>> this is an extended edition of bloomberg surveillance with tom keene, jonathan ferro, and lisa abramowicz. jonathan: live from london, good

morning or good afternoon. this is bloomberg surveillance and the countdown to open blended into one beautiful thing. equity futures heading lower and another leg lower in the last 30 minutes. down about 1%, 1.3 percent on the s&p 500. i am jonathan ferro. futures down 1.4% now on the s&p. i cannot keep up. tom: the deterioration of the last 90 minutes has been exceptional. your login next -- at spx 3800, we are here. dow 10,000. a dow 29,000 handle. jonathan: i do not think you mentioned the dow this morning and then you wait until the 9:00. tom: we are going into the market hour and we note the america looks at the dow. jonathan: let's look at fedex. what are we down by?

20%? lisa: staying there because of this morning. this morning has a velocity of change in the business outlook was what caused them to downgrade their guidance? how much will this be a story for others? jonathan: it is a story for michael mckee. fedex not getting a great read on the global economy. your take? michael: they are supposed to be a proxy for the global economy because they move the stuff that makes up the global economy. here is the quote that scared global wall street. the ceo saying "global volumes declined as macro economic trends significantly worsened." a warning flag for the economy. it has already been picked up by economists. we have a whole series of bloomberg surveys from around the world about the probability of recession. take a look at what they are

thinking for the u.k. and the eurozone. 60%. generally recessions follow when you go to 30%. the u.s. is at 50%. there is a feeling that a global recession is coming. we are seeing that reflected and not just fedex a lot of other companies. we have general electric and mcdonald's at newport, the steel companies and metal companies really concerned about the man falling off as well. we are finally seeing all of this reflected in earnings estimates from analysts, which had hung in much higher than people anticipated even as the stock market has been falling. that is starting to roll over. it is becoming acceptable to think a recession is on its way. tom: what is the history of how any central bank and particularly the american central bank reacts? jonathan: -- michael: the fed had reacted to markets and gave

rise to the fed put idea. this year they are trying to discourage them strongly, telling markets we will not get involved unless there is a systemic problem. right now you're able to sell your stocks and get your cash without a problem. the fed will stay sidelined and they will look at this is the wealth effect falls and that slows the economy. jonathan: michael mckee on the latest. the wealth effect, this market has been hammered, now they have to think about house prices with 6% mortgage rates. lisa: this is the reason why people have been so surprised the consumer has hung in there. with the wealth effect of stocks being lower in housing prices die getting in going lower as well would make a difference. jonathan: we are lower on the equity market. down 1.4% on the s&p. 26 minutes into the opening bell. joining us is lindsay piezega.

they are calling for a 4% or 5% fed funds rate next year. you think that is achievable? lindsay: it will depend on how inflation behaves. the fed has been clear they will continue to raise rates it order to get the bedrock of the economy, price stability, reinstated. should we see prices remain at these elevated levels for go worse from here i think the fed could be poised to raise rates above earlier expectations. lisa: i want to understand the fedex a little bit better. there warning about globo -- about global macro economic issues. how much will that be the theme for other u.s. companies that the u.s. cannot it escape -- cannot escape the rest of the world.

there will be that rebound effect on the balance sheet. lindsey: they are a globally integrated economy. if we see overseas demand install that will have lots of implications for economic activity here. significantly negative implication for economic activity here. we have already seen how supply chain disruption can deteriorate. you can count that with the lost of oversee demand and that will have a snowball effect for u.s. businesses. what we are seeing in the domestic economy is a loss of domestic consumption. it is not just about what is happening overseas. we have plenty of pain being felt at home. lisa: we have been talking a lot about how the fed is looking at lagging indicators. do you think the impact we are seeing is sufficient to give the fed confidence, to give people confidence that inflation is decelerating quickly enough, the

fed does not have to be as aggressive as they are currently making out? lindsey: i do not think we have seen enough evidence to suggest inflation is coming down in a meaningful way. i think there's enough evidence on the consumer side and the manufacturing side and the growth side to suggest the economy is slowing, but that is not going to be enough to ensure price stability returns. we are dealing with demand and supply side of inflation. while the fed raising borrowing costs will result in a cap down of investment and demand, that can control the demand side of inflation. raising borrowing costs will be do nothing to alleviate the supply-side pressures. the fed will air on the supply side of caution, raising rates higher than they normally would in other historical cycles because of that complicated composition of inflation. tom: if the markets deteriorate

into this friday afternoon and monday and tuesday, is that enough to change the fed call on wednesday? lindsey: it is enough to change market expectations. if investors move back into a more benign camp, i think the fed could be willing to capitulate to market expectations. right now the market is fully pricing in a 75 basis point increase. tom: are you suggesting that if we see this kind of market drop we are seeing, we could just automatically move the fed 50? lindsey: absolutely. we have seen this before. the fed is watching what the market is anticipating, waiting for the green light on the 75 basis point increase.

if the green light is there the fed will move. tom: the broad yield curve is back 22 years. isn't that enough to suggest to them 50 and not 75? lindsey: suggest to the market or the fed? the fed is focused on prices. the fed is not focused on market metrics. the fed has blinders and price stability is the primary focus. despite the apparent inversion of the curve, if the function is not there in terms of market activity and that is not enough to derail the fed focus from insuring price stability. we have inflation at a four decade high. even with the second derivative improvement, the price ascension slowing moderately for two months, that is not enough to have reached that threshold the

fed has said is needed to begin the pullback away from the pathways. jonathan: if they do not deliver what is priced, that will result in an of financial conditions. i do not think that is what they want. that is the difficulty. that is why some people still doubt their guidance. they do not think they will say certain things out loud, for instance really unveil what the threshold is to back away from interest rate hikes. can you give us an idea of what you think that threshold is? lindsey: i think we need to see a meaningful retreat. we need to see headline inflation near the 6% to 7% range. that would be enough to suggest we are seeing this retreat, there is a downward momentum in prices, that will be enough for the fed to be willing to back off more benign rate increases. it would not be enough to force the fed to pause. i think that would be enough to

get back into the range of 25 to 50 basis point clip. it is not until we get down near 4% the fed would be comfortable to pause rate increases at that point and allow inflation to continue to retreat further to the 2% preferred target range. there are still quite a ways for the fed to go. jonathan: great to catch up with you. lindsey piegza of steeple. a kick higher on the front end of the yield curve. the two year back through 3.90. lisa: what she was saying, they are not looking at what the market is doing, the capitulation. what they were looking at is the price action. it is not getting lower, they're not seeing inflation down and that is the reason why the cpi report was a real pivot for the market and not in the right direction.

jonathan: it was not like the end of 2018 where you could identify things that felt disorderly. in 2018 you had the market totally faries up in the high-yield market. we are talking about a justified change in price, at least not yet. lisa: justified by what is going on with inflation. interesting is the credit market, the fact we had not seen disruption raises the bar even higher for the fed to intervene or take a pause because you are still able to raise money, even if it is at a higher cost. jonathan: we joke as to whether chairman powell needs to reread the jackson hole speech in the news conference. you think the market is finally getting the message, after flirting with maybe a pivot? tom: why would he not read that's each -- that speech because of the international tea leaves? i take your point completely, the full faith and credit,

international has shifted this week. jonathan: you think it is starting to buy? tom: it will affect the dialogue. they will say they are not focused on it, absolute baloney. the philippine peso pushing 5860 would be a crisis for that nation, and there are 15 philippines, including columbia. lisa: at the same time, they want to get inflation lower. a strong dollar helps them achieve that. what is the incentive domestically? they are not central bankers to the world. jonathan: it is everybody else's problem, it is not the fed's problem yet, it may become their problem. i think the bank is a perfect example of a bank that has to grapple with this. sterling 1.13, it is problematic. tom: i saw governor bill lee coming out of greg's. he was too busy chewing on his

sausage. i looked at him and he turned around and walked away. jonathan: if you are walking in, tom stormed out of breakfast. it is my job to try to smooth things out with the host. how will your business adapt to change? you could hire an office full of peyton mannings. what's up, peyton? good morning, peyton. hold for peyton. they'd huddle.... welcome to the peytonverse. such a visionary. game plan... you go. no, you go! and call audibles... double our investment in omaha! omaha! omaha! omaha! or you could use workday. omaha. the finance, hr and planning system used by over half of the fortune 500. for a be-agile-like-an-mvp world. workday. for a changing world.

>> they are feeling their way to how far they have to raise the federal funds rate. they want to be restrictive,

they want aggregate demand to slow down so the underlying inflationary pressure starts to end, but what they do not want to do is intentionally cause a recession. getting to that point will require good luck. jonathan: morgan stanley seth carpenter on with those moments ago. ira jersey joins us for more on this bond market. 3.90 on the two year. as you consider where this will go next what are you thinking? ira: as we start to reprice the fed for some potential terminal rate of 4.5%, i think the two year note could keep going. we thought we would be somewhere near here at the end of the year so we have gotten to all these levels much faster than we thought ed part of that is the persistence of inflation at the insistence the federal reserve has they will keep fighting inflation for now. lisa: three months ago that

would've been a revolutionary call. that is currently what is being priced into the market. how long can the federal reserve full interest rates at that level before you do get some sort of bait deterioration -- some sort of deterioration? ira: that was our call in june so i appreciate you said that was revolutionary. [laughter] our call has been we would reach there in january or march of next year and i think at that point the fed holds there for at least six months. six months is not atypical. if the fed gets to a terminal rate there is a six-month lag before they start to cut interest rates. so much of that will depend on the path of inflation. if inflation comes down faster than we think and core inflation measure start to come down, unemployment rate start to go up , those are the things that might cause the federal reserve to follow the markets path and

start to cut in the second half of 2023. if the economy holds up, that is more of a midcycle correction, then the fed can hold there for nine to 12 months before it starts to cut interest rates. tom: are people losing money, is it ugly or is it being managed? ira: a little bit of both. one of the reasons you see some of these large moves is people are getting short. you look at futures positioning from everybody that can be short is short. in futures you have to have an equal number of buyers and sellers. if you look at the repo market and some of the funding markets from a structural perspective, that is for all of the hedging goes on. it seems like a lot of people are short. that is one of the reasons you've seen major pullbacks when you get better data from

inflationary perspective, you see the market bouncing around so much. it is hard to be short the market because the problem is being short means you are paying almost 4% if you are a short it gives 2-year note. if you are short, you have to pay the coupons. it is hard to be short for a long time. jonathan: thank you. good to catch up. what i call that was on the two year. greg staples joins us now. have we seen the highs of the year on these yields yet? greg: we've not seen the highs in the 10 year treasury, i do not think we have seen the lows in the euro. there is lot of buying waiting to get to a 3.5% 10 year. we could bounce around on the two year it will pull longer rates up. lisa: what is the high for the two year? when you start to get confidence

we have full hawkish mispriced in? greg: there's a bit of upward gravity pull in the expectation of the terminal fed funds rate. 4.5% seems to be the number. matt luzetti is talking about potentially 5%. that number will pull the two up with it. to be as much as 4.25 before we finish this cycle. tom: how does credit respond to this? does issuance go on hold? greg: there it be acceleration for market participants to try to issue in the marketplace. there is concert if they wait longer they face higher coupons and the possibility the window shots overall. one thing we have been talking about on this program is they're concerned about evaporating liquidity at the market based. we were talking about the idea regulatory capital is making the funding markets triumph a little bit.

it is the pernicious effective qt. nobody knows when the runoff starts to impact liquidity, but we are strike to see it already. spreads are widening in the treasury market. it is not too concerning. you don't want to wait until you need to find funding and find out it is not there. tom: what is the easiest way to measure liquidity in the market for mere mortals? greg: is the ability to find bibs within the marketplace for the not coco bonds. we are talking about the bbb's, the issuances of maybe $500 million outstanding, you go to market and are expecting a decent bid from two or three dealers and you are finding markdowns because the dealers do not want to step up. we are not there yet but it is starting to get concerning. jonathan: can we pick up on a

theme lisa has been pushing on qt? where is it? where is the balance sheet reduction? greg: it is tough to say. we are looking at the mortgage market where the fed has indicated they do not want to hold mortgages in their portfolio long-term. there's a lot of concern in the mortgage market if they sell lower coupon mortgages. the material part of the 2% and 2.5% mortgages -- did they start accelerating outright -- i think there concerned about raising mortgage rates much higher than they did. broader qt is a ways away from before it really impacts. banks are happy to ease some of the pressures. ultimately it needs a lower level of liquidity overall in the marketplace. it is the reverse of what they did for two years. tom: thank you -- jonathan:

thank you. greg staples there. five minutes away from the opening bell. yields higher on the two-year, on the 30 year up six basis points. equity down 1.4%. tom: i am focused. i have never gone as far out as soon three but if i take the train from london bridge to tottenham -- jonathan: where you going? tom: there is a game. jonathan: point is that happening? tom: this weekend. are you going to a get -- jonathan: are you going to a game? tom: i am considering it. jonathan: the opening bell is just around the corner. ♪

jonathan: seconds away from the opening. futures laura wright one 5% on the s&p -- which is lower by 1.5% on the s&p. in the bond market, yields holding. on a two-year, and up a basis

point -- a few basis points. right now, euro-dollar .9968. abigail: the selloff we are seeing is what you see when fedex has its worst day since february 1980. down 22% on the bearish preannouncement. asia, europe, areas of weakness. this reaffirms the area that a global recession, slowdown is here or very soon. it is confirmed by the area that ge also announced to the downside for the third quarter. they are talking about the supply chain to have another conglomerate announcing and also worth noting ge, the big businesses aviation so if fedex is seeing slowing, it could pull

on ge. this is also weighing on ups and it is worth noting that joining mike wilson on the bearish call that the s&p 500 drops 20%. goldman also talking about bearish miss -- bearishness. jonathan: that drop on fedex down 22%, the biggest one-day drop going back to 1980. lisa: $11 billion of market cap. jonathan: fedex down and down hard. equities down, yields up. >> down 1.5 percent on the nasdaq 100 with the stronger dollar and the push hiring yields. this showing the relationship

between the nasdaq 100 and real yields. you and i tracking the move on the two-year and the policy sensitive end of the curve. there seems to be a relationship with tech around the week. the selloff in tech shares is also mega caps with microsoft and google, also -- often considered holds with the strength of their balance sheets, year-to-date down collectively 3.2 trillion dollars worth of market cap. you also think of amazon impacted overnight with fedex because they are suffering the same cost pressures. with the impression print we got early in the week, not just because the discount future profits but what does it mean for households and debt? it is interesting to continue everyday seeing mega cap decline every day.

tom: it is so important when you look at the tech analysis and growth revenue. will it be the only place where it on a relative basis? jonathan: a very different situation now. equities down 1.3% on the nasdaq 100. james athey from aberdeen joins us. let's start with what was said this morning, yields meet the high which means stock have to make new lows. do you agree? james: we have seen highs for the year. we are leaning against this level because we think the tightness of monetary policy

will hit companies like a sledgehammer and that will invert the curve. i agree with the idea. it should be a cold shower for the equity markets. jonathan: we have the story. >> talking about the unit expansion over the last few years. this venture now facing officials at the fed conducting review of the business and it is very much ongoing. there is no indication of wrongdoing but it goes beyond the regular business of

oversight and what they sometimes do is industrywide dive into areas very specific look at goldman, another headache for the ceo. tom: what is the difference between an sec review and other review? >> this is part of the regular oversight overseeing goldman sachs. this goes beyond that where they are drilling into the business and making sure that the business and a and leaders have complete control over what is going on since the business is still losing money. it was supposed to break even but it has lost billing -- $4 billion. that could explain some of the heightened interest from the fed in this case. lisa: the heightened interest in terms of stability or something else? >> i think it is fair to say

when you have company like goldman. it has never really been with consumers. it is growing rapidly and hopes to have $4 billion in revenue. that is incredible growth. they will want to make sure they are doing it in the right fashion and manner. jonathan: how much support does leadership have? sridhar: the stock has not really done close to jp morgan and morgan stanley. the price is still where it was or years ago. that is not a good picture

especially when you have a rival like morgan stanley. also, other parts of the division and senior leaders intimated there is a large unit soaking up cash that is likely going to lead to less compensation for folks and even layoffs in the next few months at goldman sachs. jonathan: fantastic reporting. thank you. goldman down 3%. lisa: this comes in tandem with the concern about banks and with the future holds at a time when the yield curve is inverting. jonathan: james athey is still with us. it looks like they finally got what they wanted, higher rates and it is not helping banks. it is true in europe but also of wall street.

what happens now? james: just on a very basic level, maturity translation and a gap between short and long related to profitability. an incredibly fat -- flat yield curve and by narrowing money at -- borrowing money at high rates. it is not surprising to me that the flatten the curve has it worked for the banks. these are incredibly complex institutions that are regulated in a very complex fashion. last year, the bar was particularly high for activity last year.

it is not too surprising to me. lisa: the story that bloomberg reported about goldman sachs is to do with the consumer aspect. there is a question about the health of the consumer and when that has been adequately priced in on the consumer facing equities of already gotten beaten up to give is it enough? james: i am looking at fedex, not particularly normal and it looks like a cold shower moment. the markets seem reluctant to be too forward-looking when the future doesn't look particularly rosy. i think it is a show me the money kind of market when certain outcomes don't turn out as anticipated. you just get abandonment of the ship. looking across the market and

some of the more cyclicals, they are still looking for growth. it feels like all three of those are down in much of the equity market. tom: you are quoted on a daily basis across all of the press. i have to ask your thoughts on what this government can do for growth. can they deliver a growth rate for the united kingdom? james: it is very difficult situation. i can understand why the prime minister is talking about the policy she is and it should keep the back of england on the sidelines.

you have given money to those who aren't in need of it. that would take away the upside inflation risks. where we have come from to where we are now, with the u.k. in particular, the expansion is really escape combination for governments. as always in this situations we have been relying too little on long-term structural investment and enhancement. at some stage we will have to wear a lot of short-term pain to get ourselves where we can look medium-term or long-term. hopefully this is the government

to do that but the next 12 months will be incredibly difficult. jonathan: james athey of aberdeen will be sticking with us. something we have discussed multiple times, what is the price we have to play -- pay to get inflation down? forecasted inflation rate coming down and unemployment coming down and you realize the data points. lisa: there is so much that is unknowable at a time when what happens with zero code with china, oil prices, supply? tom: these markets are original. there is a little good in the equity market, two-year up. we are now up to 40 something. i just can't say enough about

the speed of movement in the real yield. jonathan: equities lower by 1.4% on the s&p. live from london, this is bloomberg. ♪

>> i am very supportive of the idea of an oil price cut in general for russian oil. we are working on amending the sanctions package. that is required for this new proposal and we know we have to be fast. jonathan: european gas fluctuating as investors weigh eu intervention. walk us through how big this will be. >> it is going to be a big job.

the packages controversial but it is interesting she said she wants to take part. it is potentially significant but unclear how this is going to work. tom: i am confused on this. in london, i am baffled about where the united states of america fits into this. europe seems so lonely in this war and energy production. what can the united states do to help brussels and the best team in the continent? will: i think the u.s. has helped europe with record

numbers of gas and oil, but there is a limit to what they can do. they are limited in the production capacity. there is not much more they can do it when it comes to the oil side, the u.s. is trying to find a way to hurt russia by depriest -- depressing prices and keeping the global price from getting too high. the intent is interesting, not to limit supply and force the price up but to limit financial gains into russia. lisa: will kennedy, thank you so much. i wonder how much there'll be a germany like situation to try to get rid of the punitive valuations we have seen.

jonathan: we talked about this yesterday. do you remember when italy shut down over the weekends in the pandemic? what does that moment look like for europe? lisa: which is the question of when does it become realistic. how much do we get a reality check going into winter about the crisis. everyone is recognizing it at least in theory. james: there are a lot of moving parts. whether we have a mild winter or no more -- or normal or harsh winter will have an impact on energy demand and capping or

reducing energy usage will play a part. also what that means for the rates and consumer confidence. i was hoping to see a huge upside in economic outlook but whether we get to that depends. jonathan: i wonder how much of this is actually priced. there is some indication that people were priced for a slowdown in the global economy. i wonder what other parts of the market are not priced for a slowdown in the global economy. james: the u.s. yield curve is inverted by ready to 50 basis

points. some of the other yield curves are still positive. in germany you get the collateral shortage going on. it suggests the outlook is brighter for europe relative to the u.s. at a time when the amount of tightening is about the same. it wakes up and we saw this in 2007 and 2008. tom: the direction and magnitude of the move, two-year u.s., german, does it change policy over the weekend into next week? are those the type of brutal moves that can change institutional policy? james: to a large degree, i

agree the central banks are waiting and they have net for 10 years. government policy pushing in the same direction. the banks were sleeping through that but rushing to catch up but that is the best option on the table for them in order to have the policy propagating through markets and through the economy and demand. there is a shop element to this from an economic perspective, lots of debt that needs to be rolled over and lots of ways consumers can cope with it in a short time but it is a drag as

it goes on longer. i think they will pat themselves on the back and say a job well done. what happens in six months is a different ballgame. the pain occasion can become the policy and it never gets to that. they have to talk tough today it asked again in six months when unemployment is up and inflation is shrinking and it is a very different landscape. jonathan: let's talk before then. that is too long. thank you. it is good to catch up. down 1.5 percent on the s&p 500 and lower on the russell. small caps don't look good on the russell. lisa: they are going to be penalized for the same outlook

fedex is looking at, casting cold water on it. tom: we will have coverage of the funeral on monday. anna edwards will be leading the coverage. jonathan: looking forward to your coverage after the weekend. they cute for being with us. -- thank you for being with us. this is bloomberg. ♪ as a main street bank, pnc has helped over 7 million kids develop their passion for learning. and now we're providing 88 billion dollars to support underserved communities... ...helping us all move forward financially. pnc bank: see how we can make a difference for you.

>> from the financial centers of the world, this is "bloomberg markets" alix steel and guy johnson. ♪ alix: 30 minutes into the u.s. trading day on this friday, september 16. here are the stories we are following at this hour bank of america says the inflation shock are not done. that means new lows for equity stocks. and dollar dominance. the pound hit its lowest level since 1985 of the 30th anniversary of black wednesday when the uk crashed the exchange rate mechanism. and the