Surveillance: Supply Constraints With Le Maire

is a joy with Amrie Harden in Rome. It is entirely appropriate that Maria Todeo is with us, and she's from one of truly the most famous embassy buildings in the world is the Palazzo Finacea, and it is the jewel of the sixteenth century. And Maria I would suggest that Mr mccrown the people of France have to spend zillions of francs every year keeping it in wonderful restoration. They probably do, but you know, the French do have a niver beauty. And on that note, we are going

straight with our guests. Unmail. Always nice to see you, French finance minister. You have an important meeting. But before we go into the economics, I want to talk about the politics your president. I mean, when mccron is meeting with President Biden. The last time they met together was a very different scenario than the submarine crisis happened. Are you making peace this time or are you still angry? I don't know. We are on the process to make peace.

Of course, we have been disappointed. Everybody is aware of that. But now this is the first step in the way of rebuilding trust and confidence between the United States and France. And what's that going to entail? Is there anything specifically that will come out of the meetings. I know you don't speak on behavin, so I would attend the meeting with President Biden and mccon. But let's wait some minutes

before explaining anything about this meeting, okay. And you're also very involved in the O City deal, thecent compermaniment tax. We know that this is something you've worked on for years. It finally does seem like it will be agreed in Rome this weekend. How about the implementation? However, in real life, how do you put it to work? It is a

key agreement and now the key question is implementation. So we will do our best as the next EU presidency, the fronts will have the EU presidency to implement the tupidas of this international taxation, digital taxation and minimum taxation. Our goal is to have this international taxation system being fully implemented, no letters than twenty three. And what's your message to Facebook, Google? Is it prepared to pay more? They have to pay, so how much more and powerful

they're making profits, they have to pay. This is fairness And you think they get that now, I think they get that. But let's have a look at the consequences of the COVID crisis and the econdemic crisis. Facebook, Google and all the digital giants of the big winners of this crisis. So it's fair that they have to pay the due level of taxes. And you know you mentioned the economic recovery. We are seeing in Europe that it is speeding up, but we do have problems on the

supply chain. I know that's something that you say. You're also concerned in terms of the big French names that operate globally. How big an issue is the shortage economy? Do you buy into this theory that we're heading into a period of type types? Very good news on the economic recovery. You know that the last figure for funds for the third quarter of the year is three percent of growth, which means that we will reach our goal of having six point twenty of growth, and we already have.

We covered the same level of growth and the one we had before the crisis. So that's excellent news. The economic coqwy is quick, it is rapid, and it is solid. Then we are facing the negative consequences of this economic recovery. Bottlenecks, shortages on the labor market, on the semi conductors, on the whole materials. It might affect the level of gowth

over the next month and over the next years. It means that we clearly need all the twenty countries to address the issue and to find very concrete solutions to these bottlenecks. And of course, feeding into this as a debata around inflation yesterdays, who used to do your job in the past. She said, it's it's heating up, but it's temporary. The factors are pushing up inflation will fade away. To buy her theory, yes, I fully share her point

of view. I think it is temporary inflation. Nevertheless, once again we should be very careful about this question of bottlenecks. Let's just have a look at the question of semi conductors. Now you have the automotive industry being directly hit by the lack of semi conductors, which means that the right solution, and we share the same point of view as the one expressed by Proson Biden, is to be more independent.

Mccommed it very clear. We won't Europe to be more independent, to invest in new factories so that we can have our own semiconductors, not being too much dependent on Asia, on South Korea or other nations. And Europe has made that very clear too. I want to also follow up on the e c B question. I know you don't want to talk about the central bank, but yesterday we did see markets pricing that there will be an entrance rate hike by the end of next year in Europe.

Is that premature? Does this economy still need more stimulus? As a market reading it wrong? I think that we have to go step by step. The first step was to protect our salaries and our companies against the most important crisis since nineteen nine. Second step the economic recovery. We are successful on the economic recovery. That's very good news for all of us, to the United States and Europe.

The third step will be to come back to some public finances, but we should not hurry up in coming back to some public finances or otherwise you run the risk of killing growth. And the best response to the economic crisis is more gross sustainable growth for all the people. Just a very final question energy. This is a big conversation in Europe. We're seeing the bills are going through the roof. Your government has announced measures to help. Is

that on households? Are you willing to work more with Russia perhaps on that front or does it prove the case the nuclear energy is the French way is actually valid. She proves the case that nuclear energy is one of the best solutions. If you want to be dependent on Russia and on vere putting, that's your choice, that's not

my choice. My choice is to have fronts on the open countries, being totally independent, which means investing more in nuclear energies, investing more in renewable energies, so that we can have a mix which makes Europe fully independence from the other countries, perhaps more more French, less German, at least on the energy energy, more French rather than German. Yes, okay, well one of them. Oil. Thank you so much for

your time. Always like seeing you, and I hope of the meeting with the Treasure Secretary goes well, thanks so much, Thank you. Tom all right today, oh thank you so much. On radio and television worldwide Maria today O from the Embassy of the Republic of France in Rome. Were the reset view on the American economy with Bank of America. Michelle Meyer joins us. Right now, Michelle, what have you

done to reset off of two percent yesterday? UM, So we were tracking right around two percent, so it came in pretty close expectations given all the high frequency data we were looking at UM and we are holding to review that the fourth quarter should show a rebound. We're seeing stronger signs of consumer spending. When we look at our aggregated UM card data, we're seeing a really healthy UM move higher in spending with UM the services economy red gauging UM with potentially an early start to the

holiday shopping season. So we think we're going to see stronger consumer spending into the fourth quarter, business investment continuing, and some further contribution from inventories. There's a while to go in terms of inventory cycles. So our foecast is six percent real GDP growth. Thank you four which is again and I pick up from the third quarter. Major Inside Baseball, Michelle Meyer, how can you count inventories were

the upset of supply shock? Okay, so this gets wonky, as you can expect, but for gen let's just do it. For GDP calculations, it's the change in the change in inventories. So if you're simply contracting by less, it's actually a positive contribution for GDP growth. And that's what we saw in the third quarter. Inventories were still down, but not as down as they were in a second quarter, so

that added two percentage points to GDP growth. So we were so far away from a point where we're actually adding to inventory levels, but simply subtracting less will support the GDP adding up process going forward, Spending will be a key issue, Wages a key issue. We just got some spending data. How much does that enlighten us about what happened with a third quarter GDP reading and what

we can expect going forward. Absolutely, I think the consumer is very much what we should be paying attention to. And Lisa, as you noted, it's important to understand the money in and the money out right, So I a hundred percent agree with you that the wage data this

morning was by far the most important statistic. That was a big increase in the employment costs Index UM, and that shows that there's more purchasing power for the consumer, but it also tells us that there's more inflationary pressure building in the broader economy. Businesses will be able to pass more of those costs on they're doing it. We're seeing in terms of these price pressures UM. But I think the big picture for the consumer is that there's

still a lot of cash out there. There's a lot of availability to borrow to the extent that that's necessary. We are seeing some pick up in UM spending on credit cards amongst lower income consumers UM, and the savings rate, although coming down in today's report, is still pretty elevated. So I think the extent that consumers have items to buy, are feeling comfortable re engaging in the services economy, we will see that play out in the data, even if

it means coming with more price pressure. Michelle, let's just sit on that employment cost index for a minute, because I just did the data and this is actually the highest read ever in data going back to the I mean, this is a shocking increase in wages in how much is that labor is demanding. What does this mean in terms of the stickiness of inflation and frankly, the response from central bankers as the FED meets next week. Yeah, So the employment cross the next is the Fed's preferred

measure of wages. So they can look past some of the noise and the average early ernies numbers because of composition issues, et cetera. But employment costs Index they pay a lot of attention to. And this is a big burt and it's very much consistent with what we're staying in terms of the high quit rate, the high amount of job openings, the fact that purchasing power has shifted to the employee UM and we're seeing that in terms

of these labor costs. So when you have wage growth of this magnitude, especially if it proves to be persistent the keyword um, it pushes, you know, you get this wage price push into broader prices and that sets up for a much more of a sticky path higher of inflation. And the Feed is going to pay very close attention

to that well. And obviously we'll be watching the Fed decision on Wednesday next week, But then on Friday, we have a job's report and given some of those labor market dynamics that Lisa was referring to, what are you expecting to see from the month of October given September took us all by surprise in many ways, so we

think we will see an acceleration. We're looking for four hundred and fifty thousand non farm puerial growth um in the next report, which is a nice pick up from the last two months, but not quite to the levels that we were prior to the pandemic. And I think one of the key components within the report will be the labor force participation rate, whether or not we're seeing move back up supply into labor market, because that's absolutely critical in order to step some of the inflationary pressure

and also keep this business cycle going. You know, we're dealing with very large supply side constraints in any sign that that's opening up or creating some relief is going to be critical. Michelle, Thank you so much, Michelle Meyer, Bank of America with us for briefing everyone. Really changing and adjusting your folks. I really can't say enough about house to house right now. We monitor your problems in the fixed income market, and there's no one better to

do that with George Boy who writes brilliantly clear research notes. George, you go all calculus on us and say, get over it. We're seeing a deceleration in the fixed income market. Explain that. Yeah, sure, thanks, thanks Tom, good morning. Um. You know what we're seeing is it is a deceleration in the bond market. You know, we've seen a pretty big move over the last week or so at the long end of the curve as bond yields have dropped UM and the curve is flattened.

The curve is flattened pretty meaningfully, and very very importantly, we've seen a mild inversion out at the very long end between the twenty year and the ten year UH tenure point on the curves. And and people have rushed to assume that this is now a sort of a meaningful indicator that we're headed for a hard landing. UM And I think that's that's kind of getting a little bit ahead of the curve, as they say, um And And the reality is is that there there are tremendous

technicals that that drive fixed income markets. It's it's the shape of the curve. One of the best indicators you can look at for sort of the direction of the economy, the direction of growth and and ultimately markets, and a flattening curve usually kind of raises some alarm bells. But but when we look at the curve, what we see is a curve that's actually is actually what's called, you know, what we would call, you know, a bare flatten er.

Yields are moving incrementally higher. It's not one direction and it's not universal, but they are moving higher. And so the fact that yields overall are moving higher while the curve flattens, that underscores to us a message that the economy is decelerating, it's not headed for a hard landing, that the economy is still doing well. We saw kind of a soft patch in the in the in the third quarter, as we saw yesterday, but the the underpinnings

of demand are very robust. Yes, supply constraints are impacting growth, end user is still pretty healthy. I like the discrepancy that you make, or there's sort of the distinction that you make between heading toward recession, creating off a cliff, and just slowing down, which is what pretty much everyone expects to see. But a lot of this is predicated on central banks raising rates sooner than they say they will. Do you buy that story that the market is telling

or do you buy what central bankers are trying to us? Well, I I think that the market is certainly testing the limits of the central banks, and I think what the central banks have told us is they are again using the yield curve as as an example. They definitively want to be behind the curve. They're gonna let the market move ahead and ultimately sort of guide where they need to be. Now you can you can debate whether or

not the markets getting ahead of itself. You know, current levels of inflation are quite high by historical standards and are remaining higher than than people would have expected. But there is a good chance that they do start to decelerate as well as we get into next year. Supply supply side constraints don't last forever. They do start to get some level of relief, and so, you know, I think the market is sort of pressure pro pressuring the

sort of the limits of the Fed. FED has been very clear they're going to you know, they plan to start to taper. We're going to hear from them next week and then you know that will sort of set the stage for other central banks around the world are already in ocean. And so the reality is, is that sort of the extreme liquidity that's been in the market now for you know, eighteen months or so, you know, is starting to come out and is starting to decelerate.

But we're going from extreme extreme liquidity to less liquidity. So it's not negative, it's not tightening, it's just less. But is there a tipping point? And I think this is what people are looking at when they say things like a hawkish dot, the idea that there's a similar kind of sentiment in central banks around the world where you saw all yields go down for years together globally in tandem, and now we're starting to see it move

in the opposite direction in tandem. Could we reach a tipping point where it starts to accelerate on itself and people start to try to normalize rates with something more akin to inflation and growth. We could reach a tipping point. I think that's a fair point. It's and I think this is sort of the game of cat and mouse between markets and between central bankers. You know, I think our our our view is that that that the FED

is trying to recalibrate fixed income markets. I mean they see the same data we do, and so, you know, sort of moving yields higher, allowing yields to move higher to be more in sync with both inflation and growth is effectively one of their objectives when they can't let it move too far, too fast. Your point about a tipping point is that do central bankers lose control of the plot, do they allow or do they are they unable to sort of control the pace of the move.

So far that has not been the case, and so and and that's sort of exactly what we're seeing right now, is that you know, there is still very very strong technicals, goods, technical support within the fixed income market. There's a chronic shortage of duration globally, and and sort of liability managers, pension funds, insurance companies and others still move to sort of try and immunize their liabilities. It's not a value trade, it's it's a it's a requirement they need to buy duration.

And so when you get to a point like we are now, stock markets at all time highs, we're heading into your end. You sell some stocks, you buy some bonds, You immunize your liability. Those those are very strong technicals that we think keep this market in check. The big picture, Fine yields are moving higher. I mean, that's that's our central case. It's a matter of pace. So then George,

what's the read through to credit. Have we seen the tights? Yeah, we do think we've seen the tights actually, um, you know, and what we've seen in historical uh you know periods, is that one central bank policy does start to change, you know, sort of it becomes more of a carry trade than a compression trade. And that's very consistent with

what we've seen over the last couple of months. Now that carry trade can last years, many years in some instances, So it is a little bit dangerous to get too far ahead of the curve, again using the curve as the analogy. But but importantly, you do start to move your portfolio around, You start to move up in quality, you start to move sort of down in sort of what we call spread duration, so slightly shorter maturities. You try to sort of buffer yourself against those potential spikes

and volatility. But it is still much too early to just simply cut and run, you know. We can find good value in places like structured credit. We want predictable cash flows and we want to try and minimize that that volatile How of you on the Boy continuum. I'm in the triple leverage all cash fund, so I bring bring in the duration and George Boy, thank you so much. Not enough. Scott Clemens, partner in chief investment strategist at

Brown Brothers Harriman, joining us right now. I would love to get your sense, Scott, what you make of the volatility on the front end of the yield curve across the world bleeding into longer end over the past few days, when there really hasn't been a major identifiable catalyst. And I think you're right, what we're seeing is just a

reflection of continued uncertainty in the economy. The big sort of hundred thousand foot lesson of the last eighteen months is that for all of its volatility, the economy financial markets are pretty finely tuned, and when you dislocate them, as COVID did for the past eighteen months, complex systems

do not heal quickly. And in almost any data series you look at, be at the bond market, being inflation GDP, the labor market, anything is still showing these signs of fibrillation, and that's going to take some time to sort out. So right now the bond market is being pushed and pulled between what do I believe a two percent GDP growth figure for the third core that we got yesterday, or do I believe that inflation is the new normal?

And I think we're going to see more of this volatility on a daily basis as bond market participants sort those issues out. Scott Clemens, Brown Brothers Hareman goes back almost as far as the setting of the obelisk in St. Peter's square. It's a venerable and ancient firm. Your guys idea of short term is three years. I'm going to even say the BBH rule is short term is five

or ten years. How do our listeners and viewers in that For a true BBH long term um, you focus on the fundamentals and you accept the notion that price volatility is a feature of financial markets. It is not a bug. If anything, I have been surprised that we haven't had more volatility in financial markets over the past eighteen months. We're getting a little bit now on the bond market. We had a little bit in the UH the equity markets in September to me the incoming tide.

The real driver of the equity market in particular is the growth we're seeing in corporate earnings and and furthermore, the growth and profitability of corporate earnings. That's fundamental. That's not day to day price volatility. That's the fuel that drives markets forward. And I think that's sort of an undertold story driving markets forward on a secular basis. Not to deny the likelihood even of short term volatility and prices. Well,

let's talk about those earnings. Because things were going well and then two of the biggest companies out there, Apple and Amazon had big disappointments after the bell. If tech isn't leading the way, what does that mean for the

broader equity market. Well, Kayley, it's certainly something that worries me because the markets have become so top heavy in a handful of very familiar names that that that we all and all your viewers know about that a stumble in some of those very large names like Apple, like Amazon, for example, could dent the markets just by virtue of them being such a large representation in the markets. Here here too, we're cautioning our investors to look through that

headline volatility. And we're active investors, so we can choose to avoid some of those large names in technology and find those companies that have been left behind and those companies that have certain characteristics that we think we'll see them through thick and thin, almost no matter where we are in the economic cycle or where we are in

the market cycle. But as a potential source of near term price volatility, absolutely, some of these large technology stocks stumbling for one reason or another is a potential source of price volatility at the index level. Scott Clemens a personal note, and I really would love you to speak to this. Ground zero of all that we invented here with Bloomberg on the economy and Bloomberg Surveillance is nineteen

o seven in the structure of American finance. You are on the board of the Morgan Library, and there is that study of JP Morgan's from nineteen o seven when he saved this nation by simply writing a check. What is it like for you, so active with the Morgan Library, to be in that room where we began our modern finance. Well, Tom, you, you and your producers have done their homework, and thank

you for noting that it is remarkable. And the advice that I give to young investors, professional or amateur everywhere is to study history. Because although regulations change, markets change in interest rates change, the fed changes, human nature is the mutable, and the human nature that drove the panics of the nineteen hundred nineteenth century in the early twentieth century still happened today. It's greed, it's lust, it's fear,

its anxiety, it's desire. In rereading that history in nineteen oh seven, in particular, in the actions that Mr Morgan took in that library, which looks just as it did in nineteen seven, is a wonderful testimony to how fragile this economy is, but in the long run, how durable it is as well, because here we still are. Scott Clemence, thank you so much. With Brown Brothers Harriman. 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 Bloomer