tv Bloomberg Markets Bloomberg January 27, 2016 2:00pm-3:01pm EST
oil and watch the stock market. torlet: they are having create the idea that they are monitoring this. let's head over to washington where brendan greeley has the fed statement. brendan: the rate remains unchanged, the fed would like you to know that they are watching things, they see what you see and everybody can take a deep breath and stop freaking out. ofy changed the description what they see in the economy. they've been saying economic activity was expanding at a moderate pace. they say that labor market conditions continue to improve with that job number this month but economic growth slowed at the end of last year. monitoring global economic conditions and financial development, sensing their implications for the labor market and inflation and for the balance of risks. we are aware of the strong dollar, where that the facebook
says it is affecting exports and a lot of places. -- the beige book. other than that, the language remains largely unchanged. the updated their broad statement of purpose. two things are changed. it used to be that the long-term natural rate of employment was 5.2-5 .5%. now, they say it is lower, 4.9%. they've adopted new language on understanding inflation. concerned if indeed inflation runs below its target consistently, jim bullard of the st. louis fed dissented from that statement. he's even more worried about losing the anchor on inflation. something he has been talking about for a wild. more broadly, what we see is the fed says yes, we see it, we are
looking at it, we've got it. "ss." they will assess what's going on. "assess."ord is scarlet: u.s. stocks taking a leg higher and the nasdaq is paring some of its losses. now down just .3%. the two year yield coming down a bit. year yield now at 86 basis points. tom: we are measured. we are gradual. dr. leavy, when i look at a gradual headline, gradual rate rise, what is the difference between that and the greenspan measure? nothing. i wonder if the rulebook has changed from 15 years ago. , you have to live with
this at pimco. what will this change? mark: a lot of the data is reflected in the inventory cycle. based on theomy is consumer which is doing the well. our strategy is to be underweight interest rate risk. interest rates could rise more than the market is expecting. we are favoring credit as we don't see the u.s. economy going into recession for many reasons. we want to own some risk assets here in this market. world andnvestment mark with the economics -- the agreed -- mike: the fed is looking for 18 months from now where things are going to be. short-term volatility in the markets is not going to change their view. we have two months until the next fed decision.
they will want to wait and see if things come down and if we seal start to rise again. which is their base forecast. tom: i find it amazing here, the little bit we see. gradual. scarlet: we are working through the language here. the fed closely monitoring global economic and financial wellness. what does that mean to you in terms of actual levels the federal reserve is looking at? when comes to china or what the ecb is doing? mark: the fed is looking at the headwinds of the stronger dollar and that will clearly impact trade and exports. upsetting that is the fact that government is going to contribute to growth this year about half a percent. the consumer is as strong as they've been in 10 years and the banks are healthy. if you actually look going the economy is going to go from headwinds to tailwind.
tom: can any central-bank get out front of the debate? is there any proof they will be successful in that? mickey: their data dependent. don't lose sight of their long-term policy statement. estimate of their the natural rate of unemployment because wages have not increased yet. it is clear they are having a serious internal debate about their inflation forecasts. that will show up in the minutes. tom: the idea that inflation dynamics link into labor dynamics. natural ratee predict what does it mean to see that so-called natural rate come down? the: you're talking about rate of employment when we see labor markets get so tight that employers are forced to bid up wages.
that in theory feeds into inflation. it is the phelps curve. the fed has said in the last couple of meetings and the staff has done some work on this, that rate is lower. you never know exactly what the rate was except in hindsight. scarlet: is that a low rate? is that a big deal? or still average or above average? mickey: a 5% unemployment rate is not down to the point where they think it will trigger higher inflation. we've had a decline in inflation and the fed is believing with inflation low, they somehow might be the should they somehow think it might hurt the economy, but it is definitely affecting their outlook. my read is they take all the evidence and all the market reaction come everything about
china and emerging markets since the december forecast and they say, we are monitoring it now, you see the central bank president singh he's concerned about inflation being low. he'spresident saying concerned about inflation being low. but gradual, data-driven -- i ise to say this -- the fed just as fickle as people in the marketplace. scarlet: let's bring in brendan greeley. jump in here. brendan: there's one more thing we can add to this conversation about inflation expectations anchor topped their the downside. something jim bullard has brought up in the past. expectations of future inflation, the five-year forward -- william dudley also gave a speech looking at consumer
expectations of inflation. consumer expectations are always widely skewed to the upside. if we look at it over the last happier, it is much lower than the low end of the range we've seen for the last two decades. -- the last half year. it is reflected in the statement. in the end of the first paragraph, the added language, the market-based measures of inflation compensation decline further. survey-based measures are little changed on balance in recent months. a reflection of the discussion i i suspect is happening internally. thinks.what the market over indicating the possibility we lost the anger and we've lost it to the downside. scarlet: one thing everyone is fixated on. we cannot say how much oil has determined inflation expeditions. you are looking at the changes in the statement.
mike: they did change the format of this statement. they made minor tweaks in the past. this time, they changed the format. a couple of points. they noted what's going on in global markets. they get out front in terms of why things are happening. inflation is being affected by energy. we are going to see slower growth because inventories that's because of inventories and because of net exports. we know that will be the case when we get the gdp report on friday. they are suggesting that that is going to be transitory. they also dropped the balance of risk statement. they don't say whether they are balanced or nearly balanced. they took that line out. gdp?where is i cannot get a straight answer. scarlet: scarlet: you have to
wait until friday. tom: are we lowballing our growth or doing better than we think we are? >> i think we are doing better than we think we are. the fourth quarter will be .5% because of inventory headwinds. and the global economy. we are going through an inventory cycle, u.s. economy will grow at 2.5%. discussionsation are very important because energy is only 7% of cti. energy prices were down 12% last year. 59% of cpi is services inflation. that is growing at 2.9% and accelerating. everyone is focused on inflation. inflation is set to pick up, tips are very cheap right now, the tenure tip is trading at a breakeven inflation rate of 1.3%. that is screaming cheap. as cheap as it's been in seven years.
tom: screaming cheap. cheap.: screaming so much for joining us with the instant analysis. is great. can i do a screaming data check? in -- we wills get a 199 handle on the 10 year. even oil coming in with enthusiasm. euro advancing as well. there is a market dynamics here. look at how u.s. stocks are performing right now, they've given up their earlier gains. the nasdaq now down 1.2%. coming up from the leading china watchers will be joining us. ♪
tom: good afternoon, everyone. scarlet fu and michael mckee with me this afternoon, looking at an interesting nuanced and complex fed meeting. a lot of it having to do with international economics. it is a good time to talk to donald. invent the study of asian economics for america. you see that with the challenges of gdp and the big new thing in the soros interview francine lacqua had at davos. morning. mr. soros is adamant we have a hard landing. is he right or wrong? donald: he may be right, but i
think he is wrong. the chinese economy does not look very good. on the other hand, industrial china is zero. at 70% --er sector there will not be a hard landing. tom: is it enough for chair yellen to stay focused on domestic policy? can our fed ignore china in international economics? donald: they cannot ignore china and i don't think they are now. they are not ignoring what happens in japan, what happens in europe. they never said anything about the dollar, which is quite understandable. we've heard from two of the big central banks. boj in a fewfrom hours. i don't think we will hear anything directly from china.
tom: we will continue this dialogue -- the dow -103. a churn all in all within the markets. was texas intermediate getting euro-dollar 108.92 after the fed meeting. scarlet: this is the fed decides life on bloomberg television and radio. live on bloomberg television and radio. head of chinahe research, spent decades on the china watch, the king of anecdotal analysis on china. we've heard from two central bankers lately, mario draghi and from the bank of japan,
regarding china -- >> with china so down a little and even if oil producers countries, there growth rate slightly slowdowns come i don't think there is any sort of global financial crisis. like the situation after the crisis. scarlet: so many people say china's market turmoil does not reflect what is happening in the real economy. what would you look for to signal there is spillage into the real economy? first of all, china's equity market is an animal unto itself. not really correlated well with other equity markets or with china's economy. the data that comes out of beijing we find is simply opaque and not very useful. you need to watch this real economic measures, consumption
of electricity, container traffic, rail freight, consumption of various industrial products. those are the things to watch. i don't think there is a hard landing in china. at aina's economy grows very slow historically 4% rate the next few years, that is likely to be faster than the u.s., japan and europe. they will be a bigger player in the global economy five years from now than they are today. saw back in august was china's revaluation of the yuan. it has people worried right now is that they might do another one on a fairly graphic basis. the solution to their problems rather than a problem for the rest of the world? donald: you are exactly right. i don't think they are going to do another evaluation. -- devaluation. gradual depreciation is in the works and will continue to be
n is up 30% yua versus the u.s. dollar in the last decade. up onassive 40% give competitiveness is what china is now working hard to fix. tom: a great idea, let's go to the bloomberg terminal and look at this. it wonderful chart from ever isi. -- evercore this is by comparison in the land of putin. the hydrocarbon currency sinking. we forget the scale of the appreciation of china. they've done their fair share of appreciation. scarlet: absolutely. i want to bring in what mario draghi has said this week. he gave strong words when it came to with the ecb did.
>> in this environment, euro area inflation dynamics also continued to be weaker than expected. it was therefore necessary to review and possibly reconsider our monetary policy stance at our next meeting in early march. mario draghi wants to maintain option audi. keep all options on the table. we know the bank of china has been shifting to adding liquidity through the market than traditional measures. talk a little bit about the other tools the boc has at its disposal and can reconsider and act on in a prompt manner. donald: they cut interest rates already six times this cycle. more is to come.
they used a whole host of other, smaller market operation measures to lift the economy. there will be more of that. isme, the key here right now the boj and ecb are headed down the evaluation, depreciation path to the extent they do that and china watches a basket of currencies, not the dollar, this will tend to make the yuan weaker than otherwise had been thought versus the dollar versus the next -- over the next 6-12 months. mike: it is important that we not overreact to that. donald: it is important that we do not overreact to that. yuan up 30%owed the versus 15% or 20% for those other currencies.
they said last year, timeout, we are done with this. instead of chasing the dollar up , they will be more inclined to follow the other currencies down. that is what is the most important part of this -- these and central-bank actions by some of the others around the world. mike: one thing we have to fear is fear itself because people don't know what's going on in china. are you confident the leadership there has the economy under control? are we may be at a bottom for them, the worst is behind us, the biggest drops in commodities buying behind us and the switchover to consumer demand led economy is underway? donald: that process is underway, michael. it will be a long, long time metals showairest any life because they have excess capacity.
this producers in china are state owned enterprises, they are not profit maximizing. they are employment agencies. they're not willing to cut back production, which is what the market signals around the world are saying they ought to do. do they have their arms around this? i don't think so. there's not enough people in china who have long market experience. they are admittedly doing the best they can, they are a sovereign nation and they will pay attention to what is best for china, not what is best for everyone else. tom: a day of international economics for the fed. .he yield cannot get to 2% i will call it noise, i will call it a day to check of noise right now. scarlet: that is the 10 year yield. look at the two year yield, 89 voices points -- 89 basis points before, 84 now, coming back a
krozsner, former fed governor. that barely describes his academic credentials, doing finance and economics as well. come areu to tell us we working out of the textbooks? brownour time at university to where we are now, out of modern textbooks or are they going by the seat-of-the-pants? randall: there's a some pieces that are new and some that are more traditional. they're worried about the potential for which pressure to come at the unemployment rate comes down. we've seen little evidence of that is the unemployment rate has come down from 5% to 10%. we've had interest rates near zero for so long. tom: is that altered business? is it low nominal and low real rate?
has that altered how business and finance gets done? randall: that's one of the big questions we have not gotten the full answer to. some say this is generating bubbles and price dislocation for assets. i'm not sure the evidence is therefore that. it's possible, but i don't think we've seen clear evidence that this is caused -- this has caused major disruptions. tom: what do you expect to see this year? the parlor game has been four rate rises, three rate rises. randall: there's always a lot of concern and not always the focus on the most important things for the fed. where is the direction going forward? what does this mean for the next few years? with little inflation pressure, we are likely to see the fed seriously consider moving before june come maybe much beyond that.
-- before june, maybe much beyond that. scarlett: this is a special markets." "bloomberg tom: you were saying? take intoid not account what was going on around the unit -- world. how will the fed be able to control its monetary policy? financial conditions have tightened at a rate that suggests we've already seen f -- thet the realtor yield curve is flattening. randall: they know the direction they want to go in. obviously, they don't have control of everything.
they are powerful, but there are a lot of other market horses -- forces that are powerful, too. somenk we have seen tightening of some financial market conditions, but,
as you said, if you look at the 10 year rate, the rate is down rather -- rather than up. there are a lot of short run factors that can move the stock market up and down, but they have to look to the longer run. rates, butraised mortgage rates have since then gone down with the long rate in danger ofthink having to move faster than maybe the market is expecting, because the market -- the economy is not losing steam. they will see how the conditions evolve, but i think
what we are seeing is a concern that inflation is not going to get back to the 2% goal. they said that they started to move because they saw that it was -- they were reasonably confident it would get there. what we've seen in the market-based expectations that have come down and in the longer rate, the markets are not so sure about that, and that might slow them from moving forward rather than speed them up. tom: what a joy it was to speak with your colleague in doubles -- davos. to him on where our central banks are. the monetarys stimulus has run its course. now, exit is an issue. once you are in a situation, how do you get out of it without creating an abrupt change in asset prices? that's what we are grappling with today. broadly speaking, i think the
answer has to lie at looking at the underpinnings of growth, the structural reforms we all know and love, but can't actually do. ra: regular of rush on -- rajan. the toolbox seems a little empty? randall: it is not sufficient for growth. i agree that, ultimately, it's about productivity growth, which incentivestting the right for investment, for the tax system, for savings. that's what's going to be driving growth. monetary policy can make that difficult to happen or it can try to provide the financial -- the foundation for it, but it is just a foundation. you have to build with enough confidence on the fiscal side, regulatory side. we have so much uncertainty that it is hard for businesses to invest and hire. tom: and this isn't lawrence
summers talking. -- cannot just bring -- old fold in fancy numbers. did i taken a good shot at chicago? when you consider the calendar that the fomc has set up, and fed funds futures currently indicate the first time where we see the likelihood of a rate increase that is more than 50% won't be until september 21, do you see a path to get us to that rate increase? ondall: it dependsrandall: the evolution of the economy and inflation. i don't see the price pressures there. we haven't seen a lot of weight pressure. pressures -- ace lot of wage pressure. i don't see price pressures, broadly. the next move has to come when we actually see inflation.
i just don't see much evidence of that, so i think it is going to be a while before they move. scarlet: there is a lack of price pressures we see in the economy. speculation economy might be taking into recession. the credit spread is whitening. -- is is -- whitening widening. profit is declining. is this like 2008? randall: there's nothing like 2008. at least at this stage, there is no evidence of that. banks are dramatically more capitalized. a lot of the connections between banks and other organizations are much less fragile than they were. problems going forward, but i think we are in a much firmer foundation. it's possible the -- the economy could slow.
the fed believes there will be slow growth in the fourth quarter in the numbers we see at the end of the month, but that's part of their broad forecast. a little bit of slowdown, but it will pick back up. not robust recovery. but a sideways slide. kroszner, ofall course, a former fomc member. programming note, tomorrow, do not miss a special edition of "what'd you miss?" in which we will -- tom: are you kidding me? scarlet: starting at 3:30 tomorrow. tom: slit my wrists. we must need to talk to every joseph: of goldman sachs -- every joseph cohen of goldman sachs as well. let's bring up the chart of where we are. this signals opportunity. we show this a lot.
yellow line correction. i will put it out on bloomberg radio. in betweenetween -- a correction and a bear market. abby joseph cohen, are you lowering the boat after 11%? abby: that's a very charged question, mr. keen. let me ask a few questions and then answer. do we think this is a recession? the answer is no. you would think there are some idiosyncratic reasons why profits -- do we think there are some idiosyncratic reasons why profits -- yes, we do. some of it having to do with the currency adjustment because of the rise of the dollar. the profit picture will likely be improving in 2006 -- 2016
vs. 2015. we have,nclude, as that it's not an economic recession or a prophet recession, we take a look at the valuations. profitons in many -- a recession, we take a look at the valuations. scarlet: certain sectors have gotten a huge bump up. --this the time to abby: this is the time to look at companies. 's,n you look at 25-year p/e in some cases, high p/e's are warranted. our focus is really on margins. those are companies that are able to continue to generate good returns on capital and so on. a fewile you identified
sectors that have performed well as companies -- stocks, the question for 2016 is, will they continue to perform well? we do see that in some areas of pharma, for example, that were hard hit at the end of last year. 's are down, the dividends are up. for those with a strong stomach and along time horizon, there -- and a long time horizon, there are some interesting deals. tom: i'm going to break a rule. i'm not going to talk about the first place washington capitals, who i know you adore. i'm going to talk about apple computer. your house went long on apple before a lot of other brave souls. not that i want you to talk individual-- an stocks, but is apple symptomatic of what we are going to see this year? let me not respond
specifically to apple, but let's talk about the tyranny of indices. one of the things we've seen over the last few years has been an awful lot of money going into passive or passive-like andoaches, indices, etf's, so on. in that environment, it is the momentum stocks that continue to do extremely well, often without regard for relative valuation. again, i'm not making a comment about apple or any other specific name, other than to say that, in 2016, the focus, i believe, should not be on where the price momentum has been, but rather who has the earnings and who has the margins. within the tech area, there are some companies that will continue to perform extremely well. relativewe look at margin basis, i think we have to look -- tom: thank you so much, abby joseph cohen. we will stay with -- we will
robert kaplan and asks him how he incorporates this into his thinking. as a monetary policy maker, you have to watch these market moves, but you've got to realize they may or may not reflect what's going on in the underlying economy in the united states. mike: joining us now is a man who agrees. grindered chairman alan -- former fed vice chairman alan blinder. you suggest this is the case where the wisdom of crowds may be wrong. alan: exactly. maybe is exactly the right word. you know the old adage, the stock market critics -- pre dicts. sometime.lson said it sometimes it can be an indicator
of the economy. sometimes it is wrong. that's a reason why the federal reserve does not want to take it too seriously. mike: you don't think we are seeing the sign of an imminent collapse? signs andn't see any i don't think the fed sees any signs of anything like the collapse in the economy. remember, we haven't been growing that fast. a little sag will make it a little worse, but nothing like the collapse. scarlet: let's get a data check on how things stand. as expected, no change. the alteration and the -- in the language. 0.84%,e two-year yield, unch. i will go with that. i want to emphasize that there is too much of that within the fed game. waitrn to the market and a
to equities. scarlet: welcome back to this special edition. one thing everyone was focused on, how much would the market swings shift the fed assessment? this indicates that the financial conditions have tightened in 2016. but they are tighter than where they were today in september and december, yet when the fed decided to look at the balance, they dropped the language entirely. >> they may have punted. they note that they are monitoring global economic and financial developments and assessing their implications for the labor market inflation, their two mandates. or at are not sure yet
least we are going to pretend we are not sure yet. alan blinder, do we have an idea the markets, the dollar movement, china's problems, the oil fall are going to affect the overall outlook? the balance of risks? alan: i don't think we know yet, but information is coming in every day. the stock market is relevant to the fed mainly for what it does to wealth and consumption, and business and investment spending. china is relevant mainly for what it does to the whole world, not so much china, percent -- china, per se. -- stockse talk market market is about as irrelevant as you can get, as far as the fed. the fed doesn't care. tom: the archive of alan blinder. bring up if you can the productivity quote from vice
chairman blinder. no one should mechanically extrapolate the recent miserable performance into the future. no one has the slightest idea about how fast productivity will grow. hat's 2014. professor, we are still there. is this a fed flying blind? does janet yellen have a radar? sees where you are, not where you are going to be. i was a little distressed you showed that quote. it's almost a year ago. time is gonethat and there has been no improvement in productivity. tell you the truth, one of the things i found most serious about the fed'd forecast -- most forecastbout the fed's is they are moving the productivity growth rate down very slowly. -- loath toy close
jump to the conclusion that we are on a new productivity track. so far, they are wrong. tom: jump in on a productivity. -- on productivity. mike: this means we will not see the wage pressures that the fed fears? that's think in part true, but the bigger thing for the fed is what our wages doing relative to productivity? longtime wages were going up slower than productivity was going up, and that was bad news on many fronts. things, evidence that lieber had no power at all. lately, that has not been true, actually -- that labor had no power at all. lately, that has not been true, actually. wages are gaining on productivity. we want them to gain on productivity, but not because productivity is so poor. ourlet: professor blinder,
economic correspondent is on the ground in washington and has a question for you. reporter: what stuck out for me was the changes to the long-term goals. they are looking at -- "concerns " was their word. when you look at market-based inflation expectations, are you concerned about the possibility that expectations have slipped their anger and fall into the downside? -- their anchor and falling to the down -- and fallen to the downside? alan: there are gradations to how deeply worried or happy you are about inflationary expectations. i'm probably a little bit less so than the fomc. the do matter, but i think fomc is, on average, probably a bit more concerned about that than i am. tom: we have a chart with gotten a lot of miles out of on
"surveillance." this is the path chair yellen has been under. this is meeting to meeting. i put this out a million times. velocity --a scape near escape velocity. jeff rosenberg, are we at a point where gerald -- janet yellen can say all clear? can she keep talking up the two-year yield? tom, that's -- no, what today's statement is all about. the contradiction between trying to normalize at this late stage of the cycle when you have an external shock that is potentially pushing you into recession. i'm not arguing that part of the conversation that that is where we are going, but that's the
risk. that's what markets are focused on. how are they going to respond? they change their -- changed their balance of risk assessment in a novel way, but basically not saying anything about it at all and shifting the language from having a view on the balance of risk to just reminding us they are going to look at all these things and that it is going to impact their balance of risk. language, and i think that is the knowledge that the financial market tightening conditions do weigh on their outlook. scarlet: you have been up for forecaster -- been a core forecaster. we know that people believes the credit cycle leads the business cycle, not the other way around. what's the fed's interpretation of the widening of credit spreads? alan: the fed views that as most people do. ofighly fallible indicator possible future recession.
before that happened, if you're recession probability was, i will make up numbers -- if your recession probability 5%, i will make up numbers, it is better than the stock market, which has been wrong so many times, but it is far from infallible as an indicator. thing, id say one more read that change in the treatment of the balance of risk as expressing deeper concern with inflation staying too low for too long. the balance is the strength of the economy against the inflation. i think it is quite rational for the fed, given what has happened to energy prices, for example, is to push outward in time the data, which it thinks is going to get back to 2% inflation. mike: let's talk about that with jeff rosenberg.
let's note the collapse in inflation expectations over the last month or so. you can see -- you can see the green dot. that's where the fed raised rates. there was a little bit of a recovery. since then, they've been largely downhill. what does this suggest about the fed's credibility in holding rates where they are? jeff: certainly -- the fed has to ignore it and did a good job in a statement here of the knology the facts -- has to acknowledge and did a good job in a statement here of acknowledging the facts. the risk of oil prices and commodity prices in china is not about oil. it's about the potential that these financial market conditions tightening, more than just oil prices --
it's about the value of currencies. it's about the status of credit markets. when we come back to the credit cycle signals in a second, they have the potential to create a recessionary outcome which, by its nature, is this inflationary or at such low levels of inflation that it is even -- is such lowionary or at levels of inflation that it is inflationary -- deflationary. tom: how come when he comes on, the market goes down? the et: the tao is off -- dow is off. jeffrey rosenberg, thank you so much. alan blinder -- tom: can you come back for an hour in the morning when you are
in new york? we will chat for a whole hour. scarlet: i want to get everyone's final thoughts. brendan greeley? brendan: the statement on longer run goals and monetary policy strategy sticks out. the fomc changed the understanding. we have been looking for an answer. there is our answer. they are concerned about missing their inflationary target. tom: markets matter. iteard in dallas that doesn't. baloney. markets matter. mike: the bond markets are neither here nor there. currency markets are unchanged. that's the tiebreaker. janet yellen wins. she gets away without any market volatility. scarlet: she threaded the needle. the san francisco
from bloomberg world headquarters here in new york, good afternoon. i'm betty liu. you's what we are watching. markets are taking a turn -- here is what we are watching. markets are taking a turn lower. the fed says it is closely monitoring global economic developments. hikes fort out rate the rest of the year? driving down the market, apple and boeing, falling the most since this summer as their forecasts fall short of estimates. is it a temporary blip or a sign of tougher times ahead? facebook is reporting after the bell. 10 mark zuckerberg impress investors again? -- can mark zuckerberg impress investors again? wr