Fed Fallout | Bloomberg Markets: The Shut 01/31/2024

The door to Fed rate cuts may be open,but Jay Powell is still blocking the entrance.This is the countdown to the close. I'm Romaine Bostick and I'm Scarlet Fu.Our coverage of the Fed decision continues as we take you to the closingbell and beyond. A three pronged Fed decision today bythe FOMC to hold interest rate where they've been going back to late July toquantity to continue quantitative tightening at the current pace and toclarify that rate cuts will only come when the Fed is confident that inflationis nearing 2%. Now, Powell did offer a glimmer of hope,saying rates have likely peaked and can.

Be dialed back, just not in March.Fed Funds Futures pricing, though, shows investors have high conviction for ratecuts in May, June, July. And at that September meeting, the bigleg down on that two year Treasury yield today, Scarlet Fu a big portion of thatmove was less about the Fed and a little bit more about what's going on in theregional banking sector. Absolutely.If you take a look at CRE, the ETF that tracks regional banks down as much as5.6% after New York Community Bank reported a surprise loss, it announced aincrease in provision for credit losses to half a billion dollars.Analysts were looking for about a 10th.

Of that, so that raised a lot ofeyebrows. Is this the regional banking crisis parttwo? That's the big question.A lot of people saying this might just be specific to New York CommunityBancorp. I think a lot of investors, when youconsider what CRE is doing, think otherwise.Absolutely. And of course, Stryker, I just threwthat in there because medical device makers are definitely in a focus todayafter Stryker and Boston Scientific both reported results that topped estimatesand just another company to throw out.

There as well, Rockwell, the industrialtech company falling the most since March 2020.Quarterly profits missed analyst estimates on lingering supply chainissues and still high inventories and customers.You combine the disappointing news out of the Fed and the disappointment out ofearnings and a big reason why you're seeing the S&P down one and a halfpercent and the NASDAQ down two. But let's start off here with the bignews of the day. Then that is Fed Chair Jay Powellsignaling he's in no rush to cut rates. I don't think it's likely that thecommittee will reach a level of.

Confidence by the time of the Marchmeeting to identify March as the time to do that.But that's that's to be seen. So I wouldn't call, you know, when yousit when you ask me about in the near term, I'm hearing that is March, I wouldsay I don't think that's probably not themost likely case or what we would call the base case.Jay Powell, they're making cyber here, director of U.S.rate strategy over at Bank of America. Look, this is now a big guessing game.Not so much if the Fed is going to cut. And let's be clear, he kind of basicallysaid the door is wide open to a rate cut.

At some point this year.When it when does that happen? Is it in April or I'm sorry, in the Maymeeting, or do we have to wait all the way to December of that year is done?He said, See here, you got your rate cut.Yeah, that's exactly the question everyone's asking.Remain. And really the key buzz word here, weheard it from Powell multiple times. We saw that we saw the mention in thestatement is confidence, is confidence that inflation is still on this pathlower that that the disinflation that we're seeing from some some componentsin the basket is still going to be at.

Play here.The Fed is is now thinking that March is going to be too soon for them to seethat good evidence that inflation is showing good progress besides just thegood story that we're seeing, but also shifting to services that's buying themtime, they want to maintain optionality. They want to see how the state is comingin. It's buying them time.But how much time do they really have? I mean, you have a ten year yield nowfirmly below three a, B below 4% excuse me, that two year yield down nine or tenbasis points on the day. And that's been the trend for a whilenow.

And at least based on the price actionI'm seeing and maybe you have a much clearer view than I would, but I assumethat's a pretty, pretty large conviction here that rates are going to be lower atsome point at the end of the year than where they are right now.Yes, exactly. And we see that certainly in the dotplot. And and Powell is not dismissing that inany way. It's really just the timing.And the market has gotten very much so ahead of itself in terms of pricing,where the Fed is going to end up by the end of the year.If you look actually, I have a nice.

Chart on this that I published, but youlook at the difference between where the market had been pricing rates at the endof 2024 versus what the what the Fed has told us and guided us.We see a historically large wedge between those two things.So it was really Powell coming out and challenging.Well, slow, slow your horses here. We still haven't seen enough progressyet to go. Absolutely.I think he said that so. Well, the fact that markets are gettingahead of themselves and the Fed has made very clear that it needs to see morebetter data, more good data, not.

Necessarily better data, but more gooddata overall, he says We're going to be reacting to the data.So by definition, that means the Fed is going to be behind the curve wheninvestors are trying to get ahead of everything.Where does that leave investors in terms of how they position for when eventuallythey get the all clear from Jay Powell? Yeah, great question, Scarlett.So what we're seeing in terms of how the rates market is responding to thisalready is investors are already out there extend, extending, duration,extending. I'm preparing for the Fed to be movingfrom hikes to cuts.

A lot of that behavior has happenedalready. And really the markets alreadyunderstood that. Well, inflation's on its way down.So if you look at the one year inflation swap, there's a lot of confidence injust how quickly inflation's going to continue to cool down and come towardsthat Fed's target. So while, you know, Chair Powell is kindof walking some of this back, the market has a lot of conviction in thisdisinflation story. And so we've seen a lot of this behaviorfrom investors, particularly in the rates market happened already.We've seen a lot of investors move more.

Overweight duration.We've seen some shifts in positioning. We've seen folks largely set up for asteepening of the yield curve, a very, very popular trade that we've seen inrecent months. So a lot of this has happened alreadyannounced the fine tuning of this message.How much is the Fed going to cut? To what degree?And really the big question here is, is pace.And what's interesting to I was just looking at Bloomberg headline across thewire the Fed funds pricing continues to drop for that March meeting.We were basically in a coin flip prior.

To the meeting.We're now down about 30% chance. But Terry, her point, I think you lookat the other meetings and we're basically at about 100% probability atleast as what's being priced in for that May meeting through the Septembermeeting. Yeah, that's a really good point.So what do you do between now and then when we actually do get that rate cut?You mentioning steepening of the yield curve, how that's a popular tradeincreasingly, is it a overcrowded trade Right now?It's a little tough to see. So one thing that we look at veryspecifically and what the market focuses.

A lot on are some of these momentumstrategies. And we have seen CTAs in particular in apretty meaningful way in that steepen our position.But it's been a tough trade for the market.A lot of that has been the sensitivity of Powell pushing back on the cut, someof the data that we've gotten, which has been really quite strong.So it's a hard trade to get right. And usually you don't see the curvereally steepen out all that meaningfully until we see a rise in the unemploymentrate. And this cycle may just look a lotdifferent than prior Fed cutting cycle.

There's long term investing there, butthere's a lot of tactical trades out there, particularly given all thevolatility. Is that something that you and your teamhave have your eye on? Yes, indeed.So, you know, we continue to think that investors want to be trading the ratesmarket tactically. You want to be taking advantage ofpoints in time when rates are moving up towards that 425 or so level buying atthose levels. But if you're seeing rates drift closerto the 375 or so range, probably overdone because again, this cuttingcycle could just look different.

The Fed may not necessarily be cuttingall the way back down to 2% or the zero lower bound as we've seen in priorcutting cycle. So we have to be cautious here.And the story is data dependence and that confidence on the inflationpicture. All right.Well, he did say the peak was in or likely in, which I think is about asdefinitive as you're ever going to get out of a Fed chair making.Great to have you here on set. Megan Swiger, director of U.S.rates strategy over at Bank of America Securities.With about 3 minutes until 2 minutes, I.

Should say, until we get to thoseclosing bell stocks right now in the U.S.hitting session lows. The NASDAQ 100 right now down almost 2%here on the day. The S&P down one and one half.We're going to the bell and beyond. Beyond the Bell.Bloomberg's comprehensive cross-platform.Coverage of the U.S. market.Close starts right now. And right now, we are few minutes awayfrom the end of the trading day. Romaine Bostick alongside Scarlet Fucounting down to the closing bell.

And here to help take us Beyond thebell, it's a global simulcast with Carol Massar and tim stanwick matching inlovely blue. We welcome our audiences across all ofour bloomberg platforms. Television, Radio didn't get themessages and YouTube. I sent Scarlett a completely separatee-mail. You know, it's it's like a joke withher. I went out my own way today.It's going to stand out. But look, I mean, we have to talk, ofcourse, about the big news, the Fed meeting today and really the marketreaction to it, guys.

And we're looking at one of the biggersell offs that we've seen in the equity space.And of course, one of the bigger rallies that we've seen in the Treasury space ina while. Yeah, right.That's certainly significant. We've seen that play off of it.Walter Todd, that we just talking from Greenwood Capital saying, you know, I'ma little confused. I felt like the Fed was saying one thingin December and Jay Powell was saying one thing.And now it's like, what? March is completely off the table here,it feels like.

So he felt like the mood was different.And then for equity investors, that meant, well, wait a minute, ourexpectations were too high, so we've got to pull back a little.The message, though, is clear from Fed Chair Powell.He wants to see inflation come down. He wants it to be consistent.He doesn't want to get burned by six months of data.He wants to see more than six months of data.Scarlett, He doesn't You know, it's the concern, of course, is that it's youknow, the data that we've seen in recent months doesn't stick.And that's why he's telling people you.

Have to be prepared for us to keep rateshigher for longer. Yeah, for equity investors, the datacoming out of companies like Alphabet, Microsoft was certainly nothing tocelebrate, especially given how much those stocks had rallied after the lastearnings report. Don't forget Alphabet, Microsoft, Big,big chunks of the S&P 500, the Nasdaq, we've got another three companiesreporting tomorrow that can really set the tone for the rest of earningsseason. Yeah, this is such a weird confluence ofevents this week with all the big earnings, a big Fed meeting and ofcourse, the we still got more economic.

Data, consequential economic data onFriday with that jobs report number. But you're seeing a lot of weaknessright now in the markets here. They had kind of oscillated aroundearlier in the session, but after Jay Powell started speaking here, thedirection really shifted to the downside.The Dow Jones Industrial Average lower by more than 300 points or about 8/10 ofa percent. The S&P is going to close out the day,down about 1.6%. Biggest one day drop for the S&P goingback to September 21st of last year, now camped out at that 4846 level.The Nasdaq composite down more than 2%,.

Its worst day since late October.And the Russell 2000 guys down about two and a half percent Carol.All right, folks, let's get to Qualcomm Earnings just crossing and let's get tothe outlook as it's talking about second quarter revenue.The outlook here, 8.9 to 9.7 billion, quite a range.The estimate out there on the street, 9.36 billion, first quarter adjustedrevenue, 9.92 billion. Folks, that is a beat.The estimate on the street is 9.54 billion.So that initially first quarter adjusted EPS to 75, again, a big beat.The estimate on the street is $2.36 a.

Share.And initially, Scarlett, we're seeing the stock up about 1.7% here.Yeah, Qualcomm, of course, so critical in the smartphone market.And it's really kind of a barometer for demand for smartphones, which we knowhas slowed down, particularly in big, big markets like China for someone likeApple. So the fact that this revenue outlook isso broad leaves a lot of questions in my mind.It's going to really depend on how the company characterizes what it sees outthere. During the earnings call, Cristiano Amonin a press release, the president and.

CEO of Qualcomm saying, looking ahead,we're building on the momentum with our leading Snapdragon platforms and techdifferentiation in connectivity computing and on device generative AIacross handsets, automotive, PC, XR and industrial Internet of Things.ROMAN Yeah, I mean, this is going to be the big story.I think everyone is really so focused right now on the health of the mobilemarket and obviously Qualcomm space in it.And of course we'll get a much better read on that when we get those Appleearnings in a couple of days time. What's really interesting, too, is, youknow, we've got to keep an idea of.

Whether or not in terms of the PC side,a little bit like that is something we've been talking about a lot with thechips in general. But again, giving this revenue forecastfor the current quarter in line with analyst estimates, recovering market, asthey say for smartphone chips. And you do wonder if there's an AI playhere as well as they look at that part of the market as well.Yeah, we talk again about handsets. It should be noted here that revenuefrom handsets for Qualcomm rose 16% in the fourth quarter, the fiscal fourthquarter, compared with a 27% drop in the previous three months.So there was a recovery.

But the question is how does that lookgoing forward? Yeah, exactly.All right, Qualcomm, guys, we're going to keep a watch as we continue to gothrough the press release and comments still up about 1.7% in the aftermarket.Let's get to some of the individual gainers, if I may, in this session.Paramount among them, a top gainer in the S&P 500 today.You know this story. We've been covering it up.Bloomberg, Byron Allen, he's been making big plays, big bets in the media space,making a $14.3 billion bid to buy all of the outstanding shares of ParamountGlobal.

That's about 2858share. It's about 50 separate.You mean for the voting stock? It involves voting in non-voting shares.I should point out, according to those in the know, including that it's a dealabout $30 billion to Paramount, really an outperformer up a more than 6% intoday's trade. Boeing also moving to the upside today.It did report revenue and free cash flow for the fourth quarter that beat analystexpectations. It's been on our radar amid all theworries over its 737 max lineup, if you will, and certainly the concerns there.Company, by the way, racing to complete.

A key engineering fix needed to certifythe smallest version of its cash cow. Of course, again, we're talking aboutthe 737 max jetliner. But nonetheless, investors giving somelove to that one, up more than 5%. One more ADP, we don't talk about it alot. It does a lot of back office operationsfor companies, human resources, payroll, stuff like that.It was a top gainer in the Nasdaq 100 earnings this morning.Solid earnings beat in a positive revenue growth forecast.What it says to me is we are constantly watching these earnings reports and it'sreally moving the names out, certainly.

At this time.Well, quite a few notable decliners to get to a.Do you want to start with New York? Community Bancorp plunging a record 46%at one point in the session before paring some of those losses, finishingdown 37% on the day. This finishing the low, falling the mostsince in 1993. It did report a surprise loss tied todeteriorating credit quality and it made a cut to its dividend.The company said it wants to build up loan loss reserves to be better in linewith other banks of its size and get ahead of potential weakness in theoffice and multifamily property sectors.

This is a big one.We got Frank Sorrentino on a little bit later from Connect One back.We're going be talking to him all about it and what New York Community Bancorpresults mean across the sector. Also got to talk about this, techcompanies reporting late yesterday and how they finished on the day.Let's take a look at Alphabet ticker goggle shares finishing down 7.5%,biggest intraday drop in months. The company reported Google advertisingrevenue that was weaker than expected. And then AMD, another stock thatreported yesterday, falling on the day today, finishing the day down by 2.5%.The chip maker gave a revenue forecast.

That was weaker than expected, thoughanalysts said that the guidance, even though it was particularly weak, theywere encouraged by the ramp in its A.I. accelerators remain.All right. Let's take a look at what was going onin the Treasury market here, because it was a really wild day here.We started off the day with the Treasury market much more focused on thatTreasury refunding announcement. Basically, the details here of thedurations and size of the durations that they plan to sell in the quarter here.And then of course, you got that news out of New York Bancorp that you werejust talking about that also sent.

Treasuries much lower here on the day.And then we got that Fed meeting. The net effect of it all is we're downabout 11 basis points on the two and the ten year yield is down by about tenbasis points here on the day. But it was much more severe than that atone point. So what you're seeing is a little bit ofa claw back of that. And it's kind of hard to even knowwhether these moves are actually because of the Fed, because of the regionalbanking issues or because of the Treasury fund announcement.Maybe the answer is all of the above. All of the above, probably.You know, that brings to mind the next.

Question, which is we have more data.We talked about how this is a monumental week with the FOMC with big, bigearnings. The jobs data comes up on Friday.Does that matter as much as we once thought it did, given what Jay Powellhas told us? I think it does.I mean, I think there's going to be after today's kind of a soft report thatwe got today in the employment market and private payrolls, at least I thinkit does matter if there's significant deterioration there, then that's kindof, you know, bad news is good news. And I think if if they show that there'ssignificant hiring this month because it.

Is still January, then that's not sogood news for them. Because because I now said that he waslooking for good news. So is he looking for bad news or is helooking for. No, he doesn't want the labor market tofall apart. Right?He does. But if the labor market does fall apart,then you can expect a rate cut sooner than later.That's the market's interpretation. Yeah.Yeah, I wouldn't say that. Yeah.Are you.

Are you still confused?I'm in Charlotte explaining I was born confused.Okay. All right.Thanks, Scarlett. I don't know.I feel like Jay Powell was really clear. Like he says, okay, we're at peakpolicy, guys. We're taking March off the table.Although he said meh. Like, I really feel like every meetingstill is a live meeting, so we have to be smart about that.I just think he kind of laid it out like that.There's a lot of good momentum.

Are Mike McKee trying to say, okay, ifyou're not going to call it a soft landing, do you call it a hard landing?You know, dodge that one, right? He did.But he said, listen, there's a lot of good stuff out there, Right.We're glad people are still working. Yes.It's softening in the labor market. We're going to watch that very closely.But I think this is the delicate part as you get to the end of a monetary policy.Yeah, but they're very, very careful. He was very, very careful to not get toofar ahead. Right.We're not declaring victory.

We have a ways to go.We're not saying mission accomplished on a soft landing, even though JanetYellen, the treasury secretary, has said just that.Yeah, well, she's not in the seat anymore, so it's easier.Was that I think bottom line data, don't she still important, right.Well, no, she's absolutely important. But she's you know, you mean, you know,she's the one selling all that debt that we can afford.So I thought it was really interesting. I always thought it was interesting inthe simulcast. That's very fair.But it was just reminding that you can.

Tell geopolitics is very.Seriously, because when they were asking him, asking some of the guests aboutpolitics and so on and so forth, like you can tell he takes the dual mandatereally seriously, I think. Yeah.His expression for some of the answers, he looked like he was pained to answersome of the questions. Well, yeah, You feel like he's like,okay, I'm done. I just like, had to stand in front of abunch of journalists. I able to quantify greater orunfortunately, you have to do that all day.All right, guys, that's a wrap or cross.

Platform on this Fed Wednesday, Radio,TV, YouTube, Bloomberg Originals. We're wrapping it up a little bit ofearnings as well, but we will see you again same time tomorrow.And our coverage continues here on Bloomberg Television.Additional analysis into the big Fed decision today.And, of course, a big read on where we go from here.Ken Shinoda, Seth Carpenter, Betsy Duke, John Taylor, just a few of the nameswe're going to talk to over the next hour.Stick with us. This is the close on Bloomberg.

All right.Let's give you a recap from those results out of Qualcomm right at themarket close, giving a revenue forecast for this quarter that was pretty much inline with what Wall Street had anticipated.A second quarter revenue of 8.9 billion to 9.7 billion.Analysts on average were expecting 9.36 billion.Let's bring in now John Venn, his equity research analyst for KeyBanc CapitalMarkets. And John has an overweight rating onQualcomm. John, I want to talk about that forecastlittle more.

It's the fiscal second quarter forecast.So this current quarter, that range is about a gang of $800 million from thelow end to the high end. What accounts for that?What does Qualcomm need to see or how does it pin that down or narrow thatdown a bit? Yeah, I think the range is maybe alittle bit wider than what we normally would typically see, Although Qualcomm,I think there is a couple factors that may be potentially factor in that range.One is, you know, there's a little bit of consternation in the supply chainabout Apple demand. I think we've seen sell through get alittle bit weaker in the China market.

We've seen it get a little bit weaker inthe North American market, but we haven't seen major cuts out of thesupply chain at Apple. More broadly speaking, you know,Skyworks reported yesterday and their results and guidance seems to imply thatthey haven't seen it. So I think there a little bit ofconservatism related to Apple. And then also on Android sell through,we've seen more recently over the last several weeks that sell throughparticularly in the China market has really started to soften.Mostly it's in the mid to low end segment, which doesn't really impactQualcomm as much, but potentially.

Management's taking a little bit moreconservative view here by just widening the range a little bit.So we're hearing from Apple suppliers like Qualcomm, like Skyworks, buttomorrow we're going to hear from Apple itself.Do you expect Apple will say anything that will allow us give us morevisibility into its suppliers, or is Apple going to be conservative, as itusually is in giving an outlook? Yeah, I would say that there arecommentary on the outlook is probably going to be conservative as theynormally do. They obviously don't give you veryexplicit guidance like most other.

Companies within the mobile supply chaindo. But yeah, I would I would expect yourcommentary to be pretty consistent and vague as they have been in in pastquarters. I am curious about the longer term storyfor this company. I mean, we already know based on, Ithink, some public comments by Apple, the certainly through our own reportinghere at Bloomberg that Apple is trying to sort of divorce itself and move on.Qualcomm has acknowledged that publicly. And I am curious about the pivot thatthey've been trying to make the transition to sort of broaden out theirconsumer base, their customer base, I.

Should say, and more importantly, justbroaden out into different areas that provides a little bit more of a moataround them. How are they doing?Oh, you're talking about Qualcomm apples.Qualcomm. Yeah, I think if you're Qualcomm, youknow, I think they're focused on kind of the next secular cycle like a lot ofcompanies in some ways are, which is which is a right.I think their focus right now is embedding kind of generative AIcapabilities in its Snapdragon processors.Snapdragon eight Gen three has, you.

Know, native AI capabilities that allowyou to do inferencing on on large language models.And I think that's going to be the next potential wave of growth.It's certainly early days. We certainly don't know what all theapplications are, but in the near term, that's going to drive a nice, upliftingASPs for Qualcomm here. I do want to just go back a little bit.We actually are getting a had another headline right now, John, on Qualcomm.This is coming out at the 10-Q, basically addressing the inventorylevels and saying that they expect them to remain elevated in the near term.Wondering if you can comment on that.

I don't have any more details on itother than that. But you get a sense here that there arestill inventory issues they need to work through.You know, we we believe that Qualcomm in the second half of last year hadobviously gone through a significant inventory destocking cycle.We think that they, you know, ended the year at kind of healthy levels.I think their customers did build a little bit of inventory because it wassort of a strong holiday selling season. And potentially maybe what they'recautioning here is just that as stalled restarts are slow, they're starting tosee those inventories start to pile up.

Again.In terms of balance sheet inventories, we are seeing days of inventory in theirbalance sheets come down about 19 days on a sequential basis, down 3%.But that's something that we're certainly looking for.More color commentary on the on the earnings call.All right. Well, we'll let you get right to it.That call starting shortly, Jonathan, over at KeyBanc Capital Markets.A closer look at Qualcomm, a bit on several metrics there, including theguidance, the shares up by about 3%. And a lot of talk right now about chipsand a high optimism for AMD actually.

Pushing, helping to make in video styleprocessors and helping investors look past a rather downbeat sales outlook forAMD. CEO Lisa Su has the chance to sit downwith our very own Ed Ludlow and she said she's confident about what thetechnology can do in the accelerators market.When I look at the potential of AI is really the single most important, youknow, sort of, you know, technology innovation over the last 50 years.So AI has so much potential to, you know, change the way our businesseswork, to change our personal productivity, to really change the waywe do research and a whole bunch of.

Things.You know, from our standpoint, we see the A-Team growing to upwards of 400billion by 2027. I think from an R&D standpoint, youknow, you were at our launch, Ed, in December.It was a great coming out party for the AMD, you know, capabilities and it'sgone really well. I think our customer interactions, ourproduct qualifications, our ramp have gone really well.So we were able to update, you know, some of our numbers this this past week.I think a lot of folks focused on that ramp and how it went in the quarter.You know, you exceeded the 400 million.

That you told me about at that event.So it's $3.5 billion of sales this year for my 300.What's interesting here is kind of your ramp relative to what's happening on thesupply side. And I wondered how big a factor supplywill be in matching or beating that number in 24?Yeah, absolutely. This is the fastest product ramp, youknow, in our history. So, you know, we exceeded our numbers inQ4, over 400 million. We're going to grow into Q1 and weupdate our full year forecast from 2 billion to 3 and a half billion.The way we think about that is that's a.

Customer demand statement.So that is customers that we've engaged in who have made commitments to us, whohave placed orders with us. We're planning for a much larger numberas it relates to the supply chain. This is what we should do.We always plan for success. So, you know, my view is it's stillvery, very early in the in the innings for AI accelerators and particularly formy 300. But this is an opportunity for us tocontinue to build a major growth driver as we work with our top customers ontheir plans. And that was Lisa Su, CEO of AMD,speaking with our Ed Ludlow.

And Remain we have earnings.We heard from Qualcomm. We also heard from Corvil.Yeah, another chip maker here, those shares up about 6% here in after hourstrading. The beat here on their fourth quarterrevenue numbers. Also the announcement of an acquisitionhere for a supplier of silicon integrated circuits here thatspecifically are designed for that push into what else and of course, the buzzword of the year. All right.Coming up next, we're going to focus on the Fed and the short end of the curvewith Kenji Goto, portfolio manager at.

DoubleLine Capital.This is the closed on Bloomberg. And. And welcome back.Let's look back to that Fed decision and the press conference by Jay Powell and afocus on the short end of the Treasury curve.Two year treasuries paring some of the gains after the central bank held itsbenchmark rate steady as expected. But Chairman Jay Powell said it'sunlikely that the Fed will cut in March, though he did leave the door open to arate cut of some type at some point this year.Ken Shinoda joining us right now,.

Portfolio manager over at DoubleLineCapital. And that's really going to be the parlorgame, I guess, for the next few months. I mean, yeah, some point this year thatcould mean the March meeting. That's off the table.It could be the main meeting. It could be in December.Do you have any confidence right now that the Fed will follow through on atleast one rate cut this year? And if so, why?I think probably cut three times. That's what they have been telling usthey want to do. I think the plots are what theirintentions are if the data allows them.

To.And going into this meeting, we definitely didn't think they were goingto do anything today, and we were highly unlikely that March was going to be onthe table. And Powell himself said that's unlikely.So it's wait and watch the data, see how that comes through.But higher for longer should continue to slow growth, should continue to helpinflation stay low. And on a 3 to 6 month basis, Corp is nowsub 3% on the way towards their goals. I am curious about sort of the themarket, the environment for trading around this.We know that that uncertainty has.

Created a lot of volatility and one ofour reporters at Bloomberg had a chance to catch up with one of your colleaguesat DoubleLine, Greg Whiteley, and I thought he had the great quote he wastalking about how this decision kind of puts a floor under that volatility,meaning it will continue and basically saying rate spreads, liquidity, I'mquoting him, will all be choppy. I mean, I think we lived in a decade ofthe best liquidity will probably see when we were in peak quantitative easingand the Fed was buying treasuries and mortgage backed securities.And as we come out of that, we normalize into a world of, you know, QE, into aworld of higher Fed funds, a more normal.

Fed funds rate.I think that we'll be in a more choppy, volatile environment in 2024 will bethat environment. We have some pretty big swings intreasuries today. And looking at the short end, the twoyear yield down 12 basis points. And if you look at the movement sincethe 2 p.m. announcement, it's pretty much been allover place. Tell us a little bit about what thepositioning look like heading into today's trade and how the headlines thatwe got out of New York Community Bank may have exacerbated things.Yeah, I don't like to read too much into.

Price action on Fed Day.I think the market needs some time to digest things.I think there was a lot of buyers perhaps just short of front end in casethere was something unexpected that happened.And then once you saw that news this morning on the New York Community Bank,I think that led to a short covering that created that vol on the front end.So I think we want to wait and see how things shake out.I think it's likely that the front end probably heads back a little bit higher,given Powell's stance on staying higher for longer.Yeah, absolutely.

Powell also made really clear that hedoesn't see a need for the Fed to cut rates, you know, because of real ratesrising. So I'm wondering what kind of scenariowould require the Fed to move sooner, perhaps in March or certainly beforeJune? Well, they need some data, some type ofnegative event, and they need that economic shock that would cause them towant to cut rates more aggressively. Right now, it's hard to predict whatthat is, but I think we're going to be a little bit a little bit of smoothsailing here in the near term. But, you know, things have gotten alittle bit overbought.

Stocks are at all time highs.Optimism for risk assets is very high. Even the credit markets have run prettydramatically. Investment grade corporate bonds, highyield have all gone really tight and spread.They're of like 10 to 12 percentile and a ten year look back.And so we're a little cautious here. Some of those assets we talked about onthe last meeting in mid-December that had lagged the market like non-agencymortgages and commercial mortgage backed securities closed.Those nontraditional parts of the market have been playing catch up.And so that's that's played out.

And now not much looks too cheap outthere. So in that environment, then, I mean,not too much cheap here. But of course, we talked to a lot offolks. They talk about some of the tacticalopportunities, particularly given the volatility, but also the idea that evenlonger term, if you are betting on a drop in rates and more importantly,economic conditions that will at a minimum at least be stable here.Is there a case, though, to for entry points right now, whether it's in highquality fixed income or longer duration or something like that?Absolutely.

I mean, from a long term standpoint, theTreasury curve is at levels we haven't seen in over a decade.I know over the last couple of years we've seen this positive correlationwith stocks and bonds, which typically exist when CPI lives about 3%.But with CPI coming down 3%, I do think that that negative correlation of stocksand bonds kicks in the. The safety of bonds and the risk off.So I do think that high quality fixed income, especially Treasuries, lookreally interesting today. You don't have to go all the way out thecurve. The belly of the curve should benefitthe most, the most as the Fed cuts kind.

Of a 2 to 5 year portion.And so I think investors should start and we talked about this last time yougot to start coming out those T-bills I know is still attractive.Oh, come on. Oh, Ken, there are some of us who arejust scared of everything. Ken Shinoda, portfolio manager atDoubleLine Capital. Yeah, well, urging everyone to maybe,you know, step put your toe in the market and, you know, come out ofT-bills. Maybe, maybe look at, you know, take outa little bit of risk. All right.And of course, what he said I thought.

Was really interesting in terms of, youknow, the 5 to 7 year, the belly of the curve will be the attractive entrypoint. But there's not a whole lot right now inthe credit markets that is priced for, you know, opportunity.Yeah, no price for opportunity. But there's it's there and we have somany people that say it's there. I mean, I was speaking with Earl Davisover at BMO and he actually chuckling at just basically how great at least from atrading environment it is, maybe not from investing environment, but for atrader, this is where you want to ride the waves, right?All right.

Coming up, we're going to speak withJohn Taylor of Stanford University. This is the close on Bloomberg. A focus today on the Fed and centralbank central banks around the world. Central banks that have actually beenusing the Taylor Rule as one of their guides and deciding where to set thepolicy rate. Earlier this week, right here onBloomberg, Apollo Global Management chief economist Torsten Slok gave us hisview on what the Taylor Rule suggests about Fed policy today.The Taylor Rule is just a fancy way of saying that what the Fed focuses on isits dual mandate.

It focuses on where we relative to fullemployment, where are we ready to go to inflation at 2%?And if you take the traditional way of looking at this, you will find that theFed funds rate today is actually according to those frameworks, should below, namely around four and a half ransom to the five and a half where weare. And speaking of the Taylor Rule, let'sgo right to the source. John Taylor joining us right now, seniorfellow at the Hoover Institution and economics professor at StanfordUniversity. And John, I'll quibble with one thing.He said he called this fancy, but I.

Think the beauty of the Taylor Rule isits simplicity here. And at least based on that calculation,rates should be coming down. Is that the right interpretation?A little bit. But let's face it, they they they wereup. They were as appropriate.They move them up and now they should be thinking about cutting it down.But I kind of liked what the chairman said today, which will we have a movetowards that direction? But we're not moving exactly right nowbecause they're a little worried about inflation picking up again.So I think it's about right.

It can kill a little bit about it, but Ithink they move the right direction. I thought his comment was interesting tomany Jay Powell, his comments, and he really talked about this, how, you know,this doesn't necessarily mean we're going to mechanically adjust policy.And he really talked about this idea here that they still don't really knowwhere that neutral rate is or should be. Yes.Yes, that's true. That's one of the big questions.I like how the reporters and the chair both referred to the Taylor Rog,supposedly. So that means they're thinking aboutthis way, about doing the job, which is.

Good, which which means they don't comedown really too fast, but they come down to rate base.And I think that's what I think about the rest of the year.Let's hope inflation moves in that direction.So they're able to do that. Yeah, he described it as saying we'rereally in a risk management role mode, avoiding moving too quickly, too soon.How would you grade the Fed's effort on that?I think that I always complain about the Fed when they were at a half a percentand inflation rate was coming up towards nine.But they got to, as we know, five and a.

Quarter to five and a half.And that was about right to give a little bit, but that's about right.So I think that they're there right now to stay close to this area to see ifinflation comes out. And it's important they mentioned atleast two or three times the 2% inflation target.So it just didn't seem to be too much debate about that.And so they want to be sure they get it down, doesn't reverse, which wouldreally cause a lot of trouble for the markets.I think just coming down gradually is the best way to make this happen.Yeah, he said a lot about greater.

Confidence as well.And when asked to really explain what that means, we want to see more gooddata, not better. Did a data just a continuation of thegood data that we've already been seeing?Does three more months of that qualify? What what what does that look like inyour mind? Well, you know, the three months is alittle bit short. Quite frankly, things can move back up.I think your chart there shows very much how the inflation rate came down.It's still coming down, but it's not permanent.There's not 2%.

I think it's important.They mentioned 2% several times a day and they can't mention it and it didn'tlook away. But I think the notion that he's alsoemphasized and the Fed has emphasized that a longer may be appropriate.So don't don't be surprised if they hold on for a little bit longer than thethree times during this year. I think I asked you this question everytime we bring you on for a Fed day, John.And that's really your assessment of the communication that Powell has had, notonly today, but really throughout this entire cycle that we've been in.Well, I had problems with a year and a.

Half or two years ago where the fundsrate was only a half percent and the inflation rate was way high.So by the Taylor Rule or other measures, they were way off and that they tookpretty aggressive action, I think, by comparative terms.And they brought it up to, as we know, five in a quarter to five and a half.And I think that's much more appropriate.So while it was delayed and people like me complain about it being delayed byhave got there, and I think now they're wise not to move it down too quickly andto follow the so-called Taylor Rule and keep it where it is.Do you think the economic conditions,.

The economic data as they roll in, theeconomic data that Powell kept talking about, that they need to see more of, isthat going to be cooperative? I think so is my best guess.We're kind of worried that the the low rates and they should move to a highrate would was shock the economy with that doesn't seem to have happened.We have good good employment numbers we have good growth numbers both came inat. 3.1%, 3.3% for the year.And so I think that's a good sign. And I'd like to see higher growth.I could see a little better fiscal policy, but not just monetary policywise.

The whole ramp of policies that we'relooking at at the same time. Yeah, that's a whole nother can ofworms, isn't it? John Taylor, thank you so much, seniorfellow at the Hoover Institution and economics professor at StanfordUniversity on this very day. And of course, we talked aboutinflation. The Fed does have a dual mandate notonly to get inflation to 2%, but also maximum employment.And one key piece of data that helps the Fed make its decisions on monetarypolicy is the upcoming monthly jobs report.Those come out on Friday, and that'll.

Give us some more insight into thestrength of the labor market, which has been, as we've been reporting, verystrong thus far. Let's turn now to Seth Carpenter.He is chief global economist at Morgan Stanley.Seth, always good to speak with you. We heard from Chair Powell that we'renot declaring victory. We have a ways to go when it comes tothe economy and a soft landing. He didn't want to say a soft landing inthat way, but he did say that when it comes to the labor market, we'renormalizing and things are looking better.How will Friday's jobs report advance.

That picture of a normalizing labormarket? Great question.I mean, I think we could start even earlier.We just got data on the employment compensation index and it slowed again.So again, showing more of that balance between supply and demand that Powellwas talking about. You had up on the screen just beforesort of the consensus views were actually a little bit higher than that.We're looking at just over 200 for the headline, a bit below for privatepayrolls. So that's not showing substantialslowing.

We do think the economy is slowing down.We do think the labor market and hiring will slow down in coming months andquarters. But we are not looking for anythingwhere the labor market just rolls over and falls off of the cliff.And if anything, if we're right and we get just slightly north of 200,000 andpayrolls, then I think the market reaction when General Powell said Marchis not the base case, I think the market will take that even more to heart.Our base case, in fact, is all the way back in in June, and we're feelingpretty comfortable there. So you're seeing a rate cut when ithappens in June.

What what does that mean in terms of Mayand the adjustments to the forecast that the Federal Reserve does make when itdoes release its next statement of economic projections?Absolutely. So they're going to have to confrontlots of different things. The last time they made the statement,their projections was in December. And we've got a lot of information sincethen. The economy in 2023, which is nowhistory, but we got new data on that was stronger than they had realized.The unemployment rate, at least so far, has ticked up a little bit.We'll see how that goes.

I think the main thing, though, is thatthey're going to have to ask themselves, what are they going to do with thepolicy rate inflation's coming down. It's consistently surprised them to thedownside for the past six or nine months.And so I suspect they'll build in a little bit more in the way of rate cutsfor 2024, but nothing like the, you know, six, seven rate cuts that we'veseen the market pricing in at times. I thought it was interesting becausePowell was asked this repeatedly and he dodged the question repeatedly.But it gets to this point here, too. He talked about this idea that there isa lot of disagreement right now in the.

Fed.And then he made a joke about you can see it in the transcripts, which Ididn't come out in like, you know, 2050 or something.But but it gets to this idea that when you have that type of disparity in viewsand I know he's the one kind of driving the show here, but how much is thatgoing to end up factoring into, I guess, how the market sort of tries to predictwhat the Fed does next? Is this just going to be about what JayPowell says and what he wants, or are we going to start to see a much greateraccounting in the market of what we hear from the other Fed members, the votingmembers?.

All of the above, I have to say remain.I mean, if you look at the market pricing for a march cut over the past ofgo back to the beginning of November, we've seen it go from no cut price towell over a full cut price back to where we are now with about a third of a cutprice. I think all of that is a reflection oflots of things happening at once. We're at an inflection point.The economy was strong in 2023, but inflation came down a lot and we thinkwe're going to see some more slowing. It's always hard to call any sort of aninflection point and there'll be different views around the committee.And you see that in community committee.

Communication.There was tepid pushback from some FOMC participants against being too prematureon a rate cut. There was your namesake, Raphael Bostic,who is saying you're probably not got until Q3 of this year.And so I think that range of views is there.The market gets to pick and choose. But at the end of the day, as you said,Powell is driving this bus. I think he is showing that he wants tobe very cautious, very deliberate. Between now and March, we get to moreCPI as we get to more nonfarm payrolls. That's a lot of information about thetrajectory of the economy.

So this gets us back to the inflation.Quite. And by the way, Rafael, my favorite Fedmember for obvious reasons, but this gets us back to that inflation question,Seth, and this idea of. Kind of what economists really look at.I mean, I feel like historically it really was all about sort of that demandcycle here and now we're much. I mean, he spent I don't know how muchtime talking about supply chains. And of course, we're headed into anelection year that a lot of people think could have a major impact on at leastour fiscal policy goals. And that, of course, would then feedinto monetary policy.

No question.And I think the reference to supply chains was important.And if anything, this ties back when you when you just had John Taylor on.One of the things that trick that's tricky in applying those sorts ofmechanical rules is part of the surge in inflation was not good old fashionedsort of cyclical macroeconomic inflation.There were supply chain disruptions that caused goods prices to shoot up.Now we're seeing the reverse of that with goods prices starting to come down,at least on average over the past six or nine months.And I think that makes all of this.

Inference harder.Chair Powell and the FOMC statement said they're looking for inflation to movetowards 2%, quote, sustainably, not just to touch 2%, but to be there, you know,over time, including a year from now. Well, that goods deflation from thehealing of supply chains. I'm not sure you can count on that beingaround a year from now. I think Chair Powell alluded to thatsame thing and it makes their judgment super tricky.So I do think the slowing in the economy from policy is going to help with theservices side of the economy. I think the good side of the economy,disinflation or even deflation, that's.

Taking care of itself.And it's a real judgment call for the committee.As long as the real side holds up, though, they have plenty of flexibilityto wait and be sure. All right.Seth Carpenter, Morgan Stanley, chief global economist, thank you so much forjoining us on this Fed day and helping us look ahead to some of the data thatthe Fed will need to consider and that investors will need to take stock of aswell. We should mention, of course, that todaywas a down day for equities. Stocks actually saw their biggestdecline on a Fed day since March of last.

Year.And of course, a lot of that remain was because of what we had heard from thebig tech companies that did report yesterday.Yeah, and I'm glad you bring that up here because right now in after hourstrading, we were talking about Qualcomm and those earnings results, those sharesthat rally in after hours trading. Now flipping to losses here, down about2% here right now. And it gets to the question here as towhether all that the potential good news, the eye and everything associatedwith it that's already been priced into the market.Yeah, well, investors got ahead of.

Themselves, certainly when it comes toAI and when it comes to actually putting numbers to the actual optimism, perhapsthat didn't measure up. And now and that brings us to tomorrow,right? We get better Apple, Amazon, Amazon anda lot of other second tier tech companies.So that's kind of the last hope, right? I mean, if we're going to see big growthstories there, we got to hear it from them or maybe we're not getting it.Yes, three of the Magnificent Seven will be reporting.So all stuff to keep an eye on. All of that, we will be covering foryou.

This is the close on Bloomberg. I'm. And. The US banking system is sound andresilient. The FOMC said that in December, but thatline is noticeably absent in today's statement, which is raising eyebrows,especially given the plunge in New York Community Bank shares.The lender tumbled by the most ever after reporting a surprise quarterlyloss because of increased provisions for bad loans tied to commercial realestate.

Is this a return of banking instabilityfollowing last year's regional banking crisis?Let's turn now to former Fed Governor Betsy Duke for her take.She has also served as chairman of Wells Fargo and chairman of the AmericanBanking Association. Betsy, thank you so much for joining ustoday. It's a pleasure.So how are you reading the reaction, perhaps outsize reaction to in yourcommunity banks results, which certainly surprised everyone because the provisionfor bad loans was about ten times what analysts had anticipated.But it is some kind of quantifying of.

The commercial real estate concerns thathave been really lingering in the market for over a year now.So first of all, as a community banker, I want to say that New York CommunityBank at over $100 billion in assets is no longer a community bank.And so this is not something when you hear community bank, I wouldn't wantanybody to think this is an issue with community banks generally.This is a bank that's very large and has just gone over the $100 billionasset level that is that is giving it a lot closer regulatory scrutiny.And the regulatory scrutiny on banks that size is a lot stronger than it wasbefore the issues that we had earlier.

This year.So looking at what they have particular this appears to be not a capital issueper se, but really an issue of loan quality.As you've had downturns in the past and as you've had particularly creditdeterioration, there are going to be numerous announcements of this is a verylarge provision that we're taking always sort of in the context of we're tryingto get everything out of the way at once.And this is this is all of it. So how do investors I'm sorry, go on.There's never one just one cockroach. So usually when someone says this is allof it, it may not be all of it, but but.

Issuing credit is a bit slower, slowermoving than something which is a liquidity issue.Thank you. That's a really important point.So how do investors discern between something like this where New YorkCommunity Bancorp is saying, which again, not equity bank, as youmentioned, saying we're going to be cautious, we're going to write thingsdown. We're going to, you know, account forpossibilities that things are going go bad versus the kind of quick moving markto market issues that we had seen in the past that prompted a run on banks.So one thing it's it's a little bit hard.

To tell because this will be the firstcredit cycle since the since vastly change the accounting for loan lossreserve. So the current accounting is supposed totake take account of through the cycle losses.And so it's going to be interesting to see how that actually plays out in thiscycle. So get us to a sense here of Betsy whenwe talk about the health and the stability really of the banking sectoroverall. I mean, we're not just talking aboutcommunity banks, but even the ones that are a couple of legs up all the way upto the big money center banks here.

Is there anything, at least from amonetary policy perspective, that the Fed needs to be worried about?Nothing from a monetary policy perspective and even from a generalhealth of the system perspective? I don't think so.I think you will see individual institutions that are heavilythat their balance sheets are heavily weighted in commercial real estate mayhave more issues than others. But I don't I don't see this beingsomething that that's contagious. I asked that because we know there arestill a lot of proposals out there right now when it comes to the regulation ofbanks and capital rules.

Whether you talk about the Basel endgameproposals that have to be finalized or some of the other potential rules thatcould come out of the Fed and the other agencies here.Are we going to be looking at an environment, I don't know, in a coupleof years time where the capital requirements, at least on the biggerbanks and to that extent maybe in the midsize banks, is materially higher thanwhere they are right now? I don't know.I don't know where the current capital proposal is going to end up.And the real the real thrust of that proposal is a capital charge foroperational risk.

And I don't think the regulators havehave ever defined what they mean by operational risk.And so right now they're using revenues as a proxy for that risk.And I'm just not so sure that that that makes sense.And I think that's what's got the banks very much concerned.It does not look like this is going to be an easy road to approval.And it's hard to tell what I'm certain that they're going to be a lot ofchanges to the proposal. I think there's a good chance that therewill be a re proposal of of a rule that's calibrated somewhatdifferently.

Well, this gets to the idea, too.I mean, Michele Bachmann, of course, the Fed governor has really pushed back onthe. Prior proposal in not quite clearexactly what she wants, but certainly what she wants is something that thatinterview is a little bit less onerous than than what was originally put on thetable. I think that's right.And I think a number of the governors have expressed some concern even in themeeting. She was the most vocal.But I think there there are several who have some concerns.And, you know, one of the purposes of an.

Open meeting like that is to get thosequestions and concerns on the table. This proposal will include a number ofquestions that they want comment on. And so, you know, they're waiting forthose comments. It'll take a while to compile and digestall the comments and for all of the agencies to to have a discussion and andcome to a conclusion as to where they go next.Just to kind of circle back to where we started.Do you think when we get the minutes of this Fed decision and the Fed meetingthat we're going to hear them discuss near Community Bank or the regionalbanks or the big banks in any way in.

Terms of how they're thinking throughmonetary policy? I'd be very surprised if that's part ofthat discussion, or at least at the level that it makes the minutes.All right, Betsy, always great to talk to you and always appreciate you takingtime for us. Betsy Duke there, former Fed governor,former chairman over at Wells Fargo. A closer look here at the Fed decisionand maybe some of the potential banking regulations coming down the pike.Stick with us. We're going to set you up for what towatch. This is DAYBREAK.

And. All right.There was no doubt about what the big market catalysts were going to be today.But let's push ahead over the next 24 hours and set you up for what to watch.And we start with another central bank decision.Yeah, this time from the Bank of England.So New York time, that'll be about 7 a.m.when the decision comes out. No change expected, but according toBloomberg Economics, there will be at least one of the nine members that willvote for a rate cut.

And usually what that means is that twomeetings later the rest of the committee tends to follow.So take that as you will. It'll be interesting to see what happensthere. EU leaders also set to meet tomorrow inBrussels. This is a special summit, I'm told,surrounding some of the issues going on right now with the military war, withthe war in Ukraine and the military assistance.Absolutely. And this is something we'll be watchingfor. A lot of the EU leaders are also kind ofthinking through what the world will.

Look like in November if president ifformer President Trump is elected and what that means for their militaryspending as well. Absolutely.Not just an academic exercise as a feed through into the economy.And we do get more economic data tomorrow.Yes, jobless claims at 8:30 a.m., high frequency data point.Of course, it's part of the lead up to the jobs report on Friday.But that's Friday. All right.Let's get right to it. The big events tomorrow is going to comeafter the bell.

Scarlett and I will be here.Full market coverage of some big earnings.Apple, Amazon, Medha, we already heard from Alphabet that the ad spendingmarket was not great last quarter. So that has huge implications for acompany like Metta, also for Amazon, which increasingly is relying onadvertising. Yeah, basically rounding out theMagnificent Seven SANS in media. We have to wait a couple more weeks toget them. Tesla, of course, has been the biglaggard and the other company just kind of a mixed bag.Yeah, Alphabet was not a good one for.

The Mag seven.All right. We'll see what happens tomorrow.And please tune in Will. We'll have full coverage of thoseearnings better than anywhere else. In the meantime, stick around.All your politics coverage coming up on balance of power.Scarlett and I will be back tomorrow. Have a great evening.This is Bloomberg and.

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