Yields, Caterpillar, Euro, and the Fed

Ira Jersey, Chief US interest rate strategist for Bloomberg Intelligence, discusses yields, the Fed, and the US Treasury. Chris Ciolino, with Bloomberg Intelligence, joins to break down Caterpillar earnings. Ken Monaghan, co-director of high yield at Amundi US, joins to discuss high yield, credit markets, and central banks. Tim Craighead, Director of Research and Senior European Strategist at Bloomberg Intelligence, joins to discuss Euro contraction and a 3Q midseason takeaways for Europe. Lukasz Tomicki, founder and Managing Partner at LRT Capital Management, joins to discuss the outlook for markets and gives his stock picks. Claudia Sahm, founder of Sahm Consulting, joins to talk about the Fed, bad economic data, and outlook for a recession. Hosted by Paul Sweeney and Matt Miller.

FULL TRANSCRIPT:

Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller. Every business day, we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news. Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Let's talk to our Jersey here, chief US interest rates strategist. I just saw Michael McKee leaving here. He's gonna hop on the Assella train, get down and washing it in DC for that FED meeting tomorrow where you can heckle the chairman with some questions. What do you want to hear from FED Chairman Jpal tomorrow after the release of the results there? Well, what I'd like to hear and what we're not going to hear is wind up being what's the Fed's reaction function and for when they might cut or raise interest rates? Obviously, if inflation accelerates meaningfully, they'll raise interest rates again. They've already mentioned that that they might have to do more if inflation does except right, although we got some data today that seems like maybe it is going to moderate a little bit, but really, you know, what will it take for them to cut? And I think that the idea that they're going to remain at the peak for some time, which they've hounded on, it would be helpful for them, I think, to basically be a little bit more explicit, like, look, we're not cutting unless the unemployment rate is you know, three four percentage points higher than where it is and inflation is close to our target. Right, So saying something like that, which isn't completely explicit, is but it still has some meaning around it for markets. I think that that would be helpful for the FED to maintain monetary policy at this page. Close to our target is weak talk week talk weak sauce, right, I mean, do you want a hawkish Why don't they say, like, we want to get to two percent two hour target? You know, I mean at least for six months or a year. I mean, weren't they trying to average long term average two percent? And how many decades would that take? Yeah, well, that was our old framework. It wouldn't take you know, it wouldn't take that long because we remember we were at under two percent at least for quite a while in the last decade. I think the the thing for the FED though, is that if look, if inflation is two point seven percent, two point six percent, two point five percent trending lower, and you had a real spike in unemployment, then everyone would be forecasting inflation to be significantly lower, right. And I think that's the reason why they can say like near our target or approaching our target, right, something like that. So the FED doesn't like to be as explicit as saying, look, we will cut interest rates if the unemployment rate is above five percent and unemployment and inflation is at two percent if they won't be as explicit as that, because they want to leave themselves flexibility in case there's a crisis, if there's you know, massive corporate defaults for example, and unemployment spikes, but you still have you know, year of a year inflation hasn't fallen off a cliff. Yet they always want to leave some of that flexibility. But you know what's interesting about the FED is it's that little minution detail. It's going to matter because the Fed's probably not going to do anything tomorrow. The Treasury Department, though, at eight thirty in the morning, is going to give us some information that might actually be market moving. So yeah, I mean, yesterday we heard from I guess Treasury that they need about what eight hundred billion dollars in this quarter seven hundred and seventy six billion in this quarter of of net debt rays. Effectively, that's a little bit higher than what our expectation was, a little bit lower than most expectations, and the reason is is that they want to keep this pretty big cash balance. They want to keep a cash balance of around seven hundred and fifty billion dollars. So in order to do that, with Social Security payments coming and additional additional payments for medicare as well as just just general government deficits, not to mention interest payments on the debt, they're going to have to raise, you know, quite a lot of money. Now. Interestingly, remember that seven hundred and seventy six billion dollars is what they're selling to the public. It's actually not the total debt that's being raised because there's non marketable debts, so debt from the Social Security Trust Fund and some other trust funds that are being paid down. So what you'll see is a deficit for the quarter of around half half a trillion dollars. Round five hundred billion dollars. But you'll but the actual debt that they need to raise is much more than that because of the things that we've known for thirty years. Right, the Sochi Security Trust Fund is is a is a net negative and that has to be funded out of out of general revenue. So it's it's you know, it's all the problems that we've seen over the last twenty five years, and we said we're going to be problems for the government debt are actually coming home to roost right now. So I right, I mean, nobody likes to ignore treasury auctions more than me. Will you tell me i'd have to pay attention to this. Well, they've been important, they've been market moving events. When you look at auction demand the last couple of weeks, they've they've started to slip a little on on on average. We last week, for example, we had pretty weak auctions for two year debt and five year notes, but the seven year on Thursday one. Okay, But I would say that demand is much more mixed. Prior to this past month or so, we actually had pretty decent demand at auctions people, where I think we're taking advantage of the selloff. We you know, hit five percent on ten year notes, and people had, you know, taking a little stab at maybe owning a little bit more on at auction. So, yeah, we need to see if demand is maintained, particularly since tomorrow morning with all of that seven hundred billion dollars of debt that needs to be raised, there's going to have to the government's going to have to increase the size of auctions almost across the board. So I'm looking at the two tens. That's another thing you got me looking at. Unfortunately still inverted, but you know, much less than it was before, not only about you know, twenty basis points or so are we going to get to a point where we actually have longer term yields higher than shorter term yields. Yeah, I think I think we will, and it will probably happen early next year. I think it really depends. Though. The important nuance of that is, is it because two year yields go down a lot, So do we have a weakening economy? As Ana Wog and the Bloomberg Economics team correct, And if we do have a meaningful slowdown in the economy, we could probably see two year yields go down, you kno