Surveillance: Earnings Revision with Sheets

the chief cross assets strategist. Andrew, It's gonna say, Mr Schats when camp by this equity market, Well, thanks, It's nice to be with you. It's nice to be with you in person. Look, this is an equity market that I think, over the next month is still dealing with a real crucible of challenges. We are into the thick of what we think is going to be a disappointing earnings revision lower. That's a key view of my colleague

Michael Wilson in the US, by colleagu Graham Secker. Here in Europe, I think this is still a period where it's going to be very difficult for the Fed to sound anything other than hawkish given these upside surprises to inflation. And then on the geopolitical front, right, it's too soon to get anything real developments in terms of changes in China policy, and still a lot of uncertainty into European

energy policy heading into winter. So we think it's still too soon, especially with rates rising, especially in the front end, and think investors should stay cautious, and we think that cash will outperform a lot of assets. There is at Brown University a fabulous tradition of differential geometry. Cornellen Brown on the high ground on that, and it all comes down to calculus. Are you frightened by the rates of

change right now? And the second derivative as well well, I think the biggest change that I think the market is going to have to adjust to is you investors over the last twelve years, which is a quite long period of time, have known mostly rates of zero or less than zero on cash, and so Tell said that's out on Twitter yesterday he said, it's like physics without are we going to use to gravity again? I think we're getting used to gravity. I think we're seeing a

real large adjustment. And so if you think about the SMP five having an earnings yield of about five point nine percent, and you know one to five year corporate bonds having a yield of four point nine percent, that is an enormous convergence in ass cross asset yields and so and that's a shift we haven't seen for twelve years. So I think that's an adjustment that is truly different and that the market's going to have to, you know,

make some make some adjustments. For there's a difference between more downside and risk assets and something breaking and something that becomes a systemic issue, that is a fissure, and that is rapid when does something break As we take a look at that pace of change, particularly with the front end rate, Yes, at least I think that's such a great point because I think ironically here the fact that stuff is good not breaking, means that the FED can and likely will do more. You know, I think

we see banks with very healthy balance sheets. We see consumers and corporates with healthy balance sheets. The low rates of last two years allowed a lot of Americans to refinance into low third year fixed rate mortgages, which means their largest liability, their highest cost, is almost immune from the rate hikes, and so that strength I think means that the market is sending the Fed signals you can keep going. We haven't yet hit that point where its disorderly.

So what is that point? I mean, can they get up to the Deutsche Bank call of four point nine percent on a FED funds rate and still have things be sanguine enough to give them some confidence that they can stay there for a while. Well, so we don't think rates will get that high, but we do think that the skew is that they will continue to press

higher and go for longer. And again, I think the Fed is is having a real challenge right in in hockey terms, they're trying to skate to the puck and and we don't know exactly what the delay between you know, a rate hike today and impact and the economy is going to be. And so this is a real, real uncertain I think the market was hopeful that we would get some relief that inflation would start heading in the right direction and that would buy the Fed some time.

But I think it's quite clear with that sticky core inflation, they just cannot pivot yet. And then the skew is excu st Gretzky is that what that was like that I'm going to tear up here, get the spelling right on that banner. I mean, I saw Gretzky actually do this is an absolutely where he does. He was playing the Buffalo sabers in Pero, and Gretzky did exactly what you said, Jerol, Jerol Powell is no way in Gretzky,

is he? Well. I do think what you're dealing with is, if you ask a lot of economists, right, there's not an agreement on what that delay between a rate hike today is on the economy. And then I think there's still very divergent camps theoretically, right, I think there's a camp and we heard this last year the Fed can never hike very much because there's so much debt in

the economy. They'll never hike more than one or two percent versus well, actually, maybe companies and households have termed out so much debt at super low rates that the sensitivity is lower. And I think this is a real question that you kind of don't really know until it makes contact with the economy. So Andrew became out the last crisis, and I oh nine, and you all remember the projections for high yields every single year high yields

high yield, it's never materialized year it's went lower. Do you sense it's that kind of story in reverse, that we haven't quite fully capitulated on this view of a low interest rate world, that we just seem to think that this is an anomaly and we're going back to where we were before. I think there's still some of that,

you know. And I think that the real rate is a very interesting debate where real rates are still quite low in the US, in the Eurozone, in the UK, they have not yet gone back to kind of just the PREGFC level, let alone kind of the higher levels we saw in the nineties. So I think there's still room for the market to readjust especially as you see a healthy household, healthy corporate balance sheets, more capital expenditure that again could point to kind of hire somewhat higher

neutral neutral levels of interest. I put out that Deutsche Bank cool from Matt Lizette five fed funds next year. The amount of pushback I got on that cool just because people wonder whether we can actually live least when you've spoken to this a few times in a five

percent interest rate world anymore. Yeah, And I think that Andrew's Jesus point saying that basically people have turned it out and the fact that they are coping with it gives this uncertainty of maybe we have gotten less rate sensitive and allows the FED to go further is really underpinning the reality of what people are pressing in. You know how you try and get me to explain football to people who don't know? Can you explain? Can you explain Gretzky to every world? This is where you think

the park is going to be. Everybody, I mean everybody knows I know less about English football ice hockey? Are you dazzling me? How do you know that Gretzky skated to where the park wasn't because his daughter married a very very good golfer. So a sort of reverse engineered it from golf through his wife and back into ice hockey. That's how I did it. Does that work for you? That word? Does that work for you? So sort of reversed engineered it from golf to ice hockey and then Tom.

You know it takes a lot of work. Andrew sheets and more? Can Stanley Andrew think it's good to see it? Well, we get on for the next two hours. We will get along with Jane Foley, I can guarantee you that kind of effect strategy at Rubber Bank. Jane. The significance of a one thirteen on sterling, can we start there, Well,

it's very significant. As Leasta talked about Nino and Sterling being fuced out of the e RM, and you know, thinking about that story this morning, the first thing that came to my mind was the current account position of the UK, because if you've got a current account deficit, and don't forget the UK deficit as in the center of GDP is right now at record levels. It's much worse than it was. But if you have a deficit, really you're you're exposing your country to more of the

whims of of of non domestic investors. And if they do not like the fundamentals that they see, your currency is going to adjust lower now right now. I think that's something which has been happening to the pound. You know, for a while. The market doesn't like the growth story, doesn't like the Brexit story, and and it doesn't like that the fact that the tax cuts that are coming from the new Prime Minister could really push the public finance.

Isn't it to numbers that people just don't like, so Sterling is vulnerable and that current account position really exposes the UK. Now, of course a lot of the story is Donna strength, but there was certainly Sterling weakness in here. And one thing that we did see earlier in the years interest rate pikes couldn't it couldn't pull the band out of the whole. Less point to Lisa's point, does it will a seventy five basis points move offer that

much protection? Some maybe, but not all. Chris Gerles the too, with a brilliant short essay pulling the United Kingdom back to I believe nineteen seventy four and Mr Barber the complete failed plan. Then is this Chancellor of the Exchequer going down in flames with a growth model that's undoable? Well, certainly the market is extremely skeptical. I mean he's he's been talking about a growth target for the UK to two and a half percent. Nobody really expects that can happen.

So you're talking about tax cuts which will give it a bit of a boost, But actually what investors will to see our measures that I'm going to prove you know, productivity and growth and and and potential app but not just a quick from text cuts. So investors a skeptical and that is what the government is facing, and that is what the government today appears to be ignoring. It's a sterling story, it's a Chinese u N story. There

are specific stories about weakness. But on the other side, it's very much a dollar story, especially as we're pricing in such high potential FED funds rates next year. What is your sense of when things break of, when at the stronger dollar creates weakness that becomes hard for all of these other central banks and these economies to get

out from under. I think you could probably already argue that the the the the strength of the dollar is already pushing half of the economy, half the world economy under the bus. You know, it is very, very difficult, and I think we see this already for a long time in emerging market so many interstrate hikes there to try and protect their currencies. Look at just care a well, you see it's I don't think that's a particularly logical.

But because if you have a central bank putting up interest rates, you know you've got to say, well, a strong dollar is a byproduct that policy, So why then come in On the other hand, and say, well, we're going to weaken this country. It's not logical. So maybe we were talking about some sort of plaza thing maybe next year when the FED is confident that it has got inflation under control. But a negative feedback loop that you can think of, from the rest of the world

into the US economy for the FED has to respond to. Well, I mean, I don't know whether the FED has to respond to it, because after all that the FEDS in a primary object is domestic inflation and domestic employment. Should it address it? You know, I don't know. You know, that's another question. But certainly there is a feedback loop into the US dollar because as the rest of the world weakens, is emerging markets weaken, people tend to buy

the dollar. And so if you're if you're buying the dollar because the strong dollar is worsening the environment for the rest of the world. Is you've got this, You've got this absolutely, So you know what is going to break it? I think it's it's only going to break maybe, you know next year when when the FED things, you know what, we can come down and this we we've got to handle on medium term inflation. Expect Until then, let's talk about some levels and squeeze this in cable

stirring against the US dollar one thirteen. You're a dollar in and around parity dollar China through seven. Do you think there's some big moves from here or is this kind of it? I don't think it's it yet. And we're thinking on your a dollar. I mean, we've got a horrible winter to come for for Europe, you know, energy price crisis, you know, rationing? Is that all priced in up? I think perhaps not. Are we going an enter turn your election? You know, will the far right

get in? You know that's that's perhaps you know the next potential trigger for the for the euro in just a few weeks time on cable. Our target now is one oh nine. People are out there talking about parity and we dismiss that, you know, no, I don't think we can dismiss it's not our target. But you know

it depends very much on the US dollar. So you know, these are are still nasty numbers to come and and right now, you know, I think the dollar strength will will sustain until you can honestly answer the question, we'll what else are you going to buy? For the best part of ten years, I think it's fantasize. The phone exchange was kind of boring, and it's not boring anymore, no at so Jank writes a catch shop, James Rabbit Bank right now with your most important brief of the

day and fixed income. Sobrato Rijapa joins us head of the United States rate strategy at the French Bank Society General. Their history of math derivative dynamics is world class, Sobrata, thank you for joining us. When you look at the derivative mathematics of what we've seen in the last two days or even the last two weeks, what is the telling story about the rates of change in fixed income?

It's stunning. I mean we were looking at if you look at a chart I think John was showing the chart earlier the two years, we've gone somewhere between twenty basis points last year this time to close to four percent right now. So the rate of change has been just absolutely stunning. You know. To me, what I'm looking at is the message that you're getting from the barn market, which is, you know, to take a page from you know, I think Facebook's you know, um motto, it's like move

fast and break things. That's kind of what the FED is it's about to do, which is, if they do go along the path that the market has laid out, they're going to have to break things ultimately, and that's what the curve is really suggesting to us. I got eight ways to go here, I'm going to go pro on your right now, Sabadre. And that's of all the different spreads, there's that one across all the yield curve.

The two years you go to three months, but let's take the two years the former benchmark thirty year bond. It isn't a place we literally haven't seen almost in a lifetime two thousand. What is the importance of the level of inversion of the two thirty spread? Absolutely the five thirties a two thirty spread is Juliet levels we

haven't seen in two decades. So so to me, what the message there is at the market ultimately, if you look at ten years and beyond, is looking at the potential for a meaningful slow down and growth and you know, perhaps a hard landing, especially if the FED high strates as aggressively as what's placed in the market. You're looking at the term FED fund strate right now around four and a half percent I mean that level was at four percent or below just before the CPI print this week.

So the move and the repricing higher of the term I fed fund strates quite dramatic in a very short amount of time. So that would mean that there's a potential, much higher potential for hard landing at LISA. I'm going to tear up here what a control room we have? Quantas in the crew they throw up a two thirty spread chart. No one else in financial media does you stop referring to our Australia to see there on radio. It's just it's just active, definitely know he rejected be

a little bit ago. Let's get back to the bottom market. I think that's a safer place for us to sit on maybe, although maybe not. The question is where do we stop right and where do we stop not only with twos but also with tens, given that people are wondering are we going to break something? And what does the post breakage look like? Are we still looking at a higher inflation rate, at a higher uh real interest rate in an era where we're not talking about zero

yields anymore? Yeah? I know I think that really at this you know, next meeting, given how dramatically yields have risen. I'd be looking to hear from share Powell on what they think that policy path is going to be. And in my view, at least, I feel like the market has gotten a little bit ahead of itself and and Powell might have to thread the needle and try to sort of talk the market away from the ledge, if you will, Because yes, they do want to frontal rate heights.

Yes they do want to get to four percent and a rush, but I think that they're going to take a much more measured approach beyond four percent to make sure that they're not breaking things as they're raising. Right, So it's gonna be balancing act between what's happening on the employment front. You know you you spoke about FedEx earlier. They'll be looking at a variety of metrics see what the impact of high interest rates are on the broader economy.

They know that Monterrey policy acts with lags, so they're gonna have to figure out what that lag is and how to act now so that the Montrey policy transmission is effective and doesn't break things over the longer run. Sabad, does that mean the area they're buying too? Your bonds, buying two your bonds, um, you know, not necessarily. I mean, I think the FED is not going to be you know,

buying bonds anytime soon. I'm saying, sorry, excuse me. I'm just wondering whether it's a good opportunity, whether we basically have seen a peak, if you're gonna expect a FED to push back and give the market a little bit of ashore as that perhaps they've got ahead of themselves. Does this mean there's an opportunity and short term death, Uh,

there might be. The question is whether you want to enter to that trade now, perhaps Legan, if you start getting you know, closer to four percent and twoes, I mean, you'll start looking very, very attractive. I think you're going to see perhaps a little bit of a tactical steepening between say the three year and the tenure part of the curve. I'm still afraid to ted to year part of the curve because it's it's peggy fat expectations that

has the potential to move higher. But I would say tactically position for a three year ten year steepening makes sense to me, at least over the short term, so broad it's away from your Remit. When I'm going there, it's a Friday, no one's listening or watching. What do you do with the sixty forty allocations and bonds? I mean, come on, in this world where these rates have changed. I look at the Bloomberg Total Return Index and sixty

forty is getting absolutely crushed. Absolutely. I think that you know, all assets are very collated. Right now, you're seeing you know, bond sell off, equity sell off, the daughter continue to tighten. At some point when you've seen a significant move and risky assets, you're the best place you want to be is going to be in bonds because yields are looking very,

very attractive across the curve. You know, even in the long end, even though yields haven't risen as much as they've done in the very front end, you know, you still see pretty consistent demand from mass and liability managers

and pension funds for the very long end. So I think that that's sort of trade is here to stay, and that's going to keep long and yields you know somewhat you know, pegged, and you know it makes sense because if you're looking at a much longer term horizon, you probably want to be long bonds, especially at a time when equities are performing very poorly. So Patra, I'm gonna leave it there, thank you, So Padra Jaffa there

of sock gem on the like market. Jose Antonio Ocounvo joins us now Minister of Finance and Public Credit for his Columbia or thrilled that he could join us this morning. There's so much to talk about, minister, but I have to go larger. After reach back to stan Fisher in do you, through the prism of Colombia economics and foreign exchange, see anything like an international upset that we witnessed in and frankly before that in well, thank you, I'm delighted to be with you. Let me say on that that

I don't think the same kind of crisis. It was very much an emerging market crisis. This is a global crisis, uh, both the slowdown, particularly the inflation on the increasing interest rate, which is affecting all very heavily, very importantly, Sir, I look at the caps, the limitation of price increase. We see it on India and their channel just with Rice.

Here in the United Kingdom we see it, and indeed Colombia and others talk about it given a more global economy, the speed of information, the transfer of finance can caps be effective in two thousand twenty three. But let me say that the major problem that we're getting from the global economy is the inflation, but particularly defect it has

had on interest rates. So both domestic interest rates in Colombia as well as the interest rate in in double capital markets are very high, and that the major specifically effect. Of course, inflation is hard to fight due to the international dimensions of inflation. So for a specific country, it is very tough to to fight that inflation, which you can say it's a supply inflation, right, and the man inflation. Central banks are good at managing the man inflation. But

let's so in imagining supply inflation. There's a great concern that when the FED hikes rates by as much as the market is currently pricing administer that it will create some real problems for the rest of the world. And I wonder from your Columbia, whether you're taking a look at the dollar market and saying we cannot raise money

in that right now at affordable rates? Is that really the situation as you look at your financing needs looking out, Yes, private capital markets are very expensive for emerging economies today, including the Fort Columbia. So for the time being, our international financing is coming from multilatal development banks and official institutions. But so far we have not gone this year into the private capital markets. We hope things that normaliza, I think in the near future, and we'll go back to

the market. We're expecting to raise about one half billion dollars in the private capital markets next year. What does it mean for things to stabilize, Minister? Does it mean that the dollar stabilizes. Does it mean that the Fed star ups raising rates. Does it mean that inflation stops accelerating. But it really means that the the long term interest

rates of the US start to fall. They were falling actually before the the recent announcement of the fact that they would likely increase interest rates again in the next meeting, But before that they were falling, and and also the

risk markets for emerging markets were also falling. But the situation has changed again, but we helped the At one point, when the inflation stabilizes in the United States, UH, the interest rates of the US effectively long term interest rate, which is irrelevant for for US to start to fall. Dr Campo. You have been one of the great voices of Columbia through time, and the stereotype in America is of true civil unrest. In Colombia, you've moved beyond that

with a new government. In your participation as well, can you describe the stability in Colombia and what it means for your tourism. So many people have go on to Cartoner and the rest of it. Describe the tourism future for Colombia after decades of real unrest. Well, let me say that the peace process that took place UH five years ago has been fairly successful in in generating UH

peace in several parts of the country. The current government is involved in UH in other negotiations that we hope would be successful and and let's say they returned to peace in many parts of the country. Has generated UH effectively what you say, UH actually a boom of tourism. We hope that it will come back when the what economy is fully recovers, because the tourism in the world is still a bit depressed. Let's say UH oh tho it's recovering, and in Columbia, WILL would hope to have

a boom tourism and then step. We appreciate you time today. It's lucky to catch up with you. We're lucky to catch up with you. How's the antonio, I'll campo that general equilibrium theory and in the middle of all that is stochastic. And what that means is things are moving rapidly. And Seth Carpenter's chief global economis at Morgan Stanley and those decidedly it is a stochastic two thousand twenty two. Seth, what is the process or path to get to calmer times,

a calmer economy and calmer markets. I think that prospect will require a fair amount of luck. I think the challenge here, especially you started off talking about the Fed. They are feeling their way to how far they have to raise the federal funds. Right. They want to be restrictive, They want to get demand to slow down a lot so that that underlying inflationary pressure starts to EBB. But what they don't want to do is intentionally cause a recession and one and getting to that point I think

will require a bit of luck. How do you respond to the idea that the inflation impulse has a certain effect on the public, but the jobless impulse has a much greater effect. Oh, I think they're I think they're both very very important. Clearly for people who have lost their jobs, that's that's just very very difficult. And crimps they're spending a great deal. We don't have in our

forecast any meaningful rise in in in layoffs. In fact, if you look at the last jobs report, that was super strong and over three hundred thousands of so far, that's been okay. Uh. The inflationary side of things, though, very much hits the pocketbooks of everyday people. The rise in gas prices that we saw a few months ago

was painful. That's starting to come off now. Think the challenge for the FED then will be if gas prices come down to people go back to spending more or or have they been hit hard enough in the wall in the pocketbook it seth We spend the whole of summer trying to work out what the threshold would be for a pivot, a pause, maybe even right cuts next year. You've got right cuts out in. I just wonder what is it about where you think this threshold is going

to be breached and the FETE starts cutting. So I will I will just own up front the uncertainty here is huge um of what we've been for many many years. Lower for longer was what central banks are doing. Now it is higher for longer. And again I think what the FED is trying to do is feel their way to where they can rain in the economy without actually

causing an outright recession. And that's the reason why they go to what they call restrictive territory, but then not so much that things actually crashed, and then hang out there as the economy slows down. So that's what we have as our baseline, is getting some traction and then they just wait for things to slow down. John, I just want to point out equity futures just moved to new lows for the morning. And that's the story so far, Seth.

And the story many people are grappling with for participants in markets at the moment is whether these are sufficiently type financial conditions for this FED to achieve its objective. Do you think they are right now sufficiently tight? Very hard to say. I will say one of the most typically sensitive sectors is housing, and we have seen a

very strong roll over there in housing. On the other hand, consumer durable good spending is actually still holding up to some degree, so it's not clear that things have actually been yet. That said, you were talking about equities. You know, my colleague Mike Wilson always points out that this probably needs to be a lower and earnings projections, and I

think that makes sense. If the economy is going to slow down enough to get inflationary pressures under control, you just have to expect earnings across the board to be lower than they are now, and we're just not there yet. I like your call for holding it at four percent though for almost a year for the Fed funds rate, and I wonder if people are underestimating the pain of holding rates at a level like that, rather than just missing the boat raising too far and then quickly cutting again,

which seems to be the projection in markets. I think there probably is a bit of underestimation there. But I suspect the even greater underestimation is is what happens if

getting hiking rates to four percent isn't enough. What happens if they hike to four percent, wait there for a quarter or two and the economy just proves to be strong enough that demand is there and inflation doesn't come down, then the Fed's just going to keep hiking, and I think that point that there's not really an upside economic growth right now. It is either things slow down and inflation comes under control, or they don't slow down and the FED just hikes more until they do slow down.

John and Tom both make fun of me because at four thirty pm on Thursdays I take a look at the Fed's balance sheet to see where it is and whether it's coming down as they promised quantitative tightening. Over the past week, it actually rose. It became bigger, even though they insensibly we're supposed to be accelerating quantitative tightening. When do we start to feel the effects of this, When does it start to matter for markets? That's a great question, and you and I can can sort of

bond on Thursday afternoons. That was a big part of my job at was in charge of the H four one statistical release nerd alert. Um. Yeah. The challenge I think with with getting QT to actually show up on the balance sheet, and large part is, you know, some of the way they're settling their mortgage back securities holdings on a forward basis, and so it really hasn't shown up. Just give it a couple more months. The treasuries are

coming off their balanty. Over time, the mortgage backed securities will prepay and go away, but it does take a long time. So if I look at the d X, Y is a bundled Pacific rim thermometer. If you would I look at Korean one unraveling through the week, help us in the week and into the Asia morning. What is the gamesmanship Morgan Stanley season, You've got Robbie Feldman in Tokyo, who's iconic, But what is the gamesmanship you see of the Bank of Japan and the Ministry of

Finance into their Monday morning our Sunday evening. Are we close to action? That is a great question. So our baseline view is no. Not from the Bank of Japan. You have Governor Corona in place. His term is up in the first half of next year. He has been committed for so long to be easy with policy, to try to get inflation up. Now it is working, clearly. The end has gone on a on a tear, going lower and lower and lower against the dollar um but

finally they're starting to get some traction with inflation. So very importantly, what do you read and listen to from Robbie Feldman? You have the advantage of Dr Feldman in Tokyo, who's absolutely kind of on this. What is Robbie's twist on this? No, Robbie is fantastic, and I think everybody

should get the opportunity to read his work. I think the key really is here all about legacy and the amount of time and effort that has been put into this very easy policy to try to get inflation of Japan has had lost decades plural now when it comes to the deflationary spiral, and I think there really is a sense, at least with Governor Krota, that it's critical to to stay the course to get inflation of Seth.

Can we just wrap things up with FedEx. It's such a big story for everyone this morning, guess, arguably contributing to some of the nervous that's around the equity market as well. The stocks down almost in the pre market. We all know this is not a small company. It was something like a fifty sixty billion dollar company. It won't be if we close here a little bit later, Seth. They're talking about speed that things have slowed down really

really quickly. Is there anything that you look at on your dashboard that would perhaps resonate with what FedEx rexperiencing. Can you see anything like this? Well, I think one of the key points with companies like fed X in the shipping business is we did see this massive, massive

surge in good spending. Yesterday's retail sales report didn't really make you feel like it has unwound completely yet, but it does seem that at some point we're going to have to see that consumer pull back from as much consumer spending as had been going on on physical goods, and that's going to have ripple effects across the economy. Two retailers, but also two companies that do a lot of shipping. Seth comment of Morgus Stanley Seth. Thank you, Seth.

From you. 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. M