Asia Markets React to Central Banks

Published Mar 25, 2024, 2:04 AM

Featuring:
Steve Sosnick, Chief Strategist at Interactive Brokers, joins the program to discuss how central bank decisions are influencing global markets.


Mark Heppenstall, President and CIO of Penn Mutual Asset Management, shares his perspective on APAC market outlook.


Mahjabeen Zaman, Head of FX Research at ANZ, sits down with us to talk about the Bank of Japan, The Fed, and APAC markets.  

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This is the Bloomberg Daybreak Asia podcast. I'm Brian Curtis along with Doug Krisner join us each day for the stories making news and moving markets in the Asia Pacific. You can subscribe to the show anywhere you get your podcasts and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App. Joining us now for some discussion about the FED and inflation and the markets is mister Steve Sosnik, chief strategist at Interactive Brokers. Steve, great to have you in the program, and thanks for doing this on a Sunday. We do appreciate it. I want to talk to you a little bit about the FED. The stance that we heard from Jerome Powell. It seems to be part opium, part rational analysis. It's to be fair, and maybe just part patients. I'm curious your take on where we are now in the ballot between inflation and jobs.

Well, first of all, good morning, Brian, and sorry to hear you were at a sweaty weekend. The there's definitely there is definitely that hopium element in this whole thing. You know, uh, you know, you have Larry Summers on Bloomberg TV, you know, on Friday night our time, basically, you know, saying that he doesn't understand where where the FED thinks that the neutral rate is. And I really I didn't express it quite so eloquently, but I've been I've been getting at the same point in some of the work I've been doing, which is, you know, we've got all this fiscal expansion. You know, you look at you look at rollicking stock markets, you look at bond markets doing fine, still pricing in big cuts. You look at heavy speculation and things like bitcoin and gold and other things that are non interest bearing assets, and you have to wonder, why do we actually need interest rate cuts, especially if the if the summary of economic projections is now up two point one percent, which tells me a recession isn't in the cards either. So yes, there's rational analysis, but I do have to think that that you know, he's feeding into this idea of this urgency that we need to get to a more neutral rate without willingess what that neutral rate is.

Yeah, back to Larry Summer, is the one issue I would take with his comments is, you know, he's saying, why is the Fed in such a hurry. And actually the Fed did not say they were definitely going to start cutting rates by the summer. They said that they were watching the data and that they thought that the two months January and February.

Were a couple of months. That's it, a couple of months.

Just like they didn't overreact last year when disinflation was happening over a period of seven months. They still, you know, they still hung in there with their rate hikes and said, well, we'll see. That's still what they're saying, right, we'll see. So that's why I think the patience comes in. And should we doubt his word that if the inflation stays hot that they'll wait longer, or that they could even hike.

I don't doubt his word. I'm not going to say that about Chairman Powell. But the thing I don't think he appreciates is if he says, maybe the market here's yes, okay, And that's I think really where it really stems from. Think about the reaction to the December meeting. He confirmed that we would that we you know, three rate cuts would be in the cards potentially for twenty twenty four. The market heard six, and you know, so this is I think what he doesn't necessarily reckon with when he speaks publicly. Or maybe this is what he wants because it just keeps confidence high and maybe actually reduces the need for the FED to do anything. Maybe.

Yeah, I think that's where you got a point from. Yeah, you definitely got a point there. And well there's this too.

I'm curious whether the FED and even the Biden administration should be getting a little bit worried about the oil price here. It has been creeping higher. We heard from the IEA about ten days ago they increased their demand for cap and they reduced their supply forecast. And you know that could become an issue too, right.

Oh, absolutely, you know that that when when I I've tracked this several times where where I look at the consumer you know, expectations for consumer expectations for one year on one year inflation, it pretty much tracks the price of gasoline at the pump. Yeah, you know, almost perfectly. And so yes, that's the problem. If prices at the pump go back up, that's not good for the Biden administration. And a strong economy lists gas prices because there's more demand for energy.

We we do have a story on the terminal that suggests that investors are back to putting on trades now that will benefit from a cutting interest rates, and not just citing the FED, but also the ECB and.

The Bank of England and others too.

How are you positioning for, you know, the sort of play over the next few months.

Well, one of the things that I'm that I've been referring to because I've seen this trade to a large extent, and I call it fomo insurance. What we see in the options market is definitely options priced in pricing in it works more aggressively purchased to the buyside than to the downside. And yes there's a lot of speculation and options, but still the options market is the best place for institutions to put on hedges put on hedges, except the thing that they're hedging is they're fomo. They don't want to miss a rally. So if you've got Nvidia adder near aal time highs, or pick your product added near all time highs, you may not want to be putting a lot of putting a lot of capital into it, but you may want that upside. And we're seeing a lot of traders and investors basically buying the upside so that they don't have to put a lot of money into products that are added near all time hids but are performing so well that you really can't afford to miss it.

We've got some time to circle back, but I want to get a question in on Japan and China and then if we if we have some time, we'll come back to the general thrust of things on investing in Japan. Chris Wood's a guy that I have read for twenty odd years. Jeffries used to be at CLSA, and he spent some time in a peace out late last week talking about how all of a sudden you're seeing interest from domestic Japanese investors in their own stock market and they've been net sellers for like twenty years. And you know, I ask you the question now because the ni Ka has rallied a lot and people are wondering, well, you know, I don't know, is it has gone too far?

Your thoughts on Japan.

Well, I think what what you're discussing seeing in Japan is human nature as it refers to the stock market at work. I mean, you know, supply and demand has a different as an upside down curve. It's the only it's really pretty much the only thing I can think of where the demand goes up as the price goes up. It's completely the opposite of what we learn in economics one oh one. And I think, you know, after twenty years of being beaten down by the stock market and it's lack of performance, I think it's quite encouraging to see Japanese investors looking at their domestic markets, although it probably would have been nicer if they've been looking at twenty thousand and starting to look at forty thousand. The other piece of anecdotal evidence i'd heard, and I can't put a number on it, but I think it was Eric Belchunas who reported that the Japanese government, thanks to all their quantitative easing, owns about seventy percent of the ETFs in Japan. And that's going to be interesting because at some point you'd like to think that the Bank of Japan would sort of take the profits on this and release those back into the market. Does that put a ceiling on things or do they let things get a little euphoric If that institution is that international and domestic investors coming back.

In Okay, now a place that hasn't gone up and we can't talk about the greater fool theory is China. And we had the premier Lee Chong opening up this key Development forum. A lot of big time CEOs there, including mister Cook at Tim Cook at Apple, but his basic mess is to play down the concerns the Chinese economy is okay, how are you playing that?

You know, I'm not one of the people who believes that China, you know, Greater China's uninvestable, but it's certainly you know, since the world is in love with momentum trading right now and momentum investing, you know, China's basically zagging. Well the rest of the world zigs moving sideways. You know. On the one hand, I guess if you believe in international diversification, you're diversifying if you invest in Greater China. The problem is, it's really the one set of you know, Hong Kong and Mainland of pretty much the one set of markets that are not at her near all time highs. And so you know, if you're a value player, yeah, there's definitely.

Good time, right, there's some possibility. Okay, Steve, thank you very much. Got a homebrew coming away one.

Of these days.

Steve Sosnik from Interactive Brokers take a closer look at the FED and interest rates and the US economy with Mark Heppenstall, President and CIO of Pen Mutual Asset Management. Mark, is it safe to say that the FED is well into now starting to think about jobs more and a little bit less about inflation And how do you think the balance is at the moment?

Well, Brian, good to be with you this evening.

I do think that last week's FED meeting where FED Chair Pale I don't want to say he necessarily dismissed the recent uptick in inflation, but I will say it is hard to reconcile. I guess three rate cuts this year in light of the projection that the FED made last week that inflation wasn't going to hit their two percent target until two twenty six. So, you know, there's been a lot of talk about whether the inflation target may in fact be more of a range now as opposed to a precise target at two percent. But I do think that, you know, last year, they seem to be willing to sort of accept the fact that there was going to be some pain necessary in the labor market, and thankfully that has not at all been the case with more than five hundred basis points of interest rate hikes. But I do think that I would say that sort of dynamic between inflation and employment in the dual mandate is much more in balance than it was, let's say, at this point last year.

Well, we had seven months last year of disinflation, pretty strong disinflation. We had rates coming or actually inflation coming down pretty solidly. It wasn't at the target, not even near it, but it did come down a lot. But I'm curious why so many people now think that the two months that we've seen here, even given seasonal you know, seasonal changes and everything, bad weather in January, why are those two months like swinging everybody on what the trend is.

Well, that is that is a good point, because you know, we've obviously come down a long way, depending on which one of the inflation metrics that you want to use, but clearly we've made a lot of progress getting back closer to the FEDS two percent target. And I do think, especially as you mentioned that, you know, the seasonal in January tends to be I would say, maybe distorted a bit to the high side. I think it was two years in a row where January was somewhat of an outlier. But it does seem as though, you know, the employment picture is still somewhat out of balance, where there aren't enough unemployed workers to fill all the open positions. Some of the service sector inflation appears to be moving higher if you look at the wealth effect with what's happening within the stock market, it does seem as though even residential real estate, it seems as though buyers are now a little more willing to accept seven percent mortgage rates than maybe some of the sticker shock they had last year. So I just think there are a lot of factors that could keep inflation above the two percent target.

Surely there's so much that we don't know.

Patients may be their key position here at the moment. They do have the math working in their favor, and it's working in the favor of the American worker as well, because inflation levels are well below the Fed funds rate at the moment, and the longer they wait, the more the lag effect comes into effect.

Right, Yeah, I.

Mean that is very true. And I was listening to an interview earlier this evening on Bloomberg with Larry Summers, and he was really calling into question the neutral rate projection by the Federal Reserve and the fact that they kept it basically at near two and a half percent with last weeks dat plots and his estimate that it's somewhere above the four percent level today. So really it's it's just a question of how restrictive the Federal Reserve is today relative to.

The neutral rate of interest. And I think there are a lot of secular.

Forces that are that are at play here.

So again, I think even if.

He's right, even if he's right, and you know, that's pretty high four percent, I think the Fed's at two point six up from two point five. Even if he's right, the math is still working in your favor. Right, FED runs rate is five point thirty seven and a half, and.

So you know, it's it's going to be it's going to.

Be a sort of tightening measure that stays in place as long as they don't actually start cutting.

Well, that is very very true.

However, if you sort of look at where the ten yere treasury is today, for example, that that's awfully close to a four percent neutral rate.

If that is indeed the target.

So, you know, I think the slope of the yield curve is you know, clearly making longer term borrowing costs a lot lower. And if you just look at how easy credit conditions are today by certain metrics, and we spend a lot of time investing in the corporate bond market, you know, investment grade and high yield spreads are really near the lowest levels since the financial crisis. So again, there are a lot of signals today that says that sort of this fed forward guidance, this communication that's tilted clearly towards easier.

Money, has in fact already ease credit by s.

Do you feel pretty comfortable with Do you feel pretty comfortable collecting those seven percent or so yields on corporates?

Well, I will say we you know, I think if you look at the absolute yield levels today, we think they look attractive, even if you think that let's say, inflation sort of stays in that three to four percent range. So I think there are a lot of attractive opportunities in the corporate bond world today.

Yes, Mark, thank you. Unfortunately tied on time. Mark Hepenstall, President CIO of pen Mutual Asset Management, Let's get to our guest, Maja Bean Zaman, who is head of FX research shit A and Z. Maja Bean, thanks very much for joining us. Let's talk first about the Bank of Japan. It seems like what they did it didn't quite work out because we've seen weakness in the Japanese yet, and I mean, perhaps we can argue that it did work out and they sort of threaded the needle there. But then this morning you had the top currency official in Japan warning against speculation, saying that the action that we've seen here with yen is not in line with the fundamentals. How do you see the yen moving against the dollar, for instance, over the medium term.

Look, I think over the medium time we do see a little bit of strengthening in the end, but in the short term, surely we think it will remain elevate. Dollar. En will remain elevated above that one fifty marks we have seen previously. You know, over the past year, even verbal intervention usually doesn't have much much of an effect. And at the end of the day, it's really those you know, dollar and rate differentials that are the key driving factor of this currency pair. And we have seen the dollar stronger over the last week, and that'speeding into dolly en.

One of the issues seems to be that a lot of central banks elsewhere around the world looking to cut their rates at the same time that the FED may be cutting its rates. And so, you know, the strength that we saw on the dollar that we thought might turn into weakness with the FED cutting now seems like it's actually keeping the dollar strong, and so it's hard for the end to really rally against the dollar. Is you know, We've got a lot of variables there, but do you see that that other central banks and the FED moving and sync keeps strength in the green back.

Look, I think in the short term, especially over the last few weeks, as you said, everybody's looking to cut, it's going to be the race to who cuts first and who cuts last, and possibly that's probably going to have some impact on the way the dollar moves. Of course, last week we had the SMB surprise. I think we had a little bit of that driving that dollar strength. We also had BOE now looking to sort of turn a little bit neutral. You could argue RBA similar language. I think all of that has lend some support to the dollar. CNY again, the fix was wider, so all of this lending support, but I think that's not going to be long lasting. We continue to maintain the view that into the year end, we're looking at the DXY at ninety eight to that's above four or five five plus percent from here, and there are many different drivers for that.

I guess the basic math is the FED raised more than everyone else, so it stands to reason that they'll probably eventually have to cut a lot.

Yeah, definitely, And I think it's a lot of things right. I think we had us exceptionalism helped the dollar over the last two years, particularly, and you know, as you said, they've gone stronger as well on the rate side, so they have to cut more. But also I guess, you know, the rest of the economies. You know, you could argue about China where maybe the green shoots are not really there yet, but then you know, in Europe they're starting to see green shoots. The rest of the economies are now starting to look better. Sure, we've had technical recessions, so called Japan was not really there. You know, England's behind the New Zealand, but that's all backward looking stuff. Going ahead, I think the growth differential between US and the rest is narrowing, and so I think that will help the currencies of the other economies as well going forward.

How do you see bond yields moving, particularly at the short end.

Look, I think bond yields front front end hels are moving to the tune of what the FED says and what the expectations are. You know, we were at technical technical levels before. We're moving a little bit over from there. And look, I think fects markets, which we look at dollar is very strongly correlated to what front end shields do. At some point we think that should be moving south. As you know, we get more data, we're getting PC this week that should give us some idea as well.

I'm a little surprised to see that you expect the FED to cut four times one hundred basis points this year.

Yes, so we do. We are a little bit more you know, I would say dovesh shirt than the FED themselves. And I think, you know, inflation is coming down. Of course we've had two months of higher inflation, but clearly power has clearly pushed that back from where we see, you know, the communication coming from the FED and the way the direction of the inflation on allo underlying data, and the job market is starting to look a little bit softer, and all of that will warrant you know that that that hundred business points of easing this year, you.

Know, given the dovish stand that the FED had, and admittedly you're a little more dubbish than the Fed, but still in sticking with the three rate cuts, I would have thought that Powell might have been talking a little bit more about slight weakness in the jobs market, but instead he seemed to be pretty confident in job creation and the fact that you know, it's pretty steady and pretty strong.

Look, I think it's various indicators non pompios, of course, are painting a fairly stronger picture than the rest of it. When we look at the underlying data and we look at the wage tracker, Atlanta wage Tracker and a few other you know, the job openings and all of that, all of that has retreated quite a bit, and I think that will play into the data as we go along. But you know, whether they go seventy five or one hundred, surely you know, sorry, the FED will be moving pretty soon. We think June will be when they start June July or July is when they will start.

I want to go back to the Bank of Japan because I've been thinking about this a little bit over the past week about whether or not it might have been smarter for them to say we're dropping yield curve control and we're going to stop the buying of bonds and you know some of the other changes that they put in place, rather than what they did, which is they dropped yield curve control, but they said they were still going to buy bonds as they saw a fit, and that's why the yen has weakened quite a lot. Do you think that would have been a step too far?

Yeah, I think so, And I think, you know, it was a pretty dubbish hike. And as you said, you know, buj they continue to maintain to buy bond at the same things they were buying previously. Now they should keep its balance sheet steady, and I think Governor Yuieda had mentioned that, you know, again not to shop the market, but you know, they will keep financial conditions accommodated when that's important with regard to getting out of that negative right environment. You know, that was pretty much coming and it was I think to me, I'm looking at it as a one and done. The rage negotiations really fueled the move a little bit earlier that we were first thinking April, but came a little bit earlier now in terms of when they're going to move next. To be honest, we do see you know, I mean the economic conditions in Japan are pretty weak. You look at consumption, it's pretty weak. We're looking at services PPI, which is the BOG watches closely. That's also retweeted. And when we look at inflation that came out last week again it's kind of retreating. So we don't think there's going to be a sequential rate hikes story here. Maybe they might hike once next to the start of next year, but that's dependent on how data moves and also very difficult to be tightening when the rest of the world is in an easy cycle.

And I guess the final question on the Reserve Bank of Australia a little bit less hawkish, but still more hawkish than many other central banks, what does the outlook look like for the RBA going forward.

Look, I think this shift towards I guess, as you said, less hawkish was coming, and that's really because you know, they've had monthly CPI data coming out, which seems to be retreating. We look at you know, inflation from all elements and surely is painting the right picture for the RBA. Having said that, you know, locally here we are expecting some fiscal easing coming through in form of tax cuts starting from the middle of the year. We think that the RBA may want to see the result of that on consumption and GDP before shifting the doll and so when we look at you know, they're probably the most one of the most hawkish within the GPN, and we expect them to only start cutting in November the.

Just briefly, yes, briefly, in twenty seconds, do you think that oil prices will continue to rally?

Yes, I think so. I think the demand side of the story from China is picking up, you know again that's been supportive, and supply side is retracting, so that point to higher our prices.

Yeah.

Yeah.

We saw China's oil demand in January and February those two months pick up six percent from a year ago, and that does seem to be adding to some of the demand pressures. Thanks very much to Muja Bean Saban from A and Z. This is the Bloomberg Daybreak Asia podcast, bringing you the stories making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.