Surveillance: Dollar Weakness with Wizman

He's global interest rate and Currency strategistic Macquarie, but with decades of experience and understanding that the FED is a central banker to the world, Dr Weisman, I what I want to do right now is take the really important comment in your recent research that the FED is far more important than Amicron and the Ukraine as well. If that's the case, what does E M want from the

central banker to the world. I think emerging markets want what they always want, which is cheap liquidity flowing from the developed markets into the emerging markets to help sustain their asset prices and sustained sustain their growth in their

financial system. Unfortunately, we're probably not going to get that that easily when the FED is retracting liquidity, and this is not really unusual when the Fed starts into its a tightening policy from an accommodated policy, as we saw in two thousand thirteen with the taper tantrum, as we saw it in two thousand fifteen in anticipation of the the first rate hike from the Fed. There's always a class of asset of assets does poorly. Two thousand thirteen during

the Taper tamptrum is clearly emerging markets. But you had a rotation in two thousand fifteen into the into the asset classes, and most poorly being commodities. There's always an asset class that suffers. It may not be emerging markets this year, by the way, it may simply be that that class of assets that's done very well in the previous regime of easy monetary policy and the pandemic, which was large cap techy. We're seeing a money coming out of the NASDAC one hundred uh and and and the

and the cryptocurrencies right now. The arch theory is it e M is stronger, better, more resilient than they were twenty or thirty years ago. Do you buy that? I would have bought it if you asked me that two years ago. The problem is that the pandemic has introduced

certain structural weaknesses into the emerging markets, including high debt levels. Remember, the emerging markets were no less shot and developed markets, and it's trying to spend their way out of the problems of the pandemic that's left them with a high level of debt, a high debt burden, just as it has for the developed markets. So that thesis might it might have been valid two years ago, it's hardly valid these days. So Terry, why have we not seen more

of what you expect from the Fed? Priced in? If we have one house after another coming out trying to up their forecast to the for the year to five rate hikes are possibly more well, if you mean for for the emerging markets, I think it's because they were never a beneficiary of of what happened over the last two years, certainly not from a from a structural or

economic perspective. So there's a thinking out there that because there's so much more value relatively speaking, in the emerging markets versus developed markets, they should be rotated into as we as we move out of the old regime and into the new regime. That that might be valid, except for the fact that I mentioned that some of these emerging markets do have these structural issues now as a

result of the pandemic. But let's face as some of the issues that are burning the world and the the sentiment of traders right now are stemming from the emerging markets. Russia is clearly an emerging market, China is as well, and there are geopolitical tensions there too with regard to Taiwan and of course Latin America. The other the other bulish bracket emerging market is um It's it's it's confronting a lot of political issues this year, including two major elections.

So yes, if it weren't for the structural issues from the pandemic, if it weren't these real political concerns, yes, Uh, Latin American emerging markets generally would look cheap right now. I agree, But there's still a few headwinds. So give us a sense of the scope of dollar strengthening that

you're expecting. So we're expecting a little bit more dollar strengthening over the next few weeks and months, I mean, until we get resolution from the Fed as to what it's going to do this week and especially in March. It feels very difficult to imagine traders jumping back into

the foreign exchange and abandoning the dollar. So I think for the next few weeks and months, we're gonna continue to see that strong, sturdy dollar theme that we've been advancing and calling for since the middle of last year.

I think when we get through a few hurdles, including the FEDS UH hike and the clarity over what their interest rate outlook is, we get through the French elections, maybe we get through the rush of Ukraine issues, then we can expect UH some dollar weakness, but it probably won't happen until well into the second quarter of this year. We need to get to all of those hurdles. Tell me of China in the state of it now, Terry Weisman, going into the Olympics days away, and then out of

the Olympics, what happens when we go home? I don't know. Are they going to invade Taiwan? Are they going to continue to to um pump more more liquid into the system? Is their property development sector going to to crash as a result of the burden of death? Can this is really this is your wheelhouse, Terry, Let's go there. I don't mean to interrupt it. This is too important. Do you suggest that their government can bail out the real estate sector? Is then the way they've bailed out things

over the many decades. There are very few financial sector problems that enough domestic liquidity created by the central bank cannot solve. Okay, let's be very clear here on top of that, China has certain advantage when dealing with these financial sector issues. They control the state banks, for example,

they control a lot of the economy. Uh so, so I think they're the tools at their disposal, actually greater than the tools that might have been at the disposal of the US and great in the global financial crisis of two thousand nine. Uh so, so, yes, I think that there is I mean, if if you have to bet whether or not they're going to be able to

solve all this, I would say yes. It may not be an a dropt solution, it might not be immediate, but over time, I don't think it's going to lead to the kind of concerns that we saw eleven or twelve years ago in the Western World crisis. And mcauie Terry, thank you, without question. This is our conversation of the day on what we see, what we observe, what we try to figure out forward in Ukraine. Chancellor A. Marco

is retired. So you were to say who has the most expertise among Western diplomats on the fractious nature of Eastern Europe down to Ukraine and all the balance of NATO, and many would suggest that the assistance of Mr mccra of France is Philippe Eten, his French ambassador to the United States, but far more tours of duty in Belgrade and buch Arest, and of course with his knowledge of Eastern European languages of Romanian and Sir about Karad as well, Embassador,

honored to have you with us this morning. What does the reporting, what does the zeitgeist right now in the West get wrong on Ukraine? Well for the moment. First, thank you for having me for the moment. Of course, we face a very very serious crisis. We are everybody is very much worried here about the risks of this major crisis in the heart of Europe, and we must

combine firmness and obviously keep the channels opened. Uh. We are doing that as friends, friends, having the Presidency of the Council of the European Union right now with our foreign ministers meeting again of the twenty seven countries. We are indeed very very keen to keep a very close consultation with the United States and between all the formats engaged uh we see, but also you, as I said,

and NATO and the United States. And also to continue our work together with Germany in the so called Nomine format, to work with Ukraine Andrews Russia, to continue our work to find a solution to the crisis in eastern Ukraine. You were experienced moving French citizens out of a crisis in Georgia. Georgia, of course part of the Soviet Union. You've had a tangible hand on experience. What should be the presentation to Mr Putin to have him find a

stability instead of an invasion of Ukraine. What is the distinction that you believe will change Mr Putin's tone and rhetoric and action. First, we must deter him from an aggression by clearly indicating that any aggression would have as

a consequence, very very serious consequences. And then, as I said, we must also, as the US as the Europeans are doing, keep the channel opened to discuss how we have the possibility using instruments of diplomacy to solve this crisis, also in view of a longer term basis, which is to rebuild the instruments of European security. So many treaties have been abandoned in the recent years. We have this to rebuild. Now. How much daylight is there between the French approach to

dealing with diplomacy and the US approach right now? As I said, the French approach is not to deal with diplomacy only. It's also a clear indication on the Europeans side that we UH will take the measures to face and to answer inmigration. So it's it's this dual approach where I do not see differences between the Europeans and the Americans ambassador going forward. There is also a lot of tension though in the European Union because of the

bifurcated economic recoveries after the pandemic. How much has this been a discussion As France has enjoyed a faster recovery

than many other European regions. France indeed has a regained its position the position of its economy had been before the Pandemics are Economic and Finance Minister and just forecast four person growth next year and as an economistic economist, Paul Krugman wrote in a recent column, the labor market has not been disrupted because we have taken measures by the way, not on in France, i think, but in Europe, but in particular in France. As we have seen last

Monday a week ago, economy remains very attractive. Twenty one important investors, including eleven American companies, have committed to invest four point five billion in in the French economy and to create ten thousand jobs, which means that's the attractiveness of our economy is indeed quite strong. What does the French image in Europe mean in terms of military hardware sales?

Do Ukraine? Germany seems so reticent and not on a simplistic nature, but with airbus expertise and with jet engineering expertise that everyone understands is world class. Will avoid submarines with Ukraine with great respect, ambassador. But tell me what France can signal by selling by selling French engineering to the people of Ukraine. Uh. Well, it's not new that we have our strong economic relationship with Ukraine, so we we we intend to continue to to support Ukraine as

we have been doing until now. Of course, I have to ask you one question and COVID there's been such a an uproar within the United Kingdom in America over mcroninal give Lisa Bramo. It's once an update on Paris in April. In terms of our macrone how are you doing? The micron variant had, like in the US, a very strong search recently, uh or and we we hope it

is now having its speak. Of course, as a consequences in terms of health intensive care units was the consequences were not that as serious as before because people are vaccinated a lot, and the new vaccination pass is coming into force today. So there was a very very strong policy in France to have everybody being vaccinated, and I think it worked quite well because of time in the market. Sir, we must move on, Ambassador at Young. Thank you so much,

Ambassador of France to the United States. Let's get to Victoria Fernandez. The chief market is strategic a cross mark global investments, and right on cue Victoria, I'll quote you. I know everybody is saying that the FED is way behind the curve, but I do believe that they were trying to follow the data, at least their interpretation of

the data. What is that last bit mean, Victoria, Well, I think Jonathan and we look, everyone has a different opinion of what the data means, even just talking about the inflation components a moment ago or people more concerned about the inflation number or the response to inflation, and so I think that's what it means. What is the FEDS and reportation of what we're seeing? Do they still see a transitory component even though they took that word

away because the market didn't like it. I think they do. They anticipate that the inflation never is going to come down, probably starting in the second quarter, and perhaps they want to buy themselves a little bit of time, so maybe we get one rate hike in March. I think originally they probably wanted to wait until June to do that, So maybe they'll give the market the first rate hike and then hold off until the middle of the year

when inflation has come back down. So we need to see how them uh found interprets what's going on with inflation, Victoria. What's a sweat level out there? When you talked across mark clients, how afraid are people? Is there any sense of catharsis out there? And abrupt change and equity portfolios. Well. Obviously, when we've seen some of the volatility over the last couple of weeks, that's made clients nervous, right, But our conversation with them is, look, there is a lot going

on right now for the market to digest. We have a decently strong economy. Hopefully earnings is going to continue to support at that, but you go along with it. We do have some high inflation numbers, we have monetary policy we're trying to get through, and we have rich valuations on some of these stocks out there, So the markets trying to digest that. It's not surprising then that we're in like the lowest death stile of stocks making

twenty day highs. But I think what's important and what we tell our clients is look at this kind of oversold condition that we're in, in the longer term upward trend that the market is still in, and combine that with the fact that credit spreads Jonathan and I we talked about this, and I'm really yealed about a week ago. Credit spreads are so well behaved right now that that tells us there's still some support for the equity markets. There's just gonna be quite a bit of volatility. I

love that you have. John has embedded a plug for his Real Yale Show into his guests that come on this property. Thank you for that. That is a fantastic show. I do recommend you watch it one pm on Friday's Victoria. How much going forward? Do you think that we have priced in some of the potential margin compression as we deal with the inflation that you talk about? Yeah, I mean this is what everyone's gonna be looking at in these earnings reports that come out. I mean this week

is jam packed. You were naming some of the companies that we're gonna see. The biggest issue that we think is going to be UM margin pressure when it comes to UM wages and employment cost index. Look at the e c I and how high that number has run. I think the Fed is watching that very closely. JP Morgan is an excellent example talking about UM, the issues that they had in regards to wages going higher and

what that did to their earnings. So I think that's gonna be key when we're looking UM at what the earnings report tell us and the guidance. Obviously there's gonna be some supply chain issues UM that will cause some margin compression as well. But I think it's gonna be the employment cost that really people are gonna be watching, and that could make a difference when we're looking at

the volatility throughout the rest of earning season. So Victoria, given his whole backdrop, the fact that you said that you look or you're looking at an oversold condition, what asked, spects of the market right now are oversold and look attractive and given all of these risk factors that you're putting out there, yeah, you know, at least the look the average stock is down about fifteen percent right now from its fifty two week HUIHS tech names even more

so around twenty, So we think people need to pull out their shopping list here. We like financials as a sector for the for two. We like JP Morgan, We like Bank of America. But I think look at some of the pullbacks that you've seen in other names, some of those more cyclical value names. Lows is down eleven percent over the last month. We just added to our Lows position on Friday. Regions Financial is another name. Tractor Supply I think was down about ten percent over the

last month. So I think look for individual names that you can add to your portfolio that have had that pullback and start checking them off your shopping list. Victoria Fernandez a cross mark. Victoria, thank you for jointing us out of course for the plug as well. When in doubt, parachute in an optimist. There's a number of optimists are with us, and there's no other optimist is optimistic? Is Neil Datta And he's a been a pinata is a

pessimists have gone after him through this entire pandemic. It's real simple. You need a theoretical construct to be in the market. And the way to be in the market to go up spent last year was to read Datta. He joins us this morning. His your optimism weakened, Neil No, I mean we have to focus back on the fundamentals, and ultimately healthy fundamentals can help turn the market. Um. You know, for all to talk about how this is a FED driven slowdown, I mean, where is the flight

to safety in the dollar? Why is emerging markets out performing this year? I mean it's all it's it's a very sort of interesting period for the financial markets. But that you know, on this sort of idea that growth is decelerating. Um, you know, like so many things, I mean, potential sightings, like UFOLS, potential sighting is not actually confirmed. I mean you look, you think about housing, the housing markets accelerating. Um, there's a lot of construction activity in

the pipeline. I would expect motor vehicle production to also be accelerating this year. Uh, that's substantially running below trend. Uh. And oh, by the way, we have um, you know, two of Asia's largest economies taking steps to support growth this year. So um, I think, and with the omicron very beginning to fade, I mean, that's going to provide a positive demand shock to the service sector, not only

in the US. But Okay, this is really critical and goes to Krugman's essay this weekend, which I thought was brilliant partitioning the demand side dynamics with a supply side dynamics. And what you're suggesting, Neil is within the gloom, demand will remain resilient, I believe. So. I mean, take a look at mortgage purchase applications, Tom, I mean, even though interest rates have been backing up, purchase applications have actually been strengthening during that time, which tells you that maybe

it's not only about interest race, but things like price expectations. Right, So the user costs for for housing, even though rates have gone up, remain low because price expectations also remained firm. Right, So people are going to be much more willing to finance an asset they think is going to go up in value. And that's underpinning demand in the housing market. I mean, you're out a situation now where the builders are actually throttling sales again. So, um, you know this

isn't a demand issue. Um, so you know. Look, I mean this deceleration call, Yes, growth will decelerate. I mean that doesn't take a rocket scientist to figure out. I mean, we're growing very rapidly off the lows in the pandemic, and believe it or not, a deceleration is priced in. I'm looking at ECFC in Bloomberg right now. Quarterly growth expected to grow from six percent in the fourth quarter of this year down to two and a half uh

in the fourth quarter of two. So it's about what's priced into the market and consensus expectations, and what's the likely outcome relative to those expectations. And my sense is the inflation sinary boom is largely continuing this year. Okay, so if the inflationary boom is largely continuing, then how about the risk that people were worried about maybe a week ago about the Fed hiking rates h too quickly.

Do you think that that's an overreaction as well, since the Fed's going to act cautiously and move slowly so that they don't disrupt anything. Well, I think the I think the market is right to price and hikes this year. But I mean I think we're getting a little bit over our skis. I mean, it looks like your dollar futures markets basically priced for a coin flip for a

fifty basis point move in March. I mean, if history is any guide recent history, so basically at during since from the nineties on, the Fed's more likely to end a tightening cycle of fifty basis points and start one. So um, I think the odds of them going fifty in March is basically zero. Um. But as I said, I mean four hikes and runoff this year, I think

that's a reasonable baseline. Um. But I think where the markets getting a little bit over its skis here is you know, pricing in five hikes, maybe six sites potentially those hikes probably shift more into you, so the markets right to price in a little bit more of an aggressive FED. But you know, let's be let's be honest

about this. Is the FED really hawkish? I mean, other central banks are already hiking lisa And maybe that's one of the reasons why even though the kitchen sink has been thrown at the foreign exchange market, the dollar has actually been flattening out over the last three months. The two concerns here right now, right there's the inflation side,

which you actually endorse. You think that inflation is going to be stickier this year throughout the year, and how much does that crimp consumer demand, which you think it won't necessarily do. And then there's the idea of the FED responding to this but which will at least shake risk markets, which possibly is a reason why you've seen

such a huge draw down, particularly in the NASDAC. On the first point, how much can you dismiss some of the retail sales data that we got out, some of the peripheral sentiment data that suggests that consumers really are pairing back on what they're buying because they're purchasing power has gone down so much so to me, if you look just at average generally earnings, that gives you an incomplete picture of just how strong the consumer is, because

you have to look at aggregate wages and salaries. That's the some product of jobs, the work week, and hourly earnings, and that's running at a very healthy rate. In fact, is running double digits. That was true in December as well. It's running well above the pace of inflation. So the aggregate sort of real income pie is growing. At the same time, we haven't even actually had a household credit

cycle yet. If you look at consumer credit revolving credit relative to things like disposable income or core consumer spending, it remains well below normal. So households haven't even taken on normal levels of credit appetites. So there's room for improvement there. But are you we really going to worry about um consumer spending when people are putting on down payments for homes. I mean, you're worried about whether they're gonna be buying cashmere sweaters during the winter when they're

buying houses. Um, so I think you know and that and that and that's durable goods. Those are durable goods, right, So and that obviously has tentacle into other areas of consumer spending. You do you delay the FED rate rate moves into two thousand twenty three. Doug cash just published that he's buying at the sound of cannons, This off of Nathan Mayer Rothschild from years and years ago. You step up to the sound of cannons and start buying into the market. The underpinning of that is framing the

FED call. Let's be clear here, how many rate rises do you see in two thousand and twenty two. Are you in the camp with Stephen Englander at Standard Charter that we're gonna see a lot less movement by the Fed than expected. Well, I think there's a decent amount of dispersion with the Fed. But you know, look when when when when governor uh sorry, when Minneapolis Fed President Neil cash Car's telling you that he's penciling in two

rate hikes for this year. I think that's a reasonable baseline of how much the FED will do, at least at a bare minimum this year. And it's probably uh, you know something where they go in March and June at a minimum um, then they'll do runoff and then if inflation is sticky. I think you can pencil and hikes in September and December. The Wall Street Journal was out today talking about how the FED may go at

every meeting. Again, it just tells you about how how how much focusing it has already priced into the markets, and how little the Fed actually has to do to surprise in a dovish direction. So I think that you'll probably see a bull stepending of the yolker going in or or or immediately following the meeting. That that's that's that's what we're telling our our clients. I think the front end has room to rally the front room, the

front the front end has room to rallies. In other words, you're telling your clients to buy short dated bonds and buy the risk stories. Yeah, for a trade at least. I mean, you know, coin flip for for fifty basis points in March. The odds are zero, Okay, And who's worried about those cashmir sweatershean, No, that's for sure. No, we appreciate it's I think the point there was Mike and hits home. It's really really important. It's about probabilities.

This is the Bloomberg Surveillance Podcast. Thanks for listening, Join us live weekdays from seven to ten a m. Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine a m. 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