Surveillance: US Inflation Cools

Deutsche Bank. But Matt, I look at corese c P I and you've got to be kidding me. This is, you know, the to use a fancy phrase of David Fokas Landau would use, this is a teen tweets move and a turnaround. There's no way there's a vector here. So on the path it's six point three corps. What number do you need to see or you have John Farrell's vector of disinflation. Yeah, So I think we shouldn't over emphasize the zero point three. We've seen that a

few times over the past year and a half. But I think when you do look at the underlying elements of this data, there's some support there. So owners equivalent rent coming off a little bit. We saw health insurance inflation come down, which was anticipated. You're seeing some of the goods deflation as we were. You know, everybody anticipates that we're going to see a power prices down, use cars everybody knew was gonna be down. Household furnishing is

coming off. So I think the underlying elements of this report are actually you know, they're they're good, they're supportive. There's you know, some evidence that we are moving from peak inflation down lower. Where where do we end up? I think is the big question. But to John's point on vector six ish core inflation, at what point do you say, yeah, the arrows pointing down, is it five point eight? Is it five point two? How much move do you need to see in core to say vector

in place? So I think we can't look at the year of a year data simply because you're building these point six point seven prints that we've seen over the past year. I think it's all about the month on month prints, and I think the market is right to focus on that. Um In those prints, you know we've gotten I would say some broad based deceleration and a lot of these categories I would expect the trim, mean

and medium measures do look better today. It does support I think, what is the FEDS leaning towards wanting to downshift in in December? And then as we get into next year, you know, February March, it's all about can we maintain some deceleration and will you begin to see the labor market come into better balance over the next several months. And we're seeing the market down grade the expectation for a seventy five basis point rate hike in December.

It seems like a fifty basis point rate hike is being locked in as well as a lower terminal rate than perhaps they were thinking just a couple of minutes before this report came out. How much does that change your assessment of how far the feder will have to go? If we get ongoing down shift in the inflation reads, if we get another softer than expected print in December, does that cause you to rethink a at recession and

be that it's going to be deep? Yeah? I think the big if is do these into these continue because we've seen these point three prints before, UM, but no out if you continue to see these come off, UM, it's certainly supportive for the Fed not having to get too much higher levels. Our terminal rate has been at four point nine percent. I think that still seems like a reasonable view at the moment um. We wrote a

piece yesterday. There's a lot of focus on financial conditions, and certainly with equity markets really taking off here, there will be a lot of focus on our financial conditions easing in a way that Chapal does not want. What I would highlight that is maybe a little bit different than that is the bank lending channel and we get the Senior Loan Officer survey. It's a really good leading indicator when you see tightening of lending standards on commercial

and industrial loans UM, commercial real estate UM. And we've seen a material tightening there. So it's a question of has the Fed done enough? How much more do they need to do. The bank lending channel tells us you may not need to have a materially higher terminal rate than than what's being priced. It's a three percent move on some futures, it's a nineteen basis point twenty basis point move in some places on the curve in the

bond market. Let me ask you this. You said something that is of interest to make this gives the FETE the spice to what that we're going to do anyway, which is back away from seventy five basis point hikes. If this FED had this data going into the last meeting with that news conference has been any different, I don't think so. I mean, you know, I think the worry is when you downshift that you ease financial conditions in a way kind of like where we saw in

July that is counterproductive from the Fed's perspective. This is one data point. We had points six the previous month. This is point three. There are some encouraging elements within this data point, so I definitely want to emphasize that, but the FED needs to see more to to say, you know, we we can decelerate them from fifty down to twenty five and ultimately pause at some point. It is something that I think helps them along that path um,

but it's no, it's not conclusive evidence. I think that they can peak up at five percent and be fine for this Watching this and listening right now, they won't just have the hope that FED backs away from seventy five and goes with fifty and this data. If we get the data like this again on December thirteenth. That would endorse that approach. They're hoping that the second piece of a communication from chair and Pal also gets readdressed, so it's slower seventy fifty maybe twenty five. He also

said higher. Does this remove the risk or help to remove the risk that the terminal rate scope for the terminal rates much higher than where we are priced right now is removed. Yeah. I think some of the contexts

around those comments was lost. You know, when chair Pal is talking about a higher terminal rate, he's usually referencing what the sep dot plot was showing in September that terminal rate was four point six as a medium, up from three up, up from three a D. But I think he was saying higher than what they had projected as of September. The market went with it and went to five and a quarter for someone what we priced already, absolutely sure, and so I think there's there's some context there.

He was guiding towards something that was higher than where they were in September, not necessarily something that was materially higher than what the market was pricing at the time. A viewer just wants to know your view as we got the CPI report, we got initial jobs claims, and we see the continuing claims ticked up to one point four nine million. How much are we looking at increase in employment rates that perhaps people have not really priced in fully. Yeah, so on our re continuing jobs claims

are the best real time indicators of recessions. UM. There's been a lot of difficulty in interpreting that data. UM. At least if you look to the prior weeks, you had seen this uptick take place, but it was only in the seasonally just the data was not in the n s A data. So I think there's some caution because there's been a lot of difficulties seasonally adjusting the

data UM post the pandemic. But if you continue to see that rise, uh, it is something that tells you that the labor market is beginning to materially usen and it is the best real time indicator of recession. This was awesome gotten into the print coming out of it. I hope we can do it again December thirty for that and it's our real something. Okay, look forward to your bank looking forward to it too. Kathy Jones Jones Down, Chief Fixed Income strategistic Charles Swabs, so she could join.

That's warning, Kathy, I want to get right to the reality. You know, I've been on this. I don't care about spreads, I don't care about fancy convexity and the rest of the frank fibosy world. I'm down in some flavor of quality bonds. How do I begin the recovery? Well, yeah, there's a couple of choices you have, so you know, most likely what you want to do is start reinvesting and higher coupon bonds. So in order to recoup your money, you want that coupon money, right, because that's what you

get out of the bond market. It's much less about capital gains. Obviously that was when when deals were falling to zero, But in reality, most income you get from fixed income is the coupon payment. So frankly, to repeat what we had this year and get another fourteen percent down, you need rates to go to nine percent. Now I know a lot of parish people, I don't know anybody

talking about nine percent. So even in a static or higher interest rate environment, if you have higher coupon hang bonds and you're going to have a positive tone return, what quality of quality corporates is the best positioning point? Is it the no brainer triple A. I'm not using it as a credit rating basis, but just the emotional triple A quality or do you want to go some

shades of quality down to find that coupon? Well, in the corporate bond world, there's not a lot of triple A paper out there anymore, but you know you want to stay investment grade. We think um high yield is it's very appealing at nine percent yield. The problem is we haven't really I don't think discounted the weakness in the economy that's coming and there's probably more shake out.

They are so pretty cautious on high yield, but sticking with higher credit quality and with munis too, or if you're in a higher tax bracket, the mini market still offers from very attractive tax exempt returns. How until you staying in cash are short term bonds? I mean, we just heard from Phil camp Rally over at JP Morgan temper percent of his portfolio in cash because there is

an alternative. Are you finding the same thing in fixed income and avoiding, for example, long duration simply because of the uncertainty Right now? Yeah, we're seeing a lot of people, you know, stay short relatively, stay short duration. We think that's actually a mistake to stay all in cash because to lock in higher yields right now, we think as an opportunity we are looking for inflation to come down.

We are still looking at a rocky road ahead for the economy, and you're not locking in some of that income right now. You're probably going to ride ride it up and ride it all the way down and be looking at lower yields down the road. So we're not extending duration too, you know, uh, thirty years, but would definitely think you should be moving out to at least an egg like duration in portfolios. Do you think that longer term we're going to see an average tenure yield

closer to say three percent or even two percent? Is that the more likely kind of target that you're looking at. Just get people an understanding of the rate of change and where we may be headed. Yeah, we do. I think some of the basic fundamentals haven't changed, so and well, hey we've got some you know, weakness in the economy coming to just a cumulative effect of all the typing

we've seen globally. We should see the economy continue to weekend and inflation come down, But then we haven't really changed the demographic profile globally and domestically of an aging population. We still have a lot of savings around the world, and frankly in the US, we still have the world's reserve currency that people flocked to when you know, things

get tough. So I don't know why we wouldn't go back we get inflation down to around our roughly three three percentage tenure yield because the Iro Jersey over at Bloomberg Intelligence just publishes and he talks about a ten year yield that will be hovering and that there will be almost the stasis. Are you assuming we come out of bond volatility and yield volatility towards a hovering sense

of the fixed income market? Well, I would love volatility in the bond market to come down, but I think we have to get the FED to slow down or stabilize before that happens. I think one of the concerns I have is that this this volatility, this rate of change has been so dramatic and so high that it's kind of destabilizing a lot of other things. So, you know, because bonds are used to price other assets, if you have a highly volatile treasury market, you can't really price

those assets very well. So I think down the road, sure we should get lower volatility, but I think we need to see the FED plateau at least before that's going to happen. Kathy one of the best time, so always Kathy Jones. That changed to up climate. It was one of the themes in the election. Maybe below the radar of crime, immigration, inflation, the economy of America, but

nevertheless it is always of this. Michael Reagan joins US now administrator, yes, of the Environmental Protection Agency, but far more from the backbone in the fields the hills of North Carolina. He's got an understanding of the value of climate to ourselves. Michael, thank you so much for joining us. From copy seven. The problem with these interviews, as we tend to go big and broad, I want to go narrow.

And it does go to the President's back and forth on hydrocarbons, on oil, on net gas, and also on methane emissions from oil. Take us into that little narrow window of methane emissions and what can be accomplished. Well, thank you for having me, and you know the President has pledged that will continue to move forward UH to reduce global warming, to reduce these emissions that cause global warming.

He never pledged that we would get out of it immediately overnight, but he pledged that we would work our way out of this. And so I think when we talk about methane in particular, the conversation is that I'm having with the oil and gas sector, with technology providers, UH, with you know, the US Chamber of Commerce, is that we see an opportunity to deploy technology to reduce methane UH and actually save the loss of gas and gas

products while saving the planet and protecting public health. We know the technologies exist, We know that there are advanced technologies and business models that can aggt to reduce in methane, and so E p a's job is to put some rules of engagement in the role so that all companies know and can make these longer term investments. How does EPHS job change with the election including a big Republican

win in your North Carolina. I'm fascinated how the oil and gas industry that has a GOP ben will change an amend coming off this election. Well, you know, we're the president has had a historic two years and passing historic legislation with the Biparts and Infrastructure Law, the Inflation Reduction Act. You know, resources coming to e p A UH to help with and enhance the regulations UH that

we are required to put in place by law. So I don't think the elections will change the fact that e p A has legislative authority or authority provided by the legislature or Congress to pursue the reduction of greenhouse gas emissions to protect public health and protect the planet. We're gonna continue to move forward and do our job.

But the resources that flow from the UH, from the Inflation Reduction that just help with that public private partnership to pursue these reductions, So we're not solely reliant on

regulations alone. How complicated is it right now, Michael, to be with this mandate to reduce submissions at a time where people are prioritizing fossil fuels in light of some of the shortages, in light of the war in Ukraine, Is it perhap taking some energy away from what you're saying or making it more difficult to argue your cause.

You know, it's a it's a it's a it's a speed bump, right I mean, I think we find ourselves in this position where many countries are overly reliant on fossil fuels provided by UH, you know, countries like Russia at a time where it's it's inconvenient, and we are seeing that this unprovoked war with Ukraine is causing pain globally.

If we were not so dependent on these fossil fuels, if we had made the proper investments in clean technologies and energy efficiency and more domestic opportunities, we would not see the price volatility that we're seeing internationally. So it's

a wake up call, right. Number one, it is very inconvenient obviously, but number two, UH, it is really forcing all of us UH here at cop UH to think through how we continue to double down and invest in alternatives to fossil fill with Michael Reagan, Thank you, sir, Michael Reriggan, there have the e p A. This is important, John and you alluded to it one an election. To speak to Terry Haynes. He has a certain perspective. He got it right, He just got it right out into

all of this. I've almost looking for that massive red wave. It dominated the conversations on this show when that's not what's Harry was looking for? Terry Haynes, founder of PANCHEA Policy, joined us right now, Terry, why don't you start with what you were looking for and why and we'll take it from there. Good morning, John, And uh, you know, I'm kind of old school. I I look at the data as much as possible. I weigh in a bunch

of other things. I do pay attention to what some of the aggregators are are looking at, whether it be uh, you know, real clear politics, ornate silver sight, or whatever. It's kind of a spice. But I've been been around us and doing this a long time, and in the end, what you get from me is my own view. I

wasn't seeing a way. I was seeing a you know, slight reddening of the map, certainly, but probably what probably a small house majority and uh, you know, the Senate is still up for grabs, but I think right now a little more likely to go are than D. But

it wasn't gonna happen. So you know, I mean what you get out of this is, you know, you get continued but what you already have continued for firstability, nothing in the domestic and uh continued unimity on foreign policy Terry, Will there be a set of Joe Mansions in the House. Will there be centrist Republicans looking to two thousand and twenty four that will push against more conservative Republicans. I'll let Joe Mansion and the Democrats in the Senate. Oh sure,

and well there already are. You know, Mansion by no means is alone. Everybody knows Mansion in cinema. But yeah, I always look at them and know that they're they're representing others on issues, whether it be energy issues or you know, frankly the regulation of financial services, because remember they've rejected a bunch of people. Those people exist in the House as well. So sure, these are four factions, not two parties, I always say, and there then that's

still true. Well, this is really important. I don't think it's in the zeitgeist right now, Terry. It's not a unified GOP in the House. I get that, But do they have real power to steer GOP legislation with the GOP majority in the House. Well, if if they can unify around something, sure, and there will be lots of responsible people, uh Patrick McHenry and financial services being one who will look to do that exactly. But it won't be an easy process for them, just like it wasn't

an easy process for Democrats in the last cycle. Uh. You know, it'll take some time. It won't be instantaneous. Uh. And of course if the Senate does not go whether or not the Senate goes Republicans way, you need sixty votes to to proceed the legislation in the Senate. They won't have anywhere near that. So the net net of that is you won't see very much legislation be successful. Terry, is it too soon to say that Rhoda Santis is a new leader of the Republican Party? Um? No, probably not, Lesta,

It's probably not too soon to say that. You know. Certainly the direction that the Santis points, which is, you know, kind of unapologetic on policy while at the same time having having a winning way about if not only personally but but through election results, is exactly the direction the party wants to go in. And Uh, then so sure, I think that's probably true. From a substance perspective, How does that differ from Donald Trump from a what perspective?

From a substance perspective? Substance perspective, I think what, what and how it changes. Is that kind of consistency of purpose and consistency of message. What always dogged former President Trump was was a lack of consistency in messaging and

and a lack of consistency in substance. To some extent, Now there were he had some successes where he was laser sharp on both of those, trying to tearriffs being one, but a lot of other things that Trump White House is a little bit all over the map, and that was bad for them. Uh. De Sanders has shown in his governorship that he's he's learned from that. It's Terry. Tom's talked about this. I just want to build on it a little bit more too close down this conversation.

The failure to embrace men in voting on the Republican side, Terry, how did they address that? How do they even talk about it in the coming months? Uh? The what? John? I'm sorry? There to embrace mail in votes on the Republican side, it just hasn't been part of the strategy for the party. Yeah. That's strange, isn't it. It's Uh, They're they're gonna have to. Uh And I think this is probably a wake up call for that. I don't know why they've been laid to the post done that,

but they have been. But they're going to have to figure out that there's really two h two elections here, the mail in vote election in the day of vote election. Uh, Pennsylvania is a perfect example that I could never understand why uh why Republican why Oz agreed to debate Veterman so late after there were so many votes already starting, and uh, they're already in and that's probably what election against him. Terry, Yeah, Terry, don't feel bad that you

didn't understand John. I didn't understand him either. There, you know, like about every fifth word with John, I just with the accident, I just I don't I didn't get the mail in thing there as well. It wasn't just like no, it's just like a pinky blinders thing. I have to watch the captions. No, I did not understand what John said. There is Terry said the same thing. The accent you'll suggesting that was a Brimi accent. No, I need well,

I changes now that I think about it. I need to get you know, the word thing at the bottom of the screens close captions. I do that with pinky blinders. I mean I didn't understand me there and I didn't well, yeah, but you know, but I need close caption for Bloomberg Surveillance with John Farrow. I mean question how offended I should be. I think I think quite. I think you're justified being quite. But let's talk about Shelter. Melon voted. Sterry has hugely valuable. Thank you ter. 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