>> you got this beast called inflation out there. how many stabs does it take to slay it? >> it is not a healthy consumer. >> we do not get strong growth without a healthy consumer. >> we are seeing very high inflation rates. >> 12 months from now, cpi is probably closer to a 5% figure, not the 3%-ish that consensus is looking for. >> this is "bloomberg surveillance" with tom keene, jonathan ferro, and lisa abramowicz. tom: good morning, everyone.

kailey leinz in for 'bramo today on a most different thursday. in 30 minutes, the nation receives an inflation report. jonathan: the range of estimates anywhere from 7% to 7.6% at the high-end. 7.2% is the median. two-year yields pulled back a little bit, close to the highs of the last 12 months. tom: the quality of the conversations as we see in the opening, rebecca patterson, the pros are looking forward, and it is foggy. as lisa shalett says, it is hazy out there. jonathan: march, the fed is ready to move. somewhere, maybe they keep going. after that, who knows? tom: kailey leinz joining us today, giving perspective on 1982. the grateful dead, 1982, alabama get away with their opening song. it was great.

whether it is alabama, washington, this nation is gripped by higher inflation. kailey: if we do get an upside surprise, how to the message around inflation? it is not reading through yet. it is something that has consistently dodged this presidency. tom: forget about the headlines. what do you see of industrial america? kailey: it comes back to inflation. sales growth incredible he strong. jon is going to catch up with the pepsi ceo later today. tom: on one of his other

properties. that's very good. a cuba libre with pepsi in it to get through the morning. jonathan: two yields kept creepi higher. 10 year yields came in a bit off the back of a really strong auction for 10 year supply america. flatter curve, unchanged, but how far will they push it? what is the destination? questions we don't know the answer to. tom: i can't talk about u.s. data on curling, but i can say the tops lost -- the tots lost. jonathan: you cannot even share the score of the curling? i have not watched a minute of it. yields come back in on tends to 1.93 3%. early this week, a couple of days ago, very close to 1.97%. 2.25% is the call from goldman

year-end this year. tom: very good. brent crude, $92.29. we see the president talking with saudi arabia. as we talked to ed yardeni last hour, now on asset allocation, lisa shalett joins us, chief investment officer at morgan stanley. good morning to you. how will this report change morgan stanley allocation? lisa: i don't think we are going to react to this report at all. i think we are really looking to see what the market does. one of the things that has an very impressive to us is that market measures of inflation expectations have not moved. in fact, if you look at 10 year breakevens, they have been extraordinarily stable, somewhere between 2.45 percent

and 2.55% for the last year. the fives, the five year breakevens, r may be up to 2.85%. to echo rebecca patterson, that may be nowhere near where we really are over the next couple of years, which is a lot closer to 3% to 5% then we are necessarily to 2%. so the fed may be acting now, and global central banks may be reacting, but the markets are giving them credit for success and saying that expectations out the curve will squash inflation. jonathan: you have your doubts. how are you playing that the moment? lisa: from a portfolio perspective, we have been talking about inflation protection for quite a while. obviously part of that call is avoiding the middle of the curve in fixed income and barbelling

it, but with real assets, we have been using real estate. we have been using them for structure assets, particularly linked to energy. it had small allocations to commodities, obviously. tips is not one of the places we are hiding right now. we think tips are mis-valued, and folks have filed in and you're not really getting paid the right risk me right now. jonathan: just trying to square a couple of your thoughts at the moment. you think what is priced in for the near term for the fed funds rate is too aggressive, but are you suggesting that it is not that they won't do what is needed, or rather they won't do what is needed because the market thinks this is what is needed? can you give me your exact thinking on that? lisa: i think the issue is that right now, the market is

assuming or pricing that this is all a rate hike story, and we just don't think it is going to be quite that simple. if you are really an economic student as you and tom are, you know milton friedman is not completely dead. money and liquidity matter to inflation. our sense is that we are going to need to see the fed get serious about guidance on balance sheet action that they are going to take to withdraw liquidity from the system if they are truly going to slay inflation, and problem is really not getting us to five-and-a-half hikes this year. i think the problem is juggling with two hands and may be doing three or four hikes at the same time that they are draining $500 billion off the balance sheet. kailey: we talk about your allocation in terms of within the equity market earlier.

i am wondering, and this kind of environment you are describing, what role cash plays in a portfolio here. kailey: cash is very tough -- lisa: cash is very tough because you want to have a maximum allocation to cash, but for us, maximum is somewhere between 5% and 10%. war than that, you are creating a huge after inflation drag because even though front-end rates have moved up, they are nowhere near that potential 7% inflation. so while we have recommended a little bit of cash to be opportunistic, to be able to stock pick our securities across the volatility we are seeing, you don't want to create a cash drag in your portfolio by really breaching that 10% level. tom: i want to go back to the qt dynamics. this comes off of ellen zentner's work in the piece you did about 10 days ago.

i thought it was truly outstanding. let's cut to the chase. can our hikes or hikes be efficacious if we don't do a qt strategy? my answer would be they are essentially useless unless you put a horse before the cart and identify the qt strategy. lisa: i am completely in your camp. this is where we have tried to caution our client that was think the market is being overly simplistic in pricing five-and-a-half hikes. the issue right now is liquidity is so ample, and it manifests everywhere, not just in the potential overvaluation or asset bubbles we are seeing that could be developing in both stocks and bonds, but we are seeing it in real estate, seeing it in things like crypto assets and some of the other things. it is not at all clear that

another 100 basis points on the front end of the curve are where the problem is. this has not been a debt fueled boom. this has been a demand fueled boom, where it is demand and supply that are out of joint, and that demand is not being credit driven. simply changing your cost of capital may not slay the dragon, as they say. jonathan: that final comment is so important. we appreciate your time. lisa shalett of morgan stanley, thank you. we talked three hours a day. i learn something every week we speak, tom. this is the line that comes from lisa. "only when rates start to rise and the fed provides additional guidance on balance sheet reduction will stocks better reflect the new reality." tom: it is the messaging. this is all original territory. i don't want to play pseudo-phd here, but to ed yardeni and james tobin, you've got to

message the message, and we have not seen that yet. we just haven't seen qt messaging yet. jonathan: lisa's point at the end that we don't really know the channel for how interest rates will work this time because this has not been a credit fueled growth story over the last 18 months. kailey: it will make it a tightening cycle unlike any other. it is only going to be when that -- when we get that balance sheet reduction. they have said they want to lift off first, but what is the time window? jonathan: inflation data 19 minutes away in the united states. weighing in on that, tom porcelli of rbc. mckee leading the coverage at 8:30 eastern time. your data just around the corner. this is bloomberg. ritika: with the first word

news, i'm ritika gupta. russia and belarus are beginning their largest military drills in years today, being watched by the u.s. and others over increasing tensions in ukraine. the protests branching -- the protests blocking freight traffic from the u.s. to canada forced ford to temporarily shut a canadian factory and will reduce another plant to low capacity. new york city is starting to get back to normal. restaurant reservations are getting harder to come by, and today, new york state is dropping its mask mandate for those in businesses. the number of covid cases statewide has plunged 93% from its peak during the omicron stage. twitter sales rose 22% in the fourth quarter. the social network's add business held up despite changes

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♪ >> i actually think the market is stabbing a little bit in the dark. you've got inflation that is out there, and how many stabs does it take to slay it? right now it is five, but we really don't know. it might take two or three to do it. it might take six or seven. it is not something we are going to bet the house on. jonathan: the median estimate dancing around. now 7.3%. 7.3% is your median estimate. yields lower by a single basis point, 1.92 68%. futures unchanged. euro-dollar essentially unchanged. we at some weight to crude,

$90.70. tom: it is upon us, and we are honored that michael mckee joins us with all of his perspective on my new of the data, but also the history of the moment. how is 7% inflation now different than 1982 or 11% of only 12 months before that? tom: the biggest difference is that that ash michael: the biggest -- michael: the biggest difference is at that point, inflation was coming down. the construction of the problem is completely different in the sense that a lot of the way they do the cpi has changed. the housing part is the sister took away they come up with it is different. oil prices so much higher these days than they were in those days. the one thing you could probably say is the same is there was a supply problem in the 1970's,

when there was the oil embargo. tom: you will parse the inflation, but the historians and economists say what matters is the goods dynamic versus the surface is dynamic. when are we able to see this in this report? michael: we will see it in this report. they will have the latest numbers on a year-over-year basis showing the difference between the two. goods prices were up about 37% over the past year because we are buying so many goods because everybody was stuck at home. services prices rose 4%. there's a big difference there in the way we spent our money, which changed the calculation for inflation. kailey: talking about the composition of this inflation, which forces are likely to take the most notice of the federal reserve? i am thinking selfishly, as someone who has to move in a couple of months, of rent. michael: the fed knows that rent

s -- that rent are in there. home so prices went up 70.5% last year, so that is going to keep feeding into the way it is getting into cpi and keep prices higher. they also know that the fed interest rate moves are going to affect the real estate market more quickly than many others. we have already seen a decline in home sales, a decline in mortgage applications. kailey: worried about it on the rent side, and also thinking i'm going to buy a house now, especially with rates going up. talk about how the federal reserve is looking at this. you have pointed out it is not just about this data we get today. there is another read on inflation prior to the march meeting. do we see the march move, 25, 50 basis points, decided today? or do we have to wait until then to see if it is on the table? kailey: we will have to --

michael: we will have to wait. get a chart i brought along, if we have it here. basically, you put together the fed forecast and where inflation is, and you note that the inflation levels are way above where the fed thinks we will be at the end of the year, but the important number is where the market thinks we will be at the end of the year because inflation expectations will be what the fed is watching. after today's number, watch for the market expectations for inflation. if they don't start rising significantly, the fed has no reason to look at 50 basis points. tom: lisa shalett echoed what rebecca patterson said yesterday. this idea that we come down, we don't come down at 2%, to adam posen 3%.

patterson suggests a blended estimate of 2.5% -- of 5% inflation. michael: it will depend on whether wages are really getting into that. a lot of people trying to calculate this. steve stanley coming up with something in the threes. the problem is inflation is so high, to get down to where the fed thinks we will be, you would have to have inflation fall off a cliff in the next couple of months. mathematically, to get it to 3% or 4% is a little more realistic. if that is the case, the fed probably says we are soldiering on. but it is also true that we will have a lot of things happening between now and the and the year that could influence what is going on. we don't know what is going to happen with ukraine. we don't know what is going to happen with employment and whether rig -- whether we are going to see people still pushing for wages.

tom: to see this statistic, 7.2% on the screen, is surreal. jonathan: without a doubt. when does the calendar start to become the friend of this administration? at what point in the summer to the base effects start to kick in? michael: the base effects should start to have an impact in march, april, may. how much of an effect will it have? that is an open question. it will impact the numbers and push down them -- push down on them, but enough difference to have a political impact, that is a good question. it goes back to what if we get into the threes or fives or something like that. would it make a difference in the way that people are looking at the biden administration? that is going to be hard to tell. jonathan: we will break down the number in about six minutes. let's talk about the shape of the curve. twos up 52 basis points. tends up about 42 basis points

-- tens up about 42 basis points. tom: since mckee walked into the building, it flattens. we go from where we were a day go down to 55 basis points. for those of you that this is greek, the pros are watching this. do we see curve flattening dynamic at the two-year or dynamic at the 10 year off of this report? jonathan: looking at treasuries this morning. the highs of the week are the highs of the year. kailey: we thought we would get a taste of that nice round 2% earlier this week. talks of convexity hedging kicking in, pushing the yield up to that number. does that data today start to make a difference in this bond market and get us across that threshold? jonathan: let's get your final look at this market before we get at that inflation print. your equity market unchanged on

the s&p 500. yields in acing go basis point on tens. on twos, down a basis point to 2.36%. dollar, 1.1345. from new york, this is bloomberg. ♪ ♪

jonathan: seconds away from inflation in america. equity futures unchanged. bond yields down one basis point on tens. with your inflation data let's cross over to michael mckee. michael: it comes in a little bit stronger than we had anticipated. we get .6% of arise in january. over the last 12 months we are at 7.5%. the market consensus for 7.3% too low. on a poor basis we are up .6%. that is better than the core estimate. we are at 6% for the court on a year-over-year basis. i might point out that raphael bostic said earlier this week

that he is watching the month over month statistic because he wants to see the trend. this trend is no friend to the fed. if we got this again next month you could probably start talking about the possibility -- the labor department says food, electricity, and shelter the largest contributors. food up .9% after a .5% rise in december. energy almost up .9%. electricity was the big gainer there. gasoline and natural gas did go down but we know they have gone up .6%. that is bad news on the horizon. i will let you do the markets. let me find the goods. tom: do the markets. jonathan: i will run through the price action. up six basis point santos go to

1.43. on tens, up to 1.96. an upside surprise on inflation. nasdaq 100 futures down .9%. s&p 500 down .5%. tom: all you need to know, the two year yield up six basis points, the 10 year yield up only two basis point. interesting to see some of the more sophisticated spreads the pros use, will they show inversion. to me the number one thing politically as they will want action at the white house. how does the white house convey to the fed they need action? jonathan: the fed has to go and they have to get a move on. we have one more inflation print before the march decision. march 10 and then the decision on march 16. the move is pretty clear. if i told you upside surprise

this is what you would say. two up to 1.43 come the dollar stronger one third of 1%, and the nasdaq down more than 1%. mike mckee, you have had a second look, what is your take? michael: service prices are up 4.6% while durable goods prices are up 18.4%. we are still buying more stuff than we are services. the question is when did that change? maybe it is changing in february ? maybe is changing with the mast mandates going away, people feel better about going out to get a drink at tom's local hotel. for right now it is the amazon delivery guy that has pushed the prices up. tom: inflation-adjusted weekly, average hourly earnings have now fallen below the depth of 2008. we have a more negative weekly

paycheck than we did during the financial crisis. as bloomberg economics points out, we have a huge rise in average hourly earnings earlier in the pandemic. we seem to be giving that up. michael: early in the pandemic you cannot use those numbers because of the composition affect, but we are seeing people get raises and that is making a difference. it is still negative, real average hourly earnings of 1.7% in january -- down 1.7% in january. you are below the level of inflation. but they were down 2.4% in december. that is one trend better than some of the races people are getting, making up some of the ground we have lost in the last year. kailey: we talked about the market reaction. swaps now so in full point from

the federal reserve price did. talking about the composition of that, 25 or 50, with inflation this hot, how is the fed likely to look at this? michael: they will want to think about whether a 50 basis point move would make a difference at this point. it is hard to see 50 basis points from zero making a big difference except to shock the markets. if the markets are shopped, what is that going to accomplish? does that mean we see a big drop and people lose confidence as markets lose confidence in their wealth and stop buying stuff. they want a way that issue. at this point they've not said anything endorsing 50 basis -- 50 basis points. many of the bed officials have said the opposite. you would have to see them start a campaign to suggest this is going to be coming. if you do 50, then you wait in

make, if you do 25 may be you go again in make. jonathan: the fact this is even part of the conversation tells you the central bank is behind the curve. the fact they are still doing qe when starting down the barrel of 7.5%, that is why the joseph: year yield is up to around 1.45. on tens we reached 1.98 briefly. tom: the 2-10 spread, valentine's day, let's call that the beginning of the pandemic, 15 basis points, .1 5% above and inversion. we are really getting back to that at 52 basis points this morning. project lead with his expertise on the labor economy of america, thomas burr saly -- tom porcelli joins us. how much of this new inflation is wage inflation and what does the fed do about it?

tom p.: here's what i think is very interesting about the inflation report in particular. what we need to keep in mind is those weightings, i think they will haunt inflation for the next few months. you now have a bigger weight on goods. as we have been writing about for quite some time, the thing that is doing most of the driving from an inflation perspective -- services are certainly starting the process of -- this is a goods dominated inflation backdrop. what is interesting is the new waiting. it is now 1.5% more weight towards goods, which keep in mind, this is an interesting thing in the context we are a service dominated economy. that is our beasley reflection of what happened last year. -- that is a reflection of what

happened last year. people were spending extra money on goods, not services. if the tradition from goods to services ending is slower to evolve this year, and we think that will probably be the case, that means you could continue to see additional upward pressure on inflation because of this new, bigger weight on goods. it is an interesting theme not a lot of people are talking about. here's the punchline. while i think that will be the case for the next few months, where you will see continued upward pressure for goods, i think what will happen this year is the transition will happen from people spending a lot on goods and shifting to services. what will wind up happening as the year progresses is a new weight in goods is actually acting as an anchor around goods prices. as people shift from goods to services we think that will wind

up putting notable downward pressure in the space. that is the anatomy of what will be happening over here. in the medium there is upward pressure. to not answer your question directly, i think that is the thing doing most of the driving from an inflation perspective. the consumer in is it -- is it a great spot from a wage perspective to drive spending. we live in a nominal world, whether that is a better or worse idea, so i think that gives the consumer some confidence to be able to spend. you will see this transition away and i think goods prices will actually start the process of slowing meaningfully. give that a handful of months by think that is where we are going. jonathan: get me to march because we need to do march 1. the fed meets. what is on the table and what happens with the dot plot? tom p.: i think you're looking

at probably four hikes this year. the fed will go 25 to start this process off. i love that the top keep saying they want to be humble, but in all frankness, they should have had that last year. what they need now this year is a hefty dose of patients. -- of patience. inflation will start the process of slowing. at a minimum the base affects will ease into the year. if i'm right about the transition from goods to services spending and that taking the heat off of the siegler component that now has a bigger weight, i think if they have patience they can avoid a 50, they can avoid going every meeting over the balance of the year. that is for jay powell to decide. jonathan: -- kailey: where does

the balance sheet come into play? robert: -- tom p.: i will try to keep this part of it tight. qt is not the mirror image of qe. with huey -- with qe you know the duration the fed is pulling out the market. with qt we do not know the amount of duration added back into the market. the fed starts the process of unwinding the bounce seat to create a funding gap. it is the treasury that decides what duration will be added back into the market. if the treasury will meet that funding cap loading up on bills, than there is no duration added back into the market. bills relative to total outstanding is pretty small. jonathan: i have a break did hit. -- i've a break to get to. are you saying this gets worse

before it gets better? tom p.: i do not think there's any question about that. i think you can live with it being a little worse because by the end of the year it be quite a bit better. jonathan: tom porcelli, we appreciate you, we always do. tom k.: i will go to david rosenberg who is saying everybody calm down. they will parse each item of inflation led by the elephant in the room, which is maybe it is fuel, maybe it is food. i will suggest it is the rent analysis we will see in the coming days split out to the goods and services dynamics. jonathan: a couple saying the same thing, hike, hike into summer and then pause. this seems to be the consensus view this gets worse before it gets better. kailey: that is what the market is pricing, full percent higher in terms of where the rate will be at the end of july.

the question becomes the move in march. the market says the odds of 50, 37 basis points priced in. jonathan: look out for the fed speak. equity futures demo nasdaq by 1.2%. a tight lift in the front end of the yield curve. two back to 1.40 2, 10, 1.96. she is known by some of you by the name queen of rates. priya misra joins us at the top of the hour to run you through to the opening bell. from new york city this is bloomberg. ♪

>> we are going through a very tough time. our prices are torn up.

it is hard for those in the middle. tom: joseph stiglitz with his great support of the show over the years speaking a liberal line on the prescription for america given new inflation and the challenges of the pandemic. good to speak with joseph stiglitz. now we will digress. when you go to brown stevens, all you need to note is fancy real estate in new york. we will talk to bess freedman, their chief executive officer about the real world. you have a listing on 88th street, and not the fancy part of 80th street which is one bedroom, one bath come into kitchen i cannot turn around in and it is $529,000. my question to you, and this goes with all the great work you do nationwide with brown harris stevens is to we have the income levels to afford the new real estate price you are touting?

bess: it is so nice to see you. not as expected that 2021 would perform the way it was in real estate in new york city. it came back with a vengeance. prices have gone up. remember, we are in a buyers market. people made a lot of money during the pandemic. there is a sense of safety, there is a nudist ration, a new mayor and governor -- there is a new administration, a new mayor and governor working together, so there a lot of things happening in new york city. it has turned around, but pricing with disinflation talk, the cpi going up is not ideal. we have less power in our money. the trees do not grow to the sky. tom: this is really important.

is the lack of rising incomes one of the constraints on surging real estate inflation, or is that something nobody worries about because there's so much money sloshing around? bess: there is definitely a lot of money sloshing around. prices have picked up but not incredibly in new york city. people have come back and they are here and they are changing and moving around. inflation pieces not the thing that is wearing people in new york city. the focus is making sure crime is under control, we are focusing on getting people back to work. the market did not pick up so much in new york city. it is the other regions like connecticut and palm beach, those markets you saw prices go up and alice applied changes really short. -- and now the supply chain is really short. kailey: because we are so

focused on the inflation data, we will have to see some reaction on the monetary side. we are expecting the federal reserve will raise rates. when that translates through the higher mortgage rates what effect will that have on real estate across the country? bess: rates are still historically low and i think it is good they increase them and they go up once or twice. it will be good because you cannot keep moving at this pace. this is part of the reason prices has gone up. it cannot be champagne and caviar forever. we have to slow down a little bit. we need to find a man to intersect in a better way with other regions so the market will stay fluid. inflation, we have dealt with inflation in the past, we have dealt with rates going up, what we cannot have is a paralyzed market from something like the pandemic or 9/11. that is when markets freeze and that is when people are scared. we can manage inflation.

kailey: there is also the fiscal side of the equation and that is contributing to the debate we are seeing. a lot of what we saw might come to fruition under the lighted administration -- a change in the salt cap has not. bess: they are still discussing that. we would like to see that increase from $10,000 to $80,000. the good news is we have a new city council, a new speaker was much more moderate, and we are hoping the legislation in albany will be much more reasonable economically so we do not drive people out of the state. we want to create tax policy that is seated in economics that keeps people here. we need rich people here. we want them to be here. tom: bess freedman with brown

harris stevens on what we are all talking bout with inflation and rent and ownership of real estate nationwide. we do have markets on the move. we are watching the tenure up to 1.98%. we are on the 2% watch there. i would notice the deterioration in equities. the vix moves down. kailey: obviously that is concentrated in the nasdaq 100 come those features down 1.5%. calls into question when we see yields moving higher. 1.98 on the 10 year. getting very technical at 8:53 on a thursday morning. his 2% and inevitability at this point? the move in the short end and inevitability. the curve is still flatter. tom: let me translate what kailey just said. convexity hedging is the

accelerating force as people cover trade. the answer is we may get an acceleration to some of these yield moves. on the 10 year yield, the two 10 spread comes in three basis points. of 49 would be something to see. the real deal -- jon ferro has to do the show over the weekend. kailey: we will watch that 1:00 tomorrow. the dollar stronger as you might expect. the market is exacting exactly how you think it would to a hot inflation print. also in terms of how it is pricing the federal reserve, now full percentage point of hikes expected by the end of july. tom: pit goes out to the fed meeting. we have not even begun to frame march inflation to begin are at in april. this is so much like a return to the 1980's for me, but as we heard from many guests it is a

difference. we are watching the benchmark yield trying to move higher. kailey: something else we should watch his weapon of response when they get from the biden administration on these figures. the impetus is on the federal reserve. do we hear anything from the biden administration about 7.5 percent consumer price inflation? interesting to see if we get any commentary. tom: michael mckee parsing the very complicated inflation report. we heard from tom purcell like, to me it will be what we heard from bess freedman, real estate is the biggest part of my paycheck. kailey: i put so much of my money -- my paycheck towards rent. tom: thanks for listing on bloomberg radio. on this moment as we roll over

toward different properties on bloomberg surveillance. it is about the 10 year yield. rounded up, 1.99%. good morning. this is bloomberg. ♪

jonathan: upside surprise on cpi and equities heading south. from new york city, good morning. s&p down .9%.

"the countdown to the open" starts right now. >> everything you need to get set for the start of u.s. trading. this is "bloomberg: the open" with jonathan ferro. jonathan: we begin with the big issue. inflation in america. >> inflation. >> headline inflation. >> on the consumer front. >> eating into consumer confidence. >> i am calling q1 inflation readings the darkest hour. >> let's bring the fed into the equation. >> the environment is one of tightening. >> there should be no ambiguity. >> they have a window -- >>