Surveillance: Payrolls with Gapen

and fiscal linkol. Just Michael, thank you for briefing us UH this morning. I want to go Michael within a swirl of the data right now to what matters for you. We go to jobs and we go on, we stagger into November. What matters from Michael Gabon honestly only one number, and that's the payroll number. I think that there's a lot of just doortion in the data, as you know, and we've talked about it many times and and it's really hard to know, you know, which one do we

take the right signal from? And so what matters to me in terms of the underlying momentum in the economy, how far the FED may go, and the near term course of the economy. It's it's almost exclusively just payrolls. Let's droll into that to payrolls versus the two studies

that will see on Friday. If I take a three month moving average of non farm payrolls, the number of folks that comes out at a thirty that everybody reads first, what is the appropriate three months moving average for the Fed to say all clear, let's change and to slow to to move to a slower pace of hikes. You probably need that number to drop below two hundred thousand to get a soft landing. That number probably needs to

be about fifty two, maybe seventy. So I think that it's to two hundred and seventy five thousand a month. Those are still robust numbers. That tells the Fed to keep going, so pivot to a slower pace, probably below two hundred. But to get the unemployment rate to rise gently over a two year period like their forecasting, certainly someone and that's something that is going to be hard to see. What that's at least based on a lot

of the projections that we've been seeing. Liz Ane Saunders actually put out some interesting charts of Charles Schwab talking about how the data is showing peripheral weakness. You're seeing more part time jobs appear in some of the anecdotal data. Is the headline non farm payrolls number really the one that we should be watching for real time changes in just how quickly this labor market is softening. No, certainly there are there are other data points that are complementary

to the overall picture. And I would never say we shouldn't look at those of the jolts data that we received with fewer job openings, the quits rate, um, the ratio of openings to the unemployed. I think all those are important to provide context. And yes, they do show that on the margin, labor demand is softening and the labor market is cooling, and that's of course where the

FED wants to to go. But I just think ultimately the Fed's not going to conclude that policy the policy setting is right, the outlook for inflation is correct if we're still adding two to three thousand jobs a month. So at the end, yes, it comes down to where payroll growth is, where employment growth is over time, But there are certainly other data points that we should be looking at to see whether or not are they right that we can reduce labor demand without pushing the unemployment

rate up significantly. Those other data points that you mentioned and including the jolts, can help give context around that story. Mike. There are a lot of people pushing back and saying that inflation is actually decelerating pretty dramatically. They point to a number of different metrics, and they say that looking at the labor market data as it is is not accurate. It is a misleading way to create future policy based on a lagging indicator. John has talked a lot about this.

Would you agree in part yes, I think you do have to be forward looking in your in your policy settings, So only looking at the data under your feet at that moment in time may mean that you overcorrect in

one direction or the other. And there are going to be other factors that help bring inflation down, whether it's global commodity prices or some reversal and goods prices, So wholesale use car prices being down seven of the last eight months, according to Mannheim, we should start getting some relief from from global supply chains that are going to

help the FED. So it's not just the labor market, uh And, and certainly setting policy on where the labor market is today would increase the likelihood that you make a mistake. Um. But it's it's you know, it's some in some respects. You have what you have, and that's the data point that over time is going to tell them where is services inflation going to end up? Michael.

And this is your wheelhouse from from the day's i've known you at the FED, and that is the merchandise trade statistic of w t O today was absolutely stunning. It's a one percent two thousand twenty three growth statistic from merchandise trade. Clearly globally, that does not get it done. What does that statistic mean for Americans, as you discussed in your prior segment, not as much because we're still

we're a large, relatively closed economy. Strong appreciations in the dollar like we have will slow the economy down through the trade balance. But that's a relatively narrow channel for us. It's certainly not as large as it is for other developed economies like Europe, the UK, Australia, uh and and

so forth. And what I would say is what it what it implies is a very weak global growth backdrop, including outside the U S, which we all know, and that actually tends to help the US because it brings lower energy prices on on net and gasoline prices fall, so the U S gets a windfall on the con sumerside, even though a strong dollar and weak global growth is a drag through trade. So it's a more complicated picture when it comes to the US. So I might let's

net this out. You've got a recession call on America, on the American economy, can you just tell me on balance? Are you moving that forward? You're pushing that out our things develop in we uh. We pushed it out to begin in Q one. We I originally had things slowing down in the fourth quarter of the year as data earlier this year we're kind of pointing to that, but then things picked up here in the summer in the fall, I moved it out to begin in the first half

of of next year. At the moment, I haven't changed that. I think trends in recent weeks the FED shifted being serious and lifting its policy rate, and the tightening and financial conditions that that's developed. That's that's left me comfortable with something around Q one or in the first half of next year. But that's when we have it starting just around it out. What about duration and depth Mike, beyond the start point. I you know, we I spread it out over three quarters in part to signal a

little uncertainty about start depth and in duration. And we have the unemployment rate rising, you know, a little above five per cent, so a little more than than the FED would have it um But I think kind of in the first three quarters of next year as when we're likely to see our peaks softness and the cut stot when Mike, December of This is what's interesting about the The reason I'm not I'm not sitting sitting here saying you've got a crystal ball. That's not why I've

asked you those questions. It's interesting to me that you've got three quarters of recession and the cuts don't start until the very end of the year. Mike, Is that original? Because uh so, the the idea behind that is the terminal rates about the labor market. But cuts are about inflation, and so when do they shift to a more balanced reaction function they I think, you know, every time inflation comes in higher, it gives them a worse starting point. So it just takes a while for for that to

show through. But yes, but it's consistent with the idea that we're going to have to accept some pain in the domestic economy to bring inflation down. Um so yeah, it's it's an odd situation, but it's a FED right now that's saying we need the economy to slow to help us on the inflation side. So it's a different setting for them. Fascinating, Mike, just wonderful. It's been brilliant reading your stuff since you've got to be of a it's going to have you with us. Sis Mornic, thank you,

mikeeping their Bank America right now we do better. I have no idea why he's not in the OPEC plus meeting. At the table. Christian Maylock joins us now from JP Morgan, who's really been definitive on the how we get to a permanent hundred dollars of barrel plus. We've seen the demand questions Ed Morrison's City group gaming out nicely. Christian, seventy eight dollars a barrel and suddenly we are higher.

What is a single distinction that drives us to a hundred and twenty dollars a barrel nice vacapacity in short turns on. I mean we were seeing being repricing of oil to the marginal barrel, and it's away from opec um. I know it sounds controversial to say that on a day like OPEC meeting, it's away from OPEC and is getting back into control of the majors who represent somewhere

between the world's oil and they're not spending. They're not investing at these levels, which then begs the question what price will they spend? Will they grow their production um and reinvest into those long term projects. And I think we're going to move a significantly higher price, which in some ways is potentially what is trying to do today. They're trying to defend the front end, but the backing, the trying of OPEC. I have the memory of six

oil plunging. Here's my quick mathematics. How close is the cartel to a night six? I think in terms of how close they are that will all depend on how demand responds to the current price. And we know that they're arguably looking for a higher price, potentially closer to where their fiscal break evens are. Ultimately, it's not just

the break even of the countries. It's also what they want in terms of defending social reform, and we know there's a lot of issues at the moment with the high energy prices, So that price level versus what the US wants suggests there's arguably a price war that's emerging between these two continents. But in the end, if demand can respond at which is our house view, then I don't necessarily see um demand collapsing, and then it's all

about supply. It's a supply driven crisis, which is ultimately where our super cycle thesis projects for the next five or seven years. Where are we in terms of the US as a swing producer at this point, given the lack of investment in the shale patch and just generally throughout the energy sector. Shale, it's it's interesting. It's like you've sort it's been dismantled, parts of rusted, you put it back together again. It's just not as effective in

terms of productivity, in terms of production volumes. And ultimately they've got used to return in cash and getting more popular with wall streets, so have to sort of think about what price do they need to cover their all their capex, all their cash return as well as a price they can necessarily see much bigger volumes of growth with all the money in the world, and that's much higher as closer to So we're not seeing as much volume growth this year, close to seven nfousand barrels similar

to next year, and I think that's the key. So right now, if you're not seeing production increase and you're actually seeing production cuts at OPEC plus, where does the marginal stop gap come in? Right We talked about the Strategic Petroleum Reserve and how much the US has already drawn down on some of those reserves, the speculation that they could tap them yet again during them further in response to some sort of two million barrel production cut today,

is that bullet gone? Is it used? Absolutely? I think it's used. And you know, I love to web jewels and we all the world is short energy right across all fuels. And that's what we've been talking through this year and with you, and I think the key here is if the marge, your jewel, if you like, is is oil. Then so they're like saying to your customers

a couple of good news and bad news. The good news is of good oil, you know, still got some energy, and the bad news, you can have to pay a lot more for it as a ventured to come down, and that silver bullet from the US is done. It ultimately becomes who's up for taking those barrels at the high price? Christian and your definitive report of I'm gonna say seven eight months ago, you give a fair share to E s G two synthetics, to the other things

we're gonna do for energy besides oil. Give us your sense of the E s G event given a war in Ukraine. Is it forever altered? Is it shifted? I think what we're going to see is ultimately an upgrade of bad code to good code in this sector and alter. What I mean by that is the sector. We did some work last week and doing a bottom up version

of that Jewels report for companies and the industry. The European US majors represent roughly twenty percent of the world's energy and jewels across all fuels, not just oil, gas, hydrogen, etceteran. So the key here is I think what the E s G event ultimately will revolve to is more of a hybrid of recognized position. Is a function of this

sector delivering energy on a lower carbon footprint. But ultimately delivering energy so that we don't compromise security, and I think that will change the optics and redefine the sector's role. Energy transition is opposed to being simply you know, in the penalty ball. Christian May with truly a definitive report, controversial report earlier this year advancing a theme to higher oil Pricess Nagozia kanjo Iwala is Director General of the

World Trade Organization. She brings absolutely bulletproof Harvard and m I T economics to the massive task of a w t O finding a place within international institutions. They founded about six months ago with a single best call on global slowdown of any of the institutions. All you need to know is dr okonjo Iwala and w t O was way out front. Director General, thank you for joining

Bloomberg this morning. I'll get to the headline. You say, merchandise trade is going to slow down off the proverbial cliff to one percent in two thousand twenty three. What does that mean for the developed world? What does it mean for your Nigeria and emerging markets? Well, thank you very much for having us. Yes, we'll just release that podcast and it's looking quite green, a little more green than we had thought, a real slowdown. And it's happening

for several reasons. Of course, the the the higher energy prizes in in Europe arising from the war in Ukraine a big factor in this, and the squeeze on household spent, didn't the monitor policy tightening and various developed countries that are happening, and even emergine markets also explaining to this, and and so a whole variety of factors. What does

this mean? It means that we're looking at a situation in which global slowdown is going to sweeze ouselves even more sweets businesses, and what we may be edging intrough a recession, if not globally at the general Because of time, I must interrupt and be rude, but I'm going to do it because this question is so important. Is J Powell is central banker to the world impinging on global slowdown? Are the central banks moving in the wrong direction? What's

your advice? Off the chalkboards at the Massachusetts Institute of Technology. It's very difficult. J. Power is in the top position, whether to continue tightening, whether you over root if you do that because of looking at lagging indicators. Um, it's very difficult to give advice to central bankers now, um, but there's no doubt that something has to be done

about inflation. We just have to watch and see. So it's not too edging to an overshoot, but probably from me to give you all advice on how to run monitored policy and go see how much this China factor into your outlooks. How much does the potential for them to open up from a zero COVID policy or emerge from some of the downturn that they've experienced factor in

or not to this forecast. It factors in considerable Linked to the broadcast I've mentioned the one you're doing, had mentioned the monetory title about China is another big factor of course. Uh, the COVID slowed down and what it means, um, whether it's going to continue and we're going to have other lockdowns. It's a big factor if China's economy continues to slow the way as seeing that will have a

big impact on what happens to the world economy. As you know, and I really here for developing countries and imagine Mark go see. Just to sort of broaden out, we've been talking about how we're witnessing a sea change were suddenly governments cannot finance themselves with deficits the way that they have before, particularly developed markets and central bankers cannot fuel growth by just lowering rates. How do you take that into consideration for not only this year's projection,

but projection for growth over the next decade. Well, it obvious me, it's very very difficult. What we are saying we're seeing in our projections is to remend us uncertainty that I can I can tell you is what is really making it difficult to predict. You've never seen this amount of certainty when we do our podcasts before. But what we do see is that this so certainty is tending to risk on the downside. So that is really impacting and we need to look at what what come

we do to turn things around. How can we slow down inflationary prejus whilst looking for truls that can help us restore group. So, um, it's very difficult to predict. That's too much uncertain in the Director General, thank you for being with us today and go see conwell that of the WT I have to say that w T I came out Yeah, pretty much in front most of those organizations. Now there it is, and it's a backdrop there one percent again for two thousand twenty three and

merchandise trade. Toni Caricenzi has these numbers tattooed to his brain. He's with PIMCO and his truly expert in the short term space in the bond market. What does fixed income due, Tony, given a global recession and certainly from w t O a trade recession, the BODO market is starting to think about that possibility and these yields therefore making a propitious time for investors in attractive period bond markets, thinking the

economies will weaken. They're not sure, so there's some risk premium, you could say, in prices of various assets, equities in particular. So I think it's just the uncertainty factor that's keeping markets on edge, because we're not sure about how inflation

will evolve in particular. But as long as there's vigilance by central banks, and there will be it seems vocal arrest style in in the United States, for example, it's highly likely that the inflation rate will decline, there will be disinflation, the bond market will look increasingly attractive to investors especially if the w t O type scenario where global trade vines shrink as much as they expect, I mean strength relative to well, let's cut to the chase

as pim Co extending duration or you're loading the boat on how yield this morning, Tony, PIMCO has been underweight duration for some time. We've been reducing that. We've been we'd rather keep it close to neutral. Remember when you're thinking about the Asian interest rate sensitivity, you're you're talking about a directional strategy. If you open up the Frank for Boseige book on bond investing, you see there's a lot more to do than simply bet on the direction

of interest rates. And that's what PAMCO is trying to do right now. Just try to stay up in quality and try to not make directional best to look for assets that we think would bend but not break in a time of procession and with stand lots of different types of economic outcomes. But all that said, duration underway slight underweight given the recent drop and yield slight underweight

might make sense. But remember Tom the Bloomberg advocate has a duration of six point six years, meaning I yields moved a percentage point uh that the investor would lose six and a half point so slight underweight would it be much? You said something interesting, A slight underweight? Does that imply, hi, Tony, does that imply from your perspective

that we have not yet seen peak yields. It's different called to say there's a wide range of scenarios, but yields today are closer to their long term averages, and that makes it a very attractive time to be investing. For one. Secondly, the yields and the Bloomberg aggregate today, which is a compilation by the way, for those who don't know of treasuries, mortgages, corporates, and a bunch of other securities. It yields today the yield is four point six. Now,

how does that compare historically? Very good? It's closer to long term averages. That's one reason why bonds look quite attractive today. Secondly, where do you think the inflation rates headed? Bond market seems to think into the low twos eventually, so that yield high fours looks attractive on that basis.

And finally, this time alluded if economy is weakend there's a chance for capital gains in fixed income now, and so one doesn't want to miss out on that, And so you have to question, are you really interested in timing the diversification benefits of bonds, which, of course this year haven't been quite apparent, but we think we'll assert themselves over time. How much are you seeing, Tony, a lot of just mom and pop investors pile into short term treasuries for the first time in a long time.

How much are you seeing those cash investments really balloon in a way that feels sticky to you, that will transform the rest of the markets, because that is money not going to equities, not going to hire your bonds. I recently took a trip to Asia, Korea, Singapore, Thailand. Lots of investors there. Today I'll travel to San Francisco from New York. Been traveling a lot, seeing lots of clients talking to him on zoom, etcetera. Seems like the wagons are circling, but of course, as you could see

by the global fund flows, investors are still leering. All that said, investors seem to be willing to move into the center of what we would call the concentric circle for investing. The concentric circle would be would have the riskless securities treasuries at the center and the most risky securities at the perimeter. So investors are seeming to want to move toward the sent of that concentric circle and will slowly work their way out when they gain confidence

and take lots of things and lots of scenarios. Of course, you can envision that cause it to occur, but they're not in place yet. A Tony echoes some triples, say on secure debt for sale, Um, what kind of interest would you offer on a triple, say, social media company struggling for direction? What do you reckon the cut of the areas that bates on the concentric circle. Think of a solar system and the concentric circle looks like that. That's like going way out to the outer perimeter of

the system. So and that's a risky gambit right now, given the uncertainties about economic growth and cash flows. Because at the end, at the end of the day, what a bond ofstor cares about is cash flow. Getting is a herror, it's money back, and of course in a dour economic serials it becomes uncertain. Very diplomatic, Tony, thank you, So it was very This is the Bloomberg Surveillance Podcast.

Thanks listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom keene In. This is Bloomberg