>> every time central banks have gone out shooting for inflation they cause a recession. >> it might wind up being probably a recession and may a couple hundred points downside on the s&p. >> what the fed has done is create an equity recession. >> the fed has done a good job to look for upside inflation surprises. >> has the market priced in

maximum fed confidence? we do not think it has. >> this is over go to bloomberg surveillance with tom keene, jonathan ferro, and lisa abramowicz. jonathan: this is bloomberg surveillance live on tv and radio. i am jonathan ferro. equity futures up .6%. it is decision time. tom: it is decision time and there was a shift yesterday afternoon. bill dudley who we will have on the show today, he came out and said this is a 75 point meeting and the market shifted. jonathan: he is not allowed. barclays, deutsche bank, jeffries, a long list of companies and banks looking for 75. let's say they go with 75. what is next? tom: what is next will be what is in the press conference. 75 and what comes next.

dominic konstam coming up in it moments on this huge distinction of this meeting. jonathan: before we get there there's another central-bank decision. i woke up this morning on expecting this. the ecb. lisa: they're having an emergency meeting to address italian yields. they are watching spreads blowout to 2020 levels. it is a conundrum. those names are at odds. what did they say at this meeting other than sit around and say what we do? jonathan: the contradiction of ecb objectives. kid shoots of socgen -- kit juc kes of socgen put out the message, how do you -- that is the big challenge for this ecb. lisa: how do you have additional bond purchases without pushing down yields, without going in the opposite direction and loosening monetary conditions?

they are in a difficult spot. they are trying to normalize the situation that is not normal. jonathan: the italian 10 year just above 50 basis points. tom: italy is the focus but i do not think it is the only focus. italy, since the beginning of the year, the italy 10 year has gone 100 down to 76. go over to hungary, 175 since the beginning of the year. what gets my attention is finland, down 8% from 100 to 92 in 12 days. jonathan: unreal. so much pain in bond and equities. equity futures bouncing back a little bit on the s&p, up .5%. the pain over the previous five days, five days of losses down

more than 10% on the s&p 500. into the bond market where it does to a year yield is higher by 70 basis bites. the 10 year coming back a little bit, just south of 3.40. tom: can we agree the pain over the last five days has been jonathan has been in capri and we have not. lisa: wherever he was he was keeping track of this market and it has been moving quickly. that move in the two year yield was the biggest going back to 1987. the move in the italian bond market the biggest back to 2014. this is what is getting the ecb attention when they called the emergency meeting. how do you address bond turmoil while also tightening financial conditions? how do you tamp down the volatility you have been tamping down for over a decade with below zero interest rates? jonathan, you were saying the

ecb may have a tougher job than the federal reserve. how they deal with this at a time when people say if you look at the credit of italy this is justified? jonathan: i think it is so tough for this ecb. they have been talking with no limits. they will say they will do this with no limits. the problem with their current plan, the reinvestment of pepp, it has a limit. if they want to communicate there are no limits to what they will do, this market wants to hear in detail what the mechanism is to do that. lisa: they want details to have the believe they can achieve it. 8:30 we get u.s. retail sales at a time consumer confidence has plunged the lowest on record according to the university of michigan consumer sentiment survey. 2:00, the fomc rate decision followed by a press conference with jay powell.

this after a catastrophic move in the bond market. catastrophic because it has been a 20% decline in the overall aggregate index since the highs of last year. it has been a shocking move. when we start to see things break down and away people were worried about? jonathan: yesterday i said frame the chart, the two year chart is ridiculous, just to see that move. tom: this is full faith and credit. i would go to lisa's world. i did a study this morning. corporate bonds have shifted down in price over four standard deviations. that is unheard of. jonathan: let's get to dominic konstam. let's start with the federal reserve. what are you looking for later? dominic:that is unheard of. jonathan: we are looking for the fed to be very hawkish, which means they will probably go to 75 and guarantee a quick move to neutral.

they could go more than 75. if they do 50 they would have to go out of their way to convince the market they were accelerating rate hikes. tom: you parse a distinction between unlikely and unnecessary. it is a 75 move unlikely or unnecessary? dominic: at this stage now, given the market reaction, it is absolutely necessary to move to 75. the problem is that if even the forecast is correct and there is a soft landing where inflation can come down without damage to growth, the market is tightening financial conditions too aggressively, both in europe and the u.s.. they have to stabilize the long end. it is a different game plan for what they had envisaged. stabilizing the plan will help them avoid a hard landing.

lisa: what is the bigger risk, that the fed is overly hawkish or overly dovish versus market expectations? dominic: the biggest risk is they push back. jay powell took 75 off the table last time. if they stick to their guns and try to do a boj and draw a line in the sand and say we will not get pushed around they will get in a sticky situation. they are not like the boj. they do not have that kind of commitment. both the bonds and equities selloff hard. it is not a problem -- there measure of neutral may be too low. no one knows where neutral is. it is not a question of how restrictive they might have to become. people start to ask the question may be inflation is too long.

tom: the mother of all textbooks in the united kingdom is john bag and his one volume economic textbook. all of this is not in bag. this is original territory. what is the level of yen where this unfolds? when dollar-yen it's to such and such weakness, where the pieces begin to fall apart? dominic: for japan the issue is wage inflation that drives price inflation. it is a similar issue across the major economies. the inflation is bad inflation. wages are barely keeping pace with inflation. japan is the same situation. they will not react to inflation unless wages are going up. dollar-yen can keep on going down.

they will try to push back on it. it is more about stabilizing the global bond yields and that will make the boj life a lot easier if you stabilize the 10 year yield there is a limit to how far dollar-yen will go down, and that will cap some of this inflation. unless you can get to wages i do not think the japanese will start to try to have any kind of normalization on policy. jonathan: i want to finish on the federal reserve. a lot of people wondering if they should come out and go bigger than 75, get back to neutral. with that restore confidence in this market were scare this market? i'm trying to understand the tipping point between hawkish enough and too hawkish. dominic: i think it would in the back end.

i don't think the equity market would initially react very well but at the end of the day there is a requirement for a massive reallocation and that normally happens when debt yields are stabilizing. we have to get to that. i see no light at the end of the tunnel. if you see the light you see a way in which this stabilizes. right now you're in a void. you do not know where the tunnel ends. committing to 75 almost get you there. jonathan: thanks to dominic konstam. a big question going into the decision later. tom: is a huge question and we have a wonderful lineup coming up. we begin it at the 1:00 hour. to me it is not just 75 basis

points as you just said. the idea is that then what in the press conference. he will be making it up, reading off prepared words, plus he has the ecb meeting to worry about. jonathan: michael mckee has some details on that. they are facing a big risk. they risk "turning the perception of the fed from the most powerful central bank to an institution that too closely resembles and emerging-market bank." lisa: trying to catch up with a market that is gotten ahead of itself. jonathan: strong words from mohamed el-erian on bloomberg opinion this morning. futures up .5%. this is bloomberg. ritika: keeping you up-to-date with news from around the world. u.s. democrats constrain new energy legislation. the senator may proposed a tax of up to 42% on companies that report a profit margin better

than 10%. democrats in the white house are struggling to curb u.s. energy costs and broader inflation. the european central bank governing council is ready to step in if it considers moving government bond markets to be unjustified. the group's open to taking actions. the ecb is holding an emergency meeting to discuss a selloff in government bonds. the u.k. has canceled its first flight deporting migrants to rwanda. the asylum-seekers -- the government says it is trying to disparage the work of human smugglers. china's economy has had a mixed economy in may as covid-19 restrictions ease. consumer spending and the property market contracting. industrial output rose from a year ago according to the

national bureau of statistics, while the almost 7% contraction in retail sales was better than the prior month plunge. global news 24 hours a day, on air and on quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries. i am ritika gupta. this is bloomberg. ♪

jonathan: live from new york city for our audience worldwide, tom keene jamming out to the music on this fed decision date. in ecb decision as well. is that your go to dance move? that is nice. tom: i am learning a lot about europe. jonathan: how's that working out? we miss the dance move. do you want to do it again? tom: coming next month, bobbleheads, we will have surveillance bobbleheads, we are starting with lisa. i had no idea hungry was 1/10 the size of italy's economy.

jonathan: on ecb fed decision date, that is your focus? futures positive half of 1%. on the nasdaq up .7%. this is real turnaround for the last five days. tom: can you imagine chairman powell, busy day at the fed and getting ready and all of the sudden a courier drops in email, the ecb will get out front with an emergency meeting. it changes the tone. jonathan: get out front? the fx channel is fascinating. somebody will be unhappy. cable around 1.20. euro-dollar threatening 1.03. somebody will be uncomfortable with what the currency is doing. this is the previous decade in reverse. member that? get inflation higher, trying to get a weaker currency. tom: let's get some perspective

from annmarie hordern in washington. right now in brussels, leading your economic coverage in europe, maria tadeo joins us. i am suggesting this is not just about italy. for global wall street, that will be the move. i walked through finland's chains of price -- change your price. it is not just about italy. with hungary well over 600 basis points. maria: i think if you see a recalibration in many ways it is the result of the change in policy from the european central bank. not just an italian story. i think the importance of italy is something that cannot be understated. there is reason we talk so much about this country. this is the third biggest economy in the euro area, this is a founding member of the euro , and it does carry a lot of weight. for many in the european central

bank, they have been in a room for about an hour and 30 minutes. this is a country that you have to treat definitely -- have to treat differently. tom: did germinate force this meeting? maria: i do not think it was the germans. it comes from last week to the governing council cannot agree what danger from the btp and they did not anticipate the moves. if your member the press conference by christine lagarde, she was asked how are you going to fight fragmentation, and she cannot give any details. that means there was no consensus behind the scenes. that means we have seen the market pile on the italians. there has been jitters for the last two days. i do not think this is coming from the hawks. this is about the periphery, how to avoid the fragmentation. if today the european central bank does not tackle fragmentation and then we talk about reinvesting the -- and

only talk about reinvesting the pepp program, this is a big disappointment. jonathan: what is the mood at the white house on the others of the pond. inflation is too high for this president to get reelected. consumer sentiment has plummeted. what is the mood in washington, d.c.? annmarie: frustration is the mood of the electric when you look at the level -- the mood of the electorate when you look at the level of inflation, and also at the white house what is sticking in terms of getting inflation down. they are throwing spaghetti at the wall in terms of trying to talk about why inflation is happening and what they can do to bring it down and nothing is sticking. the president has called is the bane of our existence. he is speaking to the afl-cio. the inflation numbers are hurting the white house. they are hurting the democratic party when you look at what they

can pick up in terms of seats or hold onto seeds, and you're are seeing that frustration play out. they are looking to tax higher on oil companies. will that change the price of gasoline tomorrow? no. could it become law by the time people vote in november? probably not. this is maybe a new tool they can use to message. they are trying to do everything they tend to go after oil companies which they say are unfairly targeting consumers. lisa: what are the details of this proposal? any profits over 10% they would tax. is this a nonexistent proposal or is it something substantial up into the windfall tax in britain? annmarie: it depends if they can get 50 democratic senators to sign on to this. we have not seen the legislation yet, but the senator from oregon who is leading the charge on this says it would be for the companies that are making these

excessive profits. those that are potentially going to ease the pressure on consumers will not face it. maybe this is little bit of a carrot and a stick. at the same time we have the president writing letters to the likes of valerio, chevron, talking about refining capacity. the president saying he wants to change this and wants immediate action and things what is happening right now with refining capacity issue, he says oil companies are the ones to blame. he said last week exxon is making more money than god and they need to actually change this. jonathan: let's talk about that. we have a minute. the oil companies have enough money to lobby for themselves. you have had somebody bill campaign trail, you've had democrats for years and years push psg, they did not want any new refineries built, now they want the oil companies to build

refiners? who is going to do that? who in their right mind running the company would do that knowing what the push is over the next 10 years and beyond? annmarie: some of these refiners are moving to more sustainable fuel because that is the momentum, not just politics but also psg investment in the banking community. it is a difficult time for the administration. they came into this year talking about renewables and now they need to reverse. jonathan: amh down in d.c.. maria tadeo, thank you as well. tk, talk about contradicting yourself on a big issue. tom: i will look at the american public. the middle class will get crushed. chairman powell will address that today. jonathan: from new york, this is

bloomberg. ♪ the middle class will get

jonathan: are you watching f utbol yesterday? tom: got that right.

jonathan: do you want to be friends with the city of london this morning? tom: a beverage in my hand and mr. south gate, what do you think? jonathan: clearly, it has taken me a little while to get up to speed. futures, positive .4 this morning. futures positive on the nasdaq 100 as well at .6%. over the previous five days, what a move we have seen. that is matched backed up. somehow instigated by what is happening to bond markets. two-year yields over the same period of 70 basis points. 12 basis points ahead of the fed, ahead of the ecb. 10 year, three 38.

getting close to 350 in the last couple of hours. let's talk about europe ahead of this meeting with the ecb. expect a conclusion to that in about 29 minutes time. 50 basis points 12 months ago. looking at 4% in the last 12 hours. the ecb needs to do something about reconciliation. how to do this now to stop bond yields rising in certain vices? the president of the ecb last week talked about fragmentation impairing larger policy. what happened to italian yields breaks down and the euro breaks down. i would argue that is a big problem if you want to tighten financial conditions and do something about a euro that is too weak as opposed to two strong. which brings about more important point. central banks want to talk about

but we can talk about it, the fx channel is going to be an important channel to do something about inflation but when it comes to fx, not everyone can win that game. what we have got to talk about is who is the loser going to be. the ecb with euro-dollar in and around 104 or federal reserve which is so far as winning with a very bearish strong dollar. tom: you triangulate got off the bloomberg and there are lots of secondary triangulation's as well. i say this in honor of liz. she and i would lecture on price. there is a point where yield does not matter. the sweat of the ecb meeting as price declines. jonathan: i don't think the ecb is going to be too concerned about investors losing money. what they will be concerned about is the interest payments they will have to pay when they go back to market. the spanish government, great

government. tom: we have a nice mix of guest today and also in our set -- our special coverage this afternoon. i'm not going to call it up after 40, but maybe in the angst, attract to 40. how do you assume we migrate out to the fear and angst, the catharsis of vix to 40? >> i would like to say that nothing good happens in equity markets and the vix is around 30. but bad things start to happen when it is at 40 so we should be asking ourselves this question, how is it that we get to 40? we can let -- look at history, we can look at the backend of the telco bust with adelphia and worldcom in 2002. those were both low vix events. two things were different than

from now. one is real-life volatility got into the 40's. these markets are punishing. we are getting 2% moves. to get the 40 plus real-life volatility, you have to be having a reprocessed move a day. we have to sprinkle in a 5% move here and there. we are almost there. you can see the pathway because market stuff all this quickly tend to stick -- tend to destabilize themselves. that is the first one is realized volatility. it is the daily size of the moves in the s&p. this is where we differentiate now. there is not really the pricing of the left tail in the market. the outcome that would truly spillover into the markets and create kind of a toppling effect. in 1998, it was the portfolio

that really was the risk in the market. in 2002, the risk of bankruptcy for many companies was very high. my concern is as prices deteriorate, these macro spillover events become issues and with further price deterioration, we can easily get there. jonathan: it seems to me the fx channel is in play. can you give me your perspective on it? >> i think the equity market is going to lose the game. it is quite interesting. there used to be a term during the disinflation period called the ugly fx contest. how we could you make your currency to effectively try to bring in inflation? lower the price of your currency so you can do some the risk assets and import inflation. now, we are trying to do these exact other thing on the minds

of central bankers. for equity markets. i like to say equity has assured the struggle. the move index just got 135 plus. it is a very dicey time for equity markets and what i would say is because volatility has risen so much and not just volatility, but correlation between stock and bond prices is just in a different regime, it is totally different. without lifting a finger, your portfolio just got a lot bigger on a realized volatility basis. you just have to run a lot tighter and leaner than you did a year ago. lisa: you've said markets do crazy things when they are stressed. when we see things break down

not only with stocks, which we have seen to some extent on the periphery but also with bonds. >> i think we actually had some semblance of getting there a couple of weeks ago. what you had seen was a big rise in the implied number of tightening's let's say after december. you saw that the implied techniques got to 10. went down to eight and then kind of hung out between 7.5 and eight tightening's of 25 basis points. that was the market saying i think that get the 2.5% of the funds raised and then ppi undid all of that. what i would say is we need to see a lowering of interest rate volatility. that is going to be some signal the market and the fed are speaking the same language and that the fed has got some confidence that what it has done is enough. i think what is so tricky is the

reality that they may have already done too much. we operate through the wealth effect, financial conditions and they have tightened in a hurry. it is obviously base interest rates. we may have already done enough and we just don't realize it yet. this is what makes central banking so difficult at this point. jonathan: thank you. we have inflation worry after inflation worry after the last week. you speak to economists right now, the fed can keep raising until they are affected -- confronted by weaker data. we need a deeper understanding of how they're going to respond because that is the big conundrum dilemma they face potentially later this year. lisa: all central banks were hoping to be helped by software

inflation and hoping the data would cooperate and we would get some sort of disinflationary force from the shocks easing up a bit. they have not gotten that and so now, they are faced with what we do in the face of stagflation. we are looking at what they're going to do ahead of that. how do they get ahead of that at a time when the market is already there and they are not clear what the market will do when they signal they are right there with them. jonathan: we turned around straight out of the gate and said i think that is the last good one. that is the last solid one. in the not-too-distant future, we will have a negative payrolls prints. today, they might be able to say that is in the future but ultimately, they've got to respond to the inflation data today and i think that is about politics. tom: the president is going to

fold it into the housing market. i am sorry, this is going to fold into the 6% level. i want to give you some price pain. i mentioned liz goldenberg earlier. i do admit month check on my portfolio and that austria 100 is just working out. i loaded the boat on that puppy. jonathan: you have made that point repeatedly in the bond market. tom: i'm sorry, it is a bond bear market we have never seen. other research we are doing particularly with the ecb coming, we look at the ratio of population of england to hungary and we are trying to get scope and scale for hungary for this emergency ecb meeting.

jonathan: what currency does hungary use? what has the ecb got to do with that today? tom: are the germans driving the bus? that is what i want to know. jonathan: from new york city, this is bloomberg. ♪ >> supply from russia and the u.s.. a longer than expected pitch also added to price pressures. rain and snow melt at

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>> three options for rate hikes. 50, 75 or 100 and what that is going to depend on as if we see signs of moderated inflation or demand. there is no sign of inflation alleviating. the key question is has the market priced in. we don't think it has. jonathan: i have no idea what max hawkish ms. actually is.

think about where we have been. we have gone from bank of america saying we get a high meeting this year and people laughing. then andrew come out and see 50, 50, 50. then we had a 75 basis point idea. i laughed. it is consensus for today. things have moved so quickly. lisa: it has moved fastest if you look at short-term yields going back to 1987. at what point do we have to look at a fed whose hand is being forced and is going to have to go much more than they have foreseen in the forecast? jonathan: now more than 10%. tom: it is brutal. even the market where it is, we're looking at the price dynamics. we have to do a surveillance correction.

larry insists we go out to four digits on the england to the hungary population. he wants to stay on top of that with four goals scored. jonathan: thanks. i've courts have more affection for the italian national team but they did not do so well yesterday. we can avoid that. let's talk about ecb. i am told they make a decision in 11 minutes time. tom: right now, we are going to brief on this meeting today. i guess it is about the consumer after the housing transaction. you are truly expert at housing. what are the new 6% mortgage rate in housing and rental and how it folds over into what mastercard sees? >> absolutely. we are seeing a real moderation in the housing market. home sales are now following for

several months in a row. if you look at the more granular data, you are seeing that home sitting on the market a bit longer. the percent of homes selling above ask has gone down. the market has started to turn and that makes sense because mortgage rates have jumped higher in an environment where affordability was already stretched because of extremely big pricing. on top of that, there was a change in timing around what people were buying because so many people concentrated these home purchases right after the pandemic when they were moving into this major goods consumption. from the fed's point of view, they are saying what are the parts of the economy that have been accessed? how did they try to tamper down those excesses increasing interest rates and you see the impact. to me, the fed is looking out

the housing market is saying. jonathan: i'm trying to work out when it starts to become a bad thing. when we start to see that really weak economic data people are starting to forecast and where is the fed once we get to that point? >> i think for the broad economy, we have a while to go before you see real turnarounds. and there is a number of reasons why. the first, the consumer is the heart of the economy. the consumer is still strong. the consumer is still spending. balance sheets are strong. we just the latest from the federal reserve. households dipped a bit but very modestly. there is still purchasing power out there. the labor market -- look at the last jobs report. still strong.

it is going to take much more time and effort from the fed to really effectively moderate roads and cool inflation. lisa: a listener rights in that organic deflation is already happening. you are seeing prices moderate or even take down a bit in areas. how much do you think this is actually what we should be watching and might raise some red flags for moving much more aggressively for the fed? >> there are lots of different categories. i think the easiest way to separate it is the goods category and nondurable versus durable. and then the leisure categories. in the last report, there were glimmers of price slowing or inflation slowing in certain goods and that is categories where you see this big concentration of demand,

unwanted inventory and modest discounting but that is not the majority by any means. if you look at the services side of the economy, there is an acceleration of inflation particularly for things like travel and shelter. tom: the answer is the boston university textbooks say demand destruction clicks in. where is the demand destruction? >> it started to click in the beginning of housing. you are going to start to see that spillover into the economy and see other areas and to that weakening but it is not going to be overnight and i think that is because of the extraordinary amount pumped in over the last two years. as you all were talking about before, the fed was intentionally behind the curve, intentionally trying to over stimulate the economy and that was coupled with a large amount of's bending. tom: give us a day.

do we go to jackson hole amid nine -- amid 9% inflation? >> i think we are going to go through summer with heightened inflation as people are still outspending and you still have some of these challenges. i think as we get into the fall and end of the year after the holiday shopping season, then you can really start to see things turn in the economy more broadly. jonathan: you've got a perfect window into it, are you seeing signs of it at the moment? >> look at what the study is reporting. the quarterly survey, yes. consumer credit is increasing from very low levels. consumers spent the last summer reducing their debt. jonathan: thank you. brilliant as always.

the consumer turns to credit cards. we have talked about it. some people have come on here and said it is a sign of strength. not many buying that strong consumer narrative. lisa: they want to keep buying goods at the same pace. they borrow money to do so. at what point does this exacerbate the downside of this cycle. jonathan: the ecb has a big call to make. how do you raise interest rates through the summer and keep a lid on italian yield? the ecb will try to provide an answer to that question. yields come in 10 or 11 basis points on a u.s. 10 year. and on a whole lot more on an italian 10 year. down 32 basis points 23 84. from new york, this is bloomberg. ♪

>> every time banks have gone out shooting for inflation, there's been recession. >> maybe a couple of more hundred points downside on the s&p. >>