Surveillance: CPI Expectations with Chaudhuri

Let's just start with CPI, What you're looking for tomorrow and how you expect this market to respond to it. Hey, good morning, Great to be here. So very exciting days for those of us who look at the inflation markets, which is everyone these days. Um So, I think we're probably going to get something that's a little bit stronger at least than what the market is pricing in on

both the core and the headline. And when I think about the core or data, I think what will be important for us to look at is the breadth of the strength. Um So, thinking back to sort of the summer, you'll remember that most of the strength and cp I was coming from those reopening sectors. So whether you think about travel or f as or hotels, things like that.

And I think what we saw in the October data more specifically, was that there was a little bit of a breath broadening out, so we were seeing strengthen both goods and services inflation. So I am looking forward to seeing more of that, more of strength and some of the goods parts of the market as well as services

such as shelter inflation. Where is the opportunity for investors, Gary, given the fact that we've seen inflation rise to the fastest pace since the nineteen eighties, likely to continue in that vein with likely pressure then coming from the Fed next year. Yes, absolutely, so I would say a couple of things here. We do think that inflation, you know, if you look about a year ahead from now, so obviously we're going to see a pick up in the

near town, but after that we're likely to moderate. But I think what it's important to note is we're still going to settle at a level that is higher than the pre pandemic period, which was obviously, as we know, below two percent. So we're going to settle at that higher level of inflation, and investors need to think about

hedging their portfolios in a multi asset fashion. So obviously looking at equities of those companies what we call the quality companies that are able to pass on higher prices to their cast, you know, pass on the higher prices. Within the bond markets, obviously, you know expectations are our expectations are for yields to go higher. But at the same time, sort of moving your allocations to inflation link

bonds I think could make sense. We've certainly seen a huge amount of flow both into T I P and S t I P, which are the two E t F tak us. Twenty of the fixed income E t F flows this year have come into inflation link bonds and I expect that to continue to do well as compared to nominal bonds. And in the last area, I think that makes sense. It's really looking at real assets, so you should be looking at a basket of diversified commodities,

looking at reads UH and looking at infrastructure. I think all of those makes sense for an investor to think about in a regime of higher inflation than the pre pandemic one. Gargi, it's fantastic to speak with you, in part because you've got a bird's eye view for the

retail and the institutional investors. Have you felt a big divergence between the two heading into year end as retail investors see the inflation concerns and a longer term nature of them potentially as being more of a threat in the institutions that seem relatively sanguine or even optimistic in their outlooks um, I don't think it's a retail versus institutional bifurcation. I think there are investors that brought into

that really did buy into that transitory story. I know we don't say that word anymore, it's been retired, but there were investors that did buy into that story, and they could have been from the wealth community as well as the institutional community. I think more and more we're gravitating towards the space where investors are asking me, and I'm sure many other strategies and portfolio managers across Wall Street,

around what is the best inflation head? You know, we've written papers and we're coming out with our year ahead outlook, and this is something that we're focusing on because this is what our clients are asking us. So I think the story has changed from what do I need to do to insulate my portfolio for the next two or three months to very much a belief now that this is probably with us for a slightly longer period of time, and how should I play for it in that medium

term period. And Gargy speaking of the two outlook, we've talked a lot already this morning about the divergence in the headline level where we think the SMB five were strategists think it will end up at the surface level when you talk about the leadership beneath. It was supposed to be value over growth, small caps over large that actually didn't really happen. Does that actually happen in you we'll see, I mean, listen, there there are a lot

of reasons why it didn't happen. You know, we saw that did take place in the beginning of the year, and then you had the delta scare and again this year, right when we were all getting pretty optimistic about the growth prospect and you know we still are. You do have this omicron fear that is in the markets. We see that in the bond pricing right now. Um So for next year, I think there is reason to believe that, yes, we can see some of those cyclical components of the

economy do better. But we have to be a little bit humble around some of the risks that have come up more recently, whether it is with the Federal Reserve, whether it's with the new variant. UM. So what we're telling investors to do is really focus on a value and a quality barbell and then really look at some of those companies that have that pricing power, that ability

to pass on higher prices and um. You know, that's what we think investors should do for just awesome and so always and could hear from your county chantry there of plank Rock Market Banner. I wonder if he is the head of Right Strategy Bank America Global Research. Mark the front end the back end of the yeld curve. Let's start with the back end and then we can go to the front end. What is driving tens right now?

Mark why we down at one fifty? So tends are believing that the Fed maybe making a policy error by essentially overweighting a fight against inflation versus supporting growth. UM. They're doing that because there's concerns about the omicron variant and the recent uptake in cases that we have seen. They're doing that because they're worried that the FED is going to be tightening into supply constrained inflation and reduction

of consumer purchasing power. And they're doing it because they're worried that risk assets may be very sensitive to overall rate levels in the stance of policy. So that's what's keeping the back end relatively pinned. It's what's keeping it around one and a half percent right now. Um, But it's what's allowing the curve to flatten because the market has gotten the message from the FED and they know that the FED is going to be tightening in the not too distant future. This is a reason why I

love covering this market. It's enough to make your head spin. The idea that at a certain point the FED might get a message from the markets that are getting a message from the Federal Reserve and say, well, they think that we're making a policy error. Perhaps will tap the brakes not raise rates as much. At what point does a yield curve flattening send that message to the Federal Reserve? So I think that the FED is probably not too happy about the shape of the curve, given where they

are in their hiking cycle. They're just about to start and they know that the market is telling them that they may not be able to hike by all that much. That's not a real warm and fuzzy signal if you're at the Fed. But that's not your issue right now. Your issue is that you need to guard against elevated inflation. You need to start leaning against demand, and need to start doing that by tightening financial conditions. That's how the

FED transmits monetary policy. And so even though it's not a great signal for the Fed, I don't think it's going to prevent them from taking the necessary action and beginning to withdraw a monetary policy accommodation. Well, the action that will be taking in the most immediate term may come on Wednesday, and of course we have the cp I print tomorrow mark or either of those events actually going to be catalyst for the bond market or is all of that already priced in and the market already

front rent both of those events. So the market certainly expecting elevated inflation tomorrow. Our economists who have had a great call on this are projecting, though, that CPI is going to realize even higher than expected. Uh. They project a reading that's going to be two tents above consensus on headline at one tenth above consensus on four. So that's gonna be Probably it's gonna further this flattening dynamic that we're seeing in the market, or it's gonna firm, uh,

the amount of rate hikes that are expected for next year. Now, the meeting next week, we think will confirm some things that are likely widely expected now by the market, such as a more accelerated pace of taper, essentially doubling the monthly just reduction and then ending purchases by the time of the March fo MC meeting, which may give the Fed there will give the Fed the option to hike

if they want. Um. It's also going to give us an updated reading on the dot plot UM And certainly we're sympathetic to former New York Fed President Dudley's views that we're probably gonna see more hikes that get priced two maybe three for next year. But the thing that could surprise the market that we sense is still underappreciated by clients is a discussion of the Fed's balance sheet. At least you mentioned this earlier. The Fed maybe gearing

up for quantitative tightening. They haven't given us much guidance yet. But if they start to shrink the balance sheet at some point next year, that we think could really weigh against risk assets, because it's going to be adding duration risk to the market. It will be adding more term

premium that will lean against the flattening pressures slightly. But most importantly, it's going to be withdrawing liquidity out of markets um and the extent to which Powell elaborates on this or provides hints in that direction may end up being the big surprise for the meeting next week. Mark just quickly, just in terms of sequencing, then, do you think that needs to happen before we get that right?

High can just that change your view on when they make a move Now, we think that the sequencing will be as they have historically done, rate hikes before balance sheet reduction, or perhaps rate hikes with balance sheet reduction. At the same time, we don't think it's likely that they begin balance sheet reduction before rate hikes, primarily because the Fed has a much better understanding of how rate hikes or increases in the Federal funds rate end up

impacting the real economy. They've done this for years. They've got good models, they give them confidence and how it works, but they're less confidences. Less confident in is how the balance sheet actually influences underlying economic conditions. That said, Powell has told us all along that they have multiple tools with the emphasis on the plural here to deal with elevated inflation, and the two of the obvious tools to us are rate hikes and bounty reduction. That means that

bounty reduction could potentially be pulled forward. Gets you thinking, Mark, just wonderful, brilliant. Thank you, sir, Mark o'banna of Bank America Global Research jointing us now is planned Herbert Columbia Professor of economics and former chairman of the Council of Economic Advisors. Professor, You've also got a book coming out at twenty two called The Wall and the Bridge. We can discuss that little bit later. I just want your response to your read how you gauge this labor market

right now in America? Well, I think the labor market is improving and is in frankly fairly good shape even from a FED perspective. The question is what about the participation rate? If everything else looks good in terms of employment and monetary policy, bring back that participation rate. I'm skeptical there. I think the labor market is in great a bit is time for the FED to adjust. It's

time for the FED to adjust. This is a message that you've sent before, and you're not alone in this, especially with the likes of Bill Dudley, formerly of the New York FED saying the same thing. At what point do we start to see it reflected in wages that are keeping up with the inflation that we're seeing consumer prices. I think that won't happen very soon, and I think in some respects it is already happening. We have demand

running faster than supply. There are a lot of supply problems in the economy, but FED can't really fix those. I FED had been focused on the word transitory. Now fortunately it's backed away from from that definition. The game, of course, is to stop a wage spiral from starting. I think there is an opportunity for the FED to do that, but the pivot to tapering and rate hikes will have to be more aggressive than the FED and

telegraphed before. What do you say to people who argue that inflation will naturally roll over next year, that some of these pressures will become less of a pressure as we get a more normal economy and people come back to work in more for some of those eleven million job openings get filled. What do you say, given the fact that that has been the regime we have been in for decades. Well, we certainly will see supply pressures attenuate. That will help, But let's remember there's been a lot

of goose sing of demand. FED had been buying back mortgage backed securities when the housing market was on fire. We've been very accommodated fiscal and monetary policy, so those really have to adjust. I don't think we can think it's just going to roll back on its own. You know, consensus for PC next year will be about three c p I, more than four. The FED really has overshot in the manner it's suggested in its new framework. It's

still time to adjumpt. Well, glad you mentioned fiscal policy there, and Michael McKee when talking about these jobless claims, the idea that maybe people went back into the labor market as they've had to start drawing down their savings that they built up over the course of the pandemic things in part to fiscal policy. What do you think happens as that winds down, and what happens especially to can humors,

tolerance of some of the higher prices that they're facing. Well, I think we will start to see people re entering the labor force, but there's still a lot of excess savings out there, albeit there unevenly distributed in the in the population. I think a bigger issue may be consumers and households workers fears of going back to work, and I think that will have to sort its out out with the vaccine more than with physical calls. Well, and we're seeing return to office plans push back for some

Wall Street banks for the likes of Lift. What is the economic consequence? And John was alluding to this earlier, the idea that if people aren't going into the office in the cities, they're not going to visit their coffee shops or their lunch places. Do you see a risk of us reverting if we do go back to a kind of work from home environment as we move forward throughout the winter and into two Well, I think most large employers want to avert that for simple reasons that

having people together can improve collaboration and productivity. But of course the down us to be safe, and so the real issue is to focus on the public health and get people back to work for all the reasons you suggest. Having said that, I don't think the new world will look like yold. I think companies will have to adjust and be more flexible to work from home, just not as extreme as all the time. Glenn, can I make a suggestion that those empty shafts behind you, we filled

them with your new book. We're moving to a new campus in a week, so they've just packed up my office. I'm not part of the great resignation. Just wanted to try and find out, Glenn. As this book release comes out early next year, can you walk us through it? Glenn? What's in the book? What's the objective? What's the essencelf In Sure, it's a book called The Wall in the Branch. It's a love letter to Adam Smith across the centuries,

uh founder of modern capitalism and economics. Basically, we're living in a world a big change, and big change means good things to a lot of people, but disruption for others. Our policy makers on both sides have tended to try to build walls on the left and the right to protect people betters to go back to small and other classical fingers. You wanted to build bridges. How do you help people compete? How do you bring communities back? That's

what the books about, really really thoughtful stuff. And Glenn, you're always generous with your time. We appreciate it. So Professor, thank you, Glenn over there of Columbia, Dctor, thanks for being with us. Dr Chris Bira, Professor the JOHNS. Halkins Bloombergh School of Public Health, Dodger. I want to start here because yesterday all we talked about was this lamb based study from Fire to Beyond Tech. Can you help us understand the difference between a lamp based study and

a real world study. How wide the gap is between the two. Well, you know, the lab studies are very informative and they're important, but at the end of the day, what really matters is what the real world data looks like. What we're seeing with infections, hospitalization, serious disease fisor study UM was small, fewer than fifty people. It's lab based data. It suggests good antibody responses to O macron with the third dose boost in this small number of people UM.

But there's other data that we're more excited about, like the fact that what we're seeing from South Africa is that many of the people hospitalized with A macron are on room air and don't appear to be as gravely ill as people, for example, infective with delta. Dr Buyer. I've been asking for a couple of months now, when we can transfer from a pandemic to something endemic when the illness is not severe enough, whether because of immunizations or because of a variant, it isn't as severe to

allow us to treat it like the cold. Are we getting close? Is O macron close to that threshold? Well? Unfortunately, you know the world is in a serious delta search. So I think right now the answer is no. Infections are up in Europe as you know they're up here. We are approaching eight hundred thousand American dead. We're going to pass that threshold in a few days, is uh. And we had a hundred eighteen thousand infections yesterday. Most

of that or almost all of it is delta. So I think the answer so far is no. It does appear that O macron is more transmissible even than delta. And if it is really true, and we'll know that in another week or two, that it's a milder disease. Uh, that may be something of attorney, but for right now, we're in the middle of a serious delta search. Can you elaborate on that this idea that if it is four or more times as transmissible as a delta variant, is this one Japanese study showed and it is less

virulence that it could cause her immunity. And I hate to use this when it's Tom Keene's birthday, but her immunity in a more efficient way. How realistic is that possibility among some of the health care professionals that you speak with, well, I herd immunity has been elusive, unfortunately, Lisa.

And one of the reasons why is because one of the things we've seen with O macron that's concerning is that any of the people infected with omicron have recovered from previous infections with coronavirus, So natural immunity does not appear to be that protective. What we really need to see, of course, is people getting their full immunization and then

now clearly needing to be boosted. If you look at the total US population including children under five, we're only at six percent fully immunized, So that is not enough

to achieve herd immunity in this country for sure. When we look at the policy response to this in the public sector in the UK, for example, where they're putting in massive restrictions on the entire country, or the private sector here in the U S where you have Jeffrey saying work from home again, lift pushing their return to office date out into what is the appropriate policy response at this point in the pandemic, given how little we know, well, I have to say that I think the vaccine mandates

are a very important part of this. And by the way, as I've said four to you all, they are constitutional, at least as far as the five case that went to the Supreme Court in the case of the smallpox vaccine mandate, and it was determined to be constitutional. So I think the workplace employment mandate that President Biden has put forward is a really important policy step. In the meantime,

we are in the middle of a delta surge. We are seeing that related to the winter and the cold weather and people going inside, and that means that non vaccine interventions like indoor mask mandates and people working from home are again going to be important. We know now the O macron is here in fifty states. We're still very carefully following this to see if indeed it's going to be less virulent um. But of course in the middle of a delta surge, we need to really practice

the basics of control of coronavirus. Dot gonna catch out with you, sir, Dr Chris Biro that at John's helpines. 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 In. This is Bloomberg