Featuring:
George Boubouras, Managing Director, Research, Investments and Advisory, K2 Asset Management, shares his outlook on emerging markets.
Meredith Whitney, Founder and CEO, Meredith Whitney Advisory Group, shares her perspective on US markets.
Garfield Reynolds, Bloomberg MLIV Team Lead, joins us from Sydney to break down the various comments from US Fed officials. Plus, the latest from the BOJ.
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This is the Bloomberg Daybreak Asia podcast. I'm Doug Prisner. You can join Brian Curtis and myself for the stories, making news and moving markets in the Apec region. You can subscribe to the show anywhere you get your podcast and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app. We had more than a half dozen FED officials addressing the issue of rate cuts today, one of them the head of the Minneapolis Fed, Neil Kashkari. Curiously, he was saying rate cuts may not be needed this year, especially if the economy remains robust.
If we continue to see strong job growth, if we continue to see strong consumer spending and strong GDP growth, then that raises a question in my mind, well, why would.
We cut rates.
Maybe the dynamics that we have right now are actually sustainable, but there's a lot there's only a lot of gifts underlying that question and that hypothesis.
He is Neil Kashkara, the head of the Minneapolis FED, at a virtual event on LinkedIn earlier today. We also heard from the head of the Cleveland Fed, lorettam Mesters, She suggested the FED could be getting close to the level of confidence it needs to begin cutting and Austin Goolsby, the head of the Chicago FED, was saying today those higher than expected inflation readings in the months of January and February likely don't change the broader picture of cooling price growth. Let's get to our guest, George, but Boris is with us. George's managing director of research and Investments, also advisory at K two Asset Management. He joins us from the line in Melbourne. George, thanks for being with us. Where are we right now in the inflation story.
That's a good question to laid with.
But in the Western world inflation is falling in a non linear manner.
Others are calling it bumpy.
That is much as expected for most participants in the market, but some do. You act surprise, but that stubborn core services inflation is an issue, and then it splits very quickly, depending on what narrative you are. You can look at core CPI it is upper end to that three handle. We can look at core PCE and it's upper end of the two handle. The directions in the right way. It is non many. It is messy. There is stubbornness to it, which is predicated on the resilience of aggregate data in North America.
Do we are we underestimating the effect that the crude oil market could be having on inflation? I mean we're above we were trading above eighty seven dollars a barrel in a WTI and Brent right now is above ninety one bucks. If this is lasting, if this is durable in terms of the price moves in oil, could we be underestimating where we are in the inflation story?
Just like a high interest rates are less sensitive the stage of the cycle. In broader terms of the US economy, you'd have to say higher energy prices are as well, to a degree at the stage of the cycle versus previous cycles decades. Part But the thing to reinforce is that the demand destruction kicks in rule of thumb. Econometricians like telling us ninety days of these sort of prices. Demand destruction kicks in one to eighty days. Demand destruction amplifies itself if there were to be sustainably higher and you need GDP.
And aggregate data to justify it.
Just like high nomenal bond yards, you can tolerate it if economic growth in nominal terms is expanding, So comes back to it is ahead.
When it is demand destruction, it is a tax on the consumer. But taking a.
Step back is that there's the resilience for the US economy and the employments there. So in the US you'll be going up at a higher price. You'd be upset with hurb feelings, but in the main, generally it's that economic activity is more robust to tolerate it.
Yeah, hurt feelings great in an election year. I mean, we'll see where that gets us, right, So let's talk a little bit of higher for longer in the states. Are you in the camp that we're going to get as many as three rate cuts this year in the US?
Not too much three believe I'll start one late in the year, But that's irrelevant.
It's more what does the data do.
So having government obviously fed governors speaking about no rate cuts this year really gets the attention on the headline, so people can sit down and go, oh, what am I dealing with here? Because it can't be as binary as rate cut good, rate staying the same bad for risk assets, It's going to be more nuanced to that and that's what something's happening, and people need to focus on it. So the economic data and the wealth effects for households in North America and their residential homes are much higher than what it was before. There's a double wealth effect in there. Yes, there's the fixed loans and it's an accid in itself that have to be reset sometime. But why would someone's looking for price stability across an economy?
Why would you be cutting into that?
So data has to deteriorate in a faster momentum and pace, not just one month.
It can't be just pay rolls tonight.
It needs to be weakness over three months, rolling three months to be able to build that narrative of three rate cuts this year.
But as it stands at the moment, earnings are growing.
They're probably pricing to be too high, high single digits, but they are growing. It's quite healthy relative to expectations. And cutting interest rates in the face of these risks and average out of the earnings is what would be all looking for.
It doesn't seem to make much sense to me.
So let's change gears talk a little bit about China, and I'm curious as to whether or not first, you think the economy has bottomed, and if we are in that process right now, could we begin to inflate a little bit and kind of emerge from this deflationary trap in China.
Possible, many moving parts, and your show discusses it all the time. It's very clear that household and business sentiment in China is at real depressed levels, unlike North America, and they got deflation unelike North America. So there are many moving parts as they've got to deal with the consequences of the biggest construction housing collapse we've ever seen. But it's very clear Beijing is very targeted. So the middle class is going to maintain this painful period for considerable time as they deviate their policies accordingly as pragmatic as Beijing always chose to be. So there is an aggregate turnaround of data. Sentiment is very very low in there, and they are controlling and the rest. This is why everybody's underweight auto's in the West. They are controlling the next phase of EVS and the protest grummery. So Janet Yellen needs to do her best work, and even that won't be enough on the current tour because they are ready to unload lower cost products right across the board to the whole world. And that is good for China in itself, But from the investment point of view, this is the crux of it all. We are not putting finite capital in China for the last three years, we are buying earning some of those exporters to China, hence their energy overweight.
It seems as though authorities in China are really caught between a rock and a hard place. I mean, I understand the weakness and the property market and how industrial policy as a driver of growth may be able to make up for some of that, but if you're dealing with over capacity in so many industries, it's not clear to me how you can continue to use industrial policy as a driver.
No spot on.
Sometimes some people would say there's some cognitive dissonance with some of the policy cutting out of Beijing, but in reality they're taking a step back from the grand to play the long term. They will unload cheaper products to the rest of the world that will allow it, and North America will maintain them. They've obviously died up those tariffs and the current administration from the previous one. They can allow these cheap goods to come through, which they won't and that would be very CPI will fall very quick. But in the main, China's just got a different playbook at the moment to where we're worth three years ago and the middle class of China going to pay that price.
Look it is.
It is a property construction collapse like we've never seen. It will take a decade to get out of that. But again in the main, China is just coordinating that middle class go through the pain, hold onto that pain. Aggregate data will get us over the edge. And they are producing some some key goods, particularly in the technology sector, in the energy transition sector, that the rest of the world needs at a lower price. And that's a nuance of it. Or how do they do? And we believe the risks are which you can't price see with geopolitical is that there's tariff's go even of off the current template which is really high, Tariff's just accelerate in twenty twenty five to another level. They're the risks for the global economy.
George, Before I let you go, I have to get your take on Japan. We heard from Governor Uwaita speaking with Saji Shimboon, saying that really greater certainty is necessary before on the inflation story, before there is any more policy action in terms of raising infrastrates. Where are you on Japan right now?
Firstly, Yuela has played it perfectly, engineered that he's nominal rates to zero very well, and it's obviously communicated in hindsight by a local press in Japan, and that's been a good nuance, and he's targeted that March April period.
It's plant panned out.
I think they're right to reinforce that they've got a pastoring more inflation obviously, the weakness of the yen, the issues for their corporate sector on that and passing those through. Yes, the way drives is already built in. I do think they've got this is at this stage. The current policy mix is good. The overweight to Japan as a consequence is reasonable. You can overgeneralize a calendar twenty three was a value play, Calendar twenty four is a growth play and guard play for earnings in Japan. And I do think sitting back in that lange which is giving us quite good so very happy with Japan, more predictive that it's bad for some.
Time George, Thank you so much. George bar boris of K two Asset Management, joining us here on a daybreak Asia from Melbourne. Meredith Whitney is with us. She is the founder also the CEO of the Meredith with Me Advisory Group. Nice of you to stop by, good to see you. Thank you so much. I hope you're doing well. It was kind of interesting. And I don't know whether you've had a chance to listen to some of our FED coverage today. I know we had about a half dozen or so FED speakers today. Neil Kashkari caught my attention. He was saying that, hey, maybe we don't get any rate cuts this year. If inflation proves to be as stubborn as it may be, and the American economy holds up as well as it seems to be, maybe Cashkari is not going to be one of those that would advocate for a cut. What do you think about that.
I think it's hard to argue with the fact that we all signals in the US economy continue to be very strong, so it's hard to imagine. And I came into this year not thinking there would be six rate cuts. Three even seemed aggressive. I think one would be at best maybe after the election, but the economy still strong. Wages are going to I think, remain strong. I think jobs are going to remain strong because we have a real labor shortage in the US. So that'll call. You know, people don't want to hear that. People don't want to believe that. Everyone thought that that the FED didn't was signaling things that they didn't really mean. And I think as the year progresses, they'll appreciate the fact that the FED has been saying they're data dependent and the data is stronger than would allow them to eat to cut.
That's an interesting point. Do you have a sense of why the Fed, why Powell and company back in let's say November December period of last year, were so optimistic that they could be maybe as aggressive as to cut seventy five basis points. What did they see then? What what did they understand about the trajectory that allowed them to say that.
It's hard to see because I look at things in a very bottoms up basis, and I think that the FED is looking at a lot of twenty year thirty year old measures to value the economy and what you know statistically as well as anecdotally is that we have real shortage of labor and healthcare and home healthcare AIDS. We have a chronic and I think a systemically dangerous shortage in basic trade. So these are steel workers, these are electricians, these are plumbers from the steel workers at welders rather from the welder's perspective. That's where I say it's an issue of national security, and so it's very hard to imagine that that abates anytime soon. So you've seen layoffs, the most prolific in the tech sector that had over hired, and you see really basic no impact in the unemployment and in the jobs data with over five hundred thousand lost jobs in the tech industry. I would argue, and this, by the way, is you know federal FED data and Census data and BLS data. Is the fact that you know, since COVID more college educated workers are working multiple jobs. Prior to COVID, thirty percent of folks working multiple jobs were college educated. Post COVID, it's over over fifty. And I think that's probably understated because people working full time, high paid jobs are probably not going to admit in a survey that they're working multiple jobs. But this is why, you know. I just think you've got to go below the surface. And there are a lot of very smart people at the FED, but they're looking at traditional metrics, which I don't think apply today.
Can I ask why you were in Hong Kong? But are you speaking with clients? Are you kicking the tires on some opportunities there? Why are you in hk.
Well forst starters, I love being in Hong Kong. I love my clients in Hong Kong. And I'm on a board and Hong Kong and it's just, you know, it's it's hyper speed in terms of learning and a very very smart investor base. So I come here at least once a year. Obviously during COVID I missed a few years, but I've been a regular Hong Kong visitor.
What is the view on putting money to work in China right now? I mean, the consensus opinion is you want to avoid it at all costs right now. In one of our surveys, we spoke I think to seven different financial firms in Shanghai. All but one said that the economy is yet to bottom. We're looking for further weakness. Is that the sense that you're getting that it will remain a week outlook for for the Chinese economy in twenty four It.
Depends on who you ask. So they're perma China bowls in Hong Kong and the US. You know, China is a four letter word, so so it's it's very difficult. You know, you see a real disparity in valuations. Right, Chinese stocks are incredibly cheap stocks. A lot of US stocks are arguably very expensive. So there is a point where you know, global managers are going to be underweight China, and when is that point that they'll have to reallocate their portfolios. It's hard to argue the demographics are on anybody's side in China. So it's hard to argue that the real estate market is truly bottomed. It's hard hard to argue that unemployment is not a problem. So there, I don't you know, you're always going to make the most money when nobody wants to go into a market. You know, I'm not an expert on China, but it still seems a little a little you know, evaluation. If you're a if you're a classic Chinese investor, you're you're not going to be swayed by so much aversion to the Chinese market, but it's all question of timing, and I'm not sure it's right.
Meredith.
Before I let you go twenty seconds, the biggest surprise that you have had during your time in Hong Kong is what.
The fact that so many people think Trump's going to win the election here?
Hmm. Interesting? Interesting, And that certainly is going to factor into the equation, particularly during Janet Yellen's visit to Beijing, which is underway now, and whether or not leaders in China are going to be betting more and more that they're not going to have to deal with a Biden administration a year from now. Meredith, thank you so much. Always a pleasure, Meredith Whitney of the Meredith Whitney Advisor Group joining us from our studios in Hong Kong, Garfield Reynolds, Bloomberg's chief rates correspondent for Asia. He joins us from our studios in Sydney Garfield. It's always a pleasure. Maybe we don't get a rate cut at all this year. What do you think of that?
Well, it certainly has to be a possibility, you're given the extremely strong start of the year we've had from the US economy, and as he said, if that continues, well, then why would you cut rights. I mean, that's kind of one of the underlying questions around the globe is that most economies looking pretty strong, especially your job markets are just fine. Unemployment levels are the kind of place where five ten years ago you would have been ecstatic about those and you would certainly not be thinking you need to ease policy as a result. Inflation also remains elevated, even though it's come down from those extreme highs. So all of those reasons say you have to consider it as an option that rates don't come down. But you know, the caveat is that with inflation having come down as much as it has, what we now have are restrictive rates. In real terms, the cash rate is well above the inflation rate.
You're right about that, but I think the Fed is looking at the labor market in particular as well as inflation. Yes, but the labor market may now be showing signs of a little bit of softening. Weekly jobless claims at our highest level since January, although our Michael McKee was saying it's not exceptionally high. And then I was struck by a survey from the National Federation of Independent Business. The firms they surveyed, only eleven percent of those firms intend to add workers in the next three months on a net basis. So it's possible that we're beginning to see maybe a peak in the level of employment now. A lot more is going to become clear tomorrow with the March jobs numbers in the US. We're expecting to see healthy gains and payrolls and maybe a little bit of moderation in wages. So would you think that it's fair that the Fed remains very much focused on what's happening, not only on the inflation story, but the labor market especially.
Well, I mean, those are its two basic mandates. And the other thing the factor in is your Keshkari, who doesn't vote, is definitely hawkish. Powell has been far more consistent in saying that do expect the cut rights and that do expect to meet the three rate cuts that they're projected in the top plots. And that makes sense from the point of view of in March, they boosted their forecasts for economic growth and yet they stuck with their rate cuts. So to some extent, the way the economy is traveling now is not hugely at variance with how the FED was seeing things developing when they had their last meeting. So they're still thinking they're going to cut rates, given that if there's a downside surprise for jobs that will bring rate cuts roaring back into play. Market will probably overshoot, but certainly the current pricing for June as a likely rate cut venue will firm, ride up, and we'll get back to betting on three rate cuts this year. That's still the base case scene of the markets. But there's a small a small constituency looking for maybe only two two. But yeah, a week payrolls print would put us back to three. Yeah.
We had a lot of FED speak today, I think a half dozen of FED speakers, and one of them was Tom Barkman of the Richmond Fed. He was saying, it's smart to take your time to get clarity about where inflation is before you cut rates. But if you look at the way the bond market behave today, yields were actually down. Obviously, the equity market got hammered, and the dollar I think softened just a bit. These perhaps suggested to your point that maybe things are on track for cuts, because there will be on the horizon and maybe in the near term of softening in the in the American economy, and markets are beginning to kind of anticipate that.
Yeah, I think. I think also, you know, the overnight action very much is smelled like investors repositioning into jobs to looking, okay, where have we gone maybe a bit too far considering we think things are going to develop. Yields are up a lot still on the week, you know, in the ten year yield hit four point four percent earlier on, which was a level we haven't seen since ya back in November, So that that makes sense to pull back from that. And stocks as well, stocks had been marching on pretty much unconcerned. They got a little bit of course, for concern with what's been going on in the Middle East and what that is the oil price. Also with your people like Kashkari laying out the potential that you know, an upside surprise on jobs could take some of those rate cuts off the table. So again, plenty of reason to get a little bit nervous that you're you've gone too far in the way that the market has been going and pull back a bit. So that's why you've got to pull back and yields, and you've got to pull back in equity prices.
So before I let you go, let's talk a little bit about Japan, not only the Bank of Japan, but the yen. I mean, the yen had quite a bit of strength here in New York today. I think we were up about three tenths of one percent, the biggest gain in nearly a month. Some of that probably has to do with the anticipation that at some point, had the en remained weak, that the Ministry of Finance in Japan would have had no choice but to intervene. So maybe a little bit of haven buying as well as a result of the selloff that we had in risk assets. And here's Governor Uwaita saying that there's a lot more that's going to be required before there is another move up in the official policy Radio Japan makes sense of all of that. For me, how do you see the EN's performance right now visa VI BOJ policy.
Well, the end's going to remain under pressure as long as the BOJ is pushing back against the idea that it's in any rush to titan policy. Now that it's gotten root of negative rights, I do think there's been a little bit of exhaustion when it comes to yen bears. The yen tried three times to go past one hundred and fifty two per dollar, couldn't make it so strong anticipation that if there was a move past one hundred and fifty two that would lead to intervention, then you'll certainly put intervention far more on the table than it has been. So the failure of the dottle that go past that meant a bit of exhaustion. There this kind of this difficulty that on the fundamentals, the en probably should be weaker. Certainly plenty of people think it should be. However, it's facing this this double danger of the FED still says it wants to cut rates, so forgets a reason to show that that's definitely on the table that's going to support the yen. And even as the BOJ says it's in no rush to titan, the Japanese government has made it pretty clear it's getting kind of antsy about seeing the yen this week, so that that's keeping the end and they're feeling narrow range. The moves of the night weren't that large, just unusual in the scope of where they went, but it becomes hard to see. You need a real shock to send the yen noticeably weaker from here. That means this is kind of an asymmetric risk, like if you get a shock that could send the yen stronger, it could go a lot stronger rapidly, there's nothing really to stop it. Whereas if you get a shock that should send it higher, you have the potential for the Ministry of Finance to step in with a range of tools all the way up to actual physical interventions. So the downside beckons for the dollar yen at the moment a little bit more strongly than the upside.
Garfield, It's always a pleasure. I know it's a busy day for you there in Sydney, but I appreciate you making time to chat with us at Garfield Reynolds, Bloomberg's chief rates correspondent for Asia. This has been the Bloomberg Daybreak Asia podcast, bringing you the stories making news 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.