♪ >> i think what we've got is a

midcycle slow down but i don't think we have a recession going on the >> this is an inflationary process that has been broadening out. >> the adaptability of people and the economy. >> by going out and going out. >> this is bloomberg surveillance with tom keene, jonathan arrow and lisa abramowitz. lisa: on the brink of a bear market ahead of a pivotal fed meeting. good morning, this is bloomberg surveillance. tom keene, jonathan farrakhan and lisa abramowitz. john is out, kailey is very much in. -- jonathan ferro. it has been fluctuating, the nasdaq down more than 3%. tom: a half an hour ago, a leg lower, reaching through some new low levels.

lisa, -95, -91. lisa, the yield spaces so out of kilter when i look at the screen i am mixing up the two-year and the 10 year. lisa: i think a lot of people are because we did see a yield curve conversion meaning that they were the same. even the two year yield exceeded that briefly before reverting back to normal that we hope for. we are looking at the highest yields going back to 2007. what can the fed say in this market? tom: i think it citigroup for about five hours ago i'm going to say making clear they felt 75 basis points is unlikely. it is a parlor game, something to talk about, chat about. just another way of saying you need more data. but what data do they need? look at the headlights -- headlines coming out right now. lisa: i keep focusing on the

nasdaq, the nasdaq is so much deeper than the s&p in a way that is really reminiscent of the early 2000 and the.com crash. can you give us a sense of what people are doing with that? we heard for a hot second that people are going into tech, and then not so much because frankly it is just interest rate sensitive. kailey: that has been the story of 2022 so far. we have seen tech underperform in the broad market because while these companies have gotten a lot cheaper because of how much prices have come in, they are still more expensive than other areas of the market, and do you want to be paying that in an environment of higher interest rates? not only do you look at the bond market, they are just going to continue to get higher. it is that kind of duration equity asset, and by and large, the answer has been no. lisa: tom, again, this market has just made some massive

moves. we are looking at deterioration of the fed. taking a step back, we are looking at a bear market. just to make clear, i know that i've been called bearish across the board and looking for gloom and doom. it is not a positive thing. nobody wants to see pain in the economy, nobody wants to see real people struggle. what we are looking for is some sort of lord to give us a sense of what is ahead, but it is the issue of hiking into weakness. tom: the floor is not bear and the catharsis is not there. dow futures, -600. i hit all the complexes quickly any moment. not curve inversion, five basis points. crude, softer on growth, the

dollar, stronger, stronger, stronger. i noticed sterling this week, 1.21. lisa? lisa: honestly, it has been such a rough market, i keep going back to one guest before we went on air. she says this is getting a little nervous, today's trading action. matt, are we seeing catharsis today? matt: well, i don't know if it is catharsis but i do think it makes sense in the wake of an astoundingly strong cpi were on friday. this economy is going to require higher real yields to slow down. and to put some downward pressure on inflation. and that is exactly what we are seeing this morning with yields of across the board, real yields leading the moves higher. and the yield curve flatter.

one of the key themes at morgan stanley has been the funding of the yield curve and we do think it will invert again as it did this morning and it will invert a level that we have not seen for decades. tom: matt, you are an outstanding student of behavior with your expertise on japan. michael wilson is maybe the strategist of the moment with a real cautious call on 2001 into this year. he looks this morning for a change in corporate behavior. do you agree? >> interestingly, i just came from a trip in japan, i was out there last week with a colleague, and what we saw out in japan suggest that until you start to get some inflation, you shouldn't expect to see corporations change their behavior. because we have inflation here in the u.s., certainly makes sense to me that we are going to see some changing behavior out of u.s. opera with the dollar

strengthening again this morning. that should ultimately result in some changed at the u.s. corporate level. lisa: then let's talk more about u.s. inflation and fed policy response. he sees 60 basis points in june, july, and september. he set the reason why he is sticking with 50 is because of indications that activities slowing down and that has to avoid overdoing it and having an abrupt about-face. the market is also now breaking in great cuts in the second half of 2023. is this just the fed being aggressive now and then having to cut in rather quick fashion after the fact? >> that is what it looks like in market pricing but i would just remind your listeners and your ewers that last year, the market thought the fed terminal rate would be 1.5 percent looking out into 2022-2023. the forward market has a guess as to what is going on, but it

is typically the wrong gas. i wouldn't spend too much time focusing on what is going on in the longer-dated forward. to the point of going 50's, the fed doesn't have much reason at this point to slow the pace of rate hikes until it at least gets policy rates between neutral settings which ultimately would imply a string of 50's between now and september. lisa: how close of the morgan stanley deal to the deutsche bank deal? >> lisa, that is not our view at the moment. our u.s. economics effort, she currently has the terminal rate in the low threes. but let's be honest, things are changing very quickly and in patient data is surprising more economists to the upside and surprising most people to the upside. we are certainly not alone in that sense. tom: asking in italy this

morning, i did a long study and it is indicative of some of these series and it is what is called log convex, which means the second derivative is increasing to a greater point of tension. how long convex is the market right now? >> ultimately, i think the markets are completely writing on what is going on in the central bank community and the central bank community is moving more and more aggressively toward tighter monetary policies. inflation is really the achilles' heel of risk markets because central banks with inflation mandates have to respond if inflation is going up and might not come down anytime soon. that is what we are starting to see, central banks moving more and more aggressively, and that is going to put pressure on real interest rates. and when real interest rates go higher, valuations will have to

come down. tom: greatly appreciate it. futures at -91. lisa, one of our high points in davos was a banking a conversation with a banker from boston, bank of america. one brian moynahan. a reaffirming year. what moynahan was talking about with the consumer is strong, the markets are moving, credit remains really strong. bfa sees mortgage growth keeping face and continuing. i'm lost. lisa: kailey pointed this out, some headlines reiterating from all of the banks, saying that credit is holding in there, but consumers are doing well. to use your word, the partition between now and then. now and what is going to happen in six months. how do you game that out given how higher rates are, how high they are likely to go, higher

gas prices, read prices. tom: 4% inflation out there somewhere, i have 2% growth, that 6% nominal gdp which goes back to the animal spirit that moynahan has seen. kailey: that is that they are reiterating now, the growth picture doesn't actually look all too bad at this moment i look at these kind of headlines and i wonder is that a good thing for the federal reserve? it means that they are actually going to be able to exclude a soft landing. where is the fact that the consumer is still willing to take out mortgages even as rates go higher mean that that is going to have a much tougher job actually seeing the transmission mechanism in that higher rate and bring down prices? if the consumer is willing to spend, how does the fed job? tom: look at the real yield. 0.51%.

that is a 14 basis points. folks, on radio, this is the nominal yield moving up much more than the inflation yield. lisa: what was that thing that you did that day? tom: on landing a triple seven. lisa: we are teasing a show that already happened. tom: futures at -87. stay with us. more data checks, markets moving. >> keeping you up-to-date with news from around the world. russia continues its assault on ukraine, pushing ukrainian troops out of the last foothold in the area. president volodymyr zelenskyy -- ukraine's top military manner

has pleaded with the u.s. send more artillery. chinese military say taiwan -- is not international warfare. much of the state constitutes international order when they routinely send naval vessels during freedom of navigation exercises. a software engineer on google's artificial intelligence development team has gone public claims of encountering sent the ai on the company's servers after sharing confidential information. the alphabet unit claims he breached the confidentiality quality -- policy. doubts about the high yields

have intensified. 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.

>> one of the big reasons why the price of gas is so high in the united states is that were winery margins have hit historic levels. we need industry and the government to work together here to try to get more's bike to the market.

tom: the director of the national economic council talking about a gallon of gas, front and center. we are doing more data checks, idly over the last 45 minutes. futures, -85, a little better. weaker currencies against the stronger dollar. as brian yates was talking about, a gallon of gas is an entire other story. i have been remiss on this, which is natural gas. no one talks about the price of a gallon of natural gas, do they? >> outside of the u.s. i'm sure people have concerns about high price of natural gas.

u.s. national gas has gone up multiple times. the strong demand coupled with the production growth has gone up with the u.s. price as well. >> you're so good at fundamentals of all of this. describe right now who is going to win the battle. do we export more? do we keep it instead of exporting it? do we start to import hydrocarbon again? >> in the near term, we are fairly maxed out on export capacity, and that won't change until we anticipate 2024 and beyond. and there are scheduled projects to come online to convert and natural gas into forms that can be exported. export capacity to mexico

pipeline, we always have some import and export between canada and the u.s. to deliver gas from bases for each country. but most of those pipelines are at maximum capacity. given how low u.s. price still is compared to global price, we are less than a half to a third. once that capacity to export liquid and natural gas and reese's. lisa: from natural gas to crude gas, gasoline and diesel, the fact that we are seeing such incredible lift in gasoline prices basically regardless of what happens in the crude market, at what price -- point

do prices finally fall enough? >> that is a great question. in the near term, we still see strong draws from gasoline. we should have been seeing a build as refineries prepare for summer. that natural demand draw will continue. i think the solution to a high gasoline price for the comes to significant reduction to allow for the price to fall. we still see quite a bit of driving demand. lisa: how long or at what level will that the start -- how far are we from that? >> we are anticipating a year from now will probably see less because of demand from covid-19, and matching help with the price next summer. unfortunately for this summer,

we probably won't see that realize. lisa: you mentioned china, you're still seeing large arts of covid zero, dealing with overhang. if and when china opens back up, what does that do to this entire supply and manage dynamic? >> that is a great question. the timing is very important. we anticipate additional stimulus program announced ahead of time. fiscal and monetary to help demand growth in china. however, it is difficult to tell exactly when that is going to take lace. even recently because of the zero policy -- without that being a result, we don't see this coming back up we do hope in the next 12 months, we

anticipate all of the interest rates the uss nate and other countries are likely to follow. we are hoping that the demand from china will help balance that movement and keep the price stabilized in the near term. lisa: citigroup put out a report overnight where they were talking about the amount of gdp destruction from where gas races were an oil as is our right now is really reminiscent of what we saw in the 1970's. do you think that the oil shock analogy is the right one? >> it is similar. in both situations, we see rising oil prices and constraints on supply, and eventually we are going to see demand destruction. whether we see a significant destruction that leads to a significant economic downturn or a more moderate soft landing

scenario will determine the outcome of oil prices moving or read. tom: thank you so much, we will get him back here soon particularly on the commodities dynamic of china. i can finally report there is a pause and a plunge. lisa, it is the first time i've got a correlated lift off the bottom the deterioration we've seen. lisa: this is simply a lift, bottom, is not going to keep plunging. setting us up for the first bear market that we've really seen. this is the s&p down 20%, the nasdaq down much more. at what point do you get relation? how much does that signal volatility? tom: 32.49, one of the important

insights this morning with a number of guests, we really don't see that right now. futures are -96. s&p futures, i should point out. now -81, -512 as well. maybe we will see that in the next 20 minutes as well. the 10 year yield, get used to it. 3.25%. please stay with us on the radio and television. this is bloomberg.

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♪ tom: good morning, jonathan farrow, lisa brim with and tom keene. mr. farrow is off, kailey leinz is here today. the straw that broke the back, maybe the inflation patients report.

an ugly morning, and futures negative. -83. dow futures, -600. the nasdaq down 2.7%. lisa, how strong is the stronger dollar? i mean, it is stronger, but it didn't break out. lisa: this highlighted the differentiation in monetary policies of the two nations and is breaking out when it comes to the euro. how much do we see this push the stress points at a time when perhaps policy isn't doing the trick? and i would point to the bank of japan for that one. tom: the tank this morning is too strong. lisa: they will be very

concerned. tom: this is an important interview. the best economics of anyone in the street. he has earned his way to being chief economist at city global wealth. stephen, let's go to your wheelhouse. our profits threatened? >> yes, we are in a. of -- in a period of very high profits. we think the 2023 will be a year of decline but we don't see the need for plunge in every industry profits. we don't see the need to unwind all over the gains that we have had for the last couple of years. but clearly, the impact of fiscal stimulus on demand blood through into profits in a positive way.

this is not going to be your 10% gains followed by another next year. i do think share prices already understand. tom: stephen, when we get tested like this, to companies that this way free cash flow persistency, do they go down with everything else, or do they partition and separate from the gloom? steven: they do. and it often comes down to dividend coverage. dividend delivery. again, it is really boring stuff, but good stuff. if we take a look at u.s. shares that have the most consistent long-run dividend increases, they have fallen half as much as the bond market and the yield nearly twice as much. this is an area to hide out. our own discretionary

portfolios, we have 11% on all discretionary portfolios. again, these were not the companies that could gain in 2020, and they were not the cyclicals of 2021. they didn't perform terribly well for the last couple of years. lisa: what is the distance between now and later? i look at bank of america -- tom: that is way too existential, what did you say? lisa: the idea that you have corporations that are strong. how far is the distance from now to a lesser now, one that people are forecasting in the rices of stocks? -- prices of stocks? steven: some of the lagging indicators like inflation take a long time to roll over but it

doesn't mean we have to assume that inflation will rise forever and that's because consumer fundamentals are firm in many ways, a lot is tripping against it. we would expect, for example, the slow down in goods consumption to result in lesser need for employment. employment growth will be slowing down by later in the year. i don't want to seem ultra-bearish, but these are the reasons why i think from a foreign-looking perspective in terms of monetary policy, you can't say we need to raise rates until inflation is low. by then, you have created a forward-looking condition for a much, much deeper declined in the economy. lisa: the former fetid vice chair came out over the weekend and said the chair of the bed doesn't want to let the r-word slip out of his mouth in a positive way, but we need a

recession, but there are a lot of euphemisms, and he will use them. what are we going to hear from him? steven: he can't really satisfy markets over short-term inflation outcomes. we kind of joke around. it is like well, why don't you raise rates 1000 basis points, what will that do next month? there is very little they can do. there has been less acknowledgment than we might have seen. everybody is having fun criticizing the fed, it is too easy for all of us, but supply shocks. we have instability in the economy. we were talking earlier on the break, airfares have shot up by 32% over two months, non-annualized area what were receding in goods prices last year? the same thing. monetary policy can take care of everything, but it can't.

these are periods where we don't stabilize in the short term. tom: we continue with citigroup private bank. futures, negative 96, up 10 points. ridley come across the bloomberg screen, everything doing better. even the spread from the quicken version, now up 10 basis points. kailey: yes, things have moderated, but you are still seeing that selling pressure on the short end of the curve. i was just taking a look at what has happened in the month of june. keep in mind, it is only june 13. that two year treasury yield is up 61 basis points. i guess it one word question,

75? i say that with a little shrug for our listeners on radio. steven: if they are going to be 75, it is better to do it sooner than later when policy is still at a very low interest rate. but it also goes to the fact that they could have lost control of the dialogue over this. they need a monetary policy approach. look at the history of the tightening cycles. the last 30 five years, when the federal reserve reaches maximum policy rate, it has only capped it before cutting seven months on average. if they really wanted to deal with longer-term inflationary imbalances in the economy, you want a monetary policy that you can sustain. again, you could game this out, maybe i am the wrong person to guess this, but if you just created a shock and all effect where everyone believe this is under wraps and then a couple months later, the cpi is still rising, i don't know what you've

accomplished. if you have a recession and then you have an easing cycle and we got to do qe again, this whole approach again of the federal reserve going from -- the mistake that was made was easing in the boom last year. again, i think trying to satisfy the market in short-term inflation outcomes might be the wrong approach, i'm concerned. lisa: what you're saying is essentially jerome powell has an impossible job, that he just can't do this right. you're going to upset the markets or you don't want to move too aggressively and surprised the markets, therefore inflation is allowed to run hotter for longer. isn't that binary, realistically? steven: one thing that we just can't dispute is the fact that monetary policy is in complete control of the economy.

there are really positive developments beneath the surface on the supply side. the price of appliances is down. why? consumer goods production is now rising. consumer goods consumption is falling. imports are rising 12%. if you want to get through this, we need to get through the next leg of it, which is going to be services, which is going to be housing-related issues. we really want to create more instability. this is going to be in an environment where they are trying to avoid that, and maybe they can do both. tom: thank you so much. some turmoil, a little bit of a pullback. there is no real bid out there. lisa: correct, i think that is a good way of framing it right now. the two year yield is really what is driving a lot of. certainly people are looking at

more can trackable inflation. what is j pal going to say on wednesday -- j powell? tom: c. we need to send readings. nailed the inflation call. lisa: absolutely brilliant on inflation. they had a cat who thought it was transitory. lisa: most people don't have the same treatment of their pets. tom: welcome a birthday greetings to dr. larry and the beast. it is a tough life.

you've got an important guest coming up. lisa: we are going to be speaking as we carry into the open and again come if this move holds, a bear market in the s&p. tom: stay with us. futures at -87. good morning on bloomberg radio and bloomberg television. >> keeping you up-to-date, russia accused of war crimes in ukraine, many using band carpet bombed to kill hundreds of civilians. ukrainian president balaam or zelenskyy says the death toll could surpass 40,000 soon. more money this summer with a

one-time payment in august of more than 64,000 employees. the u.k. financial regulator has added -- to a watchlist. adding the bank to a list of -- monetary. french president emmanuel macron is facing a challenge upcoming election. lard -- national assembly. as margin of victory narrows. 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. this is

>> i think it is clear from all the data that we are getting over the last few weeks and the last few months that this economy is actually quite resilient. eventually, those risks are writing -- rising. i think maybe people are getting a little too pessimistic too early. tom: dan has the privilege of working with richard bernstein and i can't say enough about a book that is not dated written decades ago, open style

investing" is a really, really smart effort. with the markets moving, a bit of a pullback. there is real tension in the markets. two ideas. record gary in weakness. this is like, be careful what you wish for. a lot of real estate in europe has hinged off the swiss banking. moments ago, just taking a sentence out of her note. mortgage rates at 6% by the end of the week according to coronado. lisa: i'm really glad i'm not in the market to buy a house right now but how does that track with the comments we've heard out of the bank of america cfo earlier speaking at a conference saying that mortgage loanss ar still

holding, people are still willing to borrow even as rates go higher. how long will that remain the case as we see the fed continually hiking potentially even more aggressively in the wake of last week's inflation data? tom: usually in a dog and pony if you have to say your trading team has "done great," there is not a lot of money that has leveraged finance right now. not a lot of money, but we will go with it. i demand that after friday's zeitgeist where she was the focus of attention in the markets, u.s. equity strategy, what is so extraordinary, what is the distinction that got global wall street attention this weekend? lisa: you saw me, i try to keep

a cool head and topsy-turvy markets the upside or the downside. we were at a crossroads back in mid-may. could be territory that we are pricing in a full recession. we are right now back at that crossroads and i think it is very interesting the markets did not break on friday. i actually thought it was interesting, frankly, how it did not get materially worse on friday. i think we can start to look for areas of the market that have been deep risk. tom: a great credit to our team thursday and friday, the five-year view of inflation, you

highlight that. a reset to higher inflation expectations, is that good for equities, or less good? lisa: i think that it keeps the value train going forward and i think that ends up being a destabilizing or's the equity market because we do need that growth really stabilized. we actually just took a look at how different sectors in the market have traded in regards to the university of michigan five-year in legionary expectation number. people used to make fun of me for using it and it turns out it was good we had it. the reality is it seems like they tend to outperform on inflation expectations. if that trend continues it is going to let this value train live a little bit longer. >> the nasdaq 100 is down 27.5%

year to date but even beyond tech, the s&p 500 retail index is down a full 30% so far in 2022. the focus really being on margins. when are we going to start to see that bleeding into more areas of the market? >> it is a great question. if you look at the declines we have seen in the consumer discretionary sector as well as the communications services sector which has a lot of consumer sensitive names and as well, the declines we are seeing are very close to the average designs we have seen the past four recessions. if we are headed into a recession, areas like financial, industrial, material should have been under arming. that is part of the historical recession playbook. they do quite well on the

rebound. another one we've been talking to people about his energy. energy has actually done quite well this year for obvious reasons but heading into a recession, it does normally see decline. it is fair to ask whether some of those winters, if this recession fear does continue to take heart, are they going to continue to see that resilience? >> maybe you don't want to continue to buy into areas of the market --, but there are pockets where you have seen enough that maybe it provide some kind of an entry point level. >> one place we have been putting people toward small-cap, we're technically neutral. if you have been underway, we think to remove -- the time to remove that is to get back to neutral. valuations are key not just in relative terms, but they are also getting pretty darn close to where they tend to bottom out

in recent years. what we don't have as a fundamental tailwind. this is not an area you typically want to be and when the fed is hiking rates, when ifn is falling. but we do know that risk is starting to get priced in very early and historically, recessions are great buying opportunities. tom: for those of you want to know, catch down is a phrase from cfa-level. you know >> where she probably learned that? the great university of virginia. tom: thank you. we will do something a year in the future. kailey, there is a lot to talk about and one of them is the fragility here is tangible.

kailey: we've seen futures kind of stabilizing as we drive closer to the opening bell, but still, at these levels, we could see the s&p 500 opening in a bear market whereas the nasdaq is already there, but the concern around the inflation data and the idea that the fed is going to have to be even more aggressive on the treasury yield. tom: we are going to exit optimistic. stephen stanley, a blistering short note. he is optimistic households have massive spending power. thanks to our team for blowing up the show today. until the morning on bloomberg radio and bloomberg television. good morning.

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>> on the brink of a bear market. coverage starts right now. >> everything you need to get back to the start of u.s. trading, this is "bloomberg the open." lisa: we begin with the big issue, stuck between a rock and a hard place.