The Fed, Rate Hikes, and AI

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Tom Keene (0:27)

Steven Major joins us now with all of his heritage on the Pacific Rim in London and now, of course, Global Macro Advisor at Tradition. Steven, you have called for a lower regime environment. I'm going to go to Jan Hatsias at Goldman Sachs, who makes clear, yeah, you may get rate increase, but we're not going to get three, four, five rate increases and that this is a not idiosyncratic, but one-off move to a higher rate regime. The shocks will recede and we'll get back to Steven Major lower rates. Discuss that.

Steven Major (1:03)

Yeah, it could be a one and done, Tom. So if you perhaps looked at the Fed Chair's view of inflation, he would share what many people say about the near-term inflationary, inflationary impulse that comes from the AI and the infrastructure build out all this kind of stuff.

But his view would be that in the longer run, and this is going into next year, you start to get some of the disinflationary pressures coming through.

Back in February of this year, before the war in this region started, that was on the 27th of February, the yield on 10-year treasuries was below 4 percent and the market was implying three cuts. Here we are 6, 7 months later, we've got 5 percent 10-year yields and 3 hikes. So one thing I would say is that you've had a 6 rate hike move in the space of 6, 7 months. That's 150 basis points.

That explains the entirety of that 10-year yield shift and a bit more really. So I think that a lot of the narrative out there has got very bearish on bonds and it tends to talk about fiscal policy in the same breath being bearish and about the supply of bonds and all of the inflation risk premium and what have you. I just don't really see it. The term premium hasn't gone up. People have been claiming that it has. It has not gone up. You can see it on the Bloomberg terminal. The curve has flattened because it's been pricing in the rate hikes. Inflation expectations are controlled. Spot inflation is a bit higher. So I could see one hike and then next year, we could be back into the easing mode. It's the war in this region that has ruined the best laid plans.

Tom Keene (2:48)

I mean, Paul, under the press conference today, it's like Howard Johnson's, there's 28 flavors. Everybody's got an opinion.

Paul Sweeney (2:54)

Which way is he going to go? Steven, so given that background, I mean, is there a call here for, if I want to ask you where the tenure is going to be a year from now, would you say lower than where we are here?

Steven Major (3:08)

I'd say nearer to four than six.

Paul Sweeney (3:11)

Okay.

Steven Major (3:11)

So the starting point is five. So if we had a sportsman's bet on this, we could bet a coffee each way. Yeah.

So if it's 499, I win. If it's 501, you win.

Jonathan Ferro (3:28)

We have plenty of coffee here at Bloomberg.

Tom Keene (3:32)

Yeah.

Steven Major (3:32)

So earlier this year, when yields were 4 percent, John Ferro asked me what was more likely, the yield on treasuries going down towards three or West Ham United staying up in the premiership. So it was an impossible question because I didn't know how to answer it, in fact.

Here we are at 5 percent. Yeah. And West Ham are top of the championship. Just saying. There you go.

Paul Sweeney (3:58)

Steven, what are you going to be listening for from Chairman Warshare? He's kind of in a tough situation. He's got a lot of pressures coming from different areas. What are you going to be looking for?

Steven Major (4:10)

Yeah.

I'm tempted to give him a break in that he's still in his honeymoon phase. And frankly, it's been very difficult with the global geopolitical backdrop. What's happened is pretty unprecedented. So as I said, the best-laid plans have been completely wrecked.

Tom Keene (4:30)

Right.

Steven Major (4:32)

I think we have to give it time. And I think committing to a series of rate hikes is very unlikely here. Steven Major, he's not going to signal anything.

Tom Keene (4:41)

Talk about the real yield. I mean, I'm looking at the 10-year real yield. It gets my attention. But to me, almost historic is the 30-year inflation-adjusted yield is really back to once-in-a-lifetime highs, way over 3%.