Surveillance: GDP Growth Will Persist, Feroli Says

Obviously it was you know, pandemic and all that, and Michael Faroli, kim Shaw notes, Katherine Mann and Steve Chacchetty wrote a definitive paper on the tools that we have forward monetary policy. We come forward fifty four weeks and it's a whole new world after all. Michael Faroli joins us this morning with JP Morgan. Michael, the paper that you wrote at the Boost School seminar a fifty four weeks ago? Is that paper true today? Are you and

Bruce Kasman working off a new playbook? No? I think I think the results from that paper we're actually put into uh into use a few weeks later, right, So, uh, that paper focused on the tools what we have that the FED has when in a low interest rate environment and we had we come to a recession, which is forward guidance and quantitative using. They used both those tools very aggressively. And one of the tools that we recommended UH and most economists I think recommend weren't a looning.

This is outcome based guidance, which is basically saying when the first hike will COMMA is going to be based on certain economic conditions, which the Fed put into place last September. What is so important here, and I believe John Farrell mentioned in an hour ago, were the United Kingdom and vision sub two percent GDP out a number

of years as well? You own the study of potential g d P. Do you look at six or seven or eight percent g d P now is one quarter two quarters fade out or one quarters two quarters in a real abrupt drop down to where you see potential GDP? So first of all, I should say we see GDP growth this year around six and a half percent, but we also see above trend GDP growth persisting next year. So a lot of the stimulus that we're expecting UH

should be somewhat delayed. So, for instance, a lot of the a to state and local governments won't necessarily get spent quickly. H. So that should support growth on into next year. But you know, I think when we get to perhaps twenty three or twenty four, it's reasonable to expect a return to sub GDP growth, which is probably still the h the potential GDP growth rate of the economy. Tom kicked off this hour talking about the Simon Kennedy article about the savings rate, about the glut of cash

sitting and savings accounts in the US. He pegs it at one and a half trillion dollars. And then there's this nugget that if everyone were to spend all of that money, GDP would run it about nine percent. If none of it were spent, it would be two point two percent. A huge spread there. What gives you confidence that people are going to go out and spend it? And on? What? So? Uh? First of all, I would say a lot of that saving is an accumulated stimulus

that wasn't spent last year. Uh, But we should keep in mind that it's very likely that we're going to see further stimulus this year. Right, so now we have potentially checks coming uh, perhaps within a couple of weeks, and we saw last year a lot of those checks

were spent pretty quickly. Uh this year we would expect the same, perhaps even more so because unlike last year, those checks may be coming out of time when the economy as reopening and you can actually spend on a lot of things that you couldn't spend on last year. So it's not simply the fact that we have a lot of accumulated saving, but there should be more income support forthcoming that I think should be the really big

stimulus to growth this year. Give me a second. I just want to run through the ice action at the moment, up seven basis points on tens, up six on thirties, and the NASTAC does roll over to NASTAC future is now down by thirty six call it thirty five, and off by about a thirty one percent. And just one observation, John, we go back to where we were on Friday. We've given up essentially Monday, Tuesday, Wednesday of dynamics. This is the outlook gets better, and might let's put some numbers

on that better outlook you've mentioned GDP growth. I read a note from you guys in the last couple of days six eighty five thousand monthly average for payrolls growth for the rest of this year. That just fat sounds absolutely fantastic, Mike. Are they the kind of numbers you're looking for? Now? Those are two things I would say. One is that there's a link between GDP growth and job growth, which or at least between the unemploymer rate,

which is called the Oakin's rule that economists use. Uh. In addition, I would say that relative to that, to that sort of rule of thumb, we might see more than one might expect in terms of job growth because we're going to see a lot of sectors come back. We should see a lot of sectors come back. That a are things like restaurants and movie theaters that might be you know, services tend to be a little lower than average productivity, but that means you're gonna have higher

than average jobs per amount of GDP growth. So uh So I think we're set for a very good year in terms of job growth. In addition to participation rate, we anticipate will mostly recover some of the gain some of the losses that suffered over the past twelve months. Uh. In part because those who are concerned about you know, uh, face to face job, so you can can actually get back in the labor market, as well as hopefully the normalization of school schedules should allow uh, you know, parents

to get back into the labor market. So it should be good from both the perspective of the number of jobs created as well as you know, the amount of

the population that's actually back in the workforce. And perhaps markets have already prices in at least if you look at the equity valuations that we're looking at, And the question is what happens three, what happens even two, and whether there's sort of an ongoing virtuous cycle it gets create aided by some of the stimulus by the job creation, and growth can go a little bit faster than people

currently are expecting. What's your view on that, given the sort of consensus that we will see a slowing out of growth, a slowing out of inflation, in a return to the environment that we were in pre COVID, right, So, as Tomas mentioned, you know, we have been somewhat cautious on potential GDP growth, but there have been some developed developments that have been um I think favorable When thinking

about the longer term outlook. One of those is that capital spending has really recovered quite robustly, particularly spending on tech R and D, things that tend to be sort of high productivity uh categories of spending. So I think that's one favorable development. I think if we do get an infrastructure package later this year, which seems you know, uh likely, Uh, there's a lot of evidence that suggest that infrastructure is good for the economy's long run growth rate.

So there are still a lot of get us out there in terms of slowing growth in the labor force that will you know, keep trend GDP growth definitely below three percent and probably below two percent. But there have been some favorable developments when we look at the productivity picture. Mike want to finish up on the bond market. We've got a thirty year at two five tens at one forty six helds bleeding high again. Chairman Power tomorrow, do you expect Chairman Power to stay on script? I do.

I think he's going to remain quite dothersh um. I don't know if he necessarily is going to have to fight the market per se, but I think he wants to. Uh, he'll have to reiterate that they're gonna hike only when they are confident that inflation is going to be above two percent, And right now it doesn't look like the inflation markets are pricing persistent above two percent pc inflation.

So I think Powell have to address that that perhaps misperception in the market that they're going to be quick to tighten even when there's no inflation pressure out there doesn't really I want to steal a phrase from Jean Clautrichet, and that is the idea of diffuse. He was talking to me about productivity diffew using. What is the diffusement of stimulus? Do you and your combine over there under Bruce Kasman, do you have a confidence in knowing how

stimulus will diffuse through the American system? I don't think the economics profession really has a lot of confidence in UH and understanding UH stimulus to you know, to the decimal point. We do think it will UM obviously boost spending, particularly the stimulus checks H and that should help view overall economy and once we kind of get out of UM this patchword and where we still have a lot of excess labor resources, that should help you know, a

broad set of of sectors in the economy. But you know, I think we do have to be humble and kind of putting too much false precision on our understanding of how fiscal stimulus affects the economy. Tocay the number for Friday, Mike for Friday, We're looking for two. My front could say SA and so ife more than chafe. US economists

look at two hundred thousand on Friday. Let's get a relation of it in Bank of New York Man and chief strategist joining us now at Lesia Great to catch up, Let's just start with the SMP five hundred struggling at thirty hundred. What's going on? Well, what's going on here is the rotation trade and and higher yields and a steeper yelker because the sectors of the market that are outperforming and are quite strong are not the ones at

the top of the index. So all those large cap tech docks have really peeked out on a relative basis in the summer of so as they struggle, the index itself will struggle. But there are plenty of sectors and plenty of companies that are doing great year today that that are having very clear bowl markets and as yields move higher as as we have expectations for higher yields. Listen the tech and the growth sectors as large cap names that really led last year are going to struggle.

They're just going to struggle, and that's affecting the index. Alicia, you do the macro micro was such acuity. I want you to dove chail the easy call on the macro with the reality of microadjustment down the income statement. Are we at the edge of too good to be true? So that is the great question. I think this year we're going to see a little bit of a bifurcation

between Main Street and Wall Street. And last year was an amazing year for Wall Street and for asset classes because we sat on yields, and this year it's going to be a very difficult dance for the FED and actually a very difficult dance for the bond market because if we actually print ten percent quarters of g d P a couple in a row double digits, which I think could happen given the spending and consumption numbers we're seeing, I think it's gonna be very hard for yields just

to sit there and for the market to believe that the FED isn't going to move sooner. That's the dance that the market has to absorb. We do think that the economy will reopen. You can feel it everywhere, even in the middle of New York City where I am. You know, you feel it. Half springs coming. People are getting inoculated, and it's happening sooner than I think we had hoped for six weeks ago. At Leasha Roberts Shiftment over at Bloomberg Intelligence as a brilliant piece today on

how tight the big tech bond credits are. They're shockingly tight and surprisingly Amazon actually doing you know, on the edge of apple uh in tightness as well. They're up to their eyeballs in cash. What do they do with the cash? And particularly across the market, what do they do with all the new cash? Look, that's a great question. We think overall, in the aggregate, with all the new cash that's raised, you are going to see a lot of M and A, which will help support markets here.

But I think I think ultimately, you know, the cash is going to be used for buybacks and things like that, an investment, because this is a great investment year for those companies that have large cash surpluses change the business grow the business ad businesses. This is really the way to use it to look forward. We were kind of concerned about those favorite names that supported all of us

last year during the misery we all experienced. It's kind of clear that the growth year of the year is going to be slower this year, and I think those names are going to struggle. We love energy, we love financials. Invest with the yield curve, think big, big economy boom in the economy, yields moving higher, and pick those old economy stocks that everybody gave up for dead for years and years and years. You know, value has an outperformed

since two thousand and seven. There are many investors who don't remember a time when those stocks in the old economy actually worked and gave your performance. And here we are and it's working. Not to mention the under allocation to energy across the investors space because of E S G concerns and investor concerns. I mean, this is the sectory that's outperforming, outperforming, and under owned. There's your pain trade, Felicia. I don't want to say that I'm Debbie Downer again.

I go back to trying to see a on corners because I think that that's sort of more how I'm playing this. But let's say the consensus is wrong, and let's say yields instead of rising fall a fall to eighty basis points, as Greg Peter's of PGM was saying, could very well happen earlier, as we've seen Scott miner And of Guggenheim say that he could see yields going close to zero next year on the ten year treasury. Let's say that the structural story here of an aging

demographic of slow growth reasserts itself. What happens then, how violent could the move be? Given how crowded this consensus that we see today in the market really is. Look, that's really the left tail risk, and it could be a violent move down. You'll see a rotation very quickly back into those defensive favorites of large large cap growers and tech. But also, I mean, but that is really the risk here. You know, the variant whoever invented that

word was the scary variants. I mean, that's that's really the risk. And also that there's their stasis within the labor market and that bottom and has really been affected by unemployment and the closing of the service economy. Doesn't really quite come back. So maybe you get fifty of those jobs back, maybe sev but what do you do with the rest? And it's very clear that retraining is not something this country does very well on a short term basis, So then you do have a permanently unemployed

That is the risk here. Um. We do think though, there's so much forward momentum in the next few months, and I think the desire to engage with the service economy is palpable. It's real, and so I'm pretty optimistic about what happens with the labor market going forward. Alicia love catching up with you, Alicia Leving The Bank of New York melon chief strategists John, is there a bag

book with a Bank of England? They do have the report the agencies around the country report bank, Yeah, something similar, so like you know Tottenham is terrible, they report something like that. You get the North London report on report back to the government. Yeah, we often do that in London time because our wonderful to the question this morning with Greg paid is a page Jim Senya futfolio manager. Greg We've been asking is awake about page Jim. He

was touching one sixty one sixty one on Thursday. Have you been a buyer? Yeah, So we've been poking around. I mean it's been definitely an interesting journey, right, So I mean our view, you know above, it gets more interesting kind of one fifty uh, you know, even more interesting, uh, and then one seventy five very interesting. And so that's kind of how we're thinking about it from a scale. I mean, what happened last Thursday was less about kind of the level of yield, but more what happened in

the market itself. Right, The market really had a whiff of March two thousand and twenty where there was just a lot of dysfunction in the marketplace, tremendous ill liquidity. So those are the things that we were really more attuned to. But at the same time it has created, i think dislocations in the curve. And so there's been lots to talk about the seven year auction and how at tailed and by frankly, how worrisome that was. The twenty year part of the curve. Tread curve is also

very interesting. So to me, maybe it's not so much about the overall level of interistrates, but really the dislocations across treasuries themselves. Within there, we go back to basics, Greg Peters, and there's an idea of the nominal yield, the regular yield, the one point four or four percent yield, folks, and around that the dynamics of inflation, and what's called the residual, which is the real yield. It's a show on Bloomberg TV Greg Peters. Which matters right now, the

inflation dynamics or the residual the real yield. I think the real yield matters more here as that will actually act as a buying constraint around activity, I think, uh and borrowing. And so you've seen this real move in inflation, right, So inflation was priced clearly too low in March of last year. It was absolutely on the floor. So it's been moving higher ever since. But I really struggle with this narrative that inflation, uh, it's really going to continue

to pick up. So so I'm I'm kind of on the other side of inflation continuing to rise. Will it be around the two percent level, yes, but it's not going to be well above uh. And I hate to talk about base effects, but there are real base effects coming through here that gives the optics of inflation being much higher than it really is, and the FETE is telling you that, and no one wants to listen. This

is so so, so so important, Lisa. I can't say enough about this five year five year forward says exactly what Mr Peters just described. Yeah, and that's what we've been seeing with respect to short term inflation expectations versus long term inflation expectations. The curve is inverted the most ever on record, which raises a question, could we actually see tenure treasure yields drop two new lows at some point?

And this seemed to be at Scott Minard of Guggenheim was saying yesterday in a report where he was seeing saying that even tenure treasure yields could go negative at some point. I mean, Greg, are you on that side of things that we could see an actual rally that is pretty significant in treasuries? Are you just saying that perhaps it's gotten a little ahead of itself in terms of the sell off. Also, I'm not willing to say negative at this point. I mean, let's get below one

percent and then take it from there. So I think that's somewhat heroic. But I think the director of travels right, But the timing is tricky. So so we think the natural wrestling place for ten year treasuries is around a B basis points. Uh so. Uh. That's not to say it's going to happen over the next several months, as the forces with stimulus and just the economic rebound is so strong. But I think when you look out, you know, eighteen months, two years, I do really see an environment

where yields will continue to kind of move lower. So timing is tricky, but I do think the direction of travel is for lower yields, not higher yields. Correct the south side, and this is not at this on the south side, they often predict high yields, but gradual moves. And I think on the bis side right now, there's more attention being paid to that volatility, that burst of all we got last week in the treasury market, and

whether we see repeats of that. Think Apollo in the last twenty four hours speaking of Bloomberg about this, how

to take advantage of those bursts of volatility in the future. Greg, can you want me three how you approach things last week and how you approach things in the future if you expect to see that again, Well, quite frankly, it's it's tricky though, because the markets have a tendency of seizing up, and so if there's dysfunction and dislocation in the treasury market, which is the most liquid market, uh in the world, in the US for sure, everything sets

off of that. So what we saw in March of last year was it all started with treasuries and then the illequidity broke down everywhere else. So quite frankly, it's difficult to do that. Being said, the derivative market is where you continue to see real liquidity in times of

stress with cash. So I do think though, if you get these gaps and creating kind of these vacuum moods which which we didn't really see um, that will create opportunity because I think the whole world on the boy sides waiting for credit the cheapen up because uh, you know, the strengthened economy is such where you really want to own it. Greg always get to say so, Greg Padish,

portfolio manager. Right now in commodities and of course every major house is really looking at the idea of a supercycle. The nuances of commodities, the metals, the softs and of course oil lifting Francisco. Blanche rides a herd at Bank of America Securities, head of Global Commodities in Derivatives Research, Francisco to cut to the chase into paragraph one. Are we re seeing now a new commodity supercycle? Hey Tom,

thank you for having me. I do think we are saying, Uh, definitely upside pressure sending in some cases across the commority complex. We could see um supercycle like behavior. But I do think I do think it's gonna be more concentrated on the metals. Um. Unfortunately, I don't see that cycle happening in oil. I do see upside pressure on oil prices, but as you know, oil is the main commodity, is the largest portion of the commodity market value, so and it's gonna be hard for oil to see the kind

of supercycle we witness in the two thousands. The metals, then, how do you apply capital on a bed of the Pacific rim? Is it as simple as buying re minby? Is there something more nuanced if you believe in the metals play? Um? No, I mean I think you can you can buy you can buy industrial metals for sure. Um. You know, we do like copper a lot we we also like UH nickel that we think it's all stretched

right now, we think aluminium will perform well. Um. And then of course there is also some of the precious metals that are used in new technologies, like silver or platinum played in so so we we like those metals UM and UH and and think those have still significant upside over the course of the O the next few years. But um, but yeah, that's kind of the most direct

way to do it. And then of course there is also the the the equities in that space, which I think are also also interesting ways to to to lever into the metal story. Let me energy, I need to bring in the China conversation as well. What's your reading, what's happening with China right now? And can you be this constructive on metals on the miners when the recovery in China is already maturing at this stage you're not exagerating. Um, I think you can because remember the metal, sir, not

not just throughout China. It is true to half of the world's metals demand comes from China. But what we're going to see in the next few years is a huge transformation towards UM. The electrification of transportation, the actrification of industry, and also the big organization of electricity electricity networks, and those three elements are very very metals intensive. So in my mind, um metals still have I think quite

quite a run ahead. Energy is probably gonna run to and remember as those vaccines get more and more distributed, and we heard from President by Them yesterday that we may have vaccines for the entire population by May in the US. M Johnson and Johnson is going to really accelerate the vaccination process with the vaccine. That could also lead to a pickup in UH, a pickup in in mobility around the world. But the thing is, we have ten million barrels they spare capacity temper cent of of

supplies still spare in the case of transplation fuels. So that's gonna, I think lead to OPEC tomorrow opening out the tabs and tampering the price appreciation. But you'll still see I think the commority cycle moving higher with pretty good with all the monetary and fiscal stimulas that we've seen so far. Let's get numbers this morning. Brent sixty three ninety three w c I sixty Francisco, what do you say this topping. Now, what are the limits of

this rally? So we think for this year the limits about seventy lords of barrel, So we don't see a lot of upside. And we think that OPEN is gonna be quite careful, uh, trying not to breach that seventy dollar level on Brent because obviously that could trigger a fair amount of UM response in the US shell patch if if they did so. I do realize producers are trying to be disciplined. But but obviously there's something called price that can can change the Yeah, Francisco, actually can

you elaborate on that? This idea of the price point at which shall comes back into the picture. Well, so remember the curves is in very steep backwardation. Um, so the spot price is very high righted to a forward. If you look at prices for oil five years out on the w t I, they're actually under barrel. So um, what we think is OPEN wants to keep the curving backwardation. That's definitely a key objective of the group. They want to collect a high price on the spot basis and

give shailed players the lowest possible price on my four basis. Um. And and again this means that that they'll try to keep things relatively tight. But um, but I do see eventually over the next three years there's a risk, as I mentioned earlier, if demand accelerates beyond our expectations, and remember the next three years are going to be the fastest three years of oil demand growth since the seventies,

simply because we're coming from a very low base. But if if we overshoot, that's where I think that the upside risk over the next three years could be up to a hundred dollors preparal. So that's that's our view that we could see up to a hundred if demand conditions really stand up to to UH these levels of nine plus million barrels a day. Francisco, can you talk a little bit about the dynamics of what that would look like that upside surprise in terms of both GDP growth,

in terms terms of the recovery and international travel. What would we have to see to get to the hundred dollars a barrel? So I think, as I said, from from an oil demand standpoint, we have to see over nine million bells they of growth. We would have to be above levels UH from a demand standpoint, by the second half of next year, so again relatively quick acceleration UM. And we will also that's from a from an oil consumption,

from a consumption standpoint, my GPS standpoint UM. Again, our our U S economics team is calling for US GDP of six and a half percent this year UM. Some of this spills into next year with growth potentially in the three to four percent range. So if that's the case for the US, the world follows along. We see relatively UH week dollar on the back of that. Because some of this US growth feeds into international UH demand for goods as we've seen so far, and that feeds

into a stronger Chinese bounced payments UM. Together with easy monitory policy, all of that can can actually trigger US to that higher level from a macrostandpoint. So it's those three things really. It's it's improving micro fundamentals, it's continued easy fiscal and monetary and it's of course UH continued improvements in China's balance of payments. Those are the three

key elements for for a continued commority rally. Francisco, just a final question from me, just to wrap things up on the metals market, how supply response there because they've been disciplined over the last few years because they got burned coming out. Do they maintain that discipline? Do you see them doing that this story of value of a volume that really standed with Rio and p HP several

years back. I I think they do. I think they do, and in fact I think what the metals and mean Ultimately, Number one thing is very different metals versus energy is uh. Metals don't have something like US shale. US shale is short cycle. It can respond within six flot months. Nothing in the metals world response in six quot months. There's a very very long investment cycles looking at seven years. So uh, even if they responded, this has still probably

respond by by the end of the decade. And and and by then we will have maybe vehicles being sold into the market will be electric and uh, and that that's going to create some serious model legs in the in the metal space in our I think we saw that from Volvo yesterday looking for an electric fleet by Francisco. Great to catch up with you, sir, Francisco Blanche that Bank of America security has had at global commodities, and the Rivers says, this is the Bloomberg Surveillance Podcast. Thanks

for listening. Join us live weekdays from seven to ten AMI 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