June 18, 2025 • 22 mins
Senior US officials are preparing for the possibility of a strike on Iran in the coming days, according to people familiar with the matter, a sign that Washington is assembling the infrastructure to directly enter a conflict with Tehran.
Meantime, there are a lot of unknowns about the outlook for the economy and interest rates, but Federal Reserve Chair Jerome Powell signaled at least one thing seems certain: Higher prices are coming. Policymakers voted unanimously to hold interest rates steady for a fourth straight meeting Wednesday as they await clarity on whether tariffs will leave a one-time or more lasting mark on inflation. Powell said it’s still unclear how much of the bill will fall on the shoulders of consumers, but he expects to learn more about tariffs this summer. For more, we speak to Mark Cranfield, Bloomberg MLIV Strategist in Singapore.
Plus - for more on the Federal Reserve's latest decision, we heard from Betsey Stevenson. She is a Professor at the University of Michigan. Stevenson was also a former Chief Economist of the United States Department of Labor.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:10):
Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner,
and we begin today with the geopolitics of the Mideast.
We are being told that senior US officials are preparing
for the possibility of a strike on Iran in the
coming days. Now, this situation, important to say, is still
evolving and it could change. Some of our sources pointed
(00:31):
to the potential plans for a strike on the weekend.
Joining me now is Mark Cranfield. He is Bloomberg Markets
Live strategist and he joins from Singapore. Mark, thank you
so much for making time to chat with me. I
think we can agree these are indeed delicate times. There's
the geopolitical situation between Israel and the Iran and the
(00:53):
uncertainty of potential US involvement. The story on tariffs meantime
is very much still alive. And then we've got the
macro picture, which may be a little cloudy right now.
But can we play off the FED decision in the
last session here in the States, And I'm curious to
get your take on how you see it impacting market
psychology right now in the Asia Pacific.
Speaker 3 (01:15):
The FED would be pretty happy with the result of
what happened yesterday. They had an extremely difficult balancing act
to do, as you say, in the context of all
those things happening in the world, how do you create
policy and guidance for people in the United States and
to some extent globally, because everybody watches what the FED
has to say, And they managed to do it without
disrupting markets at all. By the end of the day,
(01:36):
equity markets, bond markets, currencies are pretty much where they
started the day. So from that point of view, patter
on the back for the FED. But it's certainly their
task is extra difficult because they clearly hinted at the
fact that the United States is going to have a
statulation every problem. They've lowered economic forecasts in their summary
of economic projections, and at the same time they've upsized
(01:59):
the project for inflation, particularly through the PCE window. So
they're telling you that the in stackulation which is beginning
to appear, is probably going to get worse in the
United States. And yet they're working essentially one arm tied
behind their back, because all investors can see that the
difficulty for the FED is that should inflation pick up
(02:21):
and become sticky in the sense that it stays for
a bit longer. Is the FED going to really raise
interest rates? Well, in the current environment and with your
own power as a chairman, I think most investors would
come to conclusion the FED is not going to typen policy.
It's very much skewed the other way. Should the employment
situation deteriorate and the America risk going somewhere towards the recession,
(02:44):
of course they would act quickly and lower interest rates.
The last thing they did was to lower interest rates,
so they obviously have a slight bias towards doing that.
But the real problem for them is what happens if
inflation starts to get higher.
Speaker 2 (02:57):
When you evaluate some of the risk that the markets
are dealing with right now, and you look at the
potential for haven buying, particularly in US treasuries or for
that matter, in the US dollar, talk to me a
little bit about the flow of funds that you have
been seeing and how the dollar may be impacted right now.
Speaker 3 (03:16):
We can take the dollar first, and I don't think
there's much doubt that the US is losing its haven appeal.
You can see that against major currencies it's had a
pretty rough year this year, it's underperformed pretty badly. And
then it's not just a one sided thing, because obviously
there needs to be an appeal on the others. If
you've got in currency trading, it's always one against something else.
(03:39):
So it's all fine to say that the US dollar
doesn't look as attractive as it did, but you need alternatives,
and the alternatives are starting to look a bit better.
So you take the Euro, which is the second biggest
currency on the planet. Europe's getting exacted together, partly because
it has to. It's under pressure to improve its defenses
because of the situation in Russia and Ukraine and United
(04:00):
States moving away from NATO, so they'reppy to spend more
on the defense. That's creating a bigger poll of funds
for the Euro. Investors can see that they're getting more
comfortable that there's deep liquidity in the European market, so
more money is starting to flow towards Europe. Then you've
got China, which as just yesterday we had the Central
Bank governor giving extended details about what they're doing to
(04:23):
improve the dynamics in China for foreign investors, and that
all revolves around stability and strength in the currency. They've
made it very clear that China is right behind the Yuwan.
They're not going to let it deteriorate. They're going to
keep it stronger and stable. And that supports all other
security aspects. It supports equities, it supports bonds, it supports
(04:43):
all kinds of investment flows to China, and they're encouraging
foreigners to send their money there. So you're beginning to
have serious contenders to the US dot. It doesn't mean
to say that the US dollar loses its status overnight,
but you can see why money can now more happily
move to other parts of the world because there are
currencies which are standing up and being counted and saying, hey,
(05:05):
we're a real alternative to the US dollar if you're
uncertain about the outlook there. Treasuries is a much more
complex picture, of course, because the Federal Reserve can twist
the needle, they can lower interest rates quickly when they
need to. But at the same time you do have
these spreads between treasury yields and other countries, and that's
where things will begin to show. If people start to
(05:26):
lose faith in treasuries, you'll see where spreads will widen
against Germany, against Japan, against other parts of the world.
That's more like it's in the absolute direction of what
treasuries may be doing, but certainly their share of the
market holdings of fixed income investments could well go down
in relation to other countries.
Speaker 2 (05:45):
It's very interesting because we heard today from the US
Treasury with respect to foreign holdings of US bonds and notes,
and we learned that foreign holdings were actually up in
the month of April to the second highest level on record.
I found that a little surprising. So foreigners right now
are holding a little bit more than nine trillion dollars
(06:06):
in US government securities. Japan still the largest, Britain interestingly
has increased its holdings. China's holdings were down a little bit.
But when you look at the risk talking earlier about
Haven's status, how much concern is there over the US
fiscal situation right now, particularly the budget deficit, And I'm
wondering whether that outlook for budget deficits going forward has
(06:29):
become an important driver of the buying that we have
seen on the part of foreigners in US treasuries.
Speaker 3 (06:36):
Absolutely, investors clearly are a bit concerned that should the
tax and spending be all go through in United States
as it's currently planned, it's going to worsen what's already
quite a bad fiscal deficit situation in United States. It's
not going to get any easier. And then if you
look at the way the data you're just talking about
the holdings of UK number of people from the UK
(06:58):
entities which are holding treasures. When that is going up,
that is a warning signal because that tends to be
hedge funds. That is not UK government or anybody UK
sovereign well fund they don't even have one, but so
it's not that kind of money. It's not secure money
which is going to this is much more flaky short
term money. So when the UK shows up as a
(07:19):
bigger holder of treasure is that's not a good sign.
That just means that short term holders who can quickly
come in and out, and they're often doing it as
spreads anywhere against other things, so they're not really secure
holders of treasures. These are the people who can change
on a dime. They'll be in and out in a
matter of minutes. So that's actually a warning signal that
the holders are less stable of US treasurers than they
(07:40):
were earlier in the year. So all of these things,
and of course we're on watch for the potential that
we've had one sovereign downgrade already this year of the
United States. These things tend to come in waves, and
once the ball starts rolling in that direction, you could
see more. Next stage will probably be to put the
sovereign rating on an other outlook for potential vision lower.
(08:03):
Investors are watching that very close. It could come before
the end of the year. So all of these things
are stacking up against the US Treasury. It's not looking
as secure as it was.
Speaker 2 (08:11):
I don't think it's a surprise at all that China
reduced its holdings of US government securities. Talk to me
a little bit about what's happening right now, insofar as
you understand the progress that may be happening, or may
not be happening, for that matter, when it comes to
the trade issue between Washington and Beijing.
Speaker 3 (08:30):
It looks from outsider in Asia, we probably see it
a bit more slanted from the from the Chinese side,
and it looks like they're playing the long game. It
looks like the Chinese authorities are fairly happy with the
way that they're stimulating their own economy. They're starting to
rebuild things extremely well there. It's on a much better footing.
Their markets are stable, currencies strong, They have some strong cards,
(08:54):
as President Trump would say, particularly when it comes to
some of the minerals they hold. So they look as
though they're ready to take their time to get a
trade deal. Dot really works from their point of view.
They don't look as though they're going to panic and
sign anything quickly at all. They want to do thorough
negotiating and if it takes time, it causes a bit
of pain. They're willing to play the long game in
(09:15):
that respect. That might be in contrast to how the
US authorities see it. So don't expect China to suddenly say, oh, yeah,
we're happy we've got a deal straight away until they're
really sure that it's something that is fair and favors
them as much as it favors the United States.
Speaker 2 (09:31):
I mentioned a moment ago the conflict between Israel and Iran.
How is this being digested right now in the Asia Pacific.
Speaker 3 (09:40):
It's all eyes on the oil on prices, as you
can expect, everybody's watching that minute by minute to see
what it means for changes in oil so far, we
haven't got close to the one hundred dollars threshold. That's
probably where people really start to get excited about the
oil market. If it goes about one hundred, that starts
to impact other asset classes lot more. And now we've
(10:01):
reached about eighty dollars roughly on on Brent, which is
not this high by recent standards, but it's not really
out of the realms of what we've been seeing in
the movements over the past year or so, so not extraordinary.
It certainly was a quick movi in oil, but not
yet one that really destabilizes financial markets on a brigger basis.
(10:22):
So that's probably why you're seeing contained moves in currencies
and bonds and equities as well. Get above one hundred dollars,
things start to change quite rapidly.
Speaker 2 (10:30):
You were talking a moment ago about the potential for
hedge funds to become involved in trading of US bonds,
particularly in the UK. Talk to me a little bit
about what hedge funds do when they're trading oil and
how that may be manifesting it right now, particularly given
the environment that we're in right now.
Speaker 3 (10:48):
We can already see in the options market in some
very substantial changes in the demand in the options market.
In fact, by some measures, what's going on in the
current state of the option is actually more extreme than
when Russia invaded Ukraine a few years ago. So that
just shows you how suddenly people are positioning very quickly
(11:08):
into that space. They will be trading spreads between contracts,
so Oil's futures trading is very deep liquid market. People
would trade the curve, whether it's steepens or flattens. They'll
also be trading on the outright volatility in the market,
which they do through the options market. So that turnover
in that market has exploded in the past couple of weeks,
(11:28):
and that's all geared towards the expectation that oil could
spike higher again from here. So at the same time,
the flip side of that, of course, is if things
come down quickly, you could see oil retrace it very quickly,
so we could go easily go back towards the mid sixties.
In terms of price. If that premium some people gold
Men Sacks are they saying that the premium is around
(11:49):
ten dollars for the world premium priced into oil at
the moment, I think Bloomberg they kind of miss save
between five and ten, so something around that figure needs
to be shaved off the oil price if you can.
The situation calming down quickly so you could see quite
a fast replacement. But for the moment, of course, people
are not going to do that just yet because there's
still a lot more to play out in that area.
(12:11):
But they just shows you how quickly oil can reverse.
Should Iran and Israel no longer be a major focus
for the oil market, Mark.
Speaker 2 (12:20):
Will leave it there. It's always a pleasure. Thank you
so much for making time to chat with me. Mark
Ranfield is a Bloomberg Markets Live strategist joining from Singapore.
Here on the Daybreak Asia podcast. Welcome back to the
Daybreak Asia Podcast. I'm Doug Chrisner. So Fed officials left
(12:41):
their key policy rate unchanged in the last session, in
a move that was pretty much widely expected. They continued
at the same time to pencil in two rate cuts
in twenty twenty five. The Fed also lowered its estimate
for economic growth this year, while raising its forecast for
both on employment and inflation. So this combination of weaker
(13:03):
growth and stickier inflation suggests a more difficult economic backdrop.
We got reaction from University of Michigan professor Betsy Stevenson.
She spoke earlier with Bloomberg's Heidie Stroud Watson April Hong.
First question, just how difficult is the Fed's position.
Speaker 4 (13:20):
You can see what they're thinking exactly by looking at
their projections, So you know, it is true that their
forecasts for the US economy are getting worse over time.
You know, in December they thought that the US economy
would grow two point one percent this year. They revised
that down to one point seven percent in March, and
they revise that down again here in June to one
(13:43):
point four. So it's like every you know, day, it
gets a little bit there's a little bit more of
a sense that, Okay, we're not going to have a
strong year this year. And that was kind of ironic
to listen to him say, like, there's less uncertainty, but
that doesn't mean things are good.
Speaker 5 (14:00):
We actually feel more.
Speaker 4 (14:02):
Certainty that we're going to have tariffs that stick, that
are higher than any kind of tariffs the United States
has had in fifty or sixty years, So we're probably
going to end up with some kind of effective tariff
that is probably you know, five to ten times higher
than what we had before Trump came into office. So
I think our uncertainty is coming down, but it's because
(14:25):
we're resigned to the fact that we're going to have
higher tariffs and we're going to have lower growth.
Speaker 5 (14:30):
So if you look.
Speaker 4 (14:31):
At that range of forecasts, you did see their uncertainty
come down, but it was actually because the people who
were most optimistic have now sort of joined the rest
of the pack and thinking that it's.
Speaker 5 (14:41):
Going to be slower growth.
Speaker 4 (14:43):
So you might say, then, why shouldn't they be cutting
rates right now? Well, that's because that certainty about we're
going to end up with higher tariffs and they're going
to stick means that we do have inflation in front
of us, and he's got to make sure that we
we don't let that inflation take off. And here's another
thing to consider, which is as inflation expectations have risen, effectively,
(15:09):
they are cutting the real rate because keeping rates the
same when people are expecting higher inflation is a rise
at nominal rates and a cut in that real rate,
So the market's cutting rates for them.
Speaker 1 (15:25):
Yeah, that's a really key point.
Speaker 5 (15:26):
Bets.
Speaker 1 (15:27):
Yeah, I have to sort of you know not chuckle.
Speaker 5 (15:29):
Obviously if there's a.
Speaker 1 (15:30):
Lot of negativity out there, but you know, you make
the point of is certainty when it comes to a
more negative outlook really a good thing. But we've obviously
seen the worries for the markets over energy markets and
energy costs. Is it too early at this point to
be able to look at the inflationary upside pressure from
a potential change in those energy market dynamics.
Speaker 5 (15:52):
Well, I got on this.
Speaker 4 (15:53):
Pal was quite reassuring and reminded us that you know,
if you go back to the nineteen seventies, a big
oil price shock was terrible for the United States, but
you know, the United States doesn't rely on on foreign
oil as much. In fact, the US had achieved energy
and dependence. Now, of course the market means that you know,
(16:14):
prices should go up because we can sell anywhere in
the world. We're not forced to sell to ourselves. So
you know, and the whole you obviously care about more
than the United States, The whole the whole world is
going to suffer, you know, if with this geopolitical tension.
So I think there are real global worries about that.
Speaker 5 (16:34):
But I think what.
Speaker 4 (16:35):
Pal said is those are not huge inflationary worries for
the FED right now.
Speaker 6 (16:43):
What about domestically, Betsy, When it comes to what you're
seeing among the American public worries about consumer confidence job security.
Speaker 4 (16:53):
Well, I mean, we do see that consumer confidence has down,
CEO confidences down. People do have concerns about job security,
and they're not just about tariffs. So we have Amazon
coming out today and saying, you know, we're gonna need
fewer people because we're going to outsource our jobs to AI,
(17:14):
and so it's no longer going to be about, you know,
competing with workers in foreign countries. It's going to be
competing with artificial intelligence. So I think there is a
lot of anxiety. And in fact, I would say this
anxiety has been brewing for quite a long time and
is one of the explanations for the tariffs that we
have today, is that Americans have real anxiety about where
(17:37):
the economy is going. I don't think the choice as
President Trump is making has reassured them. In fact, I
think that it's made it worse. But I do think
it would be a mistake to think that that's the
only thing weighing on American consumers and on American businesses.
Speaker 6 (17:58):
What else is on consumer confidence and businesses, and you know,
to what extent are you seeing perhaps full American industries
as well the cost pass through, given how the DOLLA
has also been depreciating.
Speaker 4 (18:16):
Right, So, I mean this big set of questions, and
I think consumers and businesses are in different places. So
from consumers, I think that they think there's just a
lot of uncertainty around what is going to happen in
the workplace, right, are they going to have jobs? What
we're seeing is a very weird labor market right now
where unemployment is low, but it's not a good time
(18:37):
to be unemployed.
Speaker 5 (18:38):
It's not a good time to try to change jobs.
Speaker 4 (18:41):
And that creates a little bit of anxiety and consumers.
Speaker 5 (18:45):
You know, if you start to.
Speaker 4 (18:46):
Fear that you could lose your job or that you
could see your wages stagnate, you might start to pull
back on your spending. And as you pull back on
your spending, that makes out a self fulfilling prophecy. On
the business side, I mean, they're trying to make decisions
in a world that is highly uncertain. And that's about tariffs,
(19:06):
It's about the geopolitical risk, and it's also about political risk. Right,
we have a government right now that is very, very interventionist.
I think a lot of American companies thought that the great.
Speaker 5 (19:19):
Thing about President Trump was he was.
Speaker 4 (19:21):
Going to let them just do their thing and that
they were going to not have to deal with a
really heavy regulatory environment.
Speaker 5 (19:29):
But what they've learned is that it is still a
pretty heavy environment.
Speaker 4 (19:33):
It's just on a different set of issues and preferences
coming out of government. So I think that uncertainty means
everybody's moving a little bit slower, and when you slow
the pace of movement, you slow economic growth.
Speaker 5 (19:48):
See.
Speaker 1 (19:48):
I think when he spoke with Boombo back in April,
there was still this sort of discussion over whether it
was a bigger growth risk or a bigger inflation risk,
and whether we could kind.
Speaker 5 (19:58):
Of see through the risk.
Speaker 1 (20:00):
Do you think now that there's a real risk of
stagflation for the US economy.
Speaker 4 (20:06):
I mean, certainly every forecast has moved in the stagflationary direction.
Speaker 5 (20:12):
And I think if you think.
Speaker 4 (20:13):
About what can cause stagflation like we had stagflation in
the seventies, stagflation really needs to come from some kind
of supply shock that causes economic growth to shrink in
a way that's sort of mismatched with where consumers are at.
Speaker 5 (20:31):
So consumers want to keep buying stuff, so.
Speaker 4 (20:34):
Prices are going up, but we're producing less. And that
mismatch in the seventies that was caused by all the
oil price shocks. What's happening in right now in the globe,
and it's the same thing that caused the inflation in
twenty twenty one twenty twenty two.
Speaker 5 (20:51):
Coming out of the pandemic is supply chain problems.
Speaker 4 (20:55):
So we're not able to move goods around the world,
We're not able to count on trade, and that's shrinking
are what we can could possibly produce, but that's not
shrinking our desires, and so that is where we get
that stagflationary pres you know pressure, And I think we've
just got to wait and see sort of how that
(21:15):
ends up playing out. You know, what's going to happen
geo politically in all the domains, tariffs, war, et cetera.
Speaker 6 (21:24):
That disconnect there. Great to get your insights, Betsy, Thank
you so much. Betsy Stevenson, Professor of Public Policy and
Economics at the University of Michigan.
Speaker 2 (21:37):
Thanks for listening to today's episode of The Bloomberg Daybreak.
Asia edition podcast. Each weekday, we look at the story
shaping markets, finance, and geopolitics in the Asia Pacific. You
can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,
or anywhere else you listen. Join us again tomorrow for
insight on the market moves from Hong Kong to Singapore
(21:59):
and Australia. I'm Doug Prisoner and this is Bloomberg
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:10):
Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner,
and we begin today with the geopolitics of the Mideast.
We are being told that senior US officials are preparing
for the possibility of a strike on Iran in the
coming days. Now, this situation, important to say, is still
evolving and it could change. Some of our sources pointed
(00:31):
to the potential plans for a strike on the weekend.
Joining me now is Mark Cranfield. He is Bloomberg Markets
Live strategist and he joins from Singapore. Mark, thank you
so much for making time to chat with me. I
think we can agree these are indeed delicate times. There's
the geopolitical situation between Israel and the Iran and the
(00:53):
uncertainty of potential US involvement. The story on tariffs meantime
is very much still alive. And then we've got the
macro picture, which may be a little cloudy right now.
But can we play off the FED decision in the
last session here in the States, And I'm curious to
get your take on how you see it impacting market
psychology right now in the Asia Pacific.
Speaker 3 (01:15):
The FED would be pretty happy with the result of
what happened yesterday. They had an extremely difficult balancing act
to do, as you say, in the context of all
those things happening in the world, how do you create
policy and guidance for people in the United States and
to some extent globally, because everybody watches what the FED
has to say, And they managed to do it without
disrupting markets at all. By the end of the day,
(01:36):
equity markets, bond markets, currencies are pretty much where they
started the day. So from that point of view, patter
on the back for the FED. But it's certainly their
task is extra difficult because they clearly hinted at the
fact that the United States is going to have a
statulation every problem. They've lowered economic forecasts in their summary
of economic projections, and at the same time they've upsized
(01:59):
the project for inflation, particularly through the PCE window. So
they're telling you that the in stackulation which is beginning
to appear, is probably going to get worse in the
United States. And yet they're working essentially one arm tied
behind their back, because all investors can see that the
difficulty for the FED is that should inflation pick up
(02:21):
and become sticky in the sense that it stays for
a bit longer. Is the FED going to really raise
interest rates? Well, in the current environment and with your
own power as a chairman, I think most investors would
come to conclusion the FED is not going to typen policy.
It's very much skewed the other way. Should the employment
situation deteriorate and the America risk going somewhere towards the recession,
(02:44):
of course they would act quickly and lower interest rates.
The last thing they did was to lower interest rates,
so they obviously have a slight bias towards doing that.
But the real problem for them is what happens if
inflation starts to get higher.
Speaker 2 (02:57):
When you evaluate some of the risk that the markets
are dealing with right now, and you look at the
potential for haven buying, particularly in US treasuries or for
that matter, in the US dollar, talk to me a
little bit about the flow of funds that you have
been seeing and how the dollar may be impacted right now.
Speaker 3 (03:16):
We can take the dollar first, and I don't think
there's much doubt that the US is losing its haven appeal.
You can see that against major currencies it's had a
pretty rough year this year, it's underperformed pretty badly. And
then it's not just a one sided thing, because obviously
there needs to be an appeal on the others. If
you've got in currency trading, it's always one against something else.
(03:39):
So it's all fine to say that the US dollar
doesn't look as attractive as it did, but you need alternatives,
and the alternatives are starting to look a bit better.
So you take the Euro, which is the second biggest
currency on the planet. Europe's getting exacted together, partly because
it has to. It's under pressure to improve its defenses
because of the situation in Russia and Ukraine and United
(04:00):
States moving away from NATO, so they'reppy to spend more
on the defense. That's creating a bigger poll of funds
for the Euro. Investors can see that they're getting more
comfortable that there's deep liquidity in the European market, so
more money is starting to flow towards Europe. Then you've
got China, which as just yesterday we had the Central
Bank governor giving extended details about what they're doing to
(04:23):
improve the dynamics in China for foreign investors, and that
all revolves around stability and strength in the currency. They've
made it very clear that China is right behind the Yuwan.
They're not going to let it deteriorate. They're going to
keep it stronger and stable. And that supports all other
security aspects. It supports equities, it supports bonds, it supports
(04:43):
all kinds of investment flows to China, and they're encouraging
foreigners to send their money there. So you're beginning to
have serious contenders to the US dot. It doesn't mean
to say that the US dollar loses its status overnight,
but you can see why money can now more happily
move to other parts of the world because there are
currencies which are standing up and being counted and saying, hey,
(05:05):
we're a real alternative to the US dollar if you're
uncertain about the outlook there. Treasuries is a much more
complex picture, of course, because the Federal Reserve can twist
the needle, they can lower interest rates quickly when they
need to. But at the same time you do have
these spreads between treasury yields and other countries, and that's
where things will begin to show. If people start to
(05:26):
lose faith in treasuries, you'll see where spreads will widen
against Germany, against Japan, against other parts of the world.
That's more like it's in the absolute direction of what
treasuries may be doing, but certainly their share of the
market holdings of fixed income investments could well go down
in relation to other countries.
Speaker 2 (05:45):
It's very interesting because we heard today from the US
Treasury with respect to foreign holdings of US bonds and notes,
and we learned that foreign holdings were actually up in
the month of April to the second highest level on record.
I found that a little surprising. So foreigners right now
are holding a little bit more than nine trillion dollars
(06:06):
in US government securities. Japan still the largest, Britain interestingly
has increased its holdings. China's holdings were down a little bit.
But when you look at the risk talking earlier about
Haven's status, how much concern is there over the US
fiscal situation right now, particularly the budget deficit, And I'm
wondering whether that outlook for budget deficits going forward has
(06:29):
become an important driver of the buying that we have
seen on the part of foreigners in US treasuries.
Speaker 3 (06:36):
Absolutely, investors clearly are a bit concerned that should the
tax and spending be all go through in United States
as it's currently planned, it's going to worsen what's already
quite a bad fiscal deficit situation in United States. It's
not going to get any easier. And then if you
look at the way the data you're just talking about
the holdings of UK number of people from the UK
(06:58):
entities which are holding treasures. When that is going up,
that is a warning signal because that tends to be
hedge funds. That is not UK government or anybody UK
sovereign well fund they don't even have one, but so
it's not that kind of money. It's not secure money
which is going to this is much more flaky short
term money. So when the UK shows up as a
(07:19):
bigger holder of treasure is that's not a good sign.
That just means that short term holders who can quickly
come in and out, and they're often doing it as
spreads anywhere against other things, so they're not really secure
holders of treasures. These are the people who can change
on a dime. They'll be in and out in a
matter of minutes. So that's actually a warning signal that
the holders are less stable of US treasurers than they
(07:40):
were earlier in the year. So all of these things,
and of course we're on watch for the potential that
we've had one sovereign downgrade already this year of the
United States. These things tend to come in waves, and
once the ball starts rolling in that direction, you could
see more. Next stage will probably be to put the
sovereign rating on an other outlook for potential vision lower.
(08:03):
Investors are watching that very close. It could come before
the end of the year. So all of these things
are stacking up against the US Treasury. It's not looking
as secure as it was.
Speaker 2 (08:11):
I don't think it's a surprise at all that China
reduced its holdings of US government securities. Talk to me
a little bit about what's happening right now, insofar as
you understand the progress that may be happening, or may
not be happening, for that matter, when it comes to
the trade issue between Washington and Beijing.
Speaker 3 (08:30):
It looks from outsider in Asia, we probably see it
a bit more slanted from the from the Chinese side,
and it looks like they're playing the long game. It
looks like the Chinese authorities are fairly happy with the
way that they're stimulating their own economy. They're starting to
rebuild things extremely well there. It's on a much better footing.
Their markets are stable, currencies strong, They have some strong cards,
(08:54):
as President Trump would say, particularly when it comes to
some of the minerals they hold. So they look as
though they're ready to take their time to get a
trade deal. Dot really works from their point of view.
They don't look as though they're going to panic and
sign anything quickly at all. They want to do thorough
negotiating and if it takes time, it causes a bit
of pain. They're willing to play the long game in
(09:15):
that respect. That might be in contrast to how the
US authorities see it. So don't expect China to suddenly say, oh, yeah,
we're happy we've got a deal straight away until they're
really sure that it's something that is fair and favors
them as much as it favors the United States.
Speaker 2 (09:31):
I mentioned a moment ago the conflict between Israel and Iran.
How is this being digested right now in the Asia Pacific.
Speaker 3 (09:40):
It's all eyes on the oil on prices, as you
can expect, everybody's watching that minute by minute to see
what it means for changes in oil so far, we
haven't got close to the one hundred dollars threshold. That's
probably where people really start to get excited about the
oil market. If it goes about one hundred, that starts
to impact other asset classes lot more. And now we've
(10:01):
reached about eighty dollars roughly on on Brent, which is
not this high by recent standards, but it's not really
out of the realms of what we've been seeing in
the movements over the past year or so, so not extraordinary.
It certainly was a quick movi in oil, but not
yet one that really destabilizes financial markets on a brigger basis.
(10:22):
So that's probably why you're seeing contained moves in currencies
and bonds and equities as well. Get above one hundred dollars,
things start to change quite rapidly.
Speaker 2 (10:30):
You were talking a moment ago about the potential for
hedge funds to become involved in trading of US bonds,
particularly in the UK. Talk to me a little bit
about what hedge funds do when they're trading oil and
how that may be manifesting it right now, particularly given
the environment that we're in right now.
Speaker 3 (10:48):
We can already see in the options market in some
very substantial changes in the demand in the options market.
In fact, by some measures, what's going on in the
current state of the option is actually more extreme than
when Russia invaded Ukraine a few years ago. So that
just shows you how suddenly people are positioning very quickly
(11:08):
into that space. They will be trading spreads between contracts,
so Oil's futures trading is very deep liquid market. People
would trade the curve, whether it's steepens or flattens. They'll
also be trading on the outright volatility in the market,
which they do through the options market. So that turnover
in that market has exploded in the past couple of weeks,
(11:28):
and that's all geared towards the expectation that oil could
spike higher again from here. So at the same time,
the flip side of that, of course, is if things
come down quickly, you could see oil retrace it very quickly,
so we could go easily go back towards the mid sixties.
In terms of price. If that premium some people gold
Men Sacks are they saying that the premium is around
(11:49):
ten dollars for the world premium priced into oil at
the moment, I think Bloomberg they kind of miss save
between five and ten, so something around that figure needs
to be shaved off the oil price if you can.
The situation calming down quickly so you could see quite
a fast replacement. But for the moment, of course, people
are not going to do that just yet because there's
still a lot more to play out in that area.
(12:11):
But they just shows you how quickly oil can reverse.
Should Iran and Israel no longer be a major focus
for the oil market, Mark.
Speaker 2 (12:20):
Will leave it there. It's always a pleasure. Thank you
so much for making time to chat with me. Mark
Ranfield is a Bloomberg Markets Live strategist joining from Singapore.
Here on the Daybreak Asia podcast. Welcome back to the
Daybreak Asia Podcast. I'm Doug Chrisner. So Fed officials left
(12:41):
their key policy rate unchanged in the last session, in
a move that was pretty much widely expected. They continued
at the same time to pencil in two rate cuts
in twenty twenty five. The Fed also lowered its estimate
for economic growth this year, while raising its forecast for
both on employment and inflation. So this combination of weaker
(13:03):
growth and stickier inflation suggests a more difficult economic backdrop.
We got reaction from University of Michigan professor Betsy Stevenson.
She spoke earlier with Bloomberg's Heidie Stroud Watson April Hong.
First question, just how difficult is the Fed's position.
Speaker 4 (13:20):
You can see what they're thinking exactly by looking at
their projections, So you know, it is true that their
forecasts for the US economy are getting worse over time.
You know, in December they thought that the US economy
would grow two point one percent this year. They revised
that down to one point seven percent in March, and
they revise that down again here in June to one
(13:43):
point four. So it's like every you know, day, it
gets a little bit there's a little bit more of
a sense that, Okay, we're not going to have a
strong year this year. And that was kind of ironic
to listen to him say, like, there's less uncertainty, but
that doesn't mean things are good.
Speaker 5 (14:00):
We actually feel more.
Speaker 4 (14:02):
Certainty that we're going to have tariffs that stick, that
are higher than any kind of tariffs the United States
has had in fifty or sixty years, So we're probably
going to end up with some kind of effective tariff
that is probably you know, five to ten times higher
than what we had before Trump came into office. So
I think our uncertainty is coming down, but it's because
(14:25):
we're resigned to the fact that we're going to have
higher tariffs and we're going to have lower growth.
Speaker 5 (14:30):
So if you look.
Speaker 4 (14:31):
At that range of forecasts, you did see their uncertainty
come down, but it was actually because the people who
were most optimistic have now sort of joined the rest
of the pack and thinking that it's.
Speaker 5 (14:41):
Going to be slower growth.
Speaker 4 (14:43):
So you might say, then, why shouldn't they be cutting
rates right now? Well, that's because that certainty about we're
going to end up with higher tariffs and they're going
to stick means that we do have inflation in front
of us, and he's got to make sure that we
we don't let that inflation take off. And here's another
thing to consider, which is as inflation expectations have risen, effectively,
(15:09):
they are cutting the real rate because keeping rates the
same when people are expecting higher inflation is a rise
at nominal rates and a cut in that real rate,
So the market's cutting rates for them.
Speaker 1 (15:25):
Yeah, that's a really key point.
Speaker 5 (15:26):
Bets.
Speaker 1 (15:27):
Yeah, I have to sort of you know not chuckle.
Speaker 5 (15:29):
Obviously if there's a.
Speaker 1 (15:30):
Lot of negativity out there, but you know, you make
the point of is certainty when it comes to a
more negative outlook really a good thing. But we've obviously
seen the worries for the markets over energy markets and
energy costs. Is it too early at this point to
be able to look at the inflationary upside pressure from
a potential change in those energy market dynamics.
Speaker 5 (15:52):
Well, I got on this.
Speaker 4 (15:53):
Pal was quite reassuring and reminded us that you know,
if you go back to the nineteen seventies, a big
oil price shock was terrible for the United States, but
you know, the United States doesn't rely on on foreign
oil as much. In fact, the US had achieved energy
and dependence. Now, of course the market means that you know,
(16:14):
prices should go up because we can sell anywhere in
the world. We're not forced to sell to ourselves. So
you know, and the whole you obviously care about more
than the United States, The whole the whole world is
going to suffer, you know, if with this geopolitical tension.
So I think there are real global worries about that.
Speaker 5 (16:34):
But I think what.
Speaker 4 (16:35):
Pal said is those are not huge inflationary worries for
the FED right now.
Speaker 6 (16:43):
What about domestically, Betsy, When it comes to what you're
seeing among the American public worries about consumer confidence job security.
Speaker 4 (16:53):
Well, I mean, we do see that consumer confidence has down,
CEO confidences down. People do have concerns about job security,
and they're not just about tariffs. So we have Amazon
coming out today and saying, you know, we're gonna need
fewer people because we're going to outsource our jobs to AI,
(17:14):
and so it's no longer going to be about, you know,
competing with workers in foreign countries. It's going to be
competing with artificial intelligence. So I think there is a
lot of anxiety. And in fact, I would say this
anxiety has been brewing for quite a long time and
is one of the explanations for the tariffs that we
have today, is that Americans have real anxiety about where
(17:37):
the economy is going. I don't think the choice as
President Trump is making has reassured them. In fact, I
think that it's made it worse. But I do think
it would be a mistake to think that that's the
only thing weighing on American consumers and on American businesses.
Speaker 6 (17:58):
What else is on consumer confidence and businesses, and you know,
to what extent are you seeing perhaps full American industries
as well the cost pass through, given how the DOLLA
has also been depreciating.
Speaker 4 (18:16):
Right, So, I mean this big set of questions, and
I think consumers and businesses are in different places. So
from consumers, I think that they think there's just a
lot of uncertainty around what is going to happen in
the workplace, right, are they going to have jobs? What
we're seeing is a very weird labor market right now
where unemployment is low, but it's not a good time
(18:37):
to be unemployed.
Speaker 5 (18:38):
It's not a good time to try to change jobs.
Speaker 4 (18:41):
And that creates a little bit of anxiety and consumers.
Speaker 5 (18:45):
You know, if you start to.
Speaker 4 (18:46):
Fear that you could lose your job or that you
could see your wages stagnate, you might start to pull
back on your spending. And as you pull back on
your spending, that makes out a self fulfilling prophecy. On
the business side, I mean, they're trying to make decisions
in a world that is highly uncertain. And that's about tariffs,
(19:06):
It's about the geopolitical risk, and it's also about political risk. Right,
we have a government right now that is very, very interventionist.
I think a lot of American companies thought that the great.
Speaker 5 (19:19):
Thing about President Trump was he was.
Speaker 4 (19:21):
Going to let them just do their thing and that
they were going to not have to deal with a
really heavy regulatory environment.
Speaker 5 (19:29):
But what they've learned is that it is still a
pretty heavy environment.
Speaker 4 (19:33):
It's just on a different set of issues and preferences
coming out of government. So I think that uncertainty means
everybody's moving a little bit slower, and when you slow
the pace of movement, you slow economic growth.
Speaker 5 (19:48):
See.
Speaker 1 (19:48):
I think when he spoke with Boombo back in April,
there was still this sort of discussion over whether it
was a bigger growth risk or a bigger inflation risk,
and whether we could kind.
Speaker 5 (19:58):
Of see through the risk.
Speaker 1 (20:00):
Do you think now that there's a real risk of
stagflation for the US economy.
Speaker 4 (20:06):
I mean, certainly every forecast has moved in the stagflationary direction.
Speaker 5 (20:12):
And I think if you think.
Speaker 4 (20:13):
About what can cause stagflation like we had stagflation in
the seventies, stagflation really needs to come from some kind
of supply shock that causes economic growth to shrink in
a way that's sort of mismatched with where consumers are at.
Speaker 5 (20:31):
So consumers want to keep buying stuff, so.
Speaker 4 (20:34):
Prices are going up, but we're producing less. And that
mismatch in the seventies that was caused by all the
oil price shocks. What's happening in right now in the globe,
and it's the same thing that caused the inflation in
twenty twenty one twenty twenty two.
Speaker 5 (20:51):
Coming out of the pandemic is supply chain problems.
Speaker 4 (20:55):
So we're not able to move goods around the world,
We're not able to count on trade, and that's shrinking
are what we can could possibly produce, but that's not
shrinking our desires, and so that is where we get
that stagflationary pres you know pressure, And I think we've
just got to wait and see sort of how that
(21:15):
ends up playing out. You know, what's going to happen
geo politically in all the domains, tariffs, war, et cetera.
Speaker 6 (21:24):
That disconnect there. Great to get your insights, Betsy, Thank
you so much. Betsy Stevenson, Professor of Public Policy and
Economics at the University of Michigan.
Speaker 2 (21:37):
Thanks for listening to today's episode of The Bloomberg Daybreak.
Asia edition podcast. Each weekday, we look at the story
shaping markets, finance, and geopolitics in the Asia Pacific. You
can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,
or anywhere else you listen. Join us again tomorrow for
insight on the market moves from Hong Kong to Singapore
(21:59):
and Australia. I'm Doug Prisoner and this is Bloomberg
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