Surveillance: Oil Demand with Morse

now for three hour conversation. I just Dr Morris joins his global head have come out of the research at City Group and truly expert on taking the global reach of our oil politics and crossing over to the micro economics at Emerita. Sent was just talking about and I don't want to talk about the martiality and cross and fancy micromumbo jumbo of supply and demand. The arch guess is the measurement of global recession again, the marginal emerging to market demand is the e M and Pacific RIM

come out of COVID. Those are two titanic forces who will win global recession price down or burgeoning e M demand price up. I think it's the macro environment that wins. And actually we don't see the burgeoning the burgeoning demand coming out of China. There's a return to be sure, But we have to remember that while China was cutting off about a million barrels a day of oil and real demand, they were importing a record amount of oil. They were stockpiling, and that had an impact on the

global market. We had our inventory drawing, they had their inventory building. I don't see the international implications of Chinese recovery having much of an impact on the global setting. Well, if that is the case, what are you watching is the dynamic that drives oil, as Emerita said, down to nine, the are you suggest even lower? What is the single distinction right now that drives us to that shock? I don't know whether there's a single distinction. I think it's

called both supply and demand. So I think there's another view of supply that a Marita has not talked about. We see over two million barrels a day of Western Hemisphere growth this year, including a million three out of the United States. The US is already up a million

barrels a day year on year. Canada looks for sure to be up three hundred thousand barrels a day, Mexico up on a hundred a day, uh Brazil up a couple of hundred a day, Argentina is up more than people thought then, as well as even up three hundred thousand a day year on year. So we think if you look closely at supply, it really is growing and it's accelerating as we move from here to the end of December. Your scenario work on a recession end got a ton of attention in the last couple of days.

Can you help me understand what's behind that word recession? To you? What is that word? What does it mean? What kind of numbers are you thinking about? The US down to say forty five by the end of twenty three, sixty five by year end. So it really is on the why demand balance a drag on the demand side. Almost everybody has reduced their expectations of demand for the year. We reduced Stars by about a million, two hundred thousand meryls a day. We're at the two point four two

point five million Barladay level. That's similar to where the E I A and the I A are and I expect that we'll be seeing further downward revisions in demand. Demand is simply not growing on an empirical basis to the greed that people had expected, and we've seen that US demand is down. And there was a Bloomberg quote yesterday that to somebody at Bloomberg saw demand as low

as it was in fourteen. We think you've got to go back to thirteen to see demand at the levels that we're now seeing when it comes to transport fuels like diesel and gasoline. Uh. And if if the movement is going to be anywhere, it's gonna be downward. We're not gonna see. There's no evidence that we're going to see this summer surge in driving and summer surgeon demand.

The price is too hot as it was. Uh. And that's a force in looking at global g d P from the perspective of one of the countries that's growing the fastest and has the most robust growth. The demand simply isn't there as people have thought. But if it's not an outright recession, if it's just growth that slows back toward trend, which is the case of some people out there, at how does that change the demand picture?

What are we talking about then? If it's not sixty, well, we're talking about just our base case, and we still have recession at lower than but we're thinking in our base case, said oil is gonna go down to eighty five. And that's looking at it purely on a supply demand basis, looking at what the headwinds have been in the talent winds. We've had a lot of challenge underlying where oil prices have been. We might have some moral We don't know what the summer weather is going to be. It could

be a very volatile period of time. But we're looking at a supply demand balance that's seeing inventory builds from here to the end of the year. And that's that's based on a uh, you know, purely empirical analysis of where we see kind of probability of supply. We don't know what's going to happen to Iranian supply. We don't know what's going to happen to Russian supply. By so far, Russian exports into the market have been higher than people

have anticipated. And hire what the historical trend was a year ago. And this was a fascinating breed. Thanks for giving us some of your time this morning at a timely conversation too. After briefly look at it a handle on w T and I've said most of city life right now on fixed income. Kelsey Barrow joins US fixed income portfolio manager JP Morgan asset manage and putting real money to work. I believe it's price up, yield down.

If on the first order condition of inflation coming in, how will bonds react and where is the opportunity to go from nine to say seven percent inflation? Yeah, So what we've been noticing in the market, and there has been incredible volatility in the inflation markets and in the bond markets recently, is that there has been a repricing of inflation, particularly when you look at the one year one year inflation swaps. So what the market expects not

for this year, but for next year. It's erased all of that inflation risk premium that got baked into the market as a result of the invasion of Ukraine and all of the upside inflation that we've been talking about for essentially half a year um. And so what we're trying to debate right now is is this a true signal that inflation is going to decelerate or is the Fed actually going to need to continue to press because the data they're looking at actually is not showing any

signal yet that they need to stop hiking rate. How do you use versus Chasmin and Michael Faroli's work, particularly on the labor economy. For only puts at it on the Weekly Prospects of Son on page one. He's got a buried on page seven where he's talking about the labor dynamics of the United States. How do you fold the labor question that John Farrell just mentioned into what yield and price are going to do? Yeah, well, the labor market is still very strong, and it does paint

a very confusing picture. You have g d P which is weak. You have the Atlanta FED which is tracking at minus two percent. Now a lot of that is not necessarily organically driven. There's a two hundred basis point detraction in that in that forecast from inventories. But really what we look at in terms of are we in a recession is are we seeing the unemployment rate rise? And is nominal income falling? And neither of those things

are happening. And to get the unemployment rate to rise this year, you're going to need to see a material deceleration payroll's growth, which is not what we're expecting. In fact, just to get it back to four percent by the end of the year, you would need fifteen job loss on average for the next seven months to get there, So we're not in that environment yet. Jobless claims is what we're watching to see if that's checking up. For now,

the unemployment rate is on the decline. Never in my career have we hoped for job loss like It's honest, Lets be clear, I'm not sure Calcy is hoping for that. I'm not hoping for Ultimately, when you look at the tragetory of things, there is a belief that's what they're trying to engineer to take some of the heat out of this labor market, and there will be consequences. Unfortunately,

this is how this works, CALSE. So we're trying to understand how much pain they're wanting tolerate, how far they wanted to push it, and what business The two year has at two eddy two if you think it's Fed cameras on hiking. So the two year yield right now is actually inverted to what the market expects the Fed funds rate to be in just three months time. So the market is really pushing the Fed right now and saying how much longer is this rate hiking cycle going

to last? And in our view, it's going to last for a bit longer. Uh, it's not yet time for the Fed to us say that they've accomplished their missmission. Even with inflation expectations in the market declining, we do expect that the Fed will hike grade seventy five basis points in July. We expect them to hike another fifty And by the way, right now, the market is not

even pricing in a full rate hike for December. We think that the market is getting just a bit, uh, going a bit overshot here in terms of the two year yield um, and it should be going higher. Well, I heard something similar for pre Amiser over at TV Securities earlier this morning, saying, essentially, inflation is still the problem, and the problem is going to stick around. Therefore, expect the Fed to stay the course and be more aggressive.

She said. What all that leads to is a yield curve that is going to become even more deeply inverted. Is that the same camp you're in, Kelsey. We've been expecting the yield curve to invert. It has been inverting. Different parts of the yield curve have been inverting at different times. Right now we're seeing the belly lead in the inversion. So the five to tenure point is what what is leading, and that's because the market is is

testing the FED again. They're testing the FED and saying can you really go through with this, particularly as the growth signals are really decelerating, and we noticed that the growth data that's been released more recently really is showing more of a deceleration than I think people thought that third revision to Q one GDP. I mean, no one looks at the third revision to Q on GDP. It

showed really meaningful deceleration in services spending. And we need to be careful because we know that the consumer is this primary engine of growth and they're not as on as strong footing as we originally anticipated. I don't remember when we tried it on. Expectations have been fly ship and you Mitch either and here we are so confusing to me, I need to squeeze this in councy. It's just the final question. High spreads have been widened out

for five straight sessions three. You and Bud Michael worked closely with each other. I just want to understand from from you and the team. Has that got interesting yet for you? It's a bit of a Noman's land right now, because spreads are too narrow if we are expecting a full blown recession, but they're probably too wide if we're going to escape recession. But in the longer term, we do think fundamentals in the corporate in the high old market are actually much better than they have been going

into previous recessions. So if you think about it and think about defaults, defaults peaked around ten percent in the last in the Great Financial Crisis, we don't think they're going to peek at nearly as high as a rate and around six d basis points on spread that's already pricing in around a six percent to fault rate on a thirty five percent recovery rate. So actually a lot is priced in the market is considering a modest amount

of default risk. But unfortunately the markets do tend to overshoot, and so it is possible that you continue to get that spread widening that goes beyond what we think is probably justify based on our default expectations in this next downturn. Kelsey, thank you so much greatly. He was at Barclays and he was absolutely brilliant, so brilliant, brilliant. He went off to point seventy two, where he has to watch the

New York Mets. D. Mackie joins US now Chief Economists dead point seventy two on a very changed global economy, a very changed United States economy as well. Dean, what's great about your Stanford economics as you go to the micro data and you go traditional old school and say we must watch jobless claims. We'll see them tomorrow. Define surging jobless claims. Surging jobless claims would be a rise of in a fairly short amount of time. Uh. And you know, so far we've gone up, maybe from the

very bottom. So right now I think we can confidently say we're not currently in a recession. Um and because that always happens in recession, jobless claimed surge, the unemployment rate surges, payroll growth declines. None of that's happening right now. It's not saying it won't happen at some point late this year, for example, but we can say what's happening

right now with measures like that. The troops went out to the Hoover Institution of Stanford and they talked about regime change out of Bullard in this new word that's out there frontloading, Dean Mackie, If we front load our rate rises, what will that do to the real economy that wraps around labor. I think it depends how much frontloading they actually do. Um. You know. I think what we can say is, if the FED keeps going seventy five basis points a clip for an indefinite period, we

will have a recession soon. Um So, so really it depends what the Fed means by that, you know. I think what we've been hearing and what we're seeing the dot plot is something like another seventy five and July, maybe a fifty and September, and then twenty five per meeting after that. If we do that, then I think the economy can stick day in a slowdown mode and not slip into recession. But if the Fed feels they can't slow down from that seventy five per meeting pace,

that's really going to cover the economy. So Dean Tom doesn't care about the Fed minutes. Michael McKee didn't actually seem to care that much about the Fed minutes, do you Well, we certainly have to pay attention, um, you know, I don't think we'll probably have a decisively different view of the FED based on the minutes, but we you know, sometimes there is there are some things in there that are interesting and maybe color the outlook a little bit,

but I wouldn't have great expectations for them. Okay, So as we talk about kind of front loading of the hikes of potentially seventy five and seventy five seventy five for who knows how long, at what point are we no longer going to be talking about hiking but cutting instead? You know? I think that again that depends partly on how rapidly the FED raises rates, Because if the FED does induce a very sharp slot on a recession, then

cutting next year is quite possible. But if the FED is able to slow down and get on a gradual, more gradual hiking path, I don't think they'll necessarily be cutting soon. So it really depends on how much frontloading and how quickly the FED does. Dan let us talk about the arch glide path, which is the inflation migration downwards. If there's a kink in the curve, where's the kink?

Where does this become hard? John and I are going to talk to Adam pose and in a few days, and he says the new two percent is three percent? Do you have a point six percent or five where the dialogue changes, because then it's way harder to push inflation lower. I don't think it works quite like that, tom So. I tend to think of it more as the different parts of inflation. So we know, goods inflation

already is coming down. And if you talk to industrial analysts or people that are following those companies, they're talking telling us prices are falling in those industries already. And we're singing in the in the c P I and the PC goods care goods inflation is already falling. The services are really what's going to determine how far we can fall. And you know, I think that it's realistic

that we fall down into the three percent range. Whether we can get down below that on core PC is a question mark, and it really depends on how rapidly wages are rising at that point. Let's go to the rate of change, and I don't mean metsmental relief. The Mets are killing it this year except for another team up in Bronx. But Dan Mackie very simply here, where's inflation in sixty days, ninety days? How rapidly do we come off the panic of eight nine percent and come down.

How fast is that going to happen? Well, I tend to focus more on the PC because that's what the Fed follows, and we're at six and a half there. I think by year round we can be down into the three or four percent range. On Thank you, Thank you, sir.

Henrietta Treys right now gives perspective on radio and television across America, Director of Economic Policy Research at Beta Partners, with some real tangible experience within the white marble of the Capital, Henrietta, we have been transfixed today by the questions of the Prime Minister, the drama of what's going on for Prime Minister Johnson and Theodic Kingdom. Would your world be better off if we had President's questions, if we had much more fiery, visible debate within Congress in

the sleepfest it's become. I would love that. I think that would be fantastic. I think that politicians tend to speak more truthfully when they're put on the spot, and we're always looking for those little mistakes that might hold nuggets of truth, which we've seen from President Biden time and again. Um. I would I would love to see that in less agenda journalism, as Gilberts mentioning, it's a great idea. How unified other Democrats right now in the House.

In the Senate, that's a great question. On the House side of my anxiety has been pretty high because we saw the Progressive Caucus UM really derail a lot of the BBB agenda in the back half of last year as they were negotiating that infrastructure bail and ultimately failed to sway the Senate, which is always the case, and the faster House members understand that senators always get their

way the better. On the Senate side, you have a very shaky, you know, faux majority of just fifty senators, UM, and I think there are very few things that they can agree on. One of them is, Hey, healthcare really

rallies voters during an election cycle. So let's do a reconciliation bill with the healthcare component climate change post very well with independent voters who are going to be so critical to turning out the vote favor of Democrats or Republicans in this next midterm cycle and the general election that's just a couple of years away. UM. And so if you can call together a bill that's a healthcare

package and climate keep all the toxic stuff out. You can get a real bill passed through the House and set it by September. The reconciliation front, which is um I think something that will happen. Okay, So, Henrietta, if we kind of look at these two scenarios together. When we were watching the Boris Johnson in Parliament talking trying to get around the questions around his integrity, saying, but

look at what we're doing. We're putting pounds into bank accounts of UK citizens today, We're cutting taxes, we are doing all of these things. On policy, President Biden also has been trying to take action, or at least signal action on policy when it comes to fighting inflation. Just look at the news yesterday of potential tariffs talks on ten billion dollars worth of worth of goods. How many

more signals does the president have left a send? What other cards are there to play that are in his control? They're throwing everything at the wall here. UM I would

say a couple of things on that. The ten billion dollars sounds big on paper, that represents roughly two percent of the overall tariffs that have been imposed against China, and the way that it's been expressed to us and via the news reporters you all have the great Jenny Letterard at Bloomberg, is to say that the consumer facing items, which are you know, your bicycles, you're back to school gear, backpacks, baseball gloves, those are all in List four A. So

when investors think about those tariffs and what the administration is signaling, be mindful that those tariffs are only on at a seven and a half percent tax rate anyway, So you're talking about a very small portion at the lowest possible tax bracket today. So, Henrietta, what you're saying, we're not going to feel that. Voters aren't going to

feel that. I sincerely doubt it. It It sounds very big ten billion dollars, but you're looking at three hundred and sixty billion dollars worth of goods that have entire and the only rate to reduce the seven and a half percent, not that exists for the other items that are hired in fight Apote. 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.