Transcripts For BLOOMBERG Bloomberg Real Yield 20170826 : vi

Investors should be paying more attention to draghi, not yellen. He was walking on eggshells. Everything, again, is so data dependent. Obviously if the euro zone was , to show any signs of rolling over, core inflation drifts back down it may be very difficult , for them to announce anything at all but certainly the market is looking for some clarity. The central bankers want to be very gradual, very careful in both signaling and implementing the withdrawal of this extraordinary accommodation they put in place the last few years. How do you exit in a careful way where you dont signal too much youre exiting and still give time for the economies to do well and still give time for the inflation to come up and i think he will at jackson hole go carefully forward. The economy there is more fragile than the u. S. From a structural perspective. So, i think the draghi comments will have much more information content at this stage. The ecb wants to always say, were always going to say nothing and leave our options open, but the market will hear what it wants to hear. And its kind of backing off a little bit on the idea that hes going to say something. But it could always interpret what he says in a more hawkish tune. We just have to wait and hear what he says. Jonathan lets get out to jackson hole, wyoming and bring in alessandra. Great to have you with us. What are the questions were looking for answers to when we get the speech from mario draghi . Well, what everyone would want to hear from draghi is some clarity about how the e. C. B. Will continue in the course of 2018 from its unconventional Monetary Policy, most notably large asset purchases. But this is most likely not going to happen. The e. C. B. Council will meet in september and most likely draghi wont want to up front the discussion governors will have at that time. Jonathan has it stopped him before, he boxed in the governing council before. He did this three years ago at jackson hole, why is the time different and why is the topic so much more sensitive about removing accommodation . Alessandro very simple. That is because of the time identity draghi 2014, felt he probably needed to jolt the council into action in what was a rapidly changing, almost emergency situation where they were slowly sliding towards inflation. Right now, the euro economy is doing well and growth has been surprising on the upside. Theres not so much inflation but at least there are signs it may pick up in the next few years. Theres no need to rush or jolt the governing council into action. Jonathan hell get a nice break in beautiful jackson hole. Thank you very much, sir. I want to bring in the roundtable for the next 25 minutes. With me in new york is marvin haggerty of blackrock and ira, u. S. Strategist and coming to us from atlanta is matt c. I. O. , at fixed income. Iraq, lets begin with you. The theme is fostering a dynamic global economy. Its really not the sensing for an ecb president or shouldnt be, be the setting for a e. C. B. President to intervene in the currency market and do anything spectacular along those lines. Ira i think what mario draghi wants to do is play with the themes that have been talked about this conference wants to focus on, things like regulation and are there things the Central Banks can do to stimulate the economy. Janet yellen took a little bit of a step back though she was pretty pro regulation, she also said hey, there are tweaks that probably can be done, because of the interrelationships of all of these different regulations might actually be hampering growth and maybe we should look into that and i think mario draghi might come from the same type of approach. Jonathan martin, for investors, how have you prepared for the removal of accommodation in europe when Central Bank Activity has been so big the last few years and youve seen what happens to markets in your, tighter spreads and creditors driven higher and yield compressed. How are you meant to prepare for the removal of that stuff . Martin thats a great question and wouldnt say its specific to europe. I think it should be applied globally where you have the fed with the Balance Sheet and the b. O. J. Continuing to manipulate rates between plus 10 and minus 10 in the 10year space and the impact its had globally by taking yield and duration out of the market is catastrophic where you had this grab for yield where the lack of availability of assets in europe has bled into demand for u. S. Assets and the same can be said for japan leading to global demand. So the way to prepare for it is , obviously we hang on every word the central bankers say and theyve been manipulating rates and currency markets via Interest Rates the last few years. And they learned to lessen during the temper tantrum you during the taper tantrum you have to approach this incredibly carefully. Jonathan europe is so different and matt, europe is different in the sense theyve been buying Corporate Bonds as well and i put up the chart on the bloomberg barkleys in high yield and Investment Grade and the spreads are so tight, matt, whats going to happen when the e. C. B. Try to step back to that chart . Matt ultimately there is a head wind coming, but we think it is going to be some time away. We dont think 9 00 german time tonight is the right time for draghi to start the method of tapering particularly for the currency markets which will , still be quite liquid in u. S. Time. Ultimately, the headwinds will spread, but we think its more of a mid 2018 story and not 2017 story. Jonathan what is interesting is we talked of the Federal Reserve winding down q. E. And the yield are lower now on 10year treasury than running q. E. 80 billion a month. I asked the question could we , have the same situation, because pretty much every conversation around the e. C. B. Is based around yield have to go high when they pull back, but could we have a similar situation in europe that ultimately we have here in the United States . Ira not so much when they taper or when taper is announced. We know once they announce the taper, the markets will reprice and say theyre not buying quite as many bonds and the markets will ask a secondary question and now that yield are somewhat higher, whats the path of inflation and growth . And if thats stable, maybe rates stabilize there, but if people say well, maybe this is a mistake, theyre going to unwind too fast, that will wind up making longer term rates in particular come down. You wind up seeing linkers, for example, wind up showing break evens coming in quite substantially in that area. In that scenario. Jonathan we spend a lot of time focusing on flow as investors look at the rate of q. E. But the Balance Sheet is massive. How important is that Balance Sheet and how powerful will it be in years to come over the e. C. B. . Matt we think all Balance Sheets will shrink slowly. The fed put out a very slow pace of a trillion dollars over three years decline. The e. C. B. Will likely follow pace when they eventually announce this. It is going to take by all measures it looks like multiple years, five or 10 years, to get the Balance Sheet lower and theres an echo fear of the taper tantrum and Central Banks are afraid to do anything quickly and actually wed say theyre missing too slowly, and the surprise in 2018 may be the increasing pace of the fed potentially under a new leader that ultimately eventually an acceleration of any policy ultimately announced by the e. C. B. Jonathan well get to the Federal Reserve conversation in a moment, but just comparing the experience of the Balance Sheet and the path of Balance Sheet and the power of the Balance Sheet at e. C. B. And the flow versus debate, where do you stand, ira . Ira flow matters significantly more when flow is whats driving prices and thats whats driving prices right now. The stock effect has a much longer term kind of balancing effect where you say ok, should yields be 2 or 4 , that winds up being a different scenario. You know, one of the things id like to say about any Balance Sheet is what the e. C. B. Is doing is significantly different than what the fed did because the Federal Reserve for most of q. E. Didnt buy significantly risky assets like the e. C. B. Is doing. The e. C. B. Is buying corporates like you mentioned before and showed that chart and really compressing corporate yields and spreads. That dynamic can change a lot and happened in the u. S. , too, which im sure well get to. Jonathan the removal of the accommodation and the Federal Reserve is a plan of how to go from x to zero in a period of time determined by the Federal Reserve. The e. C. B. , the next plan for q. E. , will it be like that, will it be this is how we get to zero or is it the case of this is us going from 60 to 40 and this is how long well do it for and revisit it x amount of time . Martin i think the latter option is how they are going to proceed. As things currently stand, the current program, theyll start running into technical difficulties in the first half of 2018 with respect to issue ownership, ownership of bonds relative to out standings. I do think what theyll do is put up shortterm goals theyll try and get to. Theres some Political Risk again on the horizon starting with italy. Which i do think the e. C. B. Would still like to be engaged in a q. E. Program as we approach some sort of italian election in 2018. Jonathan martin is sticking with us with ira yersy and matt toms. Coming up, fed chair janet yellen has potentially made her final speech from jackson hold. Youre watching bloomberg real yield. Jonathan Jonathan Ferro from new york. This is bloomberg real yield. Federal reserve chair janet any reform could be make the Banking System safer otentially putting the martin haggert from blackrock, matt thomas from voya and ira jersey. Why dont we get a bid and we put the emphasis on the bid after the speech from the treasury market. Martin the bar for yellens speech was really low and very little expected to come out of it and she definitely did not disappoint. Where there was potentially some small hope she may bring in the current level of Financial Conditions and how that may play into Monetary Policy, but she barely brushed on the topic and talked predominantly about regulation as you referred to, and we had a couple basis point rally and a on the front end of the curve and the dollar is weaker. Jonathan lets talk about the Financial Condition and the tension between loose retention and elevated Market Pricing and that between ultimately soft inflation after soft inflation after soft inflation. How is the fed meant to calibrate Monetary Policy for those two things . Matt we think the fed will increasingly bifurcate those two things and inflation will be drawn into the ratesetting debate and the Balance Sheet side is more likely to be drawn into the Financial Conditions debate and also the bubbling fed statements about asset values. We think that ultimately the Balance Sheet is likely to be the topic of conversation on the front burner Going Forward and ultimately with the potential new fed chairman after yellens pretty open disagreement with the Administration Policy on regulation and we have to anticipate a new chairman will move towards a Balance Sheet. Jonathan matt, lets talk about that. Was that the nail in the coffin, the idea the fed chair is standing up for the current regulatory system, the structures, and this is ultimately whether shes a low rate person or not. This is ultimately what this administration wants, deregulation. Matt it seems like the delivery of the two week notice in corporate terms, and it seems that its clearly at odds and we would expect this is the beginning of what well hear about the change to ultimately messaging likely coming. Jonathan did she sign a Resignation Letter . Ira i agree with that assessment. There wasnt a High Percentage that she was going to get reappointed anyway, or if she was that she would say yes, that she would agree to it. Someone might look, though its , it will ben somebody who looks like him probably a , Monetary Policy dove and also antiregulation. Somebody that is generally a dove, but also antiregulation. Thats the type of person that the Trump Administration is likely to appoint. Jonathan whether its gary gary cohn or not an interview , with the Financial Times is theyre hopeful of getting tax reform done the end of the year and you add the deregulatory story on to that as well, will be it a stimulus . The hope coming in the year was yield would go high and everything would be great and wed finally get that inflation. Break evens rolled over and yields are 220 on a 10year. When is that going to change, martin . Martin you guys have referred to the current run rate of inflation which took a meaningful dip the last five months and some of it is legitimate and some of it is statistical noise in certain components. When we look at the legitimate components, where it is that low disinflation coming from . Its not coming from areas that are disadvantaged to consumers. Were getting discounting in apparel as we have the internet effect. Youve had a significant reduction in wireless and telecommunication plans, which are not a sign of lack of demand. Theyre all a sign of sort of recalibration of supply delivery techniques and thats definitely a pickup in real disposable income. Ira it is like the productivity boom ends up being lower prices. Jonathan add on whole foods . Ira all of these things are basically corporate productivity and not worker productivity. You can have lower prices. What does it mean for Financial Conditions . They can remain very accommodative even with the fed starting to hike because you basically have a productivity miracle thats not showing up in traditional productivity measures. Jonathan matt, you saw the picture, the video of the walk between yellen, draghi and kuroda. When you look at the inflation picture in the individual regions. Its not terrific in japan, thats for sure. The inflation picture in the United States rolling over to the eurozone rolling over as well. And i just wonder, when we have a conversation on wall street, that chart is seen as a bad thing. If you showed that to anyone and explained it to someone on main street theyd say thats ok, i want lower prices. Why is that chart viewed over at the Federal Reserve, the e. C. B. And bank of japan as a bad thing, matt . Why ultimately is that a bad thing . Matt its ultimately the fear of debt deflation thats a hangover from the financial crisis and to be avoided. Ultimately, we would say there was a very big difference between the lack of upside in inflation and the fear of downside. The market doesnt in our opinion fear debt inflation at this point, but the central bankers are acting as if they do. Moderate inflation 1. 5 percent to 2 is not to be feared and paints a very constructive outlook for growth and Financial Conditions not needing to be addressed too aggressively on the rate policy setting front. Jonathan you guys are sticking with us. I want a check on where bonds our twos 10s and 30s in the , treasury market. Yields throughout the week grinding higher on the front end by two basis points, rolling over on 10s and 30s by the same amount, two basis points. It is a flatter curve, 10 year treasury down two bases points, 217 on the week. Still ahead, the final spread. The week ahead featuring brexit talks and the u. S. Jobs report. Next week, september already. This is bloomberg real yield. Jonathan im Jonathan Ferro and this is bloomberg real yield. Time for the final spread. Coming up over the next week, well get another round of brexit and nafta talks. The u. K. s Prime Minister teresa , may will visit japan and well get a series of u. S. Economic reports that will include inflation, autos, and its payroll friday already, believe it or not. The president of the United States will also be making a public push for overhauling taxes. Still with us is Martin Hegarty from blackrock, i read jersey and matt toms from boyette investment management. Something we have to talk about is what is happening in d. C. Matt we have a debate , over the debt ceiling and this debate over the deficit and whats going to happen with the budget Going Forward and tax reform, etc. , a Government Shutdown potentially in the cards. The only tension weve seen so far is in the treasury build curve and i wonder if it can bleed out from there and go else where. What are your thoughts . Matt we ultimately dont think it will bleed out and we think a shutdown would be political suicide, and if it were to happen would be extremely short lived and dont think anybody gains from that. And ultimately, this is likely to be noise. But ultimately you need to move to this tax debate and the difference between reform and tax cuts are meaningful. We think it will be impacting the market very differently. Were anxious to move beyond the debt ceiling and get to the real debate on taxes. Jonathan ira . Ira i cant wait until were done with the debt ceiling but unfortunately i think it is just coming. We havent heard the noise around it. Weve been talking about here and there in Bloomberg Intelligence and markets. But you look at the news flow and if you look at what i have up on the bloomberg terminal, you look at the news flow and how many mentions the debt limit has had in the past versus credit the default swap spreads in the u. S. And were in the first inning here of talking about the debt ceiling. Usually its about two or three weeks before kind of that end date which i currently have at october 3 on my model is when were going to start to see this. Right around september 15, right around the time you get these corporate taxes that come in. Everyone will nail down some date the government will default if they dont raise the debt ceiling, and unfortunately i agree that i wish it would just go away. Jonathan but it wont. Ira and we can talk about real things like tax reform or the budget in general. Jonathan ultimately, martin, it wont go away, does it matter, and weve been conditioned and investors have been conditioned to say it ultimately doesnt and you get through it and move on . Is it another episode in the sense it doesnt matter and well move on . Martin theres a couple things. One year you have a english person asking about his involvement in american politics. Jonathan our political situation is just as messy. Martin i do think it matters. And you mentioned that its finding its way to the front end of the build curve. I would argue its finding its way into the fixed income yields as a whole as there have been the flat equality and discourse in d. C. Becomes a bit more negative. So its happening. And its going to continue to be important. That being said, i do think it will be resolved but not without a significant , amount of uptick in the headlines going into it. Broadly, what we have seen is a flatter quality not just in fixed income in terms of sovereigns, but credit as well. Is it another reason to accelerate that move into Higher Quality securities, into high quality assets . Matt we think its the current symptom, the ultimate the bigger issue is the dysfunction in washington. So, continued dysfunction in washington beyond the debt ceiling and into tax reform or health care and the like is starting to weigh on the market. I would agree it has an impact on the dollar and risk taking. Its the bigger issue not just the debt ceiling. When that goes away the markets will quickly focus on can anything get done and increasingly as people say no theres a bit of disappointment and a rolling back of the Growth Outlook unfortunately. Jonathan well wrap up the program the way we usually do it, wrapping up the last 30 minutes in trying to look ahead with rapid fire questions. The first one, one word answers, please. Did yellen just kill the chance of a second term, yes or no, martin . Martin no. Ira yes. Matt absolutely. Jonathan buy and hold 10year treasuries or bunds to year end . Martin i would take treasuries. Ira treasuries. Take bonds. D jonathan payroll, a surprise, its a guessing game . Martin upside. Ira downside. Matt upside. Jonathan gentlemen great to , have you with us on the program. Thank you all. That does it from us, from new york we will see you next friday at 12 00 new york time. I hope in hong kong youre doing something a lot more interesting. This is bloomberg real yield. Emily he was tapped to be heir to the softbank empire. Nikesh arora was raised the son of an Indian Air Force officer and he came to the u. S. For grad school. In 2004, he got the job of a lifetime. Larry page and sergey brin hired him to help build google into an online ad powerhouse, making him one of the most sought after tech execs in the world. A decade later he was named softbank president with a plan to eventually make him ceo. But as sons retirement approached, arora said it became