Surveillance: ECB Decision Day

this is well timed. Sarah Bianchi joins us working with Edward Simon over at evercres I s I ahead of US public policy and political strategy and actually very experienced in the Washington science of gridlock. Did we just see, Sarah, the end of gridlock? Is this what less gridlock looks like? Well, it certainly is an impressive victory. Even though there were no Republicans on this bill. With a fifty the Senate, it's a very narrow majority and really holding all of them.

You have to give your hats off to President Biden and his team in a narrow majority in the House. So I think they're showing you that they were sent here to get things done. Now their next package is going to be even harder, So I'm not sure the era of grid luck is over. They're going to try to do things that have taxes and more difficult spending. So we got some rough sledding to go, but certainly today they ought to feel very good. Sarah, is there

any chance of a bipartisan infrastructure bill? You know, I think there's a possibility that they could pull off some of the infrastructure pieces and try to pass that in the bipartisan way. What we've seen as Senator Mansion already saying I'm not going down this other route again. I've done this reconciliation only things, so they're at least kind of have to get caught trying. But I don't think you're going to see Republicans really biting on some of

these tax revenues that Democrats are talking about. So the only way I see bipartis and hip is if they're willing to pull off call it five a trillion just on infrastructure and then try to do the rest on their own. Is democrats, Sarah, it is one point nine trillion. Do income replacement in the emergency of the have nots of America or couldn't actually advanced prosperity in productivity in America.

There's a lot in this bill for everybody. Uh, there is checks and there is child UH resources for families with children, but there is also some testing and some vaccination money that should benefit all of us across the board. I think really the next bill is designed to really strengthen the country. That's where the infrastructure comes, That's where the R and D comes for things like five G and semiconductors. So I think the next one is really

more of an investment in the country. But this one, again, the biggest stimulus for all of us is if we can get out of COVID, and so I think all of it will be benefit to to to everyone, but it's not all the answers for sure. Sarah, good to see you and we appreciate your insight. Thank you, Sarah. Byankee. There about the core side, Calen picker Um advanced as a discussion. We welcome all of you on radio and

television worldwide with Barenburg, their senior economists. I just have to know now, Callen the job owning you will listen to with this press conference today, John has made it clear to me this is not a snooze fest. This is a press conference of import What will you listen for? Well, I expect the ECB basically to reaffirm this commitment to

buy bonds a little faster in the near term. I mean the first once what we've heard sounds like a fairly well judged intervention because the ECB is facing what you might describe as a time inconsistency problem. The market has welcomed the big policy intervention around the world. We have rising inflation expectations, growth and Mentumy is expected to be very strong over the next couple of years, but Europe is still under lockdown, and hence rising interest rates

at this moment is not what the economy needs. So the ECV is essentially bought a little bit of time. It will keep interest rates low and then probably that welcomed rising interest rates reflecting better economic conditions will come later this year, once the economy is opened and once economic momentum is robust. Callum. I just wonder how divided the Government Council is on this plan. The key letter

and the acronym PEP is a it's emergency. It's the pandemic emergency proceased program And for some members of the Government Council later this year, Calum, they might not consider conditions emergency conditions. How do you see that progressing in the year ahead. Well, I just like to cast our minds like a year ago, that was a real emergency.

We were facing at a global level the prospect of a major financial crisis, a major deflation, and we have had an m precedented policy response that has worked, and we're not yet out of the woods, and hence the underlying risks are still significant. I think what we will probably see actually over the course of this year is some evidence that might make people worry about inflation risks.

A lot of one of factors will push inflation probably above the two percent target for the ECB during the middle of this year, but the ECB will have to just remind everyone that these are one off powerful factors that will unwind. We don't think we get on core inflation anything close to two percent over the next couple of years. We think we get close to one and a half percent by end two and hence there's still a big justification to keep buying bonds at least for

the next twelve months, perhaps even eighteen months. So let's talk about the Japanification of the Eurozone. This idea that the year hit the ECB will own a substantial portion of overall debt from the government's in that region. What proportion could that be by the end of this year. Calum Well, I have to just jump in there. I

don't like this description Japanification of Europe. If the Eurozone, if Europe would have enjoyed GDP per capita gains as strong as Japan over the last decade, I doubt very much we would have suffered the political uncertainty and the problems that we've had. The ECB will rapidly expand its balance sheet as necessary to lift inflation expectations, but the real problems come from productivity, from weak investment momentum, and

for that we have to look at fiscal policymakers. All the central Bank can do is grease the wheels to allow actually commerce to improve with a bit of look boosted by some fiscal support. So I think it's other policymakers that we should be thinking about if we're really worried about this so called Japanification risk. I gotta say, John,

I've never heard that before. When you start talking about Japanification, usually it's a slur almost to an economic policy considered slow growth and very little inflation for a very long time with a lot of government intervention. Calum just there seemed to say that was too generous for the Eurozone based on what is seeing with respect to gra Let's take a look at what we're seeing in this market

right now. You're a dollar one nine nine and coming in a couple of tenths of one percent off session high, still positive a tenth, still a stronger euro. But the bid is in in the bond market right now. It's Haalian yields down by five basis points to zero point six to its Just quickly, John, you take it back to Kilhen But John, very quickly, here the Swiss twenty year, which is, you know, somewhat away from Europe, that does the same thing with a more negative yield. Right now.

I thought we've seen the last few days. It is a clear response to market conditions. And Callum might go further. I think what's really important here is this is the message from the entire governing council this morning, Callum, and I just wonder how much division within the Governing Council there still might be about plans to lean into the financial conditions that we've seen. Titan just a little bit undue tightening in the words of some ECB officials over

the last couple of weeks. Well, I think the Governing Council will want to make sure that the front end of this recovery is a strong one. That's the best bet for actually hitting the two percent target in time. I think one of the issues in Europe at the moment is a worry that actually it's some of the inflationary excesses from the other side of the Atlantic, the US, which are spilling over into the European market. And again, just to repeat an earlier point, rising interest rates tell

us actually growth and inflation expectations are improving. They're a sign that the ECB policy is working. But there's a time inconsistency. If those rates rise before you actually get the good growth in inflation, then it could be an impediment of growth. So I suspect actually there's pretty strong consensus to act against this modest time in financial conditions.

Just to play things on the safe side, can goardscratch up Calen Picker in there, Barrenberg Senior economists Sebastian Page of Tiro Price, Yes, a multi asset strategist, as I said before his book Beyond Diversification is except cutly acute about what to do given the mail stream of news flow that we see today, semesterion, what is your major message on how to reallocate now? Is it to go back to fundamentals or is there a new set of rules? There is a new set of rules in this much

lower rate environment. And the number one question I think for investors in one tom is will rising rates be good or bad for stocks? And I know you talk about it a lot on the show, and you know, think of things like coffee, egg, yolks, red wine, all these things you don't really know if they're good or bad for you, And it's the same with rising rates. You don't really know if they're good or bad for stocks. Uh? Did it? A discount model will tell you that if

the discount rate goes up, valuations go down. Also, you could think of higher expected returns on bonds. I know right now rates are coming down in Europe and we're gonna see them come down in the US. But we are in the rising rates environment in this recovery phase, So the expected return on bonds goes up. It makes bonds more attractive than stocks. But here's the rob and

a lot of your guests have mentioned this before. The FED is only comfortable rising raising rates when they expect positive growth, and positive growth surprises are good for stocks. Tom Which just did an analysis that shows if you go back thirty years and you look at all rolling twelve month periods, you can find seventy two twelve month periods during which the US tenure yield was up by fifty basis points or more. What do you think is the average return from the SMP five hundred over those

seventeen periods of rising rates. It's staggering seventeen percent, and the hit rate, the percentage of time stocks made money, is a hundred percent. So it's not clear whether rising rates are good or bad for the market. It is the number one question for investors in one It is in a sense a new set of rules because of the low level we're starting with and the trillion and stimulus. Ultimately,

right now we're along the recovery trade. Like a lot of your guests, I know Sebastiy of the keyword there is recovery. And when we ask ourselves the real rates, high real rates good for the equity market, we also have to answer the question where are we in the cycle. If you're in the recovery stage and you'll start to pick up. Isn't that typically a good thing for stocks. It is a good thing to stocks because you get positive growth shocks typically again you and you also possibly

get positive earning surprises. The earnings forecast for the year are pretty high twent depending on which parts of the stock market you're looking at, So the bar is high. But yes, rising rates can coexist. You know, you don't necessarily need to say they're good for stocks, but they can coexist with very positive stock returns. And let's not forget I know you were just talking about the Denmark news and issues of the vaccines in Europe. Overall, the

news on the vact scenes have been phenomenal. And we tracked this probability from a group called the super Forecasters, and they have a probability that you'll you'll have enough DoLS is to inoculate million people by July. That probability prior to Fiser in November was even dip as recently as January to below. Right now, it's so we tend it's human nature to focus on the negative side of the news, but the vaccine developments have just been phenomenal.

It's our base case that we're in a race between vaccines and new strains. It's our base case that vaccines will win that race. Vaccines may win that race in certain regions faster than others. And that's what we've seen, and we've been talking about it a lot with the US versus the European Union. How much of a boost do US fixed income markets get from very easy and easier ECP policies. I think you see the market movements this morning, they respond to it, but ultimately there's a

little bit of noise here in there. Right. The US bond market will be driven by big macro forces, the forces of the recovery, the stimulus, the fiscal measures, and there will be a lot more driven by what will hear from the Fed over the next few weeks, and that will be uh fairly dubbish. So you'll still see because of the recovery, rising rates, But I don't expect rising rates to impact to negatively impact risk gasset returns. It's so on the margin, Lisa, it's it's it's wish

Sebastian gonna see a Sebastian past that price. Multi assets strategist Jason Farley of Johns Hoppinin scheduled to be with us here on a pandemic update, the good news of America and Dr Farley and the rest of us shocked by what we see out of Denmark and Hester Zenica. What we see how to the EU on blood clots. Jason Farley with a wonderful research of j h U and I really go to Robert Brosky and hematology as well.

Give us a summary of the risk right now in America to the thrombosis, the embolism risks that we see out of Denmark. Sure well, good morning. Uh. We've known that COVID nineteen causes a state of hypercoagulability or blood clots as you say, uh, since the beginning of the epidemic. We've talked about things many, many types of things early am I, including three bovascular accidents in patients or stroke

in patients with COVID nineteen. We've seen covid toe, which is little blood clots that block the blood flow to the vasculature. So we we know that this causes a state of the body's response leading to lots of blood clot formation. UM. This has caused magnificant disease and the elderly particularly and those with coexisting comorbidities. In the United States as well. We look and I mentioned Francis Collins of n i H earlier with the key phrase even

in younger people. What is the risk of these hematology events to younger people if they get COVID, which they heal from easily, but nevertheless they've got blood clot risk well certainly so anything that up the body's response to infection, particularly the inflammatory responses, can trigger the clotting cascade. And we do see it lower risk in younger individuals with fewer comorbidities, and that risk rises as a boath with

age as well as underlying disease state. So what we know is that we have seen uh cases of blood clots in younger individuals. Although they are they remain relatively rare. Um Professor Queen talk about the vaccine role and just add to this conversation, Europe has a problem right now on the consonant and I don't want to get into the analysis of what has happened in Denmark, but the

outcome is pretty clear. The consequence to clear for the consonant, there is an issue with vaccine acceptance now and trust in some of these vaccines. Professor, have you seen us bump up against that issue yet in America? Sure so. Vaccine hesitancy or or problems with vaccine acceptance has has been a problem since the beginning of the pandemic. But we've seen that muted, however, because of lack of vaccine supply.

So importantly right now queues are really long for COVID nineteen vaccine and people can't find a vaccine even when they qualify. Uh, So importantly, we've seen this response of people not wanting the vaccine, or people hesitant to get the vaccine or a wait and see approach has been

muted because of the supply issue. And Professor, I think this rises the next question, which is when do we start to bump up against the acceptance issue, and when that force is to actually get rid of the age caps on who and caount who can and who can't have the vaccine and just make it available to everyone.

Do you think we're close to that point or not until Well, certainly this has been a state by state response and who the categories of are qualified to vaccinate in the United States, and and quite Frankly, there are many individuals who are still in the wings waiting, who

are the waiting and hopeful to receive the vaccine. So removing age restrictions I think needs to bump up against us pushing into that eight plus percent of those sixty five years of age and older, and in the United States we're sitting around sixty percent of those in that category.

So I think that we need to continue to focus on our age categories for the for the short run, probably in the March we getting of April, depending on the number of shots that we get out into arms, but then begin to think about the expansion of those categories and getting the next round of people with shots in their arms. And Jason. In the meantime, John's talked about this a lot, the idea that a number of

governors are taking matters into their own hands. As you said, it's state by state, and they're reopening perhaps earlier than health officials would recommend. What do you say to people who pushed back against health officials assertions and say there hasn't been enough done to recognize the depression, the suicides, the uh, the the violence that you have seen break out that has had real medical impact that has stemmed

from some of the shutdowns that continue to be ongoing. Well, certainly, and as a nurse, you know, we're trained to really think about the consequences of disease like the ones you're mentioning, so that the fallout of disease, if you will, I would also add to that that that the consequences of COVID nineteen remain real, and we are seeing lots of positive numbers with increased vaccination, increased amounts of herd immunity, if you will, estimates coming out this morning from the

New York Times of forty in the Carls the United States. That's all good news. We also are also seeing lots of mental health concerns, and so there's a balancing act. But I would say to them that the CDC just came out with some amazing data on a county by county level as of earlier this week, demonstrating that the earlier you roll back mask, the sooner you repopulate restaurants, the more likely you are to see a greater number of cases research and so we have to further push

her immunity. We have to get more shots in arms before we begin making this not because we don't understand and recognize the consequences of the state of these diseases, but most importantly, we have to get ahead of the variants. Professor, I'm going to see you as always. Jason Founding That Jones Helkins nursing Professor on reopening and the risk of increasing infections. This is the Bloomberg Surveillance Podcast. Thanks for listening.

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