Surveillance: Treasury Rally Temporary, Cabana Says

all interested in. The FED won't define them. Are we done yet? I don't think we're there yet, but I agree with you. I think they're gonna be the three most important words for financial markets over the next quarter or two. It's substantial further progress and that holds the key to determining when the FED will begin to slow their asset purchases, which will eventually pave the way for them to potentially raise interest rates. That the FED hasn't

told us what substantial for the progress means. We believe that it likely means a labor market that is back to pre COVID levels. The FED has been reiterating that we're in an eight million job hole um. That's the level of employment where we are today versus where we were pre pandemic. But we anticipate a lot of progress in closing that whole and in filling that hole over

the next few months. We anticipate essentially million job growth months over the next several months, and we believe that that will allow for the FED to assess that we are making substantial for the progress. Likely by the end of the year that will have been achieved, and we anticipate that the FED will begin to signal that they're moving in that direction um to agree that there has been substantial for the progress by the summer or the

early fall. We're sort of thinking, you know, August Jackson Hole or potentially September f o MC for when we could see a shift in the timing for when asset purchases will begin to be withdrawn. That will be clear. I don't think that this withdrawal will start until Q one of next year, but the FED will start sending the signal over the summer. You took away my next question, because that's what I was going to ask, what the actual type would look like and when it would be executed,

So mark up build on that. Just the sequencing some words you use this will pave the way for rat increases the sequence. That is it that obvious that that will be the next step in the imminent future. Well, that's what the FED has told us recently. So this week they started focusing a little bit more on what the path for accommodation withdrawal will look like. They stressed the tapering of asset purchases will happen before they begin to raise interest rates. Now, we think that they ideally

want to complete that taper. They want to stop buying before they raise rates UM, and that's still gonna be some time away. We think that the taper process will likely be a year or so uh, and that they won't start raising rates until at some point in three we think the latter half of UM. So it's gonna

be a long path to get there. But what the market's going to care about is when the Fed starts to signal that it is moving in that direction, because the market is very quickly going to extrapolate from a FED that is cutting its asset purchases or at least setting the stage for that UM and then extrapolating rate hikes at some point in the future off of that mark. What I'm hearing from you is higher rates ahead. What I hear from everyone, almost everyone, higher rates ahead. Looking

here at ten year yields, they are lower. They're aggressively lower on the week compared to the past a few weeks. What gives? Yeah, So, look, you're you're exactly right. Really since the start of the second quarter, since the start of April, we're down about twenty basis points on the ten year um, and frankly, it has been a bit of a surprise, especially given the very robust economic data

that we have seen. You're at good retail sales report, solid cp I and incredibly strong employment report earlier this month. So why we think that it's essentially three factors that are driving it. One, we're starting to see some pockets of demand from foreign investors and asset managers, especially with equities at all time highs. Too, we think that there's been likely a technical squeeze here some short positions that

got squeezed in the move and are now covering. And Three, we also think that there's just an incredible amount of cash outstanding. The amount of reserves in the banking system has grown a hundred billion dollars since April, it's grown almost a quarter or twenty just this year, so we've seen a lot more cash in the banking system and

that's looking for a home. This also coincides with stimulus checks that have been paid out and investors and recipients of those stimulus checks that suggest, at least to the New York Fed, of that money is going to be invested and saved and that's finding its way into financial assets. So to some extent, this is a rally where everything is rich ining right, Rates are declining, equities are reaching all time hime. We know what's happening with crypto and

other alternative assets. All of the those are appreciating, and so we do think that the rates market is a beneficiary of some of that that's pushing rates lower. Now, importantly, what we see in the rates move is that it's really all real rate lead, where the majority of it is real rate lead. That's an easing of financial conditions. Um. We also anticipate that this will likely be temporary and

short lived. Fundamentals will trump here and fundamentals are going to be incredibly strong over the remainder of this year. So we've been encouraging clients take this opportunity this little rate rally and reset your shorts because this will not likely persist. The economy is gonna be really strong, Inflation is gonna start to pick up, and the Fed will begin to change their tune. And as all of those

things happen, rates are gonna move higher. Mark with some conviction of the end that looking forward to the conversation through the rest of this year, market pound of that of bankf America Securities, the head of US rights strategy, and let's talk about the addlies we can do that with that, I'm back a cab at Sadia Reese Search analyst. Colle, there's three worlds right now in your world. We've got the business world, We've got international travel, and then we've

got leisure. And they all look different, don't they Can you just walk through them one by one? Yes, good morning and thanks for having me team. Um So, business travel is kind of a tale of two businesses one or maybe three. A one is small and medium sized companies that have never really left. Those folks. They're the

folks who need revenue, so they are traveling. Then there's corporate business and that hasn't come back yet maybe a little bit, but in general, if you're a big corporation, sales tend to come to you, you don't have to go out and get them. And then there's conferences, which I noticed are starting to come back. I'm going to one this weekend in aviation conference that starts um I think Monday, and then um World of Concrete is apparently the first conference in June that's returning to Las Vegas,

so that's coming back. So that's the business side. Then you have the international. There's again two different worlds. One is our hemisphere where I think as Americans are getting vaccinated, they feel more comfortable traveling, so they're going to the Caribbean.

They're going they're going to beach destinations and mountains and outdoor things, Latin American beach destinations, Mexico um I mentioned the Caribbean, and a lot of the big resort hotels are making it very easy for Americans to test before they go back to the United States because we still have to test even if you're vaccinated before you come back, and the airports are doing the same, so that makes

it relatively easy. And then there's Europe, which is I think four to six months behind us, and then Asia which is probably a year behind us. I don't see Asia coming back really until um two at the earliest, and even Europe fourth quarter or maybe. And then there's leisure, domestic leisure, and I think domestic leisure is at least nine of the way back. And I think those million and a half people we see traveling every day roughly

somewhere between a million two a million five UM. I think about a million UM, I would think all about a hundred and fifty or two hundred thousand of them our leisure. And I know right it's it's pretty amazing that people feel really comfortable traveling, and as they get vaccinated, they're doing things you I was listening to you guys talk about, you know, going back to restaurants and stuff. Um. Yeah.

I mean if I got vaccinated and I'm out of my two week window from because I got you know, the one vaccine with two shots, then why am I still in Paradise prison. Why can't I go out and start my next I said, my next normal as supposed to reclaiming my life. But why can I start doing the things that I used to do before I got locked down? Yeah, Helene, I gotta say it is almost trying to make us feel bad for being at work and not on those Caribbean beaches and the fantastic destinations

that you're talking about. A lot of people want to go places. There's a question about the airline and whether they can meet demand given how many people they have to bring back into the offices and bring back to their airplanes. I know that Delta had an issue with not having enough pilots, not having enough flight attendants, and they had to cancel flights. Are you hearing difficulties around this and with respect to that, are they raising some of the wages in response? Um. So there's a lot

of questions in there. And one of the issues Delta had, and I don't know that this is an excuse, but it's what they said, is that, UM, a lot of their pilots were able to get vaccinated, and the FAA doesn't let you fly within forty eight hours of getting vaccinated, so they had to cancel flights. You would just think they would have timed that a little bit better so it didn't happen over Easter weekend. UM. As far as wage rates, I want to tackle that because I think

it's really important. The Big Three airlines American, Delta, and United all have open pilot contracts, and um, we think wages at the starting level or definitely going to go up. I'm not a hundred percenter in that wages at the top end will go up more than a few dollars an hour. But when the pandemic hit really hard a year ago, and it was exactly a year ago that traffic bottom depth at eighty seven eighty five thousand a day level, and I said, we're now back to a

million five. Um, the airlines worked with their employees to try to get anybody who was thinking about retiring between say, to think about retiring. Last year, some of the airlines worked with their people to cut hours so they didn't

have to furlough as many people. I mean, one thing to consider for pilots, it's always last in, first out, which means they would have had to furlough a lot of pilots at the lower end of the pay skill and at the lesser seniority level, versus keeping those pilots and asking older pilots who were kind of sixty two to sixty five, well, mandatory retirement ages sixty five anyway, But pilots in their sixties to think about retiring earlier, working few hours to keep more people on the peril

so that when we recover, we're ready to rock and roll as opposed to having issues. As you know, I'm hearing there are issues in some other service sectors. Well, they're rocking and rolling for some of these airlines right now. Helloeen fantastically catch out with you. You're not just an analyst. I know how much you care about this industry as well, and it's good to see it back on its feet. He line back of the cam and senior research analysts.

Let's bring in Stephen Stanley. I must pay upon chief economists. Stephen, what a week. We can take a deep breath and move on to the weekend. Soon. You'll take on the data so far this week, Stephen. Sure, well, pretty much every high profile March economic indicator has been far stronger than expected, going all the way back to the I M and employment numbers in the prior week. But certainly the retail sales numbers yesterday and now the housing starts

numbers today. I think in some ways it was a perfect storm in March, because February you had the bad weather, particularly as it released to how starts, which would have depressed a lot of the February data. And I think March for housing starts at least was a catch up based on the weather. But certainly the market, the housing market continues to be extremely strong and builders are going to be uh playing catch up for a long time. So you know, the more starts they can get under

their belts, the better it is for the market. Stephen One, try if this recovery has just been how quickly things have move in As an economist, how difficult do you find to get just to keep up? Yeah, you have to be nimble. I mean usually when you're doing your GDP tracking estimates, they might move by one or two or three tenths when a particular number comes out. But you get a number like retail sales yesterday, and all of a sudden you're revising by one to three percentage

points depending on what your forecast was going in. And I think, um, you know, that's something that that I think relates to the FED as well, because the Fed has this thought in their head that they're going to be able to move very slowly and just kind of you know, inch their way back toward normal and policy. But If the economy continues to gain ground at the speed that we're seeing right now, then things may play

out quite a bit differently. Among the economic mysteries of the week has been bank earnings and the lack of loan demand. A lot of banks and executives they're saying this is actually a good thing. It's because there's so much cash that people are spending that and paying down their debt so to be that much more ready to spend later on. Do you view it the same way or are there are signs of caution within the lack

of loan demand now? I think it's the function of the fact that people are people, and corporations at this point are very flush. I mean, the household sector has been has gotten three rounds of rebate checks, very generous unemployment benefits, and if you look at the personal income numbers and the savings rate, there's no reason for people to borrow. The only reason that people are going to have the borrow really is as you as you mentioned before,

is is home mortgages. On the corporate side is kind of the same thing. We saw this blowout in UH corporate bond issues last year and into into this year, and I think most companies are are pretty flushed with cash right now and sitting on that cash and waiting to deploy it. So there's really not much need for a lot of borrowing at this point, except for you know, specific sectors like home mortgages and maybe you know, student

loans and a few other things. So how do you determine, Stephen, if we've got enough momentum to keep this pace of spending up, perhaps on a credit line rather than just using cash beyond the next two quarters or whatever it is to to wear down some of this cash. Well, there are various numbers that you can look at. Obviously,

the savings rate comes out every month. The FED puts out quarterly data on um, you know, household financial assets and and things like that, and those data indicate that that consumers are just flush right now, a lot of money. And that was even before this latest round of rebate checks. So I think it's going to take a while for consumers to plow through that stockpile. And I think they've been saving up to do all the fun stuff that we haven't been able to do for the last year.

Travel and uh, you know, go out to events, uh and things like that, and so I think there's certainly going to be kind of this one off, you know, blowout period where people are you know, everybody's trying to take a vacation at the same time, everybody's trying to go to the same concerts and ball games and all the rest. Uh. And then once the dusk starts to settle, we'll see where we are at that point. Seven, We've got to talk about the shift in the reaction function

of the FET, the shift in the framework. It's a framework that would have been perfect for the previous cycle, would have made a load of sense. Does it make sense for this one? Well, you know, I think it all depends on how inflation plays out, right, because they what they've said basically is they want to wait to see the whites of the eyes of inflation. And again, I mean, the FET has conceded that we're going to

get this uh short term pop in prices. But then they think things are gonna you know, go right back into place add or below two um. If inflation gets well above their target and stays there for more than a few months, then I think, you know, at that point, the react the new reaction function probably looks a lot like the old one would have. UM, if inflation remains very benign, then I think they're gonna be extremely devish

and wait a long time. But they may or may not have that luxury, depending on how prices behave Stephen, can we call it the weekend? Now? Are we done? I think we've done? Absolutely? Absolutely, thank you. I'm still here. Thank you, Stephen Stanley. So are you? John Economist? Just getting people on site? Okay, great, you're gonna throw off your mike. We're done. Daniel Tannon bound joys it now. Oliver Wyman, partner in a head of America's Anti financial

crime unit. I'm curious from your perspective, Dan, of whether these sanctions were harsh and unexpected or perhaps too light given some of the potential allegations here. Thanks Lisa, and as as Nick Wattams and others reported last week, these sanctions were known to be coming in response to the solar winds hack and election meddling, and as described other malign activities by Russia. UM, I think what these sanctions looked like, We're a bit unclear coming into the announcement

yesterday in terms of how severe they would be. It's pretty clear that this was a proper opening salvo and no attempt for a knockout punch. Also, these sanctions were quite explicitly responsive to just the hacking issues. You still have nord stream to lingering out there. You still have issues related to Alexi of only, as well as the Russian military build up on the Ukrainian border. So there's still a whole other range of issues that the U s could begin to push harder against on Russia. And

I think this was just the warning shot. Well, and you certainly saw that in markets. I mean, you're seeing a bounce back today in the ruble uh now gaining versus the dollar. People seemed unfazed when it came to even sovereign debt, even though you did get a bar from some of the banks engaging with these securities what could potentially disrupt markets. That seems like a realistic escalation

between the US and with with Russia. Yeah, And I think we've seen an evolution of securities trading related activity restriction since with the beginning of some of the dead

and equity restrictions after CRIMEA was annexed by Russia. What we saw yesterday and again a build up after nine sanctions that restricted trading in non rubal denominated sovereign debt um is really this is only impacting primary market trade, So secondary market trades on Russian sovereign debt be it in euro be it in rouble are still permissible on the secondary market, and I think Treasury knew that this would have a muted impact, not kind of an adverse issue,

similar to when the Oligarch sanctions were dropped in twenty eighteen and you saw a brief destabilization of the aluminum industry. So I think certainly you could touch upon greater restrictions and access to capital more broadly if you expand to the secondary market. I think it's very clear that the touch of just the primary market was only going to

have a very limited response. Dan, I want to zoom out a little bit and go to something that Jeanie's Aino is talking about earlier, as she talked about politics and this President Biden, both domestically and now from a foreign policy perspective, she said that the bidens are very different, whether they're dealing with local issues or international ones. What's

been your takeaway so far? Given his stance versus the Kremlin, given his stance with Iran, given his stance with China, I think there's been a very measured response to all of the issues that you've just described, whether it's North Korea, whether it's China, whether it's Iran, and certainly with Russia. On day one, the President announced the top the bottom review of the existing sanctions portfolio that had been in place for the last twenty plus years in the US

to really understand the productivity the unforeseen consequences. I think the team that's been assembled at State Treasury and the National Security Apparatus have been experienced from the Bush and Obama administration, some from the Trump administration, and they know how to look around the corner to see the unforeseen, constantly unanticipated consequences. That being said, I think the market

is still nervous. Friends of mine in multinational f i'es um, they're doing the analysis to see how these type of moves will ruin their days, much like some of the

Chinese security restrictions ruined their Christmas break in December. Well, one reason why I love speaking with you, Dan is because you do have this bird's eye view in what companies are thinking in their risk offices in terms of charting at some sort of strategy, how do they get ahead of different administrations, and what's their main concern right now at the Biden administration about where the potential sanctions could come, where they could potentially be restricted going forward.

So I think where what we see with this administration is certainly less unpredictability than what we've been seeing over the last four years. In particular, I think if you see some of the appointees of the Biden administration, them coming from a more mature sanctions and national security regime of the path, they know how to engage with institutions. So for some of these significant moves, um, you'll see Treasury reaching out the institutions in advance so they can

prepare of them. Um. We saw this with Libya a number of years ago, where banks were notified in advance. So I think the institutions I work with take comfort that they know there's a certain maturity and how the Biden administration approaches these issues and there's not going to be certain knee jerk reactions that really disrupt the reaction

in any sort of unforeseen way. There's also a question though internationally and Dan, I know this is sensitive and it might be uh something you don't want to weigh in on, but there was a fascinating story about how international banks are losing market share and some of the biggest Asian markets, whether it's in China, whether it's in India, and this has to do with the close relationship of local firms with the governments as well as restrictions that

have been placed on them. How concerned are your clients about that, about pushback and a lack of competitive advantage overseas bringing them more closely to the domestic economy. I'm living and breathing this issue almost every day. I think you've seen China respond with certain counter sanctions that essentially create a significant conflict of law issue for global banks operating in the U S and China, and essentially it's

forcing choice. You've already seen some global banks have picked China as they've repositioned senior leadership into Hong Kong and Greater China area. So I didn't see a lot of nervousness for how China could react to try and replicate some of what the US has done to bring foreign institutions um to really bend the knee towards the US. I think now you have a real threat to that going forward if China tries to exert those authorities they've

granted themselves. Does this nervousness represent itself as retrenchment or is it simply just weariness. I think it's weariness, although you are seeing potential moves of retrenchment as the business has looked to organize themselves going forward, do you see some banks essentially split off their business in China as its own standalone entity and essentially split the rest of

the organization around the world to keep it more operationally manageable. Um, there's a lot of different contingency plannings that are happening across a lot of large lobos right now. Dan, when's the next time you're getting on an airplane and going overseas? I I do not know, but I think my family is ready for me to do it quite soon. I think that goes for all of us. Daniel Tannebaum, thank you so much for being with us of Oliver Wyman,

a partner and ahead of America's anti financial crime. Let's turn to the issue of race and pay. When it comes to social media. Anyone can get famous on TikTok, YouTube or Instagram, or maybe anyone solver tone of anyone, but it's a lot easier to make a living there if you're white. Bloombers, we need a young In collaboration with Bloomberg, Quicktake explores how marketers are under paying black influencers while simultaneously pushing black lives matter in this Bloomberg

Radio special report. When I first started on TikTok, it was already a big talk about how much the biggest influencer on the app was making at the time. Comparing that to what I was getting off for it, I could tell. Twenty two year old Sydney McCrae is an influencer and choreographer. She's known widely for creating a viral dance to Megan the Stallion sex positive club banger Captain Hook.

McCray noticed a pay gap in the industry as soon as she first started making beauty tutorials on YouTube about a year ago, and after the viral post where she explained her dance step by step, the popular videos attracted more than four hundred thousand likes within weeks of posting. Many of TikTok's top stars performed their versions of McRae's choreography, also helping the song soar in popularity. Then in April, Megan the Stallion herself joined in and McCray started gaining

followers by the thousands. Now she has one point one million TikTok followers and she's verified. But she and other black digital content creator said, none of that talent or impact ma better in the multibillion dollar global market for brand endorsements on social media. As a content creator, seeing all of the things that we can do for an artist or a company, in receiving such little pay for our artistic creations, it was a slap in the face. Really, boy,

that's why your hairline going tobacco your net. Then there's influencer in sketch comic Kinney Knox, who started posting videos on the now defunct six second video app Vine. The twenty two year old followers swelled to one point six million, and he became one of the top creators on the app. Yet he did not get any offers for brand deals, but he noticed his non black peers who didn't have as many followers or activity as him, did get work

with the big brands. It was weird because it was like, I'm going viral with every video, but no company is even looking my way. When it comes to twenty five year old land and Moss, this influencer and actor once had a huge brand deal with a couple of other influencers on the same contract. I come to find out that they had made like devil of what I was making, and one of them had way less followers of me. It was just weird to me that he had made

more money than me with less followers. And then to think about like what I was originally offered, Like what do they offer him? He sums up the influencer pay gap like this. Racism isn't exclusive to a certain field, and so even when you have new fields like the influencer industry, it's gonna make its way in there too,

mccraine mas said Knox Tell Bloomberg Quick Take. White influencers have reposted their work or stolen their ideas which then went viral on those accounts, but they the original creators, got no credit. People take advantage of like black creatives like this trend and it's all fun and then so on profits off something that a black creator started and then they get praise and fame, and you know, and when that's just the piece of us and it doesn't

stop there. These influencers say they have to be extra careful about what they say, where, how they look, what causes they support, so they won't offend any of the brands. Meanwhile, they say they're white peers get away with more explicit posts with merely a slap on the wrist from big brands. One of the reasons why it's been such a difficult experience for many black creators is because traditionally, in Hollywood,

racial biases have tended to flow from the top. Executives hire white directors and producers, who in turn work with white casting agents who cast white actors. Whenever black talent is considered, it's often for roles or projects that specifically require it. Social media companies have often promoted diversity initiatives,

but in practice they're not much different. Inter summer twenty, when the police killing of George Floyd forced America into a racial reckoning and sparked an international Black Lives Matter movement, brands gained a strong desire to work with black influencers, and black talent managers started getting more calls for their

black creators. Knox interpreted those moves this way, I appreciate the brands working with the black creators and starting to go in that direction, but it wasn't a trend that they wanted to work when more black creators because they felt guilty. Knox Masson McRae are hoping for a more

equitable influencer industry going forward. What I hope to see change in the industry is the black creatives get the credit that we deserve, genuine appreciation for Black creators, not just when it's convenient, and even playing field when it comes to creators of all colors, specifically black creators, giving them that same energy that they're giving the white creators. And they're hoping hashtag higher Black Creatives is not just a trend or relegated to the diversity section, but baked

into the culture of brands in New York. I'm really to young Bloomberg Dio, thank you so much for anita really important issue at a time of transformation socially over that a lot of people have been hoping for and waiting for. 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.