like to go and really the ripple effects

through equities. I've got to say, John, could be what we're seeing today in terms of the sentiment. Cathy, just want to come to you on this so called FED put and whether this FED is truly data dependent. Bob middle of Blank Rock said to me on Friday that they don't have the luxury of being data dependent. Maybe they will later on in the year. Do you take that particular position as well, and what do you think they can become data dependent? Again, it's a good question.

I think they are data dependent, there's no doubt about it. But part of the data they're looking at our financial conditions broad financial conditions, So that is going to include equity prices, that is going to include corporate bonds, but it's going to include the dollar. Um. So how they see financial conditions evolving is going to help them caliber rate where they think that the funds rate is going to be. But you know, I think right now front

and center for them is taming inflation. Uh, and that's what we're gonna hear for now, um, as we progress through two twenty two, and if things slow a little, they may pull back a little bit on that really hawkish rhetoric, Kathy, what would be a restrictive Fed policy rate? And our view it's two percent neutral, So anything above two percent will get you too restrictive. Now the fedserve things,

it's two point four, um, So there's a little tension there. Um. Markets probably a little closer to our view frankly, but it's an unknown, right, It's it's an estimate. It's very difficult to really um pin down precisely. Um. But certainly once you get above two percent, that is going to have some repple effects. And we see that right in the mortgage market, right, see mortgage rates already jumping, you know, well above five percent that is going to start to

slow things down. So keep in mind what the market has done is already doing some of the work for the Fed reserve. And you've certainly seen that showing up in financial conditions. We were joking earlier at Kathy that the Fed's only actually moved twenty five basis points, and yet looking at the market, you may think they moved

a lot more dramatically. Has the market done enough work that the Federal Reserve may actually have to be less aggressive than is currently the kind of consensus thinking, yeah, we we think they're going to go less aggressive than the markets believe. When I looked at your at Eller curve, you know, with the front end short term rates, they were predicting a fund funds rate topping out around three

per cent or so next year. Again, we think it's about forty basis points lower, So within that ballpark, um so, I think. But the fears, you know, the whisper fears that they'll have to go even higher, I think are unfounded, and we'll have to watch closely the financial conditions, will

have to watch inflation. But if inflation is close to peeking despite you know, the supply chain problems and aggregate demand for the consumers shifting from goods to services, that's really going to help the fit out a lot, along with you know, the tightening in financial conditions. That next CPI print I think coming up next week, isn't it, Lisa, I believe so, I'm looking at it right now, and hold on a second. I will check that for you. But the cp I print will be important for the

perhaps psychological impacts as well as the direction. Do you think we're again it is the eleventh? On you? I think I kind of knew it was the eleventh. I was just imagining you'd have confirmation. Well you just imagine, do you imagine more of me than what actually happened? Thank you, Thank you. Next week mechanical peaking, you might just say thank you to Kathy Kathy bus Jack six. Thank you very much. Looking ahead to Wednesday in the

Federates seven. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best and 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 Bloomer