May 16, 2024 • 23 mins
Featuring:
Dan Wang, Chief Economist at Hang Seng Bank, China, sharing her outlook for the country's economy and the PBOC's MLF decision from Shanghai.
Stefan Hofer, Managing Director and Chief Investment Strategist at LGT Private Banking Asia, joins the program from Singapore with his take on the latest market action.
Jose Torres, Senior Economist at Interactive Brokers, gives us his read on April's US CPI data.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg
Daybreak Asia podcast. I'm Doug Prisner. You can join Brian
Curtis and myself for the stories, making news and moving
markets in the APEC 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 (00:26):
Joining us now for some insights is Dan Wong, chief
economist at Hangsang Bank. To take a closer look here,
I think we can talk about the ultralong bond sales
that China's announced and also this move potential move to
have the province's buy up unsold homes. In just a moment,
I just wanted to get your first reaction to the
(00:47):
slightly weaker than expected inflation data in the United States
and what it might mean for the dollar and for Asia.
Speaker 3 (00:54):
So this week performance in the inflation in the US
actually will be relatively good news for China because it
means maybe the Federal Reserve would decide to cut interested
earlier than people had hoped. But right now China is
quite constrained in its monitor policy, and largely due to
a concern and a weaker currency. If we cannot have
(01:18):
more of the monitory injection into the domestic economy, then
the economy will have much much bigger trouble when it
comes to true recovery.
Speaker 1 (01:28):
Is that the secret to seeing a little bit of
or let me put it in another way, less deflation
in China looser policy.
Speaker 3 (01:38):
Well exactly because so far what we have seen in
China is the three contractions in housing, in fiscal policy,
and in monitor policy. And it doesn't matter how many
ultra long term government bond that central government issues, as
long as that the commercial banks in China cannot really
(01:58):
land out much at a lower cost, then I won't
have a true recovery. Especially for the private seccess the
true borrowing cost for them is still high given the
deflationary pressure.
Speaker 2 (02:11):
Yeah, one of the big developments yesterday was Bloomberg source
story talking about how advice would be given to the
provinces to buy up some of these unsold homes. I'm
not sure about the technical requirements there and where this
money comes from, but this is one thing that might
lead to some sort of relief to the property sector.
(02:33):
Your thoughts on what you see there.
Speaker 3 (02:37):
I was not surprised by that news. We've been hearing
this kind of rumor from time to time in the
past three years, actually, But the critical problem is still
where can the local governments get the money to buy
up those properties, especially most of those properties are built
in the wrong location. If they are somehow built around
(03:00):
the first two cities or in some good districts in
Beijing or Shanghai, then it's not a problem because the
resale value or the rental value will be relatively high.
So for the local government they might have the intention,
but actually we have to see a lot more issuance
of those long term central government bonds for that to happen.
Speaker 4 (03:19):
Dan.
Speaker 1 (03:19):
Tomorrow, we're going to get the monthly activity data, and
I'm curious to get your read on what we may learn.
I mean, everything that we've been discussing is kind of known.
The persistent weakness and property maybe a big question mark
over the health of the Chinese consumer lending that has
really not been very very loose at all. As a
matter of fact, just over the weekend we had the
(03:40):
latest credit data. What are we going to learn about
industrial production? What are we going to learn about retail sales?
That may give the market a little bit more confidence
right now that there is some kind of something lasting
that may be on the way here for the Chinese
economy rather than just the rotation that we've been describing
in the equity market.
Speaker 3 (04:02):
The industrial sector remained to be the only bright spot
in Chinese economy given strong policy support, and for investors
it's a good news because people will know exactly where
the money is flowing. It is flowing out of the
traditional sectors of the commercial housing sexis and into the
manufacturing sector towards the higher end. And for the retail data,
(04:26):
I don't have much confidence. Although the latest the data
might appear to be okay because we do have more
holidays than last year and that has encouraged more spending
and tourism or transportation, but overall, the average spending per
person is still lower than twenty nineteen, and without a
(04:48):
strong program to support the low income families in China,
I just said, don't see how the retail market could
have a true revival.
Speaker 2 (04:57):
Yeah, consumer activity has and weak, and you know, China
has been relying on strong industrial outlook or output, but
that is the part that's getting in hotter water with
the United States and Europe, so it seems like at
the moment the country is still heading down a road
that may prove difficult in the short to medium term.
Speaker 3 (05:20):
Oh absolutely, and the more closely we look at Chinese economy,
the more concerns we might have for its long term performance.
It is true that the fundamentals in the manufacturing seccess
supply chains are quite strong, and China is trying everything
(05:40):
it could to guarantee strengthening the high tech sacset, but
the success for that strategy would depend on the rest
of the world, especially the good will, in my opinion,
from Europe. As long as that market is still open
to China, then we will have a market that can
be a sustainable driver for domestic investment and export sector
(06:02):
in particular. But if somehow there are way more tariffs
or sanctions from Europe or the US in the future,
then we'll see a stronger momentum for capital to flow
out of China, and that down the road will cause
more problems. Because we know that Japan has a larger
economy overseas than it's domestic economy, but China is so
(06:26):
much bigger and there's such a large population that needs jobs,
so we do need more money to stay in China
to create jobs.
Speaker 1 (06:34):
That's pretty consistent with the latest note from Bloomberg Economics
on the longer term risk of additional tariffs if this
trade war heats up. Imagine a new administration in the
United States coming to power in the early part of
twenty twenty five and the severity of even tougher sanctions.
So is there a policy prescription. Is there something that
(06:58):
Beijing can do to address that can concerns, whether it's
over capacity or just the lack of not playing on
a level playing field, that can turn this situation around
and maybe take some of the sting out of what
you described as being a distinct possibility.
Speaker 3 (07:18):
I think China has the tools to get rid of
some of the overcapacity, but it doesn't have the political
willingness to do so. It's largely consistent with the deterioration
of China US relations, and somehow China is in the
strong belief that they have to have more indigenous innovation capacity,
(07:42):
and by doing that, we cannot rely on foreign countries,
especially we cannot rely on the technology from the US.
But then that means this economy has to allocate even
more resources to the high tech sector, and a lot
of the money has been wasted in the past twenty years,
and see a lot more can be wasted in this
process because you know, the latest technology in AI, machine
(08:07):
learning or quantum computing, it can't be done single handedly
by one country.
Speaker 2 (08:13):
So Dan, is this a policy mistake by Beijing the
direction that it is carved out at the moment.
Speaker 3 (08:21):
I don't think it's a mistake, but it is an
over emphasis on how much the supply side can bring
to a country like China has this long ambition to
be rich and powerful, and in the past decades it
has been successful, and it was quite successful to cultivate
its own green economy as well, so it wants to
(08:43):
rely on that model.
Speaker 2 (08:45):
All right, Dan, thanks very much for being with us.
Dan Wong, chief economist at Hangsang Bank looking at the
Chinese economy and in fact global conditions. We are joined
by our old friend Stefan Hofirm, Managing director and chief
investment strategist at LGT Private Banking Asia, someone who used
(09:09):
to be on the program a lot then was transferred
back to Switzerland and the time didn't really suit, so
it's been a while. Stefan, thanks very much for coming
very much you. So, you know, I haven't talked to
you in a while. I don't know whether you're tilting
bearish or tilting bullish. But let me throw a scenario
at you and you can tell me I'm all wet,
or you can say yeah, I like it. So we
(09:30):
had a little bit of a fake scare in the
first quarter on inflation, and now we're sort of moving
away from that with this latest print. I'm speculating that,
but that's that's a position, and now we're about ready
to have a fake scare in in in a growth
that growth is going to fall off and that we're
heading into an uncomfortable position. In the first three months
(09:51):
of the year, it was time to buy even with
hot inflation. Is it now still a time to buy,
even with fears of slow and growth.
Speaker 5 (09:59):
Well, it's quite fascinating because we're still in an environment
where we've come off the fastest rate interest rate increase
in US history, and yet here we are in May,
and frankly, you know, consumption, you know, irrespective of the
of the retail print yesterday, is basically very very solid
in terms of the levels. So this this much anticipated
(10:24):
textbook or you know, you know, type of slowdown in
you simply has not happened. Unemployment is still below the
natural rate, and we have this, you know, great disinflation,
but overall the economy is still, i think objectively speaking,
quite hot.
Speaker 1 (10:40):
Have you seen in the history books a case like
this where you can have elevated interest rates and stills
so much robustness and growth that does this seem odd
to you?
Speaker 5 (10:52):
It's very odd. Dog, it doesn't happen. It frankly does
not happen. And this is sort of something that you know,
maybe five ten from our academia will sort of really,
you know, figure out why it's happened. Maybe we have
still some leftover you know, COVID handout money that is
still sort of circulating there, keeping things elevated. We also know, however,
(11:16):
that credit card to the United States has skyrocketed, so
some of this growth is fueled on a private borrowing
and that of course also will reach a limit at
some point. But all that said, yes, you apter, you're right,
this is brand new, never happened before, and by now
we really should be in a recession that it hasn't happened.
Speaker 2 (11:36):
But is it really? I mean, interest rates traditionally over
a long period of time, we're quite off and up
around four to five percent. It's really only in the
last twenty years, is it not that we've gotten used
to such strong disinflation almost deflationary conditions that you know,
we see this as unusual when perhaps it's not.
Speaker 5 (11:56):
That's true, But it's all about the rate of change,
so and not just the level. And really, if you
look at the path of what the Fed has done
in a very compressed period of time, they rapidly increased
interest rates and really textbook argues that something needs to break,
and certainly inflation has to break, and it kind of did.
But also the labor market and the fact that you've
(12:17):
got below the natural rate of unemployment in the United
States highly unusual, never happened before.
Speaker 1 (12:23):
The other thing that's confounding is that the yield curve
remains inverted. I can't remember a time that you've had
growth like that with an inverted yield curve.
Speaker 5 (12:33):
Yeah, and no one is really sort of focusing on
that anymore. And really what it's all about, you know, thankfully,
is at least on the equity side, it's earning. So
earnings growth the United States is exceptionally high, and on
that topic, it's Japan. Japan is the runaway winner in
terms of corporate profitability, So we have an investment backdrop
(12:54):
that is certainly supported by companies pretty much across the board.
Europe being the weak is what overall doing really quite well.
Speaker 2 (13:02):
So the two year is tied to FED funds rate policy.
If we get say fifty to seventy five basis points
in cuts, there goes the inversion, right And won't that
tell you then that you know, we enter a period
when it's something you really don't have to worry about this,
you know, this forever lasting inverted deal.
Speaker 5 (13:21):
Care Yes, but I mean, I think seventy five business
points right now is you know unlikely. We're also, of course,
in the election cycle, and historically the view has been
that the closer you get to the elections, the least
you know you should be doing less in terms of
the federal reserve. So maybe September some people are saying
(13:41):
July we're at LGT. We're saying this is be one
cut in September.
Speaker 1 (13:45):
So how are you viewing US China relations, particularly in
light of the new tariffs that were unveiled yesterday by
the Biden administration.
Speaker 5 (13:54):
Well, you know, if you're a believer in globalization and
free trade and efficient markets and all that kind of thing,
then then it's troubling.
Speaker 3 (14:02):
You know.
Speaker 5 (14:02):
I'm based here with with you know Brian in Hong Kong,
and Hong Kong and Singapore as well have zero import tariffs.
So that's the kind of environment that you know economy.
You know, businesses generally can prosper. The more that you
increase tariffs, the more distortions there are, is not a
good thing longer term for global growth. But at the
same time, we do know that both Republican and Democrat
(14:25):
voters tend to like to see being you know, tough
on China.
Speaker 2 (14:29):
Is Europe in the process of kind of finding a
rock pro chemong with China, or is it ready to
stiffen policy.
Speaker 5 (14:36):
So if you take the case of say Germany, Germany
is very very exposed to Chinese demand given the kind
of exports that they have, so capital, goods, chemicals and
so on and so forth. So it's a really a
dollar and cents type issue. The United States has a
much much larger domestic demand driven economy, less sensitive to that,
(14:57):
but the Europeans will really feel it if you know,
if China doesn't reaccelerate further from here, and that's been
a major drag for them over the past say two
years already, so it's all about Europe being sensitive to
try them all.
Speaker 2 (15:10):
Right, Stefan, thanks very much for joining us here on
the program Live Stuff On Hofer Managing Director, Chief Investment
Strategists at LGT Private Banking Asia. We are joined on
the program by Jose Todes, a senior economist at Interactive Brookers. Jose,
(15:32):
I wonder whether the attention now is sort of focus
in markets and for people like you as an economist,
focus a little bit more on growth now and perhaps
a little away from inflation. That's not to say that
the fight against inflation is over, but growth now is
also sort of in the in the crosshairs at least
(15:53):
in the short term.
Speaker 4 (15:54):
Your thoughts, good evening. I'm not ready to call it
quits on the consumer just yet. In the last two
and a half years, we've seen in certain months the
consumers going somewhat of a stop and go kind of
path where they're spending will decline sharply one month, only
(16:14):
to recover even more strongly the next month. So against
that backdrop. However, there are some significant headwinds, some of
the same ones that we've been hearing for the last
two years, and a lot of economists, including myself, we've
been confounded because we thought that all this monetary policy
tightening rates is high. We thought that would be in recession.
(16:34):
And it's the consumer that's rebounded whenever we thought we
were so close to that slowdown to what do.
Speaker 1 (16:40):
You attribute that? I mean, why it has The American
consumer still remained very resilient in the face of higher rates.
Speaker 4 (16:50):
Well, corporate balance sheets are quite robust, job jobs are plentiful,
you know, Labor vacancies are still at around eight and
a half million, well above pre pandemic levels. For the
high end consumer, they've benefited significantly from buoyant capital markets
and elevated real estate prices that reach all time highs
(17:12):
essentially every month, similar to what we're seeing inequities with
the S and P five hundred closing above fifty three
hundred today. That's really supported the high end consumer. The
middle and low end consumer had a lot of savings
back when fiscal stimulus was quite plentiful, but now they're
(17:33):
sort of starting to see some more significant weakness, particularly
with personal savings, as well as on the earnings calls,
we're hearing about discretionary items starting to be paired back
in favor of necessities.
Speaker 2 (17:47):
Yeah, it's tempting to say that this is retail sales
of goods today the latest data, and that services is
a much bigger part of it. But we're reminded that
City Group's Economic Surprises index is at the lowest since
January of last year. So this is really looking at
a series of weaker than estimated data points, not just
(18:08):
retail sales, but jobs, services, manufacturing. It is, it is
out there, you know. Is it a welcome slowing of
the economy or is it unwelcome?
Speaker 4 (18:21):
I think right now it's quite welcome because it's helping
on inflation, albeit very modestly, and we're in that point
of the cycle here where the private sector isn't hiring strongly.
When we look at the jobs reports, whether it's ADP
(18:41):
or BLS, we see that they have a non cyclical
tilt a lot of the jobs being created or in
healthcare and education and government, and that's been the case
for a long time. But when we look at numbers
like initial unemployment claims, and continuing unemployment claims. And let
me hold my breath, because those numbers are coming out
tomorrow at a thirty am Easter time. And we did
(19:02):
see a sharp increase, albeit to two hundred and thirty thousand,
not that concerning of a level in itself, but if
we start seeing it picking up towards two fifty two
seventy three hundred, now we're talking about an unemployment rate
ticking up to four point three or four point four percent.
That's the bearish path. The neutral to bullish path is
(19:23):
that we never actually get there. Companies have good balance sheets.
They spent post pandemic period right sizing and preparing for
a recession that many pundits thought was including myself, thought
was right around the corner. So they're in a good spot.
And there's the potential that this expansion goes longer because
(19:43):
of that factor. And finally, on this point, monetary policy
tightening hasn't been enough to counter the excessive loosening that
occurred in twenty twenty and twenty twenty one. Both from
Congress as well as the said, you know, right now
we're one point six trillion off of the FED balance
sheet peak. But we added almost five trillion due to
(20:06):
the pandemic. You know, we still have a lot of
liquidity universe repo bank reserves a quice point, and financial
conditions are the loosest sty've been in since late twenty
twenty one. Whether you look at Chicago, Fed, Bloomberg, or Goldman.
Speaker 1 (20:20):
Sachs Hose, the swaps market is now pricing in nearly
two separate twenty five basis point FED rate cuts before
the end of this year. Do you think that's reasonable?
Speaker 4 (20:32):
I think so. I think we're going to see some
slowing into September that's going to allow the FED to
cut there, and then I think that we'll probably get
one in December. But right now I'm in between one
and two. I'm really at one and a half inflation.
You know, central banks flat around the world are implicitly
(20:52):
accepting inflation higher than target because they're not willing to
endure the sacrifices necessary to really get down to two percent.
You know, we're at three point four percent uh and
you know, judging by the two percent standard, that would
require a month over month increase in the very short
term of sixteen zero point six dips month over month
(21:18):
to get to two percent at the end of the year.
Speaker 6 (21:20):
And a fun exercise, yeah yeah, yeah, And a fun
exercise last point here, A fun exercise is count every
single month, every and every kind of inflation.
Speaker 4 (21:31):
You want CPI headline, core, CPI headline, PC core PC.
You know you're not there, You're not even.
Speaker 2 (21:37):
We want we get the point, We get the point, Jose.
But but you know the Fed is actually employing time
here rather than you know, sharper activity in the short term.
It sounds like you are all for sharper activity in
the short term. You'd like to see them high rates here.
Speaker 4 (21:53):
It seems like I would like them to keep the
hike on the table because messaging has become so an
important aspect of monetary policy these days. So if you
keep leading the market on we're cutting, we're cutting. You know,
back in December that was a pivotal pivot in monetary
policy this cycle, Chair palpoint to rate cuts right around
(22:15):
the corner, right, and the uncertainty of monetary policy itself
titans financial conditions. And right now we don't really have
that kind of uncertainty because look at today the market
rallied and to my earlier point, which you know, I
explained a little too much. Sorry about that, but you
know we inflation today came in around thirty one thirty
two BIPs.
Speaker 1 (22:36):
Yeah, you know, it's kind of interesting because there was
there has been a little criticism of the fact that
maybe there's been a little too much messaging from the Fed,
and you know, we get a lot more volatility as
the result of that. Jose, thank you so much for
being with us. Jose Torres is a senior economist at
Interactive Brokers.
Speaker 2 (22:57):
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
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(23:18):
Bloomberg Business App.
Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg
Daybreak Asia podcast. I'm Doug Prisner. You can join Brian
Curtis and myself for the stories, making news and moving
markets in the APEC 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 (00:26):
Joining us now for some insights is Dan Wong, chief
economist at Hangsang Bank. To take a closer look here,
I think we can talk about the ultralong bond sales
that China's announced and also this move potential move to
have the province's buy up unsold homes. In just a moment,
I just wanted to get your first reaction to the
(00:47):
slightly weaker than expected inflation data in the United States
and what it might mean for the dollar and for Asia.
Speaker 3 (00:54):
So this week performance in the inflation in the US
actually will be relatively good news for China because it
means maybe the Federal Reserve would decide to cut interested
earlier than people had hoped. But right now China is
quite constrained in its monitor policy, and largely due to
a concern and a weaker currency. If we cannot have
(01:18):
more of the monitory injection into the domestic economy, then
the economy will have much much bigger trouble when it
comes to true recovery.
Speaker 1 (01:28):
Is that the secret to seeing a little bit of
or let me put it in another way, less deflation
in China looser policy.
Speaker 3 (01:38):
Well exactly because so far what we have seen in
China is the three contractions in housing, in fiscal policy,
and in monitor policy. And it doesn't matter how many
ultra long term government bond that central government issues, as
long as that the commercial banks in China cannot really
(01:58):
land out much at a lower cost, then I won't
have a true recovery. Especially for the private seccess the
true borrowing cost for them is still high given the
deflationary pressure.
Speaker 2 (02:11):
Yeah, one of the big developments yesterday was Bloomberg source
story talking about how advice would be given to the
provinces to buy up some of these unsold homes. I'm
not sure about the technical requirements there and where this
money comes from, but this is one thing that might
lead to some sort of relief to the property sector.
(02:33):
Your thoughts on what you see there.
Speaker 3 (02:37):
I was not surprised by that news. We've been hearing
this kind of rumor from time to time in the
past three years, actually, But the critical problem is still
where can the local governments get the money to buy
up those properties, especially most of those properties are built
in the wrong location. If they are somehow built around
(03:00):
the first two cities or in some good districts in
Beijing or Shanghai, then it's not a problem because the
resale value or the rental value will be relatively high.
So for the local government they might have the intention,
but actually we have to see a lot more issuance
of those long term central government bonds for that to happen.
Speaker 4 (03:19):
Dan.
Speaker 1 (03:19):
Tomorrow, we're going to get the monthly activity data, and
I'm curious to get your read on what we may learn.
I mean, everything that we've been discussing is kind of known.
The persistent weakness and property maybe a big question mark
over the health of the Chinese consumer lending that has
really not been very very loose at all. As a
matter of fact, just over the weekend we had the
(03:40):
latest credit data. What are we going to learn about
industrial production? What are we going to learn about retail sales?
That may give the market a little bit more confidence
right now that there is some kind of something lasting
that may be on the way here for the Chinese
economy rather than just the rotation that we've been describing
in the equity market.
Speaker 3 (04:02):
The industrial sector remained to be the only bright spot
in Chinese economy given strong policy support, and for investors
it's a good news because people will know exactly where
the money is flowing. It is flowing out of the
traditional sectors of the commercial housing sexis and into the
manufacturing sector towards the higher end. And for the retail data,
(04:26):
I don't have much confidence. Although the latest the data
might appear to be okay because we do have more
holidays than last year and that has encouraged more spending
and tourism or transportation, but overall, the average spending per
person is still lower than twenty nineteen, and without a
(04:48):
strong program to support the low income families in China,
I just said, don't see how the retail market could
have a true revival.
Speaker 2 (04:57):
Yeah, consumer activity has and weak, and you know, China
has been relying on strong industrial outlook or output, but
that is the part that's getting in hotter water with
the United States and Europe, so it seems like at
the moment the country is still heading down a road
that may prove difficult in the short to medium term.
Speaker 3 (05:20):
Oh absolutely, and the more closely we look at Chinese economy,
the more concerns we might have for its long term performance.
It is true that the fundamentals in the manufacturing seccess
supply chains are quite strong, and China is trying everything
(05:40):
it could to guarantee strengthening the high tech sacset, but
the success for that strategy would depend on the rest
of the world, especially the good will, in my opinion,
from Europe. As long as that market is still open
to China, then we will have a market that can
be a sustainable driver for domestic investment and export sector
(06:02):
in particular. But if somehow there are way more tariffs
or sanctions from Europe or the US in the future,
then we'll see a stronger momentum for capital to flow
out of China, and that down the road will cause
more problems. Because we know that Japan has a larger
economy overseas than it's domestic economy, but China is so
(06:26):
much bigger and there's such a large population that needs jobs,
so we do need more money to stay in China
to create jobs.
Speaker 1 (06:34):
That's pretty consistent with the latest note from Bloomberg Economics
on the longer term risk of additional tariffs if this
trade war heats up. Imagine a new administration in the
United States coming to power in the early part of
twenty twenty five and the severity of even tougher sanctions.
So is there a policy prescription. Is there something that
(06:58):
Beijing can do to address that can concerns, whether it's
over capacity or just the lack of not playing on
a level playing field, that can turn this situation around
and maybe take some of the sting out of what
you described as being a distinct possibility.
Speaker 3 (07:18):
I think China has the tools to get rid of
some of the overcapacity, but it doesn't have the political
willingness to do so. It's largely consistent with the deterioration
of China US relations, and somehow China is in the
strong belief that they have to have more indigenous innovation capacity,
(07:42):
and by doing that, we cannot rely on foreign countries,
especially we cannot rely on the technology from the US.
But then that means this economy has to allocate even
more resources to the high tech sector, and a lot
of the money has been wasted in the past twenty years,
and see a lot more can be wasted in this
process because you know, the latest technology in AI, machine
(08:07):
learning or quantum computing, it can't be done single handedly
by one country.
Speaker 2 (08:13):
So Dan, is this a policy mistake by Beijing the
direction that it is carved out at the moment.
Speaker 3 (08:21):
I don't think it's a mistake, but it is an
over emphasis on how much the supply side can bring
to a country like China has this long ambition to
be rich and powerful, and in the past decades it
has been successful, and it was quite successful to cultivate
its own green economy as well, so it wants to
(08:43):
rely on that model.
Speaker 2 (08:45):
All right, Dan, thanks very much for being with us.
Dan Wong, chief economist at Hangsang Bank looking at the
Chinese economy and in fact global conditions. We are joined
by our old friend Stefan Hofirm, Managing director and chief
investment strategist at LGT Private Banking Asia, someone who used
(09:09):
to be on the program a lot then was transferred
back to Switzerland and the time didn't really suit, so
it's been a while. Stefan, thanks very much for coming
very much you. So, you know, I haven't talked to
you in a while. I don't know whether you're tilting
bearish or tilting bullish. But let me throw a scenario
at you and you can tell me I'm all wet,
or you can say yeah, I like it. So we
(09:30):
had a little bit of a fake scare in the
first quarter on inflation, and now we're sort of moving
away from that with this latest print. I'm speculating that,
but that's that's a position, and now we're about ready
to have a fake scare in in in a growth
that growth is going to fall off and that we're
heading into an uncomfortable position. In the first three months
(09:51):
of the year, it was time to buy even with
hot inflation. Is it now still a time to buy,
even with fears of slow and growth.
Speaker 5 (09:59):
Well, it's quite fascinating because we're still in an environment
where we've come off the fastest rate interest rate increase
in US history, and yet here we are in May,
and frankly, you know, consumption, you know, irrespective of the
of the retail print yesterday, is basically very very solid
in terms of the levels. So this this much anticipated
(10:24):
textbook or you know, you know, type of slowdown in
you simply has not happened. Unemployment is still below the
natural rate, and we have this, you know, great disinflation,
but overall the economy is still, i think objectively speaking,
quite hot.
Speaker 1 (10:40):
Have you seen in the history books a case like
this where you can have elevated interest rates and stills
so much robustness and growth that does this seem odd
to you?
Speaker 5 (10:52):
It's very odd. Dog, it doesn't happen. It frankly does
not happen. And this is sort of something that you know,
maybe five ten from our academia will sort of really,
you know, figure out why it's happened. Maybe we have
still some leftover you know, COVID handout money that is
still sort of circulating there, keeping things elevated. We also know, however,
(11:16):
that credit card to the United States has skyrocketed, so
some of this growth is fueled on a private borrowing
and that of course also will reach a limit at
some point. But all that said, yes, you apter, you're right,
this is brand new, never happened before, and by now
we really should be in a recession that it hasn't happened.
Speaker 2 (11:36):
But is it really? I mean, interest rates traditionally over
a long period of time, we're quite off and up
around four to five percent. It's really only in the
last twenty years, is it not that we've gotten used
to such strong disinflation almost deflationary conditions that you know,
we see this as unusual when perhaps it's not.
Speaker 5 (11:56):
That's true, But it's all about the rate of change,
so and not just the level. And really, if you
look at the path of what the Fed has done
in a very compressed period of time, they rapidly increased
interest rates and really textbook argues that something needs to break,
and certainly inflation has to break, and it kind of did.
But also the labor market and the fact that you've
(12:17):
got below the natural rate of unemployment in the United
States highly unusual, never happened before.
Speaker 1 (12:23):
The other thing that's confounding is that the yield curve
remains inverted. I can't remember a time that you've had
growth like that with an inverted yield curve.
Speaker 5 (12:33):
Yeah, and no one is really sort of focusing on
that anymore. And really what it's all about, you know, thankfully,
is at least on the equity side, it's earning. So
earnings growth the United States is exceptionally high, and on
that topic, it's Japan. Japan is the runaway winner in
terms of corporate profitability, So we have an investment backdrop
(12:54):
that is certainly supported by companies pretty much across the board.
Europe being the weak is what overall doing really quite well.
Speaker 2 (13:02):
So the two year is tied to FED funds rate policy.
If we get say fifty to seventy five basis points
in cuts, there goes the inversion, right And won't that
tell you then that you know, we enter a period
when it's something you really don't have to worry about this,
you know, this forever lasting inverted deal.
Speaker 5 (13:21):
Care Yes, but I mean, I think seventy five business
points right now is you know unlikely. We're also, of course,
in the election cycle, and historically the view has been
that the closer you get to the elections, the least
you know you should be doing less in terms of
the federal reserve. So maybe September some people are saying
(13:41):
July we're at LGT. We're saying this is be one
cut in September.
Speaker 1 (13:45):
So how are you viewing US China relations, particularly in
light of the new tariffs that were unveiled yesterday by
the Biden administration.
Speaker 5 (13:54):
Well, you know, if you're a believer in globalization and
free trade and efficient markets and all that kind of thing,
then then it's troubling.
Speaker 3 (14:02):
You know.
Speaker 5 (14:02):
I'm based here with with you know Brian in Hong Kong,
and Hong Kong and Singapore as well have zero import tariffs.
So that's the kind of environment that you know economy.
You know, businesses generally can prosper. The more that you
increase tariffs, the more distortions there are, is not a
good thing longer term for global growth. But at the
same time, we do know that both Republican and Democrat
(14:25):
voters tend to like to see being you know, tough
on China.
Speaker 2 (14:29):
Is Europe in the process of kind of finding a
rock pro chemong with China, or is it ready to
stiffen policy.
Speaker 5 (14:36):
So if you take the case of say Germany, Germany
is very very exposed to Chinese demand given the kind
of exports that they have, so capital, goods, chemicals and
so on and so forth. So it's a really a
dollar and cents type issue. The United States has a
much much larger domestic demand driven economy, less sensitive to that,
(14:57):
but the Europeans will really feel it if you know,
if China doesn't reaccelerate further from here, and that's been
a major drag for them over the past say two
years already, so it's all about Europe being sensitive to
try them all.
Speaker 2 (15:10):
Right, Stefan, thanks very much for joining us here on
the program Live Stuff On Hofer Managing Director, Chief Investment
Strategists at LGT Private Banking Asia. We are joined on
the program by Jose Todes, a senior economist at Interactive Brookers. Jose,
(15:32):
I wonder whether the attention now is sort of focus
in markets and for people like you as an economist,
focus a little bit more on growth now and perhaps
a little away from inflation. That's not to say that
the fight against inflation is over, but growth now is
also sort of in the in the crosshairs at least
(15:53):
in the short term.
Speaker 4 (15:54):
Your thoughts, good evening. I'm not ready to call it
quits on the consumer just yet. In the last two
and a half years, we've seen in certain months the
consumers going somewhat of a stop and go kind of
path where they're spending will decline sharply one month, only
(16:14):
to recover even more strongly the next month. So against
that backdrop. However, there are some significant headwinds, some of
the same ones that we've been hearing for the last
two years, and a lot of economists, including myself, we've
been confounded because we thought that all this monetary policy
tightening rates is high. We thought that would be in recession.
(16:34):
And it's the consumer that's rebounded whenever we thought we
were so close to that slowdown to what do.
Speaker 1 (16:40):
You attribute that? I mean, why it has The American
consumer still remained very resilient in the face of higher rates.
Speaker 4 (16:50):
Well, corporate balance sheets are quite robust, job jobs are plentiful,
you know, Labor vacancies are still at around eight and
a half million, well above pre pandemic levels. For the
high end consumer, they've benefited significantly from buoyant capital markets
and elevated real estate prices that reach all time highs
(17:12):
essentially every month, similar to what we're seeing inequities with
the S and P five hundred closing above fifty three
hundred today. That's really supported the high end consumer. The
middle and low end consumer had a lot of savings
back when fiscal stimulus was quite plentiful, but now they're
(17:33):
sort of starting to see some more significant weakness, particularly
with personal savings, as well as on the earnings calls,
we're hearing about discretionary items starting to be paired back
in favor of necessities.
Speaker 2 (17:47):
Yeah, it's tempting to say that this is retail sales
of goods today the latest data, and that services is
a much bigger part of it. But we're reminded that
City Group's Economic Surprises index is at the lowest since
January of last year. So this is really looking at
a series of weaker than estimated data points, not just
(18:08):
retail sales, but jobs, services, manufacturing. It is, it is
out there, you know. Is it a welcome slowing of
the economy or is it unwelcome?
Speaker 4 (18:21):
I think right now it's quite welcome because it's helping
on inflation, albeit very modestly, and we're in that point
of the cycle here where the private sector isn't hiring strongly.
When we look at the jobs reports, whether it's ADP
(18:41):
or BLS, we see that they have a non cyclical
tilt a lot of the jobs being created or in
healthcare and education and government, and that's been the case
for a long time. But when we look at numbers
like initial unemployment claims, and continuing unemployment claims. And let
me hold my breath, because those numbers are coming out
tomorrow at a thirty am Easter time. And we did
(19:02):
see a sharp increase, albeit to two hundred and thirty thousand,
not that concerning of a level in itself, but if
we start seeing it picking up towards two fifty two
seventy three hundred, now we're talking about an unemployment rate
ticking up to four point three or four point four percent.
That's the bearish path. The neutral to bullish path is
(19:23):
that we never actually get there. Companies have good balance sheets.
They spent post pandemic period right sizing and preparing for
a recession that many pundits thought was including myself, thought
was right around the corner. So they're in a good spot.
And there's the potential that this expansion goes longer because
(19:43):
of that factor. And finally, on this point, monetary policy
tightening hasn't been enough to counter the excessive loosening that
occurred in twenty twenty and twenty twenty one. Both from
Congress as well as the said, you know, right now
we're one point six trillion off of the FED balance
sheet peak. But we added almost five trillion due to
(20:06):
the pandemic. You know, we still have a lot of
liquidity universe repo bank reserves a quice point, and financial
conditions are the loosest sty've been in since late twenty
twenty one. Whether you look at Chicago, Fed, Bloomberg, or Goldman.
Speaker 1 (20:20):
Sachs Hose, the swaps market is now pricing in nearly
two separate twenty five basis point FED rate cuts before
the end of this year. Do you think that's reasonable?
Speaker 4 (20:32):
I think so. I think we're going to see some
slowing into September that's going to allow the FED to
cut there, and then I think that we'll probably get
one in December. But right now I'm in between one
and two. I'm really at one and a half inflation.
You know, central banks flat around the world are implicitly
(20:52):
accepting inflation higher than target because they're not willing to
endure the sacrifices necessary to really get down to two percent.
You know, we're at three point four percent uh and
you know, judging by the two percent standard, that would
require a month over month increase in the very short
term of sixteen zero point six dips month over month
(21:18):
to get to two percent at the end of the year.
Speaker 6 (21:20):
And a fun exercise, yeah yeah, yeah, And a fun
exercise last point here, A fun exercise is count every
single month, every and every kind of inflation.
Speaker 4 (21:31):
You want CPI headline, core, CPI headline, PC core PC.
You know you're not there, You're not even.
Speaker 2 (21:37):
We want we get the point, We get the point, Jose.
But but you know the Fed is actually employing time
here rather than you know, sharper activity in the short term.
It sounds like you are all for sharper activity in
the short term. You'd like to see them high rates here.
Speaker 4 (21:53):
It seems like I would like them to keep the
hike on the table because messaging has become so an
important aspect of monetary policy these days. So if you
keep leading the market on we're cutting, we're cutting. You know,
back in December that was a pivotal pivot in monetary
policy this cycle, Chair palpoint to rate cuts right around
(22:15):
the corner, right, and the uncertainty of monetary policy itself
titans financial conditions. And right now we don't really have
that kind of uncertainty because look at today the market
rallied and to my earlier point, which you know, I
explained a little too much. Sorry about that, but you
know we inflation today came in around thirty one thirty
two BIPs.
Speaker 1 (22:36):
Yeah, you know, it's kind of interesting because there was
there has been a little criticism of the fact that
maybe there's been a little too much messaging from the Fed,
and you know, we get a lot more volatility as
the result of that. Jose, thank you so much for
being with us. Jose Torres is a senior economist at
Interactive Brokers.
Speaker 2 (22:57):
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
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(23:18):
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