Until we get validation that inflation is coming down. It is not a matter of if there is a recession, it is when and how much. Announcer this is bloomberg surveillance with jonathan ferro, tom keene and lisa abramowicz. A most unusual tuesday, the market on the move that it is a tuesday of international relations. In two hours plus, the speaker of the house is scheduled to land in taiwan. People looking at flight radar of the trip from singapore through the philippines to taiwan. Jonathan local reports indicating touchdown, something about 10 20. We are all trying to work out how china is going to respond to this. We talked about how china had 35 food exporters. Youre going to see more of that and something more direct, specific cap United States. Tom and maybe even Something Like canceled plans of a bidenxi meeting . Maybe even september. You really wonder of the upset and the ramifications of this for Global Finance and wall street. Jonathan weve been talking about tariffs moments ago. Lets be fair, that is taking a backseat. The other issue for me, back in spring, Speaker Pelosi was do to go to taiwan. Yes, we got some pushback, but i dont remember this type of rhetoric, i really dont. What experts are telling us is that some of this is linked back to what has been happening with ukraine and have china has come close to russia and increased chance of whether or not this will happen. And again, the economy, bigger and bigger. Tom Michael Wilson of Morgan Stanley scheduled to be with us. The taiwan president website under attack from 5 15 p. M. That is an official, just one of the distractions here. I want to dovetail fixed income into the cautious view and we begin with spread compression this morning that is extraordinary. Jonathan equities lower, yield lower. I think it is important to frame it this way. Lower yields and support from lower yields, and then you start to work out why yields are lower. Yields are lower because the perceptions have froze in this economy. At some point, that is going to affect the lower earnings. Tom you saw it in your space, yesterday the ig of ig was apple, and the 40 year piece was ruined, 150 basis points over treasury, and they got much, much more attractive terms on that, down to 118 basis points. What does it say about quality and the fixed income space . Lisa some people have said this could be a peak if they are trying to get in and borrow money at this point. What i will say is that you are starting to see the market revived in force. Companies borrowing after the rallies we saw in july. How much is it trying to get in while the getting is good . Tom listed data and then i want you to bring in mark wilson. Jonathan equities down 6 10 on the s p and nasdaq. You see it in the bond market, yields lower by a couple of basis points. A stronger japanese yen. Joining us now is mike wilson, the chief u. S. Equity strategist over at Morgan Stanley. Over the weekend, you used the word dream. Why is that dream misplaced . I dont know exactly if it is dreaming, but the phrase we used was really just trying to imply that we have this window of opportunity for equity investors, where rates are coming down and you can interpret that couple different ways. As if the fed is close to being done, and they are going to be able to pick up the for the next recession arrives, and that window is always positive for stocks. I think it is premature to say the least. I also believe that when they do. Or pause, that is on the growth side, and we dont get dogmatic with these, but then we get back to the framework which suggests it is pretty full given everyone growth. Tom when you have been leaning on is a divide between Service Sector equities and goods kind of equities. How sharp is the divide between caterpillar and apple computer. Well, you make a point that there are potential goods, that some are more extendable than others. This is the exact same way we skewed ourselves more defensively. We Like Companies that have things that you need for everyday life, the kinds of stocks that have been doing well. The volatility in the growth is not that volatile and they can deliver on the earnings when uncertainty is going to be higher and for all of these things that we overconsumed, it is pretty obvious that that is playing out. Lisa you have gotten the playbook so write this year and you deserve a real congratulations for pinpointing where we are and how we see rallies. Where do you see the trade when it comes to energy, given that it was one of the big calls in the first half of the year, the inflation protection at a time when now, it is really raining spring. Those are nice comments, but energy is one area we completely botched. I think that energy now is vulnerable from an equity standpoint if you take the view that a recession is commodity complex technically is telling us it is nonfood. We are seeing demand across the board. But the charts dont lie and they are telling me that when we see the fees and commodities, they would be neutral on energy and quite frankly, a little bit too long at this point. Lisa how much do you take a pushback that earnings have been better than expected . Yeah, there are potholes here and there but for the most part, companies are adjusting and adapting and moving forward. Some of these are really good at managing, but what they are not good at doing is forecasting earnings over the worst of 12 months. In our experience, particularly a major turning point. The bar gets lower, they jump over the lower bar. We do a pretty good job of forecasting macro. If this drip, drip is going to continue, it will probably be more of a drop as a recession. Dont get mesmerized by the very near term data on the earnings. That is maybe better relative to the managed numbers. You have to take their own view at these point. You cant rely necessarily on what companies are saying or communities are saying. Our view is very clear, the earnings are going to be much more negative than what we have seen the last two years. Jonathan what do you say by people midst mesmerized by the bond market movie scene. Move we have seen. The market has been infatuated with inflation when it became obvious in the fed, and that was really the story in a q1 up until about may, june. That was a time to give it away from that and start thinking about what is growth going to look like. We think it is a great hedge against the equity portfolio right now. Jonathan also dictate you want to show this morning, thank you now. Bonds over equities over at Morgan Stanley right now. Theres a lot of people that got that right. The dynamics when you look at the bloomberg screen, it is amazing to see some of these statues and particularly, the general statement curve flattening. Over at citibank on caterpillar, he said the earnings were there, but they were light. I think that is what mike relative Morgan Stanley mike wilson of Morgan Stanley alluded to. It is the quality for the conviction of belief of the earnings will be, and there is one important stock with earnings. Jonathan lisa, can we see more of that in the second half of this year . Lisa he thinks probably people are too long because the charts dont lie and he sees a peak and commodities and a rolling in this. This really goes to the heart of the issue right now, which is the only way for the fed to combat supply had been driven in vision is to curb demand in tandem with how much supplies are down, and we dont know what that is going to do, but it is going to be bearish for a whole host of industries. Jonathan this market needs to focus on the damage done to growth in the meantime. Futures down 6 10 of 1 on the s p. Yields lower by a couple of basis points. The focus on potentially landing in taipei with Speaker Pelosi on board. That landing could take place in around about two hours from now. From a beautiful new york city, this is bloomberg. Keeping you uptodate with news from around the world, nancy pelosi is set to become the highest ranking american politician to visit taiwan in 25 years. She is doing so in defined the chinese threats. China regards taiwan as part of its own territory and the government has vowed there will be an unspecified military response to a pelosi visit. President biden called a u. S. Drone strike that killed one of the members of the 9 11 attacks. He was the leader of al qaeda according to a senior ministration official. Three u. S. States with monkeypox outbreak. California joined new york and illinois in announcing its the rising infections. Roughly 6000 infections here in the u. S. Second quarter revenue more than doubled, beating estimates. And a Leisure Travel boom. Secondquarter quarter earnings beat estimates. Global news 24 hours a day on air and on bloomberg quicktake. Powered by more than 2700 journalists and analysts in more than 120 countries. This is bloomberg. What i expect is just more ongoing in the weeks and months to come, this increasing pressure on taiwan, the exposure of economic pressure, and we will see some of that in terms of the u. S. As well, which is actually remained strong up to this point. Jonathan Speaker Pelosi reportedly heading to taiwan and touching down in the next two hours. That was the codirector of the ucl center on u. S. Politics. From new york city this morning, good morning, here is your equity market. Some risk aversion out there, futures down six tense or 7 10 of 1 . No major moves here. Yields are lower by a couple of basis points, a continuation of what youve seen over the last four days or so area yields down five straight sessions. Tom this is what 300,000 plus people are doing now, looking at slight radar on their phones and looking at the plane that Speaker Pelosi is possibly on going around the south china sea. Jonathan this is going to go from malaysia, over the philippines and then it is going up to taiwan. You cant see it, but seriously, that is what 300,000 people are doing now, looking at an air force plane. Jonathan i was doing the same thing this morning. Tom with the gulf stream i have to have it. Because with the gulfstream, you got to know where you are. Ive been looking forward to this all morning. I am absolutely fascinated by what the Newt Gingrich republicans do with this trip. Uni sat on the couch in 1994 in absolute shock at what gingrich and the gop did. We come forward this many years and the republicans have to respond to this moment with the democrats are from san francisco. How will they respond . I think what you had in u. S. China, u. S. Taiwan policy for many years now, i would go back to kind of the last couple of years of the obama administration, a great deal of bipartisanship moving forward. You will remember that throughout the entire trump administration, the u. S. China policy, u. S. Taiwan policy was very unified. It continues to be unified. And i expect it to be Going Forward. This trip and chinas belligerence about it also provides an opportunity for the United States, frankly, to continue to update its china policy. The term always has been a strategic ambiguity. Recently we had a lot of ambiguity and maybe strategy that just got lost a little bit. The president unilaterally started talking about defending taiwan, Speaker Pelosi strip pete Speaker Pelosis trip is done certainly without the public concurrence of the white house and theres a lot of people in congress on a bipartisan basis again who are pushing forward to try to update china and taiwan policy and we will see how biden gets involved in that and whether he does. Tom lets build on that. The areas of agreement or disagreement, where are the areas that you expect to see clarification in the u. S. And china policy, that you think would be significant for companies, for investors and frankly, rank and file who are trying to understand what is going to happen . That we start with the end. I think there has been a great benefit in the strategic ambiguity policy in the United States, but theres probably some benefit in additional clarity here now, too. And what senator menendez, senator graham and others are trying to do, frankly, is to start a debate about exactly how to update china policy with the idea that more clarity for the United States is a good thing. If there is additional clarity, that is probably good for markets. You have some idea of what the guardrails are, some idea of where it will go and where it wont. And china will understand that and the idea is maybe it will respond in kind and there will be more clarity on both sides. That may end up being a good thing. Tom the idea lisa the idea of possibly lifting some of the tariffs on chinese goods, is that basically off the table . I think it pretty much is, but whether or not it is, the markets should not look for any kind of major moves on tariffs. The biden people have been signaling that, firstly. Secondly, theyve taken a year and a half to get to a position where they may have a decision in the future. That is not something that goes well for markets. Certainly, anything other than completely lifting tariffs doesnt provide any inflationary impact. So markets shouldnt look for that either. Jonathan your perspective on the show, this is something we werent really thinking about back in spring when Speaker Pelosi was considering a Major Movement for the change. It is the change in the way china was talking about it, which has changed in a big way. Lisa it is not just talk, it is also the buildup in military, what weve seen in terms of clamping down on Certain Communications within the mainland of china. How much does china force a change in u. S. Policy . That might be what they are talking about, this need to clarify the strategic ambiguity for something a little more concrete in the u. S. Jonathan it depends on the nature of the response from the chinese government. Polices point, it takes an economic form. About an hour ago this ultimately, this is going to her the people of taiwan more than it hurts anyone here in america. Tom the distinction here is the calendar. We all understand the cliche and made the reality that the chinese started the show talking about 2049 as a framework for president xi, but far more than that is the shortterm to get to the party of congress in november. This whole idea of saving face, how does president xi reacted this . Jonathan clearly, it is tension abroad. Tom fragility barely describes it. It is just a housing crisis, a mortgage crisis alone. David fitzpatrick with a superb essay today from bloomberg. Jonathan becoming more controversial by the day. That is the mortgage boycott you talk about, the weakness in the economy. The issues we need to focus on. Futures down 6 10 on the s p. Looking forward to that, next. This is bloomberg. Jonathan futures are negative, down six tens of 1 . About two hours from now, we are all waiting for the same thing, to see if Speaker Pelosi lands in taiwan and ultimately, how the chinese respond to that. Futures are negative on the nasdaq 100, down eight tens of 1 . Yields are lower by five basis points now. What a move lower in the middle of june. A little bit later, we hear the fed speak. Tom this is all coming up at 32 basis points. Jonathan just all driven by this dropoff in the 10 year yield over the last weeks. Tom weve got a lineup of things to talk about. Uninspired performance, nothing had been nothing. Tom there is so much going on. I want you to talk right now about the phillips curve, this ancient thing from another time, and it has to do with the time of the economist at lse. I want you to link in the phillips curve myth with the raging debate over the beverage curve and the efficiency of our labor economy. First of all, i was born in the same year that professor phillips penned his article, so if that makes me an ancient thing from another time as well. That curve was really a description of the labor market over a period of 100 years or so and it was hijacked by people like paul samuels and someone in the u. S. To make it a fear of inflation. And in 1968, Elton Friedman said it is not going to be stable. That was a very pressing article. What he said was workers will factor in the higher prices, and the phillips curve a breakdown. That is exactly what it did in the 1970s. Now, we are back in and environment where for the last 20 years or so, and patient was so low that nobody took into account, and so the phillips curve reemerged. And now the question is how much unemployment do policymakers think they are going to have to engineer tom do they engineer it . That is the heart of the matter. Whether any central bank engineers a labor economy. Well, here is the problem they want to create some slack in the thinking is very clear at the fed right now. They want to create some slack in the economy without causing a recession which means growth has to be between potential growth surrounding 1. 8 , 1. 9 per year, and zero, otherwise the economy is in recession. And lets be clear, the economy is not in recession. We have another jobs report on friday, but it is a very narrow path. The fed is going to make a mistake. Given that it has let inflation out for the first time in three decades, it is going to make a mistake by raising rates too much. And that inevitably is going to result at some point in recession. Not imminently, but as the threemonth curve flattens, that recession signal starts to emerge when we close to zero. I think engineering a soft landing braces a bit the beverage curve the relationship between unemployment. We get the job Earnings Data later today which gives us a new reading on job openings. There are almost two jobs per unemployed person. The debate going on right now is can the fed deflate the demand for labor in the economy without pushing up unemployment a lot because theres a lot of job openings and quite a raging debate going on between governor warner and larry summers, trading blows. Tom lisa, jump in here on this huge debate. Lisa basically saying that the soft landing paper had errors after they came out and tried to slap down the previous piece. Basically a titfortat of academic journalists. The other big debate is how far the fed will have to go to engineer some sort of softening in the labor market, what it will take. You have some