Featuring:
Qian Wang, Chief Asia Pacific Economist at Vanguard Group, on APAC eco outlook
Will McDonough, Founder, Chairman and CEO at Corestone Capital
James Abate, Managing Director & Chief Investment Officer of Centre Asset Management
Adam Coons, Co-Chief Investment Officer and Portfolio Manager at Winthrop Capital Management
Apple: https://podcasts.apple.com/us/podcast/bloomberg-daybreak-asia/id1663863437
Spotify: https://open.spotify.com/show/0Ccfge70zthAgVfm0NVw1b
TuneIn: https://tunein.com/podcasts/Asian-Talk/Bloomberg-Daybreak-Asia-Edition-p247557/?lang=es-es
Bloomberg Audio Studios, Podcasts, radio news. 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 APAC 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.
Chian Wong, chief Asia Pacific Economist at Vanguard Group, to take a close little for the Asia Pacific, we take a closer look at at global markets here. Chian Wong, thank you very much for being with us. Let's start off with China. We can go back to the US up wraps in a few moments. So we have this NDRC announcement coming tomorrow, just a little bit of kind of you know, connecting the dots on some of the stimulus should we expect a lot more clarity here in terms of what's happening.
Thank you so much, Dovan, Brian, thanks for having me today. I think you know having the nd r C pressing tomorrow right like right after the Golden Holiday, but the timing it itself can be sending a positive signal and that the Chinese government is really moving fast because frankly speaking, they are running out of a time trying to reach that five percent target of this year. Right, So that actually is positive the news. But on the other hand, I think we do need to figure out, you know, in terms of the size, in terms of the composition of the of the for the you know, uh support measure.
Right.
Hopefully you know, they are going to emphasize on you know, a better utilization of the existing physcal space as well as you know, uh, hopefully they can announce a supplementary physcal package that will be approved by the National People Congress later this month. There is certainly a lot of hope there, right, you know, currently we are expecting about to trillion right fiscal package you know, supporting consumption, some investment, alleviating local government that burden, and probably some injection to bank capital. But I think that remained to be seen, right you know, and I think investors are waiting to figure out whether this is really whatever it takes moment or still a continuation of just enough approach.
Do you think we're going to see sentiment move in a positive direction as as soon as some of the high frequency data from the Golden Week holiday, if there is to be positive sentiment on from the consumers and chin at all.
Well, I mean, if you look at the Golden there's some high frequency data right, like the box office, like the trouble railway tours, railway passenger outbound inbound trips. You know, some of the number actually do see you know, positive year on year growth. And also I would say in Tier one cities we do see some boosted to the housing market sentiment and activities over after the you know, coordinated policy pivot in you know, a week ago. Right. So, but I think at this moment a lot of people are still rather skeptical, you know, because see, when I think about policy stimulus, right, I think there are three stages of policy support. The first stage is really about supporting the liquidity and sentiment, and of course I think they've already done that, right, you know. But the second stage is that when the economy is really in an liquidity truck, what is it missing is really credit demand, not credited supply, and money free policy or ejecting money into the equity market does not really solve that. So that's where we get into the second stage, really focusing on the fiscal policy, but still I think cechnical policy does not really fix structural issues, right, So I think the third stage is really we need to see what the government is committed to solve those fundamental issues.
Yeah, that's that feeds. And the reason I was kind of you know, getting you know, on the edge of my seat was I was thinking that there's a possibility that there may be a kind of permanent discount placed on China, given that we've seen now that it comes down to one man rule. And I think a lot of investors really have their doubts that she Jiping is really all behind this. He's kind of being dragged along here a little bit because of conditions and such, but that he may not be fully committed. Do you think that permanent discount could be in place?
Well, I think there's a lot of skeptism, and I think this is why at this moment is really a critical moment for the Chinese government right to regain their policy credibility. Right, So if the policy supports just continue to be you know, moderate and just enough, then I think that may actually make a lot of investors more disappointed, you know, at this moment, I see it like two fundamental issues in the common one has on the housing sector, right, I mean, unless the central government is willing to leverage its own balance sheet to address the oversupply issue, right or the you know unfinished the housing unsold supply and even land that's sold but not developed. You know, unless central bank, central governments willing to do that, I don't really see that they can stabilize the housing market in a sustainable manner. And the second issue I think is ultimately business confidence, which matters the most actually for household consumption. You know there because I think the most important factor to drive consumption is really the job and income prospects, and that's where I think the government need to revive the animal spirit and business competency, especially in the private sector.
That is a very good point, and I'm curious to get your take on why the government has not yet used its balance sheet, whether it's the central bank or the other means. I'm assuming what you mean is that the PBOC would would put its balance sheet, I want, not necessarily at risk, but would certainly add to it in a substantial way. Why do you think there's been so much resistance to that idea?
Well, I think at this moment. You know, a lot of people are expecting a bazooka you know package, right, But I think still I think in Chinese government's mindset, probably they still want to follow our you know, touching the stone and acrossing the river, right. I mean, because you know, if you look at the Chinese government, what we have seen over the past several years is that they are trying to balance multiple policy goals. Right, growth rate is one thing, but growth quality, financial stability, you know, and the income and wealth equality. There's many other goals they try to balance. Oh yeah, right, have development. So I think that's where they do want to take. You know, watch closely, say, Okay, we don't want to We want to support the economy growth for sure, but we don't want to overstimulated, and that actually would threaten the financial stability down the road.
Let's circle back quickly to the US, because that's also a big, big, important part of all this. How should we interpret the stronger data of late a good thing or a worrisome thing because of the inflation implications.
Well, I think definitely this is actually suggesting that the US economy is you know, pretty resilient, right, surprisingly resilient. In fact, so I think that does come the recession fear and move the risk to the US upper side. Still, you know, we don't really expect us off lending or no landing. Actually, we still expect the ecomy to have a lending in twenty twenty five, what we call a turbulent lending, which means we are going to see some below trund growth like average one percent next year, and that nective apple gap will be able to bring inflation, you know, towards the the two percent target. Right, So this is where we steal, you know, expecting fed tool.
Yeah, a little sobering position, turbulent landing, right, yeah, Queluckily, I was getting all excited and then Chien Wong had to pour some cold water on us. Anyway, but a very nice conversation. I think I learned a lot. And Doug two Chien Wang, chief Asia Pacific Economists at Vanguard Group, looking at the Asia Pacific end a little bit on the US economy. Will McDonough, founder, chairman and CEO at Corestone Capital for a closer look at markets. Will the US economy with this latest data on jobs and some of the other data, we are going to see higher yields that seems seems certain our market's ready for that.
I think markets are realizing that the data that's coming out today is that a significant lag to the reality. You know, we liken it to the adjustment of your thermostat in your home. You might change the degrees in the morning to be up a little hotter. It doesn't get hot immediately. It takes a little time for that to adjust. It's the same when you see interest rates adjust. It's the same when you see FED activity. It takes a while for that data to get into the market. And so why I think the markets reacted positively this week is because we are very close to the first adjustment from Powell with the cut. To see data this close to that so positive, it's leading people to believe that maybe things weren't as bad as we might have thought over the summer months. And so if we follow that up into the new year with a couple more cuts, people seem to think that we might get some momentum into the new year. And I think people are really hoping for that.
Bloomberg spoke with Ed Yardeni last week and he was saying the FED might not cut again this year. Is that too bold a statement.
I think it's too bold of a statement. We're predicted one full point for the year, so they're they're halfway there. I think if we got two more twenty five bip cuts into the year end, I think that's kind of what the market's expecting, and I think if we got less than that, the market might react negatively to thinking that they're not doing enough.
The chief, the chief consideration must be, or the chief concern must be, that you get a pick up in inflation with this added growth. I mean, if we are reinvigorating and re energizing in the economy, isn't it a fear that inflation picks up with it.
I think that's a good fear. I think I think that's a well warranted fear, and that's a real fear, and that is exactly what could happen. The problem with this Q four in the traditional economic calendar is we get way better real time data from consumer spending around the holidays, and that's our real litmus test for how much money is in everyone's pocket, how much money are they spending, and when we start to see those numbers between now and you know, Christmas, in the holiday season, If those numbers are off, that's going to strike a ton of fear into people. And so I think markets right now are in a little bit of a wait and see to see how these numbers spit out, and they want the Fed to continue to lean into it because we don't know what we're going to see. You know, COVID era savings are down tremendously, inflation is still up massively compared to where it was pre COVID, and so those two things don't line up for a big holiday season of spending and that could prove to be really hard as we roll through Q four.
So kate data this week will be CPI, PPI Thursday Friday, respectively. Do you have a sense of what we're looking at here in these numbers?
I mean, they're going to be at a leg to the reality, and so, you know, while markets are going to make bets on whether or not that's going to come in hot or not, we actually zoom out a little bit more. I'm less focused on you know, this week over week, month over month number because it's really reflecting August July realities, and so I'm way more concerned and focused on the holiday season, you know, and how that's going to affect the global macro environment. We can't forget. You know, between now and holidays we have a pretty contested election cycle where the economy is front and center, and so you're going to see I think a lot of the focus go away from the numbers and the tangible numbers because those are going to be less real time. You're going to see how the US markets are voting truly at the polls and therefore with their wallets, and then you're going to see right after that how they're spending at the register. And that's going to give us a real true test for the realities of the US markets.
Have you been thinking about China and the strong impetus there for market action, you know, reflecting the change in policymakers approach to things. Is that something you like or are you in that camp that's a little concerned that it's moved too far, too fast.
I think about China more often than I care to admit. I'm horrified by I think it's amazing that what they're doing. I don't trust a lot of data that comes out of China, but when they are leaning into and throwing the kitchen sink, if you will at their own economy and trying to stimulate things. That does reverberate around the globe because of how much we depend on their output and how much we depend on their exports, and how much they define, you know, the cost structures of a lot of goods, goods that travel around the world, and so, you know, China does keep me up at night and wake me up in the morning. And when they do things like they're doing recently and really come over the top with with their movements against their own economy, it does make me a little bit fearful about the realities under their hood.
Hard to believe. We're already at earning season this week, right Delta Airlines on Thursday, some of the big banks Friday with I think JP Morgan and Wells Fargo. How do you feel about the earning season?
I think that the you know, consumer activity through the summer is probably going to be fine. I do think that the banks are going to be a better litmus test because you know, the data that they're going to be reporting off is going to be the last segments of the market, hopefully with high interest rates, and so how did they operate in a high interest rate environment? Because when interest rates are coming down and interest rates are good, banks do well. People are borrowing, people are engaging with the markets more. And when interest rates are high, that's when things are really hard on banks. You know, activities down a lot for them, transactions are down, Emina activities down, investment banking activities down. And so I do think that those banking numbers that come out this week are going to be important to monitor. And I don't predict that they're going to be spectacular, but if they are good, I think that you know, paired with the election cycle and people's promise of maybe some economic policy shift and like I say, the consumer activity into your end, we're going to come into this new year with a really good grasp on where there's a economy stands, and I'm truly hopeful for it.
Well, the big bull case would be that, you know, you've got the FED leaning toward cutting interest rates into an economy that's not only okay, but seems to be reaccelerating. And then you've got all this stimulus that's coming in China. I mean, you can make the argument that this is a unique and very interesting period for taking on risk.
It is, and one side of the coin is that that's a house of cards with a lot of different stakeholders who you know, who have a lot to gain from their own personal activity, and those are compounding off of each other. But the other thing is, you know, we can't be negative about the fact that the data and the CPI and you know, the the non farm payrolls and those have been stronger than people thought they would be. And so it's giving people hope that maybe some of this political activity actually did you know, keep things afloat through some pretty trying times. And if we do come out of that on strong footing, you know, you could predict that the market persists in the right direction and it might just go down as a case study for how to handle a crisis, which you know, I'm yet to celebrate that, but you are correct that it has the setup you know, to be a win.
It's kind of amazing. I mean, so far this year, I think the S and P is up roughly twenty percent, eight trillion added to market cap. A lot of that has to do with the AI trade. How are you feeling about megacap tech AI in particular.
I'm bullish on megacap tech and AI and its influence. You know, I do really spend a lot of time trying to figure out where the energy is going to come from to support all of this computing power necessary for AIRE. We're spending a lot of time, you know, assessing that and think that. You know, we made a big move into copper last year, which is performed well over seventeen percent year to date, and we think copper will continue in that direction. You know, I think the two different sides of the aisle have different energy policies, and those policies are really going to drive actually tech earnings, which is just a crazy commingling that you know, more so than ever because of how much computing power these you know, large language models require for AI and the queries that are coming from it. So I do think that the haves and the have nots are going to become more pronounced, and those with big balance sheets, like the big techs have will continue to succeed because they're able to lean in and double down. And we're feeling good about that.
All right, Will, thanks very much. Will McDonough, who is founder, a chairman and CEO at Corestone Capital. James Abat, Managing director and Chief Investment Officer, of Center Asset Management, James, how should we interpret the stronger economic data that we've seen here of late good news because it seems like good news or worrisome and that inflation might get restoked.
Well, it hasn't been uniform, right. The ISM Manufacturing Index released last week continued to show a great degree of weakness in the manufacturing segment of the economy. And clearly the labor report, which showed a gain to two hundred and forty five thousand jobs, and as you pointed out, the unemployment rate falling down to four point one percent, kind of puts us back in the no landing environment at this point in time. I think there are three issues that one can take exception to. I mean, the first is that when you drill down into the numbers, the average work week actually fell, so the aggregate number of hours of work actually declined. In the most recent report I think two nearly all the job growth was in government, education, and leisure. So it's essentially a bull market for job growth in bureaucrats and bartenders, I guess, because if you look at the manufacturing sector, it actually declined by seven thousand, so you know, we're seeing the fiscal stimulus continue to offset you know, cyclical and private sector weakness that we have. And you know, going back to that ISM report that we had earlier in the week, if you look at the sub sector which is the ISM labor component, it showed the biggest drop since the COVID lockdowns of mid twenty twenty. I mean, that's a real indicator. That's something consistent from business, which is very consistent with the FEDS page book. It's not a statistical figure released by the Department of Labor, who you know, I hate to say it. I don't want to, you know, question their credibility, but you know, just last month, the same Department of Labor revised the number of jobs down by eight hundred thousand lowers. So you don't have to wait and see because if you look at the bottom line, if you're recession may may now be on hold for the time being, but it's not gone completely. As the global economy seems still to be stuck. In first year, we saw Germany GDP estimates coming at negative zero point two percent, and I still think we're vulnerable to some type of demand shock and have a hard time seeing a rapid acceleration of economic and profit growth.
But for the moment, does it change. You're thinking into what the Fed may do next. Ed Yard Denny was saying last Friday in the wake of that Job's day, to Hey, the Fed may not cut again this year.
That's possible. I mean, we've never been sitting here with the pom poms ow cheerleading the Fed, you know, needed to go to another fifty basis points. Our guide post has always been the two year note, and the two year note right now is around four percent. And we've said if the FED can get to four percent on the FED funds rate, which it's still not there yet, whether that's in twenty five base points increments or you know, maybe even less, and depending upon the time, that would be an ideal situation. I mean, what you're thinking about at that stage is two percent inflation and two percent real rate, which would be, you know, theoretically, monetary policy nirvana.
So I'm a little yeah, I'm a little confused on whether or not you're concerned about the future. It seems like with your first answer, you are a little concerned about the US economy, yet you don't really think that interest rates are needed, which might suggest that you're more like it's kind of cruising along sideways here, and that's not such a bad thing.
Yeah, that's exactly right. I think that the market is already priced in much of what's occurred in terms of the easing. I mean, let's look at large corporations. They're doing fine. I mean, credit spreads relative to treasuries are already very tight. There's no indication of any kind of financial stress. I mean, if you look at ratios and at least total debt to capital, there are cycle lows right now for the average SMP five hundred company, as is the debt to EBITDA ratio. I mean, when you think about it, providing the rally that we've seen in bond yields, it means provided some benefits to regional banks. I mean the biggest beneficiary, let's just not let's cut to the chase. I mean, the biggest beneficiary of the cut in interest rates is the US Treasury. I mean the average maturity of the enormous thirty five trillion dollar US debt is you know, six years. So US deficits are highly impacted by the cuts of short term interest rates, as interest costs now top one point one trillion dollars a year. It's a quarter of the federal budget. So I mean, unfortunately, if you look back Treasury Secretary Yelling, it's probably the only person in the country who had a huge mortgage and didn't lock in low cost, long duration funding when the opportunity was there in twenty twenty one and twenty year bonds yielded less than two percent. I mean, Alexander Hamilton was probably rolling in his grave over this blunder by the Treasury.
Yeah, but to be fair, anything that's on the Fed's balance sheet in terms of US treasuries, I mean that money goes back to the Fed's account at Treasury, So the Treasury is a little bit of a winner there as we still unwind the balance sheet. How are you feeling about earnings right now?
I mean earnings right now. Expectations for Q three are relatively modest. They're about five percent. My biggest concern is that when we look out to twenty and fifteen, the estimated earnings growth rate for the S and P five hundred is fifteen percent for the full year. Well, we have a very high hard time reconciling that number with is the fact that most companies that we're analyzing from a bottom up perspective, are you know, cutting back. They're cutting back capotics, they're cutting back on employees, they're restructuring. We're not seeing the pricing power that was evident a couple of years ago. So fifteen percent seems to be a very high hurdle rate, and we think that we're at a point in time where this concept of disappointment is evident. And given where the market is trading at twenty two times forward earnings, we think that you could see some type of either time correction or maybe even a price correction in indices if guidance this quarter is not as robust as perhaps the market anticipates.
One of the things we tease that you'd be willing to talk about was what some people might think is a terrible idea to tax unrealized capital gains. And you pose the question, is their merit to it? What say you?
Well, when you think about it again, I'm probably very unlike other people that you talk to, but I think there's actually an argument for taxing unrealized capital gains above a certain threshold. And if the person is simply borrowing against stockholdings for consumption, I mean frankly, so Jeff Bezos of Amazon not pay any income taxes like he has over the past several years. There's a court case going back with a Supreme Court in nineteen sixteen. It's Eyes versus Macma. It regarded as stock dividend and the Supreme Court rule that a person needed to physically sell an asset, stock bond, or building, whatever it might be and reach some money before it could be taxed. But when you look at some of these tech locals, right, isn't paying yourself a dollar in salary like most of these guys do, but then getting sweetheart borrowing arrangements like we saw with Silicon Valley Bank from these lenders, you know, gents, your stockholdings to fund the lavish lifestyle like Bezos does, constituted the facto sale subject to a capital gains tax. Also when done perpetually, I mean there are states will avoid taxes and entirety due to the step up rules. So I think it's rocked fair, and I think the Democrats are likely to challenge us if they take Congress in the next election.
That seems less clear to me at this point. I mean, there's a chance maybe that the Senate goes Republican. Maybe the Democrats do take the House, and who knows what happen.
At the other thing, the other impediment is that the Democratic donors are very much of the tech billionaire crowd, you know, do they want to basically turn on their own donors?
A good point, James, Thank you so much for joining us. Always interesting, James Abote, And we didn't even get a chance to talk about utilities and three Mile Island in Microsoft. Anyway, next time, James Abonte from Center Asset Management. Adam Coons, co chief investment Officer and portfolio manager at Winthrop Capital Management. So we've seen this bump up in yields that could be just reflecting a better economy, which is sort of reflected by the recent data, but it could also be some fears now about inflation kicking back in. How do you see it at them?
Yeah, I mean, I think it's a mix of both. I think, you know, the reality is the economic data still is showing that the US economy has plenty of and so as you see the possibilities of the Fed cutting rates further and how much they're really going to cut and what the effect of those cuts will be is what's kind of pushing yields higher. I mean, obviously the short term, but when you have things like this hurricane and some of the labor issues with you know, just different different unions shutting down working, that can be inflationary in the short term. So I think that's some of the fears, and then the other fears just that frankly, the Fed's not going to cut nearly as much as some have forecasted, because when you look at the labor data, it's still showing some strength, and then the consumer continues to be strong. So it's really just this kind of everyone's trying to find a clear crystal ball into what FED policy is, and you know, really how much they're going to cut rates, and like I said, how that's going to affect inflation through twenty twenty five.
Do you think we're going to get any more rate cuts before the end of the year.
I do.
I think, you know, originally markets we're pricing in another fifty to seventy five basis points through the rest of the year. I think the reality is probably one more cut twenty five basis points is probably all we're going to get unless there's some significant data point, you know, showing that labor is deteriorating quicker and that the consumer is really tapped out. But there's just there's not enough time in the year. There's not enough data points that I think can push the FED to justify that a move greater than twenty five basis points.
So, Adam, I mean, we look at this as a tradeoff because if you don't get as much in the way of rate cuts, obviously that that doesn't lower your cost if you're a small and medium sized company as much as you perhaps had hoped. But a better economy means the top line is going to look a lot better right now, you think most companies would prefer this environment with stronger growth and a more solid economy than they would with you know, marginally lower costs if you borrow mynd.
Yeah, this is one of those perplexing pieces of capital markets where good news is somewhat bad news. Because I agree with you is that overall, you know, a stronger economy, it should be better for everyone. And what you'll see is, you know, kind of market volatility. The tier is picking up, and you'll see equity markets roll.
Over, especially at a time when you were worried about growth and how to grow scare in early September. So you know that's what I mean is like, oh, okay, yeah, this is different.
It is and so you know, I think it's just because so many people are trying to bet on what the Fed is going to do, and when that they get that wrong. I think they're more worried about getting what getting it wrong means. But the reality is on a long term basis, when we're looking over the next three, six, twelve months, a stronger economy will be better because you'll continue to see profit margins wider, You'll see the labor force continue to be strong, the consumer will continue to be strong. And cause you're already hearing a lot of this rhetoric around oh we're going to have another earnings recesion. Well, if the economy remains strong, then no, we're not going to. So I think all of those things long term support equity markets to stay higher. I think it's just going to come with a lot more volatility as we head into a lot of just noise with the election and other things globally through the rest of the year.
So you mentioned earnings there. Bloomberg Analysis is estimating that companies in the S and P will report four point seven percent increase in quarterly earnings from last year. Are you feeling pretty positive about what we're going to learn in the days and weeks ahead.
I am.
I mean, I think that bar has been lowered. It was when you look at the mid kind of summer numbers, it was closer to eight percent was what was the expected earnings growth year of year. So it has come down, which obviously lowers the bar for companies to beat. But like every earnings over the last several quarters, it's going to be really focused on what's next. And I think that the large focus is going to be on guidance of holiday season consumers. What they're going to do, you know, our inventory is going to be high or are they going to you know, come into the holiday season with lower inventories so that they don't have to slash prices with sales. Those are the things I think that you know, investors are really going to be focused on. That's what I'm going to be focused on, and I think that's what we're going to see drive you know, whether we get you know, the so called Santa Claus rally at the you know in here at the end of the year, it's really gonna be lever to the consumer.
You're a little cautious. You don't really buy into this rotation story, do you not?
Really?
I mean, it made a lot of sense where you know, equities and large caps had had run a little bit too far too fast, you know, obviously all the hype around the Max seven. So it made sense that people would start to take some of those profits and shift away. And that's really just profit taking. And then what are you going to do with profits while you're going to put them into some of the places maybe you're underweight because of the imbalance of your portfolio where now you're way overweight gross stocks, But that's short lived, and so I think we've already seen that flush itself out, and so I think, you know, really, going forward, you got to look at just large cab us equities because that's where the most value is right now.
Okay, all right, Adam, thanks very much for joining us. Adam Koon's co chief investment Officer and PM at Winthrom Capital Management.
This has been 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 appen