Surveillance: ECB’s Path Forward with Lane (Podcast)

Philip Lane. He's the chief Economist at the e c B, and I want to make clear, particularly to our American audience, there is no equivalent at the FED, with the inaugural Chief Economist Marius sing of Germany. This is considered a key position in global economics. Philip Lane, I want to go back to a paper you did from Trinity over to Harvard years ago with a guy named Manque, and you and Greg Manque did a paper on economics and the scientists in engineering of it all? Do we throw

the textbooks out? Now? Does the science and does the engineering of modern economics work given this moment? So I'm familiar with that with that paper, but I cannot take credit. I think there might have been a Greg Manki and maybe Ricardo reset the London s going of economics, But but the the basic question is still very relevant and

absolutely in central banking. Um, it's a blend of of course, respecting the science of the textbook while also understanding we live in the real world where we have to you know, understand the actual data arriving and to filter out and come up with policies that that work in the real world, not just in the textbook version. Well, let's talk about the real world and the data this morning, Philip, right

to have you with us on the program. So, by the way, the writing core inflation in the urosign more bad news comes in at three point. It's that with how worried you are about the second round effects here and how quickly you think we should react to that pressure. So clearly the Holy economy, all sectors, so core non core, the Holy economy has to adjust at essentially three factors

in Europe. One is the very large increase in energy prices, which of course matters directly, but also matters indirectly because every sector uses energy, so every every business which uses energies and input, including in the services sector just think about hotels, restaurants, transportation, That energy shock will show up everywhere. A second factor is the pandemic and that's working through

different channels. As you know, now with the renewed wave of lockdowns in China, we have new bottom x. Well, we also in Europe have the reopening of the economy this winter, including the early weeks of Q one, which we just seen, a lot of sectors were still locked down, which basically meant that there was a lack of activity and also honestly in the world where of that less pricing pressure. And then as we reopened those sectors, at

those sectors are also going to normalized prices. And then the third element is the war, and the war when we're talking about started as you know in late February, and this is a source of great uncertainty for the European economy. Of course, it interacts with the with the energy shock, it interacts with bottomnecks, but also has a direct effect in terms of annually trying to kind of form their outlook for for Europe for the coming months and years. How the war plays out in the coming

weeks and months is really the most important topic. Well, let's talk about how that informs your sequencing. The latest minutes published by the ECB. Let's call them the account the way you like us to show. Do you viewed the call for a rate hikes sometime after the end of asset purchases. I understand from your point of view you want to disentangle the rate hikes from asset purchases. I get all of that. You suggested recently, Philip, that

would give the Governing Council this extra space. Do you think you still need that extra space given everything you've just said and given the data this morning. So so I suppose that, let me be clear along a few dimensions after us uh, the the idea is to have an option. So that option is an option that that could be invoked quickly, as President of Guard has said.

I think in the press conferences it covers, you know, I arranged at the long end from a few months to the short end, you know, as you know of of you know, even a week. I think specially mentioned that at the short end. So it's an option, it's not a it's not a fixed window of time. And essentially here we are at the end of April. We're nearly six weeks, six weeks I think from yesterday to the June meeting, and after that we have another number of weeks to the next meeting in July and and

so on. So I appreciate those who are trying to uh form market judgments like predictions. I'm much more focused on the process. We we need to take into account of data we've seen today, We need to take into county boat on GDP and on inflation. We're basically, honestly in the middle of trying of the staff are working on the projections that will inform the June meeting. And we we were clear sequencing, if in terms of policymaking, but also in terms of the meetings we have and

the information we have. So I don't really want to run ahead of that sequence. Philip, you mentioned market pricing. Do you think it adequately reflects right now? The way you're communicating is that of any interest to you whatsoever? So I mean, I think the is involved in the market and policymakers are essentially confronted with a number of factors. Number one, I think you said earlier on in the commentary.

Our current policies are interest rate policies were developed at a time when when the imperative was to try and tackle inflation that was persistently below our two percent target. So we've been basically saying all the year long that that on a step by step basis uh uh conditional on this outlet where we do think, um, we are not returning to that low inflation trap of normalizing interest

rate policy. So so the interest rate policy will move at the you know, the question of I know of of interest at to everyone is exactly when that that will start. And you know, we essentially have been assessing in our recent meetings that we should be data dependent to respect the uncertainty we face, and that you know we thought you respect. Can I just jump into some central bankers that you will be data dependent and then I see the data change, and then I don't see

anything you say that changes whatsoever. I ask the question earlier on about what you said about a month ago relative to what the data says now, about whether you still need that extra space between ending rate purchases and rate heights, and then you say data dependence still sure, jump back in. Let's let me challenge this. Just look at the very large changes in the ECB's monetary stance

since since December. So in December, you know we took decisions which you know we're not We're not universally praised at the time to to have a big scaling down of ass of purchases, including through the ending the announced end of the of the PEP purchases at the end of March. So in terms of step one scaling down that the monthly volume of purchases, a lot has already happened. Step two of not only going ending the PEP but

talking about concluding net purchases under the app. You know, we we've signaled that strong expectation that this, this is, this is coming up. And then after that sequence it's it's the issue about moving interest rates and you know, the market um um and for ourselves, you know, it's the story is not you know, the issue about uh, you know, are we going to move away from from

minus zero point five for for the deposit rate. The big issue which we do have to still be data dependent about is the scale and the timing of interest rate normalization. And you know, we've just thought about the high uncertainty um it's recurrent everywhere that that that there are mixed dynamics into your area in the near term. Yes, inflation is very high, and that us carry its own risk of momentum under the hand at the high energy

prices are eating into a disposal incomes. It's reducing consumption. The war you know, has the scope especially you know, depending on how it goes in terms of mapping into lower investment, lower consumption at true true confidence effects and the extra pressure and energy. So I'm going to hold to this perspective that the a lot remains data dependent.

But but but but I would emphasize though, is at where where you know, I don't think you're hearing anyone saying that the the current deposit rate of minus zero point five is going to be remained there indefinitely. It's all about the prudent and the robust and durable way of having normalization. Looking at the move in the Euro, it's been pretty brutal over the last month, phill It you're a dollars down about four point five on a

month so far. You will, of course tell me that this is not a policy target, but we can all agree it has possible implications for the immediate turn outlook for price stability. We then in mind, Philip, the latest development is problematic for you. The way I mean I would think about it, I think I've always taken this view is that the exchange rate is a very important macroeconomic variable for Europe. The your area is a big trading block. It's from a Marcrot point of view, the

exchange rate absolutely matters. So when we are when the staff now are working through the projections for June, that that currency depreciation will will be an important factor shaping their projections. And again to emphasize, it's you know, one channel is a mechanical effect and import prices, but when we think about investment, when we think about consumption net exports for the your area, it's it's a it's a

big macro variable and this movie significant. So anyone looking at that and trying to think about the implications from mantro policy, that will definitely be one trend along with every other trend that we need to think about, which will be integrated into an overall assessment in the In the June forecast, Philip, how much does it affect your expectation for the potential for a recession in the Euroregion?

And I say this as ECB member Mattis Muller came out and said that they saw that the chance of a recession in the euroregion was low. Do you agree so? Absolutely? In our baseline. Let me point point out two factors. One, this is still a lot of momentum from from the recovery from the pandemic um. That's true, especially when you think about year on year, because this time last year there was you know, we were still very far below at the now, so you know, when we think about

the economy, that momentum is there. But it's not just about that kind of base effect, Like you know, the momentum we've just seen, you know, a positive Q one, not very high, admittedly, that's still positive. And the we know from the near time indicators for what's going on right now that this still seems to be resoural activity

right now here at the end of April um. So again, I don't think it's it's the most interesting way to to kind of frame the question because even if the economic continues to grow compared to the pre war baseline, you know, under all scenarios, the path for output is not going to be as high as we as we were hoping before before the war broke out. So the basic analysis applies regardless of whether everything ends up being

so strong to put us into negative territory. But but really it's it's not so much about what we know today. It's we all know the possible scenarios. We all know the possible scenarios about the intensification of the interruption of amgry supplies and other scenarios which could and this is why at the ECB we've been, you know, publishing scenarios. We've been emphasizing we don't just look at the baseline, but also adverse and severe scenarios. Philip, just a sort

of some up though. Are you saying that the market is wrong because the market seems to increasingly be pricing in a recession in the euroregion and pricing in that those scenarios look a lot more likely. Are you saying that the risk reward is perhaps a little less pessimistic from your perspective. I don't think again, I want to

spend any time on the commenting on that. What's too is the market, of course has to fold in a significant risk premium, a wrist premium on inflation, a wrist premium on GDP, and there is a covariance factor there which which is basically the urge to to kind of look for protection. It's going to be higher where when you're confronted with the risk of higher inflationment and lower output, and so filtering out between risk premia and what the market truly expects. Of course, we we we we we

did that ourselves in understanding the data. But that but both forces risk management and kind of true forecasts are off the influencing market pricing. Philip Line of ECV, the chief economist, Philip, fantastic to catch up with you, deeply thoughtful stuff on a tricky moment for this European Central Bank, Philip, Thank you. Tom Purcellio joins us now truly expert within market economics in America on wage dynamics time. You're the best guy to talk to about this right now. Is

it a wage spiral? Yeah, you know so. I'm sympathetic to everyone looking at ECI because Powell mentioned it, But I don't know too. It's quarterly number, and because monthly stuff in hand, where you have a month, we have a new month, we have March in hand. We're gonna get April dat as soon enough. I mean, look, if you're looking at wages and salaries, I think it's really interesting that at the month on months actually continue to slow and that's been going on for quite a number

of months now again make a mistake. I mean, we're looking at really high run rate here, but at the end of the day, I mean, you know, look, everyone wants it so fast, right like they just wanted like one month. They want they want to wake up one day and they want like inflation back to you know, two percent. This is not how it's gonna work, right, mean, you have to look for like these sort of little

shifts that are happening. And one of the I think there's a couple of interesting shifts that are happening right now. One of them is wages and salaries are actually slowing down on a month on month basis. Again running at a high level, we get that, but you got to look for these little ships. I thought the Beige Book from last week, I thought that was really interesting too. I mean, you know, there was this commentary embedded throughout again right like the things that you're not going to

see at the at the headline. I'm looking at the comment right here. I thought it was really interesting. A few firms noted that they're reevaluating their employment level and maybe ready for some attrition to reduce staff size, and comments like that are embedded throughout the bag book. Now again, I want to be clear, You're not gonna wake up one day and everything is going to be sort of different. I'm just simply saying you've got to look at these things.

We're sort of you know, signs or how things are starting to shift. Um, and I will submit to you that that that is happening. So you know what it means for markets, Tom, And you're trying to pick up on the e c I the recent people care it's because Chapman pounce old as he cares. This is about the reaction function of the FED. So let's work through it together. How do you anticipate this data will develop? There will be a mechanical peak developing in CP in America.

We may have already seen that peak. Tom. How do you think this Federal Reserve will internalize that data and react to it as it peaks and you start to see this slow deceleration that I assume that you anticipate through the summer. Yeah, Jonathan, So I think that this is the question that you know, we've just wrote about this the other day, and I think this is the thing that you know, the FED is going to need to sort of quantify to some extent. Think about last year.

Think about what they did last year. Last year, it was basically all about getting to max employment, right, like you know, forget about inflation. Um, it was, it was all it was, you know, a bee line to getting to max employment. Well we see how that worked out, right when you have your blinders on and you're only focused on a single side of the mandate. So the question today is are they only going to focus on getting back to target inflation? Because I'll tell you if

that's true. Look, you're speaking to someone and I think you will know this. You're speaking to someone who actually thinks that inflation will slow down as the as the year progresses. But if if it's, if this is a march to target, then you're gonna blow through bullards three fifty. I mean you're not gonna get to target until well

into next year. Um. From a from a core perspective, Um, So I think the Fed needs to define what they sort of would will feel comfortable with from an inflation perspective, because if it's if it's, if it's target, then you're gonna be meanifully higher than than neutral and you're going to cause a recession. So where do you think that they should be okay or comfortable with inflation. Coming down to yeah, Lisa, I think that it's it really is

about the movement of inflation. Right Like if if by the end of the year your whole a three handle on core inflation, core inflation, UM, I would I would define that as actually feeling like you're in a good spot, right. It's it's about the movement and where we are going. It's about the narrative in place at the time. It's really easy today to say, hey, inflation is can be an eight at eight percent, because that's all people see

is eight percent inflation. But I think as the year progresses, I think the sort of the tone on that will be very different. I think as the year progresses, the tone on spending will be very different. I mean, we've talked about this quite a bit. If you look at the lower end consumer, at the fourth and fifth income quintiles, they're tapped out. They don't have the ability to overspend overspend, which is what happened last year, and the data are

pretty clear on that, you know. I think it's interesting. I was listening to um you guys earlier, and I think Tom was was completely spot on. I think that the most recent I think that yesterday's GDP number, I think that's fascinating. I think that that is a really interesting report. And it has nothing to do with the negative. It's nothing to do with the fact that the consumer held in nothing. Has everything to do with trade and inventories and when and this is again feeds into our

story so so nicely. I think it's really interesting that the inventory build has been staggering over the last couple of quarters, absolutely staggering. And yes it's subtracted from growth yesterday, but only before you know, because of the way is the delta right, It is just because the build was less than what we saw last quarter. But the last two quarters we have seen an absolutely enormous amount of build. Think about that in the context of the other thing

that's subtracted from growth, that was trade. We're importing. We've imported almost the annual run rate is eighteen percent, eighteen percent over the last two quarters. This is amazing, iRacing us. So sorry, let's just finish his point. So what's happening is we're building all of this inventory and at the same time that the consumer is transitioning from good spending the services spending. Um, what do you think is going

to happen to good prices? In that context? Good prices are going to fall, And I think it could fall pretty sharply, just real quickly. We only have about forty five seconds left. It's no problem. I know that you're you is that the FED shouldn't go too quickly and force a recession. What would you have to see in the data that would make you change your mind about

the momentum that the FED has to curtail. So so, Lisa, if if if we're wrong, if inflation remains elevated, then yes, of course then the FED should engineer a recession, right, They basically should just get aggressive and knock this thing out. Um. But but again I think, well I've said this many times on your program. I just think a little bit of sort of patients and and and and a little bit of sort of look, making sure you're sort of noting both sides of the mandate. I think that would

get you to a pretty reasonable place. You know, we don't have to generate a recession. I don't think we'll have to generate a recession and inflation slows down. But if it doesn't, then yes, I think the FED will necessarily have to get aggressive some do you think the pivot was more to do with secure in a second term and not the a CI. Then just a final question from me. You know, you know Jonathan, I I

don't think so. I mean, I don't I don't pretend to know J. Powell in any meaningful way, but I don't think that's that what was driving just incline in minds once tonight. Some thank you, So I don't think obviously. Cavina Markets, thank you very much, just checking in. So it's just having a word. Ellen Wald is definitive off the Atlantic Council as a senior fellow in a wonderful book Saudi and kind of culture, the fabric of the royal family in Saudi Arabia, And today we're all embargo

with ellen Wald. Ellen, it's really simple. Can an embargo work on oil against Russia? I don't think that in this case an embargo really can work on oil against Russia, because, UH, there are, first of all, so many different points that Russia is able to UH to to export oil. We've got pipelines, we've got multiple ports. UH. In fact, we've got ports and UH and pipeline systems that they share with other countries like Kazakhstan, and that would be very

very are to police. So I think that what we're really talking about here is um Europe is kind of embargoing itself against Russian oil and that oil will go to other sources. In fact, we just got news that UM Indian oil companies, Indian refineries are looking to set and to secure some longish term contracts with Russia to import Russian oil. And there really isn't any way that, you know, short of of some kind of military embargo, that the EU and the United States can stop that

from happening. So then does Europe go after India. Well, they can definitely exert pressure on India, but India is a huge country with an absolutely huge population that has no domestic oil production, so they have to import all of their oil. Their oil consumption is growing, their population is growing, They're looking to really, uh, you know, to to develop their country, and to do that they need access to fossil fuels like oil, and they're not going

to just bow down to what Europe wants. Because of some you know, conflict that Europe is in with Russia. They were we were able to get them on board with the embargo against Iran, with the Iran oil stactions, but Russia is a whole another ballgame. Meanwhile, we're talking about the issues with Russian oil and perhaps a lack of willingness to dramatically ramp up production Here in the US.

We got Chevron earnings, We've got x On earnings, and both are still under investing relative to where they were over the recent past. Excellent in particular, I'm looking at three point four billion dollar charge off for Russia. What do you think of that number? Well, that's that's a pretty big, big number, and it's it's interesting to see how they these companies are taking UH significant right downs

for getting out of their assets in Russia. And yet you know, we're still seeing huge profits and huge earnings from these companies, and one would expect that we'd see a lot of that maybe reinvested into UH into upstream

or downstream development. But I think that we're we're seeing instead of seeing that, we're seeing UH significant amounts of money being put towards share buybacks to lift the share price, which I think is something that um, you know, long term and longtime investors in these big oil companies have really been looking forward to because they've been on such a downward trend for for many years, UH, and so now with high oil prices, they're looking forward to seeing

their share prices go up. And one of the other issues with increasing oil production in the US is really the bottlenecks, the supply chain issues, and the regulatory regime that's making it very difficult and costly UH to ramp up production in a in a hasty way. Well, but ellen to that point, I mean Excellon tripled their share buy back to thirty billion dollars. They did not boost their dividend, although they are expected to later in the year.

L How much does this make business sense for them that frankly it does not in their economic interest to boost production due to the boom and bus nature of the oil market. Or is this something where they just see it as no advantage because of some of the kinks in the supply chains now, but longer term would

also make business sense. I think that you can make an argument that it would be UH that they could increase their revenue if they did increase production, because increasing production is not going to bring oil prices down that much at this point because in particular there being uh, these other factors, geopolitical factors are what's causing our prices to rise. W t I is up at you know, a hundred and six dollars of barrel just on news that Germany says it won't oppose an oil embargo and

EU oil embargo against Russia. And that's not something that any number of increase in barrels per day productions from the US can combat. So they definitely could make more money. But if you're looking at the long term picture, and then yes, it does make sense not to shell out a lot of money in a very hasty way to try to increase production that you might not really be

able to because of all of these other factors. And instead it does make sense to say, pay down debt, to increase your dividend, to do these these share buybacks. These companies will probably be in a very good position going forward. But you know, from the perspective of the consumer, it certainly is it certainly looks like they're taking advantage of the situation. And I'm well at the Atlantic Council and thank you, let's dive into this right now. We're

not going to do price target. We're not gonna do buy old Cell. We're gonna talk to Brent Still And what you need to know is it was major global Wall Street headlines. A day he launched from UBS over to Jeffries and Mr Sail joins us. Uh this morning, brand, I want to talk about Silicon Valley arrogance. You are really really good at this. How do you feel about the bazos, Jessie feeling that we're only in this for our consumers. We're not going to harm our consumers. The

inflation is something we're gonna deal with separate. Are they forgetting their shareholders because they're thinking only of the consumers and they need to input inflation fighting price increases? Right now? I think they protected us in the pandemic. I mean, if you think about what happened, you know, they went from growth growth overnight, and you can't automate a delivery of toothpaste via a drone in some software, and so they had to build this capacity out. And then all

of a sudden, we're back to normal. We're starting to go back from from clicks, you know, into bricks. Right we're wandering in the Target and walmarts and in convenience stores on our local walks to pick up goods. We're walking back into into physical stores. The world's returning to normal, and they can't just automatically snap their fingers and and go back to normal. So it's gonna take time to unwind. Uh this and they've said they have over capacity now,

so it just takes it takes time. So I want to buy holders sell into one year out or two years out or three years out. Did you find a confidence on the call yesterday that they can manage out from this pandemic to a good outcome of growth on the income statement? Well, I think they've been great. Uh you know, sources of value for shareholders over time. So I think the the answer right now for tech is

all of text in the palony box. We're seeing a massive downswing post pandemic, hangover multiples have come from living with the aliens as we call it, back the planet Earth, and we have a potential recession that we're all staring at in the next year. So right now, every asset

classes under duress. And I think it's not only Amazon, it's the rest attack and so I think that over a one to two year period, the answer is yes, it's a great investment if you start to look at now the recurring software and AD business, you know, these two businesses um could potentially account for Amazon's entire market cap on this on this pull back, when you look at a few years out and start to put some multiples on the some of the parts, uh and Amazon's

E of U S business is only getting stronger. So I think you have to separate the business between the software ad business in the retail business. The retail businesses and is in the tailspin in the short term with decline in in actual demand as well as costs they're they're having, you know, to get ahold of. So yeah, price increases have to come in. But again this just

takes some time. On the retail side. I think most of our investors are are looking at that, are looking at the other part of the business and some of the parts and really looking at the A W S and AD business. Right I'm looking right now at your price target of thirty seven hundred, and you've got a buy rating on Amazon shares currently nine one. What do you think or that that was where they were at the close yesterday. They're down a lot lower than that

now in pre market trading. What makes you think that they can get to that thirty seven hundred is it's entirely a bet on AWS stripping out the entire commerce business. Well, there's some of the parts. When you take effectively the six big parts of the business and you you strip them down and look at what multiple do you pay

if the Amazon was a stand own company. If you look at two thousand twenty three, you know this company is gonna do the division of the eight of us is going to do a hundred million in revenue plus, and most investors would pay you eight to nine times for revenue. You know that then itself is worth in nine billion just for that business. So you know, you take the decline in the stock, you start to add the ad business, you start part of the media business,

and you subtract the retail business. And this is critical. You mentioned this twice now, bron we're gonna end the interview here and I need to get this in. It's too important. Are you telling me an acquisition of Amazon shares this morning, that I'm getting a cardboard box business for nothing. You're not getting it for nothing, but you're getting it for a multiple depending where it opens. And

it's really not a huge multiple. And you're getting a free call option over time that that can come back and stabilize. So I think again, Uh, you have to look at it from from the sum of the parts, not from just the retail business. And I think that's what everyone's doing. So we're trying to think of it a little more thoughtfully over a period of time. And I'm telling you, when you have six market share of the big three in the cloud against Microsoft, Google, I'm

not worried about their high sources of profitability. Uh, this is the thirty to forty percent margin business or time that no company is gonna leave once they go to on the of the US. I wanted to squeeze it in if I'm a your view seems to be the view on the south side right now, fifty seven buys one hold, one cell. The market seems to be interpreting

things differently. When you have the conversations with the buy side and you talk about what's happening with this name, what's the pushmak agett in Brent pushback right now is no one wants to buy anything in tech. So it's not just Amazon. Go pull up a chart on on Microsoft, Go pull up but chart on Google pull up a chart on anything. We are on a buyer strike across Wall Street. On on software, Brent Hill alsome to catch up of Jeffreys. This is the Bloomberg Surveillance Podcast. Thanks

for listening. Join us live weekdays from seven to ten AMI Eastern. I'm Bloomberg Radio and 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