Surveillance: The Fed & the Labor Market

and of course on the Bloomberg terminal. We need to get from the data this week on the Job's report on Friday after November two, where a FED will decide Risksman joins us sound Chief Economists at JP Morgan Bruce. I usually go global, but I gotta go domestic at today the FED will decide how close are we to a FED that will decide what to do over the

next number of meetings. Well, I think the basic message of the FED is telling us is that they're committed to creating a softer labor market, to pushing the unemployment rate, of that the picture on inflation has been concerning enough, and that they really want to gain control over credibility here. So unless we get a really big downward surprise here, I think we're not only on track for a seventy five basis point move on November two, but further big

moves in the next couple of meetings after that. So what does your rate get out to? I mean the game here, the power game is three and three quarters for even up to five. How does that What does that mean for the Bank of England, What does it mean for the Bank of Japan? What does it mean

for the Bank of Indonesia. Well, I think the FED as we would see it goes up to the mid fours and stopping at the mid fours in our forecast does require to see a material slowing and job growth over the next few months, which is in our forecast, but obviously we haven't seen yet. Um. I think the Bank of England story is really going to be dependent

on how much the government gains credibility. We think they're on track for getting rates up at least a four percent, probably more as we go through the next few And as you're noting, there's a number of other central banks in em that have wanted to slow down, maybe even stop here. They've been using FX intervention, they've been using their rhetoric. But with the FED moving, with the volatility

we're seeing in markets, uh, it's harder. And we've obviously been backing off of what we thought was some kind of moderation going on in the m central banks. Well, Bruce, that really raises the question of what point the dollar becomes the US is problem, not just the rest of the world's problem. What's the trigger point for the U s starting to respond for the US's sake, not just out of some charity for other nations that are really

struggling in the face of the green back. So I think the big issue here is does the FED get the kind of controlled moderation in labor markets and growth does it see inflation come down? I think on the inflation story, the dollar rises, combining with what we think is a fairly significant fading in both commodity and supply chain pressures, we think we're set up for a pretty decent drop often goods pricing here in the next few months. We've already started to see it on energy um and

I think the economy actually shows resilience here. It looks like it's tracking two to three percent growth in the

current quarter. So I think you have attention that the FED will get a benefit here on inflation, I think in the next few months, but it may not get the job market, It may not get the growth number that gives it the comfort to stop, in which case the concern is is not so much that I think the dollar is itself a drag in the near term, but the Fed keeps going in a way that it doesn't pay enough attention to the lags, and therefore the

economy slows much more sharply next year. Let's realize the risk here is looking at six twelve months down the road, not where we are right now. And this really speaks to the column that Paul Kruman wrote at the end of last week in the New York Times, where he basically said, is the Fed breaking too hard? The risks have moved to possibly yes? Do you agree with that view? Well, I think before we ask whether the Fed is breaking too hard, we want to ask is the Fed intending

to break things? Because if you listen to Pal, if you listen to some other speakers, they seem to be preparing us for a significant slowing and in job growth and perhaps a meaningful rise in the unemployment rate. So I think, yeah, there is a risk that they moved too hard because they're I think, concerned about seeing results and not paying um the kind of attention to the

lags in the monetary transmission mechanism. But there's also a concern that the FED is decided that it's it's much more appropriate to risk a recession here than keeping inflation unusually high. Person. None of this is in the textbooks. It's noted the Krugman textbooks, the man Cue textbooks of chasm in textbooks with the survey data. On Friday, I have a three month moving average of non farm payrolls

of two D eighties six thousand. That's job formation. Is JP Morgan saying that will break that that will slip down to some appallingly three months moving average of say a hundred and sixty thousand. Well, U, we have a three forecast for three hundred thousand job games on Friday, so clearly that's a pretty strong number, even if it's a moderation. I think to get the FED to pause, you need job growth to slow to at least a hundred thousand UH a month over the next two or

three months. UH. That I think is a harder one to to get confident. And that's that is what's based on our forecast. At the FED by the first quarter sees that and is ready to pause, and I think that's the key issue here, both in terms of getting the FED to pause and also the concern that if they don't see that and they keep moving, that they go further than they actually need to. Bruce, we gotta

expand on that. That's a stunning number. I have a run rate back decades of a hundred and fifty thousand, and maybe you come up to two hundred thousand per month for non farm payrolls. Is a healthy and normal America. You're saying we've got to get down to one hundred thousand, one hundred thousand than another hundred thousand to make this

FED blink. Well, yeah, I think if you want to have an economy in which the unemployment rate is moving in a controlled way to uh roughly four and a half percent unemployment rate, which is what I think the FED is telling us, you need job growth to be a soft A hundred thousand may not even do it, but I'd say a hundred thousand is probably the kind of number the FED needs to see to be comfortable to be thinking about pausing. Bruce. This goes to something

that you flipped at earlier. Do you think that it's inappropriate for the FED reserved to be targeting the unemployment rate at a time when the jobs market has drop dramatically changed post pandemic. I think it's appropriate for the FED to be targeting a softening in the labor market. I think it's appropriate for the FED to be paying attention to what's happening in the inflation process, wages, salients,

inflation expectations. But I think it's also appropriate for the FED to be forward looking, which is to recognize that there's lags in the process, that they're getting a restrictive policy in place. And the difficult call is do you stop on the tightening before you've gotten everything you want to see in the data. That's really the tough call

that they're going to have to make here. At some point, I think somewhere in the range of four or foreign a percent seems perfectly reasonable to be pausing, but they may not have the labor market outcomes at that time that makes them comfortable to do so. Bruce, this is the question, isn't it. I think you just framed it perfectly. How can you be forward looking if you're chasing the lanking and indicator exactly and you're also being uncomfortable by

the fact that inflation is persistently. I that you're worried about salients in terms of the lagged inflation affecting price and weight setting. So it's really I think important to be forward looking. But it's really hard to be forward looking here. Chris Cassman and jakep Mark and Bruce. Wonderful to hear from you, sir. Thank you as always. I do you think the return assumptions need to shift lower? Maybe they're shifting right now. Let's do that right now

with Kelvisin of RBC Capital Markets. Laurie is it's small caps time? Hi? Thanks for having me, Tom, And I think it is. If you look at small cap relative to large cap. Just pull up the rt Y against the SPX on your Bloomberg. We've been in sort of a trading range all year on the relative trade, and if you look at small caps, we're basically at historic

valuations on both an absolute and relative valuation. We've already priced in a big spike and jobless claims, and typically you want to buy small caps when the unemployment rate starts to tick up, so you want to keep that in mind as we look ahead to Friday. But I will just say this, um, small caps have really been orphaned for quite some times. They are more domestic, and we are hearing a lot of interest UM in small caps, even from people who are very barish on the market overall.

UM So we're overweight and we feel very good about that call. In the turmoil we're in, including low g d P, will there be transactions and combinations that combines small ups into mid caps. It's interesting time. I mean, we have been combing the transcripts among the big cap companies for commentary about it in and A and we're

not seeing it pick up yet. So I wouldn't say it's necessarily eminent, But I do think that when you're in a sluggish growth environment, and I think that's the price we have to pay for a short, shallow recession, if indeed that's what we end up getting, I do think companies will try to go out and buy growth UM And you know, we we find that a lot of small cap companies are also much better run than they were in the past, much cleaner ballot keep, much

higher quality management teams. UM. So we think the asset base is more attractive than it may have been in past cycles as well. Floor is overweighting small caps a fight to lose less or actually to get returns that are bigger than some of the negative returns that we're seeing across the board and brought indexes. I think it's a great question, Lisa, and I think that depends on your time horizon. In the short term, as stock search

for a bottom. I do think it's unlikely that small caps will start going off while everything else is still going down. Um, So it may simply just be you lose less on the on the way down to kind of find that absolute bottom. But at the same time, I will tell you, Lisa, when you talk to people who have done small cap for a very long time and you go back and look at the history, the pivots back into small cap tend to be pretty sharp.

So I do think it's an area where if you really kind of wait around and try to pick the bottom in the market, you're gonna miss the Turney. You do tend to make a lot of that outperformance in those early days in the trade. Right now, we're looking at eight five and clothes on Friday for the SMP five hundred. Your target for your end is forty two hundred. What's the trigger? What's the pivot point that gets us up there is it just the bear market rally that

we heard about from a number of analysts. I think that's one thing you can look at. I mean, we actually found if you look at the SMP five hundred this year in two, it's got about a seventy two percent correlation with house stocks for trading back in two thousand two, which was another period of kind of painful

normalization after a big market shock, an initial rally. And so if you sort of go through that playbook and there was a fierce four Q rally and then you gave most of it back in the or s quarter, that seems like a plausible way for things to turn out this time around as well. I think also, Lisa, we're about a month out from the midterm elections, and go back to the summer, I started really getting an earful from a lot of investors about how that would

be a potentially positive catalyst for markets. So we do think that's something on investors radar. And if you look at the generic congressional ballot, after you know, several weeks of seeing the pulling data kind of shift back in democrats favor, we actually saw the Republicans pull ahead of Democrats in the congressional generic congressional ballot data last week, So things are starting to shift a little bit the

more market friendly way. In the latest date of their all, I just wanted to squeeze this in Nike, FedEx, Apple, Tesla missing this morning. What are you learning from corporations about how quickly this downtown is coming around? Well, look, I think what we are learning, John, is that we are starting to see some companies rip off the our

needs band aid. And if you go back to the summer, that is something investors were telling me they really needed to see half and to get comfortable with buying markets. People said, you know, we want to buy stocks around fifteen times PE the market around fifteen sixteen times P. But we just need a little bit of certainty on that e. We need to see the numbers come down. You know, we'll see if the early reporters turn out to be a harbinger of what's to come in the

actual reporting season. Um, but I do think, you know, kind of getting those learnings expectations down is something that we really need to see. Hi, Luri, thank you all some mental whites. Let me kind of saying to that of MBC Capital markets. What an interesting day and it is about the greater economies of the world. One of the great facts is Madrid as the best museum in the world. It is called the Prado and it is a must visit and that speaks to the healing of

tourism in Spain. Spain is booming, like Paris, like London. It's been a very strong story, but with it too and up to ten inflation. Maria today on now with the Deputy Prime Minister of Spain, Tom, thank you so much, and we are joined of course by Spain's fine as Minister and Deputy Prime Minister and Aia Colvino Wan. They ask God morning, I have a lot of questions about Europe, but first of all I have to get your thoughts on what's going on in the UK, because today we've

seen a huge you term from the UK government. Markets really flipping on this country. I don't want to create trouble, but when you look at that country, isn't a message in terms of what not to do going into the winter. Perhaps for you, I think it's very good news that they back tracked, in particular when it comes to the reduction of the taxes on the wealthiest parts of society, because it really shows that it's not only a matter

of financial stability, it's also a matter of fairness. We're all confronted with the challenge how to contain prices, how to support our economies, how to fund our public services, and we need to ensure that we have fiscal sustainability, financial stability, but also a fair distribution of the impact of the world, so that means essentially tax the rich

more to some extent. That's what all international institutions are recommending, and this is what the Spanish government has been defend think when it comes to the international framework, not not specifically or not only this dimensions, but generally we need a fair tax system. We need to avoid a race to the bottom, which at the end of the day is making all of us poorer when we need stronger states to also face the blackmail coming from Russia. And

that's a message perhaps for listra Us. But I don't want to create trouble intentionally, perhaps between the e N and the UK. So let's talk about Europe. It seems to me there's forces that are pulling from different ways. You have demand instruction which seems to be working at least the message is resonated with Europeans. The storage is up.

You have an escalation in the war and an escalation in the energy war in your view, with the outlook for Europe going into the winter, we're challenging at a very challenging moment. No, because the war is entering a new phase. So it seems we also see that not stream supply was cut first of September. The positive element here is that prices are not continuing to escalate as they did in past months when Putting was using the

energy blackmail. Also, I think that actually what we see now is that the storage level is appropriate, that Europe is having a stronger voice when it comes to international energy markets, and we should continue in that direction with a response which is united determined and also based on solidarity between the different member states. When you see solidarity, last week Germany came up with the two hundred billion your package to save their households and companies. Is that

solidarity for you? Well, I understand that each country is subject to a different kind of challenge now, I mean the increase of energy prices hit Spain maybe before other countries because of the flexibility of our electricity markets, but now we see that inflation is already going down in Spain, whereas we see in Germany that the situation is very different.

They have a higher dependence on Russian gas and oil, and so we have to be respectful of the different specific the cities of the different countries and ensure that our framework and our rules are fit for purpose in the sense of allowing for this flexibility in terms of the response at the national level, but reinforcing the European level instruments so that we ensure fair treatment of all citizens and companies throughout the UN were from that messages

a final question. On Wednesday, the Spanish Prime Minister pro Sanchez will meet with the German chancellor. Is he going to convince the Germans to drop their opposition to this price cap on gas? I hope so we'll definitely Spain well. For the last year, Spain has been pushing for a European response. We've been pushing for price cups. We've been pushing for a joint purchases h an overhaul of the

European legislation. We managed to have a very exception which is allowing us to have a gas price cup between Spain and in Spain and Portugal, and this is already saving European Spanish citizens and companies more than two point five billion euros, you know, and it's proving too allow us to have lower prices in other countries. It has even the coupled the wholesale gas price from the mediterrane of the bery and gas from the t TF reference, which shows that we can act and we can change

things if we act together. So I am sure this will be discussed in the summit between Spain and Germany on Wednesday, and I hope we took convince Germany to move in this direction. And it's interesting how the diplomatic ties are changing between Madrid and Berlin, perhaps growing close over the past three weeks, in particular when it comes to potential gas suppliers coming in from Spain. But you also make it clear that has to go both ways.

Nada Calvinia, thank you so much for joining us on bloomber TV this morning, and we hope to see very soon, of course, in a few in a few hours time. Yes, yes, indeed, thank you, radiant, thank you so much, and guys back to you, Maria, thank you one of the best marit today there alongside Nadia Calvin or Spain's Deputy Deputy Prime Minister. John Gets from Birmingham. Is Bloomberg's Lizzie Burden out of

the UK morning, Lizzie, Good morning John. While I'm out Conservative Party conference and I'm sat here with Chloe Smith, the Secretary of State for Work and Pensions. Chloe, thank you so much for making time for me. It's a wild morning here in Birmingham. This budget that the Chancellor had announced was described as reverse robin Hood. At the one end, you were cutting the top rate of income

tax that has now been reversed. But at the other end, the Chancellor said he'd cut the benefits of people who are not trying hard enough to get a job. Are you not going to you turn on that as well when it's equally politically toxic. I think the key point about the growth package that the Chancellor set out is that it is all about getting more people into jobs

and getting higher wages. And in fact you can see that around us as a slogan here at the conference is painted on the stairs just over there that we want to be able to deliver more jobs and higher wages. Now, the majority of the growth package set out was to be able to do that, for example, including putting money straight back into people's pockets through the adjustment to the lower rate of income tax and of course that builds on the cost of living package and the energy price guarantee.

Now my role is then to be able to help people into those jobs that growth package will create, and that to me is a real priority. So to pay for all your tax cuts, to have any credibility and markets, you're going to have to cut spending. The one thing that the Prime Minister promised yesterday was that she was going to raise pensions in line with inflation. We're on a cost of living crisis. Has the Chancellor asked you to your cut cutting benefits? The Prime Minister was right

to talk about the triple or on pensions. That's been a commitment of ours for a while, and that's been a clear public commitment already. Now, naturally there is then also the decision to be taken about benefits operating. This is one for me to take in my role. I can't tell you here and now what that will be and what the data that goes inside it will be, because I have to wait for that data to come

to me. Now, the key principle though, that I want to take in approaching that decision is how we can best protect the most vulnerable in our society. And for me, this builds on those elements of the cost of living support that we have already been doing and delivering. My department has been making payments to people and they'll be more coming out very shortly that are supporting people at that time with real needs. Why is it fair to guarantee pensions not benefits in a cost of living crisis?

People need to plan now. And one of the other principles that I really want to look at here is how we protect those who can't perhaps work to raise their own earnings. So for example, that would usually include pensioners, and it may well include others as well. These are the principles that I'm thinking about very carefully as part of that decision. But let me also say this, as a party, we are about helping more people into work. We shouldn't be writing people often saying that they can't work.

We should have been instead be looking at what people can do rather than what they cannot do. So that's what the Growth Package is all about, and that's the golden thread that you see going through the other rest of the work of my department, helping people into work and ensuring that there is an incentive to work. Okay, so you mentioned pensions. Last week, the Bank of England had to step in to bail out the pensions industry from a systemic crash that was triggered by your government.

Are you having emergency meetings with the pensions regulator and asset managers and if so, what proposals are being discussed. Well, colleagues are having the right meetings of course, with the Pensions Regulated, with the Treasury and across my department as well.

I can't give you further details them that, but I'm glad that the Bank of England was able to take the action that they did last week, and naturally we are keeping a very close eye on this situation because we want there to be a thriving pension industry in this country. That is an essential part of supporting people in their retirement. Clarie Smith, Secretary of State for the Department of Work and Pensions, thank you very much for

joining me. John. The question remains, then, what happens when the Bank of England's rescue package ends on October the fourteenth, unclear if we're going to have the same issues for l d Eyes. Hey, Lizzie, thank you. Looking forward to catching up with you through the next camp of days, Lizzie Burton there at the United Kingdom. Let's learn something from dance setting, Dan, fantastic year, notorious, the Barrish through much of two it's worked out almost perfectly. We're all

wandering now for you. What are the preconditions that you want to see the checkbox check check check check check to add equity exposure. Sure, and good morning. By the way, it's great to be in studio altogether, having the band here back together. It's been two years, Dan, it's been too long. I'll inch my chairs to your question. You know, look, we've done a lot of damage obviously in the third quarter in last month, but notably we're still trading around

the June lows. But notably all of that work has been rates. Right, we haven't seen the earnings reflected yet, and so talking about FED speak, I think investors want to hear management speak really at this point and really kind of throw in more of a towel. So number one is earnings. Number two is p M I s. We haven't seen in that contraction yet UH. And number three is jobs, and we have a big update coming this week, but we just haven't seen that rise in

the unemployment just yet. I've been waiting, waiting, waiting for a research note like you've got, which is real simple. Look at dividend growers. How did dividend growth change? How does dividend growth change given dampened economy, dampened revenue growth and then down the income statement, How does that filter into the dividend growth decision? Well, when you look at companies M and A and and deals have been really dried up this year, So I think you look at

companies being more defensive. BIBAS has obviously been a huge use of capital this year, and dividends continues to be a huge use of capital. And and UH investors are rewarding dividend growth wildly this year. How many basis points pick up do you have there with dividend growth versus the riff raff that's out there. I mean, when you look at kind of income styles, dividend growth styles, they're down kind of mid single digit, high single digit this

year versus the SMP down plus. So Dan said something earlier at the start of the show that our bonds going to and John asked him, our bond is going to react the way that they normally do in a downturn where they gain value. People pile in. Tom was saying he doesn't think so. A lot of people agree with him, do you. Inflation is still stubbornly high, and so if we have kind of a plateau ng or a moderation inflation, I think bonds could certainly act better.

But at least it's your point. That was the case earlier this year. The first four and a half months of this year was all about stag inflation, and so you saw both stocks and bonds down together. It got a little bit better over the summer. Then, as you've seen again, bonds have sold off quite rapidly. So I think around the four percent level on the tenure, there is more value in bonds here to do their job in an in evolvable environment. Wilson, your colleague a good friend.

In the last couple of weeks, I'm austin whether you guys start to get uncomfortable when everyone starts to share your few, when you start to see some of the big bulls on Wolf Street capitulate and Marko Kanovich came about that close on Friday. Do you feel uncomfortable when everyone starts getting comfortable with your way of thinking? You do, but your thesis is still in check. Right, So when you think about the call Mike made, and we joked a few months ago about that lonely Island in every

one's on board, it's a flow, you know what. To your point, Jonathan, you look at the cell side, you look at the byside, mutual fun cash levels, hedge, fun net exposures, and we have a particular vantage because Morgan Stanley is the biggest prime broker out there. So everyone is inching. We're here in studio, you can power play. But to Jonathan's point, we are growing a little bit more nervous about that consensus trade. But that doesn't think

that doesn't mean things can't go lower. Still, swats cut this morning. I think city did as well, Jonathan Gollip Thoma has gone to fifty for year end. Down from the facts. Change I change once had gone on board that that island is very crowded right now. You were the first one there, though, Dan, it's gonna see it. That's kind of snailed it. In the supportly Allen Zentner was transitory and on a dime she switched shifted to

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