Surveillance: Smart Fed Policy with Garvey

prodigious econometrics as well. I want to go to the econometrics of the moment and really within that and the shock of all the fancy mathematic you deal with on dead and central banks every day. What's the overcome by events thing you worry about out there? What's the obe out there that we need to pay attention to. I think you've got to look at the shape of the curved tom to on the sound that they is a

really unusual set of circumstances. We haven't seen the degree of inversion that we're seeing now in the past four or five decades, and that tells me that that the back end of the curve is pricing in a huge degree of uncertainty. I'm not convinced it's entirely the rate cut narrative. I think there's a bit of geopolitics out there. I think there's the reality that the central Bank is holding lots of bonds out there, and I think there's anchoring.

I have this conversation with traders all the time. They say, oh, we think the tens they're going to go back to two percent, and I would say why, and they say, well, that's because that's where it was. We're not going back to where we were. I meant, this is brilliant and there's a lot to unpack there, and we don't have a time to do the unpacking today. We'll do our

for Bosi later. The bottom line is we are at a fourth standard deviation move off the Great Moderation going back to nineteen eighty five, and that's part of that yield curve spread. And whether if I look at two years compared to three years, as you say, truly we're in new territory, does it signal depressed growth or a duration of subpart economic growth. I doubt that very much. And here's why. If you look at where neutrality is,

I would suggest neutralities around three percent. Why three percent? Three percent is two two and a half percent off lation? A half one percent really yield And if I look at the back end of the curve, it's not discounting a break below three that's usually important for me. So I think we've had this unprecedented degree of monetary tightening. It's still in absolute terms, leaves us at approaching five

and a half percent. Big picture, that's not huge. We've come from zero to five and a half were not huge. If we get there and we're done, and the next move is down, and let's suppose a FED gets down to three percent, that's a very tolerable outcome, And it doesn't suggest anything like what you've just scribed. Work with the balance of risks, which do you think is more concerning the risk of inflation persisting at a higher level or the risk that rate hikes could really kill the economy?

The former is the biggest risk. But I think I think the way the FED is pursuing policy here is it's kind of smart. I know the FED gets a hard rap because of missing the early rate hikes, but twenty fives from here is quite smart. They've got to keep on twenty fives and level off, and at a certain point in time, this degree of tightening has got to hurt. You look at lending standards out there, they are as tough as they've been since the Great Financial Crisis,

but we're not seeing that in the data. And this is really the concern that's causing a lot of people to rethink the balance of risks once again, the sort of you know, schizophrenic nature of disinflation or not. How much do you look at the recent data and the stickiness of inflation and start to question your thesis and start to question if perhaps it's not really restrictive if you look at policy rates right now, yeah, you're right least we're not seeing it in the data for January,

potentially for February. There's a weather impact there, there's a seasonal adjustment factor there. If you stand back and look at the direction of travel for the data over the past year, we are seeing the impact with the exception of the labor market. The labor market is where we have this remarkable anomally where we still can't get people to work, which is incredible to be in that situation

right now. That is going to creek. Though we've got to remember that the replacement number in payrolls is one fifty. Once we get to blow one fifty, we're in growth recession territory. If we go mildly negative, we're in recessionary territory. We don't have to go to a deep recession territory, but the indicators we're heading in that direction, and it'll be over the next couple of quarters that we see that come to bear. If you want to peaka payrolls

for next Friday, not this Friday, but next Friday. The estimates so far to twenty the previous number five seventeen. I'm not sure what the estimate is worth at this point, and I'm not sure what the previous number is worth either, because we can have some months to revision in one way one way or the other. So I won't put too much weight on that. Probably, I think there's something I'm going to walk away from this conversation with from you. We're not going back there. There's still a lot of

people who think we're going back there. And if you look about the arc of like the last twelve eighteen months, it was we can't live with two percent, we can't live with three, we can't live with four, we're about to live with five. What is it that's changed? Do you think in this economy that maybe people haven't grasped the people that are sitting there saying we are going back there, what don't they get we also count live with five. By the way of five percent is ns

an equilibrium and the equibinate is down to three. This is a really unusual set of circumstances, John, I mean that there are so many anomalies here relative to previous cycles. I think people are not getting a lot of stuff because it's it's tough, it's it's it's all over the place. And it goes back to the inversion of the curve and how unusual that is. And I would say the other big anomaly out there is how calm. But I would say it's anomally it's a positive thing. How calm

the system is. You look at where banks PRINTCP very tight, you look at where credit spreads are very contained. There's very little concerned about anything breaking. So when I say we're not going to go back there, show me a reason to go back there. Something's got to break, and so far something hasn't broken. And until we get that, you know, I think up to five percent down to three percent, it's a pretty tolerable outcome. It includes a bit of a growth recession, but not Tom's description of

Tom's gloom and armaged. It's been a surprise to me, so to be honest with you, particularly in Europe, not just the United States least. So we've talked about this. Just the idea that we're now talking for in Europe and the Italian bond market spreads there is still pretty contained right to the whites we saw last year, which suggests we can live with higher than two percent in terms of what that terminal yield can be, as Park was saying, and we're not going back to zero a

big time soon. People say that, but have they really believed that. In that believe we can go back to pre pandemic trends, love inflation, low growth, interest rates, get a long big tech. A lot of people still think that this was great, just awesome. Come by more often.

Para of ig financial markets on this debt market. Joining Michael McKee is of course Carl Ricadana with BMP Perry by the Chief US Economents again out eight beeps on the ten year or four point zero eight percent to thirty year bond is a stunning four point zero three percent. I want to allude here to the complexities of productivity. I'm going to call its three ratios lots of partial

differentials there. And the bottom line is people like you are hoping and praying that our post pandemic productivity, that our post pandemic efficiency is good. That data tells me maybe not fold productivity into this volatile market debate. Well, the productivity numbers, if we look at them in year on year terms, are actually deep into negative territory, almost down two percent. So we have very strong job gains

and an economy that is slowing. So that's not really sustainable, but it can kind of run that way and inconsistent. The inconsistency can last for you know, at least multiple quarters unit labor costs of a three handle. Does it lead to the gloom of a wage price spiral? Does it lead to a gloom that we're not going to get quiescent wage growth. So let's look at that unit labor cost number and year on year terms, and it's even more disturbing. It's six point three percent, as I

see in the bloom table here. So what six percent plus on a unit labor costs if we look at the employment cost index running at five percent, These are the elements of wage price spiral. And I know Cher Powell has said that he doesn't think we're in a wage price spiral at the moment, but once you're there, it's too late and it's a very expensive problem. Historic this factors into how the FET is thinking about that annual average productivity decreased one point seven percent from twenty

twenty one to twenty twenty two. The BLS says, the largest annual decline in the measure since nineteen seventy four. Wow, that's it, and that that precisely gets back to four to five years before vulgar and shows the scope and scale of this historic moment. I just want to point out Lisa Rickadona can come back because he uses the Bloomberg terminal. It's good how that works well. But Carl, aside from your usage off the Bloomberg terminal, I am

curious as you pass through this. We were just talking before these numbers came out, that you were looking for more evidence that there was something stickier in nature about these numbers that we got out in January. Is this leaning you a little bit closer to that moment. We are seeing persist inflation everywhere. That's been a longstanding call of my team at BMP. We're seeing persistent inflation everywhere,

including in wages. And there was a little bit of a rollover in Q four and so team Transitory was put on their sneakers to run a victory lap. And it's pretty clear that that has kind of washed out now in the most recent data, So we have to see how far this is running. But certainly, you know, I see evidence of labor markets softening everywhere I look, except for in the economic data. Right if you open the newspaper, you see layoffs here, and hiring intentions down

and all those signals. But in the actual macroeconomic data, you're not seeing the cooling of conditions. And we have seen this. There was a Wall Street shortle article about this as well. I am looking right now at ten year yields getting close to that four point one percent, four point zero eight percent rounded up to the nearest tenth.

I'm a hundred. I'm curious from your perspective, whether we're getting to a perspective where it is a new regime where productivity is going to be lower, Labor costs are going to be higher. You have a different kind of labor market and workforce that's going to require more investment. Are you seeing enough signs that we are there? When you have that kind of heat in the labor cost

pressure series? On an extended basis, businesses have no alternative aside from making the capital investments, from the technological technological investments to drive a productivity rebound. Just real quick, the broader story here, We surged in productivity coming out of the pandemic, right, so now this is the correction period,

so we shouldn't get too depressed about the low productivity number. Also, the BLS notes that they applied the historical revisions that they put into the Jobs report and into the CPI reports to this release, which is probably why it is such a huge show to the two of you here, and you got a minute and a half to warble gaily. As Lisa mentioned earlier today, blah blah blah. And the answer here is does this shift the fifty beeps? At next meeting debate, Michael oh I would say no, this doesn't.

I mean, we have too much data coming out ahead of us that's far more important than this, Jobs and CPI will have a much bigger influence on the FED than Carl believe. They will warble gaily in uniform harmony with my you're not supposed to agree with that. The inflation report that's going to be much more critical. This is kind of stuff we already knew from the look

like the inflation report. If we look into the details, look at the US service sector inflation, which is what is really driving the FED reaction function is showing very little evidence of any kind of disinflationary trend, and you won't see that with wage pressure. It's continuing to accelerate higher.

And tomorrow we do get at ten AM the ISM services index, and that is going to be key, not just the index, but price is paid for that given the fact that we saw manufacturing prices paid increase to the degree that they did. If you see that kind of moving services, could that really move the prices matter?

But it's an activity gauge. So the new orders, the production numbers, that really will tell us more about this potential reacceleration thing about the European numbers too, as they were largely even buy food prices, which has not been a big issue here. I mean, we've had elevated food prices, but we've seen being driven by the UH service prices much more. What's been happening. Had you were talking yesterday about with or without shelter? I got the three of

your pilot on me together. Mike, please, you were talking yesterday about the differences between the way the US and Europe dealt with unemployment during the pandemic. Europe kept workers on the job by subsidizing employers, and so the employers didn't have to go out and raise wages as much as they've had to do in the US. Well, let's continue this discussion. We're go into a data check now. Lisa, help me here, because I don't see much spread movement.

I do see a ten year real yield come out to a one point five percent, but in the actual yield space nastack down one percent here on the nastack one hundred. But Lisa, four point zero seven percent on the ten year yield is just stunning. The nominal yield

is really what I'm looking at. Not just after the thirty year it crossed four percent for the first time, it went straight to four point h two percent, And we're looking at just this real trajectory of higher inflation for longer being gamed out in some of the yield structure, and that I think is a game changer on radio and television. Thank you for continuing with this pre AMISERA will join us here in a moment. We thank Carl Ricadya of BMP Pariba and always Michael McKee for driving

this stunning debate to put things into perspective. I'm going to do that right now. Priamisra and Lisa Bramwits are far too young to remember when Bob Redford stood outside the Plaza Hotel in the way we were and with Barbara Streis, and they said, memories data, DA, DA, guess what productivity dynamics are back to nineteen seventy four. Someone who has been expert at measuring this over to our financial bond market is Priamisra TV Securities, and she joins

us this morning. We're looking at the history of this pre up and we're also looking at your brilliant call an inversion. Although some have been brave recently and said look higher yields, I get a coupon along the way, I want to be brave here. In February and March of twenty twenty three, did the bravery the courage? Did it slip away this morning? Thanks for having me on. So no, I think you have to be patient. It's hard to pick the absolute topping yield. You know you're

talking about having confidence. I don't have a ton of confidence in the front end because you know, we know inflation is sticky. We know it's post services X shelter is driven by wages. It's a very tight labor market and companies are holding label. So it's possible that inflation remains persistently high through the year, and the Fed we think in twenty five basespin instruments may have to keep

hiking maybe five seventy five, maybe six percent. So you know that very front end of the yield cuve I think is very driven by data in the near term, the long end. That's your view, that's your neutral rate view. And I think the data is strong on the consumer, on the labor market. Not because policy contrastrictive. We are in restrictive freditory. It's because the lags have not worked through. I mean, the fat fund rate crossed four percent only

in December. You have to give the economy more than two months for it to keel over. And I think, you know, that's why the long end is selling off. People expect that interest rates don't matter. I think interest rates matter. They just take a while to show up in terms of business investment decisions or spending decisions free I want to go to the It takes a while.

If I've got a seven standard deviation, move from very low thirty year yields out of very high thirty year yields stunningly out above the great moderation, and I go back to whatever the new center tendency is. How long does that take? Is this a matter of six months or is it a matter of six years to get back to normal? So economic theories suggests twelve to eighteen months from monetary policy to work through. I mean you could argue maybe it's a little bit shorter, maybe it's

twelve months nine months. I will say something that maybe making the lags longer this time is that the consumer entered the hiking cycle with a large amount of accumulated savings. Now those savings are running off. We're tracking, you know, by the end of this year. We're thinking in the third quarter those savings are largely gone that's when the consumer has to start to reckon with higher interest rates, tighter financial conditions, maybe a job market that's not as strong.

I mean, there may not be a lot of firing, but job openings start to come off. So I think it's more or later this year that we think consumer spending slows down the job market starts to weaken. So I don't think you're waiting six years. But we're watching those savings numbers and the savings continue to come off. But you know, today, if I have a job and I'm making five percent wage growth, wage gains, and I've

got savings I'm spending. I think we're just saying be careful in extrapolating that, because those savings will run out by the end of the year. How much conviction do you have to load the boat on ten year to load the boat on thirty year treasuries? So I have much more conviction on the ten year and the thirtie than I do on the front end. I don't know about loading the boat. I use the word I used.

I guess some few weeks ago when I started to leg in, I would leg in some more because you know, I think you're at we entered some around three eighty, we lenter some more longs at four percent. I think the Fed's telling you that they have to engineer hard landing. They're not going to say it because it's very hard politically to get that through. But how do you get inflation down without a rise in the unemployment rate? So the FED will have to engineer a rise in the

unemployment rate. Then these four percent tens will look really cheap. But it's for the peak of four ten. Now maybe it goes to four twenty five, So I think you want to have some dry powder to keep adding to it. But I think you know these levels in a long term sense. I don't think our star is higher or the neutral rate should be much high. I think the FED is committed to two percent inflation, and we've seen productivity. I don't think the economy can handle very high real

rates in the long run. This is such an important point, and it goes guess what poor Carvey was saying, or he said, Listen, people think we're going back to the same kind of regime we were in prior. You're saying we are going to go back to that regime. What gives you confidence other than just the FET is committed to a two percent inflation regime, especially if a two percent inflation regime is different from the prior ten years,

which it wasn't a two percent inflation regime. As Time mentioned, it was a sub two percent inflation rate, right, So I think there are some structural factors that might be moving inflation a little higher. So if we were sub two percent, maybe the next ten years will be a two percent number. But I think inflation does. If the FIT thinks they want to get to two, they're going to keep policy restrictive for a while. They're going to keep that front in, you know, not cut rates anytime soon.

Really our star or really equilibrium rate, those are driven by productivity, demographics, saving the cloud. I don't know if any of this is right, you know, after COVID, so maybe it's not zero. It's fifty basins points, all right, but we're well north of that in terms of market pricing of real rate Priya with respect of the giant. Stanley Fisher, who I would suggest codified ultra accommodative as his work as a vice chairman and Ben Amma's at

New Ones just writes this up. I've never used this phrase. Before Priya and Ben doesn't predict this, but he suggests, does this data drive us out to ultra restrictive? Is the larger pendulum here from ultra accommodative out to ultra restrictive. No, I think it's fair. I mean the move in rail rates, it's not just a front endrail rates. Look at where ten year rail rates are and the speed of the

move over the last year. The extent of tightening, I think in move us from ultra accommodative to ultra restrictive. But we're not seeing it in the ITA yet, and so I think this is where we want to be patient. I don't know if the FED can be patient. Can you know, are they going to feel the pressure to go faster, go higher. We actually think they're going to be patient and go at twenty five, try and feel their way around that end point and then keep it

there for a while until inflation comes down. But yeah, we are in restrictive editory. I think there's no question. We just got there pretty late last year though, very good Prea measures, Thank you so much for joining us from the fixed income fallout shelter. She is with TD Security. Dani joins us now with wet Bush here on his enthusiasm for a musk automotive. Dan, I look at the desire for a cheap electric car. Everyone else has the

same desire. I'll leave it up to your Nissan, etcetera, etcetera. Isn't he competing at the low price point with five to six, seven, eight other vehicles? Look, I mean no doubt to hit the masses, you need a sub thirty K vehicle. I think what Must showed yesterday and the testa vision is from a production and scale, and they're at in Mexico batteries that I believe could come down thirty They're now going to be able to hit those

and hit the masses. And I think ultimately it's a flex the muscles moment for Tessa specially a lot of the industry stumbling, Okay, well this is fine. But as John mentioned, and I saw a stream of disappointment over this investor day, there was a stream about the Golden Sex investor Day, but it was nothing. What was your take on two guys in black T shirts up with

Mike's given an investor's day. I mean, I don't get it. Yeah, Look, I think these investors day, Look, we've seen it with Apple and Cupertino, you tend to come out wanting more and more meat on the bone. I think for Tesla, as we've seen before, they lay out the foundation, sometimes don't unveil the actual vehicle. They've talked about two new vehicles coming out, but but the last thing they want to do is sort of, you know, get ahead of this.

I think this is something there will be probably a separate event, but I think the foundation to get to three to five million vehicles and eventually twenty million. It's there and I think ultimately that's why, you know, I believe, along with Apple, most transformational companies in the market. Dan. There's been a lot of narrative about how companies are moving their supply chain out of China, including Elon Musk, despite some of his rhetoric supporting the cause in China

and supporting his business there. How much credence do you put into this is just just anecdotal specific incidents that don't really move the dial, or is there a seizemic shift out of China to insulate some of these companies from the geopolitical risk? Yeah, well, normally it's smoke and mirror type Beltway talk. I think this is real in terms of Flation Reduction Act. There's a real incentives from a tax perspective. That's why you're seeing more and more

of a build out in around Austin. I think you'll see more of a build out in Free Mount as well. But we're seeing in a cross path. I think you're going to see more come to the US, but no doubt right now and it is for you know, called the next three to five years. China is going to continue be the hearts and rungs of the supply chain, and I think CASSLA is just really sort of balancing between China and non China. That's why you're seeing that

build out now in Mexico as well. Dan, how do you game out the market risk tied to the presence of a lot of these tech companies and I'm including a test light in that loosely because it could be an industrial company. How do you include the risk of increasing geopolitical tensions between the US and China disrupting supply chains, forcing a more rapid shift in some sort of supply chain issue earlier that would cause some of the margins

to compress. I mean, look, just to put in context, Apple, if they if they went full in and wanted to move production out of China, best case, in the next three years, they can move five percent of production out of China. I mean there this is such the hearts and lung. It's almost cemented. So it's something where it would take a long time to start to move five

camera cent production. That's why the reality and we saw it with Tessa and and Apple in terms of the zero COVID issues in December, I mean, really at the mercy of China and Beijing for now, although slowly moving, you know, in the opposite direction, Dad, what were your February channel checks on various and sundry tech names. I mean, it's holden up much much better than feared. I mean even coming out of Asia not seeing any sort of supply chain cuts for iPhone, which I think is important.

But I think what you saw from salesforce and across the board, you know, this is not necessarily the minute that yell fire in a crowd theater. In terms of overseeing, damn, it'd be a crowded seat for some of the parts analysis from you on Apple. Somebody asked on the show the other day some of the parts, and I said, I really don't know because nobody wants to mention how high that's. This is just two one statistic is Apple

one hundred and fifty dollars a share? What's some of the parts, I mean some of the parts bull case gets you to two twenty five to two forty base case two hundred. I think the big thing is the services business, and that's a permanent rerating that we see there. And now when you start to see more and more, specially without the next iPhone, and you have twenty five

percent the base that have not upgraded. I is this doctor that's going to have a two in front of it this year despite the macro and obviously many negative attacks. Where's the two come from? And the numerator and the denominator just pe or price to cash flow or price to record share buybacks? What drives it over two hundred? I mean it's really services. I believe it's one point three to one point four trillion. Of course you have the franchise hardware, and then you start to look at

the capitol allocation program. I mean, that's what drives you anyware from that low to mid two level. In terms of where I see the stock going down just to finish on Tesla. If yesterday was so good, why is the stock down six percent? I think it's just a typical sell in the news street always wants more stock cells off the heaters come out. But also in terms of the path, in terms of record deliveries where they're playing,

I think this is more flex than muscles. More we be buying on the selloff coming out of these events. What about the cyber struck down, what's happening with that? Yeah, I mean, look, I think this is something where by the end of this year you're going to see ultimate deliveries come out production and it's important, and that's why I think there's ult to me lease the groundwork for what we see is the next vehicle, you know, from the Tesla ecosystem. Did you get enough from them yesterday

on that release? I felt yesterday they basically doubled down to that target's going to get continue to be there. It's not going the goalpost. You're not going to get moved out further. I think a year from now, you're driving round Monhan and you see cybertrucks. Okay in the wild, Dan, I's a wet bush. Thank you, Dan, appreciate it. As a White. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday,

starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and this is Bloomberg