Surveillance: Virus Woes Hit Markets

this interview up over the last hour or so. You were a team out with your rounte look five thousand next year, but not year end in June of next year, and then only an extra one hundred points from there over the next six months. Can you want me through the trajectory of the next twelve months that you're looking to play out? Absolutely, you know, we believe that will really be a year of discovery for both markets and individuals. As we know the last two as have been somewhat unusual.

But next year we think that financial markets we'll discover what normal looks like from a growth and an inflation standpoint. We really think it will be a year of two half so that's why you see the spread between our price starters from mid year and the year end. The first have been elevated economic growth, so we're looking for

growth in the range of four and high inflation. But as the year really progresses and things normalize, we're looking for the second half to be laurer growth, still healthy and above trend, and more subdued inflation. So we think in that environment the SMP can reach five thousand by the time we get to June of next year. Nadia, are you looking right now at what's going on in Europe as a blip or a potential risk scenario that could move over to the US should this pandemic start

to pick up again. Absolutely, we always watch a COVID cases very closely. Yes, the rising cases overseas is concerned and that could translate into the US. We've seen this pattern played out before. That's why we don't think that we're out of the woods, and that's why we continue

to believe that the FED will be patient. There are areas of the economy that has recovered from COVID, but there's still areas that are still on the men, particularly on the service side, and so we don't think that the FED will be overly aggressive as particularly as COVID cases haven't fully resolved yet. How important is an inflation call for you, Nadia. We had a Bloomberg Business Week cover story on this by Katie Greifeld, pointing out that if you make the wrong call here as a strategist,

it's very bad. If you make the right call, you are potentially a hero for decades. Absolutely, you know, the inflation numbers is something we're watching closely, but we do think that inflations will become more subdued in next year. As we know, much of the spike in inflation is being driven by the more flexible component of an inflation basket, so things that replace more quickly food, energy, auto hotels.

If you look at the core flexible CPI, it's up nearly but while inflation is brought in it out to some of the more sticky areas. We do think that the more flexible elements will normalize in twenty two and so we're looking for inflation to get slightly onto two percent by the time we get to end of December. There's one thing missing from this call, Naddy, that I

wonder if clients have picked up on as well. No rate hanks until twenty three inflation to subside down towards one point eight percent by the end of next year. Got all that very bullish at the index level five k by the middle of next year. I look through the preferred sectors energy, financials, discretion, we healthcare. There's one thing that's missing when you talk me through that macrobacter up inflation, the FAED patient, Where's investment, Where's the I

T story? Where's the information technology story? In your recorditly market call. Yes, we're mutual on tech at the moment, but again with COREE cases rises, you know, we know we do typically see volatility and those more reinflation trades as well as a reopening trade, and so there is room for tacking the portfolio over the long term and

so on pullbacks on TAG meaningful pullbacks on tech. We always advise clients to add to longer term position, but headed into two we just think that there's better growth opportunities in the more cyclical errors of the market, and so that's why we have a position that way. But if we do see a sustainable rise in the COVID cases, we do know that people take shelter in text so that is an opportunity now the really thoughtful stuff as always, and good to catch up. Thanks for sharing your out

look with us now your level there of ups. Thank you joining us now is Jimmy Sullivan, chief US market strategist macro strategist at TV Securities. Jim, arguably with the biggest goal that we've been talking about over the last week, we caught up with the colleague premission about it waiting until December three two high interest rates. You're at the very far end of the range of the people we talked to right now, Jim. Why can't they wait that long? Jonathan,

good morning. Well, I mean, obviously it's hard to be very specific on exact timing, but our point broadly is that momentum will be down over the next year. And obviously, if you simply extrapolate where we are now, growth looks very strong and employment is falling, inflation is way way too strong, and if you simply extrapolate, and of course the FED would have to tighten. But I mean, the key, key issue is what momentum is going to look like

over the next year. And we do think despite the budget bill being worked on in Congress and will probably ultimately be enacted that there will be significant physical dragon two, So the budget deficit will go from basically around twelve of GDP and physical one two around five percent in physical two. There are some offsets, but we think the net of this is going to be pretty significant down

or momentum. So I think it will feel quite different as we get towards the middle of next year in terms of momentum and growth as well as inflation, and so we'll see where we stand at that point. Then. Obviously the FED has bought themselves some time with tapering. I mean they've got a seven month tapering, so that won't wind down until June. I mean we would say the bar for accelerating that is extremely high. So we'll

see where we stand. Obviously we get towards the middle of next year, but we think momentum is going to be down between now and that. This is really interesting to me that a lot of people have come on and they've said it doesn't really matter how much inflation does come down next year. If it starts coming down, it will edifies the FEDS. It will edify the Fed's position.

Do you think that that's true or does it need to drop a certain amount and by a certain date for it to actually support where the FEDS approaches actually right now, I think I mean meaningful slowing. I mean, the the year of year numbers are still going to be quite strong, of course, because you're not going to drop out all these high numbers for a while until the recent strong month of the month numbers drop out them the twelve month change numbers are elevated. But we'll

see what momentum is like on a monthly basis. And I mean, do you have to get to two percent year of a year, Absolutely not to be to be just hold off and tightening. But that brings in the other part of the mandate if you get enough slowing on inflation and the focus turns back I think to where they stand on the mandate unemployment. And there's a lot of debate right now about what is maximum employment.

Obviously going number pretty strong, that presipation rate numbers have been disappointing, but yet payrolls are down four million plus from pre COVID level. So I mean this is going to be an important debate over the next year. What maximum employment. Yeah, I was gonna ask you about that too, Jim. I mean, maybe, um, there have been such structural changes

that this is just the new normal. You know, if you can't get employees through the door, even if you're wazing rages, raising wages um and there are so many jobs out there that anyone could get one, how are

we not at maximum employment already? Yeah? Well, I mean if you again, if you simply extrapolate current numbers, including jolts numbers, job openings, where the perticupation rate is, etcetera, with wage numbers are doing, then you'd say, on the surface, sure, it looks like maximumployment, but everything is so distorted right

now by COVID. I mean, we had the delta wave over the last several months, which clearly contributed to preventing the participation rate from starting to improve again despite the expiration of unemployment benefits, etcetera. So I mean it's it's too soon to really just take these numbers literally, given that we're still in the midst of the pandemic, and so we'll see where we are in a year's time.

I mean, I think most FEDE officials would say they would not be satisfied that this is the new normal in terms of the level of employment and maximum employment. I think they want to get these people back. It might take time and there will be lags, but they do expect most of these people to come back, not all of them, and certainly there are most of them

were retired. I thought most of them just have done so well on the market that they stepped out and bid adea and well, I mean, then the nature of those data is that, I mean, people retire and then they unretired. I mean, so people do go back and forth in those numbers, and a lot of what we've seen is people not coming back into the labor force

having retired previously. So again, I think it's too soon to just simply assume that the participation rate is is going to stay where it is, and I think we would expect to see recovery over the next year. It's not all gonna happen in one month. And certainly most FED officials, I mean, obviously, particularly if it's it's brain artists, the chair we would say, but even even with pale as well, would be hope full and would expect that that most of these people can come back with time. Jim,

just quickly. Lisa has been on top of this one through most of this morning. Just how much daylight is there between Cham and poal A Governor Brian had you've been waiting for the same decision we've been waiting for fed watching yourself. How much daylight is there between the two? And I mean on monitory policy. Obviously there's talk about regulatory policies being a bit more clearly clearly different, but

on monitory policy not necessarily huge. But but yes, I mean, I would say most people would say that Brainard is likely to be more dovish. She's more likely to have a dovish interpretation of maximum employment, we would say. But again, I mean Powell is pretty dubbish as well. Jim A Sunivan it's eight Jim, You're confusing it, so thank you sir.

As always, we spoke with Dr Andrew Pakosh earlier this morning on Bloomberg Surveillance and we were talking a lot about the situation over in Europe and since then in the fast moving newsplot that is the pandemic, we got the approval by the FDA of COVID nineteen booster shots from MODERNA and Pistor and Bond Tech. The question I have really is how much more protection do you get from the booster and how much can this dave off something from happening in the United States from what's happening,

say in Germany and Austria. Dr Andrew Pekosh is joining us again and we really appreciate it. Johns. Hopkins University, Bloomberg School of Public Health, professor and virologist. What's your sense, Dr Pakosh, of how much we can prevent another surge in viral cases as a result of more people getting boosters. Well,

you know, boosters will do two things. Um. One is it will almost immediately increase your protection against infection, and some of the data suggests that will get back up to that level that we saw in the early studies. The second thing that is starting to come out, though, is that that booster, particularly if you get it six months after your first doses, seems to be able to induce so much longer immune response and therefore you might be protected for six months, a year, maybe more um

after the booster. So it's doing those two things, but at the end of the day, it's targeting people who already being protected from infection and from severe infection. So it's going to move the needle a little bit, but but it's not going to be a game changer in terms of protecting us from surges of COVID nineteen because that's driven by unvaccinated people. And Dr Peckard's going to that point the unvaccinated people. You know, I'm just not

sure what more can be done. I'm just speaking here in the US for those folks who choose not to get vaccinated. It feels like this is our future, this is just the way it's going to be. We've i mean, the arguments have been made time and time again, and the decisions seemingly have been made. And maybe some mandates can move the needle a little bit, whether it's a workplace mandate or a government mandate. But is this kind

of the new normal? Well, what we need to realize is that individuals don't get vaccinated, you know, really shouldn't have free reign to be able to do anything they want because of the threat that they post to the rest of the population. Now, this could be mitigated in some ways. Uh, twice a week testing could be one way to to to to target those populations. Um Limiting them from certain activities is another way to do it.

So we're moving to the stage now where it maybe that vaccine mandates alone won't be able to do this, but putting in some of those other restrictions may be a way to get us through these surges and minimize those uh, those massive uh pushes of cases into our hospitals which stress our medical care system. Dr Pekosh. Theoretically, let's say there is a family, and let's say it's almost Thanksgiving and one member of the family is not vaccinated.

Where is the biggest risk here? Is it for the person who's not vaccinated being exposed to people who are all vaccinated but still could get the virus. Or is it people who are vaccinated getting the virus from the

person who's unvaccinated. So so so, theoretically, if you're vaccinated and you're exposed, you come into contact with someone who's infected and not exposed, you do have a higher risk of getting the infection, but your risk of getting into the hospital after that is much much reduced because of

the protection of vaccine gives you. Now, this does change a little bit if you talk about things like people with pre existing community conditions that predispose you to more severe disease, or even the elderly, in which case we know that the vaccines work, but they don't work as well as they do in the healthy populations, so it's also about those more vulnerable populations and the increasing the

exposure of those individuals to the virus if you are unvaccinated. So, Dr pecos one thing that we haven't talked about recently,

I don't think is the concept of herd immunity. Is that something that given the level of unvaccinated population, that's really not really on the table um it's it's not on the table anymore from a practical state because with the emergence of the delta variant, some of the estimates of what we need for her immunity are now in the or sometimes higher part of the population getting vaccinated, and that just doesn't seem realistic given what we see

right now. We can, however, control of severe cases with vaccines. The the soon to be approved anti viral treatments will give us another important tool that will help us reduce the disease severity. And so we have the tools to to really minimize the difficult effects of this virus on the population. We just have to be more effective at using them. Before we let you go, Dr Pekash, going back to what's going on in Europe with the Austria lockdown and the potential for Germany to do the same.

Is there any way that you could see US lockdowns at some point in the future. Considering that the fact that the vaccination rate here is similar to what we see in those nations, Well, it's interesting because while the overall vaccination rate is similar, we have a lot more variation from state to state in terms of how many individuals are vaccinated. So in my state of Maryland here I feel a little bit more confident than I would if I was in another state in terms of how

much protection is being afforded by the vaccine. It doesn't appear to me that there's political will to go through lockdowns on a massive nationwide level, but I wouldn't be surprised if some of the states that have been good about their public health interventions to control COVID nineteen do consider some additional um measures if cases do surge again this winter. Andrew Pekosh, thank you so much for being

with us. JOHNS. Hopkins, University of Bloomberg School of Public Health, professor and virologists joining us today you can just joined us now. Chief Investment Officer at Dow Tech Bank can trust you go this econity market, you can't hold it down with down a tenth on the SMP and now's back at all time highs. And that's like one dred futures up another fifty three this morning. Restrictions back in Europe struggle the shoulders over here state side, Hugo. What

do you make of all of this? Well, you've got a trifector of tail winds. It's place. You still have military support, you still have incrementalism from central banks that reining things in, but very very slowly. At Lisa highlighted, you've got economic tail winds as well. So you have the US keyboard. GDP estimates are actually being ticked up a little bit. You've had excellent QU three results from large waves of of of US courts as they reported.

So there's um, there's you know, the final Pieces've got central banks, you've got cycled, and then you've just got this this wall of liquidity sitting there too. The bond market, even though inflation this is a big bow. And the bond market, given though inflation hit six point two last week, you know, the ten ure years sort at one point, it's like it tells you all you need to know.

But Hugo, that's exactly where I wanted to go, this sort of discomfort here with high inflation reads and very low bond yields, and you have some people like Wharton professor Jeremy Siegel coming out yesterday and Bloomberg Television and saying people are not prepared for how fast, how quickly the Federal Reserve will have to high rates will have to normalize once inflation shows its persistency. What do you

make of that? Well, I mean there's a lot of work being done there by what they have to do, you know, if they haven't budged when six point two is is the inflation print, and when core inflation is north of three and still looking persistent, and you know in our estimates we're going to see those core numbers continue rising. You know, you can see what wages are doing, you can see what rent is doing. They're the core components of core inflation. So you know, we know that

numb was the core. Numb is going to be high from periods time, and yet there's still holding pat still being incremental. The communication that you saw from the fair, you seem from the ECB tells you that they're going to do absolutely everything to try not try to ignore it,

but to to avoid some sort of tape attention. They don't think their work is done in terms of fixing the economy, So why would they Why would they perform such an aggressive utah, we don't they do so the market, I mean, the markets already priced in two or three hikes for the US, four or five hikes for the UK. Why does the market actually think these super doves, I mean when you compare them to somebody like Paul Volker, right, these are incredibly dovish FED governors. Why does the mr

market think they would raise rates that much? Well? No, I think I think they can raise rates that much. Um. Look, the market is always ahead of the Fed. You can see that whenever you're looking at the at the forward rates implied and and and against the dot log. You can see on the way down the famous two hawks expecting mean version and now on the way up there

there what they're communicating will be behind the curve. The market can control o three rate hikes, it's already prized for them, and that the eggery market has to move them much. But three rate hikes is always Remember where we're coming from, we're coming from zero, so three rate heights is just taking us back to like seventy five seventy five to one percent, all right, And the question

really is can the economy handle that? And I think what people are really forgetting here as this economy is not being held back by demand rates. They that affects demand, you know, it's it's it's it's some financial conditions, credit conditions that affects demand. Right now, the economy has been

held back to twice as well. So if you raise rates and you're you're tweaking to that's not really what's gonna what was gonna affect jobs and great, so you've got some some freedom to to to see raps rise without an effect on the actual underlying economy, and the market's very cultable. Hugo, it's gonna catch up. I always dislike you at the end of the interview. Hugo from the Bahamas, Hugo Rogers from the Behalf. It just it winds me up, Hugo. Hugo Rogers of down Tech Bank,

You too, sir, got to see your buddy. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern. I'm 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 Keen, and this is Bloomberg