April 18, 2024 • 23 mins
Featuring:
Helen Zhu, Nan Fung Trinity Managing Director & CIO sits down with us in Hong Kong to discuss global economic outlook, China policy and APAC markets.
Laura Davison, Bloomberg Politics Deputy Team Lead to discuss President Biden's speech to US Steelworkers today in Pittsburgh. Plus, we discuss the White House's plans for higher tariffs on Chinese aluminum and steel products.
Lillian Li, VP and Senior Credit Officer at Moody’s Ratings, joins us to discuss the Chinese credit market and China economic policy.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
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,
(00:23):
the Bloomberg Terminal, and the Bloomberg Business App.
Speaker 2 (00:27):
US Treasury Secretary Janet Yellen acknowledged concerns from her counterparts
in Japan and South Korea on exchange rates. The three
discussed sharp declines recently in the Japanese yen and South
Korean one. Just this year, the yen has dropped about
nine percent and the one roughly seven percent against the dollar.
Before the meeting, the South Korean and Japanese officials had
(00:48):
aired concerns about their currencies slumping to multi year lows.
South Korea and Japan warned of taking appropriate steps to
counter any drastic volatility. Past G twenty agreements have emphasized
allowing markets to determine exchange rates, but they do leave
the door open for action against excessive market volatility. Joining
(01:10):
us in our studios in Hong Kong is Helen jew
nonfun Trinity Managing director and chief investment officer, to take
a closer look at markets. So, Helen, let me ask
you this in as blunt of fashion as I can.
Does a bull market really end because growth is strong?
Speaker 3 (01:28):
I think the bullmarket typically ends either because the policy
has inflected to the other side very hawkishly, or because
you know, the growth is not good anymore. Right, So,
when the growth is not good, that's probably the biggest
threat to market at that point. Even if the policy
turn is more dubbish, people have skepticism. So weaker growth
(01:49):
data from the US is probably the bigger concern that
we would have over just you know, the FED, you know,
taking a little bit longer to cut rates.
Speaker 1 (01:57):
That's one of the things that a lot of FED
officials have been saying. I mean, they've been very stubborn
in their unwillingness to kind of let go of this
idea that hire for longer is what's necessary. But if
you look at what the market is telling us right now.
I was just doing a story on this the other
day that City Group economists are looking for still five
twenty five basis point rate cuts between now and the
(02:18):
end of the year. And a lot of the traders
in the FED Fund's futures market are betting on aggressive
cutting as well. Do you think the Fed runs the
risk right now of a policy error maybe and not
getting out in front of what we're seeing in terms
of signs of economic weakness.
Speaker 3 (02:36):
Well, I think the FED has made it amply clear
that their rate path is going to be more dependent
on the inflation data rather than the growth data. Right
they have a dual mandate, and at the moment, protecting
growth is not really that vital compared to just making
sure that the inflation side doesn't serve as a constraint.
So I think so long as the inflation data starts
to come off, they will jump off with the first
(02:57):
rate cut. But how many they do subsequently, I think
really depends on the path in the second half of
this year. If you think back to last year, though,
you know, we had many ups and downs, right, people
thinking that there are going to be you know, more
rate hikes, less rate hikes, and the scare in the spring,
and then everything looking great in the summer, and the
scare again in the fall, and everything looking great again
at the end of the year. I wouldn't rello out
the possibility that the expectations regarding rate cuts, inflation, and
(03:21):
growth continue to kind of jerk back and forth later
on this year as well.
Speaker 2 (03:24):
I just see them all as inputs. I'm a fan
of math, so I look at equations and basically you
think about it. With higher for longer rates, that's a
potential negative for some companies because the costs will be
up a little, but with growth stronger than thought, sales
would be up. So net net, that would feel a
little bit like a standoff a neutral. Yet the market
(03:47):
is acting at the moment like it's net net sell.
Speaker 3 (03:52):
I would say, you're right in a strong growth scenario,
so long as you know nominal is still going up
and we actually have very robust growth. And I do
think the markets earnings and valuations since one tend to
do well. But I think the thing that we need
to watch out for is really that people may start
to worry about much bigger cracks. Right, So we might
(04:16):
actually have a scenario whereby the consumer not necessarily because
of where rates are today, but rather because of the
fact that rates have held high for quite some time
and the refinancings at whichever levels. If rates basis points
lower than today or the current level, the refinancings from
the fixed rates they had three or four weeks years
ago gets more painful. So it's more about time accruing
(04:40):
and holding rates at a relatively higher level, whether fifty
basis points lower or at the current level, rather than
just the absolute level itself. That makes a bigger difference.
Speaker 1 (04:48):
One of the things we learned from the latest Beage
Book survey which was released today in the US, firms
are reporting greater difficulty in passing on higher cost Do
you think margin pressure is something we really got to
concern ourselves with.
Speaker 3 (05:03):
I think margin pressure is. But you have to break
it down between gross margin and operating margin, right, So
gross margin probably responds more to things like you know,
commodity costs and some of these things that are fluctuating
more frequently. On the operating margin front, a lot of
it is operating leverage, right, fixed costs, et cetera. So
(05:24):
sometimes a lot of the fixed costs can be amortized
over a bigger revenue base, and that's what makes margins
go up in the upcycle. And you know, things like
wages or rents and those types of things are not
likely to move as volatively as some of the inputs
into gross margin. So generally speaking of inflation comes off
and revenue doesn't grow as quickly, then you will tend
(05:45):
to have margin pressure because you don't have as much
operating leverage, or you may even have some operating de leverage.
Speaker 2 (05:52):
So, as you were saying in the answer to the
first question, really it's a lot of this is about growth.
If growth falls off and inflation is relatively then you
have a major issue in terms of canaries in the
coal mine, the doubt transports, and the semiconductors and not
trading very well here down about four percent in a
month now one month is not a trend, and it's
(06:16):
kind of in line with the correction in the S
and P five hundred off about four or five percent.
Now after a big start to the year, is it
the start is something big or really just too early
to say.
Speaker 3 (06:26):
I would say for things like the semiconductors, they have
been just on a tear right over the last six
to twelve months, and so it's not necessarily something fundamentals related,
but probably just valuation and positioning and some profit taking
that's quite obvious as a temptation after such a tremendous run.
If you have something that's got the same earnings expectations
(06:48):
as a month ago, but you know you're just talking
about a difference between eighty times PE and sixty times PE,
then people would rather sell that than sell something that's
already gone down quite a lot or they haven't really
made much money on. So I think it's probably been
more just coming from that rather than fundamental changes or
inflection points at this time, Helen.
Speaker 1 (07:07):
Maybe we can talk about China first. Spell here that
GDP print was pretty impressive, but if you look at
the monthly activity data from March, it looks like things
are softening a bit. I mean, how are you reading
the Chinese economy right now?
Speaker 3 (07:21):
Well, I think that you probably saw a couple of
brokerages have actually upgraded their GDP forecast for this year
from let's say mid to high force to closer to
high force to five percent. So previously people are very
very skeptical, but recently we've started to see some more
promising data, as you mentioned, coming out of the destocking
period in December January and kind of coming more in
(07:45):
back into a restocking period. So I would say, net,
we're not really completely out of the woods. But certainly
things look to have landed to some extent, and maybe
there are some slight mild surprises. Of course, the market
is going to be most worried about what happens in
the latter part of the year, towards the end of
the year or maybe beginning of next year, depending on
what happens on the tariff and geopolitical side post the election.
(08:06):
That's probably the biggest overhang on this economic l shaped
landing story.
Speaker 2 (08:12):
So putting this CIO hat on for a moment, what
looks the best at the moment in terms of new capital.
Speaker 3 (08:18):
Well, we think that things are probably in the goldielocks
and no landing and some rate cuts plus no economic
weakness type of mindset. In the US, bond yields have
popped quite a lot recently because of the concerns about
one or two inflation prints which really resulted for example,
the March inflation print pop was really because of auto
(08:39):
insurance and some very idiosyncratic and narrow categories that we
don't know whether they're going to change in the next
couple of months. So we actually think that we would
find treasury to be more attractive at the four point
five four point six level on the ten year versus
what we have seen in quite a while, so some
of that might be a lot more interesting versus the
last couple of years. And then we also think that
(09:00):
is quite attractive. Really, all is pretty low and cheap
at the moment, So hedge the sections of the economy
that have performed well with the dollar reaching with the
d X y reaching one oh six, we think we're
probably getting closer to a dollar peak. And all the
segments like AJA, emerging market equities and local currency bonds
that have been crushed by the dollar, we think those
(09:22):
are looking more interesting.
Speaker 1 (09:23):
Well, it's interesting you make that point because I was
going to ask you about the comments that we had
from Treasury Secretary Yellen speaking with finance ministers of Japan
and South Korea about the depreciation of both the yen
and the wand as the result of a stronger dollar.
And you feel as though the dollars put in kind
of a near term top here and you're not expecting
much more in the way of strength. Is that right?
Speaker 3 (09:46):
I think unless there is a massive you know, multi
months CPI, you know, inflation upside surprise, I think the
dollars basically got to, you know, the peak of this
mini cycle. And I would agree that it's really the
FED and what's happening in the US that's swinging currencies
around more than whatever the boj or Bank of Korea
(10:06):
are doing.
Speaker 2 (10:06):
Yeah, and with these yields this high, you've got to
worry about asset allocators coming in and just you know,
they picking off five percent they like that over ten years.
It's something that could disrupt equity pricing.
Speaker 3 (10:18):
Right, that's right, that's right.
Speaker 2 (10:20):
Thank you very much for coming into our studios. Helen
June Nanfung Trinity, a managing director and chief investment officer.
Speaker 1 (10:34):
Today, President Biden vowed to keep US Steel a totally
American company. He made that pledge during a speech to
the United steel Workers in Pittsburgh. Let's take a closer
look now with Laura Davison, who is Bloomberg Politics Deputy
team leader. She joins us from just outside Washington, d C.
Thanks for taking time to chat with us, Laura. I'm
(10:55):
wondering I know that the union is so strongly opposed
against the bid Nippon Steele to acquire US deal. Obviously,
Pennsylvania is a big player in that it's a swinging
state for Biden. Do you think this has the potential
to go through after the election. Is this merely kind
of an election ploy on the part of the president.
Speaker 4 (11:17):
It has the possibility to go through, But when you
think about that, both Trump and Biden are opposed to
this deal, so you know, effectively, no matter who wins,
the president is likely to be opposed to the deal.
That really has the potential to really put the brakes
on this. You know, you mentioned, you know, Pennsylvania is
a swing state. It could be one of the states
that decides this election, and it is you know, for
(11:38):
Joe Biden, it is his home state. He was born there.
You really saw him in his element today that there
is you know, really not a lot of love both
within the Union community as well as the broader US
community for this deal of Nepon steel.
Speaker 2 (11:51):
Critics would say that more steel tariffs is really just
brazen politicking. I'm tough for run China. No, I'm tough
for Runshine, No tougher on China.
Speaker 4 (12:03):
Yes, this is really what you're seeing happen. You know,
both Trump and Biden they disagree on a lot, but
tariffs on China and specifically tariffs on steal from China
are one area where they really agree. The tariffs that
but Biden announced today as part of this trip, you know,
tripling some tariffs on metal from China are really symbolic.
You know, the tariffs that Trump put in place are
(12:25):
so high that really imports have ground to a halt
from Chinese steal coming into the US. But this is
really a way for him to message and signal to voters. Look,
I am serious about you know, made in America, keeping
union jobs here, but this is kind of you're really
starting to see the transition from you know, the White
House working on you know, serious policy to policies that
(12:45):
they know that they can take to the campaign trail.
Speaker 1 (12:47):
When I think of issues like the border, when I
think of the abortion issue, and then I consider industrial policy,
it doesn't seem like it's going to be up there
on the on the list of pressing concerns during this
election season? Am I right or wrong?
Speaker 4 (13:02):
That is true and we've seen time and time again,
you things like the Infrastructure Package, things like the Chips
Act are not issues that the voters are really thinking about.
But they are thinking about things like jobs and inflation,
and those are the kinds of things that at least
the White House says, you know, are are helped by
some of these policies, you know, by having semiconductors made here,
although they're not you know, they're very far away from
still being made in the US with these new these
(13:25):
new fabs that are being announced that they're kind of
hoping to get ahead of that and saying, look, you know,
we're setting the US up to sort of renew its
industrial might. But this is a real big gamble for
the for the White House because they're seeing in poll
after poll that voters aren't really registering. They call this
whole program Bidenomics. It didn't really land with voters. So
(13:45):
now they're having to rethink their their strategy on you know,
how do you talk about both the economy as well
as abortion, which is where you've really seen Democrats in
the past two or three weeks pivot to having that
be their central campaign issue.
Speaker 2 (13:56):
Laura, what do we know about the US and this
probe on chine in a shipbuilding industry, it's actually more
it's it's kind of a full gamut of maritime industry,
including logistics, UH and other aspects. So what do we
know about that.
Speaker 4 (14:11):
Yeah, so this will be a pretty comprehensive study. We've
already seen, you know, in the Chinese response to this
from the Commerce Ministry earlier today was a very stern
rebuke on this thing. It was not necessary. And so
that's where you really see kind of the you know,
it's a little bit under the water, you know, so
to speak. The tariffs are kind of a big headline thing,
(14:31):
but this uh, you know, review could be more where
there's actual you know, kind of economic power and sort
of an economic hurt that goes from Washington to China.
Speaker 1 (14:40):
One of the things that we were talking about earlier
on the program is the fact that this Byte Dance bill,
the TikTok bill, is going to be moving through the
Senate very soon. The President still committed to the to
the idea that he would sign this bill and potentially
forced by Dance to divest ownership of TikTok or bannit outright, right,
do you have a sense of how this is going
(15:01):
to play out over the next couple of weeks.
Speaker 4 (15:04):
Yeah, this is really a fast moving bill that the
Speaker Johnson, a Republican in the House, is looking to move,
you know, potentially as soon as this weekend. This is uh,
you know, really scott bipartisan support, and it's been a
bill that has been out there and has been floundering,
but as of right now it looks to have the
support to pass. I will note that Congress is a uh,
(15:25):
you know, infamously fickle place where last minute deals get
cut all the time. But right now this bill is
set up for a vote, and you know, no one
should discount the fact that this could become a US law,
you know, in the next couple of weeks.
Speaker 2 (15:38):
I guess one aspect of the TikTok information in that
bill is that it's one company, and it's kind of
unusual to come up with a law that targets one company.
And I think Maria cantwell raised the idea of having uh,
you know, a lot of judicial action targeting this. What
is what are the sorts of of claims that would
(16:00):
come perhaps from the Chinese side on that.
Speaker 4 (16:04):
Yeah, and so there's a lot of concern both from
the Chinese side as well as you noted from the
US side here that this is targeting one specific company
and that this you know, is almost certain to be
mired in appeals and judicial reviews that really that there
should be a you know, some sort of standard that
would apply to any social media platform, whether it's bike
dance and TikTok or something else that should come to
(16:24):
the future. So we're not just you know, reactively legislating,
but instead looking at, you know, sort of what is
the standard we want and having things meet or fall
short of that.
Speaker 1 (16:31):
Laura, thank you so much for being with us. We
covered a lot of ground there. With Laura Davison, Bloomberg
Politics Deputy team leader joining us from Washington.
Speaker 2 (16:46):
We thought we would take a closer look now at
the trials and tribulations of policymakers in China. Joining us
on the show is Lillian Lee, Vice president, Senior credit
officer at Moody's Ratings. Lillian, thank you for joining us.
It would seem at the moment China is caught in
the middle a little bit between looking at the long
(17:06):
term drivers of growth and tinkering with that versus the
need to do something in the short term in the
way of short term cyclical stimulus for the economy. How
would you say it's managing that balance at the moment.
Speaker 5 (17:20):
Yeah, thanks for the questions. So right now we see
that the Q once China's GDP growth actually big market
expectations range up to five point three percent. That is
largely driven by those supply side measures from the governments
as well as the explored the sectors showing quite a
delightful pictures because of the global resident demand. But however,
(17:45):
how sustainable with this effect from supply side measures is uncertain.
So we see that China is facing its structural long
term challenges now, including for example, some of them balancing
in its supply and demand in some sectors and the
physical imbalance between central and local government, as well as
(18:07):
the low productivity of growth. So how could they balance
these challenges in shorter and long term While these policy settings,
it is the key things for the government to drive
its growth potential. So actually the contributions from its new
(18:28):
growth drivers like new evs and renewed energies, their contributions
to GDP cannot match those engines like property and infrastructure.
And then over reliance on some of the government support
to support for these new sectors could lead to potentially
some overcapacities and price distortions as well. The shorter challenges
(18:51):
and long term structural factors risks could both require significant
focus and expenditure from the government, So that's really a
tricky thing. How would they balance the shift that really
needs needs coordinated policy approaches, was consistent policy directions to
implement its policy measures already announced.
Speaker 1 (19:14):
Lily, And I'm very curious as to whether or not
in your work you look at debt to GDP and
whether that ratio is important to you. I was struck
today by the fact that the IMF was saying that China, Yes,
China and the US will together drive much of the
increase in global public debt over the next five years.
And they are This is the IMF, the analyst there
(19:36):
projecting that public debt in both China and the US
under current policies will nearly double doubled by twenty fifty three.
Are you concerned about the high debt levels that you're seeing,
let's stay focused on China. Is that a concern for you? Yeah.
Speaker 5 (19:54):
Indeed, actually, the elevated debt as well as a debt
rising debt servicing cost are the major challenges for the
government fiscal to constrain their physical capacity to support growth.
It is one major concern from our ratings on to
evaluate China sovereign credits. And that's actually exactly one major
(20:17):
drivers of we changing our look negative last November and
going forward. As I mentioned just now, the government continued
to face the balance between long term and low and
short term growth target. In that essense, the capacity could
be more constrained if they are continued to face these
elevated debts. But right now the local government has limited
(20:43):
fiscal and strength to support growth. So in that essense,
the central government is trying to shift some of the
burdens to the central government balance sheet, so that could
be some way to help mitigate some of the burdens
on local governments and trying to make be a transition
period a little bit more uncomfortable for the low government
(21:06):
to continue to support growth.
Speaker 2 (21:08):
Households are under stress, and it's in part because the
social support system in China is not so well advanced.
I mean, there's so many things that are so far
advanced in China, but in terms of the average person
feeling comfortable about his or her retirement, about medical needs,
you know, unemployment insurance and these types of things, is
(21:31):
there a lot that China can do on that front?
I know it takes time, but should they be doing it.
Speaker 5 (21:37):
Well. On this point, I need to say that China,
the government spending on social security actually has kept increasing
in the past couple of years, and that has been
reflected by ex pension, healthcare per capita spending, so you
could see, I mean, from my personal view, I could
see a quite noticeable improvement on this front. However, of course,
(22:01):
they should have been doing more to further promote this
quality of services, especially though in some of the lower
tier cities and remote area as well as the rural
areas that could help to release more of the consumption
powers from their savings. Yeah. So in essence, I would
say that the government should continue to do what they
(22:24):
are doing right now already so only. But on the
other hand, as I mentioned before, there could be a
constraint from their physical balanceship because they need to still
support growth from investment in infrastructure. That could be probably
shown more on the GDP growth numbers.
Speaker 2 (22:42):
Ye, Lillian, thank you very much for joining us. Lillian Lee,
vice president and senior credit officer at Moody's Ratings.
Speaker 1 (22:52):
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
(23:12):
Bloomberg Business app.
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,
(00:23):
the Bloomberg Terminal, and the Bloomberg Business App.
Speaker 2 (00:27):
US Treasury Secretary Janet Yellen acknowledged concerns from her counterparts
in Japan and South Korea on exchange rates. The three
discussed sharp declines recently in the Japanese yen and South
Korean one. Just this year, the yen has dropped about
nine percent and the one roughly seven percent against the dollar.
Before the meeting, the South Korean and Japanese officials had
(00:48):
aired concerns about their currencies slumping to multi year lows.
South Korea and Japan warned of taking appropriate steps to
counter any drastic volatility. Past G twenty agreements have emphasized
allowing markets to determine exchange rates, but they do leave
the door open for action against excessive market volatility. Joining
(01:10):
us in our studios in Hong Kong is Helen jew
nonfun Trinity Managing director and chief investment officer, to take
a closer look at markets. So, Helen, let me ask
you this in as blunt of fashion as I can.
Does a bull market really end because growth is strong?
Speaker 3 (01:28):
I think the bullmarket typically ends either because the policy
has inflected to the other side very hawkishly, or because
you know, the growth is not good anymore. Right, So,
when the growth is not good, that's probably the biggest
threat to market at that point. Even if the policy
turn is more dubbish, people have skepticism. So weaker growth
(01:49):
data from the US is probably the bigger concern that
we would have over just you know, the FED, you know,
taking a little bit longer to cut rates.
Speaker 1 (01:57):
That's one of the things that a lot of FED
officials have been saying. I mean, they've been very stubborn
in their unwillingness to kind of let go of this
idea that hire for longer is what's necessary. But if
you look at what the market is telling us right now.
I was just doing a story on this the other
day that City Group economists are looking for still five
twenty five basis point rate cuts between now and the
(02:18):
end of the year. And a lot of the traders
in the FED Fund's futures market are betting on aggressive
cutting as well. Do you think the Fed runs the
risk right now of a policy error maybe and not
getting out in front of what we're seeing in terms
of signs of economic weakness.
Speaker 3 (02:36):
Well, I think the FED has made it amply clear
that their rate path is going to be more dependent
on the inflation data rather than the growth data. Right
they have a dual mandate, and at the moment, protecting
growth is not really that vital compared to just making
sure that the inflation side doesn't serve as a constraint.
So I think so long as the inflation data starts
to come off, they will jump off with the first
(02:57):
rate cut. But how many they do subsequently, I think
really depends on the path in the second half of
this year. If you think back to last year, though,
you know, we had many ups and downs, right, people
thinking that there are going to be you know, more
rate hikes, less rate hikes, and the scare in the spring,
and then everything looking great in the summer, and the
scare again in the fall, and everything looking great again
at the end of the year. I wouldn't rello out
the possibility that the expectations regarding rate cuts, inflation, and
(03:21):
growth continue to kind of jerk back and forth later
on this year as well.
Speaker 2 (03:24):
I just see them all as inputs. I'm a fan
of math, so I look at equations and basically you
think about it. With higher for longer rates, that's a
potential negative for some companies because the costs will be
up a little, but with growth stronger than thought, sales
would be up. So net net, that would feel a
little bit like a standoff a neutral. Yet the market
(03:47):
is acting at the moment like it's net net sell.
Speaker 3 (03:52):
I would say, you're right in a strong growth scenario,
so long as you know nominal is still going up
and we actually have very robust growth. And I do
think the markets earnings and valuations since one tend to
do well. But I think the thing that we need
to watch out for is really that people may start
to worry about much bigger cracks. Right, So we might
(04:16):
actually have a scenario whereby the consumer not necessarily because
of where rates are today, but rather because of the
fact that rates have held high for quite some time
and the refinancings at whichever levels. If rates basis points
lower than today or the current level, the refinancings from
the fixed rates they had three or four weeks years
ago gets more painful. So it's more about time accruing
(04:40):
and holding rates at a relatively higher level, whether fifty
basis points lower or at the current level, rather than
just the absolute level itself. That makes a bigger difference.
Speaker 1 (04:48):
One of the things we learned from the latest Beage
Book survey which was released today in the US, firms
are reporting greater difficulty in passing on higher cost Do
you think margin pressure is something we really got to
concern ourselves with.
Speaker 3 (05:03):
I think margin pressure is. But you have to break
it down between gross margin and operating margin, right, So
gross margin probably responds more to things like you know,
commodity costs and some of these things that are fluctuating
more frequently. On the operating margin front, a lot of
it is operating leverage, right, fixed costs, et cetera. So
(05:24):
sometimes a lot of the fixed costs can be amortized
over a bigger revenue base, and that's what makes margins
go up in the upcycle. And you know, things like
wages or rents and those types of things are not
likely to move as volatively as some of the inputs
into gross margin. So generally speaking of inflation comes off
and revenue doesn't grow as quickly, then you will tend
(05:45):
to have margin pressure because you don't have as much
operating leverage, or you may even have some operating de leverage.
Speaker 2 (05:52):
So, as you were saying in the answer to the
first question, really it's a lot of this is about growth.
If growth falls off and inflation is relatively then you
have a major issue in terms of canaries in the
coal mine, the doubt transports, and the semiconductors and not
trading very well here down about four percent in a
month now one month is not a trend, and it's
(06:16):
kind of in line with the correction in the S
and P five hundred off about four or five percent.
Now after a big start to the year, is it
the start is something big or really just too early
to say.
Speaker 3 (06:26):
I would say for things like the semiconductors, they have
been just on a tear right over the last six
to twelve months, and so it's not necessarily something fundamentals related,
but probably just valuation and positioning and some profit taking
that's quite obvious as a temptation after such a tremendous run.
If you have something that's got the same earnings expectations
(06:48):
as a month ago, but you know you're just talking
about a difference between eighty times PE and sixty times PE,
then people would rather sell that than sell something that's
already gone down quite a lot or they haven't really
made much money on. So I think it's probably been
more just coming from that rather than fundamental changes or
inflection points at this time, Helen.
Speaker 1 (07:07):
Maybe we can talk about China first. Spell here that
GDP print was pretty impressive, but if you look at
the monthly activity data from March, it looks like things
are softening a bit. I mean, how are you reading
the Chinese economy right now?
Speaker 3 (07:21):
Well, I think that you probably saw a couple of
brokerages have actually upgraded their GDP forecast for this year
from let's say mid to high force to closer to
high force to five percent. So previously people are very
very skeptical, but recently we've started to see some more
promising data, as you mentioned, coming out of the destocking
period in December January and kind of coming more in
(07:45):
back into a restocking period. So I would say, net,
we're not really completely out of the woods. But certainly
things look to have landed to some extent, and maybe
there are some slight mild surprises. Of course, the market
is going to be most worried about what happens in
the latter part of the year, towards the end of
the year or maybe beginning of next year, depending on
what happens on the tariff and geopolitical side post the election.
(08:06):
That's probably the biggest overhang on this economic l shaped
landing story.
Speaker 2 (08:12):
So putting this CIO hat on for a moment, what
looks the best at the moment in terms of new capital.
Speaker 3 (08:18):
Well, we think that things are probably in the goldielocks
and no landing and some rate cuts plus no economic
weakness type of mindset. In the US, bond yields have
popped quite a lot recently because of the concerns about
one or two inflation prints which really resulted for example,
the March inflation print pop was really because of auto
(08:39):
insurance and some very idiosyncratic and narrow categories that we
don't know whether they're going to change in the next
couple of months. So we actually think that we would
find treasury to be more attractive at the four point
five four point six level on the ten year versus
what we have seen in quite a while, so some
of that might be a lot more interesting versus the
last couple of years. And then we also think that
(09:00):
is quite attractive. Really, all is pretty low and cheap
at the moment, So hedge the sections of the economy
that have performed well with the dollar reaching with the
d X y reaching one oh six, we think we're
probably getting closer to a dollar peak. And all the
segments like AJA, emerging market equities and local currency bonds
that have been crushed by the dollar, we think those
(09:22):
are looking more interesting.
Speaker 1 (09:23):
Well, it's interesting you make that point because I was
going to ask you about the comments that we had
from Treasury Secretary Yellen speaking with finance ministers of Japan
and South Korea about the depreciation of both the yen
and the wand as the result of a stronger dollar.
And you feel as though the dollars put in kind
of a near term top here and you're not expecting
much more in the way of strength. Is that right?
Speaker 3 (09:46):
I think unless there is a massive you know, multi
months CPI, you know, inflation upside surprise, I think the
dollars basically got to, you know, the peak of this
mini cycle. And I would agree that it's really the
FED and what's happening in the US that's swinging currencies
around more than whatever the boj or Bank of Korea
(10:06):
are doing.
Speaker 2 (10:06):
Yeah, and with these yields this high, you've got to
worry about asset allocators coming in and just you know,
they picking off five percent they like that over ten years.
It's something that could disrupt equity pricing.
Speaker 3 (10:18):
Right, that's right, that's right.
Speaker 2 (10:20):
Thank you very much for coming into our studios. Helen
June Nanfung Trinity, a managing director and chief investment officer.
Speaker 1 (10:34):
Today, President Biden vowed to keep US Steel a totally
American company. He made that pledge during a speech to
the United steel Workers in Pittsburgh. Let's take a closer
look now with Laura Davison, who is Bloomberg Politics Deputy
team leader. She joins us from just outside Washington, d C.
Thanks for taking time to chat with us, Laura. I'm
(10:55):
wondering I know that the union is so strongly opposed
against the bid Nippon Steele to acquire US deal. Obviously,
Pennsylvania is a big player in that it's a swinging
state for Biden. Do you think this has the potential
to go through after the election. Is this merely kind
of an election ploy on the part of the president.
Speaker 4 (11:17):
It has the possibility to go through, But when you
think about that, both Trump and Biden are opposed to
this deal, so you know, effectively, no matter who wins,
the president is likely to be opposed to the deal.
That really has the potential to really put the brakes
on this. You know, you mentioned, you know, Pennsylvania is
a swing state. It could be one of the states
that decides this election, and it is you know, for
(11:38):
Joe Biden, it is his home state. He was born there.
You really saw him in his element today that there
is you know, really not a lot of love both
within the Union community as well as the broader US
community for this deal of Nepon steel.
Speaker 2 (11:51):
Critics would say that more steel tariffs is really just
brazen politicking. I'm tough for run China. No, I'm tough
for Runshine, No tougher on China.
Speaker 4 (12:03):
Yes, this is really what you're seeing happen. You know,
both Trump and Biden they disagree on a lot, but
tariffs on China and specifically tariffs on steal from China
are one area where they really agree. The tariffs that
but Biden announced today as part of this trip, you know,
tripling some tariffs on metal from China are really symbolic.
You know, the tariffs that Trump put in place are
(12:25):
so high that really imports have ground to a halt
from Chinese steal coming into the US. But this is
really a way for him to message and signal to voters. Look,
I am serious about you know, made in America, keeping
union jobs here, but this is kind of you're really
starting to see the transition from you know, the White
House working on you know, serious policy to policies that
(12:45):
they know that they can take to the campaign trail.
Speaker 1 (12:47):
When I think of issues like the border, when I
think of the abortion issue, and then I consider industrial policy,
it doesn't seem like it's going to be up there
on the on the list of pressing concerns during this
election season? Am I right or wrong?
Speaker 4 (13:02):
That is true and we've seen time and time again,
you things like the Infrastructure Package, things like the Chips
Act are not issues that the voters are really thinking about.
But they are thinking about things like jobs and inflation,
and those are the kinds of things that at least
the White House says, you know, are are helped by
some of these policies, you know, by having semiconductors made here,
although they're not you know, they're very far away from
still being made in the US with these new these
(13:25):
new fabs that are being announced that they're kind of
hoping to get ahead of that and saying, look, you know,
we're setting the US up to sort of renew its
industrial might. But this is a real big gamble for
the for the White House because they're seeing in poll
after poll that voters aren't really registering. They call this
whole program Bidenomics. It didn't really land with voters. So
(13:45):
now they're having to rethink their their strategy on you know,
how do you talk about both the economy as well
as abortion, which is where you've really seen Democrats in
the past two or three weeks pivot to having that
be their central campaign issue.
Speaker 2 (13:56):
Laura, what do we know about the US and this
probe on chine in a shipbuilding industry, it's actually more
it's it's kind of a full gamut of maritime industry,
including logistics, UH and other aspects. So what do we
know about that.
Speaker 4 (14:11):
Yeah, so this will be a pretty comprehensive study. We've
already seen, you know, in the Chinese response to this
from the Commerce Ministry earlier today was a very stern
rebuke on this thing. It was not necessary. And so
that's where you really see kind of the you know,
it's a little bit under the water, you know, so
to speak. The tariffs are kind of a big headline thing,
(14:31):
but this uh, you know, review could be more where
there's actual you know, kind of economic power and sort
of an economic hurt that goes from Washington to China.
Speaker 1 (14:40):
One of the things that we were talking about earlier
on the program is the fact that this Byte Dance bill,
the TikTok bill, is going to be moving through the
Senate very soon. The President still committed to the to
the idea that he would sign this bill and potentially
forced by Dance to divest ownership of TikTok or bannit outright, right,
do you have a sense of how this is going
(15:01):
to play out over the next couple of weeks.
Speaker 4 (15:04):
Yeah, this is really a fast moving bill that the
Speaker Johnson, a Republican in the House, is looking to move,
you know, potentially as soon as this weekend. This is uh,
you know, really scott bipartisan support, and it's been a
bill that has been out there and has been floundering,
but as of right now it looks to have the
support to pass. I will note that Congress is a uh,
(15:25):
you know, infamously fickle place where last minute deals get
cut all the time. But right now this bill is
set up for a vote, and you know, no one
should discount the fact that this could become a US law,
you know, in the next couple of weeks.
Speaker 2 (15:38):
I guess one aspect of the TikTok information in that
bill is that it's one company, and it's kind of
unusual to come up with a law that targets one company.
And I think Maria cantwell raised the idea of having uh,
you know, a lot of judicial action targeting this. What
is what are the sorts of of claims that would
(16:00):
come perhaps from the Chinese side on that.
Speaker 4 (16:04):
Yeah, and so there's a lot of concern both from
the Chinese side as well as you noted from the
US side here that this is targeting one specific company
and that this you know, is almost certain to be
mired in appeals and judicial reviews that really that there
should be a you know, some sort of standard that
would apply to any social media platform, whether it's bike
dance and TikTok or something else that should come to
(16:24):
the future. So we're not just you know, reactively legislating,
but instead looking at, you know, sort of what is
the standard we want and having things meet or fall
short of that.
Speaker 1 (16:31):
Laura, thank you so much for being with us. We
covered a lot of ground there. With Laura Davison, Bloomberg
Politics Deputy team leader joining us from Washington.
Speaker 2 (16:46):
We thought we would take a closer look now at
the trials and tribulations of policymakers in China. Joining us
on the show is Lillian Lee, Vice president, Senior credit
officer at Moody's Ratings. Lillian, thank you for joining us.
It would seem at the moment China is caught in
the middle a little bit between looking at the long
(17:06):
term drivers of growth and tinkering with that versus the
need to do something in the short term in the
way of short term cyclical stimulus for the economy. How
would you say it's managing that balance at the moment.
Speaker 5 (17:20):
Yeah, thanks for the questions. So right now we see
that the Q once China's GDP growth actually big market
expectations range up to five point three percent. That is
largely driven by those supply side measures from the governments
as well as the explored the sectors showing quite a
delightful pictures because of the global resident demand. But however,
(17:45):
how sustainable with this effect from supply side measures is uncertain.
So we see that China is facing its structural long
term challenges now, including for example, some of them balancing
in its supply and demand in some sectors and the
physical imbalance between central and local government, as well as
(18:07):
the low productivity of growth. So how could they balance
these challenges in shorter and long term While these policy settings,
it is the key things for the government to drive
its growth potential. So actually the contributions from its new
(18:28):
growth drivers like new evs and renewed energies, their contributions
to GDP cannot match those engines like property and infrastructure.
And then over reliance on some of the government support
to support for these new sectors could lead to potentially
some overcapacities and price distortions as well. The shorter challenges
(18:51):
and long term structural factors risks could both require significant
focus and expenditure from the government, So that's really a
tricky thing. How would they balance the shift that really
needs needs coordinated policy approaches, was consistent policy directions to
implement its policy measures already announced.
Speaker 1 (19:14):
Lily, And I'm very curious as to whether or not
in your work you look at debt to GDP and
whether that ratio is important to you. I was struck
today by the fact that the IMF was saying that China, Yes,
China and the US will together drive much of the
increase in global public debt over the next five years.
And they are This is the IMF, the analyst there
(19:36):
projecting that public debt in both China and the US
under current policies will nearly double doubled by twenty fifty three.
Are you concerned about the high debt levels that you're seeing,
let's stay focused on China. Is that a concern for you? Yeah.
Speaker 5 (19:54):
Indeed, actually, the elevated debt as well as a debt
rising debt servicing cost are the major challenges for the
government fiscal to constrain their physical capacity to support growth.
It is one major concern from our ratings on to
evaluate China sovereign credits. And that's actually exactly one major
(20:17):
drivers of we changing our look negative last November and
going forward. As I mentioned just now, the government continued
to face the balance between long term and low and
short term growth target. In that essense, the capacity could
be more constrained if they are continued to face these
elevated debts. But right now the local government has limited
(20:43):
fiscal and strength to support growth. So in that essense,
the central government is trying to shift some of the
burdens to the central government balance sheet, so that could
be some way to help mitigate some of the burdens
on local governments and trying to make be a transition
period a little bit more uncomfortable for the low government
(21:06):
to continue to support growth.
Speaker 2 (21:08):
Households are under stress, and it's in part because the
social support system in China is not so well advanced.
I mean, there's so many things that are so far
advanced in China, but in terms of the average person
feeling comfortable about his or her retirement, about medical needs,
you know, unemployment insurance and these types of things, is
(21:31):
there a lot that China can do on that front?
I know it takes time, but should they be doing it.
Speaker 5 (21:37):
Well. On this point, I need to say that China,
the government spending on social security actually has kept increasing
in the past couple of years, and that has been
reflected by ex pension, healthcare per capita spending, so you
could see, I mean, from my personal view, I could
see a quite noticeable improvement on this front. However, of course,
(22:01):
they should have been doing more to further promote this
quality of services, especially though in some of the lower
tier cities and remote area as well as the rural
areas that could help to release more of the consumption
powers from their savings. Yeah. So in essence, I would
say that the government should continue to do what they
(22:24):
are doing right now already so only. But on the
other hand, as I mentioned before, there could be a
constraint from their physical balanceship because they need to still
support growth from investment in infrastructure. That could be probably
shown more on the GDP growth numbers.
Speaker 2 (22:42):
Ye, Lillian, thank you very much for joining us. Lillian Lee,
vice president and senior credit officer at Moody's Ratings.
Speaker 1 (22:52):
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
(23:12):
Bloomberg Business app.
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