Surveillance: Fixed Income Opportunities

a global fundamental strategy for the Bank of England. Were thrilled that she could join his uh this morning, you have been in the halls of the Bank of England. How do you distill the chaos in England and also at their central bank. Well, I think it's a combination of obviously the high inflation, the Bank of England raising rates, and the new government and the very poor communication around the many budget that they announced, and I think that

really completely took investors unawares. Um There was no sign of how you know, they were going to cut you know, cut expenditure along with the cutting taxation, and I think it just added, you know, on top of Brexit, on top of you know, the deep um you know issues were seeing in terms of economic activity in the UK. Um, I think it just created you know, a lot of um you know, can't is essentially in the guilt market

for a time, big time. So when you learn to ride a bicycle in the US, they're called stabilizers training wheels. We call them stabilizers in the UK. Just so everyone knows what I'm about to say, is this bond market going to struggle without stabilizers like the Bank ofing a guilt market operation when it expires in the middle of October. So I think the Bank of England have already signaled, you know, with the temporary you know measures that they announced.

I think the Bank of England is keenly a where that they want to keep the market stable. So they may in fact need to do a little bit more. I think at the moment they're sort of treading a very fine line. The Bank of England, you know, have a very very measured approach to Muntrey policy. Every step that they take, you know, it is very very finely nuanced.

They assume essentially any tweaks that they make to the mount of policy won't be seen the full effects until at least eighteen months out, so they're trying to adjust policy for a longer term trajectory, and yet they're dealing with a very volatile market right now. So I think the Bank of England is obviously incredibly keenly watching what's happening, and I think they will be prepared to do more if they do feel they need to keep you know,

the market stable. But I think it's also a global phenomenon. I mean, we've seen volatility across all asset markets, We're seeing across you know, all all sovereign bond markets are We're seeing you know, volatility here in the US, We're seeing it in Europe and elsewhere as well, So it's

not just a UK phenomenon. But I do think in light of the fact that you know, we have issue US at a global in terms of activity issues specific to the UK, and then the fact that many central banks were obviously draining liquidity from the system at a time when inflation is high, I think I think it's just a confluence of many things, and it's being exacerbated in the UK, which raises this issue of stabilizers or training wheels for other central banks in terms of quantitative easing,

not quantitative tightening. Are you expecting a lot of central banks to fail if their attempts of quantitative tightening and end up actually having to buy bond selectively on the longer end to try to control some of the moves that they're seeing. Yeah, so that's a I think it's a very good question, and I think it's we've never been in this environment before where we have had so many central banks that came away from positions of such

loose moneture policy. They've had these massive bank balance sheets, they had these huge QUI programs. Rates have been incredibly loose, and we've never had a starting position. They're starting to tighten, you know, from these incredibly low levels, given how high inflation is as well. And so I think it does remain to be seen. I think here in the US, I think the path is pretty well laid out in terms of QT, it's already in progress. I think in the UK and also maybe in Europe as well, it

remains to be seen. I think in you know, in Europe, we do expect in d CB to continue to raise rates the next two meetings, but in terms of reducing its overall you know, bank balance and in terms of QT. The still a little bit unknown when you have the asset purchase program on the one hand, you have the PEP program on the other hand, and it's a fine balance that they are trying to juggle. You know, well, right now there's a lot of discussion about our star star.

I'm not going to get into the jarget. I don't want to do that. It's sort of I know, I feel everyone just rolling their eyes as I say that. But I am curious whether you have in your mind a level at which longer term yields could rise before the financial stability risks become more pressing than the inflation ones. I think it's not just the level to which they rise,

it's also the speed with which they do that. And so we don't have a certain level that we're currently looking at where we think will be overly concerned, and we don't think they're going to get to extreme levels, but we do think if the volatility increases and you see a dramatic shift either because you know the the economy, um you know, is much worse than we expect, or you know, because of other factors we don't know. But I think half of it is actually the speed, and

also how the curve reacts. It's not just the endpoint and just final question. Just take a step back from all of this. Can you tell us how much the world has changed for you, Rick, for Bob, for the whole of the team with rates where they are now, and are you looking at this world as maybe something that we have to live with for a while that fed funds, the risk free asset sticks around three fifty four percent and credit is hanging out at these levels.

That's right. I mean, the world has changed completely from a year ago, three years ago, five years ago, ten years ago. Um. But actually it gives us a lot more optimism now in terms of fixed income actually giving you a decent yield. I mean, obviously we're relatively cautious in this environment, but fixed income now is really I think, you know, a very decent, good asset class. Once again, you can get the decent return with little risk at the moment if you're the front end with low duration.

So I think for the long term and going into next year, then I think the very huge number of opportunities and fixed income that we haven't seen for such a long time. So I think in terms of you know, the team and fixing income investors in general. I think this is a far better environment going forward than we've seen for such a long time. Do you think we can break out into this environment, a new equilibrium, a new normal, on a sustainable basis to get the fitling

we can? We get a ton of push back around the table that we just can't live with these levels of interest rates. Do you think we can? Well, we've we've seen it in the past. We've certainly seen interest rates much higher than this the past, and I certainly think we can live with interest rates being much higher. Um. And I think to a certain extent to get back to a healthy financial environment. You know, I think to have rates a little bit higher, I think you know,

it's beneficial for a lot of different businesses. So, UM, I think it's certainly possible to get to a sustainable level. It is beneficial for the economy. The world has changed, that's for sure. Thank You also want to catch out mar name Watson a black crop Stephen Short. He's principal the Short Group. We protect the copyright of all our guests. Get his magnificent statement on the American distillate and oil economy from the Short Group. Stephen, thank you so much

for joining us this morning. It's the simple question is what does OPEC plus mean to a gout of gas? But far more than that is the nuance. How does OPEC plus his decision impinge on the many distillates that we take from a barrel of oil. Absolutely, OPEC is only influence over the market tom is the price of crudal by by constricting the production or increase in the

production thereof. So obviously, with the move they've made now or the announcement they made yesterday of taking two million barrels off the market, clearly we're looking at a fewer barrels on the market as we go into the fourth quarter. Now, I want to be clear here OPEC made the announcement of the two million barrel cut, but OPEC was already it's thirteen members, and I want to add, for which are in sub Sahara Africa are struggling to maintain their

current quotas. So by announcing a two million barrel cut, given what OPEC is actually putting onto the market now, the cut will amount to only seven fifty eight hundred thousand barrels a day, which is still not an insignificant number, and therefore it has the potential for an impact on oil prices. Now, we don't consume oil, right, we consume the derivatives of oil, gasoline, jet fuel, diesel fuel, so forth.

What we've seen here now, to answer your question Tom on the US East Coast is our refinery capacity has been slashed by more than half over the past ten years. We simply don't have the ability to turn what kudo there is out there into what we need, into everything we need. That Thomas sal Uh statement on economics is scarcity. We cannot produce everything that everybody wants. That is the

current situation when it comes to oil derivatives. We are producing what most people want the most, that is gasoline, and therefore what refining capacity we do have left here in New York is geared towards maximis and gasoline production. The other derivatives i e. Heating oil, which is also diesel fuel jet fuel that suffers. So as we look ahead to this heating season, the homes in this country that heat their homes of oil are located in the

mid Atlantic New England states. We are going into this winter with a thimble full of heat oil. We do not have it is a dire situation we're going through this winter. We don't have enough supply. It is going to be a very violatile and a very expensive. So we can get the using oil from Europe. Yeah, that's gonna be a tricky right, So we're gonna be trying

to provide them with again natural gas as well. But Stephen to your point about refineries and capacities, given that there has been talk about releasing even more from the Strategic Petroleum Reserve to lower gasoline prices, how much are we bumping up against the limits of refineries where even a release won't really make a difference in lowering prices further.

And really we're kind of out of bullets exactly, Well, we never had the bullets LEAs, So I mean, doubling down on a policy that has failed is stupidity on stilts. We've been trying to manipulate the price. We being the White House, have been trying to manipulate the price of oil. Now for the past year or the last fifty two weeks, we've dumped two million barrels up from my own crude oil onto the commercial market. And what do we have

to show for that? One year later? In New York, heating oil prices are a dollar forty six a gallon higher higher than they were a year ago. So we could drain and we're just about there with the SPR. Over the last fifty two weeks, we've drained a third of our emergency supply of oil. So what does that mean? A year ago we had forty two days worth of supply of crude oil sitting in the SPR. Today we have twenty six days left of capacity. That is the

lowest level since nineteen three. Now, keep in mind the cut patrolling reserve is for emergencies. Imagine last week of Hurricane Ian did not go into Tampa, but instead went into Houston or New Orleans, the i e. The oil

epic center of North America. We simply are the least prepared ever for an emergency, and the only thing we have to show for that least one year uh ON is a thirty percent increase in this It costs so threatening OPEC with Oh, we're just gonna put more, or we're just gonna do what hasn't worked in two weeks. I'm gonna do more of that. That is not a threat. OPEC is laughing this off right now. Statement is a strategic midsam reserved. Okay, remember that Stephen show, the show.

Thank you, sir, Nila Richardson. Let's go there right now. Michael mckith, thank you so much, greatly appreciate that. This morning, Nila Richardson with this chief economist at ADP, Nila, I want to cut to the chase and just simply say, in the new emphasis and tomorrow's jobs report, what are you in a DP focused on? Well, good morning. I can't think of a better way to start that conversation.

With wages. It's all about wages. It's about how wages are driving or not driving, and inflation, and that's what we're focused on. It takes to be a micro economist in a macro world because when you are, you look at things as a collective decision makings from small to large firms. And what we're seeing is that timing has been a very important factor in the entire dynamics of

the labor market. We are now starting to see more people, at least as according to the August report, enter the jobs market, and we saw a deceleration in wage gains growth for job changers. And I think that deceleration is notable. We saw it across all firm sizes because it means that switching jobs is not paying off quite as much as in this summer, and that might reduce some of the pressure in terms of inflation. What's the ADPs wonderful

of this. What's the character of the job market differential out there right now? Is it airline pilots? Is it bartenders? Who is the job set? Acture? It matters to Kneela Richardson right now? At all matters Tom? But um, I think what where we are different points of rebounding? Right? So the service sector was hardest hit, and so when you look at leisure in hospitality, that's important when you talk about inflation. Though, what's driving inflation is low pay,

low wage, low skill jobs. And are we still going to see that bartender or that waitress. Bartenders actually can make pretty good money. Let's go lower, Um, are we going to see low skilled, low pay workers still see gains and acceleration and pay that didn't happen during the ten years of expansion leading up to the pandemic. Well, we see it after we get over this hump of getting really back to normal when it comes to jobs

and getting inflation down. That's the concern that low pay workers won't see the pay gains in the future that they saw over the last year and a half. So, Nila, given that backdrop, i'd love you to comment and what Michael McKee is talking about that there's this expectation that the unemployment rate will rise but just marginally right. It might peek out at four and a half percent, still well below some of the peaks that we've seen in

recent downturns. How quickly could that move away from the FED based on what you're seeing in the micro data, Well, let's start with the jolts, because I think that's important. That was in a big number this week, to see a million fewer job postings. We had a DP actually think that postings peaked this spring, so we weren't surprised to see that decline. So that's the first indicator. The second,

this timing issue is really prevalent. If more people are coming back to the labor market because they want and need to work, and yet firms are slowing hiring, that's what's going to happen, going to cause the unemployment rate to increase. That denominator is really important. It's not the number of jobs created every month so much. It's the number of people entering the labor market right at a time when firms may be slowing hiring. So I'm really

focused on the denominator of the unemployment rate. We're looking at this hoping that we still managed to get some sort of softish landing, but even FED officials are really pulling back from that kind of language and elf from what you're looking at. What kind of downturn are we looking at based on some of the rate increases that are expected, and based on the pace of weakening, the pace of loosening of this labor market. I think you're

going to see at different angles. Um, maybe you could call it a downturn by a variety of cuts as opposed to one big stab. Sorry to be graphic in the morning, but you're seeing interest rate sensitive sectors starting to feel some weakness, and construction and manufacturing UH. If we see UH inflation really hit pocket books and consumer spending, you might see consumer services take a bit of a hit as well, and so all those gains and leisure

in hospital tality that we've been tallentying might slow. Professional business services are vulnerable for structural reasons. As fewer people go back into the office, um, that might change the complexion of like office support jobs. So the economy structurally is also changing at the same time that we might see some downturn dynamics driven by monetary policy, and tracing that all out is very difficult to do. And they

always love listening to you. Thanks for coming on the show with us, Nata Riches and me at ib Pig. This is a joy. C IBC World Markets Capital Markets, I should say out of Toronto is a wonderful, wonderful shop. I think of Benjamin Tall in his great work bib and right joins us right now. I had a foreign exchange strategy there on Canada, but so much more on the time we live in, which is strong dollar. But I want to talk about the X axis of the

belief that the dollar is going to weaken. Everyone's been wrong, wrong, wrong. Is your dollar study short term or to go to the British medium term or long term? Where on the X axis are you studying when the dollar breaks? We're

probably looking at the medium to long term. And if you watch a specific gauge for how long to or at least a way to calibrate that I would say that potentially in the early to mid part of next year's potentially when we'll started looking towards the next US growth story, potentially leading to a softening of the dollar and a sustained basis. Well, it's solving in a down the same sustained basis. But the question is what does

EM do along the way? Are you partitioning now developed economies from EM or they holistically the same against strong dollar, so you have to partition them. I mean, if you look at the way e m is trade this year, it's been relatively robust compared to the dollar and at least compared to other d ms. I mean, most of the stronger dollar story has really been concentrated amongst the DM currencies, predominantly the traditional funders like the Euro in

the end and also now late against the sterling. I mean, we think that will migrate more towards a stronger dollar versus commodity currencies that backdrop as we move forward, and that's probably due to the imbalances that have been built up in some of these commodity currency economies, including here in Canada and of course Australia, New Zealand as well. So over the past couple of months, and I really mean a couple a month and a half, perhaps we've

seen a little bit more stability enter the market. We haven't seen the same kind of runaway dollar strengthening, and we've seen a little bit more stasis at much lower levels versus a dollar for the euro pound is its own story. How long do you expect to get this kind of stability? Is people game out what we already know, which is rate hikes on both sides of the Atlantic. Yeah, so if we're talking about stability of the dollar, we really need to delineate against what we expect the stability

to come from. If we're talking about the broad dollar gage, say the d X Y, which of course is more tilted towards a greater way waiting on the Euro. Yeah, maybe the stability lasts a little bit longer because I do think that a lot of the sources of concern earlier, particularly with the day and interest security, you know what, they've been pushed a little bit further out. I don't want to say the completely resolved, of course, because a lot of it now depends on how serious the demand

situation will be. And for that, you know, we need to really look at the weather reports or at least see what the weather looks like and how cold it is in the AAR zone for this winter. So for migrating away from this sort of you know, concern that the dollars is going to continue to appreciate into the year and eventually the end of course an intervention story there. You know, that doesn't mean that the dollars still can't

appreciate against some of the other currencies. And you know, I very much agree with, you know, some of the other rhetoric that's been espoused by some of the other guests that we're going to look at a higher for longer story and not necessarily a scenario where central banks entertaining cuts next year. If that's the case, then we got to look at where the situations are fragile, where you know, the higher for longer story could potentially break things.

And that to me is somewhat concerning, especially for Canada in Australia. John, When do we just start to get a meteorologist done that didn't not yeah, exactly, we should. I mean, at what point is this going to determine the tragic for the euro I mean, let's say it's a called winter bribin. What are we looking at in

terms of what the euro dollars should be. Yeah, if it's a cold and unexpected winter and we see as much more serious draw and natural gas supplies, we're looking at potentially ninety euro dollar I think, and maybe even sustained momentum below there. That's when you start worrying about whether or not as security risks or at least natural gas security is is enough given what we have now.

I mean, one of the key things that have really driven that has really driven the euro lower this year is the fact that the largest economy in your Europe and of course Italy as well, both have had the re oriented or their energy story away from Russia. And again that's that's a structural change. If that's not something that you can really hope to address in one year or even two years, open right. Thank you, sir of c I b C Capital Markets. 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, and this is Bloomberg