tv Bloomberg Surveillance Bloomberg February 11, 2022 6:00am-7:00am EST
fed, i think they are in more than most occult situations in our lifetime. >> they have to tighten -- most difficult situations of our lifetime. >> have to tighten. >> i want them to just get on with it. the market has discounted it. >> the market is being overly simplistic. announcer: work surveillance -- this is "bloomberg surveillance." jonathan: from new york city, for our audience worldwide, good morning, good morning. this is "bloomberg surveillance." your equity market down .4% on the s&p. this market move, while. -- wow. tom: this is a first derivative friday we are moving.
jonathan: looking for a 50 basis point move. can that make a difference? tom: i love what craig torres said with his decades of experience fed watching in washington and makes clear that this is a data dependent fed and the kind of fed that will look at every single piece along the way. jonathan: stocks have done nothing what do you make of that? gina: i think it is a function of earnings. we have had a phenomenal earnings with all of the worry about inflation. the earnings season is still beating expectations. even yesterday it was extraordinary. i think it is able to balance the macro with the underlying
earnings strength. tom: here is what we are going to do for global wall street. we are going to sit large cap with gina martin adams and running all of the equity shop and dovetail that with david sowerby . how do they change their behavior in the rate guessing market? gina: very clearly we are seeing strong volume surge and a lot of weakness with anything a high duration. tact, consumer discretionary and health care continue to underperform -- underperform. strong earnings growth. the energy of the world financials to a lesser degree maybe real estate, material stocks generally perform well.
as long as earnings are stable, they will default to this fed related and macro related state that should be bought. jonathan: it went by yesterday's dip. is that what i am hearing? gina: suggesting low single-digit returns. any of the 5% to 10% dips, you are adding exposure, because the economy is still growing. i think the fed is behind the curve. it has been much more volatile this year than last year. it is finally waking up and creating volatility. you have to look through that. tom: is she telling me this is an entry point? jonathan: this move in the bond market has been unreal.
two-year close to 160 for 160 was where the 10 year was at the first week of 2022. we have moved so quickly come up 90 basis points. on tense, down a couple of basis points. the fx market, euro-dollar at 113.95 -- 1.1395. tom: i did a study back in 19 70 and we forget the volatility indicated by bonds, particularly in the 90's at other times before and after volker. the story is how quiet it has been for the past eight to 10 years and this new bout of first derivative movement. jonathan: the calls coming through on the fed unreal. deutsche bank, 50 basis points.
it is on the table now for the month. david sowerby joins us. what are you expecting from this fed? david: that they are still behind the curve. i'm in detroit and the last two years they have been running money supply up 40%. they have been going 85 miles per hour in the left-hand lane and the need to catch up and catch up quickly. tom: i look at where we are and gina martin adams looking much more large-cap. what is the history of what small-cap does when we get this kind of acceleration in bond yields? david: it matches the story of large or small, but when the economy is growing faster than expected, when two thirds through the corporate profits
and growing, it is good small-cap backdrop because on evaluating basis they have only been this cheap for the large-cap siblings 10% of the time and the next 12 months suggest that small caps can outperform large caps five 5% to six percentage points. tom: when the fed finally a cts, how do equities react? you have institutional coverage in michigan. what happens once the fed acts? david: it is a recognition that the fed's number one vision should be price stability. they need to combine interest rates. i worry when it is persistent inflation at 4% in the 10 year treasury doesn't cross the 2% line but gets closer to 3% and the time stocks will be the best inflation hedge and that can be
large-cap or small-cap. i am seeing cash flow margins at historically high levels, better than 12%, and they are going to go higher because revenue growth is going higher. gina: talk about what you do within the portfolio. equities are some version of inflation hedge, that the equity market, small caps specifically, how do you approach your -- how do you approach that? david: it was interesting to hear your discussion earlier. it is about is the company growing its revenue, margin expanding, generating ample cash flow? that still leads you to a healthy wage in the consumer sector. a couple of names to give you, delta apparel, manufacturing and
growing sales at 18%. they don't have supply constraints because they manufacture in central america. stock has been doing well. i name like windham, more leisure than business travel, ramada, howard johnson's to name a few have a doubled dividends not once but twice in the last 18 months. there are a couple of summer ideas. jonathan: thank you, sir. a range of views on the street. goldman coming out with a seven rate hike call. bank of america came out with that two weeks ago and when he said it, people were laughing. how quickly that has become consensus. tom: this is about credibility on one hand and also about what is keeping the choice set open. i thought it was brilliant this morning narrowing out what they
have boxed themselves into and what if they do an emergency meeting or do this or do that. they have to keep optionality open to the march meeting. they do that with data and by not panicking but they also have to get a consensus decision. does powell have consensus? jonathan: there is a massive spread between where this fed is and where the facts are on the ground. run me through how you think this market would respond pay the federal reserve -- if the federal reserve came out and said we are in qe. gina: i think something has changed materially over the past four weeks and it is no longer scared of fed tightening but afraid of inflation. we saw that play out in the equity market yesterday. the fed needs to act and the equity market would respond very positively to the fed starting to act and act with force.
the interesting thing that happened over the course of 24 hours is the equity arc started talking about 50 basis point hikes but a super bowl surprise hint. the equity market expectation is the fed needs to do something fast and even some surprise hike would be considered positively ultimately. it creates a lot of volatility in the bond market. the bond market is not expecting a whole lot and that is creating a ton of volatility. ultimately the fed acting and containing inflation is what the equity market desperately wants. tom: i looked at a partition of goods and services, both at 3.7% and they jumped up yesterday to 4.1%. do the math. it is a tangible move. that is the kind of talk that gets you to the super bowl meeting she just talked about.
in my opinion they do it this morning or before cincinnati and the other team. jonathan: why ruin sunday? tom: the month over month was only 1/10 of a percent. jonathan: i am not sure how far you can defend chairman powell. still buying bonds. a terrible look. tom: they do an emergency meeting, a choice out of three in march. an emergency meeting idea is not outlandish. it gives them options. jonathan: as gina points out, people taken quite seriously the prospect of it happening. tom keene, gma, jonathan ferro. futures down .6%. futures down .8% on the nasdaq.
the move yesterday holding. from new york, this is bloomberg. ♪ >> a bet that the federal reserve will raise rates by 175 basis points by the end of the year, coming after inflation running at its highest rate in four decades. goldman sachs expects the fed to raise rates seven times, up from the five, the economy expanded last year the most since world war ii. gdp up 7.5%. this is despite shrinking .2% in december because of the omicron break. more fallout from a protest blocking the border from the u.s. to canada.
spacex founder elon musk says he is confident his new starship will be ready to launch this year at an event with the spacecraft providing a dramatic background he may get regulatory approval in a couple of months. he envisions one-day day it will carry people to mars. global news 24 hours a day, online and at quicktake on bloomberg, powered by more than 2700 journalists and analysts in over 120 countries. i'm ritika gupta. this is bloomberg. ♪
pres. biden: i am going to work like the devil to bring gas prices down. i will work to keep strengthening the supply chain down to bring the cost of energy and goods in america down. jonathan: the cost of gas and all the rest. futures down .5% on the s&p. the nasdaq down three quarters of 1%. yields breaking yesterday in a massive way, coming a little on tens but on twos, we add weight to this move. just short of 160. we moved on the data that when steve matthews did the interview
, things changed in a big way. tom: what is so interesting is the gentleman from indiana university made history eight years ago with a theory of a regime change. this is a regime change and he was not shy yesterday. jonathan: quote is i would like to see 100 basis points july 1. i was hawkish but i pulled what i think what we hear on the street right now is a front loading. if you ask people whether they have changed the destination, i am not getting a yes. goldman sachs came out and said seven rate hikes for this year. but the destination is the same, which is getting there quicker. i wonder how long before they capitulate on that. the ultimate estimation needs to be higher as well. tom: we will have to see on that and we will do the politics.
this goes off what rebecca patterson said in the last two days, 5% is being very cautious year and target. i want to know to-10 spread, 40.08 for global wall street that is the key number this morning. for emily wilkins, the key number of votes, joins us now. i love what was said this morning, flat out the gentleman from west virginia has been vindicated. is fiscal dad? emily: it is not going anywhere. every democrat has accepted the fact that the so-called build back better package may be a smaller portion of it could potentially go through, but there is no way that the bigger package we were talking about last year's moving forward. inflation numbers hit that home.
we saw biden doubling down yesterday in virginia, talking about how doing things to have the government negotiate about drug prices but if you look at the conversations, there are no lawmakers coming out and being, yeah, we are burning the midnight oil trying to get this done the focus has been on other priorities. tom: there is a stunning photo, i will say 2008, others in an office talking and they are exhausted pier 1 is the dialogue between the white house and chairman powell -- they are exhausted. what is the dialogue between white house and chairman powell? emily: we will be seeing a vote
from the banking committee next week on the nominees. it is unclear exactly when they might actually be confirmed. remember the democrats are down one member right now as the senator from new mexico recovers and that could potentially delay things or they are concerned about inflation. you can see that with congress. a group of centrist emma kratt said they would put together a task force solely on inflation. democrats understand this will be a big issue going into the midterms and they are trying to figure out how to message on something that is only partially in their control giving the supply chain backlog. gina: one of the comments by made was striking to me that he will do everything he can to contain inflation. is this a lot of talk without any substance? emily: to a certain extent, the white house is limited in what
they can do because this is a global problem. the coronavirus pandemic is still going on, but the white house has tried to find things to do. you saw what they did with shipping trying to encourage ports to stay open 20 47 and passing legislation on infrastructure -- stay open 24-7 and passing legislation on infrastructure. they talked about that with the u.s.-china competition bill which the house passed and now the house and senate are starting to negotiating trying to get that bill to president biden's desk. jonathan: the people are unhappy. we see that and we will see it again at the end of the week with the consumer sentiment number. they are unhappy about inflation, the pandemic. in blue states, the governors are making a move before the president gives them guidance to
around things like masks. where is the president on that now? we spoke to a doctor at john's hopkins who said it looks like it is driven more by politics and not science. emily: he said the move from governors were premature. i have said throughout this that they are following science. but if you talk to democrats in congress, particularly those facing the toughest races, they say their constituents are ready to go back to normal and democrats need to pivot their message to how do we go forward in this pandemic. it has been two years. those who got vaccinated and wanted to did and those who didn't have made their choice. we don't know what is going to happen in the next several months on its, but they are preparing to message on it in a way that speaks to the
exhaustion so many americans feel with many of these mandates and restrictions and lockdowns. jonathan: emily wilkins, thank you. people are just unhappy, decade low sentiment ratings. people don't feel good, and how they feel matters. tom: we are not going to show you this because it is messy, but five and 10 year inflation expectations, university of michigan, where they own the franchise is out to three standard deviations. that is right up against the trend of 2008. and you have to go all the way back to the early 1990's to see that angst in the five to 10 year view. what is important is that series has such credibility off of schapiro, matt bosler and susan cook. jonathan: we have an awesome
jonathan: what an end to this week. futures down. coming into friday, positive on the week. we are up by a 10th of 1%. teachers down by three quarters of 1%, a lot of by what is happening in the bond market off the back of inflation. what a difference 1/10 makes 10 basis points. that is enough. seven point 5% year-over-year, the separation between the federal reserve and the facts on the ground could not be wider. the move yesterday sticks. the curve is flatter. this is what i want to sit on
here it off of the back of the biggest move since 2009 on the front end, front loading rate hikes, look at goldman. 25 basis points every time, perhaps 50 in march. the endpoint hasn't changed for a lot of people on wall street. we are just going quicker and doing more in a short amount of time. i wonder if the destination has to change. tom: the overlay is better on the pandemic period noticed yesterday for the first time since the itty-bitty between delta and omicron window, a quiet on the sidewalks of new york. i thought madison avenue was busier. i am told the train is busier. there is an overlay from chairman powell that is not about economics. jonathan: it puts both of them
together, the shot right here. two's going into the pandemic, yields aggressively lower. two years later, just like that. that out from twitter yesterday and i thought it was wonderful. going into the pandemic, you have to cut rates drastically. it sits there and does nothing for 18 months, and then all of the sudden after frontloading hikes because this federal reserve has to react to incoming data. tom: a quick surveillance correction. the heritage of michigan, i did mention susan cook but it is those for susan collins. in your writing of the last 24
hours, what is the single thing we need to know? >> the focus has to be on a terminal rate. it is definitely the back and. tom: let's go to the math. the back and terminal rate is on the x axis. have we changed the view of when the terminal rate is and when that study should be? george: we are starting to see a convergent. i know a lot of people are changing forecasts. but the best economists, i want to say this is a new regime but the bond organ has a lot of people focused on it. tom: is the long bond the 10 year or can we go more vulgar and say the 30 year ?
george: i do think the long bond is always the 30 year. the long-term investors are seeing through this noise. tom: this is important. you know i only asked that question to impress gina martin adams. step in and make for stronger conversation. gina: we can't let your thoughts on the balance sheet. tom: what is this a research study? gina: i need to know, what is the fed going to do with the balance sheet. they didn't address what they would do with the balance sheet and didn't give guidance at last month's meeting. that creates some degree of panic over the long-term outlook . how do you see this playing out?
george: i think you are right. i am focused on the balance sheet and quantitative tightening. this qt thing will matter more. going forward, it is a matter of hikes, but how do they react to a drain on liquidity. they tried qt but it didn't last long. i think there will be a risk that we will get to a point where everyone will extrapolate in the balance sheet will shrink and they'll have to stop midway. gina: what do you do with your portfolio and that landscape? where you hide, hedge? george: one think that will happen is the fed will basically give back life to the mortgage market. it has been very volatile but we are seeing this away from the
riskier parts of the fixed income back to mortgages. over time, the higher rates will be attractive. we are getting close to levels and we haven't seen the peak but we are close. tom: how important our international flows as a second order condition to provide a bid to u.s. full faith and credit? george: it is becoming less of an important factor but they have always been critical to the overall functioning. since 2015 and onward it has been the domestic investor that is taken charge for the u.s. bond market. that is why it is critical with what is going on more globally if we are truly seeing a synchronized rise in rates and other central banks rising rates, it will require higher spreads and that will have a
toll on overall financial conditions will get back to equity. jonathan: what is the endpoint for this fed? out at barclays, they are looking for five rate hikes and decelerating at a gradual pace but ultimately target range 170 522 doesn't sound like a big tightening cycle. it sounds like a concentrated one but ultimately not a big one. george: that is that is definitely the best course of action. the fed wants to elongate the business cycle. over time, it will work itself out. trying to overdo it. jonathan: which is its speed or
size? george: frontloading is the best part. the qt, we will see how that works over the year. much more than that, it will be adjusted for -- adjustable. jonathan: thank you. we are doing a lot and a small amount of time. people are talking about that and ending. real balance sheet reduction. let's go with deutsche bank, they are talking about 1.5 trillion reduction of 18 months. on top of the rate hike, all of that taking place in a small amount of time. gina: and it has to. think about where gdp growth is an unemployment. all of the excuses we used for delaying fed policy we are now paying for it in rapid behavior
in 2022. we should have been normalized policies throughout 2021. it was clear the unemployment rate was coming down and inflation was high but we delayed and the longer we delayed the more we have to pay for in 2022. luckily during the delay we had extraordinary gains so there is a lot of adjustment and longer-term gains will still exist. in the meantime, it is going to be painful. i think the balance sheet is a critical issue. there is very little guidance as to what it should be. that is the bigger risk. i agree with george we have largely priced in the tightening this year. what we don't know anything about is the balance sheet and it is a huge risk. jonathan: that is the ultimate risk. hope is that the officials would think it was like paint drying.
tom: their hope right now is to get this incremental inflation lift we saw in the month over month data. i am looking at goods and services, up to 4.1% is not incremental on goods and services and that is what president biden is seeing and many others. if it is legitimate, do you run into a rollover in may or august or december? i don't know. jonathan: ultimately, the back half of this year in terms of base effects decelerating maybe opens the door. gina: there is one assumption everybody is making, and that is just bite increasing the short-term interest rate you will contain -- just by increasing the short-term interest rate you will contain. we expect short-term interest rates, just a slight move could
create a flood of borrowing that only amplifies the inflation scenario. i am worried we are only attacking that portion of it and missing the bigger picture that inflation is also driven by this enormous amount of liquidity from the balance sheet. if you're only increasing the short-term rate, you have a lot of people rushing to the bank to get loans to get it while the getting is good as rates expected to go higher faster. jonathan: futures down 22 on the s&p. yield down south of 2%. on twos, we keep climbing on twos, looking at 160. this is bloomberg. ♪ >> federal reserve issues are
not in a rush to increase rates. a bigger than expected jump in inflation. an emergency raise could signal they are too far behind in fighting inflation. another record day of coronavirus cases in hong kong. it is training their health care resources and putting pressure on the government's push for a covid zero. a warning from the european central bank, saying it would harm a rebound if they move too quickly to tighten monetary. christine lagarde said raising rates will not solve the current problems. she said all of the moves need to be gradual. two u.s. senators have been collecting data as they say and
the cia has released some information on the program and defended its role. mercedes benz says the 2021 earnings beat guidance. they came back from a low point. global news 24 hours a day, online and at quicktake on bloomberg, powered by more than 2700 journalists and analysts in over 120 countries. i'm ritika gupta. this is bloomberg. ♪
of breakthrough infections, even in fully vaccinated people with omicron. that is part of the reason it is spreading so effectively. but the boosters really make a difference in terms of whether you get severe disease and end up in the hospital. jonathan: that was dr. chris bey rer. futures down .5% on the s&p. yields come in three basis points on tends. i know you are laser focused on the front and. twos another basis point, very close to 160. 160 is where we were the first week of 2022, five weeks ago. tom: you have to go up and we had a number of conversations saying at 10:00 you will get university of michigan data. and that will be, what do you want to look at as a litmus
paper. where was it 60 basis points? we are down and the velocity here that we are seeing is exceptional. jonathan: we go from an inflation story to growth that is the problem. consumer sentiment at a decade low. it is not looking good for the back end of next year. the readjustment is happening for the likes of goldman. tom: we will read a note and get it out to you but cautious on the dollar. he said incremental fed hikes increasingly less positive for the dollar. we will do more the on that in a bit. the good news i observe in new york city, andrew pekosz
joins us from john's hopkins bloomberg school health. yesterday in new york, it was just like the window, moment between delta and omicron. can you say all clear it for a normal society dr. pekosz: you need to look locally at what is happening. many of the states and cities that saw omicron enter at end of november are now seeing the end of that surge with numbers going down. so it does look like there is the light at the end of the tunnel coming up fast. tom: the washington post using john's hopkins data on the seven day moving average of deaths and i have been waiting for that to roll over and i now have two days of a negative first
derivative on death that is wonderful news. can you say deaths are rolling over? dr. pekosz: yes. again, some differences in states but over all the death and severe disease are always lagging indicators of case numbers. those are starting to drop. look locally to make sure the trends are as far down as they should be, but everything is looking like the surge is ending and it is about seeing where we plateau and how far down we can get before we start to relieve ourselves of most of the public health interventions. gina: could you update us on where we are on vaccinations and boosters? are we still seeing people getting vaccinations or did omicron stop that in its tracks? dr. pekosz: one would have thought the surge of cases of omicron would have helped
stimulate more people to go out and get vaccinated. those numbers don't look as impressive as i would have liked them to be very there is a very large and strong database that shows that vaccination with a booster or a combination of vaccination with infection gives you really strong antibody responses. those antibody responses recognize many different variants. omicron infection isn't as good alone as those. i would like to see people who have gotten infected during the omicron surge realizing that a simple vaccination afterwards could give them a tremendous amount of reduction, much more than they see right now with just the omicron infection. gina: what is the latest on the next variant? there have been rumors of a variant of the omicron popping up. what is the latest as we
progress through the year? dr. pekosz: my colleagues always accuse me of being the barrier of the bad news as we follow the variants. viruses mutate, variants emerge. nothing seems to be mirroring what the first omicron has done. there are variants out there. scientists like my selves -- like myself are looking at this. there is nothing on the rise and that is as concerning as omicron. tom: when you go upstairs and look at viruses, do you do it with adp two days -- do it with a petri dish? dr. pekosz: we have dishes of cells and one we put virus on those cells, usually within 12 to 14 hours virus kills those
cells and is we monitor that as our first indirect measure of how viruses are replicating. tom: is this like a petri dish and you have a bagel and cream cheese and you accidentally drop it on there and it destroys science? not that i have ever done that. dr. pekosz: the virus moves from one cell to a neighbor, so you can see cells die and their neighbors die and it moves to the whole culture. it is fascinating but i am a virologist, so it would be interesting. tom: thank you and your institution. i had a wonderful time on this and it is a joy for me every day to talk to a serious pro like
the people at johns hopkins. a big fan of the show, i am lost in translation. we need to go to the deep western of new jersey to a guy who has a parking sign in his parking lot. jonathan: i saw this. tom: it bears translation here between the tension of liverpool and manchester united. reserved for radio. any liverpool fan, all manchester united fans -- that is not what it says. jonathan: is this real? tom: it is real. describe the tension. jonathan: typically, welcome milling years ago, 40 years ago, liverpool was the most successful club in the u.k., in
>> in terms of the fed, i think they are in one of the most difficult situations of our lifetime. >> they have to take monetary policy over the coming months to combat the upside risk to inflation. that's what they need this year is a hefty dose of patients. >> i would like them to get out of this. >> the market is being overly simplistic in pricing five .5 fights. jonathan: this is "bloomberg surveillance." jonathan: we are almost at the weekend. from new york city, good morning. this is "bloomberg surveillance" live on tv and radio. i am jonathan ferro. futures down 0.5% on the s&p. the focus is the bond market. tom: a lot more data checks and the dynamics of the market. what matters