April 8, 2024 • 23 mins
Featuring:
Stephanie Leung, CIO at StashAway, sits down with us in Hong Kong to discuss her perspectives on APAC markets.
Nancy Davis, Founder and Portfolio Manager at Quadratic Capital Management, sits down with us to talk about US markets and the path forward for the federal reserve.
Steven Schoenfeld, CEO of Market Vector Indexes, joins the program to share his perspective on US and emerging markets.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:09):
This is the Bloomberg Daybreak Aisia podcast. I'm Doug Prisner.
You can join Brian Curtis and myself for the stories,
making news and moving markets in the APAC region. You
can subscribe to the show anywhere you get your podcast
and always on Bloomberg Radio, the Bloomberg Terminal, and the
Bloomberg Business App.
Speaker 3 (00:28):
Joining us now in our studios in Hong Kong is
Stephanielum who is CIO at Stashaway. For a closer look
at markets, perhaps you can get to China in a moment.
Let's take a quick look at what we see coming
out of the United States. Very strong growth. The economy
seems to be really firing on all cylinders here and
(00:49):
it's causing a little bit of concern about those who
are watching inflation carefully. Stephanie, do you think inflation is
still coming down or should we worry about a reversal?
Speaker 4 (01:00):
Yeah, I think if you look at the latest kind
of growth data, particularly in the jobs market, the US
has been surprisingly strong to a lot of people. And
just think back about three four months ago at the
beginning of the year, the market is actually looking for
the FED to start cutting interest rates in March by
about five six times by the end of this year. Now,
(01:20):
of course, those expectations have been dial back, and right now,
I mean the market is looking at kind of the
second half of the year for the first rate cut,
and perhaps I mean some participants anticipate even later. The
FED itself has signaled that they will do three rate cuts.
Now the market is closer to what the FIL's expecting. However,
we do see some risks that inflation could be kind
(01:43):
of staying higher for longer. And this is something that
we've flagged out in I guess since the past twelve months,
in the sense that if you look at the labor market,
the US labor market, there's reason why it's so strong.
If you look at COVID, COVID actually took away a
lot of jobs, a lot of people actually left their workforce.
I mean those people actually never came back. So if
(02:04):
you look at what the structural shortage of the US
labor market, the US is still short of one million
labor workers compared to pre COVID, and it takes time
for these jobs to be filled or for these people
to kind of move jobs, etc. So it's a structural
problem that we see and this playing app So.
Speaker 2 (02:22):
Is this reacceleration of growth as you're describing it in
the United States? Is that unique to the US. Are
we seeing growth reaccelerate in other parts.
Speaker 5 (02:30):
Of the world.
Speaker 2 (02:31):
Yeah.
Speaker 4 (02:32):
Indeed, the job's tightness is not just particular for the US.
We're seeing the same phenomenon in other developed markets, for
example the UK or other European countries. However, if you
look at the manufacturing cycle, the global manufacturing cycle has
actually been in a downturn for the last eighteen months.
Even that we're seeing signs of bottoming out. So when
(02:55):
you look at the manufacturing sector, which has been relatively
we compared to the service sector, the man of factoring
sector is rebounding, and we see it in the latest
PMI data, not just from the US, from a global perspective.
And also, I think if you look at China data,
China data seems to be bottoming as well. Right if
you look at CPI that has turned past it for
the first time in the last sort of like twelve
(03:15):
to eighteen months. If you look at the China PMI
that has also surpassed expectations. Now atbove fifty again, So.
Speaker 3 (03:22):
This has very wide implications for risk assets. I would
think in the sense that you know, we have discounted
a lot in the gains that we've seen in the
US market AI and perhaps you know the FED cutting
interest rates. I'm not sure we've really discounted you know,
concerted global growth reigniting here.
Speaker 4 (03:40):
Yeah, And I mean this is not where funds are
position If you look at like where the crowded possessions are,
I mean those are off in technology AI kind of
acceectors that are not as leverage to the global cycle.
And I think what you've seen in the past two
weeks or so in the price action of a lot
of commodities, a lot of cyclicals, is that there's been
(04:01):
a very very fast catch up to this kind of
imbalanced in terms of positioning. Now, of course, from a
market perspective, from a risk asset perspective, we think that
this kind of high for longer environment may not be
necessarily bad for equities per se, because companies actually do
pretty well in this kind of inflationary growth environment that
(04:21):
we identify. However, the leadership is going to be a
bit more spread out, not just focused on the AI
companies not just focus on Magnificent seven, but it's spreading
out to cyclicals. So we think there's still i mean
opportunity for its ketchup to go give it a low positioning.
Speaker 2 (04:39):
What about the Japanese equity market. We've got the nie
k today up about four hundred points. We broke about
forty grand last week. We're very close to that now
six hundred points shy of that level. Is there still
opportunity in Japan? Do you think? Yeah?
Speaker 4 (04:54):
I think from a short term perspective, I mean, things
are a bit overbought, and there's kind of concern about
the yeah and potentially getting intervention from the boj However,
if you look at a longer time frame, we're actually
structurally a lot more possile in Japan compared to other
Asia Pacific kind of economies, because there are signs that
(05:15):
Japan is finally getting of deflation, and deflation has been
kind of the worry about central bank, the worry of
Japan for the last thirty years.
Speaker 6 (05:24):
So if you look at Nikki.
Speaker 4 (05:25):
Itself, for example, it has just surpassed the high that
it made in the early eighties. So this deflationary kind
of end of deflationary era is going to play out
over the next few years. So I think if there's
a correction in Japan, it would be a good time
for investors to accumulate, if they're not exposed already.
Speaker 3 (05:44):
So there are a lot of aspects of the current
environment that look very positive, particularly for investing in risk assets.
You have inflation arguably coming down in the US, and
you have wages that are at four point one percent
higher than inflation, protecting workers there to a certain degree.
And yet the Fed funds rate is well above that
(06:05):
rate at five and a half percent or so. But
that worries some people when things look too good, you know,
it makes you nervous. Should we be nervous?
Speaker 4 (06:14):
Yes, I am. I'm actually I think if we think
about where which as a classes we're worried about, we're
actually worry about government bonds duration. Given that the narrative
of high for longer may be here to stay with
us for the next few years. I think bonds actually
have less become less attractive in this environment.
Speaker 6 (06:37):
And you're seeing it in.
Speaker 4 (06:38):
Sort of the breakout of goal as well. So gold
actually had a breakout in March and a lot of
people wondering, I mean, why is goal breaking out. There's
no kind of snic the news, there's no actually large
buying actions. I think what the market is sniffing out
is that in March we had a very very strong
US data coming out, which surprised everybody. However, the FED
(06:59):
is still sticking to is a rate cut of three
times this year. So the fat is telling you that,
I mean, they're willing to sustain. They're willing to kind
of stomach higher inflation in the future compared to what
they've done in the past. And I think that's what
the goal market is telling us, is that in this
kind of high inflation environment, bond investors should be thinking
(07:21):
about I mean goal instead or other kind of commodities instead.
So I think that is the reason.
Speaker 2 (07:27):
Last question. You know, we had a US based investor
visiting Hong Kong last week and when I asked her,
one of the things that was most surprising, she said
that most people in Hong Kong feel as though Donald
Trump would be elected president. I mean, if that's the case,
what does a Trump presidency do to your thesis on
putting money to work.
Speaker 4 (07:45):
Yeah, I think we put out a piece looking at
kind of like, what are the policy implications of buy
the versus Trump. I think, of course, right now is
still way too early. We've still got a few months ago. However,
I think one of the things that we're looking at
is sort of the historical precedence of this, and we
think that actually the correct situation still favors Biden.
Speaker 6 (08:08):
So we'll see, I mean a few months later.
Speaker 3 (08:11):
All right, Stephanie, thank you very much for joining us.
I'm sure we'll have you in our studios a few
times between now and then. Stephanie lynge cio.
Speaker 6 (08:20):
At Stashaway.
Speaker 3 (08:37):
Joining us now for some discussion of markets is Nancy Davis,
founder and portfolio manager at Quadratic Capital Management. Well, we
had that strong jobs month of job creation during the
last month, Nancy, and I wonder whether or not, since
this may not sit so well with the Fed, whether
we'll see a lot more hawkish commentary coming from the Fed.
Speaker 1 (09:00):
Well, you know this payroll report, it was the fourth
consecutive upside surprise, and now most of the job gains
were in healthcare and government. But you know, definitely the
market expectations for the rate cuts have fallen dramatically in
twenty twenty four, We're now pricing about two and a
half rate cuts, as you can see on your Bloomberg terminal,
(09:22):
and that's a lot less than where we started the
year at about six cuts. But there is still room
if the job's data continues to be so hot. I
guess we'll see what the CPI print brings this week.
Speaker 3 (09:34):
In the US, we.
Speaker 2 (09:36):
Were talking a moment ago about the oil price. I mean,
we have a brent just under ninety one bucks at
the moment. There's a lot of talk on the straight
about the possibility of a resurgence and commodity driven inflation.
Are you concerned about that at all and how that
may force the Fed to really do nothing in terms
of changing policy.
Speaker 6 (09:56):
You know, it's definitely a concern.
Speaker 1 (09:58):
There's so many all so climate as well as other
things going on around the world, whether it's the droughts
or even the bridge that just broke down, that's really
going to probably be driving the price of oil specifically.
But if you look at the commodities index, a lot
of the rally is actually cocoa like chocolate. So I
(10:19):
think the index overall for the commodities market is a
little kind of distorted because of that huge spike in cocoa.
But I definitely think the FED is keeping an eye
on that because you know, it's tricky. The battle for
inflation has kind of been declared a victory, and they're
(10:41):
easing now or saying they're going to be easing. I
think it's a question of whether easing is appropriate or
whether whether inflation is going to be more sticky.
Speaker 3 (10:51):
Nancy, would you not say, though, that inflation still appears
to be on a downward trajectory, we may see higher
energy prices. This is one of the reasons the FED
kind of separates that when it looks at core, but
then you also have shelter that is expected to be
coming down, and shelter is such a huge part of
(11:11):
the CPI thirty odd percent or so. Isn't it likely
that we'll still see it. It's just that we won't
see it happen as fast as we had thought or hoped. Well.
Speaker 1 (11:22):
I think you bring up a great point because CPI
is just an index, right, the consumer price index. It's
like any other index out there. It's probably not the
only way to measure inflation. It's even an index that
the FED sort of discounts, right. They use survey data
more or the PCE, and CPI is also the year
of a year change. So I think the tricky thing
(11:43):
is CPI has been coming down and people expect Shelter
to really drive sort of the downward trajectory. But I
think if you look at average Americans and their real
life cost a living, it's not really come down, like
things are quite still expensive. Of lots of things are
feeling quite inflationary in the day to day wives. So
(12:06):
you have CPI saying one thing, and then it's also
so sorted from the as you point out the rent component,
which is about a third.
Speaker 2 (12:14):
So earning season kicks off Friday, we get the big banks,
JP Morgan Wells City Group. I mean, how do you
think earning season is going to shape up this year
for the first quarter.
Speaker 1 (12:26):
Well, it's tricky with the banks because the US yield
curve is still massively inverted. So what that means is
long dated yields in the US are lower than short
dated yields, and that's really tricky for a bank. Also,
trading volumes haven't been tremendous. Everything is sort of going
(12:47):
up this year, right, twenty twenty four has been sort
of the everything is amazing. Everything is rallying. I think
the one thing that is falling is inflation expectations, but
besides that, everything else is up, So it's it's definitely
a tricky time for earnings. And I i'm you know,
I'm I think the yield curve being so inverted in
(13:09):
the US is also a pain point for the banks.
Speaker 3 (13:13):
I know that the appearance is that everything goes up
and the indexes have but individual stocks, I mean, plenty
are getting really punished. I mean, you just look at
a company like Lululemon, came out with its earnings, wasn't
really all that bad, didn't give a strong forecast, and
was slammed. So I mean, I don't think that's a
good thing or a bad thing, but I do think
(13:34):
it makes for an interesting time for you know, stock.
Speaker 1 (13:38):
Picking, definitely. I mean, the market is quite complacent right now.
If you think back to twenty twenty two, when everything
was going down, the you know, sentiment was really terrible.
Right now, it's kind of opposite day where everybody is
very soft landing. Everything's fine, the Fed's going to cut
Inflation's not a problem. Everyone is super complacent that things
(14:01):
are going to be okay. And I think that's the
time that investors should really prick up and be worried.
Right when everyone gets very complacent, that's kind of when
surprises can happen.
Speaker 2 (14:12):
Are you more exposed to the US right now than
you are to markets offshore?
Speaker 1 (14:18):
So I manage two fixed income funds that are both
treasury funds, So for my my portfolio management is very
focused on the US. But that's by perspectus. So, but
I do think there are a lot of great opportunities
out there in emerging markets, in fixing everyone in fixed
income and even equities, you know, going talking about complacency,
(14:40):
you know, there are certain markets that everyone hates, you know,
like it's I guess being a contrarian. I think it's
always interesting to look at the things that are out
of favor or the things that people don't expect.
Speaker 3 (14:54):
Where do you see some of the best value in
local currency em fixed in.
Speaker 1 (15:02):
Well, everyone's really excited about Japan right now. They've just
changed their yield curve control ended that it's a new
kind of regime, a new governor, and so I think
a lot of people are looking at Japan to say, hey,
are we going to have a new you know, kind
of a new era to get out of this this
decade long deflation and have more interesting markets. But Japan
(15:26):
has always been the widow maker with people trying to
play for higher yields. So it's also, you know, it's
so you know, betting that bonds jgb's sell off has
really been a really really tricky and bad thing to play.
Speaker 2 (15:42):
So to play to your strength. I mean, if you're
focused on US treasuries, let's talk about the shorter end
of the curve. Here is the two year of screaming
by at four seventy five.
Speaker 1 (15:53):
I don't think so the you know, it's really I
think two year yields probably will be going low. But
I think if you're going to look at the front end,
you know, if you pull up your Bloomberg terminal and
you tape p X one, that's the code to look
at the t bill market, and you can see you
can buy a one year, one month te bill and
get paid five point three percent, right, So why you know,
(16:16):
I feel like, if you're going to stay in the
short end, don't really make a bet about whether the
Fed how many times they're going to cut, because that's
what you're getting.
Speaker 6 (16:24):
Whereas I think.
Speaker 1 (16:25):
The long end of the curve. You know you're not.
That's a negative term premium, so you're really not getting
paid to take that risk.
Speaker 3 (16:32):
All right, Nancy, thanks very much for joining us. Nancy Davis,
founder and portfolio manager at Quadratic Capital Management.
Speaker 2 (16:56):
Let's get to our guests. Stephen Schoenfeld is with us.
Stephen is the CEO at market Vector's Indexes. He joins
us from here in New York City. Good of you
to stop by. I want to begin by what appears
to be, if you look at the jobs data, a
reacceleration of the American economy, and I think it's fair
to say a real risk that interest rates may need
(17:18):
to remain elevated for much longer than the market had
been predicting, or at least the FED had been guiding.
Speaker 3 (17:24):
On.
Speaker 2 (17:25):
Last week, we heard from Neil Keshgard, the head of
the Minneapolis FED, saying, maybe we don't get any rate
cuts this year. Are you prepared for that possibility?
Speaker 5 (17:34):
Well, certainly the economy keeps on humming. It seems quite
impervious to a slowdown, and the FED speak toward the
end of last week, after Chairman Powell was a little
bit more hawkish, but there's no clear signs yet that
the voting, when it happens again, will will choose to postpone.
(17:56):
But even if it does, we've now entered April, and
to me, if the US equity markets are going to
keep moving higher, it's a little bit less about interest rates.
It's more about earnings, and we're going to start to
see earnings this week, and so we're going to need earnings.
Growth expectations are around three to three and a half
(18:17):
percent for the S and P five hundred as a whole.
If companies deliver, it could actually further insulate the market
from let's call it non loosening fears, right or a
longer pace before we see some interest rate cuts.
Speaker 3 (18:36):
I think if you just use good old common sense,
with the economy this strong, and the fact that the
recent earnings were already pretty strong, you could get some
blowout stock gains in this next earning season because some
of these companies, particularly the in the AI related space,
are perhaps bound to have some very strong numbers'll just
(19:01):
and that'll just you know, spike up the denominator and
bring the pees down, and you know, and investors will
be seduced by that. That's a kind of prediction from
a journalist. As journalists covering this stuff, we're all sort
of Monday morning strategists, as it were.
Speaker 5 (19:16):
Well, certainly in big tech, in financials, in the areas
that have been leading and are the biggest weights in
the main market cap indexes, you are going to need
some blowout earnings to to make these valuations reasonable. I
think where we might see the real surprises could be
in energy materials, the sectors that have not been in
(19:39):
favor and yet fundamentals are supporting them. It's hard to
do technical analysis on radio, but if you look at
the SMP energy sector, it actually made all time highs
last week and seems poised to go higher. So I
do think they'll be earning surprises. We've been generally surprised
(20:01):
on the upside on all the other economic statistics. The
question we still will see, and which will make April interesting,
is where those positive earnings are going to be surprising
the market.
Speaker 2 (20:13):
Well assume for the moment that some of that has
already been discounted. I mean, witness the advance that we
had in stocks Friday. I'm wondering whether or not it's
the forecast part of the story that's even more important.
Speaker 5 (20:25):
Yeah. I mean, look, I think analysts have been adjusting
their estimates coming in. We've seen x post reduction of
estimates for you former high flyers like Tesla, and I
think you know, people are getting a little less excited
about another one of the Magnificent seven Apple, but there's
(20:50):
still plenty of room. I would be very surprised if
in Nvidia doesn't surprise again on the upside, which seems
hard to believe given how consistently it's been doing it.
But they're right there in the center of the AI story.
Speaker 3 (21:05):
And just for fun, let me take the opposite side
of a point you made a few moments ago about
about the rotation may may benefit even more. I would
say that there's a chance that rotation takes a pause
here because the earnings could be so strong for those
AI related companies and it's not just AI, but it's
it's also you know, the momentum place like Eli, Lilly
(21:26):
and Novo nor Disc and those those types of companies
just not just AI, but the money may flow back
into them and put rotation on hold. Can you count that?
Speaker 5 (21:38):
Yeah, I mean, the whole notion of rotation and rotation
tends to happen in a healthy and bullish market, is
that the high paying sectors take a pause. They don't
always fall. Pharma definitely can still go further, but you
get new leadership. And it wouldn't be in Congress for
(21:59):
there to be positive earnings on the momentum on the
companies that led the market in the fourth quarter, but
still have the areas that have been out of favor,
like materials and energy continuing to go up. And I
certainly expect that it's hard to ignore what we saw
(22:19):
with energy prices and with the main oil and gas companies,
as well as what we're beginning to see, in my opinion,
in precious metal minors.
Speaker 2 (22:28):
Yeah, no doubt about that, with gold and an all
time high. Stephen, thank you so much for making time
to chat with us. Stephen Schoenfeld as the CEO of
Market Vector Indexes. This has been the Bloomberg Daybreak Asia podcast,
bringing you the stories making news and moving markets in
(22:49):
the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube
to get more episodes of this and other shows from Bloomberg.
Subscribe to the podcast on Apple, Spotify, or anywhere else
you listen and always on Bloomberg Radio, the Bloomberg Terminal
and the Bloomberg Business appen
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:09):
This is the Bloomberg Daybreak Aisia podcast. I'm Doug Prisner.
You can join Brian Curtis and myself for the stories,
making news and moving markets in the APAC region. You
can subscribe to the show anywhere you get your podcast
and always on Bloomberg Radio, the Bloomberg Terminal, and the
Bloomberg Business App.
Speaker 3 (00:28):
Joining us now in our studios in Hong Kong is
Stephanielum who is CIO at Stashaway. For a closer look
at markets, perhaps you can get to China in a moment.
Let's take a quick look at what we see coming
out of the United States. Very strong growth. The economy
seems to be really firing on all cylinders here and
(00:49):
it's causing a little bit of concern about those who
are watching inflation carefully. Stephanie, do you think inflation is
still coming down or should we worry about a reversal?
Speaker 4 (01:00):
Yeah, I think if you look at the latest kind
of growth data, particularly in the jobs market, the US
has been surprisingly strong to a lot of people. And
just think back about three four months ago at the
beginning of the year, the market is actually looking for
the FED to start cutting interest rates in March by
about five six times by the end of this year. Now,
(01:20):
of course, those expectations have been dial back, and right now,
I mean the market is looking at kind of the
second half of the year for the first rate cut,
and perhaps I mean some participants anticipate even later. The
FED itself has signaled that they will do three rate cuts.
Now the market is closer to what the FIL's expecting. However,
we do see some risks that inflation could be kind
(01:43):
of staying higher for longer. And this is something that
we've flagged out in I guess since the past twelve months,
in the sense that if you look at the labor market,
the US labor market, there's reason why it's so strong.
If you look at COVID, COVID actually took away a
lot of jobs, a lot of people actually left their workforce.
I mean those people actually never came back. So if
(02:04):
you look at what the structural shortage of the US
labor market, the US is still short of one million
labor workers compared to pre COVID, and it takes time
for these jobs to be filled or for these people
to kind of move jobs, etc. So it's a structural
problem that we see and this playing app So.
Speaker 2 (02:22):
Is this reacceleration of growth as you're describing it in
the United States? Is that unique to the US. Are
we seeing growth reaccelerate in other parts.
Speaker 5 (02:30):
Of the world.
Speaker 2 (02:31):
Yeah.
Speaker 4 (02:32):
Indeed, the job's tightness is not just particular for the US.
We're seeing the same phenomenon in other developed markets, for
example the UK or other European countries. However, if you
look at the manufacturing cycle, the global manufacturing cycle has
actually been in a downturn for the last eighteen months.
Even that we're seeing signs of bottoming out. So when
(02:55):
you look at the manufacturing sector, which has been relatively
we compared to the service sector, the man of factoring
sector is rebounding, and we see it in the latest
PMI data, not just from the US, from a global perspective.
And also, I think if you look at China data,
China data seems to be bottoming as well. Right if
you look at CPI that has turned past it for
the first time in the last sort of like twelve
(03:15):
to eighteen months. If you look at the China PMI
that has also surpassed expectations. Now atbove fifty again, So.
Speaker 3 (03:22):
This has very wide implications for risk assets. I would
think in the sense that you know, we have discounted
a lot in the gains that we've seen in the
US market AI and perhaps you know the FED cutting
interest rates. I'm not sure we've really discounted you know,
concerted global growth reigniting here.
Speaker 4 (03:40):
Yeah, And I mean this is not where funds are
position If you look at like where the crowded possessions are,
I mean those are off in technology AI kind of
acceectors that are not as leverage to the global cycle.
And I think what you've seen in the past two
weeks or so in the price action of a lot
of commodities, a lot of cyclicals, is that there's been
(04:01):
a very very fast catch up to this kind of
imbalanced in terms of positioning. Now, of course, from a
market perspective, from a risk asset perspective, we think that
this kind of high for longer environment may not be
necessarily bad for equities per se, because companies actually do
pretty well in this kind of inflationary growth environment that
(04:21):
we identify. However, the leadership is going to be a
bit more spread out, not just focused on the AI
companies not just focus on Magnificent seven, but it's spreading
out to cyclicals. So we think there's still i mean
opportunity for its ketchup to go give it a low positioning.
Speaker 2 (04:39):
What about the Japanese equity market. We've got the nie
k today up about four hundred points. We broke about
forty grand last week. We're very close to that now
six hundred points shy of that level. Is there still
opportunity in Japan? Do you think? Yeah?
Speaker 4 (04:54):
I think from a short term perspective, I mean, things
are a bit overbought, and there's kind of concern about
the yeah and potentially getting intervention from the boj However,
if you look at a longer time frame, we're actually
structurally a lot more possile in Japan compared to other
Asia Pacific kind of economies, because there are signs that
(05:15):
Japan is finally getting of deflation, and deflation has been
kind of the worry about central bank, the worry of
Japan for the last thirty years.
Speaker 6 (05:24):
So if you look at Nikki.
Speaker 4 (05:25):
Itself, for example, it has just surpassed the high that
it made in the early eighties. So this deflationary kind
of end of deflationary era is going to play out
over the next few years. So I think if there's
a correction in Japan, it would be a good time
for investors to accumulate, if they're not exposed already.
Speaker 3 (05:44):
So there are a lot of aspects of the current
environment that look very positive, particularly for investing in risk assets.
You have inflation arguably coming down in the US, and
you have wages that are at four point one percent
higher than inflation, protecting workers there to a certain degree.
And yet the Fed funds rate is well above that
(06:05):
rate at five and a half percent or so. But
that worries some people when things look too good, you know,
it makes you nervous. Should we be nervous?
Speaker 4 (06:14):
Yes, I am. I'm actually I think if we think
about where which as a classes we're worried about, we're
actually worry about government bonds duration. Given that the narrative
of high for longer may be here to stay with
us for the next few years. I think bonds actually
have less become less attractive in this environment.
Speaker 6 (06:37):
And you're seeing it in.
Speaker 4 (06:38):
Sort of the breakout of goal as well. So gold
actually had a breakout in March and a lot of
people wondering, I mean, why is goal breaking out. There's
no kind of snic the news, there's no actually large
buying actions. I think what the market is sniffing out
is that in March we had a very very strong
US data coming out, which surprised everybody. However, the FED
(06:59):
is still sticking to is a rate cut of three
times this year. So the fat is telling you that,
I mean, they're willing to sustain. They're willing to kind
of stomach higher inflation in the future compared to what
they've done in the past. And I think that's what
the goal market is telling us, is that in this
kind of high inflation environment, bond investors should be thinking
(07:21):
about I mean goal instead or other kind of commodities instead.
So I think that is the reason.
Speaker 2 (07:27):
Last question. You know, we had a US based investor
visiting Hong Kong last week and when I asked her,
one of the things that was most surprising, she said
that most people in Hong Kong feel as though Donald
Trump would be elected president. I mean, if that's the case,
what does a Trump presidency do to your thesis on
putting money to work.
Speaker 4 (07:45):
Yeah, I think we put out a piece looking at
kind of like, what are the policy implications of buy
the versus Trump. I think, of course, right now is
still way too early. We've still got a few months ago. However,
I think one of the things that we're looking at
is sort of the historical precedence of this, and we
think that actually the correct situation still favors Biden.
Speaker 6 (08:08):
So we'll see, I mean a few months later.
Speaker 3 (08:11):
All right, Stephanie, thank you very much for joining us.
I'm sure we'll have you in our studios a few
times between now and then. Stephanie lynge cio.
Speaker 6 (08:20):
At Stashaway.
Speaker 3 (08:37):
Joining us now for some discussion of markets is Nancy Davis,
founder and portfolio manager at Quadratic Capital Management. Well, we
had that strong jobs month of job creation during the
last month, Nancy, and I wonder whether or not, since
this may not sit so well with the Fed, whether
we'll see a lot more hawkish commentary coming from the Fed.
Speaker 1 (09:00):
Well, you know this payroll report, it was the fourth
consecutive upside surprise, and now most of the job gains
were in healthcare and government. But you know, definitely the
market expectations for the rate cuts have fallen dramatically in
twenty twenty four, We're now pricing about two and a
half rate cuts, as you can see on your Bloomberg terminal,
(09:22):
and that's a lot less than where we started the
year at about six cuts. But there is still room
if the job's data continues to be so hot. I
guess we'll see what the CPI print brings this week.
Speaker 3 (09:34):
In the US, we.
Speaker 2 (09:36):
Were talking a moment ago about the oil price. I mean,
we have a brent just under ninety one bucks at
the moment. There's a lot of talk on the straight
about the possibility of a resurgence and commodity driven inflation.
Are you concerned about that at all and how that
may force the Fed to really do nothing in terms
of changing policy.
Speaker 6 (09:56):
You know, it's definitely a concern.
Speaker 1 (09:58):
There's so many all so climate as well as other
things going on around the world, whether it's the droughts
or even the bridge that just broke down, that's really
going to probably be driving the price of oil specifically.
But if you look at the commodities index, a lot
of the rally is actually cocoa like chocolate. So I
(10:19):
think the index overall for the commodities market is a
little kind of distorted because of that huge spike in cocoa.
But I definitely think the FED is keeping an eye
on that because you know, it's tricky. The battle for
inflation has kind of been declared a victory, and they're
(10:41):
easing now or saying they're going to be easing. I
think it's a question of whether easing is appropriate or
whether whether inflation is going to be more sticky.
Speaker 3 (10:51):
Nancy, would you not say, though, that inflation still appears
to be on a downward trajectory, we may see higher
energy prices. This is one of the reasons the FED
kind of separates that when it looks at core, but
then you also have shelter that is expected to be
coming down, and shelter is such a huge part of
(11:11):
the CPI thirty odd percent or so. Isn't it likely
that we'll still see it. It's just that we won't
see it happen as fast as we had thought or hoped. Well.
Speaker 1 (11:22):
I think you bring up a great point because CPI
is just an index, right, the consumer price index. It's
like any other index out there. It's probably not the
only way to measure inflation. It's even an index that
the FED sort of discounts, right. They use survey data
more or the PCE, and CPI is also the year
of a year change. So I think the tricky thing
(11:43):
is CPI has been coming down and people expect Shelter
to really drive sort of the downward trajectory. But I
think if you look at average Americans and their real
life cost a living, it's not really come down, like
things are quite still expensive. Of lots of things are
feeling quite inflationary in the day to day wives. So
(12:06):
you have CPI saying one thing, and then it's also
so sorted from the as you point out the rent component,
which is about a third.
Speaker 2 (12:14):
So earning season kicks off Friday, we get the big banks,
JP Morgan Wells City Group. I mean, how do you
think earning season is going to shape up this year
for the first quarter.
Speaker 1 (12:26):
Well, it's tricky with the banks because the US yield
curve is still massively inverted. So what that means is
long dated yields in the US are lower than short
dated yields, and that's really tricky for a bank. Also,
trading volumes haven't been tremendous. Everything is sort of going
(12:47):
up this year, right, twenty twenty four has been sort
of the everything is amazing. Everything is rallying. I think
the one thing that is falling is inflation expectations, but
besides that, everything else is up, So it's it's definitely
a tricky time for earnings. And I i'm you know,
I'm I think the yield curve being so inverted in
(13:09):
the US is also a pain point for the banks.
Speaker 3 (13:13):
I know that the appearance is that everything goes up
and the indexes have but individual stocks, I mean, plenty
are getting really punished. I mean, you just look at
a company like Lululemon, came out with its earnings, wasn't
really all that bad, didn't give a strong forecast, and
was slammed. So I mean, I don't think that's a
good thing or a bad thing, but I do think
(13:34):
it makes for an interesting time for you know, stock.
Speaker 1 (13:38):
Picking, definitely. I mean, the market is quite complacent right now.
If you think back to twenty twenty two, when everything
was going down, the you know, sentiment was really terrible.
Right now, it's kind of opposite day where everybody is
very soft landing. Everything's fine, the Fed's going to cut
Inflation's not a problem. Everyone is super complacent that things
(14:01):
are going to be okay. And I think that's the
time that investors should really prick up and be worried.
Right when everyone gets very complacent, that's kind of when
surprises can happen.
Speaker 2 (14:12):
Are you more exposed to the US right now than
you are to markets offshore?
Speaker 1 (14:18):
So I manage two fixed income funds that are both
treasury funds, So for my my portfolio management is very
focused on the US. But that's by perspectus. So, but
I do think there are a lot of great opportunities
out there in emerging markets, in fixing everyone in fixed
income and even equities, you know, going talking about complacency,
(14:40):
you know, there are certain markets that everyone hates, you know,
like it's I guess being a contrarian. I think it's
always interesting to look at the things that are out
of favor or the things that people don't expect.
Speaker 3 (14:54):
Where do you see some of the best value in
local currency em fixed in.
Speaker 1 (15:02):
Well, everyone's really excited about Japan right now. They've just
changed their yield curve control ended that it's a new
kind of regime, a new governor, and so I think
a lot of people are looking at Japan to say, hey,
are we going to have a new you know, kind
of a new era to get out of this this
decade long deflation and have more interesting markets. But Japan
(15:26):
has always been the widow maker with people trying to
play for higher yields. So it's also, you know, it's
so you know, betting that bonds jgb's sell off has
really been a really really tricky and bad thing to play.
Speaker 2 (15:42):
So to play to your strength. I mean, if you're
focused on US treasuries, let's talk about the shorter end
of the curve. Here is the two year of screaming
by at four seventy five.
Speaker 1 (15:53):
I don't think so the you know, it's really I
think two year yields probably will be going low. But
I think if you're going to look at the front end,
you know, if you pull up your Bloomberg terminal and
you tape p X one, that's the code to look
at the t bill market, and you can see you
can buy a one year, one month te bill and
get paid five point three percent, right, So why you know,
(16:16):
I feel like, if you're going to stay in the
short end, don't really make a bet about whether the
Fed how many times they're going to cut, because that's
what you're getting.
Speaker 6 (16:24):
Whereas I think.
Speaker 1 (16:25):
The long end of the curve. You know you're not.
That's a negative term premium, so you're really not getting
paid to take that risk.
Speaker 3 (16:32):
All right, Nancy, thanks very much for joining us. Nancy Davis,
founder and portfolio manager at Quadratic Capital Management.
Speaker 2 (16:56):
Let's get to our guests. Stephen Schoenfeld is with us.
Stephen is the CEO at market Vector's Indexes. He joins
us from here in New York City. Good of you
to stop by. I want to begin by what appears
to be, if you look at the jobs data, a
reacceleration of the American economy, and I think it's fair
to say a real risk that interest rates may need
(17:18):
to remain elevated for much longer than the market had
been predicting, or at least the FED had been guiding.
Speaker 3 (17:24):
On.
Speaker 2 (17:25):
Last week, we heard from Neil Keshgard, the head of
the Minneapolis FED, saying, maybe we don't get any rate
cuts this year. Are you prepared for that possibility?
Speaker 5 (17:34):
Well, certainly the economy keeps on humming. It seems quite
impervious to a slowdown, and the FED speak toward the
end of last week, after Chairman Powell was a little
bit more hawkish, but there's no clear signs yet that
the voting, when it happens again, will will choose to postpone.
(17:56):
But even if it does, we've now entered April, and
to me, if the US equity markets are going to
keep moving higher, it's a little bit less about interest rates.
It's more about earnings, and we're going to start to
see earnings this week, and so we're going to need earnings.
Growth expectations are around three to three and a half
(18:17):
percent for the S and P five hundred as a whole.
If companies deliver, it could actually further insulate the market
from let's call it non loosening fears, right or a
longer pace before we see some interest rate cuts.
Speaker 3 (18:36):
I think if you just use good old common sense,
with the economy this strong, and the fact that the
recent earnings were already pretty strong, you could get some
blowout stock gains in this next earning season because some
of these companies, particularly the in the AI related space,
are perhaps bound to have some very strong numbers'll just
(19:01):
and that'll just you know, spike up the denominator and
bring the pees down, and you know, and investors will
be seduced by that. That's a kind of prediction from
a journalist. As journalists covering this stuff, we're all sort
of Monday morning strategists, as it were.
Speaker 5 (19:16):
Well, certainly in big tech, in financials, in the areas
that have been leading and are the biggest weights in
the main market cap indexes, you are going to need
some blowout earnings to to make these valuations reasonable. I
think where we might see the real surprises could be
in energy materials, the sectors that have not been in
(19:39):
favor and yet fundamentals are supporting them. It's hard to
do technical analysis on radio, but if you look at
the SMP energy sector, it actually made all time highs
last week and seems poised to go higher. So I
do think they'll be earning surprises. We've been generally surprised
(20:01):
on the upside on all the other economic statistics. The
question we still will see, and which will make April interesting,
is where those positive earnings are going to be surprising
the market.
Speaker 2 (20:13):
Well assume for the moment that some of that has
already been discounted. I mean, witness the advance that we
had in stocks Friday. I'm wondering whether or not it's
the forecast part of the story that's even more important.
Speaker 5 (20:25):
Yeah. I mean, look, I think analysts have been adjusting
their estimates coming in. We've seen x post reduction of
estimates for you former high flyers like Tesla, and I
think you know, people are getting a little less excited
about another one of the Magnificent seven Apple, but there's
(20:50):
still plenty of room. I would be very surprised if
in Nvidia doesn't surprise again on the upside, which seems
hard to believe given how consistently it's been doing it.
But they're right there in the center of the AI story.
Speaker 3 (21:05):
And just for fun, let me take the opposite side
of a point you made a few moments ago about
about the rotation may may benefit even more. I would
say that there's a chance that rotation takes a pause
here because the earnings could be so strong for those
AI related companies and it's not just AI, but it's
it's also you know, the momentum place like Eli, Lilly
(21:26):
and Novo nor Disc and those those types of companies
just not just AI, but the money may flow back
into them and put rotation on hold. Can you count that?
Speaker 5 (21:38):
Yeah, I mean, the whole notion of rotation and rotation
tends to happen in a healthy and bullish market, is
that the high paying sectors take a pause. They don't
always fall. Pharma definitely can still go further, but you
get new leadership. And it wouldn't be in Congress for
(21:59):
there to be positive earnings on the momentum on the
companies that led the market in the fourth quarter, but
still have the areas that have been out of favor,
like materials and energy continuing to go up. And I
certainly expect that it's hard to ignore what we saw
(22:19):
with energy prices and with the main oil and gas companies,
as well as what we're beginning to see, in my opinion,
in precious metal minors.
Speaker 2 (22:28):
Yeah, no doubt about that, with gold and an all
time high. Stephen, thank you so much for making time
to chat with us. Stephen Schoenfeld as the CEO of
Market Vector Indexes. This has been the Bloomberg Daybreak Asia podcast,
bringing you the stories making news and moving markets in
(22:49):
the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube
to get more episodes of this and other shows from Bloomberg.
Subscribe to the podcast on Apple, Spotify, or anywhere else
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