♪ >> the bond is essentially telling the fed they are making a mistake. >> i was surprised by this reiteration of the declaration of the tapering. >> we think that if and when they start to hike, they won't get very far. >> i think there is a prospect for a bit of a surprise, a bit of discomfort by markets. >> this is "bloomberg surveillance" with tom keene, jonathan ferro, and lisa abramowicz. jonathan: from new york city, for our audience worldwide, good morning. this is "bloomberg surveillance ," live on tv and radio. the birthday boy will be back next week. happy birthday, tk. the people making fun of the 2022 5000 targets for next year

where the same people making fun of 4000 targets for this year. michael: that seems to be ash michael: -- lisa: that seems to be the flow of what we are getting. people thinking perhaps we are just not bullish enough. jonathan: credit suisse, farther margin outside, a pickup and buybacks, and a favorable discount rate despite fed tightening. that is the view from jonathan golub. that is what i want to build on throughout the next hour. lisa: this goes directly to your question. which part of the curve matters to equities? is it the two-year yield, or the 10 year yield hovering around that 1.5% level? if it stays that low, do we get a material selloff and a lot of assets that are really pegged for the discount rate to that 10 year yield? jonathan: 67 basis points. kailey: you are continuing to

see it in that elevated range. the curve going ever flatter. you are getting some conflicted views on that. janus henderson saying the bulk of that move is already over when it comes to the flatter curve. we heard the same thing from pgim earlier this week. jonathan: seemingly everyone is on board except td, and you've got this massive range on s&p 500 forecast. are we overdoing how much policy matters, given that everyone is in line with the move coming next year? ultimately, the spread is wide on what that means for the equity market. lisa: i am feeling very humble. jonathan: it took 60 minutes. lisa: we have no clue what the effect of monetary policy is on the market, especially if you put into effect that we will get not quantitative easing, but quantitative tightening. will we get balance effects on markets that have not really experienced that for two years. jonathan: isn't the change that

chair powell basically said the same thing? here's my baseline. i am not sure about it anymore. here's the balance of risks. we are all over the place. lisa: that is why i think bill dudley is right. watch for where rates will be in 2023, 2024. that gives a sense of where the balance of risks are in terms of whether they have to hike more, or whether they can contain inflation with 1.5% of a base rate. jonathan: your cpi rate comes tomorrow morning. we will build up towards that, 24 hours away. in the equity market, we are down 15. a pullback from a three-day winning streak on the s&p 500. yields pullback by just a couple of basis points on tens, down one on twos. some dollar strength out there. euro-dollar, $1.1314. lisa: how much do we see an increasing number of strategists

come out and say they like europe more because they think u.s. will slow down and europe will start catching up next year? 8:30 am, we get u.s. initial jobless claims. do we get another all-time low of people filing for benefits? job openings surging to the second-highest on record, 11 million job openings, even as people start to come back to the workforce despite the ongoing pandemic. how much does this really represent a very tight labor market? today, president biden holding calls with the ukrainian president, as well as allies in eastern europe. he wants to talk about security and confirmed he is very much committed to it, even as russia ines's up troops on the ukrainian border. what did we learn about that called biden had with president putin? is there any progress we can really clean? at 1:00 -- we can really glean? at 1:00 p.m., the u.s. selling

notes. that in itself is interesting because i am committed to the story, but also because it shows that people are very comfort with the dynamic in markets, which is front end, seeing rate hikes, and a yield curve that continues to flatten jonathan: the new is -- to flatten. jonathan: the news is there is no news in the bond market, and she is excited about it. mark cabana, head of u.s. rates strategy at bank of america. let's start at the back end and then we can go to the front end. why are we down at 1.50%? mark: we tend to believe the fed may be making a policy era by overweighting the fight against inflation. they are doing that because there's concerns about the omicron variant in the recent uptick in cases we have seen. they are worried the fed is going to be tightening into

supply constrained inflation and reduction of consumer purchasing power, and they are doing it because they are worried that risk assets may be very sensitive to overall rate levels . that is what is keeping the backend around 1.5% right now, but it is what is allowing the curve to flatten because the market knows the fed is going to be tightening in the not-too-distant future. lisa: this is the reason why i love covering this market. it is enough to make your head spin. at some point, the fed might get a message from the markets that are getting a message from the federal reserve and say they think you're making a policy era. perhaps we will tap the brakes and not raise rates as much. at what point does the yield curve flattening's in that message to the federal reserve? mark: the fed is probably not too happy about the shape of the curve, given where they are in there harking -- there hiking cycle. they know the market is telling them they may not be able to

hike by that much. your issue right now is that you need to guard against elevated inflation, leaning against demand, and doing that by tightening financial conditions. that is how the fed transmits monetary policy. so even though it is not a great signal for the fed, i don't think it is going to prevent them from taking necessary action and beginning to withdraw monetary policy accommodation. kailey: the action in the immediate term may come wednesday you'd we have the cpi print tomorrow. are either of those events actually going to be catalysts for the bond market, or as all of that priced in an already front running both of those events? mark: the market is certainly expecting elevated inflation tomorrow. our economists are projecting that cpi is going to run even higher than expected. they expect a reading that is going to be 0.2% above headline.

it is going to firm the amount of rate hikes that are expected for next year. the meeting next week we think will confirm some things that are likely widely expected now by the market, such as a more accelerated pace of paper, essentially doubling the monthly purchase reduction, and then ending purchases by the time of the march fomc meeting. it is also going to give an updated reading on the dot plot, and certainly we are some pathetic to former new york fed president dudley's views that we will probably see more hikes ticket priced. two, maybe three for next year. the thing that could surprise the market that we sense is still underappreciated by clients is the discussion of the fed balance sheet. lisa, you mentioned this earlier. the fed may be gearing up for quantitative tightening.

haven't given us much guidance yet, but if they start to strengthen the balance sheet at some point next year, that we think could really weigh against risk assets because it is going to be adding duration risk to the market. it is going to be adding more term premium that will lean against the flattening pressures slightly, but most important he it will be withdrawing liquidity out of markets. the extent to which powell elaborates on this or provides hints in that direction may end up being the big surprise from the meeting next week. jonathan: just quickly, and terms of sequencing, do you think that needs to happen before we get that rate hike, and does that change your view on when they make a move? mark: we think the sequencing will be historically done, or perhaps rate hikes with balance sheet reduction at the same time. we don't think it is likely that they begin balance sheet reduction for rate hikes, primarily because the fed has a much better understanding of how rate hikes or increases in the

federal funds rate and up impacting the real economy. they have done this for years. they've got good models that give them confidence and how it works. what they are less confident in is how the balance sheet actually influences underlying economic conditions. that said, powell has told us all along that they have multiple tools, with the emphasis on the plural here, to deal with elevated inflation. the tools that are obvious to us our balance sheet and rate reduction. that means rate reduction could be pulled forward. jonathan: brilliant. thank you, sir. where do you start that conversation? let's start with that view of being some pathetic to the view of bill dudley. yesterday talking about a move on the 24 dot. if they start to forecast that, doesn't make it less likely that they can achieve it? imagine the amount of financial condition tightening that he

will see off the back of those kind of forecasts. lisa: especially if there is some sort of guidance about balance sheet reduction. you go to 4:30 pm on every thursday and take a look at the balance sheet, which has more than doubled since the onset of the pandemic from about $4 trillion to about $8.7 trillion. what point does that become the more disruptive force among the potential tools that the fed has? jonathan: just to be clear, that is where you go at 4:30 eastern time on a thursday. jonathan: that is correct -- lisa: that is correct. jonathan: i am well and truly checked out at 4:30. that's a lie. i mean, i was tweeting morgan stanley calls last night at 9:30 p.m. [laughter] from new york city, this is bloomberg. ♪ ritika: with the first word news, i'm rick and could prepare get a new study is likely to compare firms about the contagiousness of the omicron

variant. it warns that omicron is four times more transmissible in its early stages than delta. japanese scientists analyzed data from south africa and found that omicron transmits more and escapes immunity. it message to president biden -- the senate has sent a message to president biden on vaccine mandates. the house is unlikely to take up the measure because courts have already put the measure on hold. the u.s. has passed legislation designed to punish china for its treatment of uighur muslims. it adds to rising tensions between the two countries. lawmakers banned most imports from china's xinjiang region over concerns that they are made by forced labor. chinese developer evergrande has defaulted on dollar debt, which cut the company's rating to district a default after it

missed dollar bond interest payments. we asked hong kong's top regulator about the impact. >> it is a significant event. you can't possibly underplay it. but it is basically not that category of event for the financial system. ritika: evergrande has about $3 billion worth of debt. for the first time since 2017, cbs is repurchasing stock -- cvs is repurchasing stock and raising its dividend. it is also increasing its dividend by 10%. plus, the cvs forecast for the full year 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. i ritika gupta. this is -- i'm ritika gupta. this is bloomberg. ♪

>> we see higher inflation for 2022, eight had a labor market,

and most importantly, tightening from the fed and the forecast horizon as it stands for 2022 to 2024. jonathan: really interesting conversation with bill dudley, bloomberg opinion columnist and former new york fed president. tk back with us next week. your equity market down 13 on the s&p, -0.3%. into the bond market, yields lower to 1.499%. in euro-dollar, $1.1311, down about 0.25%. a stronger dollar in the mix through g10. we touched on the em story, but late yesterday, if you missed it, 150 basis point hike from brazil and flagging another 150 basis point hike in the not-too-distant future. february, they could be coming again. lisa: and they are hiking into recession, hiking into weakness, as they try to keep cash in

their stores even as the federal reserve is prepared to hike rates and tighten some of the conditions, which is offering perhaps a bit of a competitive edge. jonathan: this as we look at do next week for the big three, with the bank of england. kailey: may include adding geographic >> ability to pe -- geographic flexibility to pepp reinvestments. we see a little bit of a reaction in btp's and bunds. it will be interesting to see what the ecb does when we look at the boe and the fed by comparison next week. lisa: i wonder what this means for the bank of england, unreliable boyfriend. here we go. jonathan: goldman have already made the call. socgen, too. see you in february. forget next week.

lisa: you are seeing it on the front end in the united kingdom. it gives a sense that perhaps the emergency isn't over. jonathan: let's head down to d.c. and catch up with mario parker. let's start with the top of the agenda today. a democracy summit led by the united states. what do we expect from this? mario: we are expecting president biden to follow through on some of the things he said earlier this year, that the world is in a fight for democracy right now versus apocrypha -- versus autocracy. one thing that is very essential for us to pay attention to is the fact that taiwan was invited , which is sure to increase tensions between the u.s. and china. lisa: is there a reason why the focus is suddenly entirely international at a time when there is still a lot to get done on the agenda? mario: president biden, one of the things he sought to do with his presidency is to show that

democracy can still work, that it is still irrelevant form of government in the 21st century. so he is trying to get global consensus and build global consensus around democratic principles. at the same time, as i kind of alluded to, it isolates a country like china by inviting taiwan, and that also puts pressure on russia as well. lisa: the plot seems a bit confused. you have the build back better, the debt ceiling, and the ukrainian situation with russia building up troops on the border, and then of course, you get basically a sort of provocative move towards china. is there any cohesiveness right now to president biden's agenda as he heads into a messy year-end? mario: the cohesiveness is the fact that he is facing all of these crises. you've got a resurgent omicron variant in the u.s. in covid. you've got tensions with china and russia still over ukraine. tensions with ironic well --

with ironic -- with iran also. it is a flurry of crises the president is facing now, and this is a day that encapsulates all that. kailey: on the domestic agenda, we have seen it take a very long time to get through, even though democrats have control of congress and the presidency. you've also seen we are just about 11 months on from the insurrection at the capitol, disruptions to american democracy. how does this impact the president's political capital not just domestically, but in a summit like this one and as he tries to counter u.s. adversaries? how seriously can they take the biden administration? mario: he is trying to reassert the american standing in the world. he campaigned on the allegation that the u.s. lost some of its standing in the world, given some of the missteps with covid,

some of the cases we've had, some of the foreign policy issues as well. but make no doubt about it, the president has expended a lot of political capital, particularly trying to get passed these two domestic bills, the bill but better agenda and the infrastructure bill. -- the build back better agenda and the infrastructure bill. particularly with some of the infighting in his own party. jonathan: you are often too busy for us, but we get to see you about once every month or so. jen jacobs never comes on, but i'm going to give her a shout out anyway. that award for jim jacob -- virginia jacobs yesterday -- for jen jacobs, talk about it. mario: jennifer jacobs has been a force on reporting throughout the trump administration, throughout the government, and she won yet another prestigious award yesterday from the

national press club, well-deserved for my colleague on the white house team. jonathan: who was with the president at the time that news broke, wondering what was going on in the administration at that time. what was it like at that very moment? mario: i remember thinking to myself, he did look a little bit sluggish. of course, later on, once jennifer jacobs, affectionately called jj by our team, once she reported the president tested positive for covid, i did have to look over until my wife. [laughter] jonathan: can you tell jj we would love to see her soon? fantastic works. 12 months ago, feels like years ago. lisa: i love the idea of him coming home at night and telling his wife -- jonathan: might have to get tested.

that story about the erosion of democracy after what happened in early january, i have to say that around that time, i was queuing up to get into the embassy to sort out my visa, and i can tell you, the line was around the corner. i talked to tom about it at the time. for all the talk about the erosion of democracy, the state of the united states of america, just have a look at how any people want to come here legally and how long they will line up to get here, and the desperate individuals that come here illegally as well. the line is still right around the corner in the middle of the night, people trying to get access to this country. kailey: and america certainly is still an idealistic idea. it is still young, still being formed. i think to some extent, that is also probably what the biden administration is trying to accomplish with this summit today, that there are opportunities and freedoms you can get here that you can't necessarily get in other places. that is why democracy is advantageous and something that the world should be pushing towards. jonathan: it is still a dream

for a lot of people, and we are lucky to be here. your -13 on the s&p, down 0.25%. good morning. lisa abramowicz, kailey leinz, jonathan ferro. tom keene back with us next week. a happy birthday to tk.

jonathan: good morning come on bloomberg tv and radio. prices down 0.3% on the s&p. we are negative on the russell, negative on the nasdaq. following a three-day pop on the s&p 500, the first three-day rally we have seen on the s&p for about a month. it has been that choppy over the last few weeks, that is for sure. a ton of calls coming through. 5200 the call now from credit suisse. the upgrade their view next year from 5k. a ton of calls coming from morgan stanley. two, tens and 30's focusing very much on the front-end for next week. twos right now just short of 70 basis points. a conversation for morgan stanley shifts from january to

september 2022. where on earth are we going with the ecb into thursday next week? lisa: beats me. i find this fascinating. the news today that they are looking at possibly expanding into reinvestment of the emergency bond purchasing program to prolong it after previously talking about maybe trying to start tightening at some point in 2023, i mean, honestly. can you make sense of this? jonathan: can you? we were talking about flux ability of the federal reserve -- about flexibility of the federal reserve hike if they wanted to, to do qe forever. kailey: i have no idea. the adverbs you could use here are very high in the amount. but i think this will be contrasted against the boe and the fed next week. what is the ecb doing, going

perhaps the other direction in a world where the other majors are going in the other direction? jonathan: in e.m., it is much more simple. sledgehammer. just knocking it forward. fx in e.m. right now, 8.6% over the year. we could for emerging market currencies. that is even with 150 basis point hikes coming out of central banks like brazil, and it is not over. 150 yesterday, and 150 perhaps still do come in february. lisa: how much is jay powell going to be banker to the world and respond to some of the weakness you are seeing around the world and some of these more vulnerable economies, partly in response to an expected rate hiking cycle next year? jonathan: this is exactly why this chart is a weaker e.m. story. let's get you some single names this morning. we can do that with romaine bostick. romaine: good morning. here in the premarket, keep an eye on uber.

there was news out of the european union formalizing new rules for gig workers, effectively reflect -- effectively reclassifying them as employees. southwest airlines, they had their investor day yesterday. a lot of analysts scratching their head, concerned about some of the commentary about the inability to return to those 2019 fund mental levels per passenger seat mile. jeffrey's downgrading to hold. a lot of concerns about some of the inflationary pressures and what that is going to do to a business model that is very tied to a lower-cost environment. lucid group down about 6%. the company which just went public about five months ago is now going to sell convertible debt on top of that. a little bit of dilution on the shares in the premarket. we did get some earnings, including this morning, cvs health out with earnings.

more important leak, they are reinstating the dividend and a buyback, the first buyback and dividend announcements we have gotten going back to 2017. gamestop earnings were out last night. they were a loss. shares down 5% in the premarket. if you are looking for any sort of strategy update, you do not get it. it was a one page earnings release, six billet points and a conference call in which the executives took no questions. rh, big furniture. this is a fundamental story. it has done well, up 11% in the premarket. jonathan: they cost some serious cash. romaine bostick coming up a little bit later at the close this afternoon on bloomberg television. gamestop up 821.71% this year. what a move. lisa: but it didn't really show the earnings for it. this is the issue. at what point does the rubbermaid the road and they actually take that step gain and do something that -- at stock

gain and do some thing that can make it sustainable? jonathan: we are 25 hours away from cpi in america. joining us now is target chaudhry -- is gargi chauduri, head of investment at blackrock. how do you expect to respond to it? gargi: very exciting days for those of us who look at inflation markets, which is everyone these days. i think we are probably going to get something that is a little bit stronger than what the market is pricing in, and when i think about the core data, i think what will be important for us to look at is the breadth of the strength. sending back to the summer, you will remember most of the strengthen cpi was coming from those reopening sectors, so whether you think about travel or things like that.

we saw there was a little bit of a broadening out. we were seeing strength in of goods and services inflation, so i am looking forward to seeing more of that, more strength in some of the goods parts of the market, as well as services such as shelter inflation. lisa: where is the opportunity for investors, given that we have seen inflation rise at the fastest pace since the 1980's, with likely coming from the fed next year? gargi: i would say a couple of things here. we do think that inflation, if you look about a year ahead from now, we are of his legal to see a pickup in the near term. after that we are likely to moderate. but i think what is important to note is we are still one to settle at a level that is higher than the pre-pandemic period, which was obviously below 2%. so we are going to settle at the higher level of inflation, and investors need to think about hedging their portfolios, so looking at equities of those

companies that are able to pass on higher prices. within the bond markets, expectations are for yields to go higher, but at the same time, moving your allocations to inflation linked bonds i think could make sense. we have certainly seen a huge amount of flow into tip and st ip. 20% of the fixed income flows. you could be looking at a basket of diversified rates and looking at infrastructure. i think all of those make sense for an investor to think about in a regime of higher inflation than the pre-pandemic one. lisa: you've got a birdseye view

for the retail and the institutional investors. have you felt a big divergence between the two heading into year end, as retail investors see the inflation concerns in the longer-term nature of them potentially as being more of a threat than the institutions that seem relatively sanguine in their outlooks? gargi: i don't think it is a retail versus institutional bifurcation. i think there are investors that really did buy into that transitory story. i know we don't stay that word anymore. but there were investors that did buy into that story. they could have been from the wealth community, as well as institutional community. i think more and more we are gravitating towards the space where investors are asking, and i'm sure many other strategists, around what is the best inflation hedge. we have written papers and are coming up with our year ahead

outlook, and this is something we are focusing on because this is something our clients are asking us. i thing the story has changed from what do i need to do to insulate my portfolio for the next two or three months. to very much a. belief now that this is probably with us for a slightly longer time. kailey: we talked a lot already this morning about the divergence in the headline level, where strategists think it will end up at the service level. when you talk about the leadership any fit, 2021 was supposed most we value overgrowth, small caps overlarge. does that actually happen in 2022? gargi: we will see. there are a lot of reasons why it did not happen. we saw that did take place in the beginning of the year, and then you had the delta scare. this year, when we were all getting pretty optimistic about the growth prospect, and we still are, you have this omicron fear that is in the markets. you see that in the bond pricing

right now. for next year, i think there is reason to believe we can see some of those cyclical opponents of the economy do better, but we have to be a little bit humble around some of the risks that have, more recently, whether it is with the federal reserve, with the new variant. what we are telling you to do is to focus on the value and equality barbell and really look at some of those companies that have that pricing power and ability to pass on higher prices , and that is what we think investors should do for 2022. jonathan: good to hear from you. on the days coming up tomorrow and beyond, much more on this market. the estimate on the medium, 6.8%. can you imagine the sticker shock of 7%? lisa: what has been priced in, and how do you hedge against it? is the dollar?

is it in inflation linked bond? is it equities? jonathan: i thought what gargi said about humility was important, that we just have no idea for next year. kailey: we have seen that born in from morgan stanley to others out to 5000. while there is no consensus at the headline level, there has been overwhelming consensus about where the leadership would come from, and that also has proven very hard to figure out. kailey: can we find agreement -- jonathan: can we find agreement on geopolitics? we will have that conversation with dan tannenbaum of oliver wyman. heard on radio, seen on tv, this is "bloomberg surveillance." ♪ ritika: with the first word news, i'm ritika gupta. the world health organization panel says it is best to get people to doses of the

coronavirus vaccine. it recommends against mixing and matching unless countries are facing supply problems. vaccine, nations could help low and middle income countries manage stockpiles and deal with those shortages. the u.s. is reportedly ramping up the economic pressure on iran. the biden administration is tightening enforcement of economic sanctions. that comes at a time when restarting the nuclear deer with iran has been unsuccessful so far. the new foreign minister of germany doubled down on warnings to russia over ukraine. they said moscow would pay a high price as it went ahead with an invasion of its neighbor. they urged them to avoid military escalation. the producer price index rose 12.9% from a year earlier, higher than estimates. that will provide policymakers with more room to support the

economy. meanwhile, the consumer price index rose at the fastest pace since august 2020. the chairman of credit suisse broke quarantine rules when he left switzerland before his period of isolation was over. he has apologized for what he said was an unintentional violation. under swiss law, anyone who deliberately evade spore and teen could face a possible prison sentence or a fine. 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. i'm ritika gupta. this is bloomberg. ♪

>> it is really difficult to believe that rates are going to

get anywhere near the levels reached in the last cycle, so when you look at the terminal rate like that, it is probably going to have a 1% handle, and that is why 1% in the longer run is more likely the fair value for 10 year treasuries. jonathan: that was stephen major, head of global fixed income research at hsbc. good morning. lisa abramowicz, kailey leinz, and jonathan ferro. on the s&p, we are down zero point 3%. yields are in to 1.48 71%. a bit of news on the world economic forum in davos, which portland. -- abbess, switzerland. -- it=n davos -- in davos, switzerland. kailey: it will take place in switzerland in january, so davos goes on a scheduled. jonathan: we will be here, please come. i am not sure who is going to be

in the office in january 2022. lisa: do using it is an accident that tom keene is off today at the same time the world economic forum announces this? i think he is personally there saying, come on, guys. jonathan: it was the news you have all been waiting for. kailey: was it? [laughter] jonathan: it will take place in davos, switzerland, the world are coming forum. at least, they plan for it to ice. we are -0.3% on the s&p. let's get to kriti gupta on this commodity market for a whole lot more. kriti: we are starting to see this idea of persistent inflation ever since chairman powell dropped the word transitory from his vocabulary. the question is, does that mean commodity inflation is here to stay? my chart of the day looks at commodities going all the way back to 2000 because this rally we have seen in the oil market in particular is pretty typical of post-recessionary periods.

if you look at regression lines in the periods following 2001, 2008, and 2020, it has never been steeper than right now. you start to see some of it be because of dr. demand rebounds. you have some of it because of the fed's response not only for growth, but for markets as well. commodities also trade with those risk assets. lastly, and arguably the most important one, the rapidly expanding role of china. 20 years ago, china was not as big of a player in the commodity space as it is right now. last year, and 2020, it was one of the only major economies that actually posted positive growth. that is going to be a key thing to watch as we talk about whether or not we are entering a commodity super cycle. jonathan: supersmart. look out for kriti on bloomberg tv and bloomberg radio. let's discuss with damian sassower. china, evergrande, default. we have been waiting for that

word for a wild -- for a while. what next? damian: the news everyone has been waiting for. evergrande restricted default overnight. that is about $30 billion in offshore bond. to me, it is going to be prioritizing creditors. if you look at our friends at marathon, ubs, allianz, blackrock, they probably have very low expectations on what they're going to get paid back, after the risk committee was formed. they are going to prioritize employees, homeowners, suppliers, and offshore creditors are going to be bottom of the stack. so what is the recovery on these bonds for offshore creditors? lisa: the bar is pretty low. people are having pretty low expectations. i do wonder, if you take a step

back, what this means in terms of how china will handle a restructuring. this is the first really major restructuring at a time when we have kind of cast aside fears of contagion. the government seems to be trying to step in, but there is a larger message for the chinese credit market, especially if investors want to get in with yields where they are. lisa: -- damian: you've got to look at the airline conglomerate , which defaulted. those are your benchmarks, your litmus tests for how this is going to shake out. the government is going to be actively involved. they're going to privatize that's going to prioritize stability, but they will probably bailout creditors when necessary. that is your model for how this is going to proceed, but the realty sector is a different beast altogether. it accounts for 20% of china's economic output. lisa: you said balian over --

you said bail in overseas investors. what you think the government is going to do? damian: they still need access to offshore credit markets, offer capital, so they're going to treat offshore creditors as sort of a pastored stepchild and bring them in when necessary. let's look at the holdings between kaisa and evergrande. the properties think they are so more liquid than evergrande. their valuations are probably a lot less liquid and certainly a lot lower, so -- and by the way, we will also see the keep well position. there's a gentleman's handshake between the operating company and the holding company as to whether or not they will pay back those creditors. that has yet to be tested in the china legal system. we will see some evidence of that as well. kailey: the market seems to be

pretty sanguine about evergrande being declared in default because we got a triple are cut from the pboc, but today you get the excess reserve requirements listed. is that the pboc getting really uncomfortable with a stronger you want -- stronger yuan? damian: we mentioned this the other day, that we deftly don't want to see that. you're right, we are still at 0.25% year-to-date versus the dollar. that means china relative to all of its trading partners were up 8.5% year-to-date, so it has been a very big move. they certainly want to bring it back a bit. think what you want to look at his china credit default swaps. we've gone from 54 to 44 in not even a week. certainly, credit market surprising and let's credit whisk -- credit risk, and that is something to take note of. jonathan: earlier this morning we heard from bank of america's

mark cabana about balance sheet reduction at the federal reserve. this just dropped from citi, likely to drift higher next week. this may not come as a hawkish surprise to markets already pricing hikes next year. more hawkish would be discussion of the potential for an earlier move towards balance sheet reduction. not their base case, but this is the second time in the last hour that point has come up. lisa: the risk is elaborated by a mohamed el-erian column today talking about how the flood of liquidity by the central bank has pushed everybody into the same trade. you start to withdraw that liquidity from the market. what does that do in terms of a backstop to trades that have just been a given regardless of the fundament a backdrop? today, that is a risk in terms of volatility and exposure in the back half of 2022. jonathan: tapering is not tightening. is reduction tightening? remember when you were meant to ignore that?

it was just something to shake off. look through it. futures down on the s&p. good morning. for our audience worldwide, heard on radio, seen on tv, this is "bloomberg surveillance." ♪

>> we are entering a lower liquidity environment moving forward. we may >> >> have a bit of a bond bubble caused by quantitative easing. >> there's no way floor for rates because the fed has this hawkish bias. >> the is still very strong. >> the bedrock of everything is eroding in terms of its fundamental outlook. >> this is "bloomberg surveillance" with tom keene, jonathan ferro, and lisa abramowicz. jonathan: inflation data 24 hours away. from york city -- from new york city, for our