Allianz's Subran on Higher-for-Longer Rates

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Bloomberg Sep 27, 2023 12:13 · 8804 Views

Allianz Chief Economist Ludovic Subran discusses concerns about central banks staying hawkish for longer to fight inflation. He speaks with Dani Burger and Manus Cranny on "Bloomberg Brief."

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  • 00:00 Little even if there is more inflation to come down the pipeline, does the ECB risk an accident at this point if they continue to hike with the deteriorating data we've seen
  • 00:13 for sure and especially because you know if the ECB now
  • 00:16 gets its Intel from the higher energy prices, we're getting it wrong.
  • 00:20 You know it's not up to the ECB
  • 00:22 to hike to lower the price of the pump, right.
  • 00:24 We have other issues and certainly other policies in our toolbox
  • 00:28 to to deal with that.
  • 00:30 I I think a further hike would be really pushing it over the fence.
  • 00:35 The big question now is how long can we stay at this high
  • 00:38 levels of interest rates, because already we see the deteriorating creating data
  • 00:41 and we already see that the housing market is also under a bit of direct.
  • 00:45 Right.
  • 00:45 So I think the big question is whether they're gonna pivot that only 24
  • 00:49 and I think the.
  • 00:50 You know, a lot of that is in the hands of the Fed.
  • 00:52 You just mentioned.
  • 00:53 Some people are now repositioning themselves in a much more bearish environment, so much higher for much longer.
  • 00:59 I think that's going to drive also the ECB that don't want to be the only one to pause because that would
  • 01:04 come.
  • 01:05 Quickly spook markets that the ECB would have thrown the towel would be too early.
  • 01:08 So that's the risk here.
  • 01:09 What the Fed does will be a much bigger driver that the energy prices.
  • 01:13 See the
  • 01:14 THE ECB.
  • 01:15 Objective function and monetary policy function.
  • 01:18 We have
  • 01:19 the ECB stay input
  • 01:21 for now, but we still have one hike for the feds.
  • 01:23 So that's going to be something that creates a bit more of a transatlantic spread, if I will,
  • 01:28 Little bit.
  • 01:28 Good morning.
  • 01:29 Yeah, I mean we saw the consequence of the Swiss doing that sort
  • 01:32 of unexpected pause.
  • 01:33 Look at the Swiss franc.
  • 01:35 I mean talk about taking a pasting the
  • 01:37 the longest run of losses in 50 years and the euro is under pressure.
  • 01:40 But let's go back to Holtzman.
  • 01:42 OK.
  • 01:42 I'm surprised the Bank of England didn't have the same reaction because they post far too early.
  • 01:47 The UK is one of the few economy that actually has a wage price power in the making right now.
  • 01:51 So you're right, currencies are going to be the jury and and they're going to be
  • 01:55 the yardstick against which we're going to be worried, especially because the dollar is so very strong.
  • 01:58 OK, let's let's push you a little bit further then what?
  • 02:01 Let's bang these out then.
  • 02:02 OK.
  • 02:02 On Sterling, you're surprised, you're surprised by their action, but Sterling has taken the heat.
  • 02:07 So how much lower does Sterling go?
  • 02:08 Lots of people are calling down to 118.
  • 02:10 Where do you
  • 02:10 the pressure and starting this?
  • 02:12 First of all, let's take it there.
  • 02:13 I think they can go down.
  • 02:15 As much as 10 to 15% more if
  • 02:17 you know the Bank of England doesn't hike again before.
  • 02:20 Till the end of the year
  • 02:22 and Ludo you talk in your notes about the everything slump about all asset prices falling
  • 02:28 in 2022.
  • 02:29 Have we grappled with the new normal of lower a lower return world.
  • 02:35 Well I think one thing is sure is that you know the the the end of
  • 02:39 you know real equal nominals world is is behind.
  • 02:41 I mean we we see now that anybody is deciding.
  • 02:45 On where they put their savings based on real returns.
  • 02:47 And of course this has been, there's been a big move from Bank.
  • 02:50 Deposits to
  • 02:51 the bond market.
  • 02:51 But the bond market is super volatile because everybody is tracking whatever the
  • 02:55 central banks are doing.
  • 02:56 And you see the central bank's data dependency is a nightmare for market participants because we never really know if they're paused for real or if it's a dovish pause, a hawkish hike what not
  • 03:06 so.
  • 03:06 So you see that this is creating a lot of mobility on the bond market, which is one of the securities that people actually were rushing into.
  • 03:12 And and you know 2022 was the one every 30 year type of event, nowhere to hide.
  • 03:17 So 23 looks much better, but it doesn't look as good as one would have expected.
  • 03:21 And you mentioned, you know in your introduction remarks, the risky assets,
  • 03:24 you know, equity markets have been super, super resilient.
  • 03:27 Credit spreads have also been super, super.
  • 03:30 For their own good.
  • 03:31 So of course there is a risk that there is a repricing on that front and so we're looking especially.
  • 03:35 At the WikiLeaks, the peripherals, the high yield, there is still, you know a need for
  • 03:38 you know quality, quality, quality for the investment.
  • 03:41 So the world for investors is not easy.
  • 03:44 We know the world for net lenders is not easy but the world for net savers is not easy either.
  • 03:49 I mean I I,
  • 03:50 I had the the point at the start of the show which is I can
  • 03:54 now get an ETF
  • 03:56 of a batch of T-bills or short end short end rates.
  • 04:00 They give me 5 1/2% in dollars.
  • 04:03 If I am a more mature investor, let's say,
  • 04:06 why not take 5 1/2% until I get all of these issues
  • 04:10 off
  • 04:11 the agenda in the back quarter?
  • 04:13 Surely I'm driven more to the short end of the curve at 5, 1/2% than I am to high volatility equity.
  • 04:18 I mean is that how I should look at risk going to the end of this year and the beginning of next year?
  • 04:22 It sounds to me like you're talking about a very risk off
  • 04:25 2024 environment
  • 04:28 of course I mean.
  • 04:30 24 is the ultra long year, the polarization on the US elections, you know, the weighted.
  • 04:35 C mode on investment and consumption for corporate consumer is going to create a natural risk of mode.
  • 04:39 You're right, you know the
  • 04:40 everybody's pushed to the lower to the shorter end of the curve.
  • 04:43 But this is also where the bulk of the volatility stays.
  • 04:46 So it's great to have an ETF, but you need to stay put and to hold to maturity at least, you know, don't move too much.
  • 04:51 I tried that a few times in 1994.
  • 04:53 It didn't go so well.
  • 04:54 It was one of the largest margin calls that I ever had.
  • 04:57 Take me back to 1994.
  • 04:58 Thank you.
  • 04:58 But no,
  • 05:01 there is a key parallel with 1994 of the hiking cycle, by the way,
  • 05:04 because we don't know if they keep.
  • 05:06 Yeah,
  • 05:08 yeah, I mean we're we're a step away of Manus reinforcing that he's going to take forever, forever to retire with, with those sorts of moves.
  • 05:19 Agreed.
  • 05:19 Agreed Ludo.
  • 05:20 OK, look,
  • 05:21 so it's these front end, these front end cash like instruments that are getting all this attention.
  • 05:26 But weren't these the thing, the money market funds that melted down in the pandemic and caused the Fed to step in?
  • 05:33 If all of a sudden we're talking about more money flooding into it,
  • 05:36 should we not be concerned right now?
  • 05:40 Look, I mean we had a bit of a scary March, right?
  • 05:42 So.
  • 05:42 So I think we are not out of the woods yet.
  • 05:45 There is of course this, this,
  • 05:47 this liquidity pressures, you know, but market liquidity.
  • 05:50 Because you know central banks are withdrawing fast and so there is a question on whether there is a rebound in US especially provided liquidity in 24 I believe yes.
  • 05:59 And there is the funding liquidity just talked about the risk of the credit crunch in Europe.
  • 06:02 So yes, I mean money market funds is a huge vortex and it and it's great for the short term returns somehow because it's
  • 06:09 stable in an environment that's not stable but that creates a lot of
  • 06:14 you know side effects or negative externalities on the other products.
  • 06:17 And especially you know for banks it's a big question because though there are banks and there are other financial providers that should really look at the leverage and that should really look at the liquidity position with eyes of an of a Hawks.
  • 06:27 I've been saying that since March the liquidity crisis is not over, you need to.
  • 06:31 So do you think that we face another SVB like moment briefly before we move on to China, We got to squeeze China at the end.
  • 06:36 Well, I'm look, I'm not saying they're going to have another bank implosion, but
  • 06:40 are you deeply concerned about
  • 06:42 about a major financial tail risk on the flight of deposits?
  • 06:46 Yes,
  • 06:47 I am.
  • 06:48 OK,
  • 06:49 I love this line.
  • 06:50 An undisputed Hegemon
  • 06:52 hegemon.
  • 06:53 Hegemon HEGEM Hegemini.
  • 06:56 Thank you.
  • 06:57 Hegemon in in finances, Francis.
  • 06:59 And
  • 07:00 I know
  • 07:01 you see it's the Irish in me, it's it's these long words.
  • 07:04 The Irish.
  • 07:04 Europe, Europe and Japan have lost some of their weight in the composition of the global financial markets.
  • 07:08 China's share grew slightly.
  • 07:10 When I look at everything that's been written about China, written about housing, watching images of massive tower blocks being blown up, when I look at the incremental policy responses, I'm not inspired.
  • 07:21 Are you?
  • 07:23 I'm not.
  • 07:24 China is very cheap.
  • 07:25 Chinese equity are very cheap.
  • 07:26 But you know, if you believe in a Cold War Two, you don't go much further in terms of positioning.
  • 07:30 You're right to mention the real estate crisis.
  • 07:33 You know, you have to think Spain 2009, you have to think Japan mid 90s.
  • 07:37 It's got to take some time for China to be attractive again because they have a very depressed saver.
  • 07:42 You know people have lost all of their pension, you know in evergranded crisis and and and the likes, right.
  • 07:48 So I think it's going to take time, but I wouldn't
  • 07:50 you know
  • 07:51 under appreciate the fact that China is very innovative when it comes to policy determination and they're ready to cut a couple more times the RRR, they're ready to put more fiscal subsidies without recreating a bubble.
  • 08:01 So stay tuned, it's not going to be as bad as the market sentiment is pricing it right now.
  • 08:04 But personally, I would be very cautious
  • 08:06 with Chinese holdings.
  • 08:08 I think it's it's still, you know, there's going to be some flaring up in the US China rivalry and it's going to be on the capital account.
  • 08:13 It's not going to be only on the trade account.
  • 08:16 Ludo, stay tuned.
  • 08:17 But how long do I have to wait at this point?
  • 08:20 Bloomberg Intelligence had a great headline out saying not a bazooka, but many pistols.
  • 08:24 How long do I have to wait
  • 08:25 until the many pistols result in sustained growth from China?
  • 08:30 I think that
  • 08:31 my expectation is that they're going to do a big move on consumption like they did with the EV reduced VAT back in 2016.
  • 08:38 The problem is that he needs first to align the ducts, right?
  • 08:41 And and the problem here is China doesn't want to create another bubble because that would be really detrimental to any form of growth.
  • 08:48 So they need to reposition a lot of the public investment and the polysemics including so the
  • 08:52 cheap lending to these, you know, tech environments.
  • 08:55 So climate tech maybe, you know, tech at large and certainly also the manufacturing.
  • 08:59 I think you're going to have wait at least another six months because there is some division on where to stand and they're going to also watch what's happening in the US election.
  • 09:06 So it could be as much as a year, but I think they're going to make some moves by the end of the year.
  • 09:10 And so we're going to have a bit more forward visibility.
  • 09:12 I would say by the beginning of 2024, I
  • 09:15 was going to say six months a year.
  • 09:16 I was actually expecting you to stay longer.
  • 09:18 That'll go by
  • 09:19 in no time.
  • 09:19 What time is meaningless at this moment.
  • 09:21 Hey Ludovic,
  • 09:22 we're on time lending mode.
  • 09:24 Oh, sorry, sorry.
  • 09:26 A lot to say on China.
  • 09:29 Ohh Ludovic.
  • 09:30 Alright, come back on you, you, you you deserve another go.
  • 09:33 Ludovic Sobran of Allianz.
  • 09:34 Thank you so much for joining us.