jonathan: from new york city, bloomberg "real yield" starts right now. ♪ coming up, inflation, the hottest since 1982, teeing up the federal reserve's next move as investors consider rate hike bets. we begin with the big issue. over to you, chair powell. >> is it changing materially? >> pushing the fed to accelerate tapering next week. >> keeps pressure on the federal

reserve. >> even if they double, the market is still looking at $200 billion in liquidity injections. >> they are not doing anything that will disrupt liquidity. >> one of the dangers that the fed continues to neglect -- that is really the issue for the fed. >> the fed doesn't damage the market by raising interest rates. >> they damage it when they invert the yield curve. >> it will come down to whether or not they see inflation remaining sticky. jonathan: joining us now is jim keenan, lisa shalett will be joining us later on. we also have zachary griffiths. the cdc reporting initial findings on the omicron variant. 79% of the first 43 cases are in fully vaccinated people.

mild illness. one vaccinated person hospitalized for two days, no debts. a bit of information. -- no deaths. what do you think this means at 6.8% in america? >> certainly very hot inflation, in line with our colleagues economic expectations. the data doesn't change anything for the fed. they have made it clear they will accelerate the pace of taper. our colleagues look for them to increase to 7.5 billion in mbs. that is less than what the market is expecting but the fed has made it clear they need to act. what they are doing is giving themselves the option to hike faster in 2022, should the data support that move. jonathan: jim keenan, let me get your reaction.

then we can talk about what it means for the fed further down the line. jim: this doesn't change much in terms of the midterm of fed policy. liquidity conditions are robust but you are seeing a lot of that inflation pulled through the system in different cohorts. you are seeing labor inflation, goods inflation, some of the supply and manufacturing inflation. we expect those to have a different duration to them. the fed will be patient with labor inflation if goods inflation comes down over the next couple quarters. we don't think it does much for the near term. the fed will shift its policy a little bit as labor and policy get tighter. jonathan: i hear from a lot of people that you taper aggressively, then you start thinking about rate in between. this week, people are talking about balance sheet reduction before an interest rate hike.

jim, how do you think about the sequencing of the fed? jim: i don't think they will start to shift the balance sheet. they may look at different measures to reduce some of the liquidity in the system, but i think that sequencing of taper is the initial part. i think they will balance the hikes with the data we will see in 2022. probably the most important thing is thinking about this fed becoming more data dependent. we have moved away from the extreme measures they needed to manage the crisis in 2020 during the pandemic. we are in a different state in regards to the pandemic and vaccines. there will be volatility with variants, but they will continue to be data-dependent, both on growth as well as what will happen with the variants like omicron, and how that may impact growth in 2022. jonathan: zachary, your thoughts

on the sequencing, how you think it lines up? zachary: we don't think balance sheet reduction is on the table for a good couple of years, if at all. if you think about the last time the fed reduced its balance sheet, it didn't end very well with the september 19 blowout in repo. they have taken some measures to reduce the possibility of that happening again. overall, we see the risk reward as imbalanced for the risk side. we think the fed will avoid that until well after it's begun its hiking cycle and perhaps longer. jonathan: lisa shalett joins us now. great to have you on the program, talking about inflation, cpi coming in at 6.8% in line with estimates. what is your read on that? lisa: this is not a new data point at all. we were expecting a big number, it came in right at the

consensus estimate of 6.8%. our concern at the minute is less about the fact that the fed is now likely to accelerate taper and bring forward the hikes in line with what has been discounted in the market already, and more about what is going on with the shape of the yield curve and the terminal rate. one of the things that appears to be discounted, given the current shape of the curve, is this idea that the fed remains behind the curve and that they will have to not only start hiking sooner, but once they do so, at a rapid pace. that rapid pace then undermines the cycle, which is why your 10-year yield is anchored down at 1.5%, terminal rate that is

about at the same level. that is we think there will be some surprises. we actually don't think that the fed will end up being as hawkish as is currently priced, and that while they may do one or two hikes next year, the data on inflation will moderate pretty quickly as we get into the second half. jonathan: jim, i want to pick up on what lisa said. 65 basis points on 2's. to what extent is this market pricing in to the extent people think? jim: lisa touched on it. the expectations, the fears of data points that will accelerate the fed and tightening cycle has certainly been in the market. you can see that across not just the rates market but also different parts of the equity market, spread curve.

i agree, we are starting to see some moderation of some of the inflation pressures that you see on the suppliers, transportation. we expect things like rent and housing to pick up into 2022, but that balance will be important. the market is going to have to digest that news, the interplay between the expectations of both growth and inflation and what the fed may do is going to create a lot more volatility around risk room human. -- risk premium. i don't think it will change earnings. a foundation for that is strong. the market will continue to debate, more volatility in risk premiums into 2022. jonathan: zach, what are we priced to? 2's at 65. what is your read on that? does that tell you that this market was already primed for some hot inflation? zachary: definitely seems that

way. when you think about the inflation print relative to economic expectations, it was right in line, if not stronger. the market expected a lot more. what we take away from this is that inflation is hot, we expect it to remain hot through the first quarter of next year. as far as the fed's reaction function goes, we think an accelerated taper is in the cards next week. but we think the fed will be slow to hike rates. you see the possibility of a rate hike in march. we think june is even too early. we look for two hikes next year, and that is consistent with a fed that is looking to remove accommodations slowly, as some of the issues the economy is facing now is not well-suited for the fed to deal with with its traditional tools. jonathan: lisa, i want to come

to you on the markets. your thoughts on what we are priced for. you talk about hawkish pricing in the market but i see 2's at 65. the front end has not built up much. lisa: what we are anticipating is that the 2's may come in a little more and be get some steepening in the curve. what we will see is a fed who is not just focused on inflation. let's remember, they are after this idea of "maximum employment." i think their incentive to try to extend this cycle, and therefore we will hear the word "patience" again. they will want to wait for that labor force participation rate to get back up. they will try to balance this.

in so doing, that 2-year treasury may be comes in, settles around 45, 50 basis point range. we have two to three hikes, but it is the 10-year yield and the longer end of the curve that starts to move up as we see a longer, stronger cycle, which is in our forecast. jonathan: coming up on the program, demand for junk remaining hot. the primary market recording its busiest day in three weeks. that conversation is coming up next. this is bloomberg. ♪

jonathan: from new york city, i'm jonathan ferro. this is bloomberg "real yield." sales of new bonds topping $10 billion this week. the bank of nova scotia meeting to me with the largest euro covered bond of the year. u.s. junk bond sales spring back to life with two debut issuers coming to market. back with us are lisa shalett, jim keenan, zach griffiths. anything to worry about from credit? you are there every day. what do you see? jim: credit is the more important part of the markets right now. it's a pretty solid foundation for credit markets the last couple years, fundamentals have

remained strong. general deleveraging that you have seen across the markets as you see the recovery in earnings was pandemic. next year, really solid foundation from the demand side of the equation, both at the household level and business investment as they start to compete. you will see some volatility but dispersion is a bigger story. that is volatility caused by some of the cost inflation in some sectors. that will hurt some sectors, benefit others. fundamentals are strong. as long as you have a stable growth profile and good earnings picture next year, a pretty solid foundation for credit. returns will be tighter next year because of the valuations coming in. jonathan: zach, do you agree? born is good, isn't it? zachary: born is good. we think things could get

interesting into 2022. our colleagues are calling for spreads to widen a little bit. the backdrop for that is tightening monetary policy at least on a relative basis. our economic forecast remains strong, looking for economic growth, 4.4% in 2022. while we could see some spread widening, volatility across markets, the underlying economic fundamentals are strong. that will remain the case through 2023. jonathan: does tapering make a difference? morgan stanley said tapering is tightening for the markets, will be to lower valuation. lisa, i know that you work closely with them. does tapering actually matter to risk asset? so far, not much at all. lisa: our perspective is that liquidity in the market absolutely matters. while we are not yet at the

point of reducing the balance sheet, the reality is, there is less liquidity being injected. our sense is that you will start seeing pressure on valuation multiples. you will start seeing pressure on costa capital and on rates. it is just a question of timing. at the end of the day, we have seen this playbook before to a certain extent. the experience of 2018, 2019 has certainly prepared markets to an extent. but we have also had a certain level of market resilience that has been unexpected. that is really the last leg, where we think all stocks need to discount the reality of what is going on.

we think that we will see that in the first quarter. jonathan: what should i worry about, tapering or the balance sheet reduction? what is the difference between the two, and do we get the letter? jim: i don't think it's important to think about tapering or the balance sheet when it comes to asset prices. how much liquidity is in the market? lisa touched on this before. we could spend the whole show debating what we think the fed should do. clearly, it is a more complex environment as you start to mature in the growth profile coming out of the pandemic. i think the markets will continue to debate what the fed or central bank policy should do globally relative to the inflation print, direction of rates, growth. that will create a volatility. risk premiums should go up. the range of outcomes will be more broad and to the downside.

whether it is tape or balance sheet production, which we don't think is on the table. but other measures will tighten the end of the business cycle. that will be a bigger risk to both earnings projections as well as the risk premiums you put on that. that will play out over the course of the year. you will see volatility spikes. i don't think it changes the direction, earnings are stable. but the market volatility and dispersion between industries is broad. a pretty good opportunity next year. jonathan: zach, final word. zachary: the point on liquidity is a big one. it even makes sense for the ritz call when you think about the fed reducing asset purchases. that will have a bigger impact on the tips market. that is my view think real yield will rise in 2022, a part of why we think yields will rise but less so than front end yields. jonathan: coming up, the week

ahead, including great decisions from the biggest central banks. from new york, this is bloomberg. ♪

jonathan: live from new york city, i'm jonathan ferro. this is bloomberg "real yield." coming up, u.s. ppi and retail sales. tuesday and wednesday, a host of central rate bank decisions with the ecb, bank of england, bank of japan all the policy decisions. lisa, we have talked so much about the federal reserve. can i get your thoughts on the rest of them? lisa: double markets will continue to go slow. that is one of the issues that may be underappreciated, the extent to which u.s. dollar

strength in the short-term is going to continue to assert itself. that, in and of itself, will be a deflationary force given the role in consumer imports of currency prices. that strong dollar will really help bring that cpi under control. this relative dispersion in central bank policies is at the root of that. jonathan: do you think that can make a difference next year? dollar index just short of 96. jim: i agree with lisa. the trend will continue to be higher. that goes more into the strength and stability of the u.s. growth profile. i think that will continue to lead into both the perception of the direction of travel for policy at the fed, as well as providing support on the dollar side. i don't think it makes that big of a difference if it stays

stable in that direction with regard to the underlying asset prices ross spreads or equities. jonathan: zach, do you have a call on the ecb next week? zachary: we are looking for the ecb to end its pandemic emergency program, but we expect them to offset that by boosting the real asset purchase program. the key takeaway of what we are looking for is the ecb will move very slowly and much slower than we expect the fed. we think that is a theme for the bank of japan, too, one of the reasons why we expect the u.s. dollar to keep appreciating in 2022. that is baked into our forecast, expect inflation to remain elevated even on the back of upside in their term. -- near term. jonathan: em has made some

massive moves. next week it is all about developed markets. the federal reserve on wednesday. then the bank of england and ecb. let's start with this one. faster taper announced next week. yes or no? do we get a faster taper announced next week? jim: yes. lisa: yes. zachary: yes. jonathan: a hawkish surprise or a dovish surprise? we had bill dudley early on this week talking about a shift higher in the 24 dot from 180 to 250. are you expecting a hawkish or dovish surprise? jim: dovish relative to expectations. zachary: dovish. lisa: dovish.

jonathan: rate hikes next year, 1, 2, three, or more? lisa: two. zachary: two. jim: two. jonathan: jim keenan, lisa shalett, zach griffiths. from new york city, we will see you at the same time, same place next week. this was bloomberg "real yield." from new york city, this is bloomberg. ♪

mark: i'm mark crumpton with bloomberg first word news. the first omicron cases in the united states were collected

mostly in vaccinated people who experience mild illnesses with only one hospitalization and no deaths reported so far. that is from the centers for disease 75% of the 43 confirmed cases of omicron are in those that are fully vaccinated. a mouse bite is at the center of an investigation into a possible new covid-19 outbreak in taiwan, after a worker at a research institute was confirmed as the island's first local case in more than a month. the health minister said the worker tested positive after being bitten twice by an infected lab mouse but that further investigation is needed to determine whether the bites were the source. president biden has assured the ukrainian president