Surveillance: Fed Downshift with Emanuel

which you deserve. What a runny we've just seen in October spose over to November. This morning. We asked the guest a little bit earlier, Eric Freedom, what he thought of it, and he said he'd faith this. Do you agree with that? Now? Uh? From our point of view, Uh, Look, the next week or two could be very choppy. Obviously, we've got the FED tomorrow, you've got the elections next Tuesday, and there's likely going to be back in fourth as

we've seen in the last couple of days. But from our point of view, look, we know the FED is about the downshift. I don't want to call it plause I don't want to get whatever. But we know the trajectory is going to change and the market is getting comfortable with that. At the same time, just like the July earning season, we know the numbers are coming down, okay, and it didn't matter stocks in in July, and it doesn't matter now because frankly, people have been for the

most part underinvested. And the last thing, the stock bond correlation. You can't get away from that. The UK set the line in the sand when we resolve the political issues that at least stopped the parabolic move up and yields and that supportive for stock. We've got you for the whole half hour, which is a real pleasure. I want to go into some of the machinery of what you're doing day to day that everybody on wall streets treat. We'll do that later. Right now, you have a single

statistic the morning it keeps coming up. Revenues keep taking up on your earnings edge nine point five. What's the glide path of revenues you see with your optimism and to say June of next year, well again, look, we know the story is the story that none of us as adults have a faced faced in our investing lifetime, and the revenues are being driven by the ability to pass on prices in an inflationary Absolutely, absolutely, Look, the glide path is going to moderate. The question is can

margins be maintained. They've slipped, there's likely going to be some more slippage, but can we maintain And that's really the question uh confronting corporate America to politicians want to see those profit margins maintained as the federal reserve. In other words, the more that profit margins are maintained, the higher rates will go at a time when there is the lack of sensitivity right now between monetary policy and the market response. Look, this again is part of the narrative.

There are a number of ways the policy titans and and certainly and again this is part of the dialogue we've seen in the last twenty four hours in pointing out the energy industry and in particular that we do want to see margins come in. But again that this is why the challenge of the soft Ish landing is so intense, because there's a lot of things that have to go right. Triple overage, all cash fun I have no tax losses. Okay, other people have a lot of

tax losses. How do you play the shell game of tax lost candidates into January three. So we are very strongly convicted in the idea that you don't want to take money out of the market here. Okay, look, could we go lower at some point next year, absolutely, but that is contingent on We've moved from contingent on a

recession to contingent on a deep recession. Boom Radio. You don't see this, But to put a manual over here with me, because Lisa just didn't want to sit next to that much optimism to constructive to constructive, at least we'll said that the consensus view that has shifted so much, Judy, and we've gone from the fence not going to hike too much too. It's not gonna hike fifty, it's not gonna hike seventy five, or maybe it won't hike seventy five again, they're set to do a fourth seventy five

basis point hike. When it came to the recession, it was no recession. That's recession but short and shallow. We're a long way from where we started the year, Julian, and we've been wrong, wrong, wrong, the whole way through.

What gives you any confidence about three. Look, we do have to understand the fact that when you have a year like two, both the left tail and the right tail, and you know we talked about options planning at every car I s I are very large and frankly, when you look at it, and this is one of our favorite graphs, the bond stock return quadrant. It's been the lower left in an unprecedented nature over the last sixty years. Two.

But actually the upside of that is the year after the only other time it was lower left, you had a massive return here for both bonds and stocks. And again we respect the concept of seasonality. It's not the be all and end all in the markets, but we all know the data that supports good years after mid time. Can we give him in a shout out? Just quickly? Did you say the latest institutional investor survey at him and top economist, a title he has earned forty two

times in the history of the equity racess. I'm sorry, forty two fifty one. Well, this is what you're going. And you know he's smart enough to hire Michael Chew and Julian Emmanuel. You work for Chew, right, That's how it works. We'll talk. But the basic idea here John has been doing it since C. J. Lawrence, And here's how he does it. Granularity. No one is as granular is Edward Hyman. He's got a black pencil. He's ruined three of his light Grace shoot suits. He's got the

sharpie thing going. He ruins like a three shoots using the sharp uses a black sharpie, and he's got a he's looking at railroad crossings in Kansas City. Value. Add this is real value. You just take a sharpie and you talk about rabbit cross secrets. Yeah, exactly. I had a deal once and I had a paragraph on page forty two that said, up, I didn't get ed Hyman's literature, I wouldn't work there. I was literally give the proper shout out, and you just went on around about pencils

and sharp Pia's Jude Emmanuel the Weekend. Head over to our good friend Manace Crowning morning Manus John, thank you very much. Yeah, Joimy nive is amatox seeing the Special Presidential Coordinator, and what's good to see you in the daby. We were just buying some of the presidents on there talking about uh, you know, continuing buybacks and dividends would perhaps bring the wrath of the wide House upon them in terms of taxes. But to speech last night, let's

talk about last night. The President warned, I'm paraphrasing that there's a risk of a windfall tax if you don't be invest Is this just political kite find ahead of mid terms? Is there any built possibility of windfall taxes? Well, Master, first of all, it's great to be here with you in uh In Abugabi and I'm Bloomberg. It's it's always great,

look the president is. This has been a consistent message from the President, from the administration asking companies to take their profits and invest them back in America, back in

production and refining. We have been experiencing elevated prices as a result of geopolitical dynamics, not because of markets, but because we have a war, devastating war in Europe where the perpetrator of the war is one of the largest oil producers in the world, one of the largest gas exporters in the world, and it's using energy as a weapon. This has seen a massive increase in prices. Well, of course, we're still have a huge economic growth from post COVID

that is also creating demands growth. So we're telling companies make a profit. Hey, your shareholders, but there's a level and a limit to how much profit you can tell you without investing. You weren't saying not to oil companies when oil was at twenty bucks in the United States of America. I think I think the point that at twenty dollars is when naturally companies don't invest. A hundred dollars,

ninety dollars is naturally historically when companies do invest. The problem now is that they're not doing what they always used to do. I'm not here to represent big oil and US. I'm here maybe put the problemsation, which is people have said to me, you look at this administration's guidance to big oil. Day one keystone was bins. We have neither discussion about a new taxation format, and we have a host of sort of no drilling on on

federal land. We have various messages which are respectfully schizophrenic. How can you plan for five years, ten years, copex aim us with schizophrenic policy changes like this? This is how it's been described to me. What's your response to that. I don't think it's been schizophrenic. I think we've been very clear to craft. Look, we're in a we have to deal with the short term, medium term, and laun terms.

We're in a a time when we have to increase production because we need to make sure to ensure global economic growth. Yes, we have to have reasonably brice affordable energy resources oil and gas to meet our goals of where we want the world to go. We have to accelerate our investments in renewable energy. Those are consistent with each other, they're not competing with each other. So investing right now, we here's a certainty we're giving oil companies.

We've said we are going now that we have released a hundred and eighty million barrels. Yeah, I've oil onto the market from the spr for our national security, and just we need to buy it back. We need to buy another two hundred million barrels back over the next several years, we have said. The President himself has told companies, I will get I will tell you what price. I will buy it back at seventy dollars or so I

will start buying back at large amounts. So I will provide you with certainty of price to some degree, so to enable to answer the questions you've asked, Well, there's one way to push a market against you, and that's to tell them about what price you want to replenished the spr But I know it's a lengthy document and I know it has detailed We can we move on, which is about the price cap from the United States

of America. I think the language is an effective and a strong level of forty to sixty dollars is what I understand. The numbers that's in the Blomberg stories. Do you really believe sixty bucks is going to keep Russian oil flowing onto the market, because the conversation I've had with everybody here, everybody's worried about the sanctions coming to bear here in our at home in Europe. To sixty

bucks keep Russia oil flowing in your mind? So, outside of a Bloomberg article, which I would never want to argue with Bloomberg, I don't think so. I we are going to set the price. When we do that, and we'll announce it. I think all these numbers out there that are just rumors and leaks that I can tell you are not substantiated by reality. Uh, and people should just ignore those. I really would hope people would ignore

those numbers. We are We've always said that our goal was to keep the Russian barrels on the market while we restrict the revenues to Russia at a point when they're using those revenues to finance the war. There's a balance here and we have to figure that out. There's a difference in the balance between when we were at a hundred twenty dollars of arrow versus when we were

at seventy six dollars of arrow. So we are going to have to figure out we're doing that now of what the right price is going to be in order to make sure that Russia's still incentiviz is so on the market while we make sure that they're not overprofiting beyond that level. Will it be materially higher than sixty I can't tell you what the price is because if I say anything now, you're gonna they're gonna have rumors

again on that. But we look, we get it, We understand how the market works, and we want to make sure that our goals are achieved to terrify ideal in fact, not rumor. And with that in mind, I want to understand the potency of the price cap when it comes. Because I call up the Indian Oil Ministry yesterday, it's

very unlikely. The speculation is it's very unlikely Indian China to If the biggest customers either for Russian oil will sign up, we don't know, but given the price cap, it's a fairy impotent proposition if two of the biggest customers of Russia won't sign up. I disagree because, um the country. What we're telling people, you don't have to sign up. It's not you know, a membership. Uh. You as long as you are purchasing Russian oil at a lower price, that's what we want to achieve. You have

a market price of brant. Everybody negotiates. You know that nobody buys strictly brant. There's all kinds of negotiations. Do you really believe that India and China are not going to be negotiating and are not already? We know that Russian oil is not selling a brant right now. No, it's at a discount, So it's just amount. How much of a discount? Okay, Well, let's see what you produced

at your hair in Adipec. How would you describe Starry US relations at the moment are they broken, Are they fractured? What is the word that describes it at the moment? Well, I think people attach too much to the drama of things and the soap opera of things. Satura Abrabian the United States have had an eight year relationship. We've had some ups, we've had some downs. We usually come back from the up. We have a broad range of interest

from security to economic. We had a significant disagreement that we're you know, I don't try away from that. We had a disagreement about the OPEC decision. We think it was a mistake to announce a cut of two million barrels, But we all we continue to talk to them, and we're going to continue to have a relationship that serves our interests. We're just gonna have to evaluate how that is, how that best works. In all ways, the last time you were in the region, you left here? Did you

leave here? Did you leave Saudi Arabia with a conviction and a solid belief that you were going to get more oil on the market. From the side, he's were you miss guy? You did? Did you walk away with that belief? Clarify for us today. So one of the things that I never do was talking about what we talked about. What I my conversations with government officially understand

the scenes. So I will say that we were very The good thing about my conversation and folks, I'm always very straightforward and I appreciate that they can be with me. They knew that we believe that a cut right now in this environment, under these conditions was not good for the global eco. What I mean, it was not good for their consumers. It's not good for our economy consumers. We thought it was a mistake. I also, I think that we from trip to Saudi Arabia was about oil

all along. No, it was never about oil. Think about the things that we've done. We look, we are the United States, Our interests are are varied and deep. And look at what we achieved on that trip that I think was really important. They were over flights from Israel, security arrangements, security integration, security, economic integration of Iraq, visa vi Iran, extending the ceasefire with Yemen. I mean, these

are really important things. We announced all kinds of other achievements at the in the wall on that trip that I'm nothing to do with oil. At the same time, when we announced the trip. We also so after the trip, a increase in production in July, an increase in production in August, an increase in production in September. Uh the com sauity in August had its highest production levels continuity

of them shock and it provoked immediate press releases. In the news conference I was in in Vienna that night, the question the market wants to know is how serious is the white hot abide a retaliation? You know, is retaliation the right word? What are you gonna do? Is it? Is it gonna be on sales? Is it gonna be no peck? Is it gonna be let's say more additional spr releases? What is this retaliation that's been so much

made off in the media. So again I have to deal with the relationship less with what it's made of in the media. And we are looking at what the interests in the United States are, how we see for our own interests and for our interests here in the region. We have very strong interests here in the Gulf, across the board with you A, with Saudi, with the rest

of the region. And we are going to continue to look at what other actions that we need to take that best serve the American interests and what we think are the best security interests for this region and the economic interests around the world. That's what will guide every decision that we make. And I thank you very much

to taking the time. I know you've got a busy schedule and it's been good to catch up and on I'll make sure i'll go down fact check my forty to sixty dollar oiler price in terms of where the cop comes and team Special Presidential Coordinator in OUTA two. My final guest, it's a wrapper from the hallowed halls where oil dealers are dumb. Jonathan Jane Folly will No, I would actually like it. Let's be about the company. It's just fun to say the name Billy, Billy say it.

It's fun. Alright, let's be please, let's move on. Royal Dutch show is maybe just as fun to say, Jane Folly. Strategy Jane, I did a fancy log study on the Bloomberg on Chinese you won USDC N Y and if you extrapolated out on this moon shot of weakness, you get to eight you want in the summer of next year. Can you go through that exercise? Can you extrapolate out

some of these beleaguered EM currencies and particularly China. Well you know again that the news that you were just referring to, will they pull out of COVID zero or not, Well that's going to have a big, big leaning really on the markets expectations for growth in China and therefore on the the value of the the remember, because we all know that Chinese growth this year is it's really disappointing now. And we all know that of course that we can economy means that we can exchange rate. So

those two things that are really really aligned. But you know, for many of the e M currencies or the economies, I think it really depends whether or not we're talking about commodities exporters, commodities importers and certainly the ones that have been really struck by the energy yet at crisis really in some dire straits or that or the food price crisis for many em and you know, there is some degree of a doom look for for for many of these now and that's going to be really tough

to break. And of course I think we've talked about before if you can look at the doom loop for for emerging markets as their fundamentals keep on driving them lower, and then of course refers to to do that feedback loop with respect to the dollar, to people keep on holding the dollar and instead let's go to the first principles. Off a FED meeting tomorrow and folks will have our college very coverage, very dollar centric. Jane Fawley, Can central

banks manage a dollar turnaround? Well, you know, I think central banks would like a dollar turnaround. I mean, you know, there has been keeping up with the jones Is to some extent, and that's not just an e M. And we saw the emerging market central banks at start hiking

interest rates really before detenant in many cases. And of course, you know you look at the Bank of England, you look at the u c B. You know they next time they go, I mean the Bank of England obviously this week, but next time they go, they could be hiking into an interest rate hike into a recession. That's not something they want and they don't really want to be doing seventy five basis points even fifty basis points

into a recession. But of course, as long as the FED does large increments, then because of the the impact or the potential impact on their currencies, you know that really keeps alive the possibility that they may have to go by large incumments to which crushes demand. This isn't just about a doom look for em it's happening here too. It crushes demand even more, which is clearly not what

you want when you've got energy prices crushing demand as well. So, um, if the FED were to ease up, I think it would be a relief to huge amount of economies around the world. Okay, so if there is a step down, does that mean that we've seen peak dollar? Well, you know, not necessarily. And and this is the interesting thing. Because the dollar is a safe haven, the dollar also reacts

to to slower world growth. And so you know, I still come back to the question until you can really answer, you know, what else are you going to buy if it's not the dollar and you can really say, yeah, you know, I really want to go and buy risky assets, I want to go back into em or you know, I'm confident in the Euro. Until you can answer those questions, I think the dollar retains a fair amount of strength.

And you know, with respect to the Euro, yes, you know, the energy prices have come lower in October and that's great news, but you know it won't stop. It hasn't stopped. You know, big chemical companies, aluminium smelters help manufacturers moving out of Europe because they know that it's not just about the cost of energy this winter. It's next winter and the one after that. Where is that energy going to come from? And I don't think that's something that

the euro is is really priced for yet. So how much can we see the dollar continued to rally based on that backdrop, which is really a poign to think about industries moving out wholesale of Europe because they know this is not a one winter problem. Well, you know, I think, you know, we could still have euro dollar going lower, maybe not right in the in the near term, because the market is is getting excited about that the story that we've got this this warm period and energy

prices aren't as expensive as they could have been. But I think if we move into the proper winter over you know, after Christmas into January February, if it gets cold then and I think the reality of this weak set of data that we've had from Germany in terms of industrial production and manufacturing production, the prems, etcetera, that the warning is about recession if they come into fruition.

I think that's the sort of environment where we could see, you know, you were a dollar moving back, maybe towards or so. In final word on sterling, if you'd asked me just a few weeks ago whether this Bank of England will be selling assets, I would have said I don't think so. But they are. And it's that currency positive or negative. Well, I suppose you know that the fact that they managed to pull their credibility back from the abyss, you know, is a positive thing. We have

to see how this this auction is soaked up. But for now I think the Bank of England yet credibility. It's a good thing. But you know, I think the jury is out. I've still got a negative forecast for sterling, and that's really because you know, all of this, So our fundamentals that existed before that Many budget on September twenty three fundamentally still there. In fact the worse, because confidences as worse, and business confidence, consumer confidence, that sort

of thing. We are headed into the recession if we're not already in it. So yes, you know, in terms of credibility, both the new Prime Minister and the Bank of England. Yeah, that's that's certainly a little more solid than it was just a few weeks ago. But this is a this is a tough set of environments in the UK that that both are facing, and I think Sterling is still headed for a pretty bumpy ride. The pan against the US stellar right now, one fifteen thirty five,

that dollar week through all the get ten. Jane, thank you as always, Jane Pony, there's rather thank you speaking from sixty thou feet Carracadanna's on a glide path landing with the Fed. Tomorrow we'll have our coverage. He joins US now chief US economist at BNP Perry Carl. I want to drill right down to the press conference. Everyone's gonna want to look out to December. How does Powell frame December tomorrow in the vicinity of two pm? Well,

good morning, Tom. I think that the challenge for tomorrow's press conference, obviously November is all about December, but the focus is going to be on the Fed's credibility around this messaging, and they've previously highlighted that they need to see some realized improvement in the inflation numbers, not just wishful thinking about a turn on the inflation data, and if we look at, for example, the Core cp I, the six month annualized rate of change relative to the

twelve month is not telling us things are moderating. So I think, what could happen? I mean, the Fed is obviously eager for a downshift at some point, but I think that maybe Pal will take a step away from that and rather than committing to December, he'll say, well, the time is approaching for a downshift. We'll let the

data do the talking. And we have before the December meeting two jobs reports, two more inflation reports, and also two more rounds of inflation expectations numbers which I think are exceptionally important at this moment. Is the rate regime now or what we're going to see in December or January the same as it felt the last time we were at this level of nominal rate? Well, I think that debt levels have gone up in the economy, and

so interest rate sensitivity has only increased. And that's true relative to the last time we are at these levels, and it's true over the last fifty years as well. So absolutely monetary policy is biting into economic activity. We see that very clearly in the housing sector. We'll see it through some other channels. You alluded to the manufacturing I s M out at ten o'clock this morning, the strong dollar taking a very significant toll on the factory sector.

We've seen new export orders slide into contraction, and I think that means that finally today the I s M headline will also slide into contraction as well. So we're absolutely experiencing multiple channels through which policy is tightening and rating and activity, and I think that means we're heading

into recession next year. Maybe not so early as the first quarter, but I think by the time Q two rolls around, we will have seen pay rolls slip below zero on a monthly basis, and consumers will have exhausted their excess savings from the pandemic, and the FED will be at level of about five and a quarter on the terminal FED funds rate. This will ultimately fix the inflation problem, but through the process, it will steer us

into recession. To fix the inflation problem, how long does it FED, in your estimation have to hold rates at that five and a quarter percent level. In my estimation, my team's estimation, we think that the FED will be holding at that terminal rate of five and a quarter THROUGHOUTE and then rate cuts could start in four. But don't look for the Fed to be the white Knight at historically has been riding to the rescue quickly and

aggressively with rate cuts. Rather, they will be much stingier with the lowering of the FED funds rate, keeping it in restrictive territory. We're looking for maybe uh fifty basis points of cut per quarter after at the start of four. So it's going to be a gradual moderation of that restrictive stance of policy because it is going to take time to choke the inflation pressures out of the economy.

We're seeing inflation at the moment in very sticky categories places like rents UH and services excluding rents, and historically it's taken more forceful policy action to bend the trend in those types of categories. A lot of people listening to this might say five and a quarter percent rates for a full year at a time when we haven't seen as much sensitivity this year because of some of the immunization of balance sheets that we've seen. Next year

starts to get a little bit different. What are the contours of a recession with a full year or more of five and a quarter percent fed funds rates. Well, again, Lisa, I think the recession probably starts in Q two of next year. We have to be careful not to succumb to recency bias, as psychologists call it, and draw parallels to the last few sessions which were exceptionally deep recessions, the COVID recession UH and the global financial crisis before that.

I think the contours of this recession look more like a run of the mill recession, if you will. And so why if I had to draw a historical period with the closest step parallels, maybe it's the nine recession. So I would look for again between three and five quarters of recession, probably four quarters of economic contraction, and look for the unemployment rate to back up from three and a half as it currently stands to something in

the vicinity of six percent at the peak. But the critical thing here, Carl, and you've been a great student of history, you know, for years, rolling back to your time at Deuts, your bank, and and to me, the critical thing here is life goes on. If we get a Rick and Dona view, life goes on doesn't it. I mean, there's a whole gloom crew out there. We roll over and die. I just don't buy it. Well,

we don't roll over and die. Uh. There's a you know, still a decent demographic tray and in the US, especially compared to a lot of our developed economy, appears in in in Asia and Europe for that matter. So there's

population growth, maybe we see some improvement on the immigration front. Uh, And all of these demographic factors mean that life goes on as the population grows, then the economy gets dragged along with it, so you get you get hiccups along the way, and those hiccups are recessions, but structurally there

is still a growth paradigm in place. Meanwhile, Senator Warren and Bernie Sanders putting out a note basically talking about how they want to talk better with FED Chair J. Powell about the path of rate hikes and some of the pain that it's going to inflict on the economy. If the Fed lacks the political will for whatever reason to get to that five and a quarter percent level,

how high could inflation be? I mean, what's necessarily going to be the length of time that inflation could remain high and the ramifications for the economy, well, if they lack the political will to really force full react against inflation, and I don't think that's a case by any stretch. At the moment, UH, A slew of FED officials have made it very clear that inflation is Job one priority number one, and they will do whatever it takes to

accomplish those goals. So as long as J. Powell is at the HELM, I think they will have the political will to make sure this plays out in an appropriate fashion. But if they don't act forcefully, then not only do you have a higher inflation over a medium term horizon, but possibly some dis anchoring of inflation expectations. And and that for me was really the last straw. John had mentioned.

Crude oil prices at the start of the segment. Crude oil prices in the eight to ninety dollar range mean that the relief we've seen in gasoline prices UH over the last one days or so may prove short lived and we could start to drift higher in the coming months. And nothing antagonizes inflation expectations in the United States, including longer run inflation expectations UH than rising prices at the pump We've seen this in the latest University of Michigan

details for longer run. We've also seen it in the New York FEDS survey of consumer expectations on three and five year horizons. So I think in the back of their minds uh FED officials are looking at that notch

up in inflation expectations. It's still in territory consistent with them moving back to their goal, but it's moving in the wrong direction, and I think this is part of the reason they may have some pause about really convincingly signaling a down shift for the December meeting, and instead they'll say, well, let's let the data do the talking, and if we do see some relief, maybe they can

down shift to fifty and December. But I don't think we'll get kind of convincing, table pounding confidence on that point in tomorrow's press conference. Count thank you go to Nave that down that. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to

ten am Eastern. I'm Bloomberg Radio and I'm bloom 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, and this is Bloomberg