Surveillance: Peak Inflation with Carpenter

Ellen Setner will parse of this inflation report. Is there any site out there, Professor Carpenter, Dr Carpenter of demand destruction? Uh So, demand instruction is a tricky phrase, right. It says that prices have gone up because there was so much demand that demand goes away, which presumably then brings prices back down. I do think it's clearly a hit to the consumer. From the surgeon oil prices, Tom mentioned just how much gasolute prices were up. You were both

talking about where real wages are going. I think it's unquestionable that when uh, some of the categories energy, food, that especially the lower end of the income distribution. Can't just substitute away from that's got to be a hit overall two consumption spending. But I think it's more important with this report, though, is the fact that core underperformed and we saw the rallying rates. I think if you

look at use car prices, they were down sharply. Even the rent and overs owner's equivalent rent, which stayed solid, was actually off just a little bit. So instead of a continuing upward trend to those key drivers of inflation, we're actually seeing a little bit of a softening. So in our numbers at least, and it's always hard to make a forecast, but in our numbers, we've got to the peak of inflation and we're likely to start to

see things come off, albeit gradually, from here. So if I gotta say the number, the absolute number came in above expectations. In the new Jerk respons is almost as though this is a downside surprise. What do you make of that? I think it really is the difference between core and headline. I think everyone knew that oil prices had gone up and that that was going to show through to this month's print. I think everyone knew that commodity prices for agriculture had gone up, and that that

was going to show through to this month's print. And so for the durable underlying trend of inflation that's going to be with us not just this year but next year, that the Fed may have to respond to again, not just this year but next year. That I think is what the rates market is reacting to. So how much can you really project out from this one report? We've been talking about how it's not just necessarily the peak, but how quickly it comes down on the margins. How

much does your forecast change after today's number. Well, on the bright side, our forecast doesn't have to change all that much. The core was a little bit softer. But for me, what's really important here is the pattern that we are starting to see some of that softer reading in some of the goods. We are starting to see for instances used prices start to come down. I think in that sense it's very much the pattern the trend, as opposed to the specific number. Does that pattern change

anything for the Fed seth Uh? You know, at the margin, it probably takes off just a little bit of the you know, the fire on the on the on the burner at this stage but I don't think it changes things dramatically. There's no two ways about it. Inflation is high. Inflation is too high for the Fed's comfort level. All of the members of the FED, even the historically debblish ones, have said exactly the same thing. So in that regard,

I don't think this actually changes things much. In fact, one of the points I've been making to clients is one month's CPI here there is not going to be respositive for the FED. What's gonna matter at least as much is how strong is the real economy. How much can they lean in to the strength of the economy to slow things down to get inflation under control. That I think is going to be the key well, and that comes down to the tolerance of consumers for higher prices,

their propensity to continue spending even in the face of them. Seth, what is your expectation around the demand picture and whether or not destruction is going to start to take form in the face of the higher prices really across the board. Yeah, So Ellen set in our chief US economist and her team put out a bit of a forecast revision on Friday, and we took down the consumption path for the second quarter, largely because we did see this big spike in oil prices.

Now a lot of those that rise in oil prices from the Russian invasion of Ukraine has has reversed, not but a lot of it has come out. Nevertheless, what we see in the data as a regular pattern is when energy prices spike for supply reasons, we do see a pullback overall and spending in the next couple of months, and so we are expecting to to be on the softer side for consumption Sethan. Wanting to talk about the social impact here. The integrand, Folks is the area above

or below whatever the horizontal line is. It's one measurement of the tone of the x. X in the Great Financial Crisis has an integran of negative income Seth that is small now compared to what we're going through. The agony year for certain death stiles of America has to be tangible, uh, no question about it. The past couple of years has been extraordinarily difficult for folks, and it has been extraordinarily more difficult for folks at the lower

entity income contribution um. The only silver lining there is that we do see a differential in wage growth across the income distribution, and it has been highest at the lowest quintile. So in that sense there's a bit of comfort. But I suspect for anyone who had lost their job during the pandemic, that's a bit of cold come but but Seth very quickly here, I'm so sorry, we don't

have the time. I'm looking at a middle class flat on its back on an inflation basis, unquestionably, unquestionably, and in that regard, I think the retreat of oil prices, some of it on the news of the coordinated release from the Strategic Petroleum Reserve. That's got to help some, but it's not going to go anywhere near to the

extent of making people feel good. The economy is growing extraordinarily rapidly, jobs are being created extraordinarily rapidly, and yet I think the sentiment, as measured through various surveys, is that people are still feeling fairly hard done by. And that's a very challenging thing when the macro feeling doesn't match the micro feeling. Dr Carpenters, thank you so much.

With Morgan Stanley, Seth Carpenter. She is watching the French elections is one example of the new autocracy worldwide, the strident moment that we live in, and that is Joyce Shaying, Chair of Global Research at JP Morgan, hurting cats, dealing with Bruce Casman every day as best she can. Joyce, give me the new theme at JP Morrigan. You wrote most of Diamonds forty four page letter. What is the

research theme of your shop into the rest of the year. Well, you know, we've taken half first half growth down quite a lot because of Russia, Ukraine in the higher energy crisis. I mean in Europe we're down three percentage points on first half growth. So right now what we're looking at is really the first energy crisis in the decarbonization era.

And what jam has been writing about is the need for a martial plan, something where we actually look at how we can accelerate this transition, ensure our energy security and also just get used to the world where we're in place for more volatile cycles, higher inflation, higher treasury yields still to come. So there's a lot to watch right now in the commodities markets. Um, we're beginning to see just a lot of those pressures still with us.

You know, I look here, Joyce, at the martial plan of JP Morgan, and I look at David Folk its land out the academic over Deutsche Bank saying the same thing. There will be a massive fiscal stimulus in Europe, whether they like it or not. And then I've got atmar Is seeing the giant of Germanic economics in the FT, screaming enough we need to tame inflation. Describe those two forces pushing against each other, government fiscal stimulus versus in

a titanic fear of inflation. Well, I mean we're looking at very broad based inflation right now. It's not just energy prices. I mean, taking a look at what we see in Europe, the surge in the euro Area, we see that natural gas prices have actually pushed inflation about. And looking at the US, global inflation tracking close to nine in the first quarter of the year. So there's

also rent inflation, there's wage inflation. So these inflationary pressures mean that the central banks newly are going to have to respond here, and we do see the moving fifty basis points in the next couple of moves. We do see that more stimulus is probably going to have to come online in China, particularly where growth is coming down there.

But also in other places, we're seeing now the first discussions on whether they're going to need to be some subsidies, some automatic stabilizers that are put into places energy price to stay at these levels. And we do see UM Brent oil steing, you know, above a hundred dollar mark here Joyce, At what point do rates become restrictive? How high do benchmark overnight borrowing costs have to go before

it actually has an impact on inflation. We really see the threads UM the thuds fund rates getting to two and seven eights next year and then you have more of a pause, but I think they're gonna move fifty at the next two meetings. Um you're reverted to twenty five basis coins in July and they're after But I think the issue is to get to neutral as quickly as possible and see where it settles, see if you

can anchor inflationary expectations. But to your point about oil at a hundred and the fact that China is slowing down, at what point are we looking at these dueling shocks where basically these inflationary pressures are going to take some time to roll over, are exacerbated by the shocks and we'll all inevitably conspire to a slowdown that people are

not accurately pricing. Yeah, well, everybody has first half growth down, but then they have this tilt up in the second half of the year, and that's really what remains to be seen. We're going to see a lot of um, you know, stress that comes in other parts of the world apart from the US in Europe. I mean, if you take a look at emerging markets, um you know, food inflation is as much as forty of the basket in certain countries like India, um in you know, the

the Ascan countries. So these pressures are going to be with us. And I think that you know, we've made material downward revisions to growth. But the question is not going to continue in the second half of the year. And all eyes will be on China because we are seeing that the numbers that will come out for March and April are really gonna come down materially as they increased the lockdowns. The lockdowns in China they're affect being really the equivalent of more than a third of GDP

right now. Well, of course it could have a direct impact on Chinese growth joys, but at the same time, a lot of production is housed in China. We've seen the impact has already had on company these that have production in Shanghai if supply stays constrained to a certain extent, potentially exacerbated by China's COVID zero policy. How much is the FED acting on demand actually able to make a difference. We talk a lot about the Fed's ability to engineer

a soft landing. What about their ability to actually engineer a rolling over in inflation. Well, I mean, I think there's the FED hikes, but there's also the faster q T to come. You know, we really do see it's the combination of the two things. But it's also doing fifty basis point moves to try to anchor the inflationary you know, expectations. So I think, you know, the FED is in the front seat taking the lead on this, but we are seeing that across the developed markets and

the emerging markets. I mean, there's more rate hikes to come here. But you know, I think that you know, on the oil side, releasing from the Strategic Controlling Reserve Fund, we don't think you're going to get to some of the worst case scenarios that we had thought about with higher oil prices. I mean, there are still ways in which in the oil market, that's a global market, you know, action are being taken right now well and obviously when faced with higher prices at the pump, when faced with

higher prices at the grocery store. In theory, at some point higher prices are going to alter consumer behavior in a more material way. When do you anticipate that real demand destruction may kick in. I think that that's still a ways away. I mean the mobility, the summer driving season, and that's kicking in, you know. I think that that demand destruction will happen, you know, at some point um in time. But you know, we are not in the scenarios now where we see oil over a hundred and

thirty dollars for beer. We're more in the range of looking at UH one dollars, you know, still seeing oil prices very luvated. But I think that you have a lot of pent up demand here still as the mobility comes back online. So that's gonna take some time, and I don't think it's going to be something that we see in the next quarter or something. Joyce, let me ask you a sell side question, that's what on everybody's

mind right now, whether big tech. I mean, we saw the Amazon bond deal yesterday where they from this see go out. I don't know. Maybe you've got a phone call from Mr Jasse. I can see Jesse get Shane on the phone. We need to move five billion of this. What what do you think about the vibrancy of big tech in America? You know, look, I think that this is a pandemic that has really just changed the way that we live. That we were the dependentization, um, the

dependency that we have on big tech. So yeah, we still see that there's pressures that are going to be in the equity market. A lot of that coming off of the growth numbers, the higher energy prices, UM, the

fact that we had just such a massive rally. But I don't think that changes the overall story, um your vortex for what we actually need now as consumers, as we're coming back into the office and getting back to normal, I do want to just ask you, Joyce, as you talk about big tech, A lot of it has to be tied to the bond market, which has given a

lot of the relative valuation trade too big tech. How concerned are you about the bond markets I don't want to say breaking, but breaking in terms of the lack of liquidity as the FED withdraws, how much is that going to caller the narrative in a way over the next six months that perhaps is different than even the rate hikes. Well, I think that you know, now ten year yields are in the three year high. They're finally looking like their fairly price. But I think that has

further to go. Now this year, we're looking at about two hundred billions of treasuries that will run off this year compared to um UM relatives to our baseline forecast, due to a faster normalization that's occurring. I also think that the Fed is slowly onboard on selling um you know, MBS um to get to an all treasury balance sheet

by the middle of next year. So I think, you know, MBS sales are a real possibility in three I think that the sales might actually take the form of setting a floor on the runoff rather than a cap on the runoff. But I think Treasury, you'll still have you hire to go here um and um you know we have the stage that for the balance sheet runoff nuns and may um you know, and right now some of those higher energy prices seem like they were in checks. Joyce,

thank you. It's been way too long. We've got to do this more often. I'm thinking weekly, Joyce. Put it on acclendar, Joyce chain of JP Morgan ahead of all their research effort there as well. Right now to bring you up to date on the dynamics of this bond market, this original space. Robert Tip joins us chief investment strategist ahead of all of global bonds at PIGAM Fixed Income. How much bloods on the street, Robert, let me cut to the chase. Price down means money is being lost?

How much tremendous amounting. This is a record move in bond yields we haven't seen for you know, thirty years plus and uh, even greater dropped in price because you're starting from low yields, which means prices are more sensitive to yield movements. So it's been a tough period and we've really jumped the rails in terms of growth and inflation, and investors had gone a long way towards handicapping that right here. Uh, and we're kind of at a waiting

station in the market at this point. You can see today that I think in the price action where the market is rallying in the face of what we've been warned by the President's gonna be a high inflation number. So suggesting the market is pretty oversold here, at least short term. Okay, over sold? Does that mean that you're buying? Yeah, I mean, you know, we don't. We don't uh discuss client accounts and short term activity. I think though it's

reasonable to expect. This is what you typically get in these cycles is that after the market has gotten say two d basis points ahead of the FAT, the market is that far ahead in terms of pricing in rate hikes, it's typical to get a drop in volatility, consolidation and rates, and even a consolidation and risk markets. In other words, some retracement tighters, some improven in performance. Well, the market waits for the FED to catch up h and then re evaluate what's going to be the next step in

this process. So you're not exactly a screaming pool here. Basically, what I'm hearing from you, and this is something that I'm actually I've been giving a lot of thought to, is that if suddenly we had been talking about how yields of two on the tenure would break the market, would break the economy. They are not, and that is because growth is as fast as it is. What kind of messages that send you over the longer term about how much higher yields can go than people previously we're expecting.

Basically the threshold has gone up dramatically because of the growth picture, right, So I think there are number of steps here. First one on your comment that you can't get a big rally here, you can't be very optimistic here. Remind you last year that in the midst of what was the strong economy in high inflation, then tenue rallied from down to one fifteen only two then turn around

and have to reprice for what we have now. So I think it's um you want to jump to the conclusion and that this is going to be a one way much higher and yields from here. In terms of breaking the economy, though, uh, you know, you're looking at a housing market that is incredibly strong, with very strong price appreciation and some underlying micro demographics that are boosting activity. And so as a result, uh, you know, having your mortgage rate go up to five percent, it's not clear

that's going to break it. Corporate performance has been very strong, and it's very common that arise in rates does not you know, necessarily kill the earnings per share outlook for equities, and so I think you're looking at a very strong economy with very hyphenomenal growth and that's why it's able to tolerate the interest rates increases that we've seen so far and may be able to tolerate more. Is that the signal you're taking from a yield curve that is

steeping back out to north of basis points. I think the part of the yield curve to look at, and Grum and Pal I think tried to direct us to this. Another FED research has as well is the first two years of the curve. The first two years of the curve was incredibly steep. And when that's the case, in other words, the three basis points, you know, great hikes from the start of the cycle. That is a sign of Feds be raising rates because the economy looks good

and they have runway to do. So that's the part that's typically a good indicator on the economy. The two tents curve is signaling that after they get there, and the market is banking on a soft landing. That is not going to be the important call. I don't think until at least six, if not twelve to twenty four months down the road, once they've taken up some of the slack on the front end of the curve, then the markets I think will be in the right place

to reevaluate whether this recession or not coming. But I think it's way too early. Uh. And that's the part of the current to look at is the first couple of years, not the two tents, all right, So you're looking more where the feed is looking. How do you think the fete is viewing really ills that are still negative?

And how credible the market seems to believe that it is. Yeah, I think there's so many moving parts here that investors are you know, much better off looking at nominal yields, looking at overall conditions and whether they're tight or loose, uh, and then letting the break evens the expected inflation rates, and letting the real yields drop out, because right now, you know, with inflation and let's say it's eight percent in a thirty eight basis point that funds rate, you're

looking at almost a negative seven percent meal yield at the front end of the curve that's going to destroy the entire curve. The liquidity of the tips market will compound that and some of the dedicated investor based market segmentation and distort that as well. So I think going right to the real yields is the most confusing way to try to unravel it. Raber Tip, thank you for that. Totally agree there on the residual focus is a little bit out of let lack, and you gotta look in

a more complex analysis of inflation adjusted yields. Mr. Tip. Of course, with Pigam, we moved to Ukraine now and we do this with truly an expert on human rights. Julie Norman is co director of UCL Center on US Politics, but her work at American University is on the heartbreak of terror, in the heartbreak of human rights. Many talk it, she does it. Dr Norman, we gotta cut to the chase. You were unprepared. We were unprepared for what we see

in Ukraine. Forget about the Hague, forget about war crimes. How do you respond to this in real time? Well, Tom, it's certainly horrific the images that we've seen, especially over this last week or two and unfortunately they are unlikely to stop for expecting even more atrocities in the next wave of the war, which will most likely take place

in the East. As you mentioned, there's been a lot of discussion about war crimes trials perhaps in the future work or nentrepreneals tend to be quite time consuming even when they do take place. There's a lot of questions whether the International Criminal Court would have a jurisdiction over

what's happening now anyway. But the important thing to remember two is those uh, those type of litigation don't usually deter any actions in the moment, and so even if there were to take place later, they would not stop putin now. Um, so what we have to do now more is focus on how can this conflict end. As long as the conflict is continuing, I expect that we

will continue to see the kinds of atrocities that we saw. Unfortunately, so that's now a too h a double sided coin of diplomacy in the military side, and need to be very delicate here, Professor Norman. And that is reports or speculation rumor of chemical weapons being used down by the Black Sea. How do you determine that in your academics do you look for like canisters that the stuff was used in or am I thinking from World War One?

How do you detect chemical weapons? Yeah, well, obviously depends on the type of weapon that's use of, what kind of residue is left, what kind of as you mentioned, like canisters, are these kinds of things, It tends to be against something that is difficult to often show in the moment, especially in a situation like Mario Paul where just access to the city has been very limited. So we have heard some of these reports, but they have

not been verified. It's also important to note that again chemical weapons take many different forms, and we would consider say tear gas a form a chemical weapon, but not obviously one that is you know, is deadly in that kind of thing. So the scale twitch a weapon has been used, usually you have to look at what actually

is happening to people in that area. It usually, again you have to have some kind of forensic evidence to show the impact as well as actually having either residue or having canister or something like that from things like phosphorus. But again it's not even clear what chemical weapons has been alleged to use, much less if we're where they were deployed um. But again this is something that we

were aware of, has been a possibility. Do we said why this is so crucial is because of the potential response to the use of an escalation or something that is new and more horrific in this war. What do you expect the response to be at a time when the United Kingdom has comed out and talked about NATO deployment. Well, the UK and NATO have obviously been trying as much as they can to de escalate the conflict, but at

the same time to support Ukraine's through military aid. As you noted, what would perhaps change that variable would be if there was a deployment of either a tactical nutier weapon or a chemical weapon. NATO has been pretty close to the chest in terms of what their options would

be after that. It's expected that there would be more of a robust response, but again, the alliance up until this point has been so committed to trying not to get boots on the ground, not to get this actually becoming some kind of even broader conflict, and it will be very difficult to find that balanced if indeed something like chemical weapons are used. Professor Norman, thank you so much for joining us this morning. This is the Bloomberg

Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. 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