Traders Look to Jackson Hole For Hint on Fed Direction

Published Aug 19, 2024, 12:41 AM

Featuring:

Frank Benzimra, Head of Asia Equity Strategy at Societe Generale

Steve Sosnick, Chief Strategist at Interactive Brokers

Pooja Malik, Partner at Nipun Capital

Brian Jacobsen, Chief Economist at Annex Wealth Management 

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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. Showing us now on the program, Frank Benzimra, head of Asia Equity Strategy at Associate General. Frank, thanks very much for joining us. I just wanted to ask you about Jackson Holetz. Part of the big week, We've got a lot going on. We'll have continued trading after the big moves we've seen, both to the downside and the upside. Jerome Powell will be speaking about the economic outlooks, so that'll be way up there on people's list. The Bank of England Governor Andrew Bailey will also be making an appearance on Friday in Philip Lane. The chief economists at the ECB speaking a day later. Will it be kind of a consistent message that we hear. Are you expecting a lot of divergent talk?

Well, I think probably the most important is going to be to be Jackson Hall after the recent volatilities that we had in the in the market. The thing is after we are expecting to see more of the long term issue and being being discussed. I think the theme is a transmission of monetary policy and how effective it is. But of course we are going to look for some clue on the on the short term, so I think that's that's going to be to be very very important. What the data we've seen recently are more arguing for a twenty five basics cut in in September, but that's obviously something that we need to that we need to follow.

And how do Asian markets look positioned here at the moment.

Well, you have really three types of market and you have Japan, China and the rest of Asia and Japanese super interesting and it has rebounded by more than twenty percent since in the law of the market with financials more than twenty five twenty five percent. What is interesting is that we are seeing the net position on the on the end. Now the market is becoming net longer, but still we are seeing some download pressure on the end. So it means that some carriage trade are elsewhere, and we think that it makes a lot of sense to go more domestic on that. On that market, China is very much in the earning season at the moment, which is not great, not terrible, but not great. And then you have the rest of Asia where you have this divergence between take on the one hand and the more domestic fem and here, as in the case of Japan, it's going to be probably a good idea to look more at what's happening on the domestic part of the of the market.

Let's focus on China for the moment. China apparently is putting private sector policy on the front burner. This is what we heard from Premier Lee Chang at the end of the week telling the cabinet that more has to be done to boost domestic demand. It's just talk. We've heard a lot of talk. There's work this.

Time, yes, that's indeed there has been a lot of discussion about that, and again in the in the polit Bureau, the latest the latest polit Bureau. I think the only element which can be a little bit more comforting when it comes to domestic consumption and the domestic economies. We start to see some bottoming in the housing, sales and construction, but in terms of what the government is going to do to boost consumptions, but it really remains to be to be seen because what we are seeing is still it's the greatest focus is on manufacturing and on and on building some advanced manufacturing industry.

We saw some uneven performance in the earnings of ten Cents and Ali Baba. We did close out the week pretty strongly for both of those names, but there was a little bit of uncertainty about the earnings. In ten Cents case, the gaming looked pretty pretty good, but some of the other areas of business not so much. And Ali Baba is still struggling a little bit with overall sales. I don't know if you can talk about individual names, but are some of the former star performers in Asia about ready to get a turn again.

Yeah, well, I'm not going to talk about some single names, but just just a couple of observation as the earnings on China fit Tech a mess. China, for instance, the earnings pature has not grown for the last ten years and it has even declined over the last over the last three years, which means that you have some expectations which are not very not very ambitious, so you don't have a lot of expectation when the earning season is starting. So when we see something which is a little bit about this slow expectation, so the market tends to take it to take it positively. And when it comes more specifically to the to the Internet platform and to the big Internet Internet names, it's rather recomforting to see that we have some sign of life. And so you were mantaining the gaming industry, so in some more consumer oriented industry we start to see some turn around and that's I think this is something which is in line with what we had in the previous quarter and it is extending into this quarter.

Yeah, fighting really strong resistance from at least three fronts. I mean, one, you can say policy has been pretty restrictive. Secondly, there's massive competition in China now, something we didn't have as much of going back a number of years, particularly those companies we talked about earlier. And then also you have basically a weak economy, so there's a lot of marks against them.

Yes, so we have the big picture is that you still have some defleationary pressure on the economy. One thought is coming from the housing market, and the other part is coming from this very intense competition that you are mentioning, with over capacity being the result of it. So they're just a couple of things. And to say here, the first one is we are seeing export booming and the structure of the export is also changing towards emerging economies, and this is something that is a factor of support. And then as I was mentioning, we start to see some very timid sign of bottoming in the economy in the housing market. So one question now after the latest daya whether we are going to reach the five percent target that the government has set for the GDPSS here and this is where you could have some expectation of further support if we are not reaching it.

All right, Frank, thanks very much taking out the time to be with us. Frank Benzimra, head of Asia Equity Strategy, Associated General, I'm Brian Curtis along with Paul Allen, and joining us now is Steve Sosnick, chief strategist at Interactive Brokers for a look at market. Steve, always great to have you on the program just to give our audience kind of an overview of how you're feeling about what we've seen in markets over the past month. What makes more sense to mister Steve Sosnick a Vicset fifty or a Vicset fifteen.

Good morning, Brian, Well, I mean, fifteen is more sensible than fifty. But I don't think that's particularly sensible either. I think the way that we you know, obviously, the fifty print was the result of several the overcrowded trades converging at once. The carry trade, the dispersion trade where people were shorting index ball and buying individual equity vall, along with a few other mishaps, all combined that morning to give you the crazy VIX print. But I think the fact that we've gone, we flipped from you know, get me protection asap to protection who needs protection? There's nothing coming in the next thirty days, which is really what a fifteen vix is telling you, is not correct either. I don't think.

Yeah, it's interesting, isn't it. We got the yen knocking on the door of one forty eight again. The NIKA had an amazing week last week. Are we getting set up for a sequel of the craziness of a couple of weeks ago.

It's hard to say, Paul, because you know, the size of the carry trade is pretty much a guess. You know, a JP Morgan said it was seventy five percent on. Others have said fifty percent done. It's really quite opaque, so we don't know the extent to which the carry trade exists, although I do get the sense that people were putting it right back on this week, you know, at least certainly buying US tech stocks with their bar at the end, so you know, yes, we could be setting up for a rerun. And especially I think, you know, the the idea that nothing can happen in a couple of week period where you have Powell giving a very consequential speech, a Nvidio earnings next week does seem a little bit risk, you know, risk tolerant, maybe more than we should be.

It seems like we've had a lot of these really big market shocks over the past decade or so. I know that generally speaking, you know, when you look at markets, you can say, well, you know, things are not really as bad as sometimes markets suggest, and things are not as good as they sometimes suggest. But it is a little bit curious. I think we had a pretty good piece on the terminal over the weekend about about these shocks. Do you think it's greater than before, and if so, what's causing it?

I actually don't think right now we're seeing that in many great shocks. That's why I think for lack of a better order was so shocking, you know, a couple of weeks ago, because we really haven't you know, we didn't have a two percent down day on the S and P five hundred until about a week or two ago. You know, it happened. I think the week prior to Monday too, you know, it was like three weeks ago. But we hadn't had one since December of twenty two, so we've gone a long time without any real shocks, at least in the stock market. You know. The part that's a little interesting to me is the amount of volatility that you see in the bond market. Certainly some of very big moves, even in two year notes, but yet somehow Normally, when you can't price safe assets, you shouldn't be able to price risky assets. But right now, people, I think it's really just you know, fomo drive in the fomo and momentum. If they're going up, people are going to buy them, and it doesn't take much to get them to go up. And I think that's kind of why the blow ups seem bigger than they are, because we quite frankly, we haven't had them. We're not used to them.

How about pricing in the Fed's next move, because we've got less than one hundred basis points of cuts priced in for the rest of the year, but that's still a cup at every remaining meeting that we've gone. Is that realistic or is the getting a bit of hit of itself again?

Yeah, the market's been ahead of its The market's been ahead of the Fed the entire year. Right, we came into the year at six to seven rate cuts. We're still waiting for our first And it's funny because I went back and looked at the twenty twenty two Jackson Hole conference, which which you know, really was pretty nasty for the markets, and the talk then was the market was waiting for the FED to pivot, which obviously they still haven't pivoted. But this just tells you. And so I think my concern is that Powell comes out and says, look, I told you, I told you people to expect ray cuts in September. You're right, but the data isn't there to say that we're going to go to fifty. The data isn't there to say that we're going to cut every meeting. We'll give you an adjustment cut, and we're going to start to go, and we'll go slowly unless the data dictates otherwise. And the market may just like the idea of oh oh, you mean there's a possibility. But when you think about that, if the data dictates otherwise, it means that the economy is not particularly friendly to stocks at that point. So it's my risk going into this week.

Yeah, A reference made to to when J. Powell spoke for only eight minutes and said you're going to feel some pain. Is there any chance that this time he says, hey, you're going to feel some glee.

I don't think that's in his playbook. I do think the market now, I do think see one of the things I've always think when we have these feed meetings is he sort of goldilocks, like, you know, not too hot, not too cold, and the market definitely if he says, you know, we're not likely to cut rates, but we might. The market here as well, we might cut rates. So the difference is at Jackson Hole, where he controls the message. It's not a back and forth with reporters, and I think he's got a genuinely good rapport with most of the reporters. If he wants to tell a sterner message, this is the one time he can actually do so, because there's really no back and forth to it. It's just I'm going to read. I'm going to read what I wrote, and you're gonna take it and we'll see what he says. I don't know that he's in the mood to bearticularly accommodative sounding, because if you look at what markets are doing, you know, fixed income equities, whatever, it's not like we need a ton of stimulus right now. We seem to be doing fine with what we have at the moment.

Yeah, there's other data to support that as well. I mean the Bloomberg this morning. We've got California import data that's looking pretty strong. Goldman's kind of cirsation risk, you know, right's excessively restrictive right now.

I don't think so, although I do think the FED has to be quite vigilant of it, because I do think there is there is certainly the possibility, if not the probability, that we could slip into recession. A lot of the data is softening. But you know, again the Fed, it has more control over the amount of money flowing around the system that it does necessarily the economy itself. And certainly in terms of liquidity, the Fed, you know, they've got to be looking around and saying, there's certainly ample liquidity even with the rate structure that we have these days.

So it would seem to be then that the jobs report coming up, the September of sixth jobs report would be considerably more important than a lot of what we've seen of late.

Absolutely, because I think, you know, the disinflationary story I think is here, and you know, to the extent that the Fed really is going to you know, they've indicated that they don't need to wait exactly till two percent, and you know, so we could argue certainly that this is why we might see it. You know, we're likely to see a cut in September, but the degree to which the job market tells that story, you know, first week is first Friday in September is going to be a big one because you know, we saw that slowing in you know, in the August report, the July numbers. Let's see what it says in August, because there were a lot of economists saying that the temporary factors, even though the FED kind of pooh pooed them, there was some temporary factors relating to some hurricanes and stuff that that messed up up the numbers a little bit, maybe weaker than they seemed.

Okay, Steve, out of time, but a great session, Thank you very much, Steve Soasnik, chief strategist at Interactive Brokers through Jamalik Partner at NetBoot Capital, we take a closer look at markets here and bore we had a good week last week. Who it was the data? I think that calmed a lot of frayed nerves, retail sales data and the jobless claims. And it has some forecasters, for instance Goldman Sachs in lowering their recession risk levels. Others maybe think it's a little too soon for that. How much more data would you need to see, or maybe would the markets need to see to be reassured that the economy is on solid footing.

It really depends what data the FED needs to see, right and the signal that the FED sends to the markets, and the FED really has two goals is you know, unemployment and inflation. Right, we have an unemployment number coming out in the first week of September, and I think that's the critical number for the FED.

The FED is.

Trying to manage, on one hand, the risk of recession, which seemingly is not high right now. Q two real GDP growth came in very strong at two point four percent, So the FED is trying to manage the risk of recession against rising unemployment. And so the important data that I think the FED is going to be looking out for is the unemployment number, and I think that's going to determine what the FED does, which in turn determines how the market moves.

So what you're saying is this September sixth jobs report is pretty important, maybe considerably more important than most of what we've seen of late.

I think so because some of the other things we've seen. For example, we've seen strong earnings, but despite that, we had the market y when we had the unemployment number. So the market seems to be focused more on unemployment as unemployment and inflation as opposed to earnings.

Yeah, so I guess it's a combination of what the market expects to hear from japwell and what the FED needs to see that everybody will be kind of edgy over. In some ways, I think the better data took a little pressure off of Jypowell because you had that big market sell off and a lot of fears of unemployment running to the upside and such in the market was pretty negative, and he probably would have felt at least slightly incentivized to hint that rate cuts are coming. Now perhaps he can be a little more nuanced, don't you think.

Yes, I agree with you. He has a little bit more leviate than he would have otherwise, and I think he's going to continue to be dubbish, but point towards data. The one thing, though, I think with retail sales coming in higher than expected, that really is an opportunity for investors because of the bifurcation we're seeing within retail, meaning the overall retail numbers was strong, but there are pockets like credit card delinquencies going up, like brands like Starbucks and Amazon that are more retail sensitive reporting weaker earnings versus brands like Walmart doing very well. So I think underlying that retail data, Brian, there is opportunity for good stock picking as there's a lot of dispersion underneath that overall retail number.

Yeah. In fact, it's been a really good year so far for stock picking. One last question on the FED and Jerome Palell. I mean, do you think if he does not, because we ran a story on this actually included some comments that well, if he doesn't hint at rate cuts, you're going to likely see another market sell up. Are you in that camp or do you think that the market out there that you know, they're sort of in a position where they feel as though they can be patient.

No, I don't think the market wants to be patient. I think the.

Market so you embrace the sell off idea. Then if he doesn't hint, yes.

Yeah, I think the market is looking for at least some kind of positive or it the neutral news that he's going to continue on the same path of being devision watching for data because the issue right now is there's so much uncertainty amongst investors and as you will now Brian August, you know there's lower trading volumes. Lots of people are on vacation, So the lower trading volumes combined with this uncertainty, is leading to very large market moves in market votility and policies that so I think I think he's going to stay neutral, just slightly positive, hoping for a calm market reaction.

Well, you can understand how the market would be frustrated with this because you have the FED funds rate at five and three eight percent that was geared at inflation at nine percent. Now you've got inflation at three percent, so at least x amount of the cutting that ultimately comes, it's just calibration, right, It's not saving the economy, don't you think so?

True?

True?

I do think though investors have been spoilt in the last decade, Brian, because yes, is not frustrated. But if you look at where markets are, we're still fifteen percent for the year, given that we were up twenty five percent last year, right, so there is actually no good reason for investors to be frustrated with either the stock market or with the Fed. And if you step back and think about where we were two or three years ago, not a lot of people believed that the Fed would be able to pull this off in terms of managing recession and guiding rates and unemployment. But so far, so good.

Oh yeah, they'll get huge kdos if they do pull off a soft landing. So let's go a couple of other different directions. Here, are investors, in your view, actively playing the election or keeping it at arm's length.

It's too early, i would say, to be actively playing the election, but investors are definitely starting to think about the what if scenarios. The outcome of the election still remains unclear and we are still a few away. These things can change pretty quickly. You know, the possibility of US tariffs I think is the big one, depending on election results. And as you know, for emerging markets, that's also a big impact. Meaning if the US titans tariffs, that impact is welled not just in China but all through emerging markets.

Yeah. Absolutely in China. You know, every day you get something new. We've had just in the past couple of days, defaults on convertible bonds kind of really hurting consumers even and then this latest development of the exchange in exchange is not publishing the buying and selling of foreign investors, which would seemingly turn off foreign investors even more.

Yes, that's a bad sign. Bigness and markets is always a bad sign, right. It's like saying you have something to hide right. Nevertheless, I think in China it's really I think the whole economy is dependent on what the government is going to do, because as you know, corporate sentiment is negative. Retail investors are still saving, they're not ready to spend, they don't have discretionary income to spend. So the Chinese economy still comes down to what the government can do, either in terms of physical stimulus, montre stimulus supporting Chinese banks and state on enterprises. And I think the new thing in China is of course the rise of the exporters, which for a long time China was driven by domestic demand. But the last time, I would say eighteen months or so, the stocks that have done well are the export oriented stocks in China, which I think has been an interesting change in the Chinese stock picking landscape.

Okay, so finally, and not just in China, but maybe globally. You talked about it being a good stock pickers market. Are there any interesting kind of corporate developments that have caught your eye for an investing theme.

Yes, as you know, we invest broadly across emerging markets, and in general right now, given the certain tea, we're being very defensive, which means we're buying stocks with strong cash flows, stocks that are likely to beat earnings and dividend yield, but overall we're looking for stocks that are pivoting more to global AI demand.

Poojah, thanks so much for joining us on the weekend and getting our investors and listeners ready for Monday morning trading. Pujamaleg, partner at Nipu and Capital. Brian Jacobson, Chief economist at Anex Wealth Management. Brian, one of your points is that recession fears have faded, but they haven't disappeared. Unemployment, and this is my point. Unemployment has jumped from three point four percent on May first to four point three percent. Now, that's almost a full percentage point in less than three months. Is that not worrisome? And if so, what's the FED waiting for?

Yeah, it definitely is heading in the ro direction. I guess you could say that, but you know, from the FEDS perspective, it's actually somewhat heading in the right direction because they did think that that three point four percent was too low. And if you look at kind of the broader arc of history, when we look at the Bloomberg terminal, as far as what it's telling US with going back to the nineteen fifties, with the unemployment rate, it's averaged five point seven percent. So even though it's gone from three point four up to four point three, the question in my mind is whether or not it's going to hang out around here, maybe get to four and a half, or if it's going to keep marching higher. I'm somewhat optimistic about the outlook, and so I think that we're actually going to probably settle in closer to about four point five percent, which isn't too worrying in my mind.

And the positive news over the past week has helped in that view.

It has, yeah, the initial unemployment claims numbers coming back down, stronger retail sales numbers as well. However, I think that there is a lot of superficial strength in that retail sales number because the month of June, we know that auto sales were adversely affected by that hacking attack on a number of car dealers on their computer systems, and so there was bound to be a big bounce back in auto sales in July, and we did see that there was also an increase in the building material and also the garden center sales. Maybe some of that was due to people rebuilding or cleaning up after Hurricane Barrel barreled down on the Houston area. And so even though a lot of people have now come out those who are increasing their recession odds in June, they're kind of walking that back in July. Maybe that's a little premature. I mean, I think that we're going to a point where we are seeing some economic slowing, but I don't think that we're all of a sudden getting that all clear signal that everything is all sunshine and happiness.

Still in all the Fed funds rate is up there around five and a half percent. That did its job on bringing inflation down all the way down from eight nine percent down to the current levels, which depending on how you look at it could be between say two and a half and around three percent or so. It would seem to be out of step with where we are now, and that we know that a lot of this has been in the pipeline and will be coming even if they start cutting It seems like on balance, a lot of people think, and perhaps even the Fed thinks, that it's just about time to go.

Yeah, I think that they are coming to that conclusion. It's just a question of how they want to message it as far as the timing of the initial cut and then also the pace of subsequent cuts. Now, in fairness, probably half of the improvement that we've seen in inflation, if not slightly more, has happened regardless of what the FED did. It was mainly because it was a supply side issue. And I think that you could I actually make the argument that some of the Fed's policies has actually created some supply side problems in the housing market, keeping that owner's equivalent rent and the rental component of the inflation numbers somewhat higher than it otherwise would be. And so you know, half of the progress that we've seen on inflation would have happened anyways. And so the FED maybe they because they were slow to react to inflation, that they overreacted, and now they do need to do a type of course correction. And it's more than just the course correction that Powell talked about in twenty nineteen. This is more about recalibrating policy to what's more appropriate for inflation that is probably going to get to their target by some point in twenty twenty five.

Okay, I give you thirty seconds for this this question, and this was actually a question that was in one of our pieces as a tease. How soon do they start? How fast do they go and where do they end? Thirty seconds?

Yeah, I think they'll start in September at that meeting twenty five basis points every meeting. They'll probably end up at something close to about three percent. So we're not too far right if you kind of do the math there, it's only about about two years away from being to their target.

Okay, let's talk a little bit about Asia, Pacific, China and also some of the top themes. Maybe I can go to the top theme of the year, which was AI. From the economic standpoint, Brian, is AI a net positive or negative on hiring?

It depends on who you are, right, And I think that's one of the challenges. It was just like robotics and automation in the nineteen eighties. It was probably just like the assembly line in the nineteen twenties. For some people it was a net benefit, others it was a net negative. Longer term, it's a net positive, but it's that adjustment that can be very difficult, especially for those who don't have the skills to really use it as a tool in order to help them become more productive. So there are a number of jobs that are probably at risk, but this is likely going to play out over time where those people are going to be able to put their skills and energy into something else.

Okay, I had a follow up, but I wanted to slip in China, so we'll skip to this. We have a story that says why China's woes don't move markets like Americas, and I'm interested in your views on that.

Well, I think it's just because the US has been really the locomotive of economic growth over the last couple of years while other countries Europe was in a recession, Japan was still struggling, China hasn't been able to kind of turn things around. So coming out of COVID, initially China and the US were the twin engines, but now it's really the sole locomotive has been the United States, And I think a lot of people have just written off China thinking that you know, they're an aging demographic, it's a totalitarian state and so don't really expect much out of there.

Well, put succinct as usual, Brian, Thank you very much for joining us, particularly given the time the weekend. Brian Jacobson, chief Economist at NX Wealth Management. This is the Bloomberg Daybreak Asia podcast, bringing to 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.