Surveillance: UK Fiscal Plan

up with you, sir. We understand the Chancellor and the Prime Minister is meeting with the o b R today the Bank of Engle's guilt market operation and in the middle of October. Should those forecasts from the o b R be published before then? Well, the key thing to take away is that the Government, the o b R and the Bank of England are all working coorp in

a coordinated fashion, each doing their respective job. So the Banks doing its job on monetary policy and market conduct, the o b R its job on forecasts and bringing forward though the forecasts when they're ready to be able

to wrap in the recently announced Government Growth Plan. And then of course the Government Growth Plan which has features about energy, protecting households and businesses, how we're going to go forward on energy security, building clean energy going forward, and also a lot of supply side measures in the UK. It's a very growth orientated plan. So what you've seen over the last week is each of those players do

their job. It's good that the Chancellor and the Prime Minister are joined up with the o b R. I think that meeting finishes shortly. But you've seen a lot of coordinated activity over the last coordinated action at all. I've seen a mess. So you come out last week with a mini budget, the Bank having the follow up with unprecedented intervention in the guilt market, and the o b R. Now you visit the o b R and look for some forecasts after the fact. Why weren't these

forecasts published alongside this many budget last week? Because the growth plans got lots of components to it. There was an imperative to act this time last week. It's tomorrow, you know, this is the quarter end. It's tomorrow that energy prices would have gone up across the United Kingdom, real uncertainty for businesses and households, so it was right

to do that. Then there's a lot of detail in terms of how the UK government wants to see growth going forward, and that wouldn't have been available to the O b R to factor into their forecast. Indeed, some of that we're still waiting to announce over the coming weeks, plans for infrastructure, to the housing market, for childcare, some of the deep seated challenges that probably all of our

major economies have with growth. So you know, look, it's been a it's been a busy week, but each of those players are doing their job in a coordinated fashion. How concerned are you about the increase in borrowing class with some people citing it's and in a half percent mortgage cost at a time when the Bank of England is being tasked with offsetting a proposal that has not been put out there, but the market is responding. Yeah. Look,

of course, of course rising rates are a concern. We've seen that obviously, you know, going into last week, I think you've seen more tightening in the US that's now happened in the UK as well. We've seen figures out of Europe as well today indicating that they've got exactly the same sort of issues around inflation. What the Energy package measures do is actually reduced the headline rates of inflation, and that's something that's going the other way to the

tread birrel seeing. But Andrew, there is this discussion about not releasing the o BR report earlier than the November twenty three deadline at a time when the markets moving, it's having real term effects. Now, why not just release it earlier to give people a sense of what's going on. Yeah, well, Lisa, look,

I was a finance director for eleven years. You know my board wanted me to release my figure as early as I could, but they also wanted them to be credible, to take the time to reflect all the information in a very fast moving world that's available, so everyone to have their own view on that. I think you just have to recognize there is a balance between speed and velocity and being able to wrap in information. Some of

that information, as I say, will be coming forward. The growth plan itself is a forty page document and some of that detail will still be released over the coming weeks. And it's not for you to decide how long the o b R nates is it. Let's get real about this. We're reporting now that you haven't sought to accelerate the watchdogs ECO forecast at all, that's our latest report. According to officials familiar with the comments after the o BR

Treasury meeting, why haven't you asked them to accelerate it. Well, I've just talked about how there's a lot of different detail. How familiar are with all of the growth plan? People have heard some of the headline measures. They've been widely rewarded, perhaps less so about the plan for interest structure, the plan for immigration housing. You know, these elements really important

elements of the growth Plan. That is how we're going to finance the fiscal announcements that were made last Friday. So I think you've just got to look at it as a package. When the Chancellor asked the bar to report on the twenty three November, it was in contemplation of being able to take into account the whole of that package. You in the media, BR tell you what, have you asked the o b R to bring forward those forecasts as soon as possible or have you told

them that you want them at the end of November. Well, the chance that will read out on on his meeting in due course, but in the meantime, you know, don't don't lose sight of the fact that the fundamentals here were strong coming in We started this with some of the lowest rates of the lowest jet debt to GDP and the G seven. The economy is still growing or bit we acknowledge that. Andrews time Keenan New York comes

sorry about you. As we speak. The Bloomberg Financial Conditions Index for the United Kingdom is a negative four standard deviations. You have seen a seven standard deviation move and the blended guilt price move. You have a derivative disaster. You are the city minister. What are the regulators gonna do finally to amend the derivative shell game that caused the Bank of England to bail out the marketing industry of l d I. Yeah, and you'll be aware Tom about

the independence of the regulators. So one of the things that you learn a city minister is the regulators have their job to do. What my time did? They feel that we have the most competitive environment in which to do business. Okay, you have a competitive environment that on a seventh standard deviation move, blew up. Fine, what does the United Kingdom do off of the scandals of of two thousand seven and two thousand and eight to five

only control the natural greed of the derivative business. You're at the heart of this, is City Minister, how do we finally get our every eight year derivative blow up fixed? Well, the Bank of England is taking the actions that they need to in the market right now. In the long term, of course, we look at the getting the right the right regulatory structure and that's a shared objective of ourselves

and the bank and the prudential regulators. So you know, of course one will always look at wherever there are there are the points in the regulatory structure that there needs to be looked at, but that's not but that's not the focus for today. The Bank's made its its judgment and it's into the markets and the thing the thing to your to your point earlier, Tom in terms of the politics, is that we need to communicate how

this country is going to grow. That's what's going to give people the confidence to invest, the confidence to hold the currency, and the ability for us as government to find the high quality in all of the instruction that we need to Mr Ferrell's questions earlier, what do you need to do on this Friday evening to give confidence Monday that the different experts are advising the Trust government of the outcomes of their Reaganomics like policy. Well, I

wouldn't accept that characterization. What what you need to know and the markets need to understand, is that we are working absolutely in lockstep. You've seen a number of coordinated announcements from both the Government and the Governor of the Bank of England over the course of this week. I spend my time meeting investors, talking to regulators, talking to

the fancial markets. But these are volatile times um and we're seeing that in every market, sometimes a different different speeds and pace, but it's a macro trend that is seeing and some of the things that we are asked to do is to bring forward supply side reforms to improve the UK's energy security situation because the aberrant here is the strength of the US economy and the strength of the US dollar as a function of your greater

energy overnight. It's I just want to make this clear, John, I believe the Minister just told us it's our fault. The UK is blown up. I think that's what I heard. We don't have time and that's not that's not that is not what you heard. What you heard, is that we've got a job to do to try and improve our energy security. And if anyone thinks that this isn't ultimately a macro issue that flows in part from Pugeon's

invasion of Ukraine, this is bloomberg. What we do know is from the moment it was known that Jane Foley, a rubber bank would speak with US pounders weaken from one twelve to a one ten handle as well. Jane Foley, I rarely do this, but I've got to get exceptionally narrow here right down in the g I P function and some of the technicals and Sterling give us your key support and key resistance levels for cable, Well we see huge ranges right now, so that's really difficult to

do what we are targeting one oh four. Certainly cable remains really very vulnerable because you've got to ask the question, well, what happens when the Bank of England takes away this extraordinary support of the guilt market. You know, the cracks of the problem is still there, which is what is this government going to do in terms of it's its

fiscal policies. Now it's one thing during the pandemic to to wish you more debt when you have the Bank of England hoovering up some of that depth through quantity of easing. But to try and do that when the Central Bank has reversed course, it's clearly very difficult to do a Now the Central Bank again is going through its quantity of visa program. That is a credibility issue.

Is is it supporting that the government's discal stands. Jane explained to us the efficacy of foreign ex ange analysis right now, when I look at fancy ratio and financial conditions indexes and fixed income spreads that are grim, does foreign exchange really tell me what's going on? I think it does. I think Sterling has been saying all year that UK fundamentals are grim. Sterling has been a poor

performer all year. The Bank of England has been failing to turn Sterling around with interest rate hikes and that's certainly been the case since the spring um. And that tells you that investors don't like what they see, and they don't like what they see even more because of it, because of the budget last week. And you know, even if even if you know some of those measures were to be at reverse, and there's no sign at all

that the government wants to do that. There is still being a dirty stain now on the credibility perhaps of the Bank of England, but certainly the credibility of dis government. And and you know the government's talking about the necessity of this budget because it wanted to improve growth. Well actually, you know, for many, many people, a lot of those subsidies on the energy price it's going to be taken

away in the form of higher mortgage payments. Anyway, people are going to be poor as a consequence of this, and also maybe because of the way guilts look in their pension portfolios. So no wonder We've got the latest opinion polls saying that Labor has got a thirty three point lead over the Tories at this point. The United Kingdom has unique circumstances some ways but others not so much. And we are seeing fiscal spending around the euroregion to try to grapple with what is going to be a

difficult winter. How much does this just accelerate the dollar dominance at a time when the US faces a different picture. Isn't necessarily engaged in the same kind of fiscal band aid for a problem that has a longer lasting kind of timeframe. I think it does accelerate the outlook of

the dollar. Mean, like you said, the market was already worried about global growth, it was already worried about UK fundamentals, which of course is why the time in all this BUDGECT was so particularly so bad, the chance of failing to read those market conditions. But it does accelerate the

the the movement into say favor for the dollar. But you know, would really like just to state that I don't think that US fundamentals operate on the on the dollar in the same way that fundamentals of say that the UK operate on on sterling. And this is because the dollar has his own set of fundamentals. It is a huge invoicing currency. It is a massive reserve currency

because it's a huge invoicing currency. And the long the short of it, the simplicity of it is that when there is crisis, when there is uncertainty, people just need dollars. They need it to cover their liabilities, to pay their invoices, perhaps to cover their dollar debt liabilities, depending on where

you are. So the dollar operates to his own set of fundamentals, which are pretty quite distinct from the fundamentals of the of the US and Jane Foley, Jane just wantedfull to catch up with you in London and then back here in New York as well. Jane Foley, thank you Rather Bank for John, Lisa and I and all of our team. We are going to continue to monitor this through the weekend as well, and it is across equities, bonds, currencies,

and hydrocarbons. Given a war in Ukraine. Expert on this is Regina Mayor, Global Head of Energy at KPMG, which barely describes the nexus of our military experience with the study of hydrocarbons at Rice University. Regina, thank you so much for joining today. What are you watching in the oil and gas market when you begin your day? What is the thing we need to focus on right now? So when I'm thinking about what's happening in Europe, because that's where there's a lot of attention these days, I

am looking at three things at every daytime. That is, what is the natural gas stocks supply look like, what are the spotting forward natural gas prices in Europe? And what do we think the weather projections will be? Both but today, tomorrow and the coming winter the near term. I'm near term optimistic because European gas docks are at nine of normal for this time. They were at fifty percent over the summer, so I think the EU has

done a great job of rebuilding that stock. Short term prices are down fifty percent from their highs over the summer, though there's still two higher than they were at this time last year, but they have by the summer, and I think we're hoping that the weather stays more in our favor. So near term optimism, But those are some of the things I look at near term. What about longer term? Yeah, well, longer term, there's so much volatility.

If you just look at this week alone, Lisa Cradle price jumped around eight up and down, and so I think the market has a lot of jitters. We saw some downward price pressure with recessionary concerns UH and the strengthening of the dollar, but then we worried about demand because the market got jittery with the what's happened with the North String pipelines, even though that actually does not affect near term European gas, like is this pipeline for

not serving Europe? But the EU has done a great job of reducing its short term dependence on Russian gas, and so I think that the added threats will create upward price pressure. It will continue that, but the recessionary fears, the rampant inflation that you all have been talking about, that breeds a downward price pressure that keeps US more in balanced. The analysts are are pegging average group price for to be in the seventies, which I don't think

I would have expected that just three months ago. Well, sticking on the energy story in Europe, but we heard from Enery Herdering, our correspondent in Washington, d C. About how they're increasing calls from Europe for the US to lower its natural gas prices as exports to Europe to give them some assistance through the winter. Do you see that as a realistic outcome that the US is willing to provide marginal demand and somehow cap prices in some manner.

I didn't think that most interesting. And that the paper that the EU is issued about creating an lergy transaction based benchmark. Uh, you know, the markets are very transparent, and you know high departments have been trading in the ways that they've been trading for almost decades, right, So I don't know how successful that will ultimately be given

all this volatility that we've been talking about. I do think though, the governments are really interested in having more unified policies to protect their electorate and to secure energy supplies for the coming winter month Regina the Netherlands. Inflation in the hydrocarbon part of that, I believe is a hundred and fourteen percent, just unimaginable numbers. What are the ramifications if we get ninety days of sevent inflation in the Netherlands. Well, I'm not an economist, Tom, but I

mean I think it's you're seeing major price escalation. I'm talking to a lot of senior executives that run manufacturing companies all across Europe, and their energy costs are through the roof, and that cost then has to get translated back down into goods and services that go to consumers, and that I think is what's driving some of these

these crazy inflationary numbers that we're seeing. And until we can drive that overall energy cost down, you know, they're making short term decisions to cut manufacturing runs as a demand management response. But I think will continue to see a lot of upward pressure on price given these higher energy costs. Regina, thank you and thanks for making it

this morning to join us. We appreciate it. Regina Mada of KPMG holding on as the expertise of the chief investment strategist at LUTH, Jim Paulson recalibrates in the fourth quarter with us this morning. What's the value of cash right now? Mr Paulson? I, UM, it's nice to see cash tom at least giving a positive yield of some merit, but I don't think it's the right asset to be in right now. UM. I think they are pretty unsustainable at the moment um, and it's all tied to police

officials raising rates. Um. In this country, the tenure yield is going straight north, while commodity prices are collapsing, while inflation surprise index is falling, while while the I S M S price surveys from service and manufacturers are are falling out of bed, while inflation expectations in the bond market break even rates are collapsing. Um. The dollar is simply out of control and the upside is a reflection of yields, and I think you know, something's got to change.

It's gotten too extreme and probably what changes is rates stopped going up soon? And if that's the case, I think the stock market is gonna have a good rip yet. Um And I don't think you'll be pleased by putting too much in cash, but having some in cash. It's nice to have a bond market that's yielding something, in a cash market that shielding something. It's certainly gives Asset allocators are just people, individuals and opportunity to diversify some

risks that they haven't had for quite some time. What's that coon option? You've got the gym on a rip? What are you playing? What are you sitting? What's the pocket of the knocket you want to be present in? Well? I I think I look at this like coming out of a recession, uh, Jonathan, I I would. I would look at early cycle stocks. And my favorite sector is the consumer discretionary sector. I think it's the one sector

that's been most harmed by inflation. It destroys UH not only their operations by squeezing their margins of the companies, but it destroys the confidence of their customer base, and so as inflation rolls over, I think those stocks come back to life. I'd also, you know, look at growth stocks,

particularly small cap growth. I my favorite tilt would be towards small caps, which by the way, have held up remarkably well in this last draft in the stock market here uh since August, and I think that I would I would have some exposure there. I also think that there's cycles beyond the UH consumer discretionary that probably play, like industrials and and so forth. And I also think there could be a play on the dollar. Yet, I just think the dollar is too high, has got to

come down. And I don't know if i'd have a broad based international bet right now, but I would maybe in the emerging markets excluding China, so Jim right now Nike shares down premarket trading and screaming pie Uh. No, I don't have any particular preference to Nike. Uh, Lisa. I mean, I'm not mean to put you on the spot. I know that you're you're viewing this from a more big,

big picture sense. But I guess that the point that I was trying to make is what's the risk to the downside as you wait for the FED to blank. When the FED saying we're not going to blink and no things are not breaking, it looks like actually financial stabilities holding in just fine in the US. I we're getting really close to a blink and and probably a force. It could be that we get a you know, a

really weak economic report. It could be that we get a really good inflation report, probably more likely as something breaks. And you guys are bringing up things this morning that are starting to show some cracks in the foundation. And right now, if something breaks in the US and it's a systemic problem, there's more downside risk in the stock market.

But I think that the private balance sheets of the United States, both households and corporations, are very solid, and they're very liquid, and the banking industry squeaky clean in this country, and the chance of a systemic balance sheet break here, I think are low. So I think something breaks, but if it's not systemic, it will cause a pause in the tightening cycle across the globe, and that could be a really big positive here for the stock market. One point, you can you can you make that fun

a point and then I'll come back. You just type of states you got a stage that, okay, I I just want to make a one point that you know, Powell seems bent on, you know, channelings inner inner Voker moment and the entire Voker moment that actually occurred in one there when Paul Voker took the funds rate from nine and a half percent in August I think to

by December UM. The stock market after that two fell by a total of seven And I think it's important to recognize we're already down twenty in this country already. So even if we're having a Powell moment, you know, it's interesting Volker had a Voker moment after fifteen years of runaway inflation in this country. The pole fed is wanting to do a Vocer moment after fifteen months of high inflation. I don't think the two are comparable and

don't need the same approach. Jim will continue this conversation at the time, so we appreciate you thoughts and kind of instructive. The hope is that imposting that the Luthal Creek.

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