April 11, 2024 • 24 mins
Featuring:
Wei Yao, Head of Research & Chief Economist, APAC at Société Générale CIB, sits down with us in Hong Kong to discuss China eco outlook.
Stefanie Holtze-Jen, APAC CIO at Deutsche Bank Private Bank, joins the program to discuss APAC markets.
Lindsey Piegza, Chief Economist at Stifel, sits down with us to discuss 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 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 (00:26):
Well.
Speaker 3 (00:26):
Joining us now in our studios in Hong Kong for
a discussion about inflation and deflation is Way Yao, head
of Research and Chief Economists for the Asia Pacific Associate
General cib Well. Y'all, thanks very much for being with us.
Let's talk a little bit about the data we'll get
this morning. In about twenty minutes or so seventeen to
(00:46):
twenty minutes, we'll get the PPI numbers and the CPI
numbers for the month of March. Still expecting a negative
number on PPI minus two point eight percent is the
survey estimate CPI, though I should show an increase of
zero point four percent, and that would be the second
consecutive month of being in positive territory. Can we take
(01:07):
that as a wee bit of good news?
Speaker 4 (01:09):
Well, maybe it's just a wee bit of good news,
But I think structurally things haven't really changed much. If
you look at the economic situation in China, it continued
to be a challenge of not enough do miss the
demand and a lot of supply so and a policy
on the policy front, there is not much significant to
(01:30):
address this issue.
Speaker 1 (01:32):
So when you're dealing with deflation, particularly at the factory
gate level the wholesale level, what's the remedy here? I mean,
is there a way to kind of give maybe a
little bit of guidance to policymakers in China on a
way that they could arrest this situation.
Speaker 4 (01:50):
Well, there's a lot of focus about China's over capacity issue.
I agree, you know, China does have so much supply. However,
I would think the problem liesing more of a lack
of domestic demand in the sense that you know, China,
because of the housing crash, is losing a big engine
(02:12):
of domestic demound and the policy is very much tutored
towards supply. So I think it's a matter of balancing
the policy more towards demand rather than supply.
Speaker 3 (02:24):
So we're trying to get Chinese consumers spending again and
a moment ago you said you kind of referred to
Chinese policy making as substandard.
Speaker 2 (02:33):
Almost.
Speaker 4 (02:35):
Well, it's unbalanced, I would say, because it's pretty clear
what they want to achieve for good reason, because you know,
I think the the idea here of the top leadership
is to boost the productivity growth by you know, moving
China up the value chain. However, you know, it's it
may not be entirely the remedy here, given that we
(02:58):
are in a deflation or environ and if China continue
on supporting supply, it's going to cause trade engions, which
we're already seen.
Speaker 1 (03:05):
Yeah, that's a little confounding. I mean, you talked about
the overcapacity issue, and then when you listen to what
the government is saying that industrial policy will be the
way of reviving economic activity, it doesn't really make sense,
does it.
Speaker 4 (03:19):
Well, it's just that they have a long term view
that where this is where China should be, and it
seems that there's not much willingness to adjust to the
reality that you know, they have this deflation problem at hand,
or maybe they don't worry about this as much as
we do. I think, you know what, it's just going
to take more convincing to make them at least change calls.
(03:40):
Right now, the export momentum seem to be picking up,
so it doesn't seem to be the time yet.
Speaker 3 (03:46):
Yeah, if you look long term, okay, you're thinking industrialization,
building up tech, the chest is stuck out. But then
short term you're thinking, hey, we got to get this
economy moving again. How do you stimulate consumers to get
the spending.
Speaker 4 (04:01):
Well, the one thing they talked about which got us
a little bit excited is subsidizing you know, the replacement
or upgrade of home appliances. However, we haven't heard much
follow up at least. You know, what we really need
to see is government actually providing tangible amount of fiscal
support to households, either on the consumption side or income side.
(04:23):
Another pass to the long term sustainable growth of consumptions,
obviously to beef of the social security system, but that
again is a slow moving process.
Speaker 1 (04:32):
When you look at the tension between the US and
China right now, particularly in areas of high technology, I
mean the barriers that have been established export controls limiting
China's access to some of the most sophisticated high tech technology.
Are you sensing that this is having a meaningful impact
on the economy or is it something we only talk
about kind of marginally.
Speaker 4 (04:55):
It is not too obvious yet, but I suppose you know,
this does indeed the limits put some limits on China's
development in terms of you know, AI all right, you know?
And I think one consequence, one clear consequence from all
these US policy is actually making China, making the Chinese
(05:17):
policy makers even want to double down on the supply
strategy more so, you see, this is the response to
Chinese leadership is coming up towards the US. Maybe we
could think of if the US were to relax, be
more relaxed about China, and China would be more willing
to rebalance. Who knows.
Speaker 3 (05:36):
We're seeing more efforts to try to stimulate the housing market.
We have a leading newspaper this morning, the Economic Observer
in China, saying that many Chinese cities now are cutting
or they're doing some targeted easing. Here fifteen cities have
removed the lower limit for mortgage rates on first first
time home purchases, and some four cities have relaxed housing
(05:59):
provident fund. Can they do more?
Speaker 4 (06:02):
Well, they can do more, certainly, But I guess I
guess you know, one short term problem for them is
they really need to address the issue that developers do
not have the trust of households to finish project uh
and and if this problem can be addressed, that I
believe some of the demands could come back. Because you
(06:22):
look at the sales of finished apartments, they're pretty decent.
It's the other part, which the unfinished part, you know,
it's really really distressed. But ultimately you you know it's
it's it's a market force, right. The price is probably
may need to forb more for the households to be
more willing to come back, because if you look at
(06:44):
the affordability of the housing prices in the big cities
in China, it's very hard to say they're cheap enough.
Speaker 1 (06:50):
Next week we get the monthly activity data. Is there
something that you're looking for that could represent a big surprise,
something maybe that the market is not prepared for, or
do you think market participants have a pretty good understanding
of what's happening on the mainland insofar as the economy
is concerned.
Speaker 4 (07:07):
So data wise, I think the expectation or kind of
the consensus here is, you know, cyclically, things are not
getting worse. At least there is a bit of improvement
on the supply side, industrial side, slow progress on the
consumption if anything. The positive surprise, if any, will be
you know, the consumption data, the retail sales. But the
(07:28):
downside risks is if the supplies I also lose momentum.
But it doesn't seem to be the case yet.
Speaker 3 (07:34):
So if we look at the Chinese economy way out
and think about external inputs versus internal you know, domestic consumption,
which will perform the best over the next six months
and which really holds the key to getting the economy
really roaring again.
Speaker 4 (07:51):
So our expectation is that the extern turnal demount will improve.
As we can see cross Asia, you know, the trade
momentum is really picking up, so that were help China too.
Domestic our assumption is you know, consumption income. It continues
its very gradual pace of recovery. Housing may only find
a button by the end of this year if the
(08:14):
policy keeps at it.
Speaker 1 (08:15):
What about the labor market, particularly where the younger people.
Speaker 4 (08:19):
Are concerned, Well, so that's going to be a derivative
of all these forces. Essentially, you know, we don't have
big positive force to improve the labor market very fast
because jobs are not generated by the manufacturing sector, you know,
in terms of the majority of the jobs, it has
to be the service sector doing better. But the service
(08:41):
sector is you know, has challenges. Yeah, and things don't
change fast.
Speaker 3 (08:47):
We just had the PBOC keep the fix steady to
support that you want after this big jump in the
dollar just twenty seconds or so, do you like the
way the PBOC is managing the currency?
Speaker 4 (08:58):
The PBOC is uh, you know, I would say it
seems that the thinking here is they don't want too
weak currency. They sort of throw a little bit test
to the market once in a while to see, you know,
if they weaken to fix what happens. And it seems
that what happened was not what they liked. So it
doesn't seem there would be willingness to devalue the currency
(09:20):
to generate inflation.
Speaker 3 (09:21):
All right, way, y'all's with us, head of Research and
Chief Economists for the Asia Pacific Associated General. Joining us
now in our studios in Hong Kong is Stephanie holtz Gen,
the Asia Pacific CIO at Deutsche Bank for further discussion
about markets. So I think the contrast is very interesting
(09:45):
very compelling something to talk about. A very hot inflation
reading Stephanie in the United States, a very cool inflation
reading in China, yet both countries are very much right
smack dab in the middle of global supply. How do
we make sense of that?
Speaker 2 (10:04):
Well, it's been a dynamic that is around with us
for a while, and I think the explanation goes way
back to the way the reopening after COVID has been handled.
So I'm not sure I'm adding much news here, but
I think the unfortunate part is that the macroeconomic data
in China keeps on being uneven. So we had a
(10:25):
set of fairly optimistic data when we saw the pm
I swing back into expansionary territory just slightly so, and
then you know, other readings are still coming in below expectations.
So it's something that needs to be taken into account.
As one says as the investment opportunity, we look at
it as a second half of the year opportunity. In China.
(10:47):
We had a tactical trade on and I think we
need to be careful and stay on the sidelines for
the time being because we don't have the whole mix
of macroeconomics, sentiment and the following flow all showing in
the right direction.
Speaker 1 (11:02):
So many of the guests that we have on this
program when they talk about the problem at its core
is just the absence of positive sentiment, and when you
don't have consumer engagement in an economy and you don't
have domestic demand, I mean there are ramifications for that, right.
Is there a policy prescription that you can think of
that might improve the behavior of the consumer in China.
Speaker 2 (11:26):
I think there's been a lot of policy efforts to
support the consumer sentiment. So we have seen a lot
of physical stimulus quite targeted as well in terms of
stimulating the consumer to not just save, not just to
repay loans, but go and invest and purchase in the economy.
But it's still underwhelming, as we've seen recently in the
(11:47):
retail sales data as well. But in terms of the
market opportunity, of course it's twofold. There's an international investor
sentiment that I think is still needs more to be convinced,
and I I took that stance, and again I mentioned
that technical trading opportunity that we saw and then moved
to the sidelines. About one and a half weeks ago
(12:07):
when we saw the government weakening the currency with the
less positive fixing, which I actually interpreted as a sign
of confidence from a Chinese perspective. But the market, it was,
the market not at all exactly sold off right away.
Speaker 3 (12:22):
I remember that comment so clearly. It was a couple
of weeks ago, and you were in Singapore, and the
reason we have you back now is you're here in
Hong Kong and it's great to get you into our studios.
I remember you're not that positive on China, but that
you were pretty positive on Japan and India. Let's start
off with Japan significant weakness in the end this morning
and threats from policymakers. Are you still really confident in
(12:45):
the upside possibilities in Japan?
Speaker 2 (12:48):
So the Japan investment opportunity, whether that is the structural
angle to it, because of the government, you know, of
the reforms around the Tokyo Stock Exchange that will improve governance,
as well as the cycle girl elements that drive the
market higher, which is the weekend that you just mentioned.
These are still remaining intact. Of course, we have to
be absolutely ary about the Ministry of Finance ability to
(13:12):
change the course of the currency. But I also remain
of the opinion that it's a double edged sword for
the Japanese authorities to really intervene. And I think this
is also why we are seeing this being on a
verbal tune, and that is also why the market is
not really taking its clue and going meaningful of the
(13:32):
other way. So I think what they are doing is
they will be verbally intervening to slow down the depreciation,
but it will be very difficult to change the course
because it's benefiting in export let economy, it's benefiting the
investment opportunity in an overall slowing growth environment. So I
think it's prudent to have this run for a little
(13:53):
bit more.
Speaker 1 (13:54):
So I think we can agree, yeah, that a weekend
would be positive for the exporting companies. But Prime Minister
case as in the US today, and one of the
things that was unveiled at the White House in a
joint press conference with President Biden was this investment this
program for to drive innovation in terms of artificial intelligence.
And when I think of AI as it relates to Japan,
(14:15):
that's really not an export story, is it is that
an opportunity for you to want to put money to
work in AI related companies in Japan.
Speaker 2 (14:24):
Well, we're looking at this in the context also of
the alliances that Japan has been forging around the semiconductor space,
you know, and you know, just enlarged this into more
the it and now you're talking about AI conversation. I
think that's as an important, you know, alliance that's been
fostered and definitely is an investment pocket in a sector
(14:44):
that needs to be looked at. It is it is
not benefiting of the weekend necessarily, but you know another
sector is, for instance, it's tourism. You know, everyone still
in Hong Kong, everywhere I go in Asia has a
top destination in Japan because of the weekend as well.
So there are many different elements to why the yen
weakness can run.
Speaker 3 (15:03):
Yeah, and I know that you're still positive on megacap
tech in the United States, so we don't have time
to get into that now. But even with these sort
of sticky levels of inflation that we're seeing. Stephanie, thanks
so much for joining us in our studios. We talk
again soon. Stephanie Holtz, jen apac cio at Deutsche Bank. Well,
(15:29):
joining us now for some discussion of the same as Lindsay,
Pigg's chief economist at Stifel. So, Lindsay, it does seem
sort of a slam dunk. I would imagine that June
is off the table. However, there will be a considerable
amount of data that we get between now and then.
How are you looking at rates here over the next
month or two, Well, I.
Speaker 5 (15:50):
Think given the baseline for the economy, growth accelerating beyond expectations,
a still very spendy consumer, a labor market slightly less
tight than it was, but still very tight, this is
further justification for the FED to remain on the sidelines
at the current policy level. And so our base case remains,
as it has since the turn of the calendar year,
(16:11):
that the Fed will wait until the second half of
the year before initiating rate cuts. Now, with inflation reversing
course as of late, I do think it's going to
be difficult for the FED to justify anything beyond one
or two rate reductions, And even so, after initiating that pathway,
if we failed to see meaningful improvement, we could see
(16:34):
a second round pause after that. So the FED moving
back to the sidelines after just twenty five or fifty
basis points of cuts.
Speaker 1 (16:41):
You have to remember too, last Friday's employment did it
was very very strong. We were one hundred thousand above
forecast in terms of non farm payroll growth. I think
initially we went into the data with a number of
around two hundred k. We came out three hundred k.
Is there a risk in your view that we could
see enough or hike.
Speaker 6 (17:02):
There is, but that scenario has to be very specific.
Speaker 5 (17:05):
I would need to see inflation reverse core in a
meaningful way and in a persistent manner. So we would
need to see a continued upward trajectory really forcing the
Fed into a corner in order to re engage in
order to continue with hikes. Right now, with the inflation
level just taking slightly higher, I don't think that's enough
(17:27):
to scare the Fed into further rate hikes, but again,
it does justify further position on the sideline.
Speaker 3 (17:34):
You know, slightly higher inflation is not good news to
low income people, and it's not good news for the
housing market or for small companies that have floating rate loans,
but it may not have a huge effect on company earnings.
And if we don't see that, then we'll probably see
you know, labor staying relatively strong with companies, and so ultimately,
(17:58):
I mean, is this a good news story or bad
news story for the economy.
Speaker 6 (18:04):
Well, it really depends.
Speaker 5 (18:05):
But my biggest concern is right now that the US
economy appears to be resilient. That being said, momentum is
clearly waning. Consumers are still spending, businesses are still investing,
but they're doing so at a noticeably reduced pace. So
activity has already gone from five percent in the third
quarter to three percent at year end, likely a two
(18:26):
is ish percent pace in twenty twenty four. But where
do we go from here if growth continues to slow
to a non accelerating pace or at least fall below
the bare minimum that we should expect for a developed economy.
But the Fed is still sitting on the sidelines, twiddling
their thumbs, allowing inflation to remain above target. Well, now
they've backed this, you know areas I don't think you
(18:48):
can say.
Speaker 3 (18:49):
You can't really say twiddling their thumbs, because you know,
we have to say they were very aggressive in getting
the FED funds rate up to five and a half percent.
That's well above where inflation is now, and it's well
above the noise. So it's not like they're sitting on
their hands, really, it's just that they're holding at very
high levels.
Speaker 5 (19:06):
Well, I would argue that they had a hyper focus
on achieving a soft landing, and with that focus, I
think they fail to raise rates to a sufficiently restrictive level. Well,
look at cycles. Historically, the FED typically has to raise
rates above the peak level of inflation. This time they
arguably stop short at five percent, and so I am
(19:26):
concerned that the FED has not done enough to tame inflation.
Speaker 1 (19:31):
One of the things that we've been talking about is
possible risk in the financial system is the result of
rates remaining elevated for the foreseeable future. One of the
reasons maybe that some of the regional banks were a
hard hit today given the spike and yield. Are you
confident that we have really seen the worst of the stress.
Maybe that's related to some areas of the commercial real
(19:53):
estate market.
Speaker 5 (19:54):
No, I'm certainly not, and I would say that's one
of the biggest risks for the economy over the next
twelve to twenty five or months, with trillions and commercial
loans coming due that are going to reset at significantly
higher rates, and so that's going to require a significant
amount of capital to write size those loans. Now, that's
not to say that can't happen or that commercial real
estate is essentially the next shoe to drop, But there
(20:17):
is a contagion effect when we talk about this paper,
the majority of which is being held on the balance
sheet of financial institutions that have less than two hundred
and fifty billion in assets, so that there is still
concern about further weakness in the banking sector, although the
latest commentary from the FED does suggest that we're still
at very stable conditions as of late.
Speaker 3 (20:39):
You know, one of the things that Jamie Diamond mentioned
in is islong letter to shareholders was that we may
see a structurally higher level of inflation for a considerable
period because of some new factors. One might be the
geopolitical concerns the wars that are underway, but also the
reindustrialization of the American economy and some other factors as well.
(21:04):
You know, are you thinking that longer term? You know,
we're going to be facing this problem, you know, for
a while.
Speaker 6 (21:11):
I do think it's going to be a long standing problem.
Speaker 5 (21:14):
That's not to say that the FED is going to
give up on achieving that two percent goal. Share Poal
was very clear at last month's press conference that two
percent is the Fed's target. It's always been the target,
and it does remain the target. That being said, longer term,
the Fed may be willing to reevaluate that two percent target,
and if it does prove to be a very onerous achievement,
(21:38):
they may be willing to adjust that upwards. But right
now they cannot adjust that mid cycle without potentially losing
control over inflation expectations, which of course feed back into
the direct inflation calculation.
Speaker 1 (21:51):
So we talk a lot about the fiscal story as
well on this program, and with yields being elevated to
the extent they are today, how much will that hinder
the government's effort when we're talking about debt service that's
going to be increased, I mean, and that's really maybe
going to tie the hands of the government and trying
to do more in certain areas of the economy.
Speaker 5 (22:14):
Well, as we know, debt but gets more debt, and
with thirty four trillion at current levels, we would expect
the treasury to have to massively increase issuance up and
down the curve at presumably higher rates to entice investors
into the market to buy said debt.
Speaker 6 (22:30):
But I'm not necessarily.
Speaker 5 (22:32):
Convinced that that's a negative in terms of controlling further
expansion of the government's balance sheet, because if we do
see further expenditures politics aside, social benefit, aside from the
Fed's perspective, that could further potential inflationary implications.
Speaker 3 (22:50):
Well, given that fiscal largess that was deemed as pretty
necessary because of the pandemic and other factors like the
Ukraine War, also the reindustrialization of the American economy to
create more jobs for people at home, could you see
accepting slightly higher levels of inflation for a period of time,
(23:12):
not forever, but for a few years.
Speaker 6 (23:15):
Well, we've already been in a few years of above
target inflation, so I think at this point the American
public is going to have a difficult time digesting further inflation.
Speaker 3 (23:26):
Yeah, could be enough is enough anyway, Lindsay, thank you
very much for being with us. Lindsay pigs of their
chief economist, dis Stiefel with us live here on the program,
taking questions one after the other.
Speaker 1 (23:38):
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
(23:58):
Bloomberg Business App.
Speaker 5 (24:01):
Two
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 (00:26):
Well.
Speaker 3 (00:26):
Joining us now in our studios in Hong Kong for
a discussion about inflation and deflation is Way Yao, head
of Research and Chief Economists for the Asia Pacific Associate
General cib Well. Y'all, thanks very much for being with us.
Let's talk a little bit about the data we'll get
this morning. In about twenty minutes or so seventeen to
(00:46):
twenty minutes, we'll get the PPI numbers and the CPI
numbers for the month of March. Still expecting a negative
number on PPI minus two point eight percent is the
survey estimate CPI, though I should show an increase of
zero point four percent, and that would be the second
consecutive month of being in positive territory. Can we take
(01:07):
that as a wee bit of good news?
Speaker 4 (01:09):
Well, maybe it's just a wee bit of good news,
But I think structurally things haven't really changed much. If
you look at the economic situation in China, it continued
to be a challenge of not enough do miss the
demand and a lot of supply so and a policy
on the policy front, there is not much significant to
(01:30):
address this issue.
Speaker 1 (01:32):
So when you're dealing with deflation, particularly at the factory
gate level the wholesale level, what's the remedy here? I mean,
is there a way to kind of give maybe a
little bit of guidance to policymakers in China on a
way that they could arrest this situation.
Speaker 4 (01:50):
Well, there's a lot of focus about China's over capacity issue.
I agree, you know, China does have so much supply. However,
I would think the problem liesing more of a lack
of domestic demand in the sense that you know, China,
because of the housing crash, is losing a big engine
(02:12):
of domestic demound and the policy is very much tutored
towards supply. So I think it's a matter of balancing
the policy more towards demand rather than supply.
Speaker 3 (02:24):
So we're trying to get Chinese consumers spending again and
a moment ago you said you kind of referred to
Chinese policy making as substandard.
Speaker 2 (02:33):
Almost.
Speaker 4 (02:35):
Well, it's unbalanced, I would say, because it's pretty clear
what they want to achieve for good reason, because you know,
I think the the idea here of the top leadership
is to boost the productivity growth by you know, moving
China up the value chain. However, you know, it's it
may not be entirely the remedy here, given that we
(02:58):
are in a deflation or environ and if China continue
on supporting supply, it's going to cause trade engions, which
we're already seen.
Speaker 1 (03:05):
Yeah, that's a little confounding. I mean, you talked about
the overcapacity issue, and then when you listen to what
the government is saying that industrial policy will be the
way of reviving economic activity, it doesn't really make sense,
does it.
Speaker 4 (03:19):
Well, it's just that they have a long term view
that where this is where China should be, and it
seems that there's not much willingness to adjust to the
reality that you know, they have this deflation problem at hand,
or maybe they don't worry about this as much as
we do. I think, you know what, it's just going
to take more convincing to make them at least change calls.
(03:40):
Right now, the export momentum seem to be picking up,
so it doesn't seem to be the time yet.
Speaker 3 (03:46):
Yeah, if you look long term, okay, you're thinking industrialization,
building up tech, the chest is stuck out. But then
short term you're thinking, hey, we got to get this
economy moving again. How do you stimulate consumers to get
the spending.
Speaker 4 (04:01):
Well, the one thing they talked about which got us
a little bit excited is subsidizing you know, the replacement
or upgrade of home appliances. However, we haven't heard much
follow up at least. You know, what we really need
to see is government actually providing tangible amount of fiscal
support to households, either on the consumption side or income side.
(04:23):
Another pass to the long term sustainable growth of consumptions,
obviously to beef of the social security system, but that
again is a slow moving process.
Speaker 1 (04:32):
When you look at the tension between the US and
China right now, particularly in areas of high technology, I
mean the barriers that have been established export controls limiting
China's access to some of the most sophisticated high tech technology.
Are you sensing that this is having a meaningful impact
on the economy or is it something we only talk
about kind of marginally.
Speaker 4 (04:55):
It is not too obvious yet, but I suppose you know,
this does indeed the limits put some limits on China's
development in terms of you know, AI all right, you know?
And I think one consequence, one clear consequence from all
these US policy is actually making China, making the Chinese
(05:17):
policy makers even want to double down on the supply
strategy more so, you see, this is the response to
Chinese leadership is coming up towards the US. Maybe we
could think of if the US were to relax, be
more relaxed about China, and China would be more willing
to rebalance. Who knows.
Speaker 3 (05:36):
We're seeing more efforts to try to stimulate the housing market.
We have a leading newspaper this morning, the Economic Observer
in China, saying that many Chinese cities now are cutting
or they're doing some targeted easing. Here fifteen cities have
removed the lower limit for mortgage rates on first first
time home purchases, and some four cities have relaxed housing
(05:59):
provident fund. Can they do more?
Speaker 4 (06:02):
Well, they can do more, certainly, But I guess I
guess you know, one short term problem for them is
they really need to address the issue that developers do
not have the trust of households to finish project uh
and and if this problem can be addressed, that I
believe some of the demands could come back. Because you
(06:22):
look at the sales of finished apartments, they're pretty decent.
It's the other part, which the unfinished part, you know,
it's really really distressed. But ultimately you you know it's
it's it's a market force, right. The price is probably
may need to forb more for the households to be
more willing to come back, because if you look at
(06:44):
the affordability of the housing prices in the big cities
in China, it's very hard to say they're cheap enough.
Speaker 1 (06:50):
Next week we get the monthly activity data. Is there
something that you're looking for that could represent a big surprise,
something maybe that the market is not prepared for, or
do you think market participants have a pretty good understanding
of what's happening on the mainland insofar as the economy
is concerned.
Speaker 4 (07:07):
So data wise, I think the expectation or kind of
the consensus here is, you know, cyclically, things are not
getting worse. At least there is a bit of improvement
on the supply side, industrial side, slow progress on the
consumption if anything. The positive surprise, if any, will be
you know, the consumption data, the retail sales. But the
(07:28):
downside risks is if the supplies I also lose momentum.
But it doesn't seem to be the case yet.
Speaker 3 (07:34):
So if we look at the Chinese economy way out
and think about external inputs versus internal you know, domestic consumption,
which will perform the best over the next six months
and which really holds the key to getting the economy
really roaring again.
Speaker 4 (07:51):
So our expectation is that the extern turnal demount will improve.
As we can see cross Asia, you know, the trade
momentum is really picking up, so that were help China too.
Domestic our assumption is you know, consumption income. It continues
its very gradual pace of recovery. Housing may only find
a button by the end of this year if the
(08:14):
policy keeps at it.
Speaker 1 (08:15):
What about the labor market, particularly where the younger people.
Speaker 4 (08:19):
Are concerned, Well, so that's going to be a derivative
of all these forces. Essentially, you know, we don't have
big positive force to improve the labor market very fast
because jobs are not generated by the manufacturing sector, you know,
in terms of the majority of the jobs, it has
to be the service sector doing better. But the service
(08:41):
sector is you know, has challenges. Yeah, and things don't
change fast.
Speaker 3 (08:47):
We just had the PBOC keep the fix steady to
support that you want after this big jump in the
dollar just twenty seconds or so, do you like the
way the PBOC is managing the currency?
Speaker 4 (08:58):
The PBOC is uh, you know, I would say it
seems that the thinking here is they don't want too
weak currency. They sort of throw a little bit test
to the market once in a while to see, you know,
if they weaken to fix what happens. And it seems
that what happened was not what they liked. So it
doesn't seem there would be willingness to devalue the currency
(09:20):
to generate inflation.
Speaker 3 (09:21):
All right, way, y'all's with us, head of Research and
Chief Economists for the Asia Pacific Associated General. Joining us
now in our studios in Hong Kong is Stephanie holtz Gen,
the Asia Pacific CIO at Deutsche Bank for further discussion
about markets. So I think the contrast is very interesting
(09:45):
very compelling something to talk about. A very hot inflation
reading Stephanie in the United States, a very cool inflation
reading in China, yet both countries are very much right
smack dab in the middle of global supply. How do
we make sense of that?
Speaker 2 (10:04):
Well, it's been a dynamic that is around with us
for a while, and I think the explanation goes way
back to the way the reopening after COVID has been handled.
So I'm not sure I'm adding much news here, but
I think the unfortunate part is that the macroeconomic data
in China keeps on being uneven. So we had a
(10:25):
set of fairly optimistic data when we saw the pm
I swing back into expansionary territory just slightly so, and
then you know, other readings are still coming in below expectations.
So it's something that needs to be taken into account.
As one says as the investment opportunity, we look at
it as a second half of the year opportunity. In China.
(10:47):
We had a tactical trade on and I think we
need to be careful and stay on the sidelines for
the time being because we don't have the whole mix
of macroeconomics, sentiment and the following flow all showing in
the right direction.
Speaker 1 (11:02):
So many of the guests that we have on this
program when they talk about the problem at its core
is just the absence of positive sentiment, and when you
don't have consumer engagement in an economy and you don't
have domestic demand, I mean there are ramifications for that, right.
Is there a policy prescription that you can think of
that might improve the behavior of the consumer in China.
Speaker 2 (11:26):
I think there's been a lot of policy efforts to
support the consumer sentiment. So we have seen a lot
of physical stimulus quite targeted as well in terms of
stimulating the consumer to not just save, not just to
repay loans, but go and invest and purchase in the economy.
But it's still underwhelming, as we've seen recently in the
(11:47):
retail sales data as well. But in terms of the
market opportunity, of course it's twofold. There's an international investor
sentiment that I think is still needs more to be convinced,
and I I took that stance, and again I mentioned
that technical trading opportunity that we saw and then moved
to the sidelines. About one and a half weeks ago
(12:07):
when we saw the government weakening the currency with the
less positive fixing, which I actually interpreted as a sign
of confidence from a Chinese perspective. But the market, it was,
the market not at all exactly sold off right away.
Speaker 3 (12:22):
I remember that comment so clearly. It was a couple
of weeks ago, and you were in Singapore, and the
reason we have you back now is you're here in
Hong Kong and it's great to get you into our studios.
I remember you're not that positive on China, but that
you were pretty positive on Japan and India. Let's start
off with Japan significant weakness in the end this morning
and threats from policymakers. Are you still really confident in
(12:45):
the upside possibilities in Japan?
Speaker 2 (12:48):
So the Japan investment opportunity, whether that is the structural
angle to it, because of the government, you know, of
the reforms around the Tokyo Stock Exchange that will improve governance,
as well as the cycle girl elements that drive the
market higher, which is the weekend that you just mentioned.
These are still remaining intact. Of course, we have to
be absolutely ary about the Ministry of Finance ability to
(13:12):
change the course of the currency. But I also remain
of the opinion that it's a double edged sword for
the Japanese authorities to really intervene. And I think this
is also why we are seeing this being on a
verbal tune, and that is also why the market is
not really taking its clue and going meaningful of the
(13:32):
other way. So I think what they are doing is
they will be verbally intervening to slow down the depreciation,
but it will be very difficult to change the course
because it's benefiting in export let economy, it's benefiting the
investment opportunity in an overall slowing growth environment. So I
think it's prudent to have this run for a little
(13:53):
bit more.
Speaker 1 (13:54):
So I think we can agree, yeah, that a weekend
would be positive for the exporting companies. But Prime Minister
case as in the US today, and one of the
things that was unveiled at the White House in a
joint press conference with President Biden was this investment this
program for to drive innovation in terms of artificial intelligence.
And when I think of AI as it relates to Japan,
(14:15):
that's really not an export story, is it is that
an opportunity for you to want to put money to
work in AI related companies in Japan.
Speaker 2 (14:24):
Well, we're looking at this in the context also of
the alliances that Japan has been forging around the semiconductor space,
you know, and you know, just enlarged this into more
the it and now you're talking about AI conversation. I
think that's as an important, you know, alliance that's been
fostered and definitely is an investment pocket in a sector
(14:44):
that needs to be looked at. It is it is
not benefiting of the weekend necessarily, but you know another
sector is, for instance, it's tourism. You know, everyone still
in Hong Kong, everywhere I go in Asia has a
top destination in Japan because of the weekend as well.
So there are many different elements to why the yen
weakness can run.
Speaker 3 (15:03):
Yeah, and I know that you're still positive on megacap
tech in the United States, so we don't have time
to get into that now. But even with these sort
of sticky levels of inflation that we're seeing. Stephanie, thanks
so much for joining us in our studios. We talk
again soon. Stephanie Holtz, jen apac cio at Deutsche Bank. Well,
(15:29):
joining us now for some discussion of the same as Lindsay,
Pigg's chief economist at Stifel. So, Lindsay, it does seem
sort of a slam dunk. I would imagine that June
is off the table. However, there will be a considerable
amount of data that we get between now and then.
How are you looking at rates here over the next
month or two, Well, I.
Speaker 5 (15:50):
Think given the baseline for the economy, growth accelerating beyond expectations,
a still very spendy consumer, a labor market slightly less
tight than it was, but still very tight, this is
further justification for the FED to remain on the sidelines
at the current policy level. And so our base case remains,
as it has since the turn of the calendar year,
(16:11):
that the Fed will wait until the second half of
the year before initiating rate cuts. Now, with inflation reversing
course as of late, I do think it's going to
be difficult for the FED to justify anything beyond one
or two rate reductions, And even so, after initiating that pathway,
if we failed to see meaningful improvement, we could see
(16:34):
a second round pause after that. So the FED moving
back to the sidelines after just twenty five or fifty
basis points of cuts.
Speaker 1 (16:41):
You have to remember too, last Friday's employment did it
was very very strong. We were one hundred thousand above
forecast in terms of non farm payroll growth. I think
initially we went into the data with a number of
around two hundred k. We came out three hundred k.
Is there a risk in your view that we could
see enough or hike.
Speaker 6 (17:02):
There is, but that scenario has to be very specific.
Speaker 5 (17:05):
I would need to see inflation reverse core in a
meaningful way and in a persistent manner. So we would
need to see a continued upward trajectory really forcing the
Fed into a corner in order to re engage in
order to continue with hikes. Right now, with the inflation
level just taking slightly higher, I don't think that's enough
(17:27):
to scare the Fed into further rate hikes, but again,
it does justify further position on the sideline.
Speaker 3 (17:34):
You know, slightly higher inflation is not good news to
low income people, and it's not good news for the
housing market or for small companies that have floating rate loans,
but it may not have a huge effect on company earnings.
And if we don't see that, then we'll probably see
you know, labor staying relatively strong with companies, and so ultimately,
(17:58):
I mean, is this a good news story or bad
news story for the economy.
Speaker 6 (18:04):
Well, it really depends.
Speaker 5 (18:05):
But my biggest concern is right now that the US
economy appears to be resilient. That being said, momentum is
clearly waning. Consumers are still spending, businesses are still investing,
but they're doing so at a noticeably reduced pace. So
activity has already gone from five percent in the third
quarter to three percent at year end, likely a two
(18:26):
is ish percent pace in twenty twenty four. But where
do we go from here if growth continues to slow
to a non accelerating pace or at least fall below
the bare minimum that we should expect for a developed economy.
But the Fed is still sitting on the sidelines, twiddling
their thumbs, allowing inflation to remain above target. Well, now
they've backed this, you know areas I don't think you
(18:48):
can say.
Speaker 3 (18:49):
You can't really say twiddling their thumbs, because you know,
we have to say they were very aggressive in getting
the FED funds rate up to five and a half percent.
That's well above where inflation is now, and it's well
above the noise. So it's not like they're sitting on
their hands, really, it's just that they're holding at very
high levels.
Speaker 5 (19:06):
Well, I would argue that they had a hyper focus
on achieving a soft landing, and with that focus, I
think they fail to raise rates to a sufficiently restrictive level. Well,
look at cycles. Historically, the FED typically has to raise
rates above the peak level of inflation. This time they
arguably stop short at five percent, and so I am
(19:26):
concerned that the FED has not done enough to tame inflation.
Speaker 1 (19:31):
One of the things that we've been talking about is
possible risk in the financial system is the result of
rates remaining elevated for the foreseeable future. One of the
reasons maybe that some of the regional banks were a
hard hit today given the spike and yield. Are you
confident that we have really seen the worst of the stress.
Maybe that's related to some areas of the commercial real
(19:53):
estate market.
Speaker 5 (19:54):
No, I'm certainly not, and I would say that's one
of the biggest risks for the economy over the next
twelve to twenty five or months, with trillions and commercial
loans coming due that are going to reset at significantly
higher rates, and so that's going to require a significant
amount of capital to write size those loans. Now, that's
not to say that can't happen or that commercial real
estate is essentially the next shoe to drop, But there
(20:17):
is a contagion effect when we talk about this paper,
the majority of which is being held on the balance
sheet of financial institutions that have less than two hundred
and fifty billion in assets, so that there is still
concern about further weakness in the banking sector, although the
latest commentary from the FED does suggest that we're still
at very stable conditions as of late.
Speaker 3 (20:39):
You know, one of the things that Jamie Diamond mentioned
in is islong letter to shareholders was that we may
see a structurally higher level of inflation for a considerable
period because of some new factors. One might be the
geopolitical concerns the wars that are underway, but also the
reindustrialization of the American economy and some other factors as well.
(21:04):
You know, are you thinking that longer term? You know,
we're going to be facing this problem, you know, for
a while.
Speaker 6 (21:11):
I do think it's going to be a long standing problem.
Speaker 5 (21:14):
That's not to say that the FED is going to
give up on achieving that two percent goal. Share Poal
was very clear at last month's press conference that two
percent is the Fed's target. It's always been the target,
and it does remain the target. That being said, longer term,
the Fed may be willing to reevaluate that two percent target,
and if it does prove to be a very onerous achievement,
(21:38):
they may be willing to adjust that upwards. But right
now they cannot adjust that mid cycle without potentially losing
control over inflation expectations, which of course feed back into
the direct inflation calculation.
Speaker 1 (21:51):
So we talk a lot about the fiscal story as
well on this program, and with yields being elevated to
the extent they are today, how much will that hinder
the government's effort when we're talking about debt service that's
going to be increased, I mean, and that's really maybe
going to tie the hands of the government and trying
to do more in certain areas of the economy.
Speaker 5 (22:14):
Well, as we know, debt but gets more debt, and
with thirty four trillion at current levels, we would expect
the treasury to have to massively increase issuance up and
down the curve at presumably higher rates to entice investors
into the market to buy said debt.
Speaker 6 (22:30):
But I'm not necessarily.
Speaker 5 (22:32):
Convinced that that's a negative in terms of controlling further
expansion of the government's balance sheet, because if we do
see further expenditures politics aside, social benefit, aside from the
Fed's perspective, that could further potential inflationary implications.
Speaker 3 (22:50):
Well, given that fiscal largess that was deemed as pretty
necessary because of the pandemic and other factors like the
Ukraine War, also the reindustrialization of the American economy to
create more jobs for people at home, could you see
accepting slightly higher levels of inflation for a period of time,
(23:12):
not forever, but for a few years.
Speaker 6 (23:15):
Well, we've already been in a few years of above
target inflation, so I think at this point the American
public is going to have a difficult time digesting further inflation.
Speaker 3 (23:26):
Yeah, could be enough is enough anyway, Lindsay, thank you
very much for being with us. Lindsay pigs of their
chief economist, dis Stiefel with us live here on the program,
taking questions one after the other.
Speaker 1 (23:38):
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
(23:58):
Bloomberg Business App.
Speaker 5 (24:01):
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