The Fed Holds Steady, Qualcomm Beats on China Strength

Published May 2, 2024, 1:05 AM

Featuring:

Adam Turnquist, Chief Technical Strategist at LPL Financial, discusses the latest Fed decision.

Kunjan Sobhani, Bloomberg Intelligence Senior Semiconductor Analyst, breaks down Qualcomm's second quarter earnings.

Nancy Davis, Founder and Chief Investment Officer at Quadratic Capital Management, shares her outlook on markets. 

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Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. 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.

Well.

Joining us now on the program is Adam Turnquist, chief technical strategist LPL Financial for a closer look at markets. So it was seemed it seemed a little bit like a douvish FED meeting compared to what we had expected. And you get these comments from Powell, which you know are sort of like, well, he's less confident than before, but still confident of disinflation continuing. And how you take that probably says more about you know, who you are versus who he is.

You think it was an interesting FED meeting.

I think there was a lot there really no surprises from the Fed when you look at the commentary was really just a reverberation of the higher for longer narrative that we've been hearing about from the Fed. Who's really have been pushing back against the idea of rate cuts. A lot of April was that repricing of that narrative. I think if you were to classify it, it was maybe less hawkish than feared, and really for the market, it touched on a lot of things they were looking to hear. I think most importantly, Chair Powell noted that a rate hike is unlikely. As you mentioned, they're a little less confident in the timing of reaching their two percent inflation target, but he certainly sounded.

Confident they'll eventually get there, and he also sounded confident in the economy.

He noted that he doesn't see the stag or the flation risk as he coined it at the meeting, pushing back against any of the stagflation headlines that it percolated recently, citing really a strongly or market and growth moving along at a solid pace. I was really more surprised by the fade into the clothes, as you talked about earlier sp given up at one point two percent gain and closing at session lows today.

That was that was more of a surprise than the initial reaction.

Yeah, there were a lot of cross currents, and I think another one was this rally, this incredible rally that we had in the Japanese yen against the dollar in late New York trading. At one point we were up three percent, and that obviously fostered a lot of speculation that maybe it was an opportune moment for the Ministry of Finance in Japan to intervene to support the currency. Now that you know you got the fed out of the way, let's deal with the other big problem here, which has been yen weakness. And I think that may have correlated with a lot of the volatility that we had in the equity market. When you look at Japan right now, what is your feeling. Maybe it's about the way that the currency has been behaving. Maybe it's about whether there is still opportunity to put money to work in the equity market. How are you seeing Japan these days?

Right now?

There's a rising risk of currency stability and you can see that ever since the yen weakened against the dollar through one fifty two. That was the spot where the boj came in back in twenty twenty two, and I think most people thought they would do the same, and you can see now we briefly hit one sixty Sunday overnight, the Bank of a Japan presumably came in with about a thirty five billion dollar order to prop up the end, and that was the same type of reaction that we witnessed going into the close.

It was pretty interesting.

I looked down at my screen and I was shocked when I thought when I saw the yen where it was trading, it is bounced back a little bit or weakened a little bit against the dollar. But I think if they can maintain control and we're not going to be pushing through one sixty, that should help stabilize the Japanese equity market in the yen.

Of course, a lot of that's correlated.

To what's going on in the US, and you can't really ignore that big rate differential when you're talking about BED policy and BOJ policy. But from a longer term investor standpoint, we continue to like Japan within international developed I think there's a great earning story there. Shareholder friendly practices are being implemented, and there's a lot of households that are underinvested in equity markets, and you're seeing kapital of move into equity markets at this time. So long term, I think that theme has shelf life. Might be some bumps along the road as we work through this Yen weakness story.

Adam, you said you were quite surprised at the market reaction because, as we know, when Pal finished speaking, both the NASDAC and the S and P five hundred were up more than one percent, and then just in the last hour of training I ended up with the loss. Doug talked about one possibility. I think also some of the momentum plays did get slammed pretty hard, particularly some of the chip makers. Now that might change with Coalcom after the bill, but you did have Nvidia and Broadcom and AMD down pretty sharply. I wonder whether or not we're still in this process of sort of squeezing out the giddiness in markets.

What do you think. I think that's a good point, Brian. It was interesting.

We look at things a lot technically, at least in my role, and you've had this short relief rally off some oversoul levels hit mid April that's stalled out right around the fifty day moving average. That's often a spot where you see these relief rallies die just not enough the momentum. It does raise the risk we could go back retest those April lows. We start breaking down there, that could be another leg lower down more toward the forty eight hundred level and potentially retesting those prior highs.

We were very frothy.

We'll call it if you look back, coming into the second quarter after an impressive first quarter rally that had I think a record high every three trading days. So we're taking some of that froth out. It looks like a pretty orderly pullback at this point. No major trend line violations from technical standpoint, Breath still holding up well, so looks like I could have a little bit more of a shakeout though, as you mentioned in some of those momentum.

Areas, Unfortunately Adam tech tech canalysis really doesn't work well on the radio. But I'm going to go out on a limb anyway.

I'm looking at the.

Bloomberg now on the S and P five hundred, it looks like the one hundred day moving averages at forty nine seventy four, and we seem to be using that as support right now. Is that the key number for you? I mean, we're trading today. We close the S and P at fivey eighteen, so we're not far away from the one hundred day moving average. If we violate that level the number I just quoted forty nine seventy four, is there a lot more in the way of downside, I think so.

I'm really watching the April lows forty nine sixty seven if we're going to get super technical tonight. But if dip buyers aren't stepping in and there's no demand off those lows, there's a pretty big pocket of air to really that forty eight hundred level where those prior highs are. And when you have how these type of parabolic moves, you often revert back to towards the longer term trend that tends to be around that forty eight hundred level. So it could be a pretty quick trip down there if we start breaking through those intra day lows.

In April, J.

Powell was asked if loose financial conditions were actually hurting the FEDS fight against inflation, and he shrugged it off to a certain degree, saying that growth in the early part of this year was weaker than last year even with the looser conditions, and he noted that inflation came down fast last year despite overall GDP growth being really high in the US up three point four percent in the fourth quarter, stronger than this year. It's kind of another way of saying that the relationships of these things are not hard and fast.

I think that's fair and it's been. Of course, we have to factor in the lagged effects of monetary policy and when that's really going to take fold. If you look at some of the trends in consumer spending. Obviously we witnessed that in the first quarter GDP with spending slowing down, But other areas of the market that we've watched in terms of some spending slowdowns have been just in the delinquency rates, whether it's.

Auto loans or credit credit cards.

Ninety day delinquencies are up, and also just credit scores have been moving lower as some of the bills come doe and a lot of the excess savings have been drawn down from the pandemic era.

So you seem a little cautious on the equity market very quickly. If I'm short duration in the bond market, is that a buy.

Yeah? I think so. We think you should be taking advantage of yields.

You don't need to go out long duration right now, or even in high yield. Credit spreads in the high yield space are call it ninetieth percentile, So you're not really getting.

Paid what you used to get paid to pick on credit risk.

Thank you, Adam Turnquist, Chief technical strategist LPL Financially.

Let's get to what we heard after the belt from Qualcomm, the company with an upbeat forecast for both sales and profit in the current quarter. Qualcom, you may know, is the world's largest seller of smartphone processors. We have now on the line from San Francisco, Bloomberg Intelligence Senior semiconductor analyst kun John Sabani. What did you make of what you heard from the company or what you're kind of reviewing now as you look at the statement from the company.

Yeah, I mean, you know, the main positive was that while most of the smartphone guys, including its chips peers, gave a really bleak June quarter outlook lower than seasonal, Qualcoms sort of stood out from the pack as the only one which not only came in line but with a slight beaed, which was sort of a win in itself. And we think there were two primary drivers of that. One, Apple has seen a significant share loss in China and the Android OEMs have picked up that loss, so that really benefits a qual Comm and sort of the premium, really high end segment is seeing less of this demand weakness, which is again where Qualcom has a much higher exposure.

Yeah, as mentioned, Qualcomm seems to have made a comeback in China, both on the sales front but also on its relations with regulators. What's the latest there, I.

Mean for Qualcom revenues. Sort of these US China trade sanctions never had any major impact because it goes most of its devices goes in a consumer product and again you know the Chinese OEMs who they're selling into. There's sort of no other big alternative grown, homegrown alternative from China, so it doesn't impact them. The tensions have impacted Apple, which again is sort of a beneficial benefit. Qualcom is a beneficiary from that because every Apple phone that is not sold and is replaced by a Chinese Android OEM phone, Qualcom gets sort of a three x to a five x asp uplift from that.

Yeah, for the last two quarters, I think the number in terms of sales to Chinese phonemakers was like a gain of forty percent. I mean, that's just a stunning number to look at, But when you look at the guidance for the current quarter, I want to understand it. Clearly we're calling it an upbeat forecast. Are we to look at it in that way? I mean, is it is it barely meeting expectations or is it more optimistic than I'm kind of alluding to.

Well, it's not a significant beat in terms of magnitude, but it's more of an optimistic sentimental beat, right, Like, while rest of your peers are suffering and gave double digit decline or beats, I should say non decline, you came in in line or slightly up. That's sort of an invitelf right. And what also is helping them is the auto con which has been continued to grow sequentially continues its tragedory, but IOD, which was declining significantly for multiple quarters in a row, sort of has stopped that bleeding and is now expected to turn around slowly. So all that is sort of a win in a market where again, like most of its peers are struggling.

Yeah, when I asked about actually about regulators earlier, I was kind of referring back to the difficult period that Qualcomm had in China. Over licensing and the billion dollar, almost billion dollar fine that it had to pay. But it seems like basically what you're saying is that things are pretty hunky dory for Qualcom in China now, including the relationship with Shaumi, Honor one plus Opo, Vivo, you name it.

Yeah, exactly. I mean, China is one of their, if not the biggest, most important market for them specifically, and we don't see any sort of geopolitical or regulatory issues for them in China, at least in the near future.

Huawei is a different story, right.

Yeah, I mean, Wawei is not a negative for them, right. It seems the share gains in Wahwei had in five G came again a lot at the expense of Apple, and Wawei has actually indirectly helped them to drive up the TAM for the Android space, so sort of indirectly helping them.

Just briefly on AI and Internet of Things, I know quakam as a group on that. How is the company faring in those two areas.

You know, AI outside of smartphones sort of in let's say, in automotive variety, it's too early. I don't think it's having material revenue impact on the fundamentals, it's most of its sort of other diversified products. The next big thing to look out for the companies really bullish on in that IoT segment is the AIPC, which I'd expected to hit the market sort of in second half twenty four. We don't think it is going to drive significant revenue this year. If it goes all goes well, it could be a driver in fiscal twenty five, but nothing this year.

All right, Kunjohn, it's always a pleasure. Thanks for making time to chat with us, Bloomberg Intelligence Senior semiconductor analyst, Kun John Subani. As we talk call Tom here.

Let's get to our guest, Nancy Davis, founder in CIOT Quadratic Capital Management, to talk a little bit more about markets and the FED. I always love watching the FED news conference and how definitely Pal handles the questions. I thought he was a little nervous at the open, really referring to notes and scrambling and get the papers in there. But then he started to kind of reach stride. He blasted the notion of stagfla, He blasted the notion that the FED would do anything different on policy because of the election coming up. He said, look, I'm less confident now about disinflation continuing, but I'm still confident. Your takeaway from the way that this meeting rolled.

Out, well, I don't think he said anything really new, but he was trying to thread the needle. I think the markets definitely were worried a little bit that the Fed was going to be more hawkish in their commentary, and I think all the it was read more dubvish just because of there's still they're using quantitative tightening. They're still providing so much liquidity to the market that it is still easing even though they haven't started cutting rates yet.

Yeah, they kind of dialed back on the amount of quantitative tightening they're going to be doing. Is certainly where US treasuries are concerned. I mean, the mortgage back portion of unwanting the balance sheet remained in tech I think months rated around thirty five billion. What is your sense do you fear or suspect that the market is would have a strong negative reaction if the Fed were to remain on the same track that it's been with respect to unwinding the balance sheet. Was there a risk that Powell was trying to address today that may have to do a little bit with some type of potential tantrum.

Well, he's easing by slowing the pace of quantitative tightening, which really wasn't very large when you think about the Fed's denominator, which is the balance sheet, is about seven trillion dollars in the SOMA piece of the balance sheet, So that's the piece of the Fed's balance sheet that the New York Fed actually went into the open market and bought during QE. So reducing the quantitative tightening is easing, and they're easing in a very very hot economy in the US, so it's all quite inflationary in the long term. So it's sort of like talking out of both sides of your mouth. You know, they're they're not cutting, but they still are reducing QT.

We like to think of there being a lot of volatility in the bond market, but as as we heard from a number of practitioners, I mean, if you really look at it, the ten year has been in a range of around this this sort of area of four point six percent going back on you know, back to November. So yeah, we've fluctuated thirty forty basis points, but not that much, are you do you like the short end of the curve better here, or you would you go out in duration.

I don't think you.

Really get paid to go out in duration, because the US yield curve is still, you know, massively inverted. Especially even if you look at the sofa curve, the not the treasury curve, but the swaps curve, it's you know, the choose tens as negative sixty four basis points, so you literally get paid sixty four this points less to lend the US money for ten years versus two years. I mean, it's nonsensical. Even markets like Japan, their yield curve is positive sixty basis points, so we're exactly opposite being negative. So I just don't think investors in the bond market really get paid to own duration. It's almost like you're paying a tax, right, You're taking more risk and getting paid less yield, And especially if the Fed's gonna leave it higher for longer, I just don't see any point to extend duration.

I'm glad you brought up Japan because we had a lot of action in the foreign exchange in the last hour of a New York trading in the equity market, at one point, the end strengthened buy around three percent against the greenback. The dollar had been a little week after the you know, the FED meeting, we saw a drop and yield. Some of that may have been due to the quantitative tightening adjustment. But when when you trade a market like the one that we find ourselves in right now, if you're short yen, that may help explain why we saw a pullback in US stocks. Would you have to you know, sell the equity market to raise cash to cover your short position in yen? Is Can that help explain a little of what we saw in the final moments of trading today.

Well, I do think that the yen, the currency is more closely tied to the treasury market. More too, because Japan such a large owner of our debt and the treasury does have to refinance a ton of the debt. Yeah, And at the same time, the Fed is still doing They reduced quantitative tightening starting in June, but they're still doing it, and so I think, you know, I would say the foreign currency moves are more tied to the rate differential. In carry trade.

We were like six basis points down in the case of both the two and the ten, but that was a three percent move in yen. That felt to me like a massive short squeeze that was tied to fear that or maybe the Ministry of Finance was already in there kind of trying to prompt a bit of short covering.

Yeah, I mean there's definitely a lot of chatter about intervention because again, as we can you know, if you just take a big step back, you know, the end was ninety and then got to one sixty in a very short period of time. So it's had massive depreciation recently, and the dollar has been very strong, so you know, three percent pullback before even Asia is really open. I'm sort of you know, like the bond market's moving like crazy too. It's kind of just noise at this point, and we'll really have to.

See what actually.

Where then do you see the best value in the bond market, including credit? Would you look at investment grade but the better you know, sort of maybe triple b's instead of higher than that.

No, I wouldn't touch that stuff with a ten foot pull. I mean, if you have equities in your portfolio already have that corporate beta, you know, with investment grade, you know, you pull up your Bloomberg terminal and look at the CDX index for the two year investment grade bond. It's twenty two basis points. I mean that you can only go to zero, right. It's a spread trade. You want credit spreads Titan to Titan to go lower. If you own the bonds, you're not getting paid with credit. Frankly, I think if you're going to take corporate resk, you might as well have equities, and I think values of value our inflation protection bonds.

No time to go into it, but that was Jeff Gundlock speaking on CNBC earlier saying that he thought that was the best value shot. I thought I'd throw it at you're saying no way, Nancy. Thank you for joining us, Nancy Davis from Quadratic.

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 app.