mark: welcome to the bnn and bloomberg audience. i am mark crumpton with first word news. the ukraine promised the u.s. it would not use long-range weapons inside russia. speaking at a news conference alongside the nato secretary-general, the secretary of state antony blinken said this is the right step for ukraine. sec. blinken: this morning, president biden announced a package to arm ukraine with advanced weaponry, precisely

what they need to defend themselves against russian aggression. that includes rocket systems so they can strike targets on the battlefield in ukraine from longer distances. mark: the secretary of state also said we are looking at "many months of conflict between russia and ukraine." the u.s. and taiwan have unveiled a fresh blueprint to deepen their trade relationship. the nations are focused on ending forced labor at harmful policies and practices. the u.s. trade officials say the first meeting will likely be held later this month in washington. hong kong is bringing back one of its toughest covid zero measures, forcing patients with mild infections to quarantine in a centralized location to tame spread. since february, most mildly ill patients have been ordered to stay at home. an outbreak spiraled into the world's deadliest variant

sparked an exodus to singapore, as damage to hong kong's standing as a global financial center. another 33 missing after hurricane agatha ripped through mexico. the governor said today the deaths were mostly caused by overflowing rivers and mudslides. he urged residents remain indoors as much as possible as rain still pounds the region. the category two storm marked the eastern pacific hurricane season. global news 24 hours a day on air and on "bloomberg quicktake." powered by more than 2700 journalists and analysts in over 120 countries. i am mark crumpton, this is bloomberg.

jon: i am jon erlichman. welcome to "bloomberg markets." romaine: and i am romaine bostick. starting the new week with declines on the s&p 500. back down below the 4100 level. we heard commentary out of jamie dimon and other prominent people raising concerns about the pace of growth. one of the few price spots is an oil and gas. that is the flipside and a reason everybody is worried about economic growth. the bid into the dollar on the day, spot index up 6/10 of 1%. the big moves are not in the equity or fx market, they are in the treasury space. another monster day for the two-year yield, up 10 basis points on the day. jon: as we watch the course for higher interest rates in the u.s. we have news on that front in canada with the bank of

canada pulling the trigger on higher rates. the third time we have seen it this year and the second consecutive meeting where we have seen a 50 basis point jumble height moved by the bank. in addition to that, in their statement today the bank of canada leaving the door open to more forceful action. they have another meeting in july and someone during if there might be more aggressive to the tune of 75 basis point hikes. let's get more perspective. vinayak seshasayee from pimco joins us now. we have that manufacturing data for the united states. it was a reminder of the inflation realities in the u.s. wherever you look you have central banks fighting higher prices. what is your perspective? vinayak: the bank of canada was largely in line with what we expected. 50 basis point rate hike and

acknowledgment that accelerated tightening would continue. that is similar to what we are seeing globally across most central banks. we expect most of the central banks, they have markets to expect aggressive tightening. markets have priced in meaningful tightening across both canada and the u.s. the next several months. so, we think the central banks are in a phase they are behind the curve, but at the same time, economic growth is strong and the economies are firing on all cylinders. you look at canada, pent up demand from reopening, the commodity boost is there. it is a good time for banks to catch up and get interest rates to what they regard as the neutral range. it is between 2% and 3%. romaine: it will be interesting, we get a fed meeting in a couple of weeks where we will see that update of projections that

should give us more guidance as to what they think the neutral rate should be. when you hear commentary out of the bank of canada that suggests they might be more aggressive with their rate hikes, not just 50 basis points, and you hear the commentary in the u.s. among the fomc members debating whether you stay at 25, 50, or something with more shock. do you think the central bankers have the stomach, the fortitude to be that aggressive in the face of, right now, soft markets? vinayak: that to us was the one surprise of the statement. the illusion to be more forceful would be 75 basis points. we think central banks have the stomach to do it if necessary. our baseline is that it will likely not be necessary and continuing the pace of 50 basis points over several meetings would be sufficient to bring inflation down, if not quite to

target, something quite close. we expect into the back half of the year, especially fall and winter, we will see tighter financial conditions, these hikes being delivered bite into the economic growth. we are expecting a more meaningful slow down in activity. jon: one of the key differences between the u.s. and canadian markets is the level of household debt. going to the financial crisis of 2008, over the past decade canadians have taken on an awful lot of debt. there will be sensitivity to watch when it comes to how quickly rates go up, what happens in the housing market and the canadian economy. vinayak: absolutely. the canadian economy is more levered to interest rates than the u.s., but that is not necessarily a bad thing. it means in this era of high inflation a pace of quick hikes will constrain consumer spending in other areas, whether it is

durable goods, services, and that means it will be effective in slowing down inflation. that said, the bank of canada has to watch out for a risk of a meaningful shock to the housing market. but we do not think that is likely. we still think it is more likely that the sharp hikes will lead to growth slowing down or stalling but not necessarily falling off a cliff and collapsing. romaine: i have to ask about positioning, where you see ourselves right now in the business cycle and what you find attractive based on what we know now. vinayak: absolutely. we at pimco have set the business cycle is moving along much faster than the previous cycle which took more than 10 years. but we do think we are getting into the late stages of the business cycle. it does not mean we are in the final innings, but when you look at measures like the output gap, unemployment rate, what the

yield curve is applying several months from now -- is implying several months from now, we are getting closer to late cycle of an early cycle. in that environment we have continued to maintain a neutral to slightly defensive stance on interest risks. while we have come a long way in bonds there is more volatility ahead. where we are specific is we are seeing opportunities open in the high quality sectors of the bond market, particularly higher quality corporate credit like financials. we continue to think the residential and commercial real estate market in the u.s. could offer real opportunities. and we remain cautious with respect to lower quality segments of the market, in particular issuers that have taken on debt that have levered up beyond what may be

manageable. especially if you were to get a downturn sooner rather than later. we are being very cautious in how we approach the high-yield market and being very diligent with the short selection. romaine: we are going to have to leave it there. vinayak seshasayee ticking off the show with the bank of canada. and the conversation coming up about the federal reserve. it is triggering the $8.9 billion balance sheet kicking off today. steven kelly will be joining us in a bit. this is bloomberg. ♪

romaine: this is "bloomberg markets." i am romaine bostick alongside jon erlichman. i lot of talk about the fed raising rates and potentially pausing in the hiking cycle. bill dudley says that is not going to happen. the fed has to keep raising interest rates to curb inflation and he dismisses speculation the fed could hold its fire in september. he spoke with bloomberg earlier. bill: labor market's the tightest it has ever been. you can see that from the unfilled jobs related to those unemployed. in february 2020, it was 1.2 to 1. the fed needs to loosen it up or inflation will be above 2%.

the problem is that in the past it has been difficult to push the unemployment rate up meaningfully without precipitating a hard landing. that is what the fed is going to try to do, but extremely difficult. they have not been as forthcoming in their forecast as they need to be. if you look at their last summary of projections, the inflation occurred almost immaculately. inflation was the 2% target and it begs the question of what caused inflation to come down? the way you get it down is more slack in the labor market. that is not the friendly message from the fed, but that is what is necessary. >> 4.1% and unemployment 3.5% and 3.5% again. many have been asking the

question, this conversation about the pause in september. how are you interpreting that conversation? bill: i would not put stock on it. the fed is convinced they need to go to something close to neutral expeditiously. that is what they are doing. the notion at some point they are going to pause and look around, of course, that will happen at some point, but it will be driven by economic data. the economy is going to have enough momentum to keep the fed going into the fall. the market will peak at 3%. i think we will get to that pretty easily and we will have to push beyond that ultimately. >> what kind of unemployment rate are you looking for to indicate a loosening in the tight labor market? bill: the fed's forecast is neutral unemployment is 2% inflation and unemployment 4%.

the fact we have unfilled jobs suggests the unemployment rate is consistent with higher than 4%. we need to at least get to 4% and it is difficult to do that without precipitating full-blown recession. romaine: that was bill dudley and we should point out the senior advisor to bloomberg economics. we should point out the current st. louis fed president actually giving a speech and answering questions at an event. he talked about this idea of staying the course and is comfortable with 50 basis points. the 2% inflation goal is under strain and it is important the fed follow-through, and his words, to ratify forward guidance. he also talked about the idea of global qt, including here in the united states, kicked off today. the been run off of the balance sheet that had been anticipated and well telegraphed by the fed. here to talk about that is

steven kelly, research fellow at the yale school of management. great to have you. let's start off with qt and comments out of bullard who made the case, in his words, that qt itself can put upward pressure on rates. do you buy that? steven: i do. there has been talk that qt and qe is some experiment. i do not completely buy that. we have done this before and we have experience with it, and the other thing is you have folks on your show every day the last two years talking about the impact of the fed in the market. we know it has some impact and we know the direction. this will have a tightening impact, this will push up long-term rates to some degree.

we do not know what but the direction is right. that is how the fed is thinking about it. they are not willing to talk with precision. they have a long way to go, inflation is too high, the balance sheet is too big for where inflation is at. they are going to get it down and they are going to sell along the way. jon: when you are reducing a balance sheet of this size at such a rapid clip there can be unwanted consequences, volatility, and you have been looking at all aspects, including the commodities component. can you elaborate what you have been watching and will be watching? steven: the nice thing about a big balance sheet it is easier to whoosh cash around the system. we do not know what the terminal level will be. there is a lot of liquidity needs that can show up overnight in the commodity sector, especially on exchanges. we have seen volatility and

exchange shutdowns. that will be something to watch. the fed needs to figure out where that terminal level is for the balance sheet. and has come for right now that it can operate -- comfort for now that it can operate, but it needs to think about that as it pares the balance sheet. the fed is not going to be deterred by financial volatility. we have seen volatility in the stock market and the fed is tightening financial conditions. but financial stability will prompt the fed to reconsider. romaine: let's dive deeper into that. we have seen financial conditions come down, something the fed made clear they wanted to see. there is also concern, at least amongst the investor class, the idea we have not had a real selloff. most of the selloffs has been orderly. people rotating around this market. is there any sense once the fed does remove the support with regards to the balance sheet,

combined with the rise in rates, that you could see a negative market reaction and that in and of itself could sway the fed? this gets to the idea of where the fed put is if it exists at all. steven: i would say the reason we always are talking about is the put coming, is it not coming, it does not apply to the equity market. the put is on the economy, financial stability, not financial conditions. the fed has told us explicitly it is targeting financial conditions, trying to target financial conditions. the fed is willing to bear a lot of equity market volatility when inflation is this high. it has had clear cover from the inflation and it will need to see that fall quite a bit before any stock market volatility becomes the tiebreaker in decision-making. jon: we are almost out of time, but i want to take things a step further. we have the bill dudley comment

about the hard landing. you hear people throwing around the recession word. if those become reality, how does that impact how far the fed goes with something like reducing the size of the balance sheet? steven: i think it is going to keep going as long as, like i said, there is no instability. as long as inflation is this high. we have seen, are you willing to be like paul volcker? he has not pushed back that hard and i think that is right given how far with the fed is on its mandate. we would have to see it fall a few percentage points before the fed thinks about that trade-off. jon: helpful context. steven kelly from the yale school of management. we will watch that balance sheet story and watching many people making the return to work or, in the case of elon musk, return to work or work somewhere else. what tesla employees were told but how much is the return to office worth for employees? we talk about that next.

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jon: this is "bloomberg markets ." i am jon erlichman with romaine bostick. it is time for what it is worth and we are focusing on work from home. 8%, which is the equivalent pay rise that workers equally with the ability to stay home -- this was based on a study done last year by stanford university. i am not sure if people actually happen to get back to work changes how much that is worth to them. but we have been covering those headlines today from elon musk. romaine: it is good you bring up elon musk. this is the loggerhead between employees who like flexibility and see the value of it, and employers who don't necessarily do it. elon musk runs tesla and other companies. he said, anyone who wishes to

remote work, that's fine. you just have to work somewhere else. basically saying come back to the office or find another job. he made it clear he wants employees not only there but working a minimum of 40 hours per week. jon: beyond that also saying where you work matters. that argument he is making if you are in an office but not an office central to what you do, he does not want to see that. romaine: let me get something straight. tesla made a lot of money during the pandemic when most of their workers were remote or hybrid. as did a lot of companies, apples and amazons of the world. if they made those profits, why did they need them back? jon: i would guess for the people that you have to be in the factors, that is the harder job to walk away from, maybe it is sending a message but you raise a good point.

romaine: castle keeps track of badge swipes. you know about badge swipes here. as of last week in may it was 43% in the main u.s. cities were back in the office. jon: there you go. for romaine bostick, i am jon erlichman. we will watch the work from home numbers. this is bloomberg. ♪

announcer: the most crucial moments in the trading day. this is "bloomberg markets: the close" with caroline hyde, romaine bostick and taylor riggs. caroline: 2:00 p.m. new york, 7:00 p.m. london. this is "bloomberg markets: the close." i am caroline hyde.