I wonder if you could go back to that and mention why it is a scenario rather than a forecast, is not really a worstcase or how much of a worstcase is it. And if we are really looking to learn and to manage these scenarios, do we not need to be more robust about saying what the worst case actually is . First, the question of a scenario versus a forecast, the , the point applies to both committees. Forecastw, one makes a when one can take a view of the probability distribution of district outcomes around that forecast. Forecastmal to make a and say this is our best collective judgment, and then to publish a range of outcomes around that, and then for the financial policy committee, to look at the less likely outcomes , whereas the Monetary Policy except the central one. I think the judgment of both committees was that this pandemic, the weight is playing to the World Economy and the u. K. Economy, and the Public Health measures to contain it through time and the chance of a second or third wave of a vaccine, of an effective remedy, normalt really have the risk to take a risk based judgment on that. One is truly uncertain about the and if you have things that happened in the past, you can make an assessment about the likelihood of the risk. Risk assessments are difficult if you have something to base them on. Uncertainty, one basically doesnt know. I have learned through this crisis that epidemiologists find it is as difficult to agree as economists, which is understandable, but not entirely reassuring. So for us to make a probabilistic forecast i think is very difficult, and we will a medicalng on assessment that we cant easily , and is by no means certain, and we are learning more all the time. Pass throughis one all of the possibilities. It has some credibility to it, but it is not the one you would necessarily think is central. The committee thought it would be misleading to say this is our central polyp our central probability, etc. How should we be looking at the Downside Risk in testing the extremes . I dont know where the extremes lie because ive never seen advanced economies shut down in a matter of weeks before. So the way we try to press those issues, and the stress test, and lose 3. 8 of capital 40 of the buffers they hold before they had the minimum of requirement. We published some mechanical sensitivities about an extra two weeks of lockdown would require 130 basis Points Capital to avoid the losses. You cant do a mechanical calculation of that. You have to work with every thing is that it happening. But that gives you an idea of resilience. I think for the financial policy mittee, we normally test it is very difficult for us to say how far we our into the tail. That was the reason for both committees doing something which was not their normal practice. We learn more as about the health side of this, we get a better feel for what it will take to bring this under control. We will be able to go back to a forecast based on probably the zen indicate that, but certainly forecast based on that can indicate that, but certainly at the time into we really drill down the absolute worst Case Scenario , it is unpredictable, like you say. And there are so many epidemiological and other uncertainties. I think, and tell me if you think my characterization is looks att the scenario a recovery that is maybe not vshaped. It is maybe somewhere in between a v and a u. We could discuss that, but there are lots of other scenarios. , weveeard of lshaped even heard of square root, a big second peak, for example. How does it shape up with those different scenarios . I think that makes the point that you have to picks your. Cenario ive heard wshaped. And the rest of the alphabet. Think weve made clear publicly that no Financial System is infinitely resilient. In the end, a Financial System is exposed to the economy. The Financial System will reflect that. What we have tried to show at that point in time is how and then someit, sensitivities to give people an idea of the risk of if there are other paths. As we go through this, we may come up with a different to take or forecast another judgment. , we also wanted to show to the banks, and more generally, that it was in their own interest to maintain credit, to rollover credit to the , because it has the resilience to do that rather than the natural inclination, which is to pull back on everything. We saw how disastrous that was. This was a way of implicating that they had the buffer space to do this in the scenario. You could then calculate about the sensitivities. The banks have responded as andrew said, pretty well so far, but it was an important point to demonstrate. , if this is an l shape with no upward leg, no Financial System is infinite three is infinitely resilient. To followup on that thinking, what would have to happen for the banks to fail the test . If they started paying out dividends, if you couldnt stop them indefinitely paying out dividends, for example, or different scenarios to pack that back in . Importantf all, it is that they dont pay that capital now. Ust was the reason for willg dividends, and we have to see how that evolves further. ,econd, in the stress tests they could suffer losses up to 8 billion pounds, which is a very large hit. They use up 3. 8 of their still wellt they are above the regulatory minimum. Headingw that they were towards the regulatory minimum, one would have to take other actions to deal with that. But it is better to encourage se,m not to make things wor because then we really would have a credit crunch, and a much worse situation for everybody, and to just demonstrate where they are, admittedly on one. Cenario but the ftc will come back to this at its next series of meetings before the summer break. It will come back to it in october. Im afraid we will have to adjust policy as we learn about the evolution of what effectively is a prolonged natural disaster. Thank you very much. Thank you, julie. Going over now to anthony. Thank you, chairman. I will just make the declaration i made at the beginning, that when i was chief executive of the british bank association, i worked with many members. I have one question for Andrew Bailey, and then i will start on my questions. Just speaking on points like dividends, you made the unprecedented request to banks not to lend for prudential reasons. Can you [indiscernible] enter bailey . Im sorry, you cut out on my line when you had just gotten to the question. You requested banks not pay out dividends for prudential reasons. Can you imagine repeating that request . Let me say a few things. First of all, we asked the banks about the case of paying dividends, and they decided not to. Let me make a point about that. When you look at the stress tests which we have done for some years now, we do allow banks to take socalled , which can beion therefore taken into account as an offset. We are very stringent on what we allow. When a bank has a Dividend Program and has established ar communication [indiscernible] we do allow this to be taken into consideration. The banksstress that should be very cautious in paying out dividends, and that was my view. The second part really follows on the last question. Of course, when you look at stress, and to pick up johns point come where the bank is going down to its capital, of course, it will almost by definition not be earning any returns, so the issue of dividends will become epidemic will become academic. Would really take over at that point. Sensible. [indiscernible] turns out to be more robust, then we will get another chance to pay dividends when it comes around. That theow, it makes right thing to do was to essentially preserve the until it is time to use them. Until it is time to use them. Thank you. Want to turn to macroeconomic policy. Policy, you were asked the question you have to base Monetary Policy on actual forecasts. You monitor all of the data coming in. What type of bounce to youth think it will be . Of bounceback do you think it will be . Do you think there will be lots of economic scarring . Good afternoon. As john said, the uncertainty about the paths given the Health Crisis certainly have enormous amount of uncertainties, which would explain that we didnt feel able to publish a typical forecast. Willwould avoid words like because i think they are misplaced. If i could Say Something about our scenario and where it fits of some others, theres a little bit in the Monetary Policy report comparing our scenario with others proje ctions that is pretty much in ,he middle of the pack of gdp for the next couple of years, on unemployment and inflation. It is a beastly one of those in the middle. Obviously one of those in the middle. Theres no doubt that in our scenario, the recovery takes place over a lot longer period of time then the downturn. Scenario fell precipitously in the first half of this year, returned to the level prescenario in 2022. Furthermore, unemployment its priort back to level until the Third Quarter of 2022. So what happens in the space of less than two months for tomployment takes two years unwind, so doesnt feel very much like a v. One of the reasons for that is scenario isough the based on the unwinding of the lockdown that is done by the end , they dider this year feel there were significant parts of Consumer Spending in particular which would continue to be restrained by cautious , cautious because of the uncertainty about the Economic Outlook and cautious because of what we call social consumption, together, that will continue to be nervousness about the vaccine and the Health Outlook for the virus. There are many other plausible scenarios, and it could be longer. It could be foreseeably shorter, the recovery. Toill say, and reference your question about longerterm scarring, that here, i think the committee did feel that the Downside Risks, there might also be Downside Risks on Consumer Spending in the interim relative to our scenario, but certainly, we did not allow explicitly we allowed only for one type of to the economy. Lower investment over the next two or three years on the Capital Stock of the economy, if you like. There are other sorts of things that would limit beyond the scenario the production potential of the economy. Shift into demand, for example, from one type of spending into another. That would require a shift in can disruptnd that the labor market was having to reallocate people. That can sometimes raise the natural rate of an employment for a while. Exist,e effects could but certainly it was not noticeably different from the , and from the others could not really be described as a v. ,inally, for what its worth the latest numbers we have on spending, we look now at a wide array of highfrequency , forators for travel payments through the wholesale cash system, and the very latest picture over the last couple of weeks of Consumer Spending, it is obviously severely lower than it was prior to this developing marginally this developing, marginally less lower than we had in the scenario. I dont think that tells you much, frankly, about the prospects of the next year and a half. Simply look at the evidence and respond as we get it. Just one quick, last question. As you say, there are lots of uncertainties. There is speculation it could go from 80 to 100 of gdp. Toically, that would lead higher inflation, higher interest rates. How worried about you how worried are you about the size of the National Debt . I think in every developed response hasfiscal agree thatus, and i that has been the right thing. Couldnt put one sort of wraparound. Been toolicy has minimize those scarring effects we were talking about a moment ago. Even that we have switched off essentially a large chunk of the in any, it will result increase in government debt. Traditionallyh that has resulted in inflation, i think the best way to gauge the Market Assessment of those risks is to look at the market inflation risk. For that, we can look at measures elsewhere, and there is not an increase in inflation risk in the market. If anything, the opposite. Certainly if you look at the other jurisdictions of developed economies, those breakeven rates have fallen quite a bit since the beginning of the year, all the way out on the maturity spectrum, and sterling markets in those Inflation Expectations measures are lower. Ok. Thank you very much. Thank you. Going out to harriet, please. Thank you. , just to put on record, that i was economic ticket. When Andrew Bailey was appointed that i was economic secretary when Andrew Bailey was appointed. Our constituents are finding that they are not getting payouts on their business and thetion insurance, chance that if all those thaties were to pay out, dissector would be insolvent. I just wonder why the bank has chosen at this moment not to publish the results of the 2019 stress test for insurance. If i may, i think there are two separate things here. First, theres the issue of to what extent Business Continuity policies protect against a pandemic. And i am quite fine for you not to talk about that because we discussed at. I really want to talk about the publication of the stress test. The decision not to post the stress test not to publish the stressed test was unconnected to the first issue. Come on the think stress test was this was the first time that the stress test had included Life Insurance, as well as general insurance. We have run a general insurance test for a couple of years beforehand, and it was, to some extent, an exploratory test. So when the results came back, it was clear that in order to get a clear enough message for publication, it was going to require quite a lot of work to actually go back to the companies and probe how they had done the tests, and that is not usual. We had the same thing when we brought in the first stress test for banks. That then happened at the start of the crisis, and the decision was resources would be better spent by actually doing specific stress tests around what we had already seen in the markets and around what was potentially what could happen to the asset side of insurance sheets. Suggestions id so there have been suggestions for those tests. , thee light of that statement was we had subjected them to individual tests, which have a big sort of downgrade of Credit Rating and the economy, of whether their asset size can deal with that. But the actual tests we have done, i think it would have been to get it to the point of publication, it wouldve been difficult, and i dont think it wouldve told us very much. Dont you think it looks as though you are trying to hide something by not publishing them now . I am not sure what we will do about the 2019 as we go through this because it may not. It may not be very relevant later on. But it would require work to get it to a point where it could be a reliable guide, particularly on the Life Insurance side. But on the others, we have the sovereignty ratios of the companies, and they are pretty robust. Can you say on the record that the stress test would not show that any companies are failing . Guy you have been listening to bank of england governor Andrew Bailey and other members of the mpc. If you like to continue listening, you can do so on live. We will have reaction next four at of next for the negative rates story. This is bloomberg. This is bloomberg. There are times when our need to connect really matters. To keep customers and employees in the know. To keep business moving. Comcast business is prepared for times like these. Powered by the nations largest gigspeed network. To help give you the speed, reliability, and security you need. Tools to manage your business from any device, anywhere. And a team of experts here for you 24 7. Weve always believed in the power of working together. Thats why, when every connection counts. You can count on us. York, imve from new vonnie quinn, alongside guy johnson in london. This is bloomberg markets. We have been in the boe testimony. First, we want to get you your weekly oil inventories, about to come out. A big difference this week. The market is looking for a build of 1. 8 Million Barrels with everything that has gone into reducing supply. Last week we saw a drawdown of 475,000 barrels. We are actually getting another drawdown, almost 5 Million Barrels. The market wrong once again. 4. 98 2 Million Barrels. With less supply, that should push prices even higher. Refinery utilization was also more than a dissipated at 1. 5 . More than anticipated at 1. 5 . Just checking, a barrel of wti up 4. 3 at 33. 36 right now. Mentioned, we have seen testimony from the governor of the bank of england, plus other numbers of the mpc. Hes been talking to the treasury select committee. The governor not ruling out negative rates. Michael metcalf, state street level head of microstrategy, joining us now. Globalte street head of macro strategy. We now expect negative rates to become a reality for the u. K. , do you think . Michael not immediately, but im not surprised they have not ruled it. Not ruled it out. That torevert remember that brexit in the u. K. Is not going away. Even without that, you cant take the recovery for granted. The bank needs to highlight that it has more ammunition. So certainly, if the recovery doesnt go if planned or if brexit does go wrong, which it still might, the negative rates are definitely an option. Not next month, but certainly for the future. The market is already there, isnt it . We saw a three year auction earlier on. It delivered, for the first time, with a negative rate, 0. 003 . This was the first time we have had a bond sold at negative levels. Will be market continue to push on this one . If that had come out hawkish today, those conditions would have been quickly underwater. Michael i think thats right. As you say, right markets of kind of got this. I think its kind of understandable that they are even flirting with it in the fed funds futures market. The fed has been very direct and really get out. But i think, given the low level of rates and the uncertainty we have around the recovery, it is sensible for rate markets to price where they are. I think the interesting thing for gilts now, this is a welltraveled road in europe, is whether longterm investor demand for bonds and negative yields will remain. That largely has been the case in europe. I dont see why the u. K. Would be any different. Vonnie would you be recommending piling up on them, michael . [laughter] sureel well, im not gilts would be our direct choice right now. I think the thing we are concerned about a little bit, as alluded to in the note guy mentioned a week or so ago, is it seems to us that valuation in sterling no longer has a premium to it. Were used toxit, that risk, but still it has been significantly undervalued for a long time. Has finally caught up to her spot is. So i think we are more concerned about risks to sterling right now rather than rushing into gilts. Vonnie we are seeing a bit of volatility in sterling today, and not just because of the boe governors testimony and covid19. It is also because the u. K. Has unveiled a big new trade promise. Does it come to fruition by january of next year . I think thats look, i think it is fair to say that the trade agenda is back for markets globally, but it is obviously, throughout this last , i think it is just another uncertainty. It is just not clear which way it will go, that is why i think that sterling is against our metrics, sterling is that almost fair value right now, which feels like it should have something of a discount to reflect that uncertainty around whether u. K. Treasury notes will actually fall by the end of the year. Guy lets cross the channel and talk about what is happening in the euro zone. Plan. E this merkelmacron it seems as if the dutch come of the austrians, and some of the nordic countries are going to push back on it, but with france and germany behind it, it has a real chance of happening. In some way, it is debt mutualization, the kind that everybody has hoped that ultimately europe would deliver. What is the right trade around this . Youve had a big moving btps. We are reversing that a little bit today. The ecb is going to continue to buy them, and ultimately, it looks like we will see some degree of ardent sharing of burden sharing. Michael i think thats right. Look, italy has always been ,he test case throughout this whether investor appetite for italian yields would continue given the uncertainty that they have in their fiscal position, of course. But now that we are finally Getting Movement on this issue and look, it is probably not as large or a significant as some had thought a few weeks ago, but certainly a step towards that, as you say. The reality is the ecbs mind more than the net issues. You cant say that for markets like the u. S. Positivek this is a development for peripheral debt in particular. Be thing to watch, it will interesting to see whether bunds get damaged on an absolute basis from it. I dont think we are there yet, but at the moment, it is good news for the periphery, italy in particular. Vonnie what is your favorite trade option right now, given that we have the fed in a similar position with at least tworograms outstanding, and just going crazy . Michael you mentioned a couple programs. The dollar. Other is i think we are finally getting to the point now where the dollar will begin to rollover. Given what ive said about sterling, i wouldnt necessarily like it against sterling, but i think we are beginning to see signs that crossborder flows and things are beginning to repair, so theres a whole bunch of undervalued risky currencies you could go into. Maybe someone like australia and the Australian Dollar would be one to watch. As far as a reduction of risk beginning to improve and markets beginning door overlies markets beginning to normalize. Vonnie michael, thank you. Coming up, the u. S. Treasury is bringing back its 20 year bond for the first time in more than 20 years. We will discuss demand for the security, next. This is bloomberg. With the main Street Program, we are definitely doing somewhat risky lending, and the borrowers we are providing finance forward borrowers that were in good shape at the end of the year, but are now facing difficulties as a result of the pandemic. Areartly by design, these going to be problem loans. What we are trying to do is get the right outcome for employment, so if all of these businesses end up failing, that would be a Significant Impact on employment. We want to avoid that outcome. Vonnie that was boston fed president Eric Rosengren speaking to michael mckee, defending the loans being handed out under the feds main Street Lending program. And we have with us michael mckee. Michael i didnt bring eric along with me. Vonnie just happy to have you sitting there. He seems to be throwing a spanner in the works, and yet at the same time, he says these programs are necessary, and yet they may not be enough michael may not be enough. Michael all of the fed people have said what they have done may not be enough. What he was referring to there is why the main Street Program is and running yet. Powell said yesterday, and rosengren confirmed, it should be by the end of the month. Because these are risky loans, because these companies could be trouble, and because many of them are private, and dont sincerely have Credit Ratings you can rely on, it is harder to set up Risk Management and do the loans because the companies go to banks and have one to one relationships with their banks. The fed doesnt have that, so it is taking longer to set up. But they have both said it is important to do, and rosengren come i asked if it is too late. He said no, they really need the money still. So we will have to look at what comes next because this is going to be a long, slow recovery. Can we talk a little but about that . You get this big announcement effect when the fed comes out and announces a new program, and the market kind of snaps straight to the idea that this is a reality, despite the fact that it takes sometimes weeks and months to get these programs up and running. Once they get up and running, what effect do they have . I am interested what you are hearing in terms of the initial effects and the effect of actually starting. Michael this will be a little bit different with the main Street Program because this is ppp,edrun version of the the paycheck protection program, where they are sending money out basically to Keep Companies afloat. In theory, you have to pay these back. But what you are looking at is the primary and secondary markets programs where they are buying corporate bonds, and qe, where they are buying government bonds. Youre right, there has always been an announcement around that, where the market reprices to where it thinks the fed is going to go with that. We dont see Much Movement after that. Certainly in treasuries, they have been range bound for quite a while, since the fed announced it would be doing more qe. Now we are seeing what is happening in the Corporate Market spreads have come down. We will see if they settle out, especially when the fed gets the primary Market Program running, which is the other one that hasnt been up and running yet. The second one just started last week, so we will see what effect that has. In one day, they bought 350 million worth of fallen angels, but they have been active since then, so we will see on thursday whether we get the report. Vonnie you have another big interview later on today with another fed board member. Robert kaplan represents the oil patch, so we want to talk to him about texas reopening because it has been one of the most aggressive states to do that, and how quickly he thinks the economy is going to come back. Kaplan predicted a very traumatic experience for that area when oil prices were. Hinking should things improve more quickly, that will be an interesting question for him. Vonnie looking forward to that. You will be speaking with robert kaplan, dallas fed president. Looking forward to that conversation. Time now for our stock of the hour. Rollsroyce, the engine maker, planning to cut 9000 jobs and is considering closing sites as well. The ceo spoke to bloombergs Francine Lacqua about when he expects the industry to recover. We have to consult with employee representatives and with unions, and that does take some time. It is a terrible prospect if you are told that you might not have a job, and we want to remove as soon as wety possibly can. A couple of months, or will it take longer to remove the closures . We are not talking weeks, but months, but not many months. The number one answer is as soon as we possibly can. Iss is something which a very serious impact for our business. We need to take this action now. We need to predict the future of the employees we will have in the future, and that means protecting our business. That means getting capacity and demand in line, and the uncertainty is a consequence of that we want to minimize. Orncine what types of plans site closings are you looking at . Is it manufacturing, service side, both . And would it be in the u. K. Or overseas . The answer is all of the above. This is a general reduction in demand for both new engines and for servicing of existing engines. That means that we will need to manufacture fewer parts. Either for new engines or to serve existing engines. So it is a reduction of manufacturing capacity, but also a commensurate reduction in office Staff Required to support that activity. Francine do you think the Aviation Industry will ever get back to where it was december 2019 . How long will that take . The answer is yes. I cant tell you its ackley how long it is going to take. Tell you exactly how long it is going to take. Consensus is three to five years. I think, importantly, with a shock like this to a sector like civil aerospace, we probably are going to see some changes in how things are done. I think if anything, we are going to see acceleration towards more sustainable air and as far as a business like ours is concerned, that is opportunity. We want to position our business to serve that opportunity as well as we can. Francine how any more job losses can we see with these plant closures . It will be difficult. When do you expect a pickup, even if it is not back to the normal precovid19 . There are two distinct phases, the trough, and when we expect that to pick up. And that is about surviving that now, and we believe we can get through this period of immediate disruption where , in april,right now flying was down Something Like 90 . What we are doing now is not solving for that trough. What we are doing this morning wont be affected whatsoever by how long it takes to start recovering. When it does recover, this is all about what levels will be expected to recover to, and we expect it to recover by the end of, say, 2021, back to lesss that are about 1 3 then we saw in 2019. And then we expect over the following years growth to resume so that we get back to those 2019 levels over several years. That could be five years. East, ceo of rollsroyce, the jet engine maker, talking to francine earlier on. We will keep the spot line on aviation and aerospace. We are going to have the highlights of my conversation with jetblues ceo, robin hayes. This is the Airline Industry continues to slim down and figure out what the brave new world is going to look like. Robin is coming up shortly. This is bloomberg. Vonnie live from new york, im vonnie quinn, along with guy johnson in london. This is bloomberg markets. It is time for our muni moment. Here is taylor riggs. Taylor joining me today is the minister bull Portfolio Manager at wells fargo asset management. I first want to get your thoughts on the next stimulus package. What would you like to see as it relates to additional aid for the Municipal Center . Municipal center municipal sector . Wasbout a month ago, it necessary to put something through quickly. They did that with the 2 trillion c. A. R. E. S. Act, which really hit many of your major sectors in the minas up a market with aid the Municipal Market with aid. I think the difference this time is risk markets are much more calmed, and that is going to elevate the debate. I think you are going to see all sides of the aisle really fight for what comes into this next package, especially in an election year. That is going to keep the headlines a little higher this time around than we saw with the first round of aid in the c. A. R. E. S. Act. Taylor does that stimulus package offset what could be some defaults that are expected to come, or do you see some opportunities here if you do get some defaults or downgrades . Are into athink we downgrade cycle, and downgrades are something that municipal investors should expect to see well into an economic recovery. They tend to be a lagging indicator. What we are looking at right now is the fact that most investmentgrade issuers are going to survive this. It is a very severe recession, but they are going to survive this without payment interruption. Once you get into high yield, that is a different story. Those issuers dont get the same type of direct aid that the federal packages are looking at. I think that is going to increase the likelihood of more potholes for investors. So while we have been focused more on the lower end of investmentgrade, there may be some opportunities in highyield. I think investors just have to be more mindful, to be diversified, and really have to have their pencils sharpened for what the fundamentals look like on that specific issuer ordeal. Taylor as you are talking, we are showing a lot of the optimism that has been filtering through the equity markets today. Are you seeing that optimism also within the municipal retail sector, namely by inflows . What is that telling you about the level of panic or lack of panic within investors in the muni market . It is kind of funny right now to look at how the equity market has just rocketed higher, but there are still a lot of nerves in the muni market as investors have seen a lot more volatility than they are accustomed to seeing. As a result, what we have seen is outflows have actually been a persistent problem within the asset class. Still, when you get outflows from municipal funds, historically it has proven to be a pretty good time to be a net buyer of the asset class. Selling of mutual funds creates outflows. Create a little more secondary market activity. That can be a great time to be an investor. I think Credit Research remains extremely important here, knowing that we are not quite out of the woods with regards to this covid pandemic. Taylor my thanks to Gabe Diederich of wells fargo asset management. Guy thanks very much, indeed. Coming up in the next hour, we are going to hear from Muddy Waters Capital ceo. Carson block is going to be joining bloomberg. Cant wait for that conversation. This is bloomberg. Guy live from london, im guy johnson, with vonnie quinn in new york. We are counting you down to the european close here on bloomberg markets. This is the picture we find ourselves with. We had a topsyturvy week. We started off strongly, fading that yesterday. Today a more mixed picture across the continent. The stoxx 600 is up, and trading positively. We have also had this negative rates story and the u. K. The governor of the bank of england not ruling that out. Btps completely turning around and are now bid as we continue to monitor the situation with the merkelmicron plan. There, and air france is going to phase out all of its a380s. The older the aircraft, the harder it is the more expensive it is to keep running. So you kind of retire the older aircraft
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