Surveillance: ECB Policy with Ladha

America's at BMP Perry. But hey, I love your research. Note and what I note there is a migration from four to six rate hikes in the United States. What do you need to see to ever go more from six to eight rate hikes? Absolutely? Thank you, Tom, and thank you for having me. Um. Look, I think we've been on the hoky side for some time and really

opening up the distribution to more UM. There is a question of of length of runway, and I think that question is even more asked now with the ECB and the Bank of England being a little more aggressive on on exit plants. The FED needs to move, The FED needs to move quickly, clearly, behind the curve M and six rate hikes may maybe more that the center of a distribution. We can see more. We could see one every meeting, and we don't rule out fifty or a FED funds right close to two year end. So hey,

let's just build on what you just said. The length of the runway. Does it make it easier or harder that they're all trying to do this at the same time. Look, I mean we've heard from power this time is different that something we've said before. And how this time is different, we think is with velocity. This is about pace of the recovery, pace of the exit on both the fiscal

and the monetary side. And the second is synchronization synchronization against again between the fiscal and monetary forces both heading for the exit post pandemic, but also the synchronization between different central banks moving at the same time. Look, ultimately, I think it might be more difficult press at markets and the global economy, you know, as central banks move increasingly together on the exits on both the balanty and

the level of rate. This is what I think it's important to call it regime change, because in the previous regime we'd see a bond market sell off and believe it was self limiting in many ways because these central banks would have to back away when we think about a change in regime, Shahi, are you thinking about maybe that that dynamic doesn't exist anymore? Um? No, Actually, so, I think we can get to where we're going quicker, which is a velocity part, But I don't think the

destination in itself has necessarily changed. We don't think that the new normal for the long term or neutral rate is above three. So we still feel like term yields somewhere cap below three probably intends two and a half or below. Do we think we can get We can get there quicker and get to two and above quicker,

but we're not convinced we go above. There remains a lot of liquidity in the system and lots of fixed income duration demand, which we think comes in if and when the central banks reached their peak, perhaps quicker than before. So what you're describing sounds like it's screaming yield curve, yield curve going down, going negative for the first time in a long time, inversion. Excuse me, it's a Monday.

I'm having trouble. But honestly, going forward how much is that a concern that basically you're saying the fet is way behind the curve, and that seems clear to you. Why are we not necessarily forecasting or sessions sooner if that really is your base case? Look, is a is a concern? We do have the curve flattening. We certainly see two stends of mechanically flattens basically to zero through the rate cycle and at the end of the rate

cycle ends at zero. Like why five studies often moved the same So clearly the risk is the curve continues to flatten under the scenario with outline. But I would probably like to answer that with the counter which is what's worse a flat or slightly inverted curve or a super steep curve because maybe the market can't take all the duration, or because inflation becomes much more of a long term risk and fear than a relatively short term

one which is priced. So I think the flat curve is not ideal for the FED, but I think it's perhaps a better evil than a very steep curve with credit implications as well. So you're talking about consumer sentiment, how much does that play into the e CBS perspective as well. We heard about their concern about oil prices. Sure, the labor market is not quite the same. How much they're trying to get ahead of people believing in inflation

that they have not seen in decades. Sure, I mean look at the ECB and and I guess to some extent the b o J are in a very extreme level of monetary policy that they felt maybe they'd be stuck in for some time. And I'm talking about negative interest rate policy, and that comes with a bunch of

costs and unintended consequences. So to some extent, I think the ECB should embrace the ability to get through negative rates back into positive territory, which we think they get to zero at the end of this year and positive next year. Um. But clearly we've seen from Belgium this week, Germany last week, and across the Eurozone in recent months, inflation is not a figment of the ECB or anyone

else's imagination. It's real. Yes, the labor market is different, it will take time, probably for wage both in Europe, but we think it's coming and therefore we think the ECB needs to be a somewhat on the forefront of exiting and at least getting back to zero or positive rates. You've just finished on something that I think is is

really important. We spent a long long time since the e C went into negative territory eight years ago in a summer of fourteen, discussing how beneficial that was actually for the CP to do so for the European economy. What do you think to the argument that maybe this might help the eurosound economy getting back to zero, getting back to positive territory. I think it can help. Um, I think it can help, you know, some some inflation,

much better labor market wage both. I think we can change or we hope to see a shift in the structural level of growth and inflation in Europe to a better level or better plate. Hopefully we can see the same in Japan over time too. So now, yes, we're worried about inflation, and in the US and UK it's it's extremely high and perhaps it will be more of

a challenge to bring it down. But in regions that have gone years, if not decades without proper you know, without positive inflation, and without a positive central bank, right, um, this is we think a positive outcome or good good evolution of b and Paige, she hate fantastic as always, super super smart and great to catch up with you, said John, As you know, and I think our audience has a good understanding of this, particularly global Wall Street.

There's ways that you read research. And this was the weekend John, after the two models last week, where I really sat and read every word of the research. And what's fascinating is what this inflation report tells us about the importance of future inflation reports. Do we begin to embed seven or six or five percent inflation? Let's talk about the research from a b C. Laurie Camvasina, the

head of US equity strategy at OBBC Capital Markets, joins us. Now, Laurie, you say five good things we sing in the dates right now? Can we start with the good stuff? Let's not that sure. I think you know one of those were right smack dab in the middle of right now.

Earnings are holding it and I actually we've put out something over the weekend where we talked about how we've actually seen earnings estimates move up a little bit for this year and next year, complete opposite of what a lot of people were fearful of a few weeks ago. I would say another thing that's really good right now, John Um, I think that we've largely priced in a more aggressive fit now. We haven't priced in the economic

damage that an aggressive FED bighting kerk. But if you look at the multiple contraction we've seen here to date, it's been about seventeen percent at the January lows. That's right in line with the average of the last five or six FED tightening cycles going back to the ES. So I think the FED is basically in the market right now. Again, if the FED damage is the economy, we still have to price het in and then I would lastly just give you a A II net bullishness.

A couple of weeks ago, we got down to levels that we're actually below lows. Let that sink in for a second. But what we've seen historically is that when we get below minus ten percent on a four week average on the net bullishness, so the bears out number the bulls by ten percent or more, you see a fift pop in markets over the next twelve months. So that's something else that's telling me that we've priced in

a lot of this bad news from that already. Laurid bed Layler Overdytrel calculates out of twenty lift and earnings. He makes a note that it's coming in again better than expected. Can you already model that confidence forward? Can you? Can you taken can you construct this morning a confidence in earnings for this Q one? So I think that we you know, Q one, As I've read through transcript, it seems to me like it's going to be a

messy quarter. Now. We haven't really seen companies, you know, sit here and say things are a disaster, right like if you look at the consumer in particular, people are

being vigilant, they're watching the low end. But I would say that the confidence level does seem to me a little bit shakier than what we've seen, um, you know, sort of the past few quarters, whether you're looking at demand, whether you're looking at reads on confidence less uncertainty, I would say there's maybe a little bit more, you know,

kind of a nervousness right now. But by and large, companies are being given the opportunity to kind of re set expectations in a nasty way for this year, reset expectations in a nasty way for the quarter, and they're simply not doing it. They're still telling us that demand is generally okay, even though you know that we've we've come through a little bit of a rough patch and they've maybe had a little bit more trouble than usual dealing with that. Is there a sense, Laurie, of how

much pricing power these corporate executives feel they have. It's a great question, Lisa, and we actually used the Bloomberg Transcript Analyzer tool. I'm gonna give you guys a little bit of a plug. It's a fantastic tool, and we did a search on pricing and we found that it's absolutely spiked so far this year. It had been moving up last year, and we've seen a really big spike

this year. And I've noticed that, frankly, as I've gone through the transcripts, maybe a little bit less discussion on supply chain, obviously a lot of discussion on labor that seems to be the new big issue right now, but pricing has been much more in focus in a way that we haven't seen in the past. And I would tell you even companies that are expressing a little bit of concern about the low end consumer, they're saying, we're

going to manage pricing very careful. We're taking as much as we can get, but we'll we'll we'll pull back a little bit if we feel like we need to be to the market that actually started delivering something for me last week With the banks. Banks had a massive week last week, Laurie, finally starting to see high rights translate into better performance for US banks. Do you see that continuing? You know, it's interesting, John, because we've seen

that banks actually start in the financial space broadly. They looked they weren't cheap anymore coming into this recording season. They had a repricing you know, for about a week or so, and and the news has generally been fine outside of the higher comp expences. Um So, I think we kind of got some of that bad news out of the way. We reset the expectations on the valuation side, and it's allowed, you know, sort of the good fundamentals that are in place right now to propel the banks

higher again. So we'll watch for that to continue a little bit longer. I was a little bit concerned that we wiped out the valuation story so quickly to start the year, but it's fact, so let's enjoy it as long as it lasts. Laurie, thank you as always. Lori canvasina of our BC capital markets. Right now, we're gonna get a clinic here. Every house is different HSBC as anything, you unique responsibility with a London and Hong Kong heritage. Stephen King and Janet Henry writing her there over just

a wonderful interesting look and equities, bonds, currencies, commodities. Janet Henry, their global chief Economists, joins to synthesize this morning. Janet, I want to go to the idea that inflation is elevated and it's going to come down. Do you have a framework that it reversed to something we knew or is there a new higher level of inflation we need to get used to. I think it comes down, but I don't think it goes back to pre pandemic rates. Um so not in that sense of fully transit trade.

But it's not just about yet when it comes down or how much it comes down. It's what happens in between and how much policy tightening actually has to be delivered in order to bring it back down. And that's for instance, what you saw on the on the Bank of England, wasn't it where you have fight for members voting for fifty basis points five members voting for five.

The four members took the view that you needed to bring it down more swiftly to prevent it becoming more of a I suppose a wage price dynamic, and they were prepared to take the growth consequences by voting for a more aggressive response at an earlier stage. I would suggest Janitor cross Finance and Investment. There's gonna be a lot of discussion in your world of where the new neutral radars? Do you are critically PhD s at the FED, bo E, E, C B, etcetera. Does anybody have a

clue at this point where the new neutral raders. I'm sure people have lots of thoughts, but there is just so much uncertainty about the pandemic itself and about some of the behavior changing behavior in labor markets, how permanent it is. We're all trying to get to grips. We've what the structural influence of energy transition costs are and indeed the longer term implications of this breadth of central bank mandates that we now have and some of the

inflation risk premium that might be associated with that. If central banks are increasingly focusing not just on labor markets but flight that financial stability and incommin equality and climate change itself. So no, in terms of the long term neutral rate, I don't think anyone has a firm handle on where it is um and a lot of it really comes down to where do you see long term

potential growth? Do you think as a consequence the consequence of the pandemic that long term potential growth has risen or has it fallen? And if so, how much has it's fallen. Ultimately that's will contribute toward is the long term neutral rate. Jennet, you're speaking against a lot of the harkishness where everyone's trying to out haark each other right now on the street talking about how the new

normal will be very different from the old normal. And I think about your colleagues, Steve Major, who has believes still a one and a half percent target for the treasury ll tenure treasury by year end. Can you talk a little bit about why negative real rates will not necessarily disappear so quickly as a lot of people think, well, they can in the short term, but they might not over over the longer term. And I think this is where we are at the moment. You know, what if

you think about policy rates. When central banks set policy rates, they're thinking, how will this influence really demand? You know, That's what central banks do. They try to align out periods of cyclical weakness or cyclical strength to bring it in line with where they see the potential supply of the economy. Now, where they see the potential supply right now in a world of extreme bottlenecks um and indeed some of these relate to energies, some of these relate

to labor markets. Is that going to be more persistent or will we once the pandemic has eased, Actually, and maybe people have used up their financial cushion, whether that's from government handouts or indeed whether that's from bitcoin trading and search like, if that fiscal cushion has come back, will we see actually people return to the labor market. And I think this is the issue about the long term supply issues might be quite different to what we

face currently. The current picture is actually, in the short term, demand has been stronger than expected, the supply constraints have been worse than expected, and monetary conditions are too loose, and therefore do we need just in the very short term slightly more aggressive tightening. We think the Bank of England will be done in August, if not before. In terms of policy rate tightening, it doesn't mean that the

long term termin or rate is necessarily higher. It just means, given the looseness of monetary conditions, they need to get there a little bit more quickly. Jen, what would you have to see to think that inflation is a bit

more entrenched than what you're describing? Well, I think I would need to see when you say in trench, I think we're getting back to what period it And increasingly, if inflation does continue to build and wages respond to it, the question will be do central banks play catch up? Are they willing to accept a much sharper downturning growth, possibly even something worse than a slow down in growth?

We know that a lot of tightening cycles typically end in some kind of contraction in g d P or do they sit back and still take it to gradually and you see the wage pressures start to build, and I think the risks are that that the FED does have to move a bit more aggressively than the e c B. I think the ECB has got a bit more time on its hands, and arguably in the market's already pricing in too much in the near term um in terms of interest rate rises to to have to

play catch up regarding bringing monetary conditions back in line with what needs to happen to lower inflation. Jen with a mental respect and we're thrilled your with us today. I want to stop the show and I want to

ask you something inside baseball and four. This is for Global Wall Street listening on radio, listening on television, and I think back to Steve Roach and the way he built Morgan Stanley Economics and all of their research capability, and you've done the same thing with Stephen King at HSBC. I want you to explain how you at HSBC Economic synthesize the fixed income call of Steve Major over in

Hong Kong. I think for our Global Wall Street audience this is of critical importance to talk about how a given house has such interesting research, not controversial, but just so thought provoking his major looks for lower rates. Talk about that well. We discuss everything about the global economy.

And I don't pretend to tell any fixed income strategists how bond markets work, but we know at the moment when we're moving into a world where we're getting different rates of rate rates increases coming through from central banks and also talking quite calmly about the rate with which they're willing to scale back their balance sheets in this world.

As much as I suppose many of us try to assume a certain degree of science with which this works, even the most qualified economists in academics circles, and indeed in central banks have a different view on how that increase in rates and that shrinkage of the balance sheet is actually going to operate. Um. I suppose as a house we do not subscribe to the view that actually shrinking the balance sheet at the same time as raising interest rates is necessarily going to be successful at pushing

up long term interest rates. Um. The fact is, if we do see a lot of monetary tightening, it wouldn't be unusual to see the yield curve reach some kind of inversion. Janet, awesome as always, thanks for being with us. Janet Henry there of HSBC right now angin us during US She is well known resident senior fellow at Brookings

Holds Court at George Town as well. But far more is our definitive voice on Mr putin her book of a number of years ago, was absolutely definitive, on reframing, reframing the early Putin to the later Putin, and right now with the Putent Doctrine in Foreign Affairs magazine, she holds the high ground and on our analysis of this moment. Dr Stan, thank you so much for joining us this morning. I want to talk about a single sentence in your the Putent doctrine. This is his fifth president. I found

that extraordinary. Explained to me the importance of the Putent longevity and that Mr Biden is his fifth president. Well, thank you very much for having me on. So, you know, Putin said side in the Kremlin, he's seen these U S presidents come and go. He's become quite cynical about everything. Uh, he hasn't been very impressed by a lot of these presidents. And he's now at the point where he looks at

the US. We obviously have our domestic political troubles. He throws down the bout like these two ultimatums at the US and NATO um and we are essentially dancing to his tomb. We're responding to his agenda. You have a flurry of diplomatic activity going on all the time, and he's sitting there watching us essentially scrambled to try and avoid obviously a major war in Europe. Angela's stand. You brilliantly review the three choices here were all very familiar

with the collapse of the Soviet Union. I think Lisa has got some important questions on that. But you go back, you have the courage to go back to Yalta and to say there was a tripolar outcome of the Yalta system. Explain what a shock that would be to America to see Russia, China in America with their own parts of this world. So they Alta is prutents model. He has praised it all the time. And now and we've just seen Putin and jes and paying together in Beijing talking

about a new world order. This would be a shock. We thought we had ended this kind of system with two spheres of influence uh and domination by the great powers of the smaller powers. And this is precisely what would like to restore. And the Chinese, of course, would

get best sphere of influence. And if you ask the Japanese, or the Koreans or a number of other countries how they would feel about that, you can imagine what they would say and certainly the Central and East European countries do not want to go back to being in a Russian sphere of influence, Angela, How close are the allies in terms of coordinating to try to counteract exactly the

outcome that Vladimir Putin is looking for. So the Biden administration I think has done very well trying to coordinate things. We have the German Chancellor in Washington today talking to President Biden, hoping again to get him on board with say, tough sanctions, including energy sanctions if there is to be a war there. President Markran is in Moscow today trying to talk Puttin down. Apparently he is in close contact with the White House. So I think the co ordination

is pretty good. But of course there are differences of interest between different European countries in the US, particularly again, if you think about sanctions, Angela is, why do we are put In winning? Well at the moment he looks as if he is, because we've there's been no de escalation,

In fact as more escalation. We read today of the troops that would be needed for an invasion are already amassed on the border, and we are all running around again trying to find a solution to this, and he has China's back, and he him thing had put out this extraordinary statement invajing on Friday where they are in, China will support Russia and whatever it does. So it looks as if he's winning. This is concerning considering the

fact they are concluding. Paragraph of your essay was that Putin's overarching aim is reversing the consequences of the Soviet collapses. We were talking about splitting the treads Atlantic Alliance, which sounds like it's still is relatively firm, and renegotiating the geographic settlement that ended the Cold War. Can you game out what type of altercation would sort of lead to

his goals being achieved. So I think it's highly unlikely that he will achieve the goals of NATO is saying that will never enlarge and essentially handing him back a sphere of influence, including in countries like Poland, because he has said that NATO should retreat to where it was in Um if there is or a major incursion. Obviously this would be terribly destructive for Europe, but it's very hard to see that ending in giving him what he wants. We do have an Alliance of thirty countries NATO, and

we would resist that. Are we at a point of negotiation now? I mean the diplomacy is US talking to ourselves elves and maybe Mr Putin talking to himself or the guy over in China as well. Is there any dialogue actually going on now? I don't sense it. Well, there is dialogue going on. You know, we have responded to the Soviet demands and we've said we the US and NATO, let's talk about this defense. Let's talk about troop deployments in Europe. Let's talk about other ways in

which we can build you know, rebuild confidence. Let's revitalize the Native Russia Council. So we have made all these proposals, the Russians have responded to them. That was you know, leaked the other day to El pais um So and there are conversations going on um and there there are dialogues between the US and Russia and other issues. But the diplomacy does seem to be stolen. Angela Ston, thank

you so much writing in Foreign Affairs. I can't say enough about the essay the Putin doctor, and I will put that out on Twitter as well, just to really superb USEL. 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, and this is Bloomberg