>> it doesn't look like an immaculate disinflation. interest rates will have to continue to rise. >> we have not gotten real

communication yet on when they will stop hiking. >> at the end of the day it is really the consumer who has been keeping the economy ticking along. >> this is bloomberg surveillance with jonathan ferro, tom keene, and lisa abramowicz. tom: good morning it is tom keene and jonathan ferro. bramo is on a much needed vacation. jonathan: on friday what changed was the market responded to incoming information. you had an upside to prices on payrolls. we have to be asking questions about why that might be. tom: that gets the zeitgeist of the moment, which is growth worries and yet stronger markets. jonathan: we talked about it about an hour ago.

the debate we are seeing take place over where we are right now is one of the biggest disagreements right now. you have some saying we have a re-acceleration. tom: that is the optimism that is out there. stephen englander in 15 minutes, but -- steven englander will join us in 15 minutes. not to get to the data check right away, but on my screen this morning is not a snooze fest. it is a bond market signaling a less restrictive stance. jonathan: tom kennedy of jp morgan 60 minutes ago said bonds are back. i have heard that a few times now. they are looking for the economic slow down. i think the high was about 4.30

on the high year. tom: take the bloomberg financial conditions index. a gloom of a standard one deviation and we have gone opposite of what chairman powell desires. maybe you say " disinflation is kicking in," but i am looking at the screen and that is not a powell-friendly screen. jonathan: you said that is the opposite of what he desires. i don't know what he wants anymore. let's see what he does at the news conference, but that was the change for me, what he didn't say at brookings compared to what he did say. tom: the thing i say is china. you mentioned this earlier you were more in tune with this. new be coming to 6.95. there is a mystery to this

opening in china. it links directly into the bloomberg conversation. jonathan: it is happening in stages. you saw it again overnight with the testing requirements, access to public spaces in cities like shanghai. it is incremental. tom: i was on a high-speed train in china one time and i told them " we're talking about pittsburgh and pollution." he said, "duh there are 14 pittsburghs in shanghai." jonathan: did you see the wall street journal story? they are already thinking about -- tom: -- apple are already thinking about shifting production out of china. tom: i got the new iphone. jonathan: what is new?

tom: the camera. shocking! it is that good. we had a good number off of 6 weeks of move on vix. jonathan: somebody did watch the eurodollar pushing 1.06. tom: fixed income, that is what everyone watches at front. we are joined by vishi from morgan stanley. what are you watching most closely in the fixed income space? >> this is the year of fixed income. we expect to see significant allocations away from securities

. we think you look at the institutional side with the pension funds. there is significant room for greater allocation to fixed income securities. tom: you pushed against the media fixation on fed discussion. will flows overcome all next year? vishwanath: that is the case . this all lines up well with the way we think here at morgan stanley. we think that the case for equities is weak as you have seen my colleague mike wilson mention quite a few times. the downside to come in earnings and when you look at the fixed income world one thing -- we are

closer to the terminal rate. the question for us is how long does the fed stay at those restrictive levels? one major difference this time, from economic slowdowns we have seen is that in all of those cases we have seen this credit default spike on the back of the recession or economic slowdown, something we do not expect to see this time. you take that into account, and you also take into account that other parts of fixed income, a lot of -- you put all this together, the case for greater allocation to fixed income is pretty strong. jonathan: you gave us a flavor of it then. can you build this out a little more moving out from equities to fixed income. it is a big universe.

where in fixed income? vishwanath: investment grade corporate credit. you need -- spreads need to be, wider a year from now but we expect yields to be meaningfully lower. that means a good return for investment grade credit. some of the bond market have interesting opportunities where bond yields are actually what the equity earnings are. that is a case we made in emerging-markets. we saw what the market is pricing in. compare that to the long-term average defaults we have seen. we have seen double v bonds in emerging-markets.

there long-term average default rates are 7%. that is a substantial -- there is a lot of credit, mortgages, and others. put all this together, do well on fixed income. jonathan: this year i had a little bit of the quantity price. is there a geographic bias within that as well? vishwanath: there is a little bit. it is a combination of the economy and what will be priced in. europe is a bit better than the u.s.. we think there are other parts, the leveraged loan parts of the market, we will be more cautious on. there is a bias in quality and the canary in the call mind is the markets that are interest rate sensitive, in particular --

tom: one final question. we are down -17%. maybe we are down -12%. i don't need a morgan stanley call, but i need a vishi call. how long will it take to make back that loss, if i am clipping coupons? vishwanath: it depends on what happens with rates. investment-grade credit was down 17%. as you mentioned, a lot of that is entirely because of the rate move. it was mostly rate move. some version of the rate moves, we will get midway there by the end of this year, so we are expecting some total return in the 7% context by the end of this year. tom: ok. jonathan: wonderful, thank you.

vishi of morgan stanley. tom: 11.5 months into the year, i'm not cognizant of the loss in bonds that i have never seen in my lifetime. jonathan: the price loss. tom:, price down, yield up. he was eloquent there. he said my math there is it will take 2 years to get out of the hole. jonathan: is a great if you are not holding this stuff? you are still in it, sitting in the living those losses. tom: jon and i killed it on the brackets. there is a small game today i think is way underplayed. brazil-south korea ? i don't know what to make of it. jonathan: is nine more making a comeback -- name or making a

comeback? last couple games they have had a problem scoring. they have struggled, apart from the first game. tom: against poland england was dominant the whole time. are we going to see that with south korea today? i don't think so. jonathan: is that your prediction? tom: i don't know. jonathan: what is your final 4 in the bracket? tom: i've got brazil, argentina -- jonathan: france and portugal? your final? what have you got in the final? tom: i believe i have friends going all the way. jonathan: ok. make sense. you base it on the jerseys, of course. from new york, this is bloomberg. ♪ >> keeping you up-to-date with

news from around the world with first word. i'm lisa mateo. opec and its allies have decided to keep oil production unchanged. it reflects the unpredictability of supply and demand in coming months. opec-plus demand has implemented the reduction agreed at its last gathering. european union sections on prude imports from russia going to affect today. china appears to be shifting away from its strict covid policy. the loosening of restrictions comes as china enters a downstream in its latest -- downswing im its latest -- downswing in its latest covid curve. the u.k. plans reform to london.

it is unclear how radical any changes to those rules might be. demand for teslas in china are not -- is not living up to productions. it is estimated the move could reduce production by 20%. shares of credit suisse rose today on the prospect that mohammad bin salman will take a stake in its investment bank spinoff. he may invest $500 million in the unit, which will be known as credit suisse first boston. i'm lisa mateo. this is bloomberg. ♪

jonathan: coming out of payrolls really good numbers relative to expectations. wages better than expected. equities just a little negative into the close on friday. waking up in the morning to losses address 6/10 of one perv -- losses of just 6/10 of 1%.

cribbing up on -- creeping up on 1.06. tom: we will get to steven englander in just a moment. the standard chartered are world -- but first a brief. alan one joins us with bloomberg. i want you to cut to the chase on the strong renewed be. we have seen the yuan move. is that a manipulation of beijing or is that market forces? >> i think it is market forces. i think people are getting really bullish earlier than people had expecteds. a lot of the economist are

starting to -- had expected. a lot of the economists are expecting a reopening in early summer. jonathan: the markets as you know jumped to the endgame. they are like " what is next year look like?" can you walk us through the incremental moves being made across chinese cities at the moment? >> sure. first let's get to the idea of protests. protests have died down. there was one on the weekend over some restrictive zero covid rules at a university. the most significant development over the weekend is that government keeps announcing covid loosening measures and the most interesting part of that is these are the restrictions that

affect people's lives. authorities are telling people you know longer need to show a pcr tests result in order to get on public transport or director public venues. they are doing pretty much the same thing, but they are saying you do not need to show your pcr tests results in order to get into offices and markets. this is spreading throughout the country. the biggest cities are doing the same thing. then you have cities where authorities are telling people " do not even bothered to take covid tests unless you think you have the disease or have been exposed." the downside to all this is the fact that a rapid reversal of these restrictions is leading to a lot of places shutting down covid testing this. it is leading to long lines and frustration.

things -- you still really need these covid tests. i was planning on going to the dentist tomorrow, but then they told me i need a 24 hour test result. jonathan: slow changes. tom: i will use that excuse next time. jonathan: thank you sir. allen bringing home the reality of what is happening in the city. i don't think people realize you need a pcr tests to go to the dentist or to get on public transport. jonathan: art -- tom: our dedicated chinese team is spread out all over china. steven englander, he describes the path -- steven, i wanted to frame your essay on the taylor

rule -- you say we need a new englander rule. what is the new englander rule that gets us beyond the desire for higher and higher interest rates? steven: there are a number of englander rules. having no expense in the last three decades of using interest rates to slow the economy down, they do not know what the dynamics are. right now i think their time horizon is 2 or 3 meetings ahead. " wait and see what inflation does as it happens." for them, the slowing of the economy is short. at the back, of their mind there is a phillips curve.

if you combine the fillet's curve and of the -- phillips curve and the taylor rule, once the economy slows down, it means your rates are above neutral and eventually your inflation will slow down. tom: do you assume we move it from the pandemic and supply-side dynamics and supply-side stocks back over to -- shocks back over to a demand-side analysis? can we make that transition back? i understand that is an original concept. steven: if you look back to the 70's, which bears remarkable resemblance to what we are living through now, there were a lied of push factors that kept inflation up besides energy prices. regulation, unions, union power,

and so on. we are going to be having to deal with those. some of those factors will be commendable like the shift to renewable energy. there is also a cost to it. we will be balancing supply and demand factors for the next decade. tom: thank you so much. steven englander -- tom: thank you so much. steven englander with us. these are huge overarching questions. we look at questions like what will sterling do? englander in that essay really took on bullard, really went after 7% terminal. >> with china -- jonathan: with china, will we reopen number one question? in the united states will we rollover, number one question?

when it comes to europe it is not a matter of if we get a recession, it is a matter of how deep will that recession be? we are hearing from the european economy commissioner speaking in brussels who is saying the following -- " the economy should be positive from spring, but we are in a new contraction for this winter." that is the issue that european space. the ecb will hike into this. tom: i'm looking at the bloomberg financial conditions index, separate for the u.s.. i cannot say it has never been wider, but it is close to the widest differential it has ever been. jonathan: we said it repeatedly this morning -- rock and a hard place for the ecb. tom: the governor of ireland, to say loosely, the governor of " picture eastern european -- "

take your eastern european nation -- jonathan: it is a difference between a 50 basis point hike and a 75 basis points hike. i don't hear many on the ecb saying " don't hike." tom: i don't have a clue what to do with the dollar. jonathan: dear remember this guy, carl riccadonna? tom: r -i -c -c -a. jonathan: carl coming right up. ♪ if your business kept on employees through the pandemic, innovation refunds could qualify it for a payroll tax refund of up to $26,000 per employee,

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jonathan: 60 minutes away from the opening bell. that morning to you. -- good morning to you. yields are higher by three basis points. 3.5188. tom: 9:45, 10:00, this is your area. ism services -- do we care? jonathan: ism services, i care. we are looking for 53.4.

tom: i'm very diffuse. he gets to sleep in, is that what this means? jonathan: he wakes up later. he will break down that number with me. tom: it is old news. we all know that. we are always looking forward on surveillance. carl, i want a slice. you slice and dice the confusion out there. the media is way too simplistic about the jobs reports plural. what part of the complexities of labor matter to this confusion? was it a good report? was it a bad report? carl: i would say it was not as

strong as the headline would make you believe. there was a negative net revision to the past 2 months. they should lop that off the top line. you take that off the number, and we are really talking about a market showing signs of weakness. we have all these different labor gauges. what i think we need to do because the most important thing is the take-home pay for workers. we can see the trend is decelerating. it is heading below the rate of inflation at the moment. it is a big problem for households. the rocket fuel for consumer spending is coming in, in a dramatically slower fashion. that has big implications. tom: you are fortunate at

princeton to have a guy named henry rosen -- harvey rosen. you are saying look at labor supply. what is the distinction of the american labor supply right now? carl: the supply is not there and it is not just a story of early retirements. it is happening across a broad swath of the labor. if we are printing jobs at a pace of 200,000 plus per month, it continues to amp up pressure in the labor market. jonathan: let's not bury the lead. carl: i think it is harvey rosen 102 not 101. jonathan: the bmp -- carl: we will see what happens after the press conference next week but we think there is a tightening in december. we expect another 50 basis points in february.

a terminal rate of 5.25 consistent with what we are seeing in terms of the upward -- jonathan: this -- i --

carl: gdp figures, etc., the fed will keep at it until the job is done. they may have to keep at it more than previously expected. i don't think we are seeing a shift because he did not talk about -- there is a big difference between where we are now compared to where we were between the jackson hole speech where he ripped up the script and deliver this hawkish message. we see a turn happening in the inflation numbers. w seee the impact of tighter rates and manufacturing. the fed feels less behind the curve at the moment so there is less need to aggressively stage-managed financial conditions so they can let the

-- tom: i'm going to move to the 9:00 hour looking at different things with stephen roach. i went to start with him with the wage spiral. defined what a wage spiral is. carl: a wage price spiral is when workers are demanding higher wages to keep up with inflation but those wage increases are providing the fuel for inflation. the economy is undergoing a massive deceleration. if we look at real gdp it was 13% in the middle of last year. it was 6% at year-end, about 2% middle of this year. it is heading close to zero. with that kind of deceleration you know the wage trend will decelerate as well. there is a good chance we break this dynamic before a real the leisurely us feedback loop comes

about. tom: what is your study of history? wages deflate -- do we have wages deflate? carl: you will see that bargaining power quickly eroded from u.s. workers. we are printing north of 200,000 on jobs, but by the first quarter of this year we could well see our first negative payroll print. as the loosening comes about, we are in the recession camp for next year starting in q2. that loosening of conditions will erode the bargaining power and prevent the feedback loop. jonathan: that is the trajectory for growth. can you give us the climb path for inflation? carl: the first part is easy. from 8% cpi to . getting -- from 8% cpi to 4%.

the core metric inflation we have to watch is x rents. now we have to strip out medical services because of this accounting dynamic related to insurance payments and covid and whatnot. if you look at that aspect of cp we arei -- cpi seeing no improvement on that front yet. jonathan: this is a question more along the lines of a reaction function question on the fed. if i put the two pieces together, you have growth and procession. inflation is kind of sticky. it is the fed holding inflation rates at 5, 25? carl: this is something the

markets have not fully come to appreciate. powell teased this when he said " shift away from the pace to the level." they have not fully incorporated the duration. the fed will not be the white knight writing to the rescue as it normally is. the fed, we expect to stay at this 5.25 level. they could start easing but not looking to accommodative territory. tom: this is sacrilege. the zeitgeist at virginia commonwealth university over to the peterson institute, which paul krugman wrote about 4 or 5 days ago. the new 2% will be elevated out in the vicinity of 3%. can we withstand that? that theoretical -- can we withstand a new inflation

level above 2%? carl: it is going to be hard to get to that 2% level. there.is a lot of discussion right now on fielding -- there is a lot of discussion right now. i'm fielding a lot of questions. we have to prove we cannot hit the 2% target. if there is a time to ease the threshold they have to do it from the new side of that threshold. they have to get to 2% and stay there. if they have a compelling reason, they may need to reevaluate but you cannot do that when you are this far off of the target to the high side. jonathan: football -- now that you are at bmp do have to pretend you like the world cup? carl: [laughter] jonathan: do you walk around

with french flags supporting the national team? carl: if you -- jonathan: can we clear this up? have you never watched rocky? tom: i have never watched the movie. jonathan: you have never watched rocky? carl: jonm this is when i walk offse. jon, come with me. jonathan: you have never watched rocky? tom: no. jonathan: how have you never watched rocky? tom: i don't know. i feel vulnerable right now. carl: come on, jon, let's go. tom: just walk in front of the camera, jon! there we go! thank you, jon. what we find important here folks is it is supposewhat you e

inversion going on, 2/10 spread. what i am really looking at is a basic idea of the inflation-adjusted yields speaks volumes of what we saw last week. we head towards a positive 1%, way down coming in with avis out -- coming in with a velocity. stephen roach with me next. this is bloomberg. ♪ lisa: hopefully mr. farrow will be back! the price of oil is rising today. opec and its allies have agreed

to maintain production at current levels. the european union sanctions came into effect today. china is easing the measures that have curbed its oil consumption. compromise designed to win republican support for an $800 million spending bill. he worked out the agreement with president biden. a white house official told the washington post of that nothing has been resolved. the railroad workers union has rejected an offer ending -- they would have received 4% pay hikes this year and next. this was conditional on a number of things, including closing all ticket offices. shares of gaming company activision blizzard are higher after learning microsoft is willing to fight for its acquisition of the company if

that federal regulators file suit to block it. steph is wrapping up its investigation of that deal. -- staff is wrapping up its investigation of that deal. i'm lisa mateo. this is bloomberg. ♪

>> those underlying components, the discussion around the leg impact of housing, none of that matters. what matters.

-- what matters is a wage price spiral. tom: he is -- there is a phrase harkening back to another time and place. we will slip in one question here on this american issue as we celebrate, and truly celebrate, accidental conflict. america-china and the conflict of false-negative's. you have heard me in the recent day saying he invented modern economics. dr. rose, thank you for joining us. i want to ask a question before we celebrate your informative book, and that is simply do we harken back to the fears of the 60's and 70's in a wage price spiral/ -- a wage price spiral?

>> the wage price spiral was impacted by labor union contracts. 2 things have happened. labor unions are a much smaller share of the workforce, and these adjustment clauses are less prevalent than they were back then. nevertheless wages, -- labor is a very important segment of overall business costss and labor markets are boosting the compensation piece of that. weak productivity is reinforcing that. it is important to stay focused on this issue. tom: stephen roach, sir howard davies says your book is a way to a new framework, a new discussion of both parties. we need goodwill among the united states and china.

how do we find that goodwill? stephen: we have to recognize that the current approach we have both been wedded to over the past 20 years is an abysmal failure. we have had the beginnings of a trade war and we are in the early stages of a new cold war. i propose a new approach based on three key pillars. one, rebuilding trust by going after the low hanging roots of reopening consulates and restarting exchange programs, taking pressure off of ngo's. second abandoning the zero-sum bilateral trade framework, which makes no sense and has not worked at all. embracing a market opening, progrowth initiative framed around a bilateral investment

trading. thirdly, really making an effort to establish a new architecture for engagement. the summits like the one that xi jinping and joe biden had, they are photo ops but they accomplish nothing. i am in favor of a new full-time organization i call a u.s.-china secretary. tom: what we see from the leadership in beijing, the leadership forever, is the idea you mentioned in one of your chapters -- a china with american characteristics. there seems to be zero desire for that out of beijing. dr. roach: china wants to do it their way. that has been an affront to us. we had a naive assumption that we would let china into the wnto

and they would become more like us. they had the facade of presenting that similar appearance, but they have gone their own way, and that remains a worrisome part of the ongoing conflict. tom: you are the first one to write about this within market economics. you are studying with john gorman now. does morgan stanley move from hong kong to singapore? i will leave that up to them to comment on. certainly, singapore has benefited a lot from the shifts that have occurred in hong kong, but hong kong to its credit is trying to reclaim its position as a major financial center in non-japan asia. tom: how do you react to the bipartisan nature of this in washington? it is one of the few ideas in washington where there seems to be common ground.

there was waves of this from shane kai-shek. is this another wave of bipartisan antitrust -- anti-china feeling? dr. roach: the sentiment is the only thing that is unanimous within the republican and democratic ranks. it will be hard to dislodge. one of the big surprises for me was the election of joe biden. if anything, it has not altered the trump anti-china policies. if anything, it has amplified it. for a candidate who repudiated so many of his predecessor's policies to perpetuate what is a wrongfooted u.s.-china policy is a surprise. tom: stephen roach, what is the

approach for multinational americans led by apple in china? dr. roach: tim cook has been leading the way in reevaluating the commitment of u.s.-based or multinationals to a full outsourcing in china. china is the quintessential producer taking advantage of this production platform and they are now for a variety of reasons starting to diversify production of the iphone into -- that is a move that needs to be watched carefully. tom: do you have a confidence they can get manufacturing processes in other nations equal to what they have invented in china? dr. roach: china certainly has

made a huge bet in terms of revamping its infrastructure and equipping its companies and workers with the latest technical skills and new technologies. by no means does it have a monopoly on that opportunity. that is what globalization does, it offer similar opportunities for other offshore, low cost of production platforms. tom: in the time i have left, i think we need to talk about one of your calls. you have been candid about this idea of weak dollar. it has been a steve roach quarter. there is a new weakness with the international investment doing better with that weak dollar. is this the great roachian turn? dr. roach: i'm not sure that is great for me. that is one of my more humiliating forecasts.

this was a bad one. it is very much tied to the fed. as i look back on the mistake that i made, i think it was a fair mistake to make at the time. the fed a couple years ago showed no desire to be aggressive to tighten monetary policy to counter what it incorrectly presumed was transitory inflation. the fed has gotten religion, and now it is nearing not a -- some of the bit has come off the dollar, of the dollar is still a good deal higher than when i made that seemingly dumb call. tom: let me finish with the optimism of accidental conflict as well. where you want to be in 12 months? short term for the chinese short term for the u.s. as well,

what is the to do list we need to do to get to the goodwill? dr. roach: we need to reengage. there is no one in our political structure, especially in leadership roles, who are willing to make a bet in re-engaging with the chinese. there are a lot of things about china that are uncomfortable and unpleasant that we have focused on but the two most powerful economies, the two superpowers need a more constructive framework of engagement. i propose that in the book with a very optimistic chapter on this new plan. tom: we will have to leave it there. stephen roach, congratulations on decades of work. accidental conflict. coming up, a very busy monday here, watching the bond market with futures negatives 31. this is bloomberg surveillance.

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city, good morning. everybody is rolling over just a little bit. the countdown to the open starts right now. >> everything you need to get started for the -- to get set for the start of u.s. trading -- this is bloomberg: the open with jonathan ferro. jonathan: live from new york, the big issue hoping for a strong finish to the messy year. >> this very market rally -- >> there is too