tv Bloomberg Surveillance Bloomberg August 4, 2022 7:00am-8:00am EDT
>> they don't want a recession, but they do need things to slow down for inflation to continue to go lower. >> there is a lot of work yet today. we think inflation will be running at 4% plus. >> what i worry about on the other side is that the fed works too fast and too much. >> i think a big issue we have in the market is that the fed is not about the pivot. >> we have right now about a
50-50 chance of tipping over into a true recession. announcer: this is bloomberg "surveillance" with jonathan ferro, lisa, and tom keene. jonathon: good morning, good morning. i am jonathan ferro. this is bloomberg "surveillance." 50 from the boe. tom: that is different from the american economy. i have trouble with the equivalencies of the fed and the bank of eglin. you are an excellent -- you are an expert at this. a little bit weaker off of this historic moment. jonathon: off of expectations, moves off the base of this. 121.80. lisa: this is again a bank that has to hike into weakness. they give some support to the pound. you are seeing a little bit of support. is it enough to be disinflationary at a time in the
face of incredibly high inflation, at a time that it's high on its own. jonathon: looking for a 50 basis points, just one looking for a 25 basis point hike. those are the headlines for us. outside the bank of england, it is lizzy burden. good morning. what are your take on things? >> the governor had said 50 basis points were on the table, although he did not say it was locked in. obviously, there's a lot of international pressure. it all hurt consumers. the average first-time homebuyers mortgage payment will rise 5.5% for this. it will be much harder for first timers to get in the market at a
time when it is not a party that shape local priority. the recession forecast has changed. recession will begin in the fourth quarter and last all the way through next year. it's a bit meaningless when we are about to get a new prime minister in the u.k. they are obviously going to do more fiscally. it will be to the tune of about 30 billion pounds. that might be inflationary, but surely it will help cushion the blow. there's also the forecast peak of inflation. it is not just that now, it is 13.3% in october. that reflects the higher energy prices you are going to see in the fall. that could be even worse next year. we are going to get a press
conference at 12:30. i think you can expect enter bailey to get a load of questions about the pressure he has been under lately. the next prime minister, liz trust, has been particularly scathing on the banks record, curbing inflation, saying she wants to change the boe mandate. i think enter bailey is probably going to bump those questions off to the treasury. jonathon: 13% inflation in q4, just incredible. we will hear from governor bailey and just about five minutes time. recession in q4, the bank of england hiking 50 basis points. it is toxic stuff. the fiscal picture is not clear just yet. tom: for american audiences, the heritage of this 13.2%, i cannot say enough about it. when we go to the united kingdom, most of us go to three zones. we get to heritage, the furthest west we go.
other than that, there is a whole other united kingdom out there that will truly be flat on its back with 13.2% inflation. i'm sorry, but this harkens back to the depression and that deflation, the harmful deflation. it is different over there. jonathon: they are getting squeezed even harder. longer at the yield in, higher at the front end. negative by over -- by almost 1/10 of 1%. for those of you just tuning in, i will give you the broader market. futures are positive by 0.25 percent. on the nasdaq 100, up by 0.4%. yields are back up by couple of basis points. 272.46. there is a current version we haven't seen a long time, close to -40 basis points. 50 basis points is the hike from the bank of england.
jordan, your reaction to this decision by the boe? >> it is a simple case that this wasn't a big surprise from the bank. we were expecting around 50 basis points and that's what we got today. conversations have climbed as well. 50 basis points will probably be the last, the first and the last. for us, the view is that the energy market will estimate the incomes of u.k. workers. consumption is going to continue to slow. the bank is going to potentially bring down their forecasts. the last rate hike cycle will likely be in november. it's unclear to me why today the bank would be doing 50. if they did 75, you would have seen things hit higher, but the problem for markets is we are not used today trading at 1970's style inflation. tom was mentioning that 13%
inflation really decimating people a bit. the bank of england will reflect in this. they have already put in the forecast, today they saw a forecast of 3500. it will be up again in january. that is about 800 pounds per year for the average household. that is a massive amount of money just been on energy. tom: i think it's very differ from the fed, where we have of different fed presidents, including kansas city. we perceive bank of england as a city and maybe london as well. what does 13% do to the bank of england's relationship when you go to the premier league this weekend to liverpool, to leicester, to newcastle? what is the boe relationship with the inflation the north will face? >> one day, me and jonathan will have to take you out to coalfield. -- cold field.
i was listening to one union representative just early this week and the pay they are being offered after inflation, it is relate 10% wage cuts. that's doing a whole month of the year working for free losing all statutory holiday. we could potentially see wages go up. the bank made a really strange play. they are raising rates, the consumer is being squeezed. if we do get a wage price spiral, this is very 1970's. they are going to be keeping an eye on that. in the north, they use the agents summary. there were details at the time this meeting. they do get a holistic picture of the rest of the country through this. lisa: i want to dig a little
deeper into your idea that they are raising questions about the frontloading of monetary policy and monetary tightening. that has been a big discussion. have the bank of england warning of a long recession. at what point does that pause in rate hikes to cuts in your view echo -- view? >> they raised in december last year while still talking about transitory and omicron. when things kicked off in december of last year, they were going to end their rate hiking cycle earlier than most. we are looking for may cuts. why? inflation will still be high. i think the risk-reward is that inflation does not fall down as quickly as the markets are pricing, but the fed's price will react. if you look at the crossover spreads, whatever you want to look at, the credit strength in the market is roughly around the
same levels as the worst moments in the coronavirus pandemic. i expect energy prices 10 times higher in germany. with credit stress, it leads to higher default, a deployment rising, and that is why the story will change for central banks, even though we will have higher inflation, there could be a dovish moment. jonathon: is it still the trade for you? >> indeed. i think we have been up to the 122 level. the trend is lowering. it has the same problems as europe. with 50 basis points, looking back at ecb meetings, looking at the basis points, what did the euro do? nothing. it was not enough to defend their currency. what a big trade stock. the pound should essentially be trading down to 1/10, just based on trade alone.
the price of u.k. exports has fallen and imports have skyrocketed. the u.k. needs a weaker currency to help with the exchange rate. jonathon: could you imagine if the fed forecast a recession like this one, starting a q4 and running to the whole of next year? [crosstalking] >> i can see it happening, but they are a bit slower. jonathon: john rochester there. a snobby joke from birmingham, tom, which you won't get. tom: lisa, help me here. between pharaoh -- between jonathan and rochester, i can understand a word they are saying. lisa: i didn't understand at all. jonathon: just read sometimes. that's all. can you imagine the fed forecasting this? q4 and going through the whole
of next year? lisa: the issue is not the possibility of that happening. it is the issue of them saying it out loud. the fed would never say that out loud. that, i think, is the distinction. jonathon: 50 point basis hike by the bank of englund. yields lower at the long end by seven basis points on 810-year. twos and tens invert for the first time since 2019 still more to come. this is bloomberg. ♪ >> keeping up-to-date with news from around the world. china has begun military drills around taiwan in response to house speaker nancy pelosi's visit there. one of the exercises involved missiles being fired into the sea. taiwan is downplaying the impacts of the drills on shipping and airplane routes. there will be another attempt to same -- to save the iran nuclear deal. after months of deadlock, the
accords fell apart after donald trump went there four years ago. he reimposed sanctions on the iranian economy. that led them to step up enrichment of uranium. the u.s. has voted overwhelmingly to add finland and sweden to nato. it is aimed at bolstering the military alliance after russia's invasion of ukraine. turkey is still threatening to block the two countries from joining. credit suisse is continuing thousands of job cuts worldwide in an attempt to cut costs by an additional $1 billion. the swiss bank is weighing in a plan to reduce headcount. more than 51,000 employees are being cut to try to move back to profitability after losses and scandals. the chinese e-commerce giant shows net income and revenue were better-than-expected. alibaba estimates shrink for the first time. the company says it is all signs of recovery in june.
10% risk max at the chinese and the u.s. will come to blows mayor terribly. if it happened, it would probably be inadvertent. we don't think beijing or washington want to have a military conflict here, any kind of an incident. jonathon: robert mcnally there on the situation. good morning. futures positive zero point 2% on s&p. the rally continues on the nasdaq. yields are a little bit higher on a u.s. 10-year on treasury basis points. they are lower on the relation 10-year. a guilt 10-year much lower. get this for a forecast. can you imagine? you have to hike 50 basis points, forecasting inflation to hit 13%, recession to start at the end of the year. that was the bank of england 20 and its ago. tom: we have certainly never seen that from the fed. it is original. placing in context here how the
two candidates will react. what will they listen for in the conference? jonathon: there will be a ton of pressure for them to do more on the fiscal side. ultimately, that is what they are trying to do. the former chancellor is saying that we have to get finances in order first. the more impacts on the physical side, the more the bank of england might have to lean in, to, with what could happen with inflation. they broke down this decision. it is very hard to understand these forecasts without really knowing what the fiscal picture will look like down in london and westminster. tom: for american audiences on the radio and tv, i cannot convey the differences here. there are differences and similarities with china and washington. fitzpatrick joins, picking up the pieces on a thursday after a historic week, and the week has not ended. jack, a lot of forms affairs
magazine, leading there with the response that we might -- we must have a response that is unambiguous. what clarity should we listen for from president biden? >> as it relates to the recent taiwan chip and china -- taiwan trip and china? i think there has been a lot of ambiguity, and the white house might even be leaning in a bit to some ambiguity. on the one hand, he of the speaker of the house visiting taiwan, despite warnings from the chinese government. yes, the u.s. has a close relationship with taiwan. you see, for example, the white house pushing back a bit at least on the timing of a bill that was supposed to come up to formerly -- formally treat taiwan as a non-nato ally. the biden administration has said openly that the military has some concerns about pelosi making this trip. they are not going to openly fight her on that, but there is
quite a bit of and acuity -- ambiguity. it has put president biden in communication with the chinese side, but not entirely tried to back off the relationship with taiwan. tom: should we expect an announcement from washington and beijing over a meeting of the two parties? >> i don't know about an announcement on the meeting of the two parties. there was the phone call recently and obviously, the white house doesn't want to cut off communications with the chinese government. we will have to see where the white house goes in the future, but they have made it a priority to have direct communication between president biden and xi jinping. they felt it was particularly important, given the tension with speaker pelosi's visit. lisa: it is a difficult time for president biden's camp, especially for the demented issues being faced coming down the pipe.
i'm wondering what your hearing ahead of tomorrow's jobs reports. if it is great and jobs are doing well, it's not so great because the fed will have to do more. all of a sudden, president biden overseeing an economy heading for recession. how are they trying to get ahead of that? >> either way, the white house is not trying to message in a way on the economy that takes for granted some level of success on the economy. they really lately have been focused on knowledge and concerns about inflation. you see essentially the rebranding of legislative puzzles and what they could get into the inflation reduction act, as they are calling it, trying to focus on deficit reduction issues. even if the news is good, they are not exactly taking a victory lap on the economy. the president is talking about what he is trying to do with members of congress to address
inflation. it is much more of a tone of conceding there are significant issues, but this is not an economy that is going to be a huge success electorally for democrats in the midterms, but trying to do what they can about it. jonathon: great to catch up. jack fitzpatrick of bloomberg government, down in washington. it is never easy to get a bill together and get everyone on board. lisa: especially now, when you have that much splintering within each party, let alone the dual parties very how much do you get people coalescing around a deal that really came together shockingly quickly and shockingly quietly, if you think about it. this is a strict bill back better rebranding of 2022. they are trying to push it through. jonathon: does actually reduce inflation? that is something we can talk about another time. no room for error at all in that tenet for these democrats. tom: that's true. it goes back to the heart of the
matter, which is the victory we saw in 2020. it has been a struggle the entire way and still continues to be a struggle domestically. as we are talking -- as we were talking with jack about, i'm fascinated with the cohesive message to china into q4. jonathon: that's the number one debate, covid zero. lisa, do you have a complete picture of the market next year without understanding whether we have covid zero in china echo lockdown, logoff off, what is it? lisa: can you have a coherent idea of the global economy? we get numbers in about an hour from the united states. do you get any understanding particularly with energy market, and how does this factor into where usc's its leverage and a time of conflict with china. tom: i will go back to the
relationship are one other properties with a palau ski. -- with jay. jp morgan falls right into demand recovery off emerging markets off the pacific rim. it's not happening. jonathon: you can't say it's because he just likes to sleep longer. tom: it is. jonathon: that's not a complement to my team. [crosstalking] thanks, i appreciate that. lisa: things are great between you guys this morning. [laughter] i'm going to call dr. phil. jonathon: i am reeling from these forecasts. tom: truly stunning. jonathon: 30 -- 13% cpi.
use on the bond market yesterday, how it responded to fed speak. a drop at the long end. curve inversion getting close to -40 basis points at one point this morning. yields up five a basis point or so on the 10 year. more inversion. tom: do the hands again. you look like you are landing an airplane. jonathan: inversion 2s and 10s. up the ba -- the bank of england forecasting recession that last the whole of 2023. pretty brutal. tom: with all your perspective, are we reduxing 91 to 92?
jonathan: we will find out from the next prime minister. liz truss, i wonder where that leaves the bank of england. do they have to do more? after brown, we got an independent central bank. this is the biggest hike since then. tom: that is your value add on surveillance. jonathan: from here, downhill. lisa speakes and tom and i stopped talking. lisa: there are a lot of interesting stories go beyond the macro. alibaba up 5% after being down 20% year to date. they beat expectations in their earnings despite all the headwinds, zero covid policy,
regulatory crackdowns by the authorities. time on i'm watching closely, up .8%. nancy pelosi meeting with executives from the semiconductor company which is a pivotal node in the entire global system, considering we depend so much on ships. lyft shares down. they are reporting after the bell. some other stories that are less positive today based on earnings outlooks, clorox disappointed earnings, down 6% ahead of the earnings. this is a story about the supply chains. it is more vulnerable to them when people are demanding that prices not rise too much. eli lilly talked about headwinds from the fx currents.
$400 million off of their top line off of that. lucid group talking about the forecast going forward. expectations for 2022, the electric carmaker down you to date. the reason why these stories are interesting, some stocks were bid up dramatically during the pandemic, but we have seen the wind knocked out of most companies. that is underpinning some of the market. tom: vix, 21.88 is really quite something less than one hour from jobless claims. it out was saying he joins us -- ed al-hussainy joins us.
good morning. i want to go to your real job before you got this act at columbia threadneedle. at moody's, you rated em. how fragile is em? ed: it is a good question. there is a really long tail in emerging markets that is in distress. we see that in asia, sub-saharan africa. the emerging market that went through those crises in the 2000, 1990's, they have better practices. better policy. tom: let's bring this over to developed countries. 13.2% inflation. can you explain to me, the first derivative of the x axis, we are
going to live on this inflation battle. are you looking out three years for inflation to come in? ed: i think that's right. if you look at the challenge for the central bank, the fed, bank of england is in a more difficult spot, is the ability to build confidence that inflation will go back down to 2% over the next several years is exceptionally low right now. what happens to the data over the next several quarters is in some ways less important than the ability to believe they have tipped inflation over on a trajectory down to 2%. it is difficult to get to that spot. lisa: the bank of england came out and projects recession that is long, painful, at the same time that they are raising rates. could the fed that? ed: i think the answer has to be yes. they are committed to
reestablishing credibility with the 2% target. they must tighten policy if they don't see inflation coming down to 2%. very little reason to doubt them at this stage. lisa: the market seems to be thinking if that will be able to move away from some of their rate hiking sooner than previously thought even with the recent repricing, because there is this retrenched believe that inflation will come down in the next couple quarters. ed: probably a decent bet that it will come down, but it is not clear that it will come down to 2%, which is the key benchmark. markets are prize for about 100 basis points of type over the next five meetings. that is exceptionally near room for the fed to maneuver. if anything, you are seeing the fed pushing back against that. lisa: i'm trying to understand
the movements in the market. yes, you have seen people expecting inflation to rollover, perhaps not as much as the biggest optimists, but you are seeing credit rally. people are piling in at a time when there is the expectation that at some point they will be a downturn if not recession. is this worth piling into based on how high yields got? ed: two things are true. if you look at growth and growth expectations, you could make a case that they got to negative in the last couple months. we have hit a little bit of a floor in terms of growth. data has surprise to the upside since that, so you see that relief rally in credit and risk. at the same time, it is clear that that is not done. tighter financial conditions is a precondition to inflation come down to 2%. the foundation for the risk
rally is quite thin. tom: i want to go to benjamin friedman, take all the work that you did at harvard, and his worry about sustained growth. in the jumble that we are in and 2022, is global growth at risk? this modern experiment of 6% china, decent growth in america, is growth finally at risk? ed: good question. if you look at what is happening on the demographic side, we have been slowing over the past couple decades. china's population is set to slow. birthrates in the u.s. are exceptionally low. the productivity is the key question. productivity over the last several years has been very disappointing. flat to negative this year. unless there is a recovery in productivity, which is a significant question mark, i
think long-run growth is likely to take a step down. from an industry perspective it creates a challenging environment. it becomes more likely that interest rates back to that secular stagnation, low demand, high savings place. tom: i want to get that in for our august gloom theme. jonathan: is that what it is? ed, thank you. just a mention of how yield. in a month we have tightened 140 basis points in a single month. typically you think that happens after that that has made a major pivot. they have not made a major pivot, in the words of central bankers themselves. lisa: i was speaking to howard
marks about this. before the rally he thought there was a good buy, but after he said the risk reward is pretty evenly balanced. you are seeing companies respond by selling a whole load of debt. jonathan: i love how careful howard is with his words. lisa: basically saying it was a balanced risk, seemed like a less balanced risk to the upside before that. jonathan: serious spread tightening. are you suggesting that he likes to sleep in, too? is that your excuse of why people don't want to talk to you? tom: all of us at a big table. jonathan: in the same room. do you think mohammed has tang? lisa: it is not even an
opportunity. jonathan: we would be in a different time zone. futures on the s&p up .2%. i am on board for that. ok. lisa has to talk to her sons about that. this is bloomberg. ritika: keeping you up to date with news from around the world, with the first word, i'm ritika gupta. the biden administration is lobbing democratic senators against a bill that would alter u.s. policy for time on. it would designate taiwan as a major non-nato ally. tensions between the u.s. and china were exacerbated this week by house speaker nancy pelosi's visit to time on david in
response, china began military operations around the island today. and the u.k., liz truss has regained the momentum in the race to become prime minister. she is receiving the backing of the former chancellor, a blow to rishi sunak. wall street ceos don't want to spend any time in quarantine if they attend a hong kong conference in november. it is designed to advertise the financial's revival after covid restrictions. banks want a guarantee of quarantine-free travel. bonuses on wall street are likely to plunge this year. incentive pay for those underwriting debt and equity could plunge 45%. those advising on mergers and fission could see falls by one fourth.
>> i think the big issue we have in the market is that the fed is not about to pivot. it is the same as we have with many central banks around the world. it is too early for central banks to come out and explicitly signal something new. jonathan: we are getting something new from the bank of england, 50 basis point hike. we have not seen one for 27 years. futures on the s&p up .1%. euro unchanged. 1.0169.
we can look at sterling. negative have a basis point on cable. 1.2085. they are forecasting a recession. cpi, 13% at its peak. this market really difficult for the british consumer. tom: our conversation on the day about the u.k. with david blanchflower. we are thrilled that he could join us today. you make it very clear that, like 1947, the inflation panic is overwrought. this is a bank showing disinflation out to 2024. what should be policy if we model future disinflation? david: the story, the forecast
of recession, six quarters of negative growth they are forecasting. what you see is a significant risk in 2024 deflation. a famous chart that the bank of england produces shows eight years of inflation. the one thing that stands out is the big risk when you have high inflation, you generate deflation. that is the worry. jon is right, they are forecasting 13% inflation pretty soon this year, but by 2024 this plummets. the likelihood is this forecast is overly optimistic. chances are the on employment rate will rise by much more. output probably is going to be weaker. and we are probably going to see the bank having to you turn pretty fast. this is a terrible forecast.
last point. i remember in 2008 in august, and the big deal then was that the u.k. was in recession, and they didn't use the word "recession." the word "recession" is all over this report. risks are actually very strong into the downside. why they are raising rates is unclear. jonathan: let's talk about how original this moment is. can you imagine the federal reserve forecasting recession the way the bank has done today? life is that the case? -- why is that the case? david: they are under political pressure to deal with the interest-rate story. truss came out and set the banks should have raised rates earlier. i think the policies of it are pretty interesting. the word "recession" is in this
report. i don't know of any other monetary policy report that has that word. going back to 2000, they didn't even use the word when they were in recession. how quickly does recession, how quickly does the bad data come? this could get bad pretty quickly. the likelihood of the fed doing this is really pretty different. but i think this is unique for the mpc. i have not seen this in my time of bank of england watching. lisa: when you talk about the balance of risk, how do you respond to the wage spiral? that you are starting to see in a real way. how does the bank get ahead of that to curtail that even if you
it requires downturns? david: we have been talking about wage spirals. we have seen some attempt to keep up nominal wage growth. we have seen big falls in real wages. the idea of a wage spiral in the u.k. and united states -- we see public-sector workers saying we need to maintain our living standards. the chance of any of this is driven by workers demanding higher wage increases. i see none of that in the united states, none of that in europe, the u.k. we are talking about 13% inflation and workers asking for 4% pay raises. none of this is driven by wages. i think that argument is nonsense. lisa: a lot of people are saying the bank of england is
frontloading rate hikes. pausing the rate hikes later this year and then cutting next year. there seems to be this belief with the fed, significant rate hikes, but frontloading to get ahead of the inflationary push. why do you think it's a bad idea to see what you can do now and then wait to see how it trickles out? david: that is a great point. i always have the view, we need to get rates up to try and cut them later from the recession you caused. that seems like a problem. the bigger issue, yes, you have got rates of globally now, less in the euro area. the problem is -- think back to 2008 -- we could cut from 5% to zero. the room for the central bank to cut is limited. in the u.k., there is basically
no prime minister, chancellor of the exchequer. people talk about the plan they will have, but the pressure will be on the new chancellor and prime minister pretty quickly. the markets will speak, they will say whether this is appropriate or not. i agree with you. but you frontload interest rate rises for the recession that you worsen by doing it. i think there was a significant argument today to sit pat and wait. it is unclear that these rate rises will do anything to bring inflation down being caused by global oil prices. one of these interest rates to anything other than take the economy? bailey admitted that they cannot bring down prices. it was a strong argument to sit and wait, but the political
argument was a strong one. truss was threatening the remit of the bank, that they should have raised earlier. jonathan: not surprised that you said that at the end. thank you. governor bailey saying this moments ago. our forecasts, the risks around them are exceptionally large. i think that probably holds true for most forecasts looking out beyond three months. tom: i was going to say three weeks. can we get to the november fed meeting? we have to focus on the data, including august 10. jonathan: inflation data next week. tom keene, jonathan ferro, lisa abramowicz. futures are up .1%. this is bloomberg.
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