Surveillance: Fed Cycle with Calvasina

strategy OBC Capital Markets? Let me, let's just start with a job support on Friday. It follows through into Monday at Kurticlowa. What did that change for you? If anything? It's ill. So look, I think it's one data point, you know. I think there was a view that emerged over the weekend in Friday trading um that the Fed may have to stay higher for longer. We may not

get the pause, we may not get the cuts. I'm still in the camp that thinks we are closer to the end of this hiking cycle and we're going to get the pause. And for me, it really underscores the idea that this economy is very resilient Um, I think there could have been some labor hoarding. UM. You know, I think that there are things that could explain that

hot number. But I think we just see this time and time again, just evidence that the labor market is tight and that we are seeing, you know, if you look at some other reports, we're seeing some indications that wage growth is slowing. I think that's probably enough to help inflation come down. So I'm not overreacting to Friday's report.

For me, the broader thesis is still intact for now. Laurie, when I find fascinating, I thought of you this weekend Bloomberg reporting that danaher is looking at a service company in the medical field. It's a MidCap, smaller cap kind of thing, not a zombie roll up. But are we just going to see a roll up in years small MidCap space because money finally costs something. I think it's a potential catalyst for markets going forward, in the small

MidCap space in particular. So one of the things we know about small cap companies is the hot quality is higher than it used to be. Um. What we also know is that the price we're gonna pay for, you know, either skirting the recession or a short shallow recession or a growth scare, or whatever we end up calling. This is probably going to be that economic growth is subpar

for a little bit in percentage terms. And I think that incense companies who have a lot of cash still sitting on their balance sheets, who have very good, you know, structures in terms of their debt profiles, I think this is going to incent them to go out and buy some growth. And when you're looking at historically cheap valuations in small relative to large, it's something that simply makes sense.

So I think it's you know, it's something that we have to watch going forward, and I think it argues against a deeply barished narrative in markets. At the same time, if you talk about tourists and slots narrative about no landing. Is that positive for equity valuations if that means higher rates for longer and companies having to justify their capital structures in a much higher rate regime. I think it

depends on exactly what you mean by higher rates. Now, if we're going back to something that we saw in the seventies, of course that's gonna slaughter pe multiples. Um we actually have a model where we make in inflation, FED funds and also the ten year yield, and we published an update on that this morning. We do have a couple of cuts baked in for the FED at year end, and it gets us to a twenty two

times multiple. We also have, you know, the ten year treasury at around three point four percent in inflation moderating to around three percent. But let's say I just go and Lisa and flex those interest rate assumptions and kind of take the FED number up and just leave it there, so don't bake any cuts and keep that higher for longer. I'm still looking at a twenty plus pe multiple on a trailing basis on this year's earnings. So it hurts a little bit, but it doesn't hurt as much as

people think. If you go in and do the map, Laurie, I just want to finish on the rest of the world. China has gone from uninvestable to unavoidable and then seemingly in the last forty hours that swung back to something in between. Laurie. How much interest is there from your clients to invest abroad this year? So it's been huge, John, and we've talked about this in the past, but I think investors came into three just wanting to do something new, and one of the new things that people wanted to

do was play the China reopening thesis. And I think raising the geopolitical angst and talking about worsening relations between China and in the US, I think it complicates the ability to play that trade. So as we sit here and think about things that could push markets down in the short term or cause you know, things to just lose a little bit momentum. To me, frankly, that's you know, a more legitimate downside catalyst than say, oh, earnings need to come down a little bit more. I think the

market understands the ladder. I think the China issue is it's challenging something that had gotten people very excited coming into this year. Laurie wonderful as elwise, it's going to catch up and kick off to try and with you, Laurie campus that if i'll b C Capital Markets right now. Michael Shall joins US chief executive Officer market Field Asset Management with a very very nuanced note there, How did your view change the market field view after five seventeen

thousand plus fifty four thousand revisions? How did the labor economy of the United States. Adjust your view. I mean I thought it was strong, and Friday's numbers told you it was strong. I do think it's one of those reports for it looks like a bit of a statistical aberration. It's sort of strong across the board. It's a weird time a year, and you had all of the two adjustments phone into that. So you know, I think probably we're still creating about two hundred thousand jobs a month.

All of the labor metrics look okay, and in Friday's number, particularly in the household serve a you know, you discovered a bunch of a missing jobs that j Pale have been talking about, which it's it's not shocking the labor data strong. The market field view is a is a more long term view. We're now backed where money costs something? Yes, how much? Speak to people that have never enjoyed with Michael Shore and enjoyed hers. Speak to how we're back

to now where money costs something? How does my life change? Well, I mean the question is are you operating in a kind of business that can generate enough cash flow? But money at five is unimportant. I think for a lot of the economy. You know, it's it's really still okay. I don't think the sort of what we would call the sort of old economy has really been devastated by

interest rates. Um. I think the problem is much more in people who have been very, very creative with financial engineering attached to a business and and there, you know, which is a lot of a sort of PEVC portion of the economy there. I think five percent is gonna matter. I think we're going to be added around five for a while. Thank that we're going to be added around five pc until things start to fall apart. This talk, of course of going abroad. Only a year or so

ago China was totally uninvestable. We start and I'm told repeatedly it's unavoidable. The events of Friday and over the weekend does it change how we want to be invested in the China story. Look, I think there's two big issues. One is that the Chinese have switched from you know, really a very bad COVID policy to a more manageable COVID policy. And monetarily they've gone from tight to loose. So that's really really positive. I think that hasn't changed.

It's been true really since two thousand and eighteen is the sort of geopolitical geopolitical aggravation of investing in China. You know, it's not a lot of fun um. I mean, we we found that out in Russia last year, where where everything we had there, which wasn't much, you know, was wiped over a weekend. I don't think China itself is that attractive for those reasons, but that whole region is now much much more attractive. I think some of

the markets surrounding China are investable. Um. I think the Japanese as a as a byproduct of yield curve control, have also sort of involuntary switched to a very loose you know, to a very loose monetary monetary policy. So I think Asia and the portions of the US market that feed into that, you know, are suddenly doing quite a lot better. Does this extend to Europe? To London minus listed on the foot seat, does extend to them?

You know? The foot see made an all time high on Friday record no one's talking about, yeah time high, um, and it's been struggling, you know, struggling with this level force you know, since and so it does for that portion of the London market I think it does for the German economy, which is still tied you know, which is still tied into that. So I think for you know, a portion of global economically sensitive equities, the news has

got materially better in the last four months. How do you decipher the signal from the noise at a time of such noise, particularly short covering. It's some of the volatility that we saw last week. I think it's really hard. You know, my my phone didn't stop bringing like Thursday and thirty last week from people trying to work out what what what one on earth is really going on. Look, some of the technicians I respect, I think they've seen

enough to call this a new bull market. I don't, um you know, I think that the change of monetary policy last year still matters. Um you know. I think that that we might be in this really weird situation that an index light V some P equal weight might have finished its bare market last year, but the index we actually follow, which is the headline index, which is dominated by large cap tech, I think it is still

is still in the bare market. I want to build on that, and just to give this color that Thursday's short covering with the largest is November fift according to Goldman's Trading tak to give you a sense of just how violent it really was in a historical perspective, Big Tech, You don't think it can recover from here, even with all of the job cuts. Is that what you're saying? Yeah, I don't think Manasa one hundred is going to make

a new high. I'd be shocked if it did. Why Because I think it was grotesquely overvalued when it did make it's all time high. Um, And I think the sort of tenure bull markets when they end take a long time to give you a new high. But it doesn't happen in ten months. You studied commodity cycles. You mentioned some optimism Pacific remix, China. Yeah, this is how I put it. Is that enough to get oil above a hundred dollar brand? Is that something that's more probable

than many would think? Yeah, I mean I think it's got a much better chance of being a hundred and sixty at eighty dollars today. I mean, I'm conciding, do

I need two barrels in my living room? Like Lisa Ahead, No, I don't think it's crazy, but I think you have to realize that the weakness in crude oil prices since last summer was caused partly by what was going on in China, which we assume is getting better, but it was also caused by massive releases from the strategic portroleums of And I think one thing is for sure, we're not going to see that happen again. They can't repeat

the act that's for sure. No, we can't of market field acid management, how can you repeat the acts on? They're looking to rebuild the thing right now? This is a joy. And Lisa is gonna launch on other broader US political affairs. But with Julie Norman, who is co director of the Unit Versity College of London Center on US Politics, I have to go to her younger academic

years of trapes sitting around the Levan. You have not been, Julie, in the earthquake region directly above Damascus, directly above Lebanon, in that northeast corner of the Mediterranean. But you have been northeast of there as well. It's pretty remote, isn't it. So it's not it's not as super populated area tomb, but it's not. I wouldn't described it as remote either.

I mean, these are still populated areas and obviously we've seen that from Uh, from the death toll that is just climbing as as we speak, at least people killed. So Um, I would say it's a ghazion Tep for example, the closest city to where the epicenter was is Um, one of the centers where many Syrian refugees were fleeing for a number of years during the core years of

the Syrian crisis. So these are areas where many people have already faced extreme hardship in life, forced displacement, have been gathering and are now facing this devastating crisis as well. Aleppo directly selt and we've all seen the horror of the bomb. The leveling of Aleppo is how I would put it. How does the tension, the terrorism that you follow of the war of there of Syria in various parties,

how does that obstruct earthquake relief efforts? It's on any time that you have conflict ongoing, when you have a unstable government and governing system in a place like Aleppo where there has been holed out from rebels resistance to the state taking back over for obvious reasons. Uh, it's

it's very difficult to coordinate any kind of relief. It's one reason that we've seen the group called the White Helmets, which again got a lot of press during during the Syrian conflict, have been some of the responders at this. You know, they're really the first to the scene. But in terms of reconstruction, terms rebuilding after this, it's going to be tough in places like that that are, you know, be set with many other challenges even when there aren't

natural disasters. Will keep giving updates throughout the morning as we get more on this developing situation, a tragedy where hundreds of people are dying. July, there is a question in the morning and the sort of mood about what the relationship between US and China really is on the heels of that balloon that got shot down, the surveillance balloon, maybe the weather balloon, that's what China is claiming. What did you make of the Chinese response to the US

shooting down the balloon? Yeah, so at least it's interesting. I mean, I don't think it was a shocked to any one following US China that that there's espionage going back and forth on both ways. So the fact that there are these kinds of surveillance tools themselves was not the main story as much as it was just the brazeness of having it so visible. And I think it's still unclear with how intentional that was to have it

be that visible. Was it intentional across the Chinese government, was it one part of the Chinese government, or was this just a complete um mess up on somebody's part. I do think it was interesting that China's response initially did seem to be a sort of crisis of damage control. Wasn't just sitting back with the popcorn and watching to see how the US responds to this. It really did seem alarm that this was happening and playing out as it was. Obviously, since then we've seen some of the

usual rhetoric of the US is blowing us out of proportion. Um, you know, this was, you know, unnecessary to shoot down the balloon of these kinds of things. But I think the initial reaction said at all that that something did not go right here, and it put China on the back foot and on the defensive, I think more than the US. We've been talking this morning, Julia about what the mood among the populations of the US and China have in terms of an effect on the response from

both President Biden and Jesan Paying in China. How much are people looking for Jijian Pink to take a hard stance against the US. Well, I think there's obviously that that look in there always has been. But at the same time, you know, China is coming out of a really unsteady period trying to come back after COVID restabilize the economy, and part of that means coordinating in some kind of way with the were So I think there were at least some in China who were seeing this,

you know, the Blinken visit that got canceled. This kind of open communication is okay, let's at least stabilize things, get things back to some kind of normal, and instead, when you see a crisis like this send things into kind of unpredictable directions, that's not something that those who are just wanted to get back to stability want to see. So obviously there's some support for that tough talk, but at the same time, the sense of we don't want

things going off the rails more than necessary either. Julie, the team here at Blimberg did a great right up over at the weekend if the F twenty two. This was Damon Shepherd and Toni Capacho the F twenty two raptive fighter. They indicated this was the first heir to wear kill by that Yet Julia made me wonder, what do you think the Chinese learned from how the US responded to this event. Yeah, so obviously there was going

to be watching of that. But I do think it's important that the US is also learning from the technology that they will get from this as well. And that was part of the administration's calculation. You know, we've known from before that China has been able to UM to

learn from our aircraft UM. That was one of the reverse technologies that was was seen as a real win for China, and I think the US is trying to see if they can do the same thing with unpacking some of these intelligence UM apparatus is that they do now have hands on. But but you're right, both sides are always I think watching the other to see what are they using, how are they using it, and what can we learn from it to adapt on our own systems. Judy Gray as a wise thanks with him, and this

just perfect time. Jenny Norman that if you see how Sarah Human is one of the most interesting people in the economics racket. She's out of Joan Robinson's College gertn at Cambridge, which is truly one of the toughest admits in the world. She's with Standard Charter head of Europe and America's research. Sarah, what was your first completely overwhelming day like at the University of Cambridge. The heritage of that program is stunning. What was it like your first

day in the classroom? It was fantastic, but I was amazed at how many men were in the lecture hall. To be honest, when I've been at school it had been equal women men, and economics were still very much a male type of subject at that time. Things have changed, of course, things have changed a lot, and you've been a real leader on that with your coverage here of Europe and now of essentially the Western hemisphere of Standard Charter.

What is your theme taking Standard Charters expertise in the Pacific of a China recovery and how will that affect the Sarah Human world? Well, I think it's I think it's pretty hopeful. Really, we're looking for growth of five point eight percent this year in China and that's above consensus, but we're pretty confident that we're going to see a

real surgeon consumer spending. And if we look back at what happened in the US and what happened in Europe in the immediate aftermath of the first pandemic wave, helped of course by a lot of government spending, particularly in the US, there was a huge search real terms increase in consumer spending from trough to peak in the first twelve months after that first pandemic wave in the US around fifteen percent in Europe, and I think we're going

to see similarly large increases in spending that's going to drive the Chinese economy forward UM. In terms of what it means for our part of the world, it's great for exporters. It's been a sort of difficult year trade wise, and we think that there's a lot of opportunities in China this year. UM. Question is what happens to inflation. There are concerns that we could see commodity prices picking up again. Our our own view is that the thought of growth we're going to see in China is not

necessarily going to be driving commodity prices substantially higher. UM it's not going to be construction lead, it's not going to be investment lad, very much a consumer lead and probably consumer services lead boom. Meanwhile, people are also looking at resilient labor markets, perhaps helped out by some of the demand from China, but very much domestically driven, both

in Europe as well as in the US. How much dissonance is there between the strong labor markets that we see and there's disinflationary push that a lot of people are feeling. Perhaps as a linear nature, I think there's a lot of dissonance, because it's true that typically look at the US, if we look at the euro Area, if we look at UK, we have strong labor markets everywhere, and certainly here in Europe there are real concerns about

what that means for wages. We're seeing wages rising pretty rapidly. In the UK, we have strike action which is likely to further advance that, and in the euro Area no particular war signs yet of in wages becoming out of control, but some concern that with the unemployment rate as low as it is the lowest on record, that it's only amount of time before you see wages catching up. Um so that does really question what happens to inflation, particularly

the services part of inflation. We know that that's a concern for the FED and that Chair Powell has talked about the imbalances in the labor market being potentially a driver of services inflation x X housing. So this there is this dissonance between what is undoubtedly a decline in headline inflation UM and certainly a decline in core inflation in the US less so in Europe, and what we see the real strength that we're seeing on the employment side.

What was the big takeaway for you from what we saw on Friday from the labor market report in the US that a lot of people thought was something of a head scratcher simply because of its strength. To be fair, there was little to suggest that the labor market is weak in those data. I mean, we had had some signs earlier in the week layoffs were rising pretty rapidly UM and we know that a lot of the jobs that have been created a part time. That said, the

work week was up. The employment was strong whichever measure, and even if you account for seasonal adjustments and the sort of population increase, it's difficult to poke a hole in that data well, and this was sort of the zeitgeist over the weekend, Sarah, So let's cut to the chase and be polite. How did so many people get this wrong? Have you thought about it over the weekend? I mean, it was a shark, wasn't it? It was? And I think that we have had some signs of

the economy weakening. So clearly second half of last year GDP growth was strong, but if you look at the real spending data, then they were week for October, November, December, the surveys showing activity pretty sluggish, and until we had that I S M Services survey that looked to be the case across the board. So I think it was a double wammy that we had from the payrolls report on Friday and the as M services completely reversing out

that pretty weak number that we've had previously. UM. The so a lot of head scratching over where is the economy going? Zarah? Do you agree with Torsten Slack over at Apollo that we could get a no landing given how strong the data has been. Um I question the strength of the data. To be honest, I think we need to see the next couple of months without wanting

to sound too data dependent. There is a lot of you know, there are a lot of questions over exactly what's happening to the labor market, uncertainty that this degree of strength can persist, and we know, of course that there can be huge revisions one month to the next in the data. So I'd be tempted to sit back, let's see what happens over the next month or so before deciding that there's no landing insight. Sarah, Thank you

so much, Sarah Hu and their standard Charter Bank. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the I Heart Radio app, tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane and this is Bloomberg