Surveillance: Fed Tightening with Jones

just pianist and chief Fixed and Comes strategists at Charles Schwab. Kathy, I'm gonna cut to the chase of Bloomberg Corporate Total Return index is down eight point six percent, and I'm gonna guess I've given up two and a half years of coupon enjoying the price decline in in corporate bonds. And there's the full faith and credit story as well. The great dynamics here, and folks, this is Tuesday Dynamics

on Bloomberg Surveillance with Kathy Jones. The great dynamic here, Kathy is with the rising coupon, it's okay to step in and buy even with further price erosion, because now I've got a decent coupon. Are we there? Yet yeah, I think we're getting there. So we have recently pivoted towards adding more duration to portfolios and to um being pretty outspoken about income investors finding income and things like investment great corporate bonds, preferred securities, even high yield if

you're willing to take some of the risks. We prefer the upper end of high yield rather than the lower end. But all things considered, we think a lot's been priced in in this market, and we do see growth slowing down in the second half of the year a bit, and we you know, we had a brutal first quarter, so in fixed income, so we think now of time to step in and capture some of that income. I mean, you're gonna capture coupon. What's a decent corporate coupon right now?

What's the yield I can expect? I think on the index sits around three point six plus, so you can be in uh, you know, in some depending on where you want to be. In investment grade, you can be three and a half up to four perhaps UM and you know, preferred you're looking at five or six. So these are pretty decent if you expect, as we do, that inflation will trend lower later in the year, those

those yields and will look pretty attractive. I mean on a price basis, Lisa, I'm looking at a very famous American name with a twelve year piece of paper coupon of one in three aces the yield, and you've enjoyed a price move from one sixteen down to nineties seven. You've taken out sixteen of price to enjoy your higher yield. Bond shopping on line, we're talking Fox. I've got my Blue SMP book from pim Box. Pimp Fox on my guest, so I can look up my Boise Cascade bind. Okay, well,

I'll let you do that. But Kathy, I want to go back to what Frances Donald was saying, and you really touched on that that you basically are in her camp, that you do think that inflation is going to roll over, that there is a transitory nature to this that was prolonged by the pandemic moving to the crisis, and that that was really what was going on with the conflict

driven inflation that we're seeing. Do you also think the FED will not be able to raise rates and nearly as much as people are pricing in before they get concerned about growth concerns. Yeah, you know, we've been in that camp all along. I guess I should say I've been in that camp all along, and that's everybody on my team agrees with me. But um, I think that you know, the FED now has to come out then blazing declaring that they're going to conquer inflation because that's

their job and I'm sure make me in it. But when fish comes to shove and we get to lower inflation and slower growth and rolling over in some of these sectors of the economy that are particularly interest very sensitive, will they really be able to follow through on that. Will they actually need to follow through on that, or

can they slow down the case? Then you add in q T, which I think is being underestimated as a factor here, and um, you've got a lot of tightening in liquidity coming into the market just in the last couple of months and maybe over of course the next couple of months. So we get to the end of the year, I think the pictures that will look a lot different and the fab will be able to slow

down a bit. Just quickly here, Kathy, we were talking to Francis about how she thinks we're getting close to the peak that we're going to see in tenure yields A pretty bold call when you've got the likes of credit Sueee coming out in the opposite side, say, we could see two point eight percent on the tenure because of the same thing that you just mentioned, quantity of tightening. Where do you fall on this, Yeah, I don't think TATA tightening is negative for the long end um. I

don't see that supply wing on the long end. Most of it. At the short end of the curve, they've got an MBS and we don't know, you know, what they're going to do with that yet, but that's probably a lot shorter duration than it looks like on the balance sheet. So I don't think QT weighed so much on the long end of the curve. And if you go back to the last period of QT, we actually saw some curve flattening and yields fall. So I think QT is more of a liquidity drain and that's a

slowing growth story. And you know, don't don't forget we're getting tightening liquidity and higher rates globally, so that can compound it on top up the war situation, where you know, we really have a lot of uncertain So, Cathy, you think that we've seen the peak so far in ten

your yields, I think we're pretty close to it. So you know we're Our call for this year was around two in a quarter and the ten year ending UH to an a quarter or so on the ten year, so we think as rates move of that to what it's two and a half or above UM, we'll be extending delation. Cathy Jones, joshuav Kathy, wonderful to catch up with you as a wis. Andrew Weiss joins us to this morning, vice president at Carnegie and dommad for International Peace. Andrew,

I want to talk about autocracy from the past. It's Hitler, it's Stalin. Putin has mentioned this, We have Putin, we have a massive win in Hungary with Orbon as well. How do we control, manage, or end these outcomes of autocracy as we see in Ukraine. So it's great to be here with you. Tom. I am always skeptical that the United States has within its power great ability to

shift the ultimate political direction of Russia. And as much as what President Putin is doing in Ukraine is horrible, and as much as the world must level, whatever tools it has to try to slow down Russia's war in Ukraine.

We need to be realistic that regime change in Russia is something that has looted Western policymakers now throughout Putin's tenure, and every day Ludie Murputin wakes up when he comes into work, he's mostly concerned about the safety and survival of his regime, and he's prepared to escalate and do things to protect himself against that threat. And that's been basically what's been animating him throughout the past two decades.

If the people of Russia and the various peoples of Russia find out what's going on, will they give him support or will they walk away from Mr? Putin? We need to be careful about what Russians are willing and aren't willing to accept. And one of my colleagues at Carnegie Mosca Center wrote about this very powerfully in Russian earlier this week. Russians are living in an information vacuum, and for the most part, they are doing that by choice.

They are not seeking out the truth. They don't believe that their country is responsible for atrocities or war crimes in Ukraine. And if we puncture, that information bubble, which is a big if. I'm not sure that people in Russia are prepared to take action to deal with the problem of living in a country that's ruled by Vladimir Putin. And that's just for a very simple reason. The instruments of repression that Ludimur Putin has built up over the

past two decades are intimidating. They are prepared to use violence and other measures to keep Russians off the streets and to prevent political descent from spilling over into questions of how their country is ruled. And you see that level of fear among average people as well as the elite. And so for the West to be banking on either a split within the elite or bottom up pressure on the regime to take care of our putent problem, I

think is is really unrealistic. The way we're going to deal with our putent problem is action by Western leaders. It's not going to come from within Russia itself. Unfortunately, where does China fit into this? Andrew given the fact that over the weekend and frankly yesterday the New York Times put out an article talking about propaganda that China has made that actually pays Vladimir Putin in a very

nice light for some of the party members. So I think a lot of what China is providing right now is moral support, as you say, in the propaganda sphere, in terms of supporting Russia's lies about possible biological weapons and things like that that it claims Ukraine has, all

of which is made up whole cloth. But when it comes to the ways Russian needs help right now, the main support China is going to be providing is by providing the bid on Russian oil and gas resources, which China advise on, you know, sort of at the moment of as much as it wants from Russia. The longer term problem for Russia is that China cannot be expected to be the back stop and the fiscal authority for

its its government. And so as Russia comes under increase pressure from Western sanctions, it's going to be turning to China out of desperation. It's going to be looking to China to be its its savior. I'm so I would be very surprised, particularly in the technological area, which is affected by Western export controls, if Chinese firms are gonna be willing to step up and provide inputs to the

Russiant industrial sector that it can't buy now from the West. Andrew, just to wrap things up, and we only have a little bit of time, what do you think the West could do to bring this to an end more quickly. I think that the West is going to keep ratcheting up sanctions. The problem isn't is that there isn't a ton of headroom left short of a full scale embargo

on the Russian economy. And so if the West is prepared, for example, to cut off all imports of Russian oil and gas, which I think Germany is not willing to countenance at this point, If the West is not prepared to go to that length, I think the most likely outcomes that this more simply drags on, and over time it's likely to morph into something similar of the Balkans Wars of the nies on a much vaster scale. Andrew, we appreciate your time. It's a clinic thrill of us, Andrew.

Watch that of the Econogy Endowment. It's Francis Donald, Global Chief Economists, Manual Life Investment. We're thrilled that she could join us this morning. Francis, I love what you say about Jerome Powell, He's going to be boxed in and the to distill your really good paragraphs, you're looking for a steep downturn in manufacturing. Expand on that. Every leading indicator we have of p M I S tells us

they're heading lower. Frankly, every leading indicator we have of the economy tells us that it's heading sharply lower in the next six months. And that means, as you said earlier, that a lot of the information we have, like FED minutes or how data was in January or February or March,

is really looking sale to me. When I look forward over what the FED is facing in the next six to nine months, We're gonna have still inflation, but their mandate focus is going to have to shift back towards the employment side of the picture as growth really softens.

And that's why if you're marking to market shirt that looks like it could go eight nine times this year, if you're looking forward into what the settle facing, much more difficult to see how they're going to be able to hike either as much as they want to or the market has prices. The anti Holland horse, do they come on and say one and done if they go fifty beeps, or do they play it out, say into the summer and then go enough. That pivot probably happens closer to the end of Q two or Q three

because they're gonna need cover to do it. You can't make a one eight until the data has changed. I think they may start focusing on how the nature of inflation has shifted. We're moving from COVID inflation to conflict inflation. That's a really important inflection point. It's a different composition of inflation. In mind you, it's much more damaging to growth and COVID inflation. Hey, if you didn't want to run kitchen or build a pool, or buy a used

car while you just went without. With conflict inflation, we're going to see a lot more demand destruction. Even its headline inflation declined. The feed is going to have to face that full on. The prentis if we clarify the reaction function of this FED given the opportunity, given the decision a toxic one at that, to curtail inflation or safety economy from recession, which one would they choose? Well, Paula has suggested that he's more in the Volker Camp

than save growth Camp. I think it's really interesting that we've moved from oh, it's gonna be the war in twenties and it's a reflation trade for years to most shops debating whether it's a technical recession or just the growth slowdown in a period of time. It does appear that the central bank is willing to sacrifice growth. That's

how monetary policy effectively works. And this market telling us it's pricing and cuts over the next few years already suggests that the reaction function the FED has so far told us is that, yeah, it's willing to sacrifice growth

in order to con inflation. I think that makes sense now when inflation is really high and growth feels like it's repeating, it's not gonna feel like it makes as much sense from three to six months Francis JP Morgan taking some comfort in the upcoming mechanical peak in inflation. That's a mechanical peak, Francis, Can you run us through when the base effects not to kick in the other white and when you suggest that mechanical peak inflation would develop, Oh,

it's around March or April. But again, I really did take a lot of comfort in that mechanical peak. I've been in the transitory camp, even though it kind of became bad to say that because COVID inflation was always going to be transitory. But we really have to move away from the mechanical peaks and inflation towards the compositional nature. We've been complacent about the damaging impacts of inflation on growth because where inflation was coming from was not necessary goods.

But this conflict inflation is going to create a much bigger drag on growth, even if it's a lower number. And that's why the FET is going to have this covered for a pivot later this year. Inflation will look a little bit better on the surface. We're all going to feel it a little bit more in our day

to day lives. For TIS, I'm trying to game out forty six months from now, and you think that we're going to start to see the FED shifts stances back to something that seems more concerned about the labor market than simply inflation. How high do you expect the inflation rate to be if we do get those base effects the other way. Well, I'll give you an example. Prior to Russia's invasion of Ukraine, we had inflation and may at the bottom and the two percent range at the

end of this year. Now it's closer to the four to five percent range. But when they do the same the exercise of looking out five years, when we get to three and beyond, our inflation forecast is back to two. On March sixteenth, cheer Powell was asked how much of this year's inflation do you expect to come down because of your rate heights? He said, the most important thing, he said in months, Well, we actually can't combat this year's inflation. We're trying to target the next few years.

The next two years are not the problem for inflation. Inflation is a problem in two and there's very little the FED can do about it. Francis, the reason why transitory became a dirty word is because the FED got it wrong. The FED got inflation wrong on many levels in terms of what their policy was. This is the accusation in a lot of academic and frankly, market circles. Where does the credibility come from for the Federal Reserve?

For them to make that pivot at a time when inflation is still four to five percent, Well, what a challenge, right, and all central banks understand that they can high rates as much as they want, it's not going to bring down energy prices. And that's why paying attention to long term inflation expectations is so key, because central banks will continue to try to convince us that they have some

control over that the Lisa. This brings to question a longer term issue that I think central banks are going to have to face, which is the inflation of the next ten years looks different than the inflation of the past ten years. It's going to be focused on the globalization and E s G trends much more supply side, much more global than the inflation week saying frankly the past several decades. So there is going to come into question how much control do central banks have on future

inflation post COVID inflation than they did before. Let's hope they can control that long end of the inflation curve. So far, we're still seeing the break even inverted. That's good news, but I suspect we're gonna hear a lot more comments about their extending mandate. That wouldn't surprise me. So Francis, let's put the other hand, what's the big

market kill? We are moving more defensively, So I tweeted yesterday, recession or no recession on your outlook, growth is gonna slow pretty significantly, and that means moving more defensively as we head into that growth slow down. I do not believe it is entirely priced right now, and I thinke sure we could see some upside in yield, especially as we see ongoing hawk and rish from the Fed. When you look at that forty year down trend in that tenure yield, I'm a believer we can't yet break out

of it. That means we're probably near the peak in this rates mooth. Then we go. Francis don't know of manual life investment management with a big colt right at the end there, Francis, thank you very much. Into the second quarter. What to do after negative eight percent and bond price after challenges for the equity market with all of us news, Sarah Hunt joins portfolio manager of the Alpine Woods. Are the real tangible effort of what do you do with a portfolio? What is the single change

you've made April one. I'm not sure that we've made any single changes in April one. I mean, if you think about the larger economic backdrop which you were just discussing with commodities and everything else. You've had years of history where the O E C. D countries have basically said, we're not going to do a lot, We're gonna try to move some of this stuff like mining and oil

production outside of these areas. And now this is coming back to be a real problem when you start to have geopolitical problems like we're seeing right now with Russian the Ukraine, which is just horrible, and countries now trying to figure out what do I do now that I've outsourced all of my energy production and some of the

other production to other places. We had already been moving in the direction of realizing that the FED was raising rates and getting to more stable things in the portfolio, higher cash flows, better balance sheets, things of that nature. So it's not a huge change right now, but it is looking at how do we take advantage of what we think is coming in the future. And unfortunately, I

don't see energy prices coming down that quickly. I don't see food prices coming down that quickly, and I think that's gonna be a real problem globally, and it's gonna be a problem ultimately for equities as well. Let's talk about where that problem is concentrated and what you're pulling

back from, Sarah, can you be more specific? Well, So we added some energy towards the beginning of the year because it was clear that even before the Russia Ukraine situation, the fact that there has been a pullback in the investment in the hydrocarbon space because people are looking for newer ways to produce energy, has meant that you've seen an under investment, and as prices were starting to go up, it started to look like that could be something that

was going to continue, and the Russian Ukraine situation just exacerbated that. So we added some energy in the beginning of the year. There's also places where on the technology side, you saw some stocks come down quite dramatically in the last couple of months. So we looked at some of those large franchises like Adobe that we didn't have representation, and we put some money to work there as well. What do you make in the movement a home build US Yet today it's been pretty great, So Sarah talk

about the economy to eat in America. We told it's great, but the forward look, given rising interest rates, the homebuilders have been hammered. Well, I think that. I mean, we'll see how that actually plays out. But similar to some of the technology stocks getting hit very early in the year on the back of the potential of rising interest rates, um, I think that part of the problem with housing is that that playbook says that when rates go up, housing

comes down. But you've had such under investment and there's such a demand for for housing, especially on the lower end, and the unintended consequences of the Great Financial Crisis making single family housing and investment class has also taken the ability for people to buy those single family houses out of the market. So I think the demand is there. The question is going to be what happens with pricing, materials, labor, All those costs are going higher. What's the best head

right now? Sarah? If there is this feeling that we are heading into a slowdown, is it on the margins certain US equities? Well, I think that we go back to the fact that once again the US equity market tends to be the strongest when things are weakest globally. And I think that the U s economy, even with the challenges that it's seeing, it is not seeing the problems that you're seeing in some of the emerging markets.

You do have debt issues in the United States, but it's not going to be as bad as dollar denominated debt that's coming in other places. So I think US equity markets are a decent place to hedge. It's just a challenge, you know, when you look at the rest of the globe, It's not so much how great the US is, it's how much more of a challenge the rest of the globe is facing right now? What are you doing with cash right now? Are you hoarding it

or are you actually deploying it? Well, I am a believer that cash does have a place in portfolio management. Not a huge amount of cash, but we are on the margins higher on our cash positions than we have and just because we think that there's more volatility, and if you want to be able to take advantage of that volatility, you'd like to have some cash sitting around

because the drawdowns. We've seen some drops that happen very quickly and then rebounded very quickly, and it's very difficult in those moments to try to sell something that's down to buy something else that's down. So we have some cash on the portfolios right now and probably a little higher than normally, Sir. A lot of good studies on how out of vogue equities our Liza and Saunders just out with a great chart on Twitter on that what is the level of unloved nous of equities right now

and what do you do with that knowledge? Well, it's a relative game because there's equity participations does not go across the board. I mean, if you look at some of the problems with the US is having right now, that a lot of people do not participate in the stock market. And I think that fixed income, which has come down so much, is starting to get a little bit more of a bid here because rates have gone up.

But the concern that the bet is going to keep hiking makes the bond market scene as volved hell as the stock market. So I think if you look back at what's happened over the last six months and not the last couple of years, because I'd argue coming out of COVID, you're not going to expect those kind of equity returns again. But I think that you've got some real decent growth in the equity market, even if it's not going to be the stellar growth that you've seen

in the last couple of years. I think you've at least got some ways to participate in companies that can grow, and I think that's gonna end up being important, especially given a backdrop and fixed income, which is going to be I think more volved. Sara Hunt of val palm Wood's Capital Investors. Thank you. 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