Inflation Is Hot | Bloomberg Surveillance 09/13/2022

The depths of the recession which is looming right now is probably going to end up shallower than the one we could have feared. Also consumer as well. Businesses are starting to at the margin rollover. It's still very clear that the global economy is in a very weak phase. We've been the most surprised to see that the market is more optimistic than Vincent commentary. Clearly now you know they have sent the signal that they are going after inflation first and foremost. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz. Do you think CPI Tuesday from London is a bit weird. Well it is so good. You can see beautiful here. But here is that's what we're doing from the city of London from audience worldwide. Good morning. Good morning. This is Bloomberg Surveillance alongside Tom Keene and Lisa Abramowicz. Some Jonathan Ferro NIKKEI features slightly positive here. Bit of a bounce again. Four day winning streak into Tuesday. CPI just around a cold superior around the corner. We've got a grim wonderful girls. Could choose to be with us in a moment with some really intelligent discussion of inflation. But John I'm going to suggest this is a different inflation report all looking lower but it is the magnitude that we could see in a third. It's the last big rate brown I icon and to the Federal Reserve decision next week. And we don't have Federal Reserve officials we're actually gonna be speaking and trying to color it in any particular way. We're in the silent period. So it'll be interesting to see how markets really react considering the fact that people are prepped for 75 basis points regardless. Last night over the third beverage John said time you're in the silent period. This is the blackout. How long it takes to sign. It wouldn't be the first time that we had a big upside surprise on CPI. And then someone kind of broke the quiet period with a little bit of a leak into a certain newspaper decision. I'm not saying that's going to happen certainly. Well I'm not saying that's going to happen today. I think most people looking for a soft print not a firm one. So whether we see the Wall Street Journal article or not it seems pretty clear that it's name the actual I could I could name also the reporter. But there is a question of whether we're going to see any kind of reaction because regardless of what happens 75 basis points seems to be baked in. I think it's more interesting that despite that hawkishness which is baked in in some markets you're still seeing that optimism pervade equities at a time when there's so much sort of uncertainty and concern on the Friends America. We're still mourning the death of Queen Elizabeth or King Charles will travel to Ireland today. John the Republic of Ireland ninety point one percent inflation. This American reported a 30 is of global interest without a doubt because it sets up the monetary policy story. So I think we should build on something we've said repeatedly over the last week or so. In fact the last couple of months since Jackson Hole whether it 50 or 75 it's kind of not the story at the moment for this capsule for this Fed. The story is 20 twenty three. And all the pushback is saying against rate cuts from almost every single Fed official on that committee Lisa. And then you've got the market which is basically saying that we don't buy it. I've got to say Bank of America put out a note this morning. I saw and I loved the title. The title was How to Trade this Rally even if you don't believe in it. And it pretty much sums up where we're at. People are thinking we hate this. We don't like this rally. It makes no sense from a fundamental perspective. But you lose not being part of this. But five percent over for DAX. I know we're added to it this morning this way through some of the price action for you. Equity futures shaping up as follows on the S&P 500 equities firmer by four tenths of 1 percent on the S&P yields back him by 4 basis points on a 10 year to 330 157. Look out at the front end yesterday became very close to 360. Then back to why. And Lisa again this morning backing away once more. Yeah. We're seeing right now the dollar the best litmus paper. I saw this at a note that I thought was really telling the best litmus paper for the mood on inflation. And right now people seem to think inflation will be softening and accelerating in that trajectory. And at 830 AM the reason why I'm talking Eastern Time. The reason why this is a global report is because it sets up the world's biggest economy. And where the price momentum is it is August U.S. CPI. We are watching Core more than the headline CPI figure especially because it's so well known about gasoline prices. They've come down dramatically. So we're looking now at the headline that includes that figure. But at the Reds at other aspects of the world that are actually continuing to increase particularly even in the United States today. Queen Elizabeth's coffin travels from St Giles Cathedral to Buckingham Palace. We'll be tracking all of the proceedings. This is incredibly poignant and it really has affected a lot of people here because this also was a woman who for 70 years let us stage through eras in which women were not as recognized. And I say this because she was thought of as a mother figure a grandmother figure. But she was also very powerful. And it's really interesting to see some of the tributes pour in. And at 1:00 p.m. the U.S. is planning to sell 18 billion dollars a 30 year bond. Here we go. OK. This matters. It actually matters today. Why you don't buy it at Matt Miller. You always know it's Matt Miller because he's like clockwork. You know they're always going to sell bonds. Who cares. Some people buy them. It's not going to be disruptive. But this matters because they're actually the roll off of the balance sheet is starting to gain momentum. So is there going to be a much smaller pool of investors willing to swoop in especially as real yields rise to some of the highest levels. It's not to say it matters. I know I'm getting kind of like you know I'm just not CAC is with us going to become matters chief ethics strategist at such Jeff Kennett's good. She got decent sleep last night. Finally. Oh my God. Maybe a few hours short. Kate good to see you. CPI just around the corner. Walk us through what you got a team looking for a little bit later. Well you know I think Lisa put it quite well in the sense that you know the headline is bound to come down. So so kind of so what the core I think could be sort of pernicious because the main feed. Sure of the US economy right now is that it is doing better than anybody thought it would be doing now six months ago. This cycle is persisting. The labor market is still incredibly tight. The ISE data is still incredibly robust. We know the Fed is going to slow it. The Fed has to slow it. We just have to debate how much above 4 percent. They have to go to slow it. And then we have to worry that if you have to slow it enough you get a hard landing later. So so the narrative at the moment is soft landing increasingly likely globally. Partly this is what's going on in Europe. But the difficulty for the US is the inflation data will show this in the entrails is the more they have to slow the economy with rate hikes. Now the more the uncertain and long lags are going to come back and bite us in 2023. ISE talking to our doom tell us this morning in London we were talking about the makeup of inflation. The economists look at goods inflation service inflation. You have a brilliant sentence in your note this morning that we don't really understand the formation of inflation and how we come about inflation this time around. What's different. Well I mean most of most of history inflation is all about goods. It's all about you know it's wars and pandemics and food shortages. And then it's kind of destruction of stuff and rebuilding. And then we went through the the post-war period rapid rebuilding in unionized labor without so much globalization. Now we've got a diverse labor force a very global economy. We know we've got an energy crisis. We know we've got some food crises. But we're we're we're sort of grabbing at straws of what the 70s told us about inflation. Trying to understand the 20 20s. A lot's changed in the ways that wages are formed in the way that people work in the way that prices get decided. So we know there's a lot of inflation now because there's too much money chasing too few goods. There's too few people doing too many services. So we have inflation now. But how that comes back to target other than you whack the economy on the head with a big hammer. We're not sure. Well you know a lot of people have said the US led inflation because they led in fiscal stimulus. That then had people purchasing a lot of goods at a time when the workers couldn't really sustain that rate. They couldn't make the products so they couldn't actually serve them. Now is it really shifting to Europe. Because I keep hearing about fiscal spending plans whether it's in the United Kingdom whether it's in the mainland continental Europe. As you take a look at some of these energy efforts to try to shore up household balance sheets heading into a winter. You said that Emily Chang. I think that's exactly talking about basically boosting some of that fiscal spending while also cutting taxes while also facing off with a much higher rate interest regime. How do you face this off with Europe leading on the fiscal stimulus and potentially even more inflation. Well I think part of it in Europe. But when we see what we see from the fiscal stimulus is a program to protect people from the impact of a specific energy price increase. So you're effectively giving people money and giving some money to the people we import energy from so that people's available disposable income holds up enough to not slow the economy too much. Now I think in most goods and services we're not going to crash and burn as a result of that because growth is going to slow on Libya. We saw in the UK already. We have you know over 5 percent wage growth but we're going to have double digit inflation. So we're not going to be spending spending like crazy in bars and restaurants for the next nine months. But yeah we protect the economies. We increase the chance of a soft landing and that at a global level means we know we still have a difficult problem because we're struggling to get output back up fast enough to cope with what we've already done. Lisa mentioned the farm manager survey from Bank of America earlier this morning. Most credit trade love the US dollar. I think that was one of the most crowded trades gone back to November 20 20 when it was all about being long U.S. tech. The move we've seen over the last few days. Kit can you give me an idea about the durability of this move whether it's something you can get behind. I think no. I think it tells you a lot about positioning. Sure. But you know this was sort of a euphoric reaction to positive news from the Ukraine. So Ukraine news is good. But the difficulty for me now is that this is this is really good news with higher volatility because both wings of the outcome of this conflict are more likely as a result of this if that makes sense because there will be a retaliation a reaction. So so it's not a comfortable environment so that the dollar can weaken and we can sit here with people talking about soft landing is negative for the dollar and rethink and take positions off says we're willing to look through something which I don't think you can analyze even as an amateur as anything other than a vol increasing event. Get checks. Good to see you buddy. Obviously too long. Thank you. Equity futures are positive this morning. The dollar a little bit weaker once again. And Lisa that's going to be the story for us going into CPI a couple of hours away. Yeah the dollar is weaker as people basically say that everything is priced in. Right. So if we get a stronger practice at. Things George survey is coming out and said this is it. This just shows that the dollar has gone overdone and that the Japanese yen is going to get back up. And you know you're going to see that a little bit today. You're seeing a little bit of yen strength but we'll see. I can hear the doubt in your voice. I just have to look at it. Honestly I think Kit put it beautifully. The tail risk of Vladimir Putin actually waging a more aggressive inroad as a response to potential humiliation is something I'm not hearing anything about because how do you from price that end let alone gauge that out. We mentioned a front page of the Financial Times this morning Tom and we should talk about it. 3:00 today the chancellor. It's firstly the treasury referring to them formally as a finance ministry that they were perhaps too focused on balancing the books and now focused on drugs focused on growth and power. So these balancing things. Well exactly. There a constraint. Do you get the pushback from the media and for American audiences is confusing. Is it trumping growth. Is it the growth that we are supersize supply side advocate like Lawrence Kudlow talks about. Is it growth like Dean Hubbard at Columbia talks about. Do we know. I don't know if we know the quality of the kind of growth. It is massive spending and tax cuts. Yeah I think with the double digit inflation and perhaps more on the horizon. So overdue for an investor in the game. Well that's the question isn't it. Yes. Right now positive for tens if you see who's doing on the S&P. Let's see you down with the brands. Your with Randy. Slowly. It's a slump. Unprompted from Lumberton. This is pulling back. Keeping you up to date with news from around the world with the first word. I'm Lisa Matteo. Ukrainian forces have recaptured more than 20 300 square miles in the east and south of the country so far this month. That's according to President Vladimir Zelinsky. Now he said Ukrainian troops are continuing to push forward. Meanwhile Ukraine is appealing for more weapons to build on its recent success in Europe. Natural gas prices fell for a third day to a seven week low. The European Union is pushing ahead with its market intervention plan to ease the worst energy crisis in decades. The EU wants to cut power demand and cap excessive revenue of companies producing electricity from sources other than gas. President Biden is trying to capitalize on a sudden stretch of positive economic news. His goal is to turn the Democrat's biggest political liability into an election year selling point. The Democrats bid to retain control of both houses of Congress have been boosted by falling gas prices and signs that inflation may be easing. The latest inflation data comes out at 830 New York Times. Goldman Sachs doesn't see China shifting its Covid zero policy this year. In a report published today Goldman says that stability will be prevailing narrative in the next lead up to this next month's key Communist Party meeting. Now Covid containment measures especially around Beijing have intensified in recent days. And UBS plans to raise a dividend for this year by 10 percent. The Swiss bank also expects share repurchases will exceed a target of five billion dollars for 20 twenty. UBS is returning excess capital to investors after calling off the one point four billion dollar acquisition of U.S. robo advisor wealth front. Global news 24 hours a day on air and on Bloomberg Quicktake. I'm Lisa Matteo. This is Bloomberg. Inflation may actually rise further in the near term. Why all HSC key components added to this high number. Energy price inflation in the euro area is spending at close to 40 percent. Illustrating the magnitude of relative price changes in the recent period. Executive board member of the ECB is about to novel and I have to say it's about Shery Ahn but it sounded rather hawkish over the last couple of weeks or so going into a CPI print here stateside. Futures are positive by half of 1 percent on a S&P 500. Yields are lower by 4 basis points on a 10 year swap at 317. Back in a way across the curve this morning especially on as well after coming very close yesterday to 3 6 days on a two year VFX market at dollar signs of weakness. Again the euro's some strength. Tom won at 168 on euro dollar. It's really important John right now to go into the real you yield explosion. We've seen to a positive point 9 0 and discuss that yields are pushing higher. But at the same time that calculation is the break. Even in the slope in the inertial force of various measurements of inflation the so-called break evens is tangible. Did you see it is seen. It has been so. But the real deal. Inflation expectations. Just that. Just rolling over. Oh yeah. And how much is that really the story behind the dollar. How much is that the story behind some of the risk appetite people seeing. Maybe not. But I think it's directly linked. You're going to start getting some sort of deceleration. People talking more and more about some of the soft landing. I haven't heard much of that. I think the question is where does inflation migrate to. We may get some of that this morning at a 30. But the real question is what do you do. It's 7 percent. What do you do. It's 6 percent 5 overall headline inflation right now. We wrap up the script. Joining us now Maria today in Brussels on America and the efforts in Ukraine. Maria a spectacular article in The New York Times this morning talking of a U.S. defense attaché and how we are helping Ukraine with a tactical effort of their response to the Russian invasion. From where you sit and with your reporting how much is America and the other Western nations at war with Mr. Putin. Well at war officially they're not and they're being very careful to tell you are not belligerents here we're not actively participating in this. But we all know of course that Ukrainian forces use weapons delivered by allies who they say we have to do this because this is a country that is being attacked. Ukraine did not initiate this words defending itself. And then of course we know that Intel has been key for Ukraine. But Tom I think we should also remind ourselves that this battle is being fought and and to some extent won by Ukrainians. They have proven to be an effective army that has been well-trained since Crimea. They took the lessons from the annexation of Crimea. They have been now on the battlefield more effective than many thought. And I think at this point in hindsight you do see that a lot of the early estimates about Ukraine were wrong. This is a professional army that knows how to fight. There has to be an assumed bodies number of bodies that Russia needs to hold territory or to re advance. It's a ginormous number. What's your working number of the size of the military. Russia needs to make this work for Mr. Putin. Listen Tom to me that is the key question because if you follow Russian media at this point especially after what happened on Saturday they talk about how can we escalate. How do we respond to this. And a lot of the talk now is OK. We have to go from special operation to now full war. And that means conscription. That means that you have to tell Russia man you have to go and die for your country. The issue here and this is why Vladimir Putin has been careful not to do this. Is that when you're underpaid when you've had a month training when you were 18 and you're sitting at home watching reality TV that looks like a war. And then you're told get ready to go and fight against a professional army in Ukraine. Maybe that could spark social tension. And this is why Vladimir Putin has been incredibly careful to shield the public opinion from that to say there won't be conscription for the time being. Yeah. Maria at the same time you are saying a preparation of NATO nations for more conflict with Russia. And I think about some of the German proclamations recently of their effort to become the military leader in Europe. How is that going over both domestically and within the continent considering the history considering that this is a huge departure from where they've been over the past few decades. Well it's a huge departure of course you know the history lesson for a lot of Germans of course is that they do not want to be a military power. This is a country that you know very respectfully but still has major World War guilt. It comes up many times in many conversations with German politicians. This has been a U-turn. But I think a lot of countries neighbors particularly in Eastern Europe will say I'll believe it when I see it. And I also want to see the investment. This is an army that has been under invested for a long time. They'll believe it when they see it and they start to see money going into this army. Maria thank you. Maria. Today that out of Brussels on the latest with the war in Ukraine. It's something we've talked about a few times Lisa. Over the last couple of days is whether it actually makes a difference to policy whether the sanctions would go away if we resolve this thing say tomorrow. Right. And basically in a nutshell no it won't. Right. I mean that's pretty much consensus at this point. Nobody thinks that everything is going to be fine that natural gas is going to start flowing through Nord Stream once again to Germany. Not likely however does it potentially remove some of the tail risk. Right. I mean that's I guess where people are talking about in terms of the optimism. Otherwise I can't really understand what they're talking about. And gas prices pulling back. Just stay a little bit. Coming up a little bit later this morning we'll catch up with Andrew Holland host the chief U.S. economist over at Citi. As we count down to the CPI report in a couple of hours time Andrew Holocaust is looking some where you can't dance. I'm counting down. You've got a lot of more numbers than that sir. That's it. If you asked why I keep doing that count to 75. Seventy five as well. Andrew Holmes host is looking for the family so well in about a week. Benjamin Navarro publishes moments ago his colleague in London. And he says this is the Bank of England the day after the Fed that will quote be forceful. Well but it's really not just about what happens at the meeting next week. Right. And what you were saying that earlier John and Tom you were saying that it's going to be what happens next year. Can we really find anything out. Right. I mean this is the tricky moment because of deceleration in some of the key inflation components doesn't necessarily mean we're out of the woods. We're still talking about an 8 percent headline number potentially. And with core at 6 percent you're not exactly in safe territory. But I'm still counting ISE grooves nearby. Chris. Yeah. What is it you would like the breakfast place. You want breakfast. Yeah. But you know you've always told me it's like the place. I just I just saw you eat breakfast. We just had breakfast. We could read breakfast on air. The food here frogs was outstanding. The coffee. We have to go home. The coffee is superb. The coffee is good. I just say congratulations to the team that put together this set. They did a great job yesterday evening into early this morning for those young women to come to light saying just fantastic. We're in a hugely historic part of the city of London and this is Queen Victoria Street. And behind us is a cathedral that matters to the world. St. Paul's just a little bit. Yeah. Very cool. Live from London. From audience worldwide. But Tom Keene is going to count you down to CPR to the second breakfast. That's I was just passing by like. This is Bloomberg Markets sausage. Live from London. Good morning to you. Counting you down to CPI cheese steak to for a couple of hours away. Take ISE doing a lot. Countdown clock for you. You might hear it again. Ten. Nine. What number you want now. Yes. Since we take different languages each just positive because one has some fake by four tenths of one percent. It's coming in a couple of basis points. We're down about four negative four basis points on a 10 year 331 on a 10 year. You're right. All at once there are 161 positive four tenths of one percent. Some dollar weakness. Michael Barr chat. That is bullish Tom. Please come on. Don't ruin it. Let me go with the quote. He says this We maintain the progress stats economic data an investor positioning got more important factors for risky asset performance than central bank rhetoric. And the data appear to be increasingly supportive of a soft landing. Soft landing. The bust is a new phrase. It's the soft landing moment for I'm hearing more about a soft landing than I am about a hot yes. And that is because of the deceleration in inflation which is a reason why you're seeing a little bit more dollar weakness a little bit more risk appetite. The question is is the inflation deceleration sufficient to really give people some sort of faith miss out on the water colored man Governor. Well it seems Governor Wallace says no I'm trying to be serious. You two are killing me. Governor Wallace says OK Governor I want to basically said no. I mean lost that. We thought he was pushing back. Yes he's pushed back. Was it with great force against a number of other parties. We should say John that this is a nation in mourning. All of this nation a bit later today I think with the travels today that's going to come in wisdom as we work through the day and that it's going to hit one over the head on Monday when we have a funeral service. Lizzie BURDEN of course reporting from Buckingham Palace. A little bit of lightness in the last 24 hours as this nation prepares for a funeral on Monday. We prepare for her funeral for Andrew Holland who is chief economist at Citigroup if he gets the inflation call wrong. He has been an OUTFRONT incredibly bold and a move to a higher interest rate regime. Andrew not so much. How important is this CPI call this morning but how does it relate to the CPI. ISE calls to come 30 60 and 90 days from now. Thanks Tom. I think that's really the key question here is maybe not so much what exactly do we get this morning. And it's pretty widely shared expectation that we're going to have somewhat of a softer print again. And I guess we had a softer print for July. The question is where is underlying inflation. And if I look at for instance the Atlanta Fed has a great dashboard of various underlying inflation measures all of those inflation measures indicating above 5 percent inflation some of them about 6 percent inflation. So I think no matter what we get this morning and we expect some distortions from used cars and the airfares if you look through the underlying inflationary pressure it kind of goes back to what you're talking about with. Can we get a soft landing. We have a really tight labor market. We have labor costs that are rising. That's going to show through to higher prices. Andrew do you think then we're still underestimating the persistence of this story and the resolve of this Federal Reserve. I think that's always the danger and we went through that a year ago last summer when we saw some softer prints and I think there was a lot of optimism that maybe we could be seeing inflation that was actually transitory. And I think we just have to be really careful about not letting hope triumph over the reality of the situation. We all hope for a soft landing. Certainly I would hope that's what the economy can achieve. There's a possibility of achieving that. You're going to hear Fed officials that emphasize that possibility. But it is that it is a possibility. It is not a high probability. It's a possible outcome an outcome that we hope for. Probably not the most realistic outcome at this point. Andrew I won't ask you to get out the crystal ball and tell me where inflation is going to be. Twelve months out 18 months out. But do you have a decent idea of what the threshold is for this Federal Reserve to take a pause to look around and say perhaps that's enough. So one thing that's been useful as we've heard from a lot of Fed officials we of course had Share Powell speaking at Jackson Hole just being really crystal clear about the resolve and the desire to bring inflation down. But then how do you operationalize that. We heard from Vice Chair Brainard last week saying I need to see several weaker print several softer inflation or prints in Fed speak. Several means more than a couple. So we're looking at more than two months with July and August data we may see two months of weaker inflation. So I think it's a series of weaker softer monthly inflation prints and also very importantly that you see this broad based. And I think that's part of the lesson of the last year or more of inflation data is that you really have to look at what is the breadth of the slowdown. If this is just use cards if it's just airfares that's not going to be sufficient. We want to see is services prices that are at least not accelerating rents that are slowing down at some point. We know house prices have slowed down. So there are reasons to think that you could see softer readings as we move into 2023 but clearly not seeing that yet. I think way too early for the Fed to declare victory on this. That said Andrew from your vantage point do you think. I hate saying this. I'm going to get pilloried. But a soft landing looks more likely because of how much prices have rolled over so much more than some people had previously expected. Well I think the issue Lisa is really what we were just talking about is how broad is that decline in prices. We're talking about certain categories of goods and that's maybe not that surprising given that we had really excessive demand for goods in particular. And now that that demand is moving and shifting a bit into the services sector. What I'm increasingly concerned about is upward price pressure for services. Now we saw airfares that went up significantly. Looks like we'll come off of those highs and we have come off of those highs. Maybe we'll see a decline again in that category in the report this morning. But that's really the question for me is are we slowing down in a broad based sense if this is just gasoline prices. If this is just certain goods I don't know that that's sufficient to really say that underlying inflation has slowed. And then even on the good side. Remember we're talking about shortages of energy and natural gas in Europe. We're talking about a potential railroad strike later this week in the US. So there is still some really acute upside risks to goods inflation that I think we should also be aware of. Based on your projections and these granular components Andrew where do you see inflation ending next year. Mean people are trying to game out the likelihood of getting down to a 6 percent handle hard hit percent handle by the end of this year. What about 2023. Yeah. No question will still be very elevated at the end of this year it really is 2023 where you look for for inflation to come off further. When we forecast out that for far we see a path for headline inflation and various measures of core inflation to get down into the 3 percent range. I think that would be quite an accomplishment if the Fed was able to return inflation which would still be above target but at least closer to target around 3 percent. The issue is that it looks to us that to get there you will need at least a somewhat significant rise in the unemployment rate. This idea that we're going to bring down inflation and cool wages really if you look at Atlanta Fed wage tracker it's running at six point seven percent. So we really have a lot of pressure. And in wages it looks hard to us to see those kind of even 3 percent inflation numbers without a significant loosening in labor markets. And if the dynamics in the behavioral movement from 8 9 percent inflation of 5 percent some mystery let's say it's non-linear in some forms. The linearity that was inverse invented by Alan Greenspan of a measured path we've almost become unmoored by that. How measured are we right now. How unmeasured is our response to inflation. That's a great way of putting it. Tom I think quite unmeasured in the sense that you have central banks that are trying to do two things and this is true in the US it's true globally where on the one hand or one component of this is trying to just get policy rates up to a level that's more consistent with where inflation is running euro area kind of basic back of the envelope. You usually think policy rates need to get up around the level of underlying inflation. So you're behind in that sense. That's leading to larger hikes. But then there's a second issue which is credibility. And you're going into these meetings as central bank officials with markets looking for what you're going to do the public looking for what you're going to do. And it's the messaging as well as the actual policy action. And I think that's part of why you've seen for instance from the Fed a string of 75 basis point rate hikes. It's yes it's to catch up to where policy rates probably should be but it's also to try to send that message. We had Chair Powell do that a Jackson hole through his rhetoric. I think next week at the meeting we're going to see Fed officials try to do that through their policy as well. Andrew Hahn host to City. Andrew good to catch up on are you looking for 75 from the Federal Reserve next week. The problem often and this is always the case that you have a market focused on one thing and a policymaker looking at another. The policymaker is saying look out to 2023 you're gonna keep rates up. They're going to be persistent about this. We don't wanna loosen prematurely. The markets are just looking for the downshift from 75 to 50 from 25 to pause. And let's face it. Are they going to get a signal of a downshift and this news conference next week. Well and if they do. What kind of economic pain has to accompany that Morgan Stanley's concept which is what could potentially cause I was going to ignore that caused the Fed to move away from raising rates and actually lower them. It would have to be economic pain that they see actually causing because it's unlikely to see inflation really get down that 3 percent level in core. That might make them a little more comfortable. I mean my sausage roll now my second breakfast John this parlor game of gaming rates. And then we're also going to game at the same time when we turn around and reduce interest rates. This is a modern insanity. It's increasingly frustrating some but it's happening. And ultimately that's what the Fed is pushing back against. The Fed is trying to maintain financial conditions to bring inflation back towards something that looks like it's actually back towards Target. The problem is that every time you get a sniff just a sniff of some kind of soft landing financial conditions start to loosen again. The downside. Yeah. And this is part of the problem. And this is the reason why we had people coming out and saying it's game theory. Right. Didn't Jonathan Gallup that we start with. Yeah. It was like you know it's game theory. You know the Fed wants us to believe they're going to be hawkish but they're not actually going to be hawkish. I find it interesting that over in Europe you've got the ECB still saying they do not see a recession and everybody else is doubling down on it. I mean BlackRock Way might be joining us from our she actually came out in shift yesterday with a note and said yeah there's going to be a recession. The energy costs are gonna cause a recession. It's very very difficult for a policymaker to forecast a recession and say those words out loud because there's something self-fulfilling about a policymaker saying that. In fact I think the only one that has done it out of all the major central banks is the one right here. In fact on the one just around the corner it's the Bank of England Governor Bailey that Emily Chang down around the corner just about more than what really every morning when you consider that the guy that came to me today. Maybe he read the way you wanted it. You think Governor Bailey saw you. I think he waved it. Yeah. So did I see you in church. Did he. Did he remind you that the decision is next week. Not this week. Yeah he did go to the Fed which is actually to get a sharp features positive six tenths of 1 percent CPI just around the corner. Is. Keeping you up to date with news from around the world with the first word. I'm Lisa Mateo. Ukrainian President Vladimir Zelinsky is claiming success for his forces in that counteroffensive. The Lenski says Ukrainian troops have now recaptured more than 20 300 square miles in the east and south of the country this month. But Russian forces have hit Ukraine's energy infrastructure leaving hundreds of thousands of people in the dark. Inflation in the U.S. probably slowed for a second month in a row. But that's unlikely to prevent the Fed from delivering another jumbo interest rate hike next week. In a Bloomberg survey economists forecast an eight point one percent rise in prices last month from a year earlier. The consumer price index comes out at 830 New York time. Bloomberg has learned that the Justice Department has subpoenaed dozens of former President Trump's campaign operatives and allies. It's part of an effort to collect information related to the plot to overturn the 2020 presidential election. A lawyer for one of those subpoenaed former New York Police Commissioner Bernard Kerik calls it a fishing expedition. The Twitter whistleblower who is warning of security flaws will take his case to Congress today. Peters echoes testimony could further complicate the legal battle between Twitter and Elon Musk. Is trying to back out of a 44 billion dollar agreement to acquire the social media company that goes. Testimony comes on the same day that Twitter shareholders are also set to vote on the deal. Global news 24 hours a day on air and on Bloomberg Quicktake powered by more than twenty seven hundred journalists and analysts and more than 120 countries. I'm Lisa Matteo. This is Bloomberg. We're in the camp that inflation is going to be felt great. They're going to raise rates by another seventy five. Most likely in less than two weeks time pushing the funds rate to three. That's in a six month period of time 300 basis points off to zero. The head of America's fundamental fixed income a BlackRock making the point that we've done a lot of work in a very short amount of time at this federal service. They play catch up to bring inflation back down. Equity features got into the CPI report this summer. This morning that some of six tenths of 1 percent on the S&P yield to level by full basis points to three 17 on a 10 year. The euro's stronger dollar weaker again one zero one seventy five on euro dollar summit by a half of 1 percent on that currency. Pat full days of gains on the S&P. It's the cheese states that they want to straighten out. My four days of gains I believe is the longest winning streak gone. Back to you. Yeah it's people saying it reminds people a lot of July because there isn't a lot of liquidity and a lot of not a lot of conviction. And it's not very loved. A 5 percent rally sell in that short rally. Yeah I think it's a short covering. Yeah that's what's in the zone guys. But it's got to be more than that John. But is it like June where you go up you turn around come right back downers or something different this time and we'll have to get around the hat around the year by this fellow was set off U.S. gallery. Yeah well they may not. Minneapolis resident who decides that perhaps this market shouldn't be right. There's a lot of uber bears that are going OK. That was harsh. Right now let's look at oil. We do this through June. Regina Mayor global head of Energy KPMG steeped in all the game theory of her Rice University. Regina I want to focus on the game theory right now of President Biden in one chart. I just saw in passing which is our so-called strategic oil reserve. And the proper scientific word for this is the volume we have in reserve has truly cratered. What does that mean for America. I think we've probably reached a tipping point where it's time to focus on refilling the Strategic Petroleum Reserve because it is at an all time low. And I think we're sort of out of the woods from a U.S. energy price pressure that was driving inflation and the things that I know that politicians were worried about coming into the midterms and that was the price at the pump. We see gasoline prices in the US consistently go down and down and down. So I believe if anybody was taking my advice it's time to start focusing on restocking our SPRO and getting a little above where it was where it is today. Can you get off the coup for us or slide rules and KPMG and tell me how much a gallon of gas is going to go up as President Biden restock set reserve are we going up 20 cents a gallon 52 cents a gallon. What's that statistic. No actually I think we're out of the woods on gas prices Tom. I mean I think that you know we've done with summer driving season we've got quite a lot of stock. Refineries are up and running again. I'm less worried about what that would do immediately to gas prices. I will say that what the administration did with regard to releasing fuel from the SPRO was one of the key things that the energy industry will say made a material difference in the summer peak season that when we saw gasoline prices at their peak in June. Virginia that's a story over in the United States. You're in Portugal right now in Lisbon and we're in London and the focus very much is on energy. And it's a very different and multipronged concern because it's not all gasoline or crude. It's natural gas. It's it's it's some of the issues of nuclear energy over in France. From your perspective is the plan that's coming to shape from the European Union of trying to cap demand while also providing profits from the energy companies to households. Does this make sense. Does it feel feasible to you. Police I think that the he's already made quite a bit of progress. So we have seen European gas prices drop. We're at a seven week low. And it's 40 percent off its peak on August 26. It's still eight times higher than normal. But there are bright spots. Gas storage is up. Eighty four percent right now. And it's slightly above where they would have expected to be for the five year average. The countries have been working on securing as much supply as possible. Now they're looking at packages to reduce demand and to cap what that would do to household income. It's going to cost a lot of money. There's got to be national budgets are going to be strained. So it's got to be a lot of different things that that happen. I would not say they're out of the woods because if it's a particularly cold winter and if you see Asian demand start coming back in where cargoes of LNG are priced up in a competitive way that's where things get really critical again. So not out of the woods but the things that they have been doing in the near term are having a a measurable impact. OK so Regina could you spell that out a little bit of measurable impact in that we are seeing gasoline natural gas prices come down significantly but is that impact going to lower them further as they are still eight times higher than where they were a year ago. Or is it going to just keep them here. Keep it just sort of a persistent crisis rather than something that is much more acute and immediately needing to be addressed. Definitely. We're not out of the woods. And I I think that the pullback in recent days is probably over amplified with what's happening in Ukraine. I think maybe there's a little bit of irrational exuberance about what happened and maybe some people thinking OK the war might be over and we can stop weaponized and gas. I don't anticipate that at all. So while the measures are important and what I see the EU working on is a comprehensive package because you have to work on both demand and supply. No doubt it's having a material impact and it will have a material impact on the economy. I'm hearing from some executives here in Portugal that their energy costs are in some cases a billion dollars over. Right. With their expected energy costs are all of that is going to have a material impact on earnings competitiveness and they're going to shut down factories because it's too expensive to run them. We're already seeing that. And we could see a whole lot more County Prince of Windsor which in a matter of KPMG out of Lisbon Portugal today. Lisa that's the problem for the Europeans. We've gone over it repeatedly. You're gonna see a wave of industry shutdowns as we go deeper and deeper into winter if they can't tackle this problem. And I think it's unrealistic to expect them to be able to tackle this problem completely fully this winter. Whether they can next winter or the one after that. So it's not just an issue of curbing demand in the near term and trying to help households. Also at issue of how do you build out the infrastructure whereas that natural gas is going to come from. Anne-Marie yesterday was talking about how a lot of it's coming from the United States. You have to really create new alliances and new needs at a time when there's questionable leadership and a lot of different places in the world. A new complaints to the U.S. consumer has to carry on playing high prices for that gas. And the Americans are exporting so much. What are the biggest complaints I've heard since we've been here in London and we've spoken to energy experts. Is the complaint around the lack of an effort to curtail demand in this country. Oh we've had so far it's a big big effort. I say all because it's massive from this government to support people's ability to pay the bills but doing very little to curtail the demand. Pro-growth John it's pro-growth. You just help them spend and then you also borrow lots of money. And don't worry about budgeting the balance. So balancing the budget. And that's basically been the theme that we've heard. And a lot of people are saying it's different than what's going on in Europe. So it's different than any kind of economic theory. John what does Tuesday look like after the funeral for this queen Suha. How does the debate click in Tuesday. I think almost immediately. I agree. We've got to hear from this government and get some kind of statement on what's going to happen fiscally. And then we'll hear from the Bank of England. It's go go go. I mean I would John Tucker down to our team coverage and team reporting here at Bloomberg Surveillance. Our entire team has been looking at the freshly cooked sausages a pillow soft white breakfast roll plus a generous dollop of each. Is this a great way to price rises for the sausage roll. Greg's pants. I say you don't. I mean they sell every week to me 10 million plus a seriously sausage rolls my favorite figures. He's looking up Greg sausage rolls and to figure out how to weave it into here. Fun to have to live with. At least that's yours. That's got to. The depths of the recession which is looming right now is probably going to end up shallower than the one we could have feared. Also consumer as well. Businesses are starting to at the margin rollover. It's still very clear that the global economy isn't in a very weak phase. We've been the most surprised to see that the market is more optimistic than Fed commentary clearly now. They have sent the signal that they are going after inflation first and foremost. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz. Live from London from audience worldwide good morning. Good morning. This is Bloomberg Surveillance on TV and radio alongside Tom Keene and Lisa Abramowicz. Some Jonathan Ferro with equity futures positive going into the CPI report 90 minutes away. Tom Keene is counting down. And how many different languages. I think it's way too much. Was was good French. She was counting up and not down. Translate to the rescue. How's that working out. It's good Google to work it out. Well great. I'm enjoying our more business focus today. We pause here within the morning for the queen and it was serious events today. We don't need to go into right now but it gives us the luxury of focusing John and what we do on the data in 90 minutes at least. That's front and center for all of us. And a lot of people are wondering how much of a deceleration we'll see on the top line which is the reason why the core is going to be that much more important. Basically the other non energy non-food costs how much are they increasing. And I think Andrew Holland Harris put it beautifully where he was talking about really it's all of the different components. And until you see a broad based decline in at the pace of inflation it's not only get the Fed's attention in terms of investor stories for twenty three the pivot is a pause or maybe it's even rate cuts. If you speak to some market participants need to work out a difference between 50 and 75 told they told us they talk about the totality of the data. Do you think today's is the difference between 50 or 75 from this fellow. I'm exhausted by it. And you know John I was exhausted by it months ago. I would suggest folks you look at the makeup of inflation. I'm going to go back to block and tackle which is goods service dynamics basic stuff. The world of David Rosenberg. I'm not going to focused on the financialization debate. Shelter. Shouts of cost shelter. O'REILLY Sure absolutely. Killer as Tom said. And they haven't really been rolling over. There's some areas where perhaps they're starting to plateau out but that's not enough. When you start looking year over year at some 12 15 percent kinds of rate increases you didn't you know. I don't mean to interrupt as you see of course. I would never do something like I don't. ROSENBERG Subdivisions John the commodity market looks at all this stuff. Yeah. And the answer is one of things that I noticed is home furnishings. Why does that's. I just noticed you know they had one of the beautiful artworks we have. They look great on Bloomberg Radio and in home furnishings was a stupid number. You know I noticed this morning going into the CPI print the weakness in the U.S. dollar again. Yeah. To see standing back at 117 what a week ago we were looking at 114 113. It's a big turnaround in the last what you're even seeing the Japanese yen strengthened just a tag like that. I mean kind of is actually notable considering it wasn't before. I'll take kind of. They'll take a hundred now. And basically this is a really a story about disinflation and people getting excited about the potential. Maybe we've seen peak inflation maybe. Perhaps. What kind of futures look like this on the S&P 500 that positive. About six or seven tenths of one percent. Got it into the CPI report and a wrap about 90 minutes. Yields to back head down low a negative four basis points on a 10 year to 315. Bear in mind at the front end yesterday became very very close to 360 Lee said. Then we backed away by a couple of basis points and we're doing that again this morning. Again the disinflationary theme that people's inflation expectations are coming down. And we did see that also from the New York Federal Reserve survey of consumers which also showed inflation expectations falling pretty significantly. All right. We're looking today for the eight thirty a.m. Eastern U.S. CPI and for the month of August. In case you hadn't noticed as we've been talking about all morning I am focused very much on the core of the non energy the non-food costs. How much have they really declined plateaued. Which aspects of them. We are going to be looking granular. We're also going to be tracking the Queen Elizabeth's coffin which is traveling from St Giles Cathedral to Buckingham Palace with all of the tributes pouring in and the royal family ISE speaking and walking behind her. And at 1:00 p.m. we get the U.S. selling 18 billion dollars a 30 year bonds. I am interested in this even though Tom is not. I'm interested because this highlights NYSE demand was two speeches. It's happened before. It'll happen again. He did it right. And that is going to be his response to both. And I will say this is a very interesting moment because the roll up of the Federal Reserve balance sheet is gaining steam. So suddenly do you get more concern on the part of investors about a lack of fed put or a lack of Fed buying. And you know how does that affect their involvement is key to a no QE. I think that that has consequences for the fiscal conversation we're having here in the U.K.. Yes across Europe for that matter as well. Yes. If you don't have that big buyer of that balance sheet then how do you finance a lot of these fiscal spending programs the same kind of rates that don't become feet that don't become infeasible and kind of reach those thresholds you are talking about. Are you looking forward to the auctions a little bit later. Yeah I'm all over. The surveillance now was global. I should point out. We're going to take the Netherlands. It's around that time. Right. They're really. Mahajan joins us now. Senior investment strategist at Edward Jones. Mona. Let's start here a conversation about whether this rally we're seeing over the last four days or so is just a bear market rally. We. Back in the summer. What is the difference. Yeah you know I think this rally is perhaps in part driven by the enthusiasm or anticipation of the number we're gonna get at 830 AM today which is a CPI print that will likely be below last month. The headline Inflation as we all noted likely to come down given what we're seeing in gas prices oil prices commodity prices broadly. All eyes will be on that core CPI figure. We all know that shelter and rent tends to be stickier. But we are getting an offset from lower airline fares lower car prices to some extent. And so you know we're probably poised for a decent number at eight thirty a.m. which you know the story really for 2020 to the rest of the year is what direction of travel will inflation go. And the Fed wants to see not just one print lower. They want to see two three maybe four prints lower once we get that and we head towards year end. And the Fed can pause potentially in financial conditions maybe start to ease and go in the right direction of travel. That's when we think we'll get a more sustainable rally. Until then we do think volatility more likely. You have a huge advantage with your representation of Edward Dow Jones. They are nationwide. They are across the fabric of the nation. How crushed are the clients. Edward Jones. By this unimaginable a 9 percent inflation. Yeah. Look you know there are several pockets of this country that are still suffering from elevated inflation. And think about the segmentation of our retail clients. But segmentation of the population broadly clearly those on the lower end of the spectrum those that are living more paycheck to paycheck are feeling this 8 percent inflation still to a larger extent. And that comes up in the grocery store bills that comes up in the gas pump. But the good news is it's a very tangible move lower over the last few weeks. And we're seeing it in gas prices at the pump. Even parts of your grocery store bill are looking a lot better. And so I think a little bit of optimism and we're seeing that come out in the economic metrics as well. When you think about inflation expectations not being anchored higher in fact moving in the right direction again lower. When you look at things like the ESM prices paid index for both manufacturing and services rolling over pretty dramatically. When you look at even the supply chain stress indices heading downward. So we think the momentum is moving in the right way. Things like a cooling housing market a potentially cooling labor market they will take more time to show up in the inflation figures. But we do hope to see that towards year end as well. So Mona are you all in a soft landing or are you letting the vote on FTSE release the new phrase. You know I think a soft landing right now. I think we'll still depend on this is a still unprecedented Fed cycle here. Keep in mind the Fed doesn't have a great track record. Eleven of the last 14 Fed cycles ended in recession. This one we're going up to a 4 percent terminal rate. We're going in 75 basis point increments. There is a lag impact from such a dramatic Fed rate hikes to the real economy. We do anticipate a slowing economic momentum below trend for sure as we head towards your end. But I think the probability of a full on recession still remains low. If we do enter a downturn we still don't see the scope for a deep or prolonged recessionary environment here in the US. Madam Mahajan of Edward Jones we've heard that many many times not to soften up the short shallow part. Mona thank you. It's always great to catch up with you. Appreciate it. So this soft landing this whole argument this debate got fuel from the payroll support a number of Fridays ago when the participation rate climbed unemployment climbed. Wages were soft. The payrolls were still robust. That's just one data point and a whole host of data points to make into this idea that maybe it can be executed. But I'll say this and this is the important part. This is about the journey back down to what's what 6 5 percent on inflation the journey from 5 back towards Target which is to is a very very different effort. And what this Fed is basically telling you is that to convince us that we're on a trajectory back towards two and we don't want to prematurely lose them forward we've got to get rates up and then stay there and wait. And then even if we've got the itch to think with that we've got to wait and then wait a little bit longer. The fear right now is if they're going to go back to the 70s they will move too quickly to loosen up financial conditions to loosen up financial policy monetary policy and then you'll get a resurgence because some of the dynamics haven't been healed. And this really goes to this question of understanding and inflation that is different than the 1970s but feels much more pervasive and much more global that it hasn't long. And this is what Mohamed El-Erian writes about I believe in the Financial Times a number of months ago. So the risk of a flip flopping Fed chair try not to get a flip flopping Fed chairman Paul is telling you he is telling you that he wants to avoid that almost at all costs and not address in Jackson Hole. Right. A few weeks back I take great issue with the idea that American capitalism American finance and the people of America can operate in a higher yield environment. They can like the 70s. No. Obviously that was terrible. But to move up here to some form of neutrality and wait and monitor and see what happens is certainly do the one argument against that. And someone with you the one argument against it. And I think this will resonate with least a little bit north and perhaps here is that the debt load. It's the debt load. So the increase in the debt load particularly on the suffering not just in America but worldwide. So the argument against that and I think going back and forth with a number of strategists about this some people say it is crippling. There is too much debt to really withstand this. Plus you have a lot of countries that are trying to borrow. Right. And the flip side that debt is with nations. It is not with households. And that is a big difference. And that's what is short and shallow idea. Yeah exactly. Sure. And the next step Scott Clement is going to join us from Citi. In fact Brown Brothers Harriman I'll get that right. He's going to join us from Brown Brothers the next day. I am. I'm in the city in New York. Thank you. That was the perfect segue. Thank you. It features a positive by seven cents. Then you've got to count stand in fridge tell to CPI sausage. Oh. Oh. Oh he's grunting. What. What language. They speak in Venezuela as we count down to CPI I might be more apt. Said he's still a real number. Yeah. Let's be clear about that. Even if it's got a seven handed today that's number two. CPI just around the corner from London will be talking to New York. Yeah. Let's just put. Keeping you up today with news from around the world with the first word. I'm Lisa Matteo. Ukrainian forces have recaptured more than 20 300 square miles in the east and south of the country so far this month. That's according to President Vladimir Zelinsky. He said Ukrainian troops are continuing to push forward. Meanwhile Ukraine is appealing for more weapons to build on its recent success. Bloomberg's learned that Germany will provide 68 billion dollars in loan guarantees for struggling energy companies. The money will come from a fund set up to help companies cope with the economic hit from the pandemic. Germany is at the center of Europe's energy crisis and there's concern that there could be a wave of corporate bankruptcies. President Biden is trying to capitalize on a sudden stretch of positive economic news. His goal is to turn the Democrat's biggest political liability into an election year selling point. The Democrats bid to retain control of both houses have Congress of Congress have been boosted by falling gas prices and signs that inflation may be easing. At least inflation data comes out at 830 New York time. UBS plans to raise a dividend for this year by 10 percent. The Swiss bank also expects share repurchases will exceed a target of five billion dollars for 2022. UBS is returning excess capital to investors after calling off the one point four billion dollar acquisition of U.S. robo advisor. Well front global news 24 hours a day on air and on Bloomberg Quicktake powered by more than 20 700 journalists and analysts and more than 120 countries. I'm Lisa Matteo. This is Bloomberg. We are in sort of a tipping point for now. Governments in general has been able to mitigate the loss of the role impact of the rise in gas prices that may become more complicated as we get into 2013. These are trees. Many streets are. Mark Zandi chief economist at AXA Investment Managers. As we count down to the CPI report in about an hour and 12 minutes we caught up with cities. ANDREW HOLLAND HOST Only 30 minutes or so ago. He's looking for a 75 basis point rate hike from this Federal Reserve. At their meeting next week going into that CPI print and that meeting we've got a rally in this equity market over the previous four days amounting to about a five percent move on the S&P 500. Right now futures are up by six or seven tenths of 1 percent. He was a bit lower. We're down by four or five negative five basis points to 331 on a US 10 year 10K euro dollar. Once again dollar weakness. It's on a one to one eighty two. And I can tell you on Sterling we're looking at a 117 handle through much of this morning. Sterling in America this morning as well. Dow futures up over 200 points. That's a good sign. So it's good stuff. It's 20 degrees there as well. Will be interesting to see what the VIX does at eight thirty right now. And most importantly Maria Tadeo is in Brussels. And joining us here with a view of St. Paul's Cathedral Lizzie Burnham joins us. Phone from Buckingham Palace is the ceremonies for the queen. Move forward. Lizzie I want to start with you. It is the topic of the city this morning. And this is a new chancellor of the exchequer and some would say a purge by the new prime minister. This is this is not equivalent in America. You've got a first class guy out of Trinity Cambridge in LSC Tom Scala who has been shown the door after 30 years of civil service to this nation. Let's first start. Why was Mr. Scalise shown the door and the trust purge. Yeah he's gone all the way back to Gordon Brown. Tom Scullin number one guy at the Treasury. But trust is making a statement. She says that she is taking on the blob the orthodoxy at the Treasury and the Bank of England. She wants to get rid of the Abacus economics. So as one government and one of missed you want her to define what an abacus is just as one former government economics economist put it to us it's a symbolic computation. This is showing that there's a new ruler in town and. It leaves a huge power vacuum at the top of the Treasury at a time when you've got double digit inflation. And Rory is. Yes you're dismissing Tom Scholar. But what about all the other people in the Treasury who are the most employable in the civil service who will now choose to quit if there a problem screw up your opinion on this. Well I think what Liz is explaining actually started with Boris Johnson on his way out the door drumbeat that parting speech about the Treasury and that role and the job they've got to do. Feels like he laid the groundwork for them to follow on with less trust and the new chancellor. But the thing about the trust quality time relationship is that this will be actual alignment unlike sooner John nicely. And this is going to be the closest alignment since the Osborne Cameron days. That's what trust wants. And surely that's a good thing when you're in an economic crisis. Right. We've been talking about what you wanted to say. Well it also depends on how much you support your economy and at what cost. And Rio today I'd love to get the compare and contrast with the European the EU plan for energy versus the U.K. plan for energy which is to give aid in the U.K. to households and just borrow to plug the gap. Whereas in the European Union there is a focus on curbing demand directly targeting the demand and taking money from the profits of the big oil conglomerates. How much is this gaining steam. When is this going to get passed. What details to down. Well we're about to find out because this is happening behind the scenes in a meeting led by sort of underlying as we speak but I think you really hit the nail there. It will be about taxation. They want to call it a solidarity contribution from some of this fossil fuel companies. Also power generators do not use gas. And then it's a story about demand destruction. And what they say here is that when supply is tight but also very expensive well you need to do is use less power to me. The thing to watch for here is the percentage what kind of reduction are they're hoping to get. And also the obvious question is how do you implemented. And it's very clear that police is not going to show to your house to see whether or not you're turning off the heat. And this is a story about the big European buyers but also the big European companies. So I'm interested to see whether or not they want to play ball here and what is the incentive to get them to participate in this demand destruction. And it's not just at any time of the day. They say they want to see it at peak times because this is when the bill comes from the highest. I'd say it depends how long it goes on for before people start turning up and checking thermostats deeper into the winter. But who knows. Lizzie the criticism that people have leveled at this government is that this government isn't doing what the Europeans are doing which is thinking about cuts having to mount. They've come out with a massive fiscal intervention in the last week to compliment that. Do you expect at some point that would be some kind of policy to curtail demand around energy consumption. It doesn't look like it. What this whole package is is an targeted and not in any way asking people to turn off the lights as they are in European cities. We've still got all this unnecessary energy consumption. And that's the warning that Philip Hammond the chancellor came on and told us about because really it's a blank check. The U.K. is energy bailout. You're having a blast. Had a great column saying that it was you know it's the biggest short on the wholesale gas and electricity markets with a hedge because it is a blank check. And are documents that Bloomberg seen say that it could cost 200 billion pounds. So no that is the major criticism along with the fact that trust is ruled out the windfall tax and it's going to rely so heavily on borrowing. And perhaps it's not a one off given what we're hearing from the chancellor. Well that's the other thing is that it's uncapped. Right. They plan to do this in perpetuity of course. We've been talking about this for a while which is at what point do foreign investors save me out yields up you know when they yields up and currency weaker. I wonder what this Bank of India governor thinks as well going into the meeting next week. We've talked a lot some about the 75 from the ECB the 75. We might get from the Federal Reserve next week. You've mentioned it some the day after. It's the Bank of England's turn. And each nation culturally is different in the United Kingdom is radically different to the structures of Europe and America. It's a separate and discrete debate away from Powell away from God. Is this just the beginning from this U.K. government at least at the intervention last week around Dynegy. Some people might make the argument that reduces inflation in the short term may allow the Bank of England to go a little bit more slowly. But if you are to believe what this chancellor is about to do along with this prime minister with tax cuts and all the rest of it then perhaps that's another reason for this bank having it's got a little bit more quickly especially when you add onto that the unemployment figure that we got earlier this morning which is unemployment rates falling in the U.K. It's the lowest since the mid 1970s. Now this sounds like good news but it's because people are just really good. Yeah Marco. That's fewer a smaller workforce getting higher wages because there aren't enough people to fill the jobs. I wouldn't bring this up but I happen to wander by Brown's hotel while I was eating dinner the night the night of Brexit while John was doing 15 hours in a row on air. True story floating around. So tell John we haven't talked about works. Is this a nation affected by Brexit as well as economic insistence on the fact going. They don't have to talk about Brexit. He doesn't want to do that either. Lizzie thank you. Maria Tadeo thank you to you as well. For about an hour away from a CPI report in America with futures up almost seven tenths of one percent. From London this is Bloomberg. The inflation report in America 60 minutes away life from London. Good morning to you. Futures are positive by seven tenths of 1 percent on the S&P 500. A rally in this equity market continues to build over the last four days higher by around about 5 percent. Horwich And this morning by seven tenths of one percent yields a lot but backing away by five basis points to let's call it 331 on a 10 year 330 80 on a 10 year low of a two year very very close to 360 in yesterday's session. We back away from that across the curve yields are lower and the affects market once more. This is the theme of the last week for sure. All of that dollar strength still in that over the last year or so. But backing off dollar soft. The weaker negative against the euro. Euro dollar positive six tenths of one percent. Tom that's very close to John Tucker. How do we read when I say 40 to 100 as RTX. I mean we've got so many you a million miles away. Yeah. We're not a million miles away. And I just I just wonder in the queue for remember Q2 we're all gloom by Shery Ahn boom. But then we rally tighter than then. What happened. The pushback against going to ease financial. Would you do it again. The fat. And we're all going to be asking the question next week to see if Chairman Pat pushes back. And we'll ask a question something along the lines of saying is this an unwarranted easing of financial conditions relative to what you need to achieve to get inflation back to its target. And I think the backdrop of everybody being all balled up and then all all bear it up and then all pulled up or at least more build up than they were buried up into place. I mean now I know the positioning is light. There is a lot of volatility. People don't love this. And I love how bank Erica wrote that this you know how do you trade this rally even if you have no faith in it. Basically sums up where we are right. Is it good news or bad news or bad news. Good news. Mark Barnes with the switch. Things just good. Let's do that right now. We are certain and it is good news to talk to someone so soon. Mark Cabana head of U.S. for its strategy at Bank of America writes brilliant very terse notes about the moment ahead. Mark what is the singular sentence of your research note this morning that the Fed is probably going to overdo it. We have seen them turn very hawkish with the labor market strength that we have seen that has caused us to revise up our path for the Fed. We now think terminal top of the range before point to 5 percent. And we think that the Fed will try and stick to this higher for longer mantra. But they're going to see a softening in the economic data and the tightening that they're putting in today will risk overdoing it in the future. And that's probably going to result in a recession an increase in the unemployment rate to around 5 percent. And even though the Fed doesn't want to contemplate the notion of rate cuts in 2023 or 2024 the tighter they are today the more likely it is that they're going to have to cut over that period of time. And we're about to get a reasonably constructive CPI print. Our economists are generally in line with the street. We think that we're going to see headline CPI move lower on a month over month basis. Core will be a little bit stickier. This is the type of inflation that the Fed needs to see. It's going to be the start of a trend lower in inflation and as we're seeing the start of that trend. The Fed is sounding very very hawkish. So again we do see risks that the Fed over. Does it. We do see risks that there is a recession next year and we do see risks that that's going to be a continued headwind for risk assets and markets more broadly. Mark Mike A4 is penciled in that recession for next year. Do you have a decent understanding of where the threshold is for this Fed to pause. Right now it seems very very high. And if I had to point to one indicator and one an indicator only I would point to the labor market. It really seems like the Fed wants to see a material softening in the labor market. They're probably somewhat cautiously optimistic. Behind closed doors that inflation will be moderating. Certainly most economists anticipate this surveys of inflation expectations anticipate this. And the market the tips market also anticipates this. But the Fed probably won't trust that until they see the labor market soften more meaningfully. And it certainly seems like the Fed is dead set on ensuring that they get that labor market slowdown and they're going to keep rates as high as it takes in order to get that. Again that just increases the risks of a hard landing or a recession in the future to us. But I do think that they're focused likely right now is somewhat singularly on the labor market. Certainly that's where we have seen the stronger data over the July intervening period over really the last month or two. And that's probably what has caused them to shift their tone and sound even more hawkish in relation to the last FOMC meeting. Mark a lot of people are expecting the CPI print to be constructive as you said to be lower not higher and to give some sense that there is this disinflationary feel. How much of that is actually due to the tightening in monetary policy. So we think that a lot of it has to do with lower energy prices. And I heard you earlier on this program talking about the very important distinction between headline drivers goods drivers and services drivers. And so we think that the Fed wants to see just a little bit more of easing on the services side. Lower we are lower inflation in reopening sensitive or travel sensitive sectors in the economy. That's what we think they're going to be looking for now. No doubt the tightening of financial conditions that we have seen is playing a part of the broad economic moderation that appears to be underway. But really if you look since the last FOMC meeting financial conditions are a bit tighter. But I wouldn't say that it's notable by any stretch and I do worry that this is a Fed that wants to see even more tightening of financial conditions in order to have faith that they will be able to achieve their 2 percent inflation target. Certainly we think that the risks are skewed and the Fed continuing to sound hawkish and that continuing to be a headwind for risk assets. Another way to translate this might be they want to see stocks go down a little bit more. Give them comfort that perhaps people were buying their message. There is a question of how long it's going to take for the full effect of the tightening. To really be borne out in markets in the economy is something people have been talking about that by the time they start seeing the effects it'll be too late to really turn around too quickly. How much will the run off of the balance sheet quantitative tightening which is accelerating this week really turbocharge some of those effects. Yeah it's a great point. Certainly you're right. We are seeing the Fed tightening really kick into high gear here with broad based expectations for another 75 basis point rate increase at the September meeting and the increase in the balance sheet runoff up to the maximum amount where caps are. Ninety five billion dollars a month. Now to date we don't think that Q2 has had much of an impact. And we are still somewhat cautiously optimistic that over the next couple of quarters the Kutty impact is not really going to be particularly heavily felt by the market. And a part of this reason is because we do think that there's just excess liquidity in the banking system. Banks are still holding a lot of excess unwanted deposits or excess unwanted reserves. And beauty does help them get rid of those deposits. So the early stages of Q2 we just don't think they're going to be that consequential. But by the time we get it the first half of next year maybe. Q One of next year. We do think that you're going to start to see more bank deposit competition that's going to be driving short term interest rates modestly higher. And that's probably going to bite a little bit more. So again we do think that routine matters. It's just going to probably take a little while before it really starts to bite. Ma'am I want you to help John Farrell here. He's doing the real yield from LHR here on Friday on the way out. I don't know if it's Terminal 5 or Terminal 2 but it'll be a great view of the boy. Fine throw airport. Right now we've got a nominal yield. Moving into partial differentials to the break evens is stunning. There's an inertial force to the break evens which borders on act of God. What does that signal mean of lower break evens right now to your world. It means policy mistake again. The Fed is tightening in anticipation that inflation will remain persistent and they feel like they really need to be aggressive in order to bring it down. But it strikes us that certainly the tips market is not reflecting elevated expectation of runaway inflation. If anything that tips the market continues to believe that the Fed is credible in its fight on inflation. And it's not just the tips market. It's also inflation expectations surveys. We saw that clearly in the New York Fed surveys three year ahead expectation yesterday. Inflation expectations are declining as the Fed ramps up their hawkishness. So what that is doing in the rates market is it's causing real rates to rise and it's really that real rate rise that matters more for the broad set of financial conditions. Look if interest rates are rising just because inflation is elevated that should have a fairly limited impact on broader financial markets. But if real rates are rising that has a much more meaningful impact. It packs a heavier tightening punch into markets more broadly. And that is what we are seeing in the higher real rates rise than the greater. The potential is that the economy starts to show signs of moderating and that financial conditions will continue to be tight or that financial conditions will continue to be challenged. And again it seems like that's what the Fed is going after. We do worry to some extent that the Fed is going to go too far too fast. And we think that the two tense curve is going to become more inverted as a result of this. And again we do think that the more tightening they do today the greater the risk that they will have to cut tomorrow. And again it is somewhat ironic in this higher for longer mantra that the Fed has been pushing for. But again this aggressiveness today really increases the odds in our view that the Fed will be cutting in late 2003 or in 2020 for. Mark real yields higher than when you speak to the rest of the team. Have you been surprised by say on the equity side with Savita that this hasn't led to lower equity markets in a material way. In fact they're rallying again and it hasn't led to wider spreads. Yes we have been somewhat surprised by that. Now look a part of this may be due to positioning a part of this may be due to an expectation that inflation will moderate and that that will allow for the Fed to pivot a little bit sooner. Kind of in a very similar to what we saw in the early summer and some of that rate that equity market rally and credit spread performance. And again if financial conditions continue to remain around these levels then it just makes a risk that the Fed needs to feel like they have to tighten by more and front loaded in order to try and get that sustained tightening of conditions in order to slow the economy and to bring down inflation. Hi Mark. Fantastic. Just a bit of a clinic there as well. We appreciate it Mark about that. Thanks America. Global research Lisa. That's the tug of war between the equity market both somewhat. This Fed wants to say that basically the more that equity markets shrug off the Fed the more the Fed will get out of this group. Yes exactly. And that's basically at least what they doing in the rhetoric may perhaps in the action. Do you love this thing and tell us Great Britain was great. Thirty or forty five minutes. I'm looking at the Bloomberg Financial Conditions Index which the last couple of days has pushed against where Chairman Paul wants to go. Jay Bryson chief economist is going to be joining us later said look at the S&P. Look at this. A man called Nails doing that I think. Yes I was up 200 point inches on the kind of seven tenths of one percent. Not necessarily who I meant. Maybe I've got a funny name I could ease up. This is. Keeping you up today with news from around the world with the first word. I'm Lisa Matteo. Ukrainian President Vladimir Zelinsky is claiming success for his forces in that counteroffensive. Zelinsky says Ukrainian troops have now recaptured more than 20 300 square miles in the east and south of the country this month. Russian forces have hit Ukraine's energy infrastructure leaving hundreds of thousands of people in the dark. Inflation in the US probably slowed for a second month in a row. But that's unlikely to prevent the Fed from delivering another jumbo interest rate hike next week. In a Bloomberg survey economists forecasts an eight point one percent rise in prices last month from a year earlier. The Consumer Price Index comes out at 830 New York time. Work has learned that the Justice Department has subpoenaed dozens of former President Trump's campaign operatives and allies. It's part of an effort to collect information related to the plot to overturn the 2020 presidential election. A lawyer for one of those subpoenaed former New York Police Commissioner Bernard Kerik calls it a fishing expedition. Bloomberg has also learned that Buyer has quickly started the search for a successor to CEO Bernard Bauman. Now that raises the prospect that Fallon could leave before his contract expires in 2024. He has survived plenty of shareholder frustration and legal turmoil since becoming CEO in May 2016. Bauman spearheaded the costly acquisition of Monsanto which has been a huge legal headache. Global news 24 hours a day on air and on Bloomberg Quicktake. Powered by more than twenty seven hundred journalists and analysts and more than 120 countries. I'm Lisa Matteo. This is Bloomberg. There is a lot of momentum still in the core. I think that this one reading is not going to be enough to dissuade the Fed from a large movement at its next meeting even if it is a bit softer. Take 75. Stephanie Anderson director of economic studies at Brookings Institution. She wasn't specific about being 75 five Holocaust City was thought. He joined us in the last hour going into that CPI report just around the corner 830 Eastern Time which isn't too far away. Some features a positive. My seven cents. I want the 75 basis points. That's a good statement on a buoyant and strong America. Right. If it remains buoyant and strong as you know and we've discussed it a million times if unemployment starts going the other way a little bit more persistently than I imagine the balance starts to change. Change your dialogue here right now. This has been a day where we've moved away from the ceremonies for the queen of England. But we do so with King Charles the third in Ireland distance from Belfast Northern Ireland. Dublin is one hundred and three miles across the centuries. It is substantial. Giving us perspective today on the watch in Paris and of course as Ireland's Stephen Carroll joins us from Bloomberg News to discuss the moment for King Charles the third. What did Brexit do to King Charles Northern Ireland. Well I mean to the island of Ireland Brexit changed the relationship across these islands. Some would argue irreparably it had been a reasonably stable reasonably positive relationship particularly since the visit of Queen Elizabeth in 2011 which for many was a high point of Anglo-Irish relations. It's hard to imagine that a monarch would have gotten up in Dublin Castle and opened her speech in Irish with four words that were thrown up as the carriage president and friends in a language which many had seen. That of course historically the English didn't favour in their their relations with Ireland. Brexit changed the game because you now have very different trade relations with the way that Northern Ireland functions. They're a special place within the post Brexit relationship with European Union. They're still in the European Union's single market trading rules with the UK. Still a complex issue and something that we know that is trust as prime minister has focused on as well. And it is a question now. The question of Irish unity is back on the table since Brexit in a way that we haven't seen before because the relationships have been semantics on the island of Ireland. This is a matter that is left to a referendum referendum the discretion of the British government here in London two grants in Northern Ireland. But it's a question being asked more now than it ever would have thought have been started with the great Italian University of Chicago loses and goes who's wonderful on American capitalism. How do you define Irish capitalism. Well Ireland is a very close relationship with America. If you think of all the tech companies that are in Dublin it's the European headquarters. They're just claims of DAX Dutch. I mean if you ask them they say no. You know the Irish government's argument has always been that they were transparent about their low corporate tax regime. Twelve and a half percent. And they say where do I go with you. Did it like drift away. Minimum tax still minimum still. It's still under way. It's a debate that they're hoping to reignite at a European level now because it does seem to have gone off the radar. They've been trying to package it in some of the major legislation in the US as well. It's still an effort led by the NYSE in Paris that they're trying to create the structure for this. We know that France has been pushing very hard for it. And it was a really big step for them to get countries like Ireland on board with the idea of a member of minimum corporate tax and what possible donor who was head of the Eurogroup the group of finance eurozone finance ministers as well. That's something they had agreed on the principle of both the profit shifting elements and the minimum taxation element. But something that's still there isn't political agreement everywhere about the whole argument. The Alix Steel says you need a global deal for it to be affected. So that one country can't try to outbid the others. And the focus of this case today is on Northern Ireland. Can you talk to us about the popularity of the monarchy in Northern Ireland. I mean it's probably the one place in the United Kingdom where the monarchy isn't necessarily going to be universally welcomed although relations have improved significantly over the years. I spoke about the queen's visit back in 2011. This is Charles's fortieth visit to Northern Ireland of course only his first as monarch. And it's interesting because it is the first time that there is a Sinn Fein's is somebody from the Republican tradition who is first minister designate. There is no active government in Northern Ireland at the moment for their own political difficulties. But the idea of having somebody from Sinn Fein who stood up in the northern I understand they last week and pay tribute to Queen Elizabeth as the courageous and gracious leader. Now the Sinn Fein didn't attend the accession events that was held in Northern Ireland. They said that was people who were loyal to the British monarch. But Michelle O'Neill the first minister designate as meeting Prince Charles on the queen consort today in Northern Ireland. And that's something that represents the relations that are changed over the years and the troubles with respect to the lack of government in the region. And the question around unity has been a theme for us throughout the past couple of days. Can this monarch be a uniting feature at a time when there is that kind of skepticism. Or do you think that there will be this feeling this desire for some sort of continuity enough to give people a little bit different perspective. I'm not sure that really the queen as a uniting figure ever held that much sway in Northern Ireland. Although the efforts that have been made in recent years with the number of visits being made by the queen to Northern Ireland had sowed the seeds for a positive relationship there. It is going to be a challenge for Charles in the same way that. Relations with Scotland is a challenge as well. It's he. He is somebody that has a relationship with the place and I think that's something that will stand him in good stead. But this is a political matter that's really outside the realm of the monarchy as well. David Cameron fantastic to see you in person as well. Thanks for being with us. We appreciate it. Thank you very much Tom. Another phase in a sequence going forward. Next Monday. Well next Monday the funeral service Mr. BOWDEN will attend. But I would prepare John besides the hundreds of thousands scheduled to walk by the queen's casket. I would prepare for something equivalent to what we saw in 1963 in the United States. This should be an extraordinary turnout of world leaders overwhelming overwhelmingly. So Lisa you and I went through Westminster and on to the palace over the weekend. Can you imagine how much B.S. risk to pay on Monday. Because London right now it is packed. It is packed. And they have brought in I think 10000 police officers to London and a number of troops as well to try to have crowd control. And I love the article in The Wall Street Journal about the Royal Guard saying please stop leaving Paddington Bears at the palace. I think him palace because they're not composed of all. And people think problematic heading comparison Paris. I would I would say rather selfishly the football is getting cancelled. A lot of these games are being cancelled. That's a few areas of the police resort. Yes exactly. Mentioned the resources Tom a lot of these football matches can't go ahead because it takes away. So the public support it takes. I mean they understand something. They would like to see these games go ahead. So that's some of the fans could pay tribute to the queen because some sporting events have continued. But the rules 30 mixed of course that would delight them enough to squeeze and allowed the games going into the World Cup. But you know there are more important things. I mean I'm not complaining about very to go to said games which may also factor into certain games. Should I say anything about the absence. Absolutely. Anything about CPI. So important that's just around a corner. Is that my rights away. Perhaps no inflation 8 percent whether it's 7 percent 9 7 probably is still a big number. We're from our cabana Tom Keene the Bank of America line. This is about passing away from the financialization purchasing services and goods inflation and as IT services inflation come in a little as Mr. Cabana you mentioned would be a huge deal. They would I think at the moment is persistence and that is a story for the energy story. That is a word we can use for the Federal Reserve as well and inflation. How much of this will persist. And that's what we need to discuss. Shouter at 830 Eastern and not only shelter but also employment. When you take a look at the restructuring of the labor market how much of that's going to be sticky with people demanding higher wages and not coming back to the workforce as quickly. What is Scott Clemmens worth. Brad Stone harassment. Not city city but it's inner city. It's in New York. Fantastic. You know trying to get it right just to make sure Scott Clemmens is coming from Brown. Brothers Harriman is going to join us very very shortly. We are 35 minutes away from inflation in America looking for something in at around 8 percent. The focus of this market will be on call month on month. We'll get to that in just a moment. This is Belinda. In the last few weeks and really seen an influx of risk on behavior it's possible that global inflation continues to push higher. We're in the camp that inflation is going to decelerate. Growth is going to decelerate. The Fed is going to need to see a real slowdown in the labor market. In a way we all just changing the timing of the pain. This is Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz. Live from London from audience worldwide I believe it's good afternoon. Good afternoon. Now in London at least good morning to you stateside and Bloomberg Surveillance life on TV and radio continue dance with CPI report. About 30 minutes away with futures positive. Twenty nine in the S&P up seven tenths of 1 percent to NIKKEI. We build on this rally of the last few days. So the rally is anticipating inflation. It is quite a sense of magnitude as the word here. What kind of magnitude do we get in the headline data. The core data. But John I would go beneath the headline data. I will go right away to the David Rosenberg world of goods and services. That dynamic is critical of the media as we often do. May well go with the headline year over year fake at least. So that's often the baker fake out. That's why they go with that number. The market moves straight to Tom's point very focused on month over month core inflation just to get an idea about the more recent trend. I think you can go even further than that. It's not just going to be the headline core number. They're going to be looking at housing they're going to be looking at wages. They're going to be looking at to Tom's point services. They're going to be looking at the granularity of each component and the stickiness in different sectors because that's going to possibly be more interesting than even the headline either number. And when they take in the totality of the data because that's the word used and gone into effect decision next week. Is it going to be 50 or 75 for money Dennis to wound up top 50 or 70. I'm going to wake him up even further as he's there and he starts getting it 75. I mean pretty much everyone is saying that Fed officials came out. They said it's 75. I mean if they came out at 50 that would be viewed as incredibly dovish even though it's a massive hike from any historical perspective. And that's what the market is focused on. Some. Some participants anyway. The potential for a downshift from 75 to 50 to 25 and then to the next year I'm going to move on let's say it's 75 whatever down to November and into 2023 of the guesstimate of where neutrality is. I'm going to editorialize. We have no clue what it Michael Barr site of Bank of America on the estimate of next year might gape an eye for it at Bank of America is not saying recession for next year. Mark Cabana is talking up rate cuts. But rate cuts after the fact because he thinks the risk now is the Fed takes it too far. He's talking about unemployment having to rise. And this is sort of the conundrum because if you get rate cuts it's because there has been pain that you haven't necessarily seen priced in. This is the Mike Wilson view over at Morgan Stanley. Here come the earnings revisions downward. That's going to be what drives the next leg lower in the S&P because of exactly this data could be revenue revisions lower because if you do get a vector of inflation lower all of a sudden a normal 4 percent growth that's up 7 percent growth becomes five point six percent. And that's a marginal move in revenues. The only counterargument to that I don't mean to just cause trouble. But you are probably going to see margin compression if you start to see wages continue to go up. Basically consumers pushing back on those prices demand destruction because of the inflation which we see. And I'm going to focus this morning Mrs. Keyes visiting with me. And you know she's over at the Tower of London. What have you got for me. What is she doing. If I get out a room for you in trouble I think I mean thought sounds like you're in trouble. Check out the prices to what is in the CPI report. No idea where the Dow is. I'll tell you where the S&P 500 is. Much in the Dow is take 28 on the S&P. A good seven series but not to the Dow. It was almost I mean that's as far as I'll take. You mentioned my BOVESPA and that May 2nd. I mentioned J.P. Morgan a market clinic which plays him on the team basically saying we can achieve a soft landing. It's much more about the data than it is about hawkish central bank rhetoric which you make of that. Really. Yeah sure. OK Marco Cole out of it. You can laugh because he's the perpetual bull. I can laugh but at the same time you could argue that I'm perpetually bearish on my outlook. So you know it takes one to know what. And I'm not saying that. Well I mean it's not that I'm bearish. It's just that you know it's not realistic. I'm realistic cold and a little bit of you know skepticism of the common party line. I see. Say dies in 90 days. Not about me moving on. The point is really though about a soft landing. It's not just him. A lot of people are showing that it's looking more likely because of this deceleration in inflation. As long as you keep it going precisely what percent level. It's never about whether things are good or bad for markets is about whether they are better or worse. And based on the incoming data over the last month or so that we can make the argument that getting better and not worse. And it is multifaceted. It is airplane tickets. It's also some of the surge that we saw in cars coming off. Now the question is services. Now the question is are these other I think the big question socially linking into all this mumbo jumbo due to her spinning. Oh thank you. So. Oh you are. Is real estate. Real estate real estate. It's a huge part of her monthly. But I love that you it what we're talking about. My early game out with and I just I'm calling the rich and corporations that shall tell the nation that life is. I was bullied on the world's front. Lonely this. Yeah. Bullard is front loading it to get out front of whatever comes our way. And this is an America that will adapt to these shocks. I can say you Scott Clements has things to say. He's going to join us now the chief investment strategist at Brown Brothers Harriman. Scott what are you looking for in 25 minutes. I think we're going to get further evidence that inflation actually peaked in June. And I think I think it was Lisa who put a finger on it right at the top of the hour. That's what's really important is the ingredients of the report more so than the headline. Are we continuing to see relief particularly on the goods and services front in addition to what we're anticipating is more relief in food and energy and we're seeing that in the underlying commodities markets. Probably more important than any of the numbers will be the narrative the Fed wraps around it because that'll provide some insight into whether or not the Fed is contemplating dare I use the word tapering in November and December to step back to a 50 basis point 25 basis point hike with a view towards being done with this tightening cycle by early 2020. So all the English majors are going to pass the Fed's commentary next week probably more so than the econ majors. Look at the numbers on the top line. Scott I know Brown Brothers Harriman took a meeting at the length or in a hotel in the Regency England and it was the same debate in the 1930s as it is now. You can't pick the bottom. But when you do go up you always have too much cash. Are we overburdened with cash right now as we invest for two thousand twenty five. Well our clients are pretty fully invested in cash although although I recognized that investors in general are very long cash for longer term investors I would consider that a contrarian indicator doesn't work on a day to day basis. But in terms of unspent fuel or dry powder or assets on the sideline characterize it however you want. I think that is fuel for the markets as and when the narrative begins to improve and we actually get some increasing relief on inflation. And if we get increasing confidence that the Fed is closer to the end of this tightening cycle the beginning there is plenty of cash out there to put behind that improving sentiment. So are you bullish. Lisa I would say we are. But you have to take it out of the context of a longer term view. That's not a statement about September returns or even you know between now and the end of the year. But we are looking around a lot of opportunities in equities that have been unfairly pushed down with the rest of the market particularly in the first half of this year when it was sort of a risk off sell everything that's not bolted down. So I hesitate to use the old cliche but I'm going to use it anyway. I do believe that we're in a stock pickers market and there are plenty of opportunities for people building portfolios for the long run. That's an investing comment. That's not a trading company. Can you tell us what stocks you pick and scope. We keep those a firm secret Jonathan although I will say that we're finding a lot more opportunities in the mid-cap and small cap domestic space. I'm going away do that economists thing and wave my hands and say in general those smaller companies are more geared towards domestic economic activity. We have more confidence in domestic economic activity than outside the United States. And they are less exposed to the strength of the dollar which I think will be one of the big stories this third quarter earnings reports begin to come out. Scott wonderful to hear from you. Scott Clements the Brown Brothers Harriman. That final point. Yeah. Small caps is an important one. What are the two things you want to avoid internationally right now. Until more recently. Once the strength of the dollar that translation effect back from a foreign currency back into the U.S. and the others. Just the weakness associated that with the revenue generation abroad anyway. The difficulties in China. The difficulties in Europe. Yeah. And add to that Laurie Covid has been out front on this from RBC Capital Markets saying that these have been the stocks most beaten up and they are the first to start recovering even in a recession. But before the next cycle. So that's the other reason why some people are saying it's not always the way isn't it. Stock pickers market and you asked for stock picks and you can't get any. It's always about active management. Tom Bradley was more John Ben Lulu with a brilliant summation of the failure of active management. It is stunning the math where the more you hear about these homes based on the moment wherein the argument is this is the moment and maybe things have changed. OK. If you believe. Let's just say. Let's just take the mechanics of the index based on the large weighting on the S&P 500 growth. And if you believe that real yields are going to be a persistent feature of this raise rates next year some people will struggle to make things this way. You want to think. This is important if you're running an index fund and you're working it off the Dow. There's some interesting peculiarities there. OK. What's Thomas trying to tweak you just to translate. Because. Because because because. John you're trying to tweak time because you know that this is his third rail is active management. And the whole question of that. I do think that to your point factor investing has been catching. Yes. Just sort of we've heard the both of you. Right. Because there is let's make sure we're getting along. Just trying to play that you know conciliatory part. You guys are on the same page co-dependent. You know some of it has to be allocated to the town. How much money is the Dow. They got to it. Yeah I don't adhere to the Dow situation. Tell me how you do it. I'm great. You know for those you're in radio. John and I are just sitting on the other side of St. Paul's Cathedral. That's all there is to it. It's is positive. Seven tenths of one percent. We're going to talk about OPEC's latest report with Christine Malik of J.P. Morgan very shortly. CPI is 20 minutes away. Let's cut through the. You have today with news from around the world with the first word. I'm Lisa Matteo. We'll get the latest inflation numbers for the U.S. less than 20 minutes from now. Inflation in the U.S. probably slowed for a second month in a row but that's unlikely to prevent the Fed from delivering another jumbo interest rate hike next week. In a Bloomberg survey economists forecasts an eight point one percent rise in prices last month from a year earlier. Ukrainian forces have recaptured more than twenty three hundred square miles in the east and south of the country so far this month. That's according to President Vladimir Zelinsky. He said Ukrainian troops are continuing to push forward. Meanwhile Ukraine is appealing for more weapons to be built on its recent success. Deloitte is forecasting that U.S. retailers will see slower sales growth this holiday season because of inflation. The consulting firm expected a four to six percent increase in holiday sales. Higher prices are expected to drive more consumers online to search for deals. A Chinese made single aisle passenger jet designed to rival Boeing and Airbus could be certified by the nation's regulators this month. That's according to local media. Certification would clear the way for the C 9 1 9 to start commercial flights some 14 years after development began. And UBS plans to raise a dividend for this year by 10 percent. The Swiss bank also expects share repurchases will exceed a target of five billion dollars for 2022. UBS is returning ISE capital to investors after calling off the one point four billion dollar acquisition of U.S. robo advisor wealth front. Global news 24 hours a day on air and on Bloomberg Quicktake powered by more than twenty seven hundred journalists and analysts in more than 120 countries. I'm Lisa Matteo. This is Bloomberg. Essentially shift its viewpoint from inflation can't just be better than expected inflation has to be on an absolute basis lower. And we think that sheer power and others have had a chance to reset expectations away from 2 percent can be really helpful. Commerce show this afternoon account decided to pay for exhausted all up here. Lisa happy show. Eric Friedman chief investment officer at U.S. Bank Hang Seng. What's that. Just in case it's positive seven tenths of one percent on S&P 500 with CPI just around a corner 20 minutes away. Yields are coming down low in negative 6 basis points on a 10 year just to break a three thirty three. Twenty nine eighty five. And once again what you're witnessing this morning is what you've seen over the last few days which is some dollar weakness. Dollar index down a half of 1 per cent weaker dollar euro dollar positive a half of 1 per cent one at one seventy two. I think cable tum in at around 117. Crude positive one point six per cent in our lives from close to back to 90. Markets churning urn again as John mentioned earlier I believe it was John mentioned the monthly inflation data will be of great interest here in a good eleven minutes as well. This is not only our conversation of the day but our conversation of the week on oil. If you have a fear of one hundred and fifty dollars a barrel it has been outlined in a blistering 100 page memo by Christian Malak global head of energy strategy at JP Morgan Securities. Oh a good six months ago. Yes the price is cut away from those fears but the underlying fundamentals exist. Christian Mary like the decrease in hydrocarbons that we've seen is it just simply an Asia and a Covid flat on their back ups. In some ways is a sort of a this is a two pronged story. You have on one hand a slowdown through lockdowns and some bump in us in terms of the trajectory of demand. This will pose Covid of Reno normalization. On the other hand what you're seeing is a lot of volatility and uncertainty continue to exacerbate the supply outlook mean that most companies that ought to be investing in future production particularly the majors are not. So since we're kicking the can down the road in terms of a tightening of the fundamentals in the meantime potentially just in enjoying course probably the best word but ultimately taking advantage of some of the slowdown that we've seen visiting China and some of the impacts of inflation. Christine when we spoke with you last time we spoke about your report talking about the inability for a lot of oil producers to actually produce enough oil and that boy really had not counted in that potential shortfall. We're just getting some headlines for pack with Saudi Arabia telling the nations that produce oil that they increase production up by more than 11 million barrels per day basically showing their ability their capacity to increase output. Does that give you any confidence that he said anything to change your view on that front. Absolutely not. In fact it probably consolidated our view because what you have is effectively Saudi and sometimes other members of the JCC essentially subsidizing through adding barrels into the market. The oil price. But ultimately that is a limited amount of reserves. Right. So we were literally keeping their powder dry through the sort of spare capacity. We do believe Saudi can go north of twelve spoke with two million barrels. But the reality is that we can't just rely on OPEC's in Saudi to provide the marginal barrel because what you then have is U.S. shale slowing down counts council falling because of logistics supply chain issues. It's amazing. Pre and post Covid. It's like you've dismantled it. Few things have gone rusty. Put it back together again. And it's just not as effective in terms of supply growth from shale. And then you left with everybody else a non DCC non US which is the majors the overseas and they're doing everything but investing in oil. And that's particularly because of all the uncertainty not just about the front end volatility of the price but social tax windfall tax giving cash back. So oil CapEx has never been as far back in the queue. So that leaves more reliance on Saudis to ultimately fill the gap. But the message I think around the future is that it can't be just opaque that on the right or will fill in the deficit when needed. And this is part of our super cycle thesis. In the end we're going to see a structural deficit that can't be managed well or met quickly enough through short cycle barrels. So does anything make you question your super cycle thesis at a time when you've got Morgan Stanley and you have UBS moving away from some of their previous forecasts and actually cutting their near term outlook for crude prices. Are you doing the same or are you doubling down and saying they're missing the boat. Yeah I think we're probably in the latter capital doubling tripling quadrupling. I mean we've been bullish for two years now. And we've just all we've seen is this observation particularly led by uncertainties around demand. I think there is a degree of sort of confusion as to where demand will ultimately emerge or trend to over the medium term. We still believe that demand will ultimately continue to grow 200 700 million barrels by 20 30. And the issue is this. If that's right and we have a shortage of all fuels and we're back to the same issue which is where how do we fund how do we meet this energy deficit in the future. You can't be coal. We can't be gas. We're maxed on energy. It's got to be through certain wind. And then when you've gone through that we still have a major deficit in oil which basically means that we're going to see a repricing of oil significantly higher. And so we still stand by our IBEX case 950. Christian a question that speaks of the moment I've got a ways to go here but I think we have to speak of the continent of Europe in the hope of prayer of finding energy in the next 12 months next six months maybe even the next six years. Maybe it's away from your remit. But do you have an optimism Europe can succeed in staying warm this winter. I think ultimately where we're okay for this winter and that's because we've had Nord Stream on we've had we have got gas storage up in 90 percent a recast capacity is roughly 85 percent. We've got the flex time. The issue is not this winter. It's into next winter. And then we start to debate well how do we actually structurally fix this. That this long term supply issue of energy. We can't just provide quick fixes and kick the can down the road. So if anything I'm more concerned about as we go into the second half of 2023 how we manage particularly as China comes back. I think in some ways China has appeased this deficit this crisis in Europe by virtue of having lockdowns. If you have lockdowns ease China re-emergence as a marginal buyer of an energy then we will have deficits in Europe and energy that can't wholly be met through through gas unless we have gas to oil switching which is clearly bullish demand for oil particularly through an exchange which is why we struggled to take numbers down on demand when all we can see is more real demand for foreign oil particularly as it's still the cheapest fuel relative to all other. Kristen I was just brilliant. Just to have you break that down the bullish thesis that with Christie and Malik that JP Morgan Securities are we going to have to face another winter if this is basically the argument he's laying out for all of us and some you've raised this a million times a credit to you. Can you imagine the energy crunch in the world if we didn't have Covid 0. Yes absolutely. Can you imagine how hard this might be. You know I rarely sell a sell side report but I've read every word. Lilly sits on my coffee table at home in the walkup in the basic idea is its 100 page JP Morgan essay whether you agree or disagree with that. It's a global essay and its global dynamics away from the Soap Opera of America the soap opera of Europe. Well we get to the reality the reality of CPI in just a moment. Five minutes away the CPI report just the radical ways we have CPI. I the. This is a chip four and a half minutes away not someone for 30 show. Thanks for that. 20 features positive for seven tenths of one percent he estimates. He notes that six basis points three twenty nine forty seven on a ten year and he affects market or weaken dollar. Stronger euro. You're right Dalton. What I out in 69. It's a casual encounter. This is Bloomberg. They CPI report in America just seconds away coming into equity futures positive. Three quarters of one percent on the S&P 500. Yields are lower by six or seven basis points on a 10 year. The dollar is weaker. The euro stronger. Euro dollar one at one sixty eight. Waiting for that CPI reports come out. Standing by is Mark NIKKEI. Hi Mike. It is coming out. It's a little bit higher than anticipated. A tenth of a percent rise for the month of August. And the headline number which is more than the flat reading that we had last month in less than the zero point one negative reading that was expected pushes the year over year rate to eight point three percent. The forecast had been for eight point one percent. So we're a little bit higher. We'll check into the details and see why that is the core which matters more to a lot of people rises six tenths of a percent. That is double last month and double what's expected pushes the year over year rate to six point three percent from five point nine percent last month. The expectation was for a six point one percent move. So some bad news on inflation here but it doesn't really matter because everybody was kind of expecting the Fed to go 75 anyway. Quick look at what some of the increases come from. Food is up eight tenths of a percent. Food at home your grocery store up 7 10th and energy. This is the one that was supposed to be the big wildcard. Gasoline down ten point six percent. It was up 44 percent on the year last month. Now it's only up twenty five point six percent on the year. New cars are up by eight tenths of a percent. That is probably one of the disappointments in this number. Used cars fall a tenth of a percent. There was a forecast that they would be down as much as 1 percent in this index. And so that is another disappointment. While prices fall they do not fall as much as the wholesale price index had suggested. And then shelter the the rent component that everybody has been concerned about that keeps rising keeps rising even faster up seven tenths of a percent after a half a percent move last month. And on a year over year basis shelter costs up six point two percent. So we are a long way from saying that inflation is conquered and has peaked. And so the Fed has still more work to do. Obviously cements a 75 basis point move. Mark McKay doubling down on that going into next week. Mark McKay thank you. Seventy five and some might argue changes the tone of that news conference with the Fed chair as well. Let's have a look at the equity markets lower by more than one full percentage point. We were firm and now we're negative by one point thirty five percent on the S&P 500. Yields are higher on a 10 year back through 340. That's going to bring back the conversation about whether we have actually seen the high for the year on the 10 year. But the work we're doing at the front end of the yield curve right now. Bank slicing through 360 yields much much higher at the front end of a curve. This raises a question not for this meeting coming up next week but the meeting after the meeting after serving share point from earlier. Do we go down to 50. We go back down to 25 or do they stay at 75 basis points. I mean this really changes the discussion at a time when a lot of Fed officials are saying they want to keep rates probably close to 4 percent for a while. We haven't really factor that yet. If you wanted to see a persistent and convincing string of economic data some inflation prints to back off rate hikes then we just got disruption. That said a strong data point for this Federal Reserve to see month over month core pickup in the way it did. Again some. So it's going to change the conversation next to scope and scale. Know the real yield came just within four decimal points of 1 percent on the real yield here which is to me a sea change to see a full percentage point of 10 year real yield. We had a six hundred point Dow swing from basically plus two hundred being sent around 400. It's a huge shift a huge disappointment. What was the landing that we had earlier this morning. Soft. Soft. That's very nice I think. I don't think anyone's talking about that right now. What we've heard from Fed Chair Jay Powell from vice chair Lael Brainard from Mr. Wallace the governor over the Federal Reserve. What we've also heard from Jim polite repeatedly. What are they going to say. This is exactly what we're talking about. This is not about Fed officials. This is about a narrative shift in markets markets catching up to what the Fed is looking at. And that will be the discussion through the remainder of the day as they pass through this data and say what were we getting wrong. We assumed you would see disinflation and we are not. And I think that is what's going to drive the trading action. So equities down. Going into the opening bell about an hour away we're down by one point three percent on the S&P 500. We talked about that move for the front end to the yield curve through 360 on a two year. That's a fresh high fresh multi-year high at that as well for a two year yield in America and the Treasury market. And it sends up by six basis points through 340. Jay Bryson standing by the chief economist over at Wells Fargo. J just initially your reaction to a much much hotter CPI print. Well I think you know Mike nailed it earlier. I mean if you there's any doubt at all about 75 they're definitely going 75. And then you know at least I think you had a very good comment there as well. What does this mean about November. I mean we thought they would be stepping it back to November to 50 in November. And at this point you would say 75 is certain to be on the table there in November. Jerry how do you take this data this financialization shock over to the real economy. What does this a 30 numbers signal about potential slowdown in economic growth. Well you know I think what you're looking at here is there's two things that's going on with the inflation right. One is that inflation is going to continue to eat into nominal income. And so what we've seen if you're looking at real disposable income year over year at least in July it was down three point seven percent. And so you can't continue to have consumer spending grow if real income is contracting like that. So that's the first problem with inflation. The second problem is it puts the Fed into overdrive. And if they're in overdrive sooner or later they're gonna make a policy mistake. And if we're talking 75 75 75 so far as the eye can see they're going to make that policy mistake and potentially put the economy into recession which is what we think is going to happen early next year. Why did almost all forecasters get this wrong. Well there's you know there's there's a bunch of volatility on a month by bunch sort of basis here. We were above consensus but we weren't at zero point six. You know I think the big thing here that's really pushing a lot of this and this is why it's going to be hard to bring inflation down in the near term is the shelter component. You know the way they treat shelter the way they treat housing and here comes in with a long lag. And we all know what's happened over the last year or so. Housing prices have exploded. How many came into the CPI. Relatively slowly. It's coming in with a vengeance. Now the problem is it's going to continue to come in as well. And so that's going to keep the CPI inflation rate elevated for the foreseeable future. Jihye Lee many Fed officials have given us the impression that what they wanted was two or three softer inflation reports to rethink the trajectory of rate hikes as Lisa mentioned and you alluded to it. Do you think this really disrupts their ability to say in November that we need to go a different direction. Well yeah I think. Well obviously we've got a lot of data coming out between here and in November. So you know what. We'll see. Right. But you know if they want to see two or three soft prints in a row we've just reset the clock back to zero right now. And so you know 75 obviously is on the table. I think in November we'll see what happens to the real economy that we will have you know two more employment reports between now and then. That'll be key. So if you do see slowing in the real economy maybe it backs off. But right now we haven't seen a lot. Tremendous amount of slowing in the real economy. And that keeps these supersized rate hikes in play. Jay can you tell me where you expect to see unemployment by year end and at the moment this fetish you know is very very focused on the one side of the mandate bringing inflation lower. We're all trying to work out whether the two sides of the mandate come into more conflict as we get closer to year end. So our our view John is at the end of the year you're looking at the unemployment rate saw around 3 7 or so. So I think that's still a very very tight labor market. Now as we go into early next year and as we see you know the deceleration and then a contraction in economic activity I think that's when you see the unemployment rate start to move. But if we're still at 3 7 or the say we're still below 4 percent you know we saw a 3 handle at the end of this year. I don't think the Fed is slowing down at that point. What does this say Jay about the inertial force of supposed disinflation. I think we're talking about getting to 5 or 4 4 percent inflation out there. But do we blow that up today and say simply our path is to get to seven or six point nine percent inflation. Well Tom I do believe that you are going to continue to see. So our view that inflation starts to recede next year is predicated on our view that you do have a recession. If you do have a recession then what you do see is goods prices will definitely start to decelerate as well service prices as well. You know the good thing is there's anything that's good here is that we have not seen inflation expectations become quote unmoored. That's a that's a word that the Fed will you know uses all the time. And so that's a good thing because if that does become unmoored then that creates its own dynamic as well. People start to pull forward their expenditures which pushes up inflation. They asked for higher higher wage increases as well. Fortunately we haven't seen become unmoored. But if you continue to start to see you know continuously prints like this then you do start to worry. But that happened for all of you on Bloomberg Radio Bloomberg Television Dr. Jay Bryson where this was Wells Fargo here a stunning inflation report. John is that the right word. You can call it that. Something's happening. Upside surprise some stunning inflation report. Futures turn around and I'm doing the math in my head. John help me out here. 2.5 percent. Flip flop in what we see on the Nasdaq 100. And wait that's a point. Four percent. This disrupts the idea that this Fed can back away anytime. St. Thomas a bit of rain. Well I'll go with disruption or just to say that we're going to rip up the script and come up with a whole new dialogue. We do that with Michael McKee. Dive into the inflation report a little more. Michael what is the distinction between service dynamic and goods dynamic. Well right now it looks like services are starting to pick up some speed here. Zeus is less energy rise by six tenths of a percent. That's after four tenths last month. Now services are up six point one percent over the year. So we are seeing service prices start to rise and you could see it in a number of areas. Interestingly education tuition college tuition it's time for kids to go back to school. And that was up half a percent a fairly strong increase for that category. So yes you would know something about that Tom. We're also seeing motor vehicle insurance up one point three percent. That's been an ongoing issue. And airline fares fell four point six percent but they had fallen seven point eight percent the month before. So we're losing a little of the benefit from that. So you are seeing services rise. There was one thing I did want to mention. Somebody asked me this morning if we could mention this because it matters to senior citizens. The Consumer Price Index for urban wage earners was up eight point seven percent. We'll have to see what the net the average numbers come out to be. Once September's numbers come in. But that will lead into the Social Security cola. And if you're looking at an eight point seven percent increase it's going to be pretty big. That from London. I'm in London. And Mickey's look at my NIKKEI you're going to hear from. I said right to have you write that down for us alongside Jay Bryson of Wells Fargo. I'm going to tell you that I'm focused on this market that month over month coal production at point six percent. When we were looking for point three. It's much harder than anticipated. And you can see how the market's reacting to all of this. Equities negative realty rolling over. And you know it's really punching higher at the front end. A two year lease set back through 360. When was the last time you could say that. It's been a while. It's been close to the highs that we've seen this year. Those at the highest levels going back as some 2007 2007 more than more than a decade and more than. Yes. Well this is data. We're living data dependence. Can I just say. Yes. But one more thing. I was just reading and the reaction that people were saying and the number of people saying the likelihood is 75 basis point rate hike just like we were hearing from Jay Bryson is growing in November not just September in November. So all of a sudden you start saying this is the greatest to the Fed funds futures. That's a new level of time. You're asking the right question. It's not a band next week. It's about what happens after that. Yes it does. And of course some of that comes back to economic growth and it comes back to the tealeaves. All of us in economics finance and investment glean from the short term bond market when we do that right now. IRA Jersey joins us. Chief U.S. interest rate strategist for Bloomberg Intelligence. IRA what should we watch in your space your world. What will give us the signals off the shock report. Yeah I think it's a two year yield that you guys were just highlighting and the fact that we're at levels where we haven't been since before the global financial crisis back in 2007. You know the the fact is is that we had continued to to price for the Federal Reserve to continue to hike interest rates. The question still is how high do they go and then how long do they hold them there. And I think you know a lot of the data from this report and you know it's always just one report. But when you get one report again and again and again that tends to look at things like core service prices continuing to grow as quickly as they are then you know the Federal Reserve has to worry that that inflation is going to stay well above their 2 percent target for a long time in fact. You know I think you know some investors that I've been talking to are questioning whether or not they can actually keep that 2 percent target as their as their guidepost that maybe they need to be at two and a half percent or 3 percent or have some range between you know 2 and 4 something like that. Because because we're in an environment where it's very likely that inflation is going to stay this high or well not not this high but above 2 percent for several years. And that means that they're not going to ever hit their target unless they unless they hike interest rates more than the market's pricing. And that's the item opposing view of perhaps targeting 3 percent rather than 2 percent. But they are not doing that right now IRA. And we are hearing from Fed officials talking up a 4 percent Fed funds rate as a likelihood early next year. Middle of next year. How mispriced is that in markets right now. And do you think that that's realistic. Well the market's getting there. So the markets priced for four around the upper band to be about 4 percent. And I think in my view is is that the upper band eventually will be at around four and a half. So. And Bloomberg Economics of course is even a little bit higher than that. And certainly you know directionally I think that the market needs to start pricing for somewhere above 4 percent in terms of in terms of the Fed funds rate. We're not quite there yet when you see to your yields of around 375 390. That's that'll be a signal that we're finally there and we're getting there and we're getting there quickly. John for CIBC World Markets in Toronto they focus on shelters we've talked but they also add medical care as part of this core service that we think goes back to this persistent thing. How much longer is inflation could remain at these kind of levels. IRA can you talk to me about this move. We're seeing it. The two you picked up on it let's discuss it with basically at 370 now on a two year yield. We're not far away from it. IRA how much upside do you think there actually might be on a two year based on where it is now. Yes. Our year end target is 390 and that's predicated on the idea that the Fed's going to hike to around four and a half percent and then in 2024 start to cut. But you know you get another CPI printer too similar to this. And we'll have to rethink that view and a pretty big way. I think you know two year yields are going to certainly be much more sensitive to to what the Federal Reserve is doing than say the 10 year yield. And I think the important bit is is that eventually the 10 year yield is going to really lag behind. We we're already has for about almost 2 percent over the last year. But but I do think that that the 10 year yield eventually will start to rally a little bit on the idea that look the Fed has to hike a lot more than they want to and we're going to have a hard landing. So so the yield curve will just invert more and more. What will you listen for from the Fed. How do they change their dialogue off this report. To me it completely vindicates what Powell was talking about in Jackson Hole. How do they move forward. Yeah I think that's right. You know I don't think that they really have to change their narrative very much at all. The Fed's been pretty consistent. The market just hasn't believed them or large parts of the market have believed them. Look all the investors that that we've talked to you that I talked to you are in two camps. One is the Fed's way behind the curve. They have to hike a lot more. They need to go 100 basis points at the September meeting and then and keep going to you know 5 6 7 percent. And then you have another group of investors saying the Fed can't go much beyond 4 percent because they're already going to be pricing in for a recession and a hard landing and all these other things. So so you have this very bifurcating view where where everything centers around maybe what we're pricing right now. But but you have these two very disparate views. And and as people shift from one of those views to the other you're seeing these these very big moves in markets. And liquidity has been pretty poor as well because of structural issues going on in the Treasury market. So you're going to continue to see these 10 15 20 basis point moves on a pretty regular basis as well as the sentiment shifts so so significantly. All right. Jesse Flint very intelligent. Sandra thank you. I think some people might argue going into that Fed meeting next week that the chairman should just take the speech from Jackson Hole Wyoming bring it out and just read it again. This is it isn't I. You know we're live in this and I think we're hugely biased in New York John and maybe even biased in London as well. No but I mean in New York we're living this rental by selling reality. A lot of the time. How do you substitute that if I like it. I think Budweiser and it goes up. I can substitute your two miller champagne of bottle beers. How do you substitute your rent. I take it a step further. Lisa brought this up. I remember. Was it a month two months ago you brought out the mortgage costs. Yeah. So when you say a lot of people are left with no option other than to rent it. Right. This is sort of counterintuitive because if you get higher costs to buy you would think that that would tighten the labor market or tighten the housing market. And then that would reduce housing costs. Right. But in fact it increases the cost of renting. And you're seeing that across the board. It is a different week here in London. We've had a pause today in the services for Queen Elizabeth and it's allowed us to actually catch up with members of our wonderful London team. One of them who you've heard often in America on Bloomberg Radio Bloomberg Television is Marcus Ashworth to say he writes for Bloomberg opinion barely describes his market excellence with service at Barclays over the years. And 14 other institutions I have forgotten about been merged into oblivion. Marcus wonderful to catch up with you today. What does this stunning report mean for Governor Bailey who the day after the Fed meeting has to adapt and adjust to this central banker in the inflation of the world. I mean I saw his report first thing I thought was out for America but double ouch. The rest of the world we know the dollar is just going to is killing everything and it's now killing even more. And you know two yields up well which to my mind is one number. We can look at these data and think that no one can measure of inflation properly. Someone said central banks open up to that fact. So let's not get too focused on one report. Nonetheless it does look pretty unfortunate everywhere going one way and expecting a Fed pivot. But there was enough ammunition. At some point there would be reason to have a fed. But that's just been swept to what's a reality check. Yeah it's a reality check. When you know power given that to us Jackson Heights like now is a data proving it. And that's awful for the UK. It's even more I think of the euro than real let alone emerging markets as a this. It's a very bad Brit. Well because the US are going to overdo it and they're going to break something and we're going to break is the rest of the world. Well let's talk about it. Let's talk about the bank around the corner on Threadneedle Street the Bank of England Tom Rice. The question are we at that point now where we can just call it what it looks like it is which is a little bit of a war. It's like the reverse of the ethics war we had maybe 10 years ago. Is that what we have. The only good thing about the UK is that they're not making the most stupid mistake ever trying to fiscally tighten under really since that's gone away. This this new government is going to unwind everything he did in the last sort of a year or so post furlough. We're going to get a very big fiscal stimulus which is what's needed. We should've never had the timing to start off with. So that's the only good thing going. I think the UK in that sense Sterling is already really cheap. In that sense yes they can hike. I don't think they need a hike quite so much. Then perhaps other central banks do because the consumer hit a brick wall in February in this country. I think therefore we can consider tightening was the first one to active. That probably comes this month or next month. That's that's going to be a quite a big giant release from a 115 83. And Sterling is a wow show. It's not 114. And that's the good news. It was threatening to break through one or two thirds. It was where we are right now. This bond market rally is where I think we both want to go right. There are five basis points on a 10 year at 340. We've all got that long list of people who said we've seen the highs of the year. I wonder if they have to rethink that because the highs of the year on a 10 year about 10 basis points now on a two year already through them. As you were saying before we are through those highs and we are now at the highest level going back to November 2007. Even on an intraday level and this really raises question from the international perspective about whether some of the other central banks are only hiking to keep pace with the United States and not because then their economies necessarily need this. Marcus I do wonder from your perspective whether it is probably going to be viewed as a mistake or you're going to see a reversion to rate cuts more quickly in Europe in the United Kingdom because there is not the strength to back it up and the weakness will become more pronounced quickly. Well I mean the pain in the U.K. is as it's somewhat softened by this big fiscal packages coming in Europe. I really worry because you know we've got so much problems coming through on the on the German economy in particular. And the European Central Bank seems got the zeal that at least 75 basis to exactly. To keep up with the Fed. And that's the problem. I think the rest of world's gonna be broken at some point. That will feed through the US economy and they might stop. We're out of time. 30 seconds. Credit Suisse your expert. What if they breach five euros for whatever per share. What are the ramifications. Well I think Credit Suisse is just what it's good. It's private wealth management. And one or two other things I think I have to go back to core. Get rid of the risk culture. But you know intrinsically it's a decent bank. And I don't think we'll be bought out. So there's no eminent premium of fortunate Swiss francs. Take his francs. Oh you can. You love the Swiss see and the SMP. I don't want you to keep it. You go to the McDonald's and think about what they've got to do. Yes. And B the Bank of England we've all discussed it haven't we. The ECB has got 75 feds about to go 75 looks now. Don now it's next week day after Thanksgiving that they've got to do the same thing. It's the summer of 75. And that was Citigroup which is 75. Yes I see that. Yeah. That Holland House. Yes. I think was a Mr. Sonali Basak. A small. No isn't it. No. This morning it was a couple of weeks ago. And now that this is summer of 75. I think that's about right. Jennifer O'Neill was in that movie. I read it. She was OK. So we're certainly going to book for the price action and the market. I just I just get back. Inflation came in 25 minutes ago hotter than anticipated. Month over month. Core is where this market was focused. Month over month call came in with a big upside surprise. That means equities lower without 2 percent on the S&P. We continue to deteriorate. Eurodollar turn around negative three quarters of 1 percent as a weaker euro a much stronger dollar. Talked a lot about the moves across the bond curve. Tease out tens turns up by six or seven basis points 342. Why should two you now. It's 170 287 370 170. I mean I'm very comfortable with one handle for a long time then two. And now it seems three is the place to be 370 and IRA Jersey if Bloomberg was talking up 390. Yeah it's beyond 370. Well if you think about a base case that markets are pricing in that you're going to see a 4 percent add funds rate and they're going to hold it there for a longer period of time. Well it makes no sense. John 700 Dow points most of that in the last 20 minutes. Where are we at 3 p.m. 4 p.m. today. So it's important that we're going to ask Christopher Amani of Lafayette College. He's going to reset alongside a statue at the bank. David Kelley of J.P. Morgan Asset Management taken off what's gone on for so long. I've learned some more at specific times particularly around the time he mentions Dow points. And how many points. Seven hundred. Thank you. Once your huge moves look at the NASDAQ you mentioned earlier. Yeah. NASDAQ. Huge big move lower in this equity market. We'll break it all down for you in just a moment. Upside surprise on CPI America. That means a big downward move on this equity market. The count actually open just around a corner. We've said five minutes away. This is Bloomberg. This is an extended edition of Bloomberg Surveillance with Tom Keene Jonathan Ferro and Lisa Abramowicz. Live from London for our audience worldwide counting you down to the opening bell. Good afternoon from London. Good morning to you stateside waiting for that cash open with equity futures dramatically lower down by 2 percent on the S&P 500 negative by two point nine on the NASDAQ T.K. off the back of a much much hotter than expected CPI report in America with global ramifications. There's no question about it. Let's go to the states room to go to Annmarie Horden and what the White House response to this will be here in the half hour. But John I really want to emphasize how many people got this wrong. And one lone voice a Jackson Hole nailed it. Chairman Powell if s we've got work to do and everybody else has followed him on that Federal Reserve. This market though some participants Lisa ignore it that fed communication waiting for that soft landing. Some of the data recently spoke to that this data point did not Dani Burger. No. And that's the reason why I find it fascinating. The knee jerk reaction markets is as dramatic as it is. People really have believed that the Fed had it wrong and that they were right and that there was just disinflationary tilt and you were going to see real inflation slow much more than it actually has. This raises a lot of questions about what's an assumptions and how much further this selloff has to go to Tom's point. It will be very interesting to see how the White House response to this because the month over month numbers have come in much hotter than anticipated. We talked about the front page of the newspaper game with the headline numbers. Wall Street was looking at month over month call. And you said even within month over month core you need to go deeper. Doesn't speak to a story that's fading anytime soon. No it came in double where people had expected it. If you look at month to month core inflation and what comes to their White House this response is comes at a difficult time when President Biden is now about to campaign on the fact that they're getting inflation under control and people are less worried about inflation is pointing to gasoline prices. This flies in the face that I wonder if he's rewriting some of those speeches. Him ISE whoever's writing this speech that is often the case. Oh any administration as you see someone else equities down yields up his tools out to 10 year 10 year yield is much higher year to year. Well I'm not gonna get used to 370 on a two year Tom Mackenzie. Can you get used to 370. No I cannot. In moments ago a massive moment for these markets. In the years that we've been doing this the 10 year real yield at one point zero zero. It is John the signal that for those of you that are on global Wall Street John explain why one point zero zero 10 year the real yield why that's toxic for risk assets and those kind of levels remind me of why we were in late 2018 where the equity market. Let's face it. Collapses. Some people might not like that word and yields spread some credit later. They were much much wider than where they are now. For years there was no alternative. Now there is an alternative because you're actually getting yields an income from some of these instruments. And that I think is the big takeaway from real yields climbing. Mark McKay is going to join us now to break down some of this economic data. Mike this wasn't the number. Many people were looking for. No. Some people were thinking that way on Wall Street. But let's go through some of the numbers that are making you so gloomy this morning. The month over month CPI comes in at one tenth of a percent which is higher than the negative tenth of a percent that had been expected. So we see the headline fall to eight point three percent from eight point five. But the core is the one you're talking about was up six tenths of a percent. Last month was three tenths. The forecast was three tenths. So we see the core rate rise to six point three percent from five point nine percent. I'm guessing Joe Biden will not be talking about the core rate this afternoon. What moved in the indexes. Well you could see there gasoline kept its part of the bargain. It fell ten point six percent. We knew that that had gone down quite a bit. But food has not reversed. People were thinking when the commodities started to fall in July that we would see a drop in food prices. We don't we certainly don't see a drop in shelter prices. Owners equivalent rent is up. Used cars were down a tenth of a percent. But on a wholesale basis the expectation was they might be down as much as one to one and a half percent. So that's a disappointment. And apparel prices no sell off of inventory there. They're still rising two tenths of a percent on the month. Now just few months ago you had Irish jersey on who said that the Fed is going to be determined to get up to restrictive territory. And as we watch what's happening in the futures markets and people are price again 75 five now for the September meeting and a possibility of 75 for the November meaning you could see here that the Fed in the past has always raised interest rates above the level of CPI both CPI at core. And you can see all the way over on the left on the right there. They're a long way from that. So we need inflation to come down or we need the Fed rate to go up before you're probably going to see much success at bringing overall inflation lower. Mike very quickly here if I was having a beverage of my choice in Jackson Hole for without any selected Fed presidents what would they say is the distance to neutrality. Is it November. Is it in the next year. When is the when I'm getting to neutral generally the feeling has been they want to be there by the end of the year and that gives them two more meetings to do it. So then you have to define what neutral is. Some of them think three and a half. Some of them think four or a little above. So that gives you a wide parameter of possibilities for raising rates over the next couple of meetings. Tom I can also point out that you probably helped because obviously supply not keeping up with demand with those beverages of your choice. Alcoholic beverage is up nine tenths during the month of August. I can tell you that's a true story. My McKay thank you. As I sit there with a pot of tea and Tums on martini number four as is often the case around dinner not breakfast. That's impressive. Drinkers around dinner not breakfast. Christine Romans is with us of Lafayette College the CIO. Christina you've got to respond to this one for us equities down and down hard. I think I've got the S&P off 2 percent granted over the last four days. We were up about 5 percent. But your thoughts on what we got 35 minutes ago. So I think Jim Powell basically laid it out from a policy standpoint and you focus on that nothing has really changed that much in that you know. Inflation is high and they will continue to tighten. And if you are looking for a pivot you have you know the last few days and probably last few weeks you turbocharge your expectations and you'll probably be giving all of that back. The bottom line is the Fed is looking to get it to 4 percent or higher. And they will get there either this year or early next year. The real question for the market is one how long do they stay at that terminal rate north of 4 percent and will they pivot because of something breaking. I think that's what we are dealing with. Kind of looking at this month's number contrasted with the last months. No we did. We didn't have as much of a reason to be as optimistic last month and this month probably if we projected too much is probably not too much of a reason for us to be that pessimistic. Inflation is slowing down but not at the pace that the Fed is comfortable with. And that's what the markets have to deal with. So what's your sense of when it is a good time to go into to go into debt to go into duration. To start saying we have seen the highs and the 10 year because we are going to get up to 4 percent or beyond. And that's going to lead inflation to get under control to get more of a sense of that. Now with a CPI print well I would say that both the Treasury markets and the credit markets are probably a lot more vulnerable than the equity markets for the very simple reason that we really don't know at what level the Fed is going to stop and how long they would stay at that level. That's really not a very conducive environment for owning owning credit assets or for that matter owning safe assets. I think there will be a time but it certainly is not today. Equity markets at least you can make a case that the valuations have come down. And you know if we are not in a recession and probably don't get into a recession it probably may not be such a bet that such a bad bet given that the upside in the bond markets you don't have that at the moment. Well the question a lot of people say that stock and bond markets have been moving in lockstep and that when bonds sell off so do stocks particularly big tech which has driven a lot of the activity. So what's your pushback to that to say though equities still can be a haven at a time when debt instruments are at the precipice of volatility. Well if you look at the last few weeks you know equity markets did reasonably well despite bond markets selling off almost 30 odd basis point rise in rates and probably higher than that by now. And equities equities held up reasonably well. So I'm not saying equities are not vulnerable what I am seeing. However given the potential upside from any change that may come in the environment equities you can capture that upside in bonds you have it's far riskier. Kushner Very importantly and this is to institutional Wall Street. We are going to see new lows in price for the various Bloomberg aggregate indexes. What's going to be the blood on the streets institutionally of new lower bond prices with higher yields. Let's so you know I think from from a longer term perspective as Lisa had indicated before we really did not have much of a choice other than owning equities. And that option is being created. At some point you will get to term another rate. At some point the Fed will pivot. And therefore I think bond assets may not be at their at their lows just yet. But from a longer term perspective bonds are becoming much more viable asset class than they have been over the last five 10 years. And that is you know that is really good for the institutional work. You know if you kind of go back what the world wants is a good bond with the high enough yield. If they didn't get that they don't care about equities. And I question that. So we'll be getting closer to that. We're getting closer to Chris I've got to ask you this we're getting close to the Fed next week. I was going to say 75. I get that. Can you tell me what you think the forecasts are going to look like next week. Because we didn't get the new refreshed summary of economic projections. What kind of shape do you think that's going to take. Well so you know perhaps have been a bit more optimistic than there should have been. And you know a lot of commentators have kind of chided them for that. And I think that would probably still be true. The real question is what do they do over the next few meetings and how quickly do they get to the permanent rate that they are striving for. And I think if today's data is any indication they would probably hurry it up because right now the economy is in good enough shape where they can take that take that risk and the economy can pick that punishment. So my expectation would be that a rate increase. The expectations have to be brought forward. That's what the Fed wants to do. They want to get to the terminal rate as fast as they possibly can. And then hopefully of all there whether they will be able to hold that it is a separate question altogether. Cristina thank you. Christian Amani that of Lafayette College of the Back at this higher than expected CPI report and going against the Federal Reserve next week. Got to squeeze this because you know someone's asking. Now quiet period. No Fed speak. No Fed speak. I think it's. What do you think they might we might know something. You know one particular reporter at The Wall Street Journal they basically say saying you know honestly what are they going to say that they haven't already said hey. I mean they have been very deliberate and they have been very vocal and united in saying we're going to hike rates and you people have chosen to ignore them. Right. Not something that somebody's economic projections that we get next week. Are you expecting to see inflation adjusted higher growth lower dots out there for and for a whole lot will manage the message and we'll all be vector based and they'll do it with growth gradual approach which they do. I want to look at that right now which is under no circumstances John. Here now one hour after this following. Forty five minutes after this. We've seen a very good Dow 800 points. We're going to hit it down negative 1000. Here we're going to get a VIX out. Two big figures. The aspects of course is what institutional Wall Street's looking at. These are markets on the move this afternoon. The S&P 500 down by more than 2 percent. The Nasdaq 100 down by two point nine percent. Going into the opening bell 17 minutes away. Just a moment we'll catch up with FLO Bank CIO SD work on some of the price action and we'll speak to AMH down in D.C. on what the White House might have to say about this. This is Bloomberg. We are 32 minutes away from the opening band in New York City and equities at down and down hard negative two point thirty five percent on the S&P 500 on the NASDAQ 100 down by three full percentage points after a hotter than expected inflation report in America. Joining us from Washington now Flynt DAX Amiri AMH. Let's talk about it. How is the president going to respond to this one. Well it's kind of an awkward moment because at 3:00 p.m. later today he's going to be gathered with members of Congress his cabinet environmentalist mayors to talk about this historic legislation the Inflation Reduction Act which is massive legislation. They decided to call it Inflation Reduction Act for a reason. They knew this was going into the midterm elections going to be one of the biggest issues. This of course has money going towards a climate change a 50 percent corporate minimum tax to make over a billion dollars the corporation and lowering the cost of Medicare. But how much is the president gonna be able to stick that message with the fact that inflation today is higher. I imagine the one piece of spin that they're going to want to really grapple with is that they worked all summer to try to bring gasoline prices down from where it was at the June peak of over five dollars a gallon to now just under four dollars a gallon with three dollars and 70 cents. That was the one bright spot of this inflation report. But obviously just less than two months away from the midterm elections Republicans are really going to harp on this. And I'm really which party is advantaged by sustained inflation. That would be the Republicans going into the midterm elections right. Because they're the ones that can say look inflation is not coming down. It was not transitory something that this White House. Something that the Treasury down the block from me had told us it would be. So it's the Republicans that want to make sure that this message is top of mind of voters of consumers higher food prices higher electricity bills. If you look at the inflation for your gasoline is coming down but natural gas and electricity is higher higher rents. All of this is being eclipse that you're not getting the wage gains. And that's their biggest problem. But the one thing the Democrats do have with some wind in their sails following the strike down of Roe v. Wade is that this is now a live issue. We saw that in that congressional district that swing district in New York. We saw that in Kansas. And there was a recent Wall Street Journal poll that said yes overall economy is number one for voters to go to the polls. Number two was abortion and women's health care reproductive rights. And number three was inflation. And Mary thank you so much. I'm sure there'll be a reset down in Washington D.C. as President Biden tries to double down on the message. It's a little cloudier after this latest data. Of course the message is a little cloudier in markets as he DAX CEO of Flow Bank. Joining us now we are seeing Nasdaq down two point nine percent a reset of the idea of a disinflationary tilt that we thought would take hold but didn't. Are you rethinking any of your positions today. Well it was never going to be a straight line down. We have a number of inflation data points that are still showing that disinflation is happening. Clearly the core print for today was not fantastic. And we're seeing the disappointment in markets especially because we had that expectations in the last couple of days that really ramped up and boosted markets from a positioning perspective. We still have PPA tomorrow. We have the Michigan numbers coming up at the end of the week. We had inflation expectations in the last couple of days showing guys that those have come down quite sharply as well. So I think that this inflation trend is going to continue. But for today it's definitely going to be ugly. John we're getting in the numbers right now. Peter before has one of the isolated incidents health insurance up 24 percent year over year services. Services is the distinction without a doubt. With that in mind got this tug of war between financial conditions and what is happening with the DAX would have a fetish responding to it. And investors who are hoping all of this goes away and next year is smooth sailing. What's your message to people who still doubt the resolve of this Federal Reserve. Well there wasn't going to be a pivot and there clearly isn't going to be a pivot anytime soon. I think Jackson Hole dispelled that idea completely. Anything that will anything close to a pivot would just mean we're going to stop hiking and that happens at some point in 2023. And how many more percentage they get in before that. That number is going up of course for the November expectations rising as well. But the Fed isn't going to blink. Inflation is gradually coming down slower than anyone would like but their result is going to be very firm. So where do I hide. Just as simple as my head is. This report wasn't what I expected. Where do I hide to drag myself into 2023. So I think it's a bit too early to say that the entire end of the year is going to be bad. I think at some point we are going to have some improvement in markets for the time being. It feels really like the dollar is a great place to hide. The Swiss franc you were talking earlier about the Swiss National Bank coming in with those hikes. So Swiss franc probably is another place to hide. But you're you know you're making something in cash and I think loving it. A lot of investors are going to be happy to sit in cash and wait for the picture to improve hopefully over the next couple of weeks. As they thank you ISE to ask that a flow bank told me the money question. Where do you hide when equities sit down and you it's up. Interest rates are getting battered and that's what we're seeing on trends on to is at a message just a moment ago from a blip in terms of subscriber. That guy goes Goldilocks. Remember off the payrolls report. I said I sat that looking at that one specific data point. It spoke to that same the inflation report. Just wipe the floor with that idea because this Fed has got a whole lot more work today. I keep thinking that what I wrote Jersey said a particular quantitative tightening picking up that we weren't going to see the effects of that until early next year. Would all of a sudden. Banks are going to have to go out and actually pay people more to put their deposits with them. And at what point do we get more and more people just parking their money in there in their checking accounts because you're actually getting something for it suddenly. What does Kutty fit in here. You know this is the question. It's accelerating right now. This week it actually is starting to accelerate. So as I wrote was saying we haven't really seen much effect of it yet. Will we start to see the ramifications of that the withdrawal of liquidity from the financial system more sustainably early next year. Can we get the yield curve up to tens and 30s. Because every time I check I noticed read a little bit higher. Yeah 370 for close to a two year. And what are we now for. Five basis points away from the high of the year and a 10 year. Yeah. After many people for the last several months through basically the whole of summer said the June 48 tie. That was the high for the year and a 10 year. And here we are staring down the barrel of a fresh high. Yeah we're going to look at yield curve inversion deep yield curve inversion a reinsertion after a better lesser inversion that we saw a couple weeks ago. 343 tell was this bad news. This loser was this was bad news is bad news on this front that is out. I will say it on a math basis. People tell me interviewed interviewed convexity in bonds. Does it matter. I would look for acceleration and lower prices. No one believes it's there to stay in market negative. That's to say I believe prices are lower. Is that is that works. And there is a second derivative. Everybody is going. No bonds are different. It's been tell me we've set the price loss on bonds this year. It's home to our listeners and viewers is tangible. They're not doing fancy pants spread market stuff. David Kelly if they're watching the management I'm not sure it is. You can ask. David is good hour. Our viewers and listeners are certainly down 700 points in the swing. They're watching the Dow but some they're allocated to. That would be accurate. Very good. OK. Well something that we can't get to their family. Oh yeah. Jihye Lee. Live from London for our audience worldwide this is Bloomberg Surveillance on TV and radio. We are seconds away from the opening bell. That is your opening fan in the United States of America. Equity futures going into that kind of show but getting absolutely hammered down by two point eighty five percent on the S&P on the NASDAQ 100 down by almost three. Any affects market at dollar a whole lot stronger snapping back euro dollar just about above Paris 8 1 0 0 20 to negative 1 percent on that currency path. Yields are flying up by 7 basis points on a 10 year to 342 73 and a two year through 370. You've got to go all the way back to 2007 for those kind of levels. That's the Cry Cross asset price action with some movers at the open. Let's get to Abby. Hi Harvey. Hey John. Well we do of course have this very risk off day bearish tone for stocks that S&P 500 heading to its worst day in about three weeks. It has everything to do of course with that hot CPI report hotter than expected. That means yields are higher as you were just outlining. And the big big key driver the dollar as you were just mentioning stronger up about nine tenths of one percent the best day since two weeks. That is pressing stocks overall. But those yield higher is really weighing on big tech in particular Apple and video both lower as yields higher means the valuation comes into question. But you can see J.P. Morgan Chase banks not benefiting from yields being higher. That's because that yield curve is coming in because the big action is on the short end. So that is really weighing on the banks overall. And then we even had a reversal in oil lower on that hot CPI print because of that dollar shooting higher that has pushed oil lower. We also have the energy sector lower. What's so interesting about this John is this reaction felt knee jerk but it's holding on for an hour. Let's see if it makes it through the first half hour of trading or the trading day overall. Will it stick. Abbi thank you. Grandma if I'd said see you at the start of the year that yields would be where they are that the Fed would get Fed funds rate to where it is and higher again next week perhaps by 75. Most people assume that's the case. Wasn't a big consensus tried to get along the financials. Yeah. Look IBEX. Yes. And we were talking about this yesterday. Right. That this has been the trade that can't seem to work because it's accompanied by the prospect of weakness. That has to be engineered by definition particularly in the labor market in order to achieve a decline in that inflation. Of course the yield curve contracting. The overwhelming consensus right now in the fund manager survey is that growth is not going to be tremendous. We can talk about that fund managers survey right now with Candy Line. Hi Kelly. Hey John. Yeah. The title of this fund manager survey released says it all. They titled at Lame is a Rob because they call it super bearish. A record 52 percent of investors surveyed are underweight equities and a record 62 percent are overweight cash with cash levels moving up to about six point one percent global growth expectations. Also right around an all time low 72 percent expect a weaker economy next year with the most people expecting a recession since May of 2020. Now typically that level of bearishness is actually bullish. And Bank of America reads these results as a signal that the short term pain trade is up for risk assets. Michael Hartnett saying the S&P could rise to forty three hundred but he then expects the index to fall back and he remains fundamentally and patiently bearish. As for the most crowded treats perhaps no surprise once again long dollar is topping the list. 56 percent of investors gave that answer. That is the most extended position since long U.S. tech back in November 2020. Compare that to just 10 percent who answered no too long commodities and your stuff long ESG short treasuries and long growth stocks in there as well as for the biggest tail risks inflation fittingly today. Given that hotter than expected CPI report is number one followed by hawkish central banks. Interestingly a global recession moves this month from the number two spot to the number four smart spot topped by geopolitical risk. And you also have a systemic critic of Ben making the list as well. John Miserable. Thank you. Just in the in this fashion for anyone who didn't know how to translate that home sometimes you know counting down even better you look like a guy that resembled Hugh Jackman as extraordinary. So on a serious note serious note that bearishness. Does that explain the previous four days and is it dated after the data point. We got about an hour. I would suggest it mentions two managers fighting for their careers to the end of the year. This is brutal. And again I'm going to watch the bond space. You're going to see a breakthrough of the total return aggregates of Bloomberg Price lower. We have never seen this before. David Kelly joins us now to talk about this. The chief global strategist at J.P. Morgan Asset Management. David we've given everyone the opportunity to respond to the data so far. It's about an hour old now. Your response to it. No it's it's a little warmer than expected but I'm not going to call one tenth of a percent of an increase in prices a heart inflation report. What's happening is it's cooling there just a few hot spots. Are there problems in getting all the inflation to come down but the cooling trend is there. I think markets overreacting to this in particular. There's a big chunk of inflation. That's CPI 32 percent is in shelter and that's up seven tenths of a percent. And that's really what's driving a lot of the underlying resilience of inflation here. But a lot of that is you know owners equivalent rent. It's a very almost a mythical concept because nobody actually pays only equivalent trends. Are there parts of inflation hanging on. But I think I think it's really important to recognize the economy's cooling here. And a lot of the things that pushed up inflation are cooling off also. So we shouldn't you know we shouldn't get messed up by the fact that it was a little higher than consensus here. The the big story here is inflation is actually coming down. David that is convenient for a lot of the bulls. And yet the story that people are seeing right now is that the hope was we would see a much faster disinflation that would get the Fed not perhaps raising rates as much as they were saying. How can you lean against this. What parts of the market are most overreacting. From your perspective. Well you mentioned financials and I think that what's going on is people are assuming that this will make the Fed a bit more hawkish and I think that's true. I mean I think that the Fed will now have more of a reason to go 75 basis points next week. And I think that's what they'll do. I think the ECB obviously just did that. I think the Bank of England will do the same. But I think the Fed will also leave the door open to a smaller increase in November maybe 50 basis points maybe 25 basis points in December because what they are going to see is inflation continuing actually to cool because that's actually what's going on. I think we'll get about two tenths of a percent in the September read. Energy prices are going to be down month over month in September. Also I think we'll see the airline fares come down a bit more. I think lodging will come down a bit more. We've got a big increase in tobacco prices. No reason why we get that two months in a row. So I just think we're overreacting to this. Yes it wasn't good news on inflation. It was worse than expected. But the big trend here is coming down. I think you know financials are overreacting. I have no problem with the 10 year treasury up near 350. I think that's that's OK. But I think the assumption that somehow we're not dealing with inflation or is going to get worse I think is just wrong. What about big tech Dave. I mean David we're looking right now at three point one percent decline on the Nasdaq and it's been a knee jerk whipsaw lower that has had legs. Do you push against that. No not necessary. I think you'd have to go stock by stock because the issue is there were a number of things that were overvalued based. If you ever assumed a normal level of real interest rates and we are getting back to a more normal level of real interest rates and that is negative for far of large cap growth stocks which you know which you're standing at very high valuations. So I do get that. And I don't know. I think it's really more of a return to rationality and of the pricing in markets and that's no harm. But overall I I I'm actually positive the equity markets. I'm glad to see so many people bearish because I think that that sets us up to do a bit better over the next few months. And where do you see among corporate earnings were really before the gaming of what corporate earnings are doing. Let's get out front with you. How are corporations adapting to America's inflation. Well it is it is difficult. And the last year we had a spectacular year for earnings. This year it would be lucky if we get a get out with a net or end the year with a positive an operating earnings year over year. I think it could be negative next year. I think we're going to see an inflation or an earnings squeeze. I mean. I mean the reality is you've got this growth in wages that is real. Companies can either positive or not. I think they can find it's hard to pass it on. And I think that's going to squeeze margins next year. So I do think that whether we have a recession or not we could end up with negative earnings growth next year. David like everyone out there on my cell phone I have a real estate dump of whatever geography I'm looking at. Doesn't everybody go out today and mark down the price of their house for sale. Yes and it takes a long long time for that market to clear but the reality is the average mortgage payment on a new home has gone up by 60 percent in the last year. And that really that one I do really blame the Federal Reserve for. They kept rates so low for so long that it caused a. Gem prices and now we can't deal with. I don't think there's enough people to buy homes when you push them the average mortgage rate or my average mortgage payment up by 60 percent in a year. John I think this is just absolutely profound. I can't say enough about sector to sector in inflation the different elasticities are out there on homeownership and Howard downs over the rent multi-family nationwide. Every region is different. Guess what. This report is a game changer. Core inflation came in after than expected. And shouters are one of the stickiest parts of the report when it comes to inflation. And David I appreciate what you're saying that things might be getting better perhaps not worse. But when you think about what the Fed will do not what they should do. David can you talk to me about what you expect they will do. They've laid out their reaction function. They'll top. They've told us how they respond to incoming information. Tell us what you think that means for what they will do. Well I think what they'll do is they'll go 75 basis points next week. But I do think that in the press conference and perhaps in the statement they will acknowledge the fact that inflation has cooled somewhat. But but they'll say you know two data points are not good enough to two to cause a trend. So they'll have some caution there but they'll put in enough doubt in there to give them the space to only go 50 basis points in November. So I think I think they want to set to set it up that way. They want to. They want to put in a hawkish move but give themselves the opportunity then to put in a more dovish language without being labeled as being soft on inflation. But you know again I was focused at this shelter thing. Yeah it's a long lagging problem a problem in inflation. But if you think about it how does higher interest rates help deal with the shelter inflation problem. I mean if it stops people from building houses how are you gonna bring down rents. So it's probably you know the very the one thing that that they're most worried about or the building is keeping inflation high is the thing that that they can fix the least by pushing up interest rates go democratic. If J.P. Morgan Asset Management is going to be sticking with us perhaps that's a question least if at a news conference next week. At the end of the day they've told us the data their response to this is it is hotter than expected until they turn around and say yes but this is the party the inflation report and we can't really do much about it. And we're not going to do anything. That's not where we're at. That's not what they're saying. And that's the reason why people are Shery Ahn a price in a higher likelihood of a 75 basis point rate hike in November behind the September September meeting. And this really speaks to what the Fed is probably going to signal which is everything's still on the table. It's not coming. Know it was 20 minutes of Bloomberg Financial Conditions Index has shown a more accommodative statistic. It's screaming that we need more rate rises out into the future. The S&P right now is negative 2 percent on the Nasdaq 100 is down 3 percentage points for about 1/2 minutes into the session. Yields are much much higher. We had the pushback from the Federal Reserve after the rally of June and July from mid-June into July and on to walk east. And then I imagine we think we're all preparing for the push back again at next week's meeting after the rally of the previous week or so maybe in their silence. The market will start to hear a tealeaves. They've been putting out their areas to be where we're at right now because it seems like they won't have to guide the market anywhere if today's moves. Well let's do it. That's the whole point of setting out a very clearly clearly communicated reaction function. It's that you shouldn't be out there talking all the time. You just have to lay it out and say this is it. This is how we respond to incoming information. What did I think of the Credit Suisse site. Oh that is the lie. I think it was something like you can't they can't say that they're not going to hike rates because the market's accommodative and then they want to change their goal. Yes some sterling goes through 114 three bedroom four bath Beaufort Gardens Knightsbridge a nice like 16 million dollar baby shower. And I think you know you I CAC and Thursday when separate floors of course good definition to work up equities down 3 percent on the Nasdaq 100. That's an expensive kind of walk up sell on the S&P 500. We're down more than 2 percent. The conversation continues. This is Glenn Beck. Receive hopeful signs of progress on inflation as the price of gas. We said when I was doing making deliveries. Guess what. He's down a dollar and 30 cents since the storm in the summer. He continues to place your knees in July. He said last spring on our top economic priority was to bring down inflation without giving up on all the gains American workers made last year. But there's more to do. There's more to do. That's for sure. That was yesterday. We'll hear from the president a little bit later this afternoon after a hot CPI report showed that David Kelly disagrees with JP Morgan. But most people call this a hot CPI trend in the United States of America. Twenty minutes into the session equity is lower by 2 percent on the S&P on the Nasdaq. We are lower by more than three percentage points. AMH down in D.C. I'm afraid we hear from the president I believe at 3 p.m. Eastern Time. Yeah that's right. And he's going to be talking about the quote Inflation Reduction Act. And we have a time when inflation as you say Jonathan and most of the street believes is hot right now. And it did come in worse than what was expected. And what the president has been leaning into as you just heard him just yesterday talking about the fact that they are seeing inflation starting to quell. He's trying to lean into some of these better economic data points. The one bright spot in this report that the White House is certainly going to spend so much. What the president said yesterday is the fact that gasoline was above five dollars a gallon in June. And right now it's hovering around three dollars and 70 cents. This is good news for this administration. Just last week we had the biggest draw down selling in the SPRO since the SPDR came into fruition since we had one in its history. So this is the work they've been doing. But at the same time how much is he really going to have to sell this point when you have core inflation higher when you have food higher when you have rent higher and the timing couldn't be worse because obviously we're less than two months away from the midterm elections. Well and we have seen 90 consecutive days of decline in gasoline prices which really is the heart of what you're talking about Anne-Marie. But how much further can they really go. Because we were talking earlier with Raghida Meyer of KPMG and she was saying you know talking to how low the inventories have gotten and that they've got to start rebuilding which will probably create the opposite effect. Yeah I was listening to that interview. And what her concerns are is what I'm hearing from a lot of people in the industry which is also you need to start refilling the SPRO. So that could also be good for U.S. oil companies. But I think a big question about that is at what price is the U.S. going to be willing to start buying oil. Right. They would want to obviously try to fill it up at a much cheaper price. And the other big question of course is that this SPDR release they have and it's been a slow drip in terms of how they do the draw downs but it ends in October. So there's a big question of do they slow it down into the winter or is there going to be a potential another tap of it. Annmarie Horden thank you so much from the White House lawn this morning on Bloomberg Radio on Bloomberg Television. We continue with David Kelly of J.P. Morgan. David I want to go to my chart of the year which is a comparison of Japan Europe U.S. animal spirit the nominal GDP. If we get a slower disinflation if we get an elevated disinflation. How does that change the difference between real GDP and that inflation component. What does that mean for the businesses of America. Well I think both are going to come down. We're going to get a revision actually to the last five years of GDP data. We're going to get that at the end of this month. And it could take away one of the negative quarters we got earlier on this year. I think growth might have been a little stronger at the start of this year but it is slowing down. And so we're you know I think over the next year next 12 months we'll be lucky to get 2 percent real GDP growth. I'd say closer to 1 percent maybe add another 3 percent for the GDP to pay. So you're talking about about 4 2 maybe a little over 4 percent nominal GDP growth. That's a lot less than we've been seeing in the last year as a nominal GDP growth is slowing down. What that means is lower revenue growth for companies and that is going to be tough for companies to deal with. Yeah. And that's why we're seeing a lot of revenue and earnings downgrades. And we just had a note from Jonathan Gold of our Credit Suisse come out and track those downgrades and how they've come in at an accelerating pace. He's still bullish. You've expressed optimism consistently. And I think that this is an interesting what's going to be and I hate to use this word but the pivot point from market participants to get more confidence in a rally that is not loved in clearly is quick to reverse on a day like today. Well I think at some stage the Federal Reserve will feel comfortable enough for the progress we're seeing on inflation and scared enough about what's going on with the economy that they'll signal that their next move is going to be less dramatic than the last move. And as soon as we go from a 75 basis point rise to a 50 basis point rise and people will begin to figure out that that this is you know that the Fed's going to have to turn here. But the broad I mean longer term do you think that this economy can actually operate with the federal funds rate above 4 percent. Because I don't I think that longer term there just isn't enough demand in this economy after years of very low and low interest rates. Well you know I think that this level of the dollar this level of mortgage rates they will tend to slow this economy down. So I think the Federal Reserve going to have a very hard time holding the federal funds rate above 4 percent if they decide to push it there. And that's something else they have to think about. They don't want to be cutting rates next year. The market's actually pricing that in that they're going to overshoot and have to cut. They don't want to do that. But if they go too high then they'll have to cut next year to stop the economy from going into recession. David Kelly I've got one final question. You said this was an overreaction. If it is what would you buy right now. I would. I think I would be a little short the US dollar right now. I think the dollar is surging too much of this. And I think I would be buying financials and probably tech. I mean I think that I think if rates long rates come down a little bit because people figured the Fed is eventually going to crack here then I'd want to get ahead of that trade. Democratic thank you. If JP Morgan Asset Management just laid in the other white home we'd like that different view. It was do with an equity market down 3 percent NASDAQ and down 2 percent on the S&P Mark Gurman. That was a trot down a small street in Boston from 40 years ago. David Kelley at Putnam years ago. Down the road was the legend Phil Caray of Pioneer Funds and David channeled Mr. Kerry. And trust me John it was Mr. Caray where he talked about declining revenue growth given this cycle. That's what I'm watching for in the earnings season in the next year. The world changes when you move away from the bright lights of inflation to borrow from Phil. Correct. An equity market is softer and less. So we've got to talk about a bond market that's softer too. You know it's a much much higher. 2S and 30. This is quite a move off the back of this inflation report on a two year. Now you can say the equity market perhaps not in over Korea. Overreaction because we were up 5 percent over the last four days. So maybe we've taken some of the heat out of that move. But see yields up 17 basis points on a two year 373. Ninety two on a two year yield in America the highest level going back to November of 2007. What's coming clear is that the debate is about whether this economy can withstand 4 percent interest rates for long enough. That might be one the bag yet might be one of the big dividers between bulls and bears because people might be able to say the Fed can hold them there for longer than perhaps you think. And that is a bearish case. The bullish case is no they can't. They'll have to reverse course very quick. I think you frame that debate perfectly. Not just today but over the last several months. Lisa we just say thank you to the same again. Thanks again to this beautiful set with this absolutely beautiful backdrop here in London. We'll be here through the rest of and we will be here tomorrow as well. To see if this equity market all is supposed to be tough on the S&P with RTS percent on the Nasdaq 100 with negative three full percentage points. Life from a beautiful London for our audience worldwide. This is Bloomberg.

Channel: Bloomberg Television

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Length: 181min 20sec (10880 seconds)

Published: Tue Sep 13 2022