Surveillance: Market Volatility with Schumacher

dot Com, and of course on the Bloomberg terminal. Joint to us down this bond market, Mike Shoemaker, club head of Mac Price Strategy at waust Fargo, might before we talk about levels, can we just talk about ranges in today, trading ranges on a two year of say twenty basis points on any given day without economic data. Mike, what do you make of that? It's just incredible, John, the day to day of all atilities from mind boggling. Traders here are whip lashed, and I think that's true of

people across the markets. There have been so many cross currents it can't sustain in terms of alatility like this, but there really has been wild to see and hopefully slows down at least a little bit fairly. Since is it linear or do you see a convexity where things are speeding up like in the tenure real yield. Is there a quickening there that you could predict for Q four a good point time non linear? I would say you think about the tenure real yield in July was

ballpark positive ten basis points. That rose a hundred and fifty basis points and just a bit more than two months. So now it seems to us it's up to an area that I would call the right zip code. One six two percent seems reasonable, certainly in the context of prior FED cycles and layering on additional inflation this time with respect to the US German reels crossed over to positive territory intends to that seems okay. So I suspect

the speed is about done. It's going to slow down a fair bit, but volatility remains super high intense as well. Let's talk about the step down, Mike. We talked about the pivot and then the pause as John was mentioning, and now the step down, which is actually new. I hadn't really hurt that until this morning. We already discussed it, already discussed it, right, Okay, Now all of a sudden, it's back. It's back. It's a thing, right, How does the FED communicate that it's going to slow down without

allowing the markets to move ahead of it. And some people argue the reason why there's optimism and markets is because they're getting a sniff of the step down. Do you buy any of this just a sniff? I think that's probably right. It seems sort of obvious the Fed eventually would slow down, and yet the markets are all excited about this, and you put it in contacts and say, all right, so let's say the FED goes seventy five next week and follows that up with a fifty at

the next meeting. Is that really an amazing result for risk investors? I would say not, And ultimately the destination matters in terms of terminal rate. But I think then the thing people really need to focus on the most is how long does the FED keep that that funds rate really high? So let's say up to five. We think it's going to be a long time, six plus months, maybe a year. That's gonna hurt equities, we think, and that's going to hurt risk. So that seems to be

a little bit lost in the shuffle. People are too gung home on trying to predict the next couple of meetings, not thinking enough about the destination. Mike, what you just said is pretty pretty interesting. But you could see five percent FED funds rates for a year, possibly more, six months a year or even more. What does that do to the entire credit cycle that's predicated. I'm pushing out maturities, yes, but those maturities start coming up at the end of

next year. Yeah, it means it's notion that you might have easy money come back fairly soon just doesn't really work, and credits probably take a hit with respect to defaults ramping up also. So it's not a positive in terms of credit, not a positive genuine in terms of risk. But when you think about the incentives facing the Fed, especially j Powell, his number one priority is and will remain getting inflation back into a box. I means boosting the funds requite a bit, we know that, but also

keeping it up there for a while. I just want to pick up on this move in a guilt market as well, at the front end guilt two years down five basis points, Mike, if you even got a cold on the guilt market, if you thrown the town in, yeah, guilt market, John, I think we'll take a pass on that one for now, and plays out with the whole PM sweepstakes, and then we'll something about discretion and val are coming together. I think out at my shame, thank

you oft Fanca Brandon. Laura Raim joins US chiefs Economist Investments. Laura, I go to the c o GO and there is a raft, a Seattle slew of economic data coming out this week, and I look at it and it mostly shows a resilient economy looking back. Are you surprised where we are right now? We're thirty forty fifty lines of the c O GO data. Not all that bad, No, because our economy has so much positive momentum, and this is what happens when you're just early in an expansion.

I think that that's maybe the big question. Are we early in interpion an expansion? We're pretty early in an expansion, and we had so much fiscal stimulus, so much monetary stimulus around right. It's we're a big ship. Tom. It takes time to turn in. And you've been a student of this for decades, going back way before you you know, you showed up on Well Street. And my answer is, so we get a five percent ten year yield for whatever reason is at the end of the world as

we know it. We used to live that way, right. It's not the end of the world as we know it. It's just a continuation of what we've seen. I mean, the volatility and the treasury market is so extreme. We could be there in the next ten days. Um. I think at the end of the day, what the what we're now looking at, you know, is the FED moves

later this year, the Fed moves beginning next year. Markets are so tripping over themselves to try to look around the corner, and it's causing these wild swings and expectations and we're just stuck in this higher volatility world that is,

with the economic uncertainty. It's crushing all these traditional asset classes. Laura, you mentioned that it takes a long time to turn around this economy, and this is the concern of some people, the lag effects of the policies that are being implemented today. Do you have a sense of the difference between when the interest rate rises will affect the inflation side of things and when it will affect the economic momentum side

of things. You know, this is to me one of the critical questions when I get asked, it's what should the Fed what do I think the FED should do versus what are they actually doing? And I think the time has come for them to take a slower pace of rate hikes and wait and see what kind of shape the economy is in. But the reality is, with housing and other interest rate sensitive sectors fueling so much growth over the last year and a half, they have

really heavily impacted that. The question on the inflation side is how much of this is really still driven by supply? And I'm not talking about supply chain disruptions, those have ebbed. What I'm talking about is labor supply. At this point, higher services costs, higher services inflation is really driven by higher wages. My concern is that the FED is using model They love their Phillips curve models, and they're using these models built in the nineties when labor dynamics were

completely different. So what does that mean in terms of what NEHRU is, What does that mean in terms of what they should be doing or should be looking for in terms of employment and what that will mean for when wages will start to moderate. It means that they may have to raise a lot more to get businesses to let go of workers. It means that the risk

of a policy overshoot is higher. Their estimate of NEHRU has always been a moving target, but today it may be lower given that people can work remotely, geographies are more fluid, and the fact that we're just have this more constraint participation rate. Lord. Chapter twenty three of any Good econ one oh one book is about the markets. Do you suggest that this Central Bank of FED is

looking at the markets? When I look at bonds, I took a US bond e t F. It's down twenty two percent from its high two years ago, and that's better than a lot of others. To be blunt, I'm just fascinated if this FED, you know, the phrases blink, not that they'll blink, but they become aware that a four oh one case become a two oh one. K I think that the FED is highly aware of what they've done to financial markets, and in fact, they've mentioned

that over and over again. This is another key concern, which is that recently Vice chair Brainerd commented on corporate margins, which actually remain relatively healthy, and if they FED is looking to slow the economy down and looking to spread some of the pain of that slowing to the labor market. I think increasingly they're looking to to spread some of that pain to corporate margins. It's not a good supportive

outlook for equities into the beginning of next year. So I think the other question I get asked so often is, you know, have the markets seen their bottom? We're all talking about the risk of recession, but markets still to me don't have it priced in well. And look at the priced in part. What do we do after the November two meeting? I mean, I want to get onto December, and frankly onto the meeting I believe it's February one of next year. At some point they have to respond

to the markets. Yeah, I think they would say they're not responding to markets. They would heavily argue that they're responding to the structural lags and their policy going to the economy. But Tomato, Tomato, I hear you. I think the point really is that they're going to have to They're gonna have a big challenge messaging that right, because every time they talk about holding or talk about backing off their aggressive pace, markets start pricing in rape cuts.

And you know, earlier you were talking about how kind of the fedest trained markets over the last fifteen years to expect a rally at any time, and I think this is what they're having to really beat markets up about right now. They're having to couldn't place a permanently higher trajectory, or at least, you know, a multi year higher trajectory, because inflation is not going to fit neatly back into their two percent package. Yeah, may come down

from here, but it's gonna stay really elevated. This is the fine line the feed is having to walk, and it's causing them confusion when they're communicating, it's causing it's adding to bond market volatility, and all of this is just weighing on sentiment. We were speaking of the Bloomberg's Damien says how or earlier, and he was talking about how all of this is leading to the strong dollar

that's really torpedoing a lot of emerging economies. Do you think that it's important for the FETE to step in on the dollar side of things to offset some of that pain as they combat inflation. I don't know how they can, Lisa. I think that you know, for now, the stronger dollar reinforces the monetary policy trajectory that the FET is taking. And I think there's this other issue.

The FED knows that unilateral intervention isn't particularly effective. You know, this is a big this If they wanted to weaken a dollar at all, it would be a huge change from these sort of unspoken stronger dollar policy that we've maintained for all this time. At the end of the day, I think they're more focused on what they can control, and they don't feel like the dollar is easily fits easily within that sphere, so to the extent that their

blunt instrument can control financial conditions. I think they see what the damage they've done in markets, and they feel like it's part of their move into restrictive territory to hit inflation the objective, not the unintended consequence. Laura, thank you, Laura of FS Investments. Can I give a shout out to our next guest, tomp He came on the program back in February one fifteen dollar yen, he said, one

fifty and I almost found much. And I'll think and here we are, say, k here we are, and Christopher an smarter than the average bear on that macro strategy strategistic strategius is is a bared uh Company. All I can say, John is showing me any literature of the show's unilateral intervention works. It's not out there, christopheroon what is out there is a desire for catharsis a vix of forty and the eight other shades of it is Well, it's not out there. But what element of the market

last week gave you a sense of catharsis? Well, what I thought was most interesting about last week, You know, it was a good week for stocks, but what led what's the only sector to do relative high? First the SMP was energy. Energy still leads, And this is what's really interesting on both down weeks and up weeks. Your

leadership really hasn't moved much. So I think, you know, if you look at where the positioning still is, and I would contend there's still a lot of positioning at quote the top of the market, the Apples and the Teslas and the Microsoft's energy outperforming doesn't help that group.

So I'm not sure a lot changed from a leadership perspective, which is more important to us whether the next two points is up or down if the leadership doesn't change, And you know, with technical analysis, does quality matter whether it's quality small quality, large cap profitable companies showing down

down the income statement. Does that matter right now? Well, I think that was the other message from the market last week when you look at really what didn't move or didn't rally, what I would still call the garbage basically didn't bounce. I mean things like Carvana or Roku or names that have basically um were the speculative darlings of the cycle which were thrown out. Those didn't move

last week. So I think the market continues to make this very clear distinction between what is quality and what is not quality. And I think ultimately, you know what, what would be bullish from here? I think the market disassociated eating itself from things like Bitcoin or Arc or the I p o s that I think would be a bolsh development that how to happen in two thousand two, if you remember, as we kind of came out of dot com, the market how to disassociate itself with a

lot of the garbage from the briar cycle. I gotta say, Chris, right now, the headline is that Roku and Carbon are garbage, according to Christopherone of Strategus. I don't know that that's necessarily the headline that you necessarily one, or maybe it is, but there is this issue that right now there are a lot of people who think that there's so much pessimism. We hear all the Barrish talk on this program elsewhere and are sick of it. And you're seeing that come

into the commentary. You're seeing that in the options market, where you're seeing actually people putting on much less protection against the market dropping another ten percent. What do you make of that? You know, it's a great question, Lisa, and I'm struck by a couple of things. Number One, I think back to late two thousand into two thousand nine. I think that feeling of capitulation was very different than this. I I mean, I can remember not wanting to turn

the screens on in the morning. I don't think we're quite there yet today. The second thing I would just notice be careful that or at least distinguished between what people say they're doing with their money and what they're actually doing with their money. And I still think the gap between those two things is quite uh is quite wide here. The flows, for example, are still pretty aggressive into both equities and bonds. I'm not sure that describes

that cathartic or capitulative momentum. We do have good seasonal support here for the next call at ninety days, I want to be mindful of that we essentially oscillated between thirty and thirty eight hundred for the better part of the last six weeks. I could get you to let's call it thousand on SMP, but then we have to deal with the very inconvenient fact that this is still a downtrend. And I think stocks rallying into down trends are ultimately things that you want to fade uh down

the road. So there's a breaking point at some point that a lot of people foresee yourself, Mike Wilson, and you did correctly call the en going or weakening to one fifty per dollar? How much is that going to be a potential catalyst? This question of what John called bonfire of central bank for an exchange reserves, how much is that going to be really the trigger? Well, the layers that we've used this is very simply the market is back in charge here, and I think we saw

that in the UK over the last several weeks. I suspect we're gonna learn that here in Japan over the next number of months. I mean, the story is what thirty billion dollars of intervention? I think that's what the FT reports on Friday. So that's a fifty increase from the twenty billion dollars of intervention that we saw I think on September two. After the September intervention, it took fourteen trading days for yen to make a new load. So that's kind of our our benchmark here. Let's see

where we stand in two weeks. Are we talking about one two yen again? Are we talking about I think that's going to be how we judge whether or not this is successful. Because when I see German tenure yields at two fifty and US turns at four twenty, and I see Japanese turns at twenty six basis point business points, so there's a clear outlier here, and I think that's an unsustainable path for the b o J to remain on. You see the gamp blower on that chart, Ramo, there's

just smoke coming off the bottom of it. What is it about forty billion dollars worth? Now? Article at this point men just ridiculous. I want to look at sterling as well. One thirteen eighteen. Latest reporting from the team in the UK term that Richie soon Act. The former chancellor's getting the public endorsements and we've been tracking them

here at Bloomberg News. We've verified public statements from one hundred and seventy nine Tory MP so that's more than half of the Tory MP's out time the nine this morning our time. What happens at nine a m JOm Perhaps we get a prime minister in the annoying the Queen chi soon Auld. Maybe we've got to change the language that we've got the King as wealth. Sure, big changes, Chris. I don't want to linger on it too long. I think this market wants to move on and move on quickly.

You mentioned that maybe we've had one scalpe and list trust. What is the next one come from? Chris? Can you elaborate that on that a little bit more? Is that a change in leadership at the b J that's set to take place anyway? What is it? Well? I think

that's a good place to start. We wrote something to the effect in I think February or March that the b o J was going to have its b Oe type event, and I didn't also think that the Boe would have another Bowe nine YouTube type event, But of course that's that's kind of what happened here over the last several weeks. So I do think ultimately this is heading towards some crescendo, and I think Japan is kind

of ground zero for that now. Also, keeping my time, CNH this morning is at seven thirty thirty one, right, so the stresses that we've seen in the Chinese currency haven't abated here either. So I still have yen at one fifty and I have Chinese uh at seven thirty. I'm not sure that's the greatest environment for macro risk. What are the technicals of the tenure real yield? Now we splot it out to one, I'd call that catharsis you come back, but we sets Arron above that one

sixty level. What's that chart looked like? Well, this is a little bit of a pet peeve that this idea that that that real yields are actually positive. I guess theoretically they are positive. You're if you're taking right, you take your break evens right. But if we look at like the actual policy, right, I mean, what the Fed funds rate is three and a quarter and inflations eight. So I think for all intensive purposes, for for real people,

the real legis rate is actually still quite negative. So I think there's more work to do here before the FED really believes that short rates are offering a positive Really year, it was Chrispherun our Fed speaker today. He's a Fed whisper, He's a whispers It was heartily Chris, thank you, great cold buddy. You know, just Chris to run that a fatigue. We're gonna swing back to China right now. Peter Twotz with his professor of international relations

at the London School of Economics. Peter, the advantage we have here is your work at LBJ in Texas. What is the symbolism that this is the only issue the Republican and Democrat parties share in common in Washington? Frame what we observe this weekend for a unified Washington as

they confront a third term. G Morning, Tom Well. I would say that for Washington, UH, for Republicans and Democrats, where they saw on display um in Beijing over the weekend will only reinforce the view that that that China is um is a force to be that the US are going to have to contend with going forward. I mean, it was a very impressive, carefully choreograph display of she's power at the twentie Party Congress, but I think it's more likely to fuel um, you know, insecurity security competition

in the region. One reason is that national security replaced the economy is the dominant theme in the run up to this weekend, and she's report to party members who were gathered in Beijing, and it's no accident. I think that she held back today's latest report on China's lackluster third quarter economic performance, the data until the Party Congress wrapped up, and so what they saw on display was

she consolidating his hold on power. And the belief is is that she is that the kind of underlying premise is that she is interested in pushing China's ambitions in the region and and expanding power, if only to compensate for the erosion, um, you know, the slowdown in economic growth in China. Peter, what does this mean about Taiwan? Okay, Well, she was actually very careful I think on Taiwan. On the one hand, he made it, he announced or you know, made a reference to the fact that if push came

to shove, they would use force there. On the other hand, there was a kind of olive branch to Taiwan and trying to integrate Taiwan into the larger Chinese um economy. But I think the big story kind of locally over the weekend there was what was happening at exactly the moment that she was strengthening his grip on power at home. Japan and Australia announced that they were deepening defense cooperation. This happened on Saturday to counter j and Pain's growing

preoccupation with power and influence in the region. And it's significant because it actually follows on an announcement a Japanese proposal to develop a counter strike capability capable of attacking and enemies command and control systems in military basis in the region. That is a big departure for Japan. If that becomes policy, most people think it will be we become policy in December, and so it's just a kind of it's pushing the region more and more into a

kind of insecurity dilemma. Peter, if you're advising some of the big US banks or a multinational in the US trying to capture some of the business in the world's second biggest economy. What would you tell them in terms of how big of a sea change this particular meeting, this particular apnointment for a third term of jan Ping,

really how important it was. I think it's significant. I mean, I think he really kind of reinforced his commitment to the state over markets, and you know, and and and I think for businesses it will reinforce the need desire to hedge heads their bets going forward, to look for other locations and so forth for investment. And I think the kind of general reaction of the markets this morning, I think that you were reporting on earlier kind of

points in that direction. So um, you know, you know, as I said to people, to my students, you know, when it comes to East Asia, it's time to buckle up because the stronger she Jinping at home means greater insecurity intention in the region. But I just want to pick up on something you said, why does he care about the data it's about the states over markets, because really that data is not just for domestic consumption, it's for international consumption. Why does he still care about the

economic data. I think it's just that you're talking about an event that is so carefully choreographed the Party Congress. That to have that kind of come out. I think it was supposed to be released a week ago, so during the Party Congress or at the beginning of the Party Congress. Um, you know, might have been unsettling for some who have access to that information, even if most Chinese would not really have access to it unless they were um you know, um uh you know provided it.

So I think I think it it just it was kind of off note for where he wanted to take the Party Congress. Pat wonderful to half from you. What a time. Thank you sir at the London School of the Economics. 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