March 19, 2025 • 22 mins
On today's episode, we explore the fallout of the Federal Reserve and the Bank of Japan decisions. The Fed held rates steady today. We speak to Mark Cranfield, Bloomberg MLIV Strategist.
Plus- The Federal Reserve Chair Jerome Powell cited the potential for the impact of tariffs on inflation to be “transitory.” The jump in stocks, the biggest for any Fed day since July, follows a bruising four-week stretch in which the S&P 500 slid into a correction. We speak to Jamie Cox, Managing Partner at Harris Financial Group.
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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 Daybreak Asia podcast. I'm Doug Chrisner. So
it's two down, one to go.
Speaker 1 (00:15):
We had a.
Speaker 2 (00:16):
Couple of key central bank decisions in the last twenty
four hours, and as expected, both the Bank of Japan
and the FED held their policy rates steady, although for
very different reasons. Up next, it's the Bank of England.
Let's take a closer look at how rad policy is
playing out in markets these days. Our guest is Mark Cranfield.
He is Bloomberg Markets Live strategist joining from Singapore. Mark,
(00:40):
First of all, have you been surprised by anything you
heard from either the BOJ or the Fed.
Speaker 1 (00:47):
I think the fate to some investors may be sounding
a little bit complacent on the inflation outlook. They seem
pretty relaxed, saying that it's going to be trains at tree,
which maybe not the best word for them to use
that given the history with that, but anyway, I think
that's where they may start to feel the heat from
(01:09):
the market. I think the bond vigilantis in the US
we'll be looking pretty closely at that and saying, well,
we don't feel so quite so relaxed as you guys
on the Federal Reserve, and we're seeing a little bit
of steepening in the Treasury curve already, and there is
certainly room for that to play out further if investors
get the sense that the Fed is willing to look
through upticks and inflation, when at the same time the
(01:33):
other economic numbers may start to be affected by future terarifts,
which we expect some more to come in next week,
and clearly the whole data outlook for the US is
looking a little bit more uncertain. So if you get
a slightly weakened economy with rising inflation at the same time,
the bond vigilantes are not going to like that at all,
and they're going to they're going to punish the market
(01:55):
for that, even if the Federal Reserve messaging is very
relaxed about the whole thing.
Speaker 2 (02:00):
Lacks indeed, with two more raid cuts forecast for the year.
But as you're suggesting, I mean, the idea here is
we're talking about a situation that feels like stagflation, does
it not.
Speaker 1 (02:12):
It's certainly is begin to smell like it. It's something
which is very bad for financial markets. Typically if it
gets a route. If you don't stamp it out quickly,
it doesn't really help the bond market, doesn't help the
equity market much either as well. So it's something which
definitely private sexory commentators will be looking at very closely.
The central bank may have their own reasons for trying
(02:34):
to throw a more neutral path, but you can't disguise
the numbers. People will see what is going on in
the economic data and the impulse on the ground and
they'll make their own conclusions. And if they do sense
that the circulation is coming back, you will see volatility
in the financial markets off the back of that.
Speaker 2 (02:52):
What are the implications for the dollar right now? There's
been so much trade tension and noise in the foreign exchange.
For a while, it felt like the threats of tariffs
from the US side were dollar positive, but there's been
so much volatility it's hard to know what's actually going on. So,
coming back to the FED and what we've heard today,
what is your sense of where the dollar goes from here?
Speaker 1 (03:14):
I think initially people see it as being a slight
negative for the US dollar because if the FEDI is
going to keep to two more rate cuts this year,
that probably puts them on the dubbish side in relation
to some of the other central banks. European Central Bank
is certainly going to have to dial back a bit
now that Germany looks as though it's going to get
a very big spend for defense. That certainly is something
(03:37):
the ECB will take into account very closely. So that
is slightly positive for the euro and it means the
easy be can't cut rates as quickly as thought, so
if the FED does go ahead, they stand out as
being a bit softer. We're just talking about the Bank
of Japan. Clearly they want to increase interest rates again.
The timing is a bit uncertain, but that would work
out to be slightly positive for the end. So you've
(03:57):
got two of the biggest currencies look as are they're
going to be going in the opposite direction to where
the dollar would want to go. It's not going to
be a clear path. It's going to be along the way.
You can throw in all kinds of international issues such
as where the tario of some retaliation, geopolitical issues that
will disrupt the view. But certainly if the FED does
(04:18):
stick to the idea that there are more rates coming,
that generally is not going to be good for the
US dollar.
Speaker 2 (04:23):
What about the influence that it would have on the
thinking at the Bank of Japan. I mean, we know
the bias right now at the BOJ is to titan.
We could talk whether or not that may happen as
soon as May or not, or maybe it gets pushed
to Midsummer. But if the Fed is a little bit
more dubbish, does that give the BOJ a little bit
more flexibility?
Speaker 1 (04:43):
I think it does in terms of the exchange rate.
So if you think back to last year, Bank of
Japan raised interest rates in July pretty quickly. It triggered
meltdown in Japanese equities because people are unwinding positions in
the Japanese yend, dollarm plunged caused have it for a
while in Japanese markets. That Bank of Japan got lots
of blame from the politicians that why did you do that?
(05:05):
In course this big mess, And so the speed of
the yen move certainly pushed back any thinking of the
Bank of Japan had on the next rate hike. It
didn't come until January, so six months later. This time
around is quite different. Dolly yen has been coming down
gradually this year even though there's only been one rate
hike from the Bank of Japan. So if the dolly
(05:27):
en stays on a generally slow descent, that's actually good
for the Bank of Japan because there's much less risk
that if they raise rates again it will have a
big disruptive impact on equities in Japan. So that could
be certainly a reason for them to go a bit
earlier than the market is currently pricing for somewhere around
September October. But if they are able to go in
(05:47):
May or June, it would probably be because the yen
is very stable and it gives them the window to
go earlier.
Speaker 2 (05:54):
One of the things we know about the Japanese currency
is that it's very strongly correlated to US Treasury yields.
And I bring us back to the yield story because
the other thing that we heard from the Fed today
is that they are going to slow the pace of
winding down the balance sheet. What are the ramifications here
for markets?
Speaker 1 (06:11):
Well, that's slightly bearish for the long end of the market. Certainly.
That's partly why we're going to get some more steepening.
I suspect is because you're going to have a situation
where the FED dot plots are much more effective on
the short end of the curve, so you probably find
maturities up to about two three years in the treasury curve.
(06:31):
The years there can probably continue to stay a bit
soft because people are very focused on the next FED action.
But if the FED is going to look through inflation,
and if they're also reducing the tailoff in the balance sheet,
that probably negative for the longer end of the curve.
More so you're going to get it almost like a
twist situation where investors will be reluctant to be too
(06:53):
aggressive in buying the long end, but they're much more
keen to buy the short end, which also plays into
the geopolitical situation as well. If you want hedge against
disruptions in geopolitics, you also prefer to hold short duration
bonds as well. So more steepening looks like the outcome
in that case.
Speaker 2 (07:09):
So I mentioned a decision from the Bank of England
in the next few hours, How do you think the
BOE is going to proceed.
Speaker 1 (07:17):
No, they're not expected to do anything today and they'd
be very interested to see what the UK chance that
has to say next week. This is going to be
making a big statement about spending for the government. So
the Bank of England clearly seeing there's got pretty ambitious
targets from the UK government to get the deficit down.
The Bank of England obviously wants to see success in
(07:38):
that area before they go ahead to lower indust rates
and trade does are pretty much on the same page.
They pretty much expect that The Bank of England wants
more time to digest how successful the UK government is
in reigning in spending and to generally getting things under control.
The UK Treasury in the over the last few years
has really been a spending spree and that needs to
(08:01):
be rained in. So that looks as though it's starting
to happen, but it does need the official data to
show that and it isn't yet supporting the case. So
probably more time and the best thing the central banks
tend to do in when they want more time, as
they just stay on hold for a while and try
to give us neutral a message as they can and
traders will accept that. On the flip side, the pound
(08:22):
is having a reasonably good time generally because the US
dollar is a little bit soft, and of course it
helps that the Euro is improving, so that feeds off
to the pound as well.
Speaker 2 (08:30):
Mark will leave it there. It's always a pleasure. Thank
you so much for joining us. Mark Cranfield. There he
is Bloomberg Markets Live strategist joining from Singapore. Here on
the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast.
I'm Dead prisoner. So the Fed held interest rate policy
(08:52):
steady today. That wasn't a big surprise at all. Policymakers
cited uncertainty around the economic outlook as well as the
fact of President Trump's trade policies on inflation and growth,
and FED Chair j Powell said the base case is
for the inflationary impact of tariffs to prove wait for it, transitory.
(09:13):
Let's take a closer look now with our guest, Jamie
Coxy is managing partner at Harris Financial Group. Jamie joins
us from Richmond, Virginia. Thank you for making time to
chat with us. What do you think of when you
hear Jay Powell say transitory? Does it bring back memories?
Speaker 3 (09:29):
Yes, it's sort of.
Speaker 4 (09:30):
It's it's a traumatizing thing for the Fed to say
transitory when the last couple of times that they have
used the phrase, it's been terribly wrong. However, that seemed
to be the magic those are the magic words for
the for the markets today. You know, for the past
couple of weeks, markets have been all over the place
trying to figure out and cost out what, you know,
(09:52):
the trade policies from the administration we're going to be
and how the impact, what impact that would have on
the federal reserve. And we got some answer on that
today and it looks to me as though the Fed
is much to do about nothing. Basically, they have not
been their path of you know, the rate path that
they had set forth is really not changed. And and oh,
(10:12):
by the way, they've actually done a couple of things
that actually eased the minds of markets today by reducing
the pace of the runoff of the balance sheet, in.
Speaker 3 (10:22):
Particular on treasuries. There was some concern that the.
Speaker 4 (10:27):
FED would continue its pace of runoff and that could
precipitate some decline and reserves at a time.
Speaker 3 (10:35):
When the debt ceiling could be an issue.
Speaker 4 (10:37):
But the FED put that to bed as well today
by basically reducing down the runoff to near nothing, they
can basically send the duration of runoff and it not
had any impact or any negative impact on bank reserves
and so I think that was probably one of the
most important parts, maybe one of one of the most
overlooked parts of the road of the of the FED
statement today, and that's going to prove to be the
(11:01):
most important as we moved through the more complicated parts
of the debt ceiling debate and controversy in the next
couple of weeks and months.
Speaker 2 (11:08):
Well, I can get to the thoughts that you may
have on the balance sheet and the adjustment that they
have made to the level of shrinkage, if I can
put it that way. But let's talk a little bit
about what officials are expecting in terms of slower growth
and higher inflation. That feels to me like a scenario
for stagflation. Isn't that concerning to you?
Speaker 4 (11:29):
I think that that is completely in the cards. The
last thing that we want is a stagflationary environment, and
the tariff bring that back into.
Speaker 3 (11:43):
In the sort of focus for everyone.
Speaker 4 (11:44):
We had gotten in a place last year where inflation
was declining at a reasonable rate and growth was pretty steady.
But with tariffs you sort of you sort of have
these levers pushing the wrong way, and I think it's
all about duration. If the tariffs end up being bluster.
If the tariffs end up being shortened duration, then there's
(12:06):
really nothing to be concerned about. But if it precipitates
what could be a very long drawn out trade war,
for sure, it can bring stagflation into the equation.
Speaker 3 (12:17):
And that's not my base case, but I do believe that.
Speaker 4 (12:21):
Markets should be more concerned about it than they currently
are because we have seen the president dig in, We've
seen the tarOf regime grow as the days.
Speaker 3 (12:32):
Have gone on.
Speaker 4 (12:33):
So it's definitely something that all of us in markets
need to be paying attention to, particularly for those of
us who have retirees as clients and we're trying to
help them produce income and also maintain solid investment portfolios.
It's one of the worst scenarios for investment is that
stagflationary environment.
Speaker 2 (12:53):
So if the market wants to discount that risk and
yields would necessarily want to move higher in that scenario.
Is a shrinking the balance sheet at a slower rate
running the risk of distorting market function a little.
Speaker 4 (13:06):
Bit, possibly, But I think the FED is more interested
in making sure that they don't drain reserves. I mean,
over the past couple of years they've been able to
have a free pass on draining the balance sheet because
it has largely been financed through reverse repos but now
it's going to come from bank reserves. So I think
they're more interested in averting a banking or funding crisis
(13:30):
in the banking system more so than they're worried about
some of the longer run.
Speaker 3 (13:36):
Components of what that can mean.
Speaker 4 (13:37):
So I think that's why if I'm just sort of speculating,
I'm speculating that they didn't completely end quantitative tightening.
Speaker 3 (13:46):
They just reduced it down to a sales pace.
Speaker 4 (13:49):
To get through the funding crisis potential, and then they'll
reevaluate decide how they want to move forward from there.
You'll note that they did not alter the path of
their runoff of mortgage backed security.
Speaker 3 (14:00):
It was very much isolated to treasuries.
Speaker 2 (14:02):
Okay, fair enough. Powell also said the odds for recession
have moved up a bit, although they're not high in
his words, and the FED is still assuming that maybe
we can squeeze in two rate cuts this year. Does
that square with your thinking?
Speaker 4 (14:18):
I think that the economy, based on some of the
most recent data and industrial production, may be.
Speaker 3 (14:24):
Stronger than what people appreciate.
Speaker 4 (14:27):
I think the headline risk and the shock of tariffs
have caused a lot of shifts in sentiment, but I'm
not so certain that it's translated into every sector of
the economy just yet. I think it may be sort
of shocking all of consumers, but the consumers are still spending,
they're still traveling, So I feel like that recession risk
(14:49):
is definitely not something I'm focused on in the short run.
If the tariff risk grows and the trade war escalates
and we start seeing odd loss, then perhaps.
Speaker 3 (15:02):
That that might be might be an issue.
Speaker 4 (15:04):
But I feel like we're in a position where the
FED can cut rates to normalize, but they're not trying
to cut rates to accommodate, and I think that that
fulcrum is something that's really important to pay attention to,
because if the FED is cutting rates to accommodate, that's
a much different thing, and I think that's the worst
of the scenarios.
Speaker 3 (15:24):
What I hope is that they can just normalize with
a couple of cuts to get.
Speaker 4 (15:28):
To the point where rates are not restrictive, but not
have to go all the way to make the rate
structure accommodative where they're trying to support economic growth.
Speaker 3 (15:37):
I don't see that at this point.
Speaker 4 (15:40):
I see right now that we just have some interruptions
and hopefully they're short lived.
Speaker 2 (15:44):
So you don't feel that there is a risk that
these tariffs are protracted, that they could last for a while.
Speaker 3 (15:51):
No.
Speaker 4 (15:51):
I think the administration has a messaging problem on tariffs,
and I think that they've done a poor job of
using the tariffs as a cudgel for policies or trying
to push countries in different directions. But what it appears
to me is that they finally arrived at a place
where they can get the messaging right with reciprocal tariffs,
(16:13):
where if a country is tariffing us on a particular product,
we have a reciprocal tariff. I think people can get
behind that because it makes perfect sense. But to use
them in these broad brush, you know, manners has not
worked very well. And so I think that we're going
to see a transition and I think we're seeing it
already where the tariffs will have a shorter half life
(16:35):
because reciprocal tariffs have the equal ability to go lower
as they do to stay the same, and so I
think that's a maybe an unequal chance of actually being
reduced and I think the Treasury Secretary actually mentioned that.
Speaker 3 (16:48):
In some of his remarks yesterday.
Speaker 4 (16:51):
To some media outlets about how they had seen reciprocal
tariffs already have a positive impact where people where countries
are actually now incentivized to bring tariffs to zero in
certain products.
Speaker 3 (17:01):
And I think.
Speaker 4 (17:02):
That's that particular strategy is going to work out to
be beneficial and maybe what they arrive at and finally
get the messaging on tariffs correct.
Speaker 2 (17:13):
But what about the aim of restoring manufacturing. Is that
going to end up happening as the result of this,
I don't think so.
Speaker 4 (17:20):
I think that that there are other ways to reshore manufacturing.
Foreign trade zones which have been around for decades, you
could do. You could provide economic consentives through those, you know, vehicles,
rather than trying to disincentivize, you know, using using tariffs. Now,
I think there's probably one country in particular that may
(17:41):
face a solid tariff regime.
Speaker 3 (17:44):
And that would be China.
Speaker 4 (17:46):
I think that maybe that's the one country where tariffs
have been in place for some time there probably will
remain so, but it really hasn't affected our trade relationship
with them that much. So I think that when it's
all and done, the European, the Canadian, the Mexican tariffs,
these are all going to end up in some type
(18:06):
of trade deals, like a rewrite of the US MCA.
Speaker 3 (18:11):
Or something with Europe.
Speaker 4 (18:12):
But I think that when it's all said and downe
the dust settles, our tariff regime.
Speaker 3 (18:16):
Is largely going to be focused on China.
Speaker 2 (18:18):
So trade policy is obviously just one aspect of what
the Trump administration is intending to do. In terms of
overall economic policy, deregulation has been another centerpiece. Are you
optimistic that we're going to see some signs on deregulation
this year?
Speaker 4 (18:34):
I think they're I think in the banking sector and
in cryptocurrency. I think there's you know, an enormous amount
of deregulation that will that is happening and will continue
to happen. I don't know yet whether it will all
be good, but I do know that it is, you know,
(18:55):
basically in motion. I'm not certain about the other sectors,
but it seems like where it is going to crew
and be most beneficial from people who buy stocks. I
think that if you're buying financials, I think that's one
area where deregulation is going to accrue positively for profitability
of these firms otherwise yet to be determined, but it
(19:16):
seems like that's where the focus is at the moment.
Speaker 2 (19:18):
What about tax policy, I mean that Trump tax cuts
is something that the market really was looking forward to
seeing unfold this year. You probably optimistic that is going
to happen as a result of congressional legislation, right.
Speaker 4 (19:32):
I think it will happen, but I think the market
may underappreciate how complicated it's going to be. In my
meetings on the Hill with various committee staff, I've done
that four or five times over the past six months.
There is a lot of back and forth. There's a
lot of horse trading that will have to happen to
(19:52):
get the pay fors necessary to facilitate even keeping the
law as is is. And I think it's important for
people to recognize how thin the margins are in the
House of Representatives. You have in the House currently a
two seat majority, and one of those members Thomas Massive
(20:13):
for Kentucky. He's well known to vote against most spending
packages anyway, So you really only have a one seat
majority for at least a month or two, and so
you then have to couple that with the last time
that Trump had a tax package, I think thirteen Republicans
voted against it. These are tough votes for people, tough
(20:36):
votes for some members because there are parts of the
law that could be detrimental to you know, their districts.
And in particular, there were the New York and California
delegations had difficulties with the tax cut jawback because of
the salt deduction. And so there are going to be
some components of the tax legislation that are going to
(20:56):
be difficult pills to swallow for you know, House Republicans,
and so I think that's going to it's going to
people may underappreciate how complicated it will be to get
to the end product and then what it will take
to you know, get some of the revenue raised, to
get the bill through reconciliation, to make it through the
(21:17):
Bird rule. Last time, there was repatriation of foreign you know,
earnings that that was financing a fair portion of the
tax cut. That no longer exists in a big way.
So you have difficult you have you have to raise
revenue in other ways. And I think that's going to
(21:38):
be in fact, I know because That's what they keep
asking every time we go is how give us ideas,
give us suggestions on what we can do to pay
for and continue to finance the tax cuts.
Speaker 2 (21:48):
Jamie, thank you so much. Great to get your perspective
on a number of topics. Jamie Cox, their managing partner
at Harris Financial Group, joining from Richmond, Virginia here on
the Daybreak Asia podc Thanks for listening to today's episode
of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we
(22:09):
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 and Australia. I'm Doug Chrisner,
and this is Bloomberg
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:10):
Welcome to the Daybreak Asia podcast. I'm Doug Chrisner. So
it's two down, one to go.
Speaker 1 (00:15):
We had a.
Speaker 2 (00:16):
Couple of key central bank decisions in the last twenty
four hours, and as expected, both the Bank of Japan
and the FED held their policy rates steady, although for
very different reasons. Up next, it's the Bank of England.
Let's take a closer look at how rad policy is
playing out in markets these days. Our guest is Mark Cranfield.
He is Bloomberg Markets Live strategist joining from Singapore. Mark,
(00:40):
First of all, have you been surprised by anything you
heard from either the BOJ or the Fed.
Speaker 1 (00:47):
I think the fate to some investors may be sounding
a little bit complacent on the inflation outlook. They seem
pretty relaxed, saying that it's going to be trains at tree,
which maybe not the best word for them to use
that given the history with that, but anyway, I think
that's where they may start to feel the heat from
(01:09):
the market. I think the bond vigilantis in the US
we'll be looking pretty closely at that and saying, well,
we don't feel so quite so relaxed as you guys
on the Federal Reserve, and we're seeing a little bit
of steepening in the Treasury curve already, and there is
certainly room for that to play out further if investors
get the sense that the Fed is willing to look
through upticks and inflation, when at the same time the
(01:33):
other economic numbers may start to be affected by future terarifts,
which we expect some more to come in next week,
and clearly the whole data outlook for the US is
looking a little bit more uncertain. So if you get
a slightly weakened economy with rising inflation at the same time,
the bond vigilantes are not going to like that at all,
and they're going to they're going to punish the market
(01:55):
for that, even if the Federal Reserve messaging is very
relaxed about the whole thing.
Speaker 2 (02:00):
Lacks indeed, with two more raid cuts forecast for the year.
But as you're suggesting, I mean, the idea here is
we're talking about a situation that feels like stagflation, does
it not.
Speaker 1 (02:12):
It's certainly is begin to smell like it. It's something
which is very bad for financial markets. Typically if it
gets a route. If you don't stamp it out quickly,
it doesn't really help the bond market, doesn't help the
equity market much either as well. So it's something which
definitely private sexory commentators will be looking at very closely.
The central bank may have their own reasons for trying
(02:34):
to throw a more neutral path, but you can't disguise
the numbers. People will see what is going on in
the economic data and the impulse on the ground and
they'll make their own conclusions. And if they do sense
that the circulation is coming back, you will see volatility
in the financial markets off the back of that.
Speaker 2 (02:52):
What are the implications for the dollar right now? There's
been so much trade tension and noise in the foreign exchange.
For a while, it felt like the threats of tariffs
from the US side were dollar positive, but there's been
so much volatility it's hard to know what's actually going on. So,
coming back to the FED and what we've heard today,
what is your sense of where the dollar goes from here?
Speaker 1 (03:14):
I think initially people see it as being a slight
negative for the US dollar because if the FEDI is
going to keep to two more rate cuts this year,
that probably puts them on the dubbish side in relation
to some of the other central banks. European Central Bank
is certainly going to have to dial back a bit
now that Germany looks as though it's going to get
a very big spend for defense. That certainly is something
(03:37):
the ECB will take into account very closely. So that
is slightly positive for the euro and it means the
easy be can't cut rates as quickly as thought, so
if the FED does go ahead, they stand out as
being a bit softer. We're just talking about the Bank
of Japan. Clearly they want to increase interest rates again.
The timing is a bit uncertain, but that would work
out to be slightly positive for the end. So you've
(03:57):
got two of the biggest currencies look as are they're
going to be going in the opposite direction to where
the dollar would want to go. It's not going to
be a clear path. It's going to be along the way.
You can throw in all kinds of international issues such
as where the tario of some retaliation, geopolitical issues that
will disrupt the view. But certainly if the FED does
(04:18):
stick to the idea that there are more rates coming,
that generally is not going to be good for the
US dollar.
Speaker 2 (04:23):
What about the influence that it would have on the
thinking at the Bank of Japan. I mean, we know
the bias right now at the BOJ is to titan.
We could talk whether or not that may happen as
soon as May or not, or maybe it gets pushed
to Midsummer. But if the Fed is a little bit
more dubbish, does that give the BOJ a little bit
more flexibility?
Speaker 1 (04:43):
I think it does in terms of the exchange rate.
So if you think back to last year, Bank of
Japan raised interest rates in July pretty quickly. It triggered
meltdown in Japanese equities because people are unwinding positions in
the Japanese yend, dollarm plunged caused have it for a
while in Japanese markets. That Bank of Japan got lots
of blame from the politicians that why did you do that?
(05:05):
In course this big mess, And so the speed of
the yen move certainly pushed back any thinking of the
Bank of Japan had on the next rate hike. It
didn't come until January, so six months later. This time
around is quite different. Dolly yen has been coming down
gradually this year even though there's only been one rate
hike from the Bank of Japan. So if the dolly
(05:27):
en stays on a generally slow descent, that's actually good
for the Bank of Japan because there's much less risk
that if they raise rates again it will have a
big disruptive impact on equities in Japan. So that could
be certainly a reason for them to go a bit
earlier than the market is currently pricing for somewhere around
September October. But if they are able to go in
(05:47):
May or June, it would probably be because the yen
is very stable and it gives them the window to
go earlier.
Speaker 2 (05:54):
One of the things we know about the Japanese currency
is that it's very strongly correlated to US Treasury yields.
And I bring us back to the yield story because
the other thing that we heard from the Fed today
is that they are going to slow the pace of
winding down the balance sheet. What are the ramifications here
for markets?
Speaker 1 (06:11):
Well, that's slightly bearish for the long end of the market. Certainly.
That's partly why we're going to get some more steepening.
I suspect is because you're going to have a situation
where the FED dot plots are much more effective on
the short end of the curve, so you probably find
maturities up to about two three years in the treasury curve.
(06:31):
The years there can probably continue to stay a bit
soft because people are very focused on the next FED action.
But if the FED is going to look through inflation,
and if they're also reducing the tailoff in the balance sheet,
that probably negative for the longer end of the curve.
More so you're going to get it almost like a
twist situation where investors will be reluctant to be too
(06:53):
aggressive in buying the long end, but they're much more
keen to buy the short end, which also plays into
the geopolitical situation as well. If you want hedge against
disruptions in geopolitics, you also prefer to hold short duration
bonds as well. So more steepening looks like the outcome
in that case.
Speaker 2 (07:09):
So I mentioned a decision from the Bank of England
in the next few hours, How do you think the
BOE is going to proceed.
Speaker 1 (07:17):
No, they're not expected to do anything today and they'd
be very interested to see what the UK chance that
has to say next week. This is going to be
making a big statement about spending for the government. So
the Bank of England clearly seeing there's got pretty ambitious
targets from the UK government to get the deficit down.
The Bank of England obviously wants to see success in
(07:38):
that area before they go ahead to lower indust rates
and trade does are pretty much on the same page.
They pretty much expect that The Bank of England wants
more time to digest how successful the UK government is
in reigning in spending and to generally getting things under control.
The UK Treasury in the over the last few years
has really been a spending spree and that needs to
(08:01):
be rained in. So that looks as though it's starting
to happen, but it does need the official data to
show that and it isn't yet supporting the case. So
probably more time and the best thing the central banks
tend to do in when they want more time, as
they just stay on hold for a while and try
to give us neutral a message as they can and
traders will accept that. On the flip side, the pound
(08:22):
is having a reasonably good time generally because the US
dollar is a little bit soft, and of course it
helps that the Euro is improving, so that feeds off
to the pound as well.
Speaker 2 (08:30):
Mark will leave it there. It's always a pleasure. Thank
you so much for joining us. Mark Cranfield. There he
is Bloomberg Markets Live strategist joining from Singapore. Here on
the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast.
I'm Dead prisoner. So the Fed held interest rate policy
(08:52):
steady today. That wasn't a big surprise at all. Policymakers
cited uncertainty around the economic outlook as well as the
fact of President Trump's trade policies on inflation and growth,
and FED Chair j Powell said the base case is
for the inflationary impact of tariffs to prove wait for it, transitory.
(09:13):
Let's take a closer look now with our guest, Jamie
Coxy is managing partner at Harris Financial Group. Jamie joins
us from Richmond, Virginia. Thank you for making time to
chat with us. What do you think of when you
hear Jay Powell say transitory? Does it bring back memories?
Speaker 3 (09:29):
Yes, it's sort of.
Speaker 4 (09:30):
It's it's a traumatizing thing for the Fed to say
transitory when the last couple of times that they have
used the phrase, it's been terribly wrong. However, that seemed
to be the magic those are the magic words for
the for the markets today. You know, for the past
couple of weeks, markets have been all over the place
trying to figure out and cost out what, you know,
(09:52):
the trade policies from the administration we're going to be
and how the impact, what impact that would have on
the federal reserve. And we got some answer on that
today and it looks to me as though the Fed
is much to do about nothing. Basically, they have not
been their path of you know, the rate path that
they had set forth is really not changed. And and oh,
(10:12):
by the way, they've actually done a couple of things
that actually eased the minds of markets today by reducing
the pace of the runoff of the balance sheet, in.
Speaker 3 (10:22):
Particular on treasuries. There was some concern that the.
Speaker 4 (10:27):
FED would continue its pace of runoff and that could
precipitate some decline and reserves at a time.
Speaker 3 (10:35):
When the debt ceiling could be an issue.
Speaker 4 (10:37):
But the FED put that to bed as well today
by basically reducing down the runoff to near nothing, they
can basically send the duration of runoff and it not
had any impact or any negative impact on bank reserves
and so I think that was probably one of the
most important parts, maybe one of one of the most
overlooked parts of the road of the of the FED
statement today, and that's going to prove to be the
(11:01):
most important as we moved through the more complicated parts
of the debt ceiling debate and controversy in the next
couple of weeks and months.
Speaker 2 (11:08):
Well, I can get to the thoughts that you may
have on the balance sheet and the adjustment that they
have made to the level of shrinkage, if I can
put it that way. But let's talk a little bit
about what officials are expecting in terms of slower growth
and higher inflation. That feels to me like a scenario
for stagflation. Isn't that concerning to you?
Speaker 4 (11:29):
I think that that is completely in the cards. The
last thing that we want is a stagflationary environment, and
the tariff bring that back into.
Speaker 3 (11:43):
In the sort of focus for everyone.
Speaker 4 (11:44):
We had gotten in a place last year where inflation
was declining at a reasonable rate and growth was pretty steady.
But with tariffs you sort of you sort of have
these levers pushing the wrong way, and I think it's
all about duration. If the tariffs end up being bluster.
If the tariffs end up being shortened duration, then there's
(12:06):
really nothing to be concerned about. But if it precipitates
what could be a very long drawn out trade war,
for sure, it can bring stagflation into the equation.
Speaker 3 (12:17):
And that's not my base case, but I do believe that.
Speaker 4 (12:21):
Markets should be more concerned about it than they currently
are because we have seen the president dig in, We've
seen the tarOf regime grow as the days.
Speaker 3 (12:32):
Have gone on.
Speaker 4 (12:33):
So it's definitely something that all of us in markets
need to be paying attention to, particularly for those of
us who have retirees as clients and we're trying to
help them produce income and also maintain solid investment portfolios.
It's one of the worst scenarios for investment is that
stagflationary environment.
Speaker 2 (12:53):
So if the market wants to discount that risk and
yields would necessarily want to move higher in that scenario.
Is a shrinking the balance sheet at a slower rate
running the risk of distorting market function a little.
Speaker 4 (13:06):
Bit, possibly, But I think the FED is more interested
in making sure that they don't drain reserves. I mean,
over the past couple of years they've been able to
have a free pass on draining the balance sheet because
it has largely been financed through reverse repos but now
it's going to come from bank reserves. So I think
they're more interested in averting a banking or funding crisis
(13:30):
in the banking system more so than they're worried about
some of the longer run.
Speaker 3 (13:36):
Components of what that can mean.
Speaker 4 (13:37):
So I think that's why if I'm just sort of speculating,
I'm speculating that they didn't completely end quantitative tightening.
Speaker 3 (13:46):
They just reduced it down to a sales pace.
Speaker 4 (13:49):
To get through the funding crisis potential, and then they'll
reevaluate decide how they want to move forward from there.
You'll note that they did not alter the path of
their runoff of mortgage backed security.
Speaker 3 (14:00):
It was very much isolated to treasuries.
Speaker 2 (14:02):
Okay, fair enough. Powell also said the odds for recession
have moved up a bit, although they're not high in
his words, and the FED is still assuming that maybe
we can squeeze in two rate cuts this year. Does
that square with your thinking?
Speaker 4 (14:18):
I think that the economy, based on some of the
most recent data and industrial production, may be.
Speaker 3 (14:24):
Stronger than what people appreciate.
Speaker 4 (14:27):
I think the headline risk and the shock of tariffs
have caused a lot of shifts in sentiment, but I'm
not so certain that it's translated into every sector of
the economy just yet. I think it may be sort
of shocking all of consumers, but the consumers are still spending,
they're still traveling, So I feel like that recession risk
(14:49):
is definitely not something I'm focused on in the short run.
If the tariff risk grows and the trade war escalates
and we start seeing odd loss, then perhaps.
Speaker 3 (15:02):
That that might be might be an issue.
Speaker 4 (15:04):
But I feel like we're in a position where the
FED can cut rates to normalize, but they're not trying
to cut rates to accommodate, and I think that that
fulcrum is something that's really important to pay attention to,
because if the FED is cutting rates to accommodate, that's
a much different thing, and I think that's the worst
of the scenarios.
Speaker 3 (15:24):
What I hope is that they can just normalize with
a couple of cuts to get.
Speaker 4 (15:28):
To the point where rates are not restrictive, but not
have to go all the way to make the rate
structure accommodative where they're trying to support economic growth.
Speaker 3 (15:37):
I don't see that at this point.
Speaker 4 (15:40):
I see right now that we just have some interruptions
and hopefully they're short lived.
Speaker 2 (15:44):
So you don't feel that there is a risk that
these tariffs are protracted, that they could last for a while.
Speaker 3 (15:51):
No.
Speaker 4 (15:51):
I think the administration has a messaging problem on tariffs,
and I think that they've done a poor job of
using the tariffs as a cudgel for policies or trying
to push countries in different directions. But what it appears
to me is that they finally arrived at a place
where they can get the messaging right with reciprocal tariffs,
(16:13):
where if a country is tariffing us on a particular product,
we have a reciprocal tariff. I think people can get
behind that because it makes perfect sense. But to use
them in these broad brush, you know, manners has not
worked very well. And so I think that we're going
to see a transition and I think we're seeing it
already where the tariffs will have a shorter half life
(16:35):
because reciprocal tariffs have the equal ability to go lower
as they do to stay the same, and so I
think that's a maybe an unequal chance of actually being
reduced and I think the Treasury Secretary actually mentioned that.
Speaker 3 (16:48):
In some of his remarks yesterday.
Speaker 4 (16:51):
To some media outlets about how they had seen reciprocal
tariffs already have a positive impact where people where countries
are actually now incentivized to bring tariffs to zero in
certain products.
Speaker 3 (17:01):
And I think.
Speaker 4 (17:02):
That's that particular strategy is going to work out to
be beneficial and maybe what they arrive at and finally
get the messaging on tariffs correct.
Speaker 2 (17:13):
But what about the aim of restoring manufacturing. Is that
going to end up happening as the result of this,
I don't think so.
Speaker 4 (17:20):
I think that that there are other ways to reshore manufacturing.
Foreign trade zones which have been around for decades, you
could do. You could provide economic consentives through those, you know, vehicles,
rather than trying to disincentivize, you know, using using tariffs. Now,
I think there's probably one country in particular that may
(17:41):
face a solid tariff regime.
Speaker 3 (17:44):
And that would be China.
Speaker 4 (17:46):
I think that maybe that's the one country where tariffs
have been in place for some time there probably will
remain so, but it really hasn't affected our trade relationship
with them that much. So I think that when it's
all and done, the European, the Canadian, the Mexican tariffs,
these are all going to end up in some type
(18:06):
of trade deals, like a rewrite of the US MCA.
Speaker 3 (18:11):
Or something with Europe.
Speaker 4 (18:12):
But I think that when it's all said and downe
the dust settles, our tariff regime.
Speaker 3 (18:16):
Is largely going to be focused on China.
Speaker 2 (18:18):
So trade policy is obviously just one aspect of what
the Trump administration is intending to do. In terms of
overall economic policy, deregulation has been another centerpiece. Are you
optimistic that we're going to see some signs on deregulation
this year?
Speaker 4 (18:34):
I think they're I think in the banking sector and
in cryptocurrency. I think there's you know, an enormous amount
of deregulation that will that is happening and will continue
to happen. I don't know yet whether it will all
be good, but I do know that it is, you know,
(18:55):
basically in motion. I'm not certain about the other sectors,
but it seems like where it is going to crew
and be most beneficial from people who buy stocks. I
think that if you're buying financials, I think that's one
area where deregulation is going to accrue positively for profitability
of these firms otherwise yet to be determined, but it
(19:16):
seems like that's where the focus is at the moment.
Speaker 2 (19:18):
What about tax policy, I mean that Trump tax cuts
is something that the market really was looking forward to
seeing unfold this year. You probably optimistic that is going
to happen as a result of congressional legislation, right.
Speaker 4 (19:32):
I think it will happen, but I think the market
may underappreciate how complicated it's going to be. In my
meetings on the Hill with various committee staff, I've done
that four or five times over the past six months.
There is a lot of back and forth. There's a
lot of horse trading that will have to happen to
(19:52):
get the pay fors necessary to facilitate even keeping the
law as is is. And I think it's important for
people to recognize how thin the margins are in the
House of Representatives. You have in the House currently a
two seat majority, and one of those members Thomas Massive
(20:13):
for Kentucky. He's well known to vote against most spending
packages anyway, So you really only have a one seat
majority for at least a month or two, and so
you then have to couple that with the last time
that Trump had a tax package, I think thirteen Republicans
voted against it. These are tough votes for people, tough
(20:36):
votes for some members because there are parts of the
law that could be detrimental to you know, their districts.
And in particular, there were the New York and California
delegations had difficulties with the tax cut jawback because of
the salt deduction. And so there are going to be
some components of the tax legislation that are going to
(20:56):
be difficult pills to swallow for you know, House Republicans,
and so I think that's going to it's going to
people may underappreciate how complicated it will be to get
to the end product and then what it will take
to you know, get some of the revenue raised, to
get the bill through reconciliation, to make it through the
(21:17):
Bird rule. Last time, there was repatriation of foreign you know,
earnings that that was financing a fair portion of the
tax cut. That no longer exists in a big way.
So you have difficult you have you have to raise
revenue in other ways. And I think that's going to
(21:38):
be in fact, I know because That's what they keep
asking every time we go is how give us ideas,
give us suggestions on what we can do to pay
for and continue to finance the tax cuts.
Speaker 2 (21:48):
Jamie, thank you so much. Great to get your perspective
on a number of topics. Jamie Cox, their managing partner
at Harris Financial Group, joining from Richmond, Virginia here on
the Daybreak Asia podc Thanks for listening to today's episode
of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we
(22:09):
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 and Australia. I'm Doug Chrisner,
and this is Bloomberg
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