Surveillance: Fed Tightening Risk With Fernandez

of Tommy, why should hike in March? Or if we's changed, is it a case of Timmy, why shouldn't hike in March? I still think it's tell me why we should, and I think that's what the FETE is betting on at this point in time. I know everyone is saying March is a live meeting. They're anticipating they're going to see that first rate hike in March. I'm not so sure. When we sit around our investment table across Mark, we're thinking it's going to be maybe a little bit later.

We're still looking at June for that first rate hike, and I think the FED is hoping that we're gonna see inflation hit the peak levels in the first quarter of the year, and then because of base effects and the difference that we see from a year ago numbers, hopefully we'll have supply chain issues being a little bit better,

so goods inflation comes back down. If the job openings continue to be um steady and people keep coming back to the labor market, perhaps wages come back a little bit, and so inflation will start to decrease a little bit on that year over year number and give them some room to wait until June. So I think my betting is still on June, but futures are showing March is a live meeting, Victoria. How do your assumptions there that you're making about federal reserve policy then translates into the

assumptions you are making about this bond market. Yeah, so, you know, you look at where the bond market has been pricing things, and you guys have been talking about it this morning, and I really think the long end of the curve has been under priced for quite some time. You were talking about people's projections. We were looking to be around that March hive around one seventy five on the US tenure by the end of this year, and I don't think with the week to go we're gonna

hit that. Possibly we hit the one fifty level and maybe go a little bit above there. But I think growth is going to be a little bit better than people anticipate in the first quarter because we're gonna have strong earnings. Yes, evaluations may come down some, but I think we'll have strong earnings. I think we'll have good growth. I think we'll start to see inflation pressures ease a little bit and that's going to allow the longer into the curve to go and maybe steep in the curve

a little bit. This is such a flat curve for the Fed to start hiking. I think they want to see that steepness a little bit, and perhaps we get a small amount of that in the first quarter. What what is holding the tenier yield down? Victori? I mean, who's buying this paper? Um As we talk about the possibility of two or even three rate hikes next year. You know, Matt, I have this exact conversation with the client on Thursday, and you know, why is the bond

market staying where it is? And we can talk about there's unserve t there's flight to quality. I think a lot of it, though, is you look at sovereign debt around the world. We have such low levels still, and I think that that's pulling down some of what we're seeing in the US. I don't think it's all just US centric as to why rates are so low Comparatively around the world. We have people still coming in because relatively the yields are higher, but I think we have

lower yields globally holding us down. You have some uncertainty still with the Omicron variant out there, even though we think the effects are less than what we've seen in previous variants. But I still think you have that uncertainty and questioning what the FED is going to do that

is holding yields back a little bit. At this point, Victoria, there is this belief that if you have higher interest rates the start of a right hiking cycle, the financial conditions have to tighten, the equity markets have to fall. I can think of several experiences in recent financial market history where quite the opposite has happened. I can think of the tightening experience going into oh seven, where equity markets continued alleying really aggressively even as rate hikes started

to come through quite quickly. Can you envision a similar scenario taking place this time around? I just see deeply negative real interest rates and think how much work does the FED need to do to actually tighten financial conditions. Yeah.

You know, historically, when we look at what goes on in a rate hiking cycle, throughout the tapering and even through the first rate hike, you continue to see equity markets rally, and we don't really see the equity markets take a hit until maybe that second of that third rate hike. Again, if we're looking at June as a first rate hike, even if we say it's March, you're looking at the second half of this year before it

starts to affect equity markets. And yes, we have these really low real interest rates and it's gonna take us a while to get those up. So you have low rates for the equity market that will help valuations for a while, even though I think they start to come down a little bit from current um levels of where they are on the valuation side, but I still still think you have strong support for the equity market at least in the first quarter, possibly the first half of

next year. Then I think we start to have a little bit more concern and see sideways growth for the equity market instead of continually trending higher. And when we get a little bit more specific within equities, Victoria, where do you want to be putting your money? And why do you like the banks here? With the curve this flat? Yeah? So Kaylee. When we look at the equity market, I mean, let's look at the SMP five hundred. At the end of last year, you had over of the SMP above

it's two D day moving average. That's come down. Now we're rarely around sixty six of the SMP above that level, So I think you have to start really picking your names carefully when we look at them. The outlook for next year. Financials have been hit quite hard, but yet there's still in an uptrend. There's still some momentum there, so we think it's a great time to go in UM.

I think they have stronger balance sheets than they've had before, there's upside potential for dividends next year, their cheap to the market, and as we mentioned, we do think rates are gonna go a little bit higher on the longer end of the curve. So it looks like a place and we want quality going into next year. So you look at Bank America, JP Morgan. These are the two names that we really focus on in that sector. Victoria, thank the family for letting us borrow you for ten minutes.

We appreciate it. Victoria Fernandez that of cross Mark, thank you very much, just jointing us now in place to say, Mohammed Juanist the editor in chief of Gallup. Mohammed, great time and to catch up with you, sir, looking ahead to next year. The approval writing of leadership in this administration, Mohammed, is it a simplest saying it's gone in one direction, it's heading lower. It's kind of stuck right now. Um

and we don't know where it's going. But this team started off with a really promising approval rating, especially on the pandemic. They were at six and ten Americans approving of how they were handling it in late January early February. But on every metric now the Biden team has really crunched down to the low forties on foreign Paul see, on the pandemic, on the economy. Um. Our latest number is just overall approval of President Biden uh and and

how he does his job. And he's at right now, since the fall of kabbal, which is seems like a lifetime ago but was in September, we haven't really seen that number move at all. Uh. Congress is doing even worse than the president right now approval of the job that Congress is doing so um. You know, this administration started with the America is Back the theme. When you look at the partisanship challenges, it really does feel like

the same old America. UM. And this team is really up against some very serious resistance in terms of trying to find common ground because we don't see that in the data. Well in Mohammed. That paints a pretty bleak picture for the Democratic Party heading into the mid terms. And when we talk about build back Better and that, you know, being something crucial for them, is that actually going to be enough to move the needle? Is it popular? It's the popular support there for it, and you know,

it really depends on the spin around it. Um. It was really ironic when you were talking about what's going to be left of build back if it gets past I started to think of Obamacare and these massive legislative acts that really are very different when they get past that what was initially promised and envisioned um to the public. But it's not just the Democrats. We see the Republicans also really struggling to get approval from anyone beyond their

very basic ideological base. So Mitch McConnell, for example, the Senate Republican leader, he's at thirty percent approval, sixty disapproval. Nancy Pelosi approval fifty percent disapproval. So it really goes on both sides. Um, if you're not a Democrat, you don't have a great feeling about democratic leadership. If you're not a Republican, it's about the same. How big are those ideological bases, moham it, and how much has that changed?

Are we looking at basically thirty on either side that aren't going to change their opinion no matter what happens. It's such a great question that, Matt, because that's what's really changed in America. It's not thirty forty, it's really about twenty on each side. America now has the highest rate of people who identify as independence. So the general public, if you will, us non politically minded people have really plugged out and tuned out of the in fighting between

the two parties. Um. You mentioned the midterm election. It is so critical that this is gonna be the first mid term election since President Biden has taken office. Um. The world is watching Ukraine and unfortunately American leadership is gonna be watching the pit term election. UM. So a lot of the dynamics while the rhetoric has really changed since the Trump administration, a lot of those partisan divides

really have gone nowhere. Unelected officials did much better in our poll in December then elected officials, So there are some bright points, um, but when it comes to Congress and the presidency, it's really a pretty ugly picture. By the way, you mentioned on alleged officials. I wonder about America's take on Anthony Fauci. Um. He seems to be a very partisan figure. Do I have that wrong? No? UM. It's interesting because Dr Fauci actually is one of the

leaders that did the best. UM. He got fifty approval for seven disapproval, but when you look at it by party, UM, only nine of Republicans approval of the job he's doing. The surprise to me, and as recovering attorney here was Justice Roberts. Justice Roberts actually got the highest approval of all the leaders we asked about he got a sixty approval rating, and it's actually an improvement in the past several poles that we've done of his own approval rating.

So it'll be really interesting to watch where that goes as these really critical decisions, especially on abortion, come up to the Court. But it is remarkable that in a year where the Court is really trying to argue that it's a political um, the leader of the Court actually did better than most selected officials. Mohammed, what do you think driving that for paper doo time followed Supreme Court decisions or the process than closely? What do you think

driving that unexpected decisions? I would say, Um, Justice Roberts has taken positions that if you were simply guessing on the party that appointed the justice, Um, he hasn't take He hasn't taken the partisan line on every decision. Um. But again, the Supreme Court is something that Americans don't pay a lot of attention to until there's a huge story, and there's gonna be a massive story in two with

whether or not Roe v. Wade is upheld. So these numbers are likely to change dramatically both for Justice Roberts at perceptions of court Mohammed, looking forward to catching up with you through next year to have God is through some of those issues. Mahmat units that joining us from Gallophon. Another person working today even though technically it's actually his week off, so this is his only job to do this morning is Jose Rasco, America's Chief investment Officer for

HSBC Private Banking and Wealth Management. Jose, thank you so much for making time for us on a holiday week. As we look through the last rating week of this year on to primary question is where in the cycle are we? Well, you know, Kayla, good morning to all of you, first of all, and UH, happy holidays to everybody. And clearly we think, you know, the the early part of the cycle where we see the rapid growth is

behind us. We saw that peak in growth, UH and economic growth and corporate profits growth in the second quarter of last year, so we're more in a mid cycle phase. Will keep in mind, you know, especially in the US, as growth slows from let's call it, you know, round

up to six percent. If it's slows so like four percent this year, that's still double the rate we historically have seen for the U S economy, more than double the rate in fact, so I think it's two is a year of normalization from our perspective in terms of fiscal policy, monetary policy, growth, and inflation. Well, and as we think about those fiscal and monetary forces easing, that is of course what drove the accelerated early part of the cycle. Does that also mean that the cycle is

going to come to an end much more quickly? No, we don't think so. I think if you look at the monetary policy, you and you just both debated that monetary policy is tightening to a degree. Uh. You know, if you think of you know, tapering, QUEI is really not putting your foot on the brakes, it's really lifting your foot off the accelerator. Uh. And we think the FED has decided to let the the car move forward at its own pace a little more. But but long

story short, that tightening that is just beginning. Uh. Even if the FED were to tighten three times next year and two or three times in three, the real FED funds are it's still remains quite you know, quite low uh and and in fact negative. Right, even if you get inflation slowing back toward a more normal rate of you know, two to two and a half, how responsive is this Fed going to be the market move Jose, I mean, um, is there going to be a FED

put still? Well, you raise an interesting point in the sense that there are quite a few vacancies as you know, so that is going to be somewhat you know, the concern of the market is how doubbish will this FED become. We're not anticipating that they'll be too dubbish. We think they will try to move with the market, but we don't think this is going to be a FED that is going to move in advance or try to tighten

to keep the market happy. Uh. And but if we think they'll be there to be supportive, So yeah, that FED but you want to go at a FED put Yeah, it remains somewhat in play, and we think they will be supportive next year of markets. Yeah, absolutely, Uh as they looking at the bigger picture, um, stepping out to the thirty five thousand foot view if you will, and your job title as chief investment officer for private banking

and Wealth Management. I was talking with Kaylee this morning about Nikolai Tang again, the head of the Norwegian UM Sovereign Wealth Fund. He's concerned that returns are just going to be lower in the next decade because of inflation, because of central bank positioning. Um, he's got a one point four trillion dollars invested in this market. I think the biggest equity holder. Are you worried about lower returns going forward as well? Well, it depends on your perspective, right.

If you're saying, will equity markets be lower than they were in probably yeah. I mean it's hard, you're gonna it's gonna be a tough year to beat, right, So no question or equity returns will be down from there. But one, we're sort of abnormal years in terms of economic policy and and and financial market returns. Now, going forward, if you look at next year, for example, you know the market is calling for eighteen percent growth in corporate profits. Um,

that looks pretty healthy from our perspective. And keep in mind the one thing that I think a lot of people are forgetting. While we are mid cycle, in a more of a mid cycle or mature stage of the economy, there are four other factors secular forces that are going to be driving economic growth upward from our perspective. Number one is inventory rebuild, which you've talked about the depletion of inventories this morning already and how that needs to

be rebuilt on a global basis. Number two is the infrastructure story, where we're seeing a lot of spending on infrastructure globally. Number three is the tech revolution. Everybody seems to have forgotten that five G is just the beginning of this technology revolution, which is gonna be a multi year rollout. And number four is the creation of you know, economy two point oh, the sustainable world that we're all talking about is finally happening, not just environment environmental issues,

but socialist issues as well. Those four major super trends promised to add to growth and productivity as we go forward. So um, it's easy to be negative, right, but I think if you look at those four secular trends, those forbal factor in as well to the cyclical story. Alright, So looking at the world through that lens, Jose, where

or do you want to put your money? Specifically? Well, our focus if you look at fixed income, our focus is looking at areas that provides some some better returns, and we're looking at high yield and in certain parts

of the world as well as emerging markets. If you look at the equity markets were more focused on the US, where we see you know, stability of growth and earnings and even though it's going to be a choppy year because of the political cycle, but we think the US will do very well this year with expectations of eighteen percent growth and earnings. That gives us a lot of upside potential for the equity markets UM. And then we

look at Asia. I mean, you know, I know a lot of people have have focused on the story in China, where you know, short term there are issues. Longer term, you will not see faster growth, you will not see faster UH consumer spending power explosion that we will see in in Asia over the next three to five years.

And so therefore we are very focused on the Asian markets where we see a lot of growth and a lot of intraregional trade that is going to take place, where where that growth is going to continue to build on itself within the region. So those are the two areas with your voting member of the Global Investment Committee to HSBC and on the subcommittee for f X and UH and currencies, what do you think about the dollar?

We've seen some strength recently. Does that hold into two Yeah, we think it does because if you look at relative growth rates, and most importantly, Matt is is the relative interest rate story. Right, it's one of the reasons where we think that the story on the tenure has been uh, you know, sort of a bit exaggerated in the markets. We don't see the ten year backing up any great degree because there's there's a couple of major factors. Are

number one, inflation should slow next year. Number two is we're gonna have a lower deficit than we did the year before, which means you have less issuance. And with good demand and less issuance, you should have the U S treasury markets should remain very well bid. And as a result, we see that upper constraint on long term rates uh And and therefore we see some strength in the dollar, you know, absolutely not tremendous strym, but but

range bound. Where we see some concerns in the in the fixing in the FX markets rather is in some in some markets in the emerging market space, where you've got some inflationary stories that are far more um long term than than they will be in the developed world. Um. And that is a concern. And the and the FX markets will continue to serve as a corps as it were. I was I wonderful to catch up with USA as always, and I hope you and the family to enjoy the

Christmas holidays. Rasco there of HSBC, one of the most important policy decisions at the moment is to try and decide how short the isolation period should be. After starting with this pandemic in and around fourteen days, shortening to ten doesn't need to come down to five. Lauren Sanwa joined US now a social professor at the University of

Nebraska Medical Center. Lauren, let's start there if we can just how much data you still need to make a decision like that on whether we should come down from ten days to something like five. Yeah. I think that one of the big pieces of data that we're continuing to wait for UM and that people are actively collecting, is that that initial space between exposure and when you start to be symptomatic and so UM. One of the challenges is that in the US are sequencing was delayed.

So while we've made lots of gains in that space since this pandemic begun, we had sort of gotten complacent and we had stopped sequencing everything to understand when these new variants came out, So we're catching up on the data, UM and comparing that those data to delta to other strains. And I mean, I think that this is a big focus, especially considering our frontline workers need support, They need a

deeper bent right now. So looking at how long it takes for people to become infectious and how long they stay infectious for is absolutely a number one priority of our science to us right now. Well, and Lauren, obviously that answer may be different depending on the subject in question is vaccinated or unvaccinated. And I'm wondering too as we talk about you know, all of these symptoms appear to be more mild at least that's what the data has suggested early on. How is that different depending on

if a person actually has gotten their shots. Yeah, we are seeing milder disease in people who have been vaccinated. UM. There's a lot of work being done to understand how vaccine efficacy is specific to oh macron um, is it waning? Are we going to need additional boosters? Um? And but what we are seeing is that there is more severe disease in people who are unvaccinated, and so UM, the people who are in the hospital are primarily unvaccinated people.

There are going to be some breakthrough cases, that is inevitable. But the people who are by far and large getting severely ill from this disease and this variant um even though this variant seems to be less um severe overall all are people who are unvaccinated. And we are seeing a spike in pediatric cases and and many of that many of those are because um, you know, we're catching up with children being vaccinated because they were they had

access to the vaccine. Later, kids under five still don't have access to the vaccine. As we work on the you know, we're finding that study. FISER is doing a ton of work right now to refine um that study, looking at improving and boosting the immunity of their findings. Well, speaking of FISER, it's not just their COVID nineteen vaccine that is at play now. They also have the therapy packs loved Merks covid pill was approved last week as well.

How much of that can make a difference having those therapies available when we talk about hospitals, you know, potentially being overrun with patients. Yeah, any additional tool we have in our toolkit right now makes a difference. And these therapies are great because they don't have to be given in a hospital setting. Um. So this is where telemedicine

comes into play. Um. You know, we're we've even explored strategies of of providers who are uarantining who can't actually be in the hospital but are well enough to work to be able to run COVID clinics and things like that. So, um, staffing, you know, the approach to staffing is very creative, and this gives us an additional space to provide COVID care for people who do not necessarily need to be hospitalized.

And that's huge. And if and if we can get medicines like this two people early in their in their clinical course, we can keep them out of the hospital, which is better for everybody. Hey doctor, uh, you know, I think the prevailing thought on Wall Street and in markets is that this is a pandemic that is becoming endemic. It's not that big of a deal anymore, with the exception of you know, the ten day period that's causing

canceled flights and holding up the economy. Is that the case or are we still seeing real problems with hospitals overcrowded with emergency help being called in. Are we still in the midst of a real disaster. Yeah, I definitely think endemicity is the future, and the policies will have to adjust when that happens. But right now, what we're

seeing is people who are being hospitalized. Even with this mild or potentially mild or variant, there's so many people getting sick and so many people still unvaccinated that hospitalized. Hospitalized patients are coming in, patients are coming into the hospital and droves, and the hospitals are overwhelmed. So UM, you know, I think we will get to a place where this looks more like flu or looks more like our seasonal respiratory viruses. But right now, this is still

a pandemic. This is still causing severe disease. It's causing severe strain on hospitals and healthcare workers. UM. Frontline workers outside of the hospital, across the globe are being severely impacted. UM. And you know, we're looking to get through the holidays.

We're looking to get through UM these times where people are going out, they're going to parties, they're celebrating, and we understand that, but UM, we're definitely not out of this pandemic yet, and so for vaccinated people we will start to approach, you know, some semblance of normal life, I hope this year. But for unvaccinated people there's still real risk out there. Um and this is still very dangerous.

Virus doctor. Always fantastic to hey from you. We wish you the best as we come into a new years. Sat at the University of Nebraska. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on 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