July 20, 2025 • 17 mins
The yen recouped some of last week's losses as investors weighed the extent of the defeat suffered by Japan's ruling coalition in the weekend's upper-house election. Asian stock markets edged down. Japan's currency had dropped for two weeks and bond yields spiked ahead of the vote on concern a poor showing by Prime Minister Shigeru Ishiba would open the door to more spending and tax cuts. While the ruling Liberal Democratic Party and its partner lost their majority in the chamber, their final tally may be enough to keep Ishiba in the job. We get reaction from Shuntaro Takeuchi, Portfolio Manager at Matthews Asia.
Plus - Donald Trump is struggling to get the Federal Reserve to cut interest rates, but policymakers around the world won't need so much convincing. The US president's tariff onslaught is likely to force further measured easing in coming months by most of the 23 central banks featured in this quarterly guide on the global monetary outlook, according to Bloomberg Economics. Federal Reserve Governor Christopher Waller hinted he would dissent if his colleagues vote to hold interest rates steady at their July meeting, making his case for a rate cut to support the labor market. We take a look at the Fed's path ahead with Clayton Triick, Head of Portfolio Management, Public Strategies, at Angel Oak Capital.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:10):
Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.
So we know that Donald Trump has been pressuring the
Fed to cut its policy rate, and in a moment
we'll look at the outlook for US rates with Clayton Trick.
He is head of portfolio management at angel Oak Capital.
But we begin in Japan, where Prime Minister Shigiri Ishiba
says he is intending to stay on despite his ruling
(00:32):
coalition suffering and historic setback over the weekend in the
Upper House election, the ruling Liberal Democratic Party and its
longtime ally the Kometo Party, failed to retain a majority
in the Upper House. Bloomberg Asia Economy editor Yuko Takeo
says this outcome may complicate ongoing trade talks with.
Speaker 3 (00:52):
The US Panist face across the board Tarisel twenty five
per cent from what was the first borring a deal
of the US. So far, there as being nothing concrete
to sure after Japan's chief trade negotiat A Akasawa, has
been to the US seven times already, so now the
ruling coalition will have to continue negotiations from a weakerd
(01:13):
domestic position with the deadline for higher tariffs coming up.
Speaker 2 (01:17):
That is Bloomberg's Uco Takeo in Tokyo for a closer look. Now,
I'm joined by Shintaro taka Yuchi, portfolio manager at Matthews Asia. Shintaro,
thank you so much for making time to chat with me.
Let me just begin by getting your reaction to the
outcome of the election in Japan over the weekend.
Speaker 1 (01:34):
Yes, so over the weekend, LDP KOME lost this majority
on the Upper House election, which is basically another loss
because they lost another election last autumn, so both houses
they have lost the majority, and going forward it would
be tougher operation of including the US SAFF negotiations and
(01:59):
also internal domestic policies for as they will need to
negotiate well to multiple parties going forward. In terms of
the initial market reactions, obviously the equity markets is closed
on Monday, but the currency has basically being flat or
stayed basically the same. This is because over the past
(02:23):
few weeks there has been a lot of media reports
that the LEDP COME coalition is going to lose the majority,
but given that the final outcome has only been the
lost of majority, but only by a couple of seats.
It's basically saying that it is in line with market
expectation ahead of the election itself.
Speaker 2 (02:44):
So can we expect a lot more in the way
of government spending as the result of this.
Speaker 1 (02:50):
Yes, of course Japanese government that to GDP is at
a elevated level. But many of the opposing parties who
have called for many tax cuts and basically have their
voices heard and increase their seats by quite a margin.
So these are all negotiations going forward. But in terms
(03:12):
of the directions, I think these kind of budgets will
need to be a little bit more, a bit more expanded.
Speaker 2 (03:18):
It's kind of interesting because inflation in Japan for a
while now has been well above the boj's two percent target.
Where do you think the BOJ kind of fits into
this story? Now? With the upheaval that we're talking about
in the diet of the Japanese Parliament, where does this
leave the governor UITA and BOJ policy.
Speaker 1 (03:40):
So current market consensus is about fifty to fifty and
whether the BOG will raise rates by another twenty five
basis points within this calendar year and maybe another twenty
five basis points on next spring the BOJ. We think
that is focused more on the wage growth. The real
wage growth happening. Negotiation of how much the wage growth
(04:04):
will be seen from japan corporates and its employee is
the data that BOG is looking very carefully on.
Speaker 2 (04:13):
So we know that recently the equity market in Japan,
up until this year, had been doing very well. I
mean we've seen a struggle recently. Are there still opportunities
in the Japanese equity space in your view?
Speaker 1 (04:26):
Yes, we think so. Despite the very anemic GDP growth
for Japan as a country for multiple decades. It is
important to note that Japanese equity markets is investing in
Japanese corporate profits and half of the profits actually come
from growth in overseas, so there has been a steady
(04:48):
earnings growth over more than a decade for Japanese corporates.
And on top of this, especially over the past few years,
you have seen many meaningful improvements in the corporate and
also leading to higher payouts, buybacks and dividends. And currently
Japanese markets are still training at a substantial discount to
(05:11):
European and US markets, primarily due to lower return on equities.
But finally, the Japanese corporates are making actions to improve
that on that front.
Speaker 2 (05:22):
Shantaro, I'm curious as to how much of your optimism
is tied to a successful outcome in trade negotiations with
the US. And if that is your point of view,
can you give me a sense of what you expect
the effective tariff rate with the US to be?
Speaker 1 (05:38):
So in terms of the tariffs, I have to admit
that negotiation, but when US and Japan around tariffs have
been taking longer time than we had anticipated. You know,
exports sector, especially automobiles, has been a victim of an
uncertainty and impact of tariffs. And you know the amount
of the percentage of the tariff itself. When we look
(05:58):
at how Japan puts terrify on it's US imports, there's
barely any except for a couple of agricultural and products.
So I don't have like a set number of what
is the optimal tiff rates. But as an investor, as
a long term, long only investor, what we look for
is to look for companies that actually weather through the
(06:21):
storm and will actually come out stronger after this.
Speaker 2 (06:24):
So are there industries you mentioned the autos I'm thinking of,
so of steel. When I'm thinking about trade with the
United States, are there industries that you're focused on primarily?
Speaker 1 (06:35):
So currently over the near term, we look for subsectors
and areas that are not impacted by the tariffs, namely
in like domestic industries within Japan that actually benefits from
labor shortages such as constructions, basically commanding a higher margin
as a result of that. Also in software and IP
(06:58):
such as games in other areas, those have relatively limited
impact to the US and tariff negotiations, so that we
are focusing on right now. However, we're not alone thinking
the same same thing, so we are also looking for
these kind of impacted sectors being underweight by the widest
(07:22):
margin in a couple of decades. So we're focusing and
taking a lot look in these outcomes of the negotiations,
but we're not setting any calendars of when this will dissolve,
and it's taking a little bit longer than we had anticipated.
Speaker 2 (07:38):
So let's move away from Tokyo and Washington and the
tension that may exist on that front. And I'm curious
about Japan's relationships with some of the other trading partners
it has in the Asia Pacific principally China. Is this
something that you're also taking into consideration that maybe that
relationship becomes a little bit more meaningful From the Japanese side, I.
Speaker 1 (08:01):
Think overall, I wouldn't say I would not say that
the globalization trend has reversed, but we think that the
trend of globalization has at least slowed down, meaning to
a lot of capital expenditure being more diversified globally, and
(08:22):
our view is that that actually benefits many Japanese companies
that make critical components and services in the capital of expenditure,
especially in the manufacturing sector. So because of these tensions,
you can no longer consolidate every single manufacturing in a
single country. Rather you have to make things in the
(08:44):
United States, you make things in China, you make things
in elsewhere, which means that there will be a duplication
of capital expenditure across the globe, and we look for
opportunities that benefit from that trend.
Speaker 2 (08:55):
So Shintaro just to put a button on it. When
you look at the dynamics between Japan and China, strengthening
that trading relationship, that would be something that you would
look for in terms of trying to find opportunity right correct. Okay, Shintaro,
thank you so much. Shintaro Takayuchi, portfolio manager at Matthews Asia,
joining us here on the Daybreak Asia podcast. Welcome back
(09:24):
to the Daybreak Asia Podcast. I'm Doug Chrisner. So we
know the impact of the trade war on growth and
inflation differs across economies globally. Now Here in the US,
the potential for tariffs to be inflationary is keeping the
FED in this weight and see mode. Policymakers are now
in a blackout period ahead of the Fed's July thirtieth
(09:45):
rate decision. Now in the US, last Friday, Governor Chris
Waller reiterated his case for a rate cut, and Waller
hinted that he would dissent if his FED colleagues voted
to hold rate steady this month. For a closer look
now at the rate outlook, I'm joined by Clayton Trick.
He is head of portfolio management and public Strategies at
Angel Oak Capital. Clayton is on the line from Atlanta, Georgia. Clayton,
(10:08):
thank you so much for making time to chat with me.
Is there a case to be made for cutting the
policy rate as soon as this month.
Speaker 4 (10:16):
Doug, good to be with you again. Yeah, we do
think so this meeting is obviously definitely on the early end.
But if you do look across developed economies, thinking about
where the current FED funds rate is in the United
States versus inflation, you know, it's definitely on the higher end,
i e. The real policy rate is one of the
highest levels. So there is an impetus to cutting rates
(10:38):
potentially at this meeting. We think the likelihood is extremely low,
given the Fed doesn't like to surprise the market, and
the probability is, you know, almost zero percent for this meeting.
But that being said, you know, we do think that
you know, rates could definitely be lower. That was our expectation,
you know, a few months ago going into the year,
and in our mid you're outlooking, we do expect that
the Fed funds rate you know, most likely be moving
(11:00):
lower in the next couple of months.
Speaker 2 (11:02):
I'm wondering about the tariff story, because Bloomberg Economics is
estimating that the average US tariff rate will have risen
to above thirteen percent. It was a little more than
two percent back in January. Isn't there a risk that
tariffs really create much higher inflation, and that argues for
at least keeping rates on hold for the foreseeable future.
Speaker 4 (11:24):
We do think that you could see, you know, some
bumps in the road here on inflation. You know, that
being said, kind of the overall tail risk that you
would get a significant rise and sustained inflation and core
inflation over the next three to nine months, we think
is a much lower risk today than it was just
a few months ago. So overall we think we could
(11:46):
see some bumps. You know, the last time we saw
higher tariffs, you know, that was a one time pass through.
If you look at what's driving inflation, you know, over
the intermediate term, housing prices, rent prices continued to move lower.
Actually in some places you're seeing falling home prices. That's
thirty percent of PCE and thirty percent of poor CPI
(12:08):
is shelter. And with those headwinds there in the economy
looking to lose momentum, we do think overall, core inflation
should not be surprising that much higher overall and gives
the FED the ability to kind of look through to
the longer term and potentially move rates lower even if
there's some bumps in the road. Modestly with inflation.
Speaker 2 (12:27):
So let's look at the tariff story from the other
side of the equation that it begins to hurt growth.
Obviously that would argue for lower rates. But do you
think the growth story is going to suffer a little
bit as the consequence of tariffs.
Speaker 1 (12:39):
Yeah, we do.
Speaker 4 (12:40):
We think growth is definitely continued to slow. The economy
has been losing momentum. We put this in our outlook
illustrating the GDP growth the last few years has continue
to decelerate. You know, you look at the labor market.
We've also seen a fall on average payrolls. So last
year in twenty twenty four, we had average payrolls over
one hundred and fifty thousand per mons month. You now
(13:01):
you're about one hundred and thirty thousand with last month's beat.
So you know, all eyes will be on the labor
market overall. But with the economy losing momentum here and
tariffs most likely will end up being higher, even if
they're not as high as the initial fears at the
Liberation day, that is negative for growth, and so that
sets up well for what I think Waller's kind of
(13:21):
pointing to.
Speaker 2 (13:22):
So in the week ahead, we're going to get two
reports on the housing market. Sales have previously owned homes
is one. I think that data arrives Wednesday Thursday. New
home sales. How are you understanding the housing market right
now and what the rates environment is doing, particularly the
mortgage market, the impact it's having on the real estate sector.
Speaker 4 (13:43):
It seems like consumers are continued to be surprised that
mortgage rates are staying this elevated. Right You're still seeing
thirty year mortgage rates, you know, between six and a
half to seven percent at a time, and home prices
are still very elevated. So overall affordability is quite overall
and within the kind of in the micro level for housing,
(14:05):
we've had such low inventory that only a little bit
of demand has been able to clear these levels. But
we have really seen a significant rise in supply. We
saw supply rise over the last eighteen months almost every
single month, and we actually see today as kind of
more of a buyer's market, given there's so much more
sellers in the overall housing market than buyers right now,
(14:27):
and so home prices should continue to be softer. We
don't see new home sales or existing home sales really
surprising to the upside right now. We actually think that
the housing finance markets are in great shape. But as
far as think about our home prices are going, most
likely they're going to be flat or potentially negative next year.
Speaker 2 (14:46):
On the margin, I'd like to get your take on
the MUNI market, particularly in the wake of the passage
of the Big Beautiful build. This could end up putting
a lot more stress on revenues for state governments, and
I'm wondering whether or not you have to be a
little bit more cautious when you begin to identify opportunities
in the MUNI market going forward.
Speaker 4 (15:06):
You know, overall, we do think that the short term
kind of changes for communities and for revenue, and as
you mentioned the Big Beautiful bill, you know, that's really
just kind of setting up buying opportunities in the short term.
Over the long term, we've seen a lot of budgets,
you know, kind of being fixed in a lot of
the asset liability mismatch and mismanagement, and pensions have improved
(15:29):
so significantly with stocks up so much, so we actually
view anything kind of short term ball in munis is
actually a pretty strong buying opportunity.
Speaker 1 (15:38):
We saw that earlier this year and if.
Speaker 4 (15:39):
We see that again in the second half, we think
that could continue to be of another buying opportunity as well.
Speaker 2 (15:43):
So broadly speaking, when you look at the fixed income space, Clayton,
where do you want to be positioned on the curve
right now?
Speaker 4 (15:50):
Yeah, so we see really attractive opportunities in the short
intermediate term on the long end of the O curve.
You know, while the average ten years real rate is
around two hundred basis points, and that only averaged about
eighty basis points the last twenty years, it does look
really really attractive. That being said, with the unsustainable level
(16:11):
of the fiscal side of the picture, we think there
could be a lot of all in tenure yields in
twenty and thirty year yields, And so we see much
better opportunity in short and intermediate term fixed rate bonds.
You know, the easy money's kind of been made when
it comes to investment great corporates and highal corporates, but
fixed straight bonds within mortgage backed securities, asset back bonds
(16:31):
and selective areas of corporates actually look really really strong
right now. We saw that for the first half of
the year, returns have been right in line with their expectations,
and the vall has been so low for those that
portion of the market versus if you look at the
steering deviation of the S and P it was around
thirty the first half of the year. So great returns
and fixed incomes so far with you that most likely
will continue for the second half of the year.
Speaker 2 (16:52):
Clayton will leave it there. Thank you so much. Clayton
Trick there. He is head of portfolio management and public
Strategies at Angel Oak Capital. On the line from Atlanta
here on the Daybreak Asia podcast. Thanks for listening to
today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,
(17:12):
we look at the story shaping markets, finance, and geopolitics
in the Asia Pacific. You can find us on Apple, Spotify,
the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Join us again tomorrow for insight on the market moves
from Hong Kong to Singapore and Australia. I'm Doug Chrisner,
and this is Bloomberg
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:10):
Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.
So we know that Donald Trump has been pressuring the
Fed to cut its policy rate, and in a moment
we'll look at the outlook for US rates with Clayton Trick.
He is head of portfolio management at angel Oak Capital.
But we begin in Japan, where Prime Minister Shigiri Ishiba
says he is intending to stay on despite his ruling
(00:32):
coalition suffering and historic setback over the weekend in the
Upper House election, the ruling Liberal Democratic Party and its
longtime ally the Kometo Party, failed to retain a majority
in the Upper House. Bloomberg Asia Economy editor Yuko Takeo
says this outcome may complicate ongoing trade talks with.
Speaker 3 (00:52):
The US Panist face across the board Tarisel twenty five
per cent from what was the first borring a deal
of the US. So far, there as being nothing concrete
to sure after Japan's chief trade negotiat A Akasawa, has
been to the US seven times already, so now the
ruling coalition will have to continue negotiations from a weakerd
(01:13):
domestic position with the deadline for higher tariffs coming up.
Speaker 2 (01:17):
That is Bloomberg's Uco Takeo in Tokyo for a closer look. Now,
I'm joined by Shintaro taka Yuchi, portfolio manager at Matthews Asia. Shintaro,
thank you so much for making time to chat with me.
Let me just begin by getting your reaction to the
outcome of the election in Japan over the weekend.
Speaker 1 (01:34):
Yes, so over the weekend, LDP KOME lost this majority
on the Upper House election, which is basically another loss
because they lost another election last autumn, so both houses
they have lost the majority, and going forward it would
be tougher operation of including the US SAFF negotiations and
(01:59):
also internal domestic policies for as they will need to
negotiate well to multiple parties going forward. In terms of
the initial market reactions, obviously the equity markets is closed
on Monday, but the currency has basically being flat or
stayed basically the same. This is because over the past
(02:23):
few weeks there has been a lot of media reports
that the LEDP COME coalition is going to lose the majority,
but given that the final outcome has only been the
lost of majority, but only by a couple of seats.
It's basically saying that it is in line with market
expectation ahead of the election itself.
Speaker 2 (02:44):
So can we expect a lot more in the way
of government spending as the result of this.
Speaker 1 (02:50):
Yes, of course Japanese government that to GDP is at
a elevated level. But many of the opposing parties who
have called for many tax cuts and basically have their
voices heard and increase their seats by quite a margin.
So these are all negotiations going forward. But in terms
(03:12):
of the directions, I think these kind of budgets will
need to be a little bit more, a bit more expanded.
Speaker 2 (03:18):
It's kind of interesting because inflation in Japan for a
while now has been well above the boj's two percent target.
Where do you think the BOJ kind of fits into
this story? Now? With the upheaval that we're talking about
in the diet of the Japanese Parliament, where does this
leave the governor UITA and BOJ policy.
Speaker 1 (03:40):
So current market consensus is about fifty to fifty and
whether the BOG will raise rates by another twenty five
basis points within this calendar year and maybe another twenty
five basis points on next spring the BOJ. We think
that is focused more on the wage growth. The real
wage growth happening. Negotiation of how much the wage growth
(04:04):
will be seen from japan corporates and its employee is
the data that BOG is looking very carefully on.
Speaker 2 (04:13):
So we know that recently the equity market in Japan,
up until this year, had been doing very well. I
mean we've seen a struggle recently. Are there still opportunities
in the Japanese equity space in your view?
Speaker 1 (04:26):
Yes, we think so. Despite the very anemic GDP growth
for Japan as a country for multiple decades. It is
important to note that Japanese equity markets is investing in
Japanese corporate profits and half of the profits actually come
from growth in overseas, so there has been a steady
(04:48):
earnings growth over more than a decade for Japanese corporates.
And on top of this, especially over the past few years,
you have seen many meaningful improvements in the corporate and
also leading to higher payouts, buybacks and dividends. And currently
Japanese markets are still training at a substantial discount to
(05:11):
European and US markets, primarily due to lower return on equities.
But finally, the Japanese corporates are making actions to improve
that on that front.
Speaker 2 (05:22):
Shantaro, I'm curious as to how much of your optimism
is tied to a successful outcome in trade negotiations with
the US. And if that is your point of view,
can you give me a sense of what you expect
the effective tariff rate with the US to be?
Speaker 1 (05:38):
So in terms of the tariffs, I have to admit
that negotiation, but when US and Japan around tariffs have
been taking longer time than we had anticipated. You know,
exports sector, especially automobiles, has been a victim of an
uncertainty and impact of tariffs. And you know the amount
of the percentage of the tariff itself. When we look
(05:58):
at how Japan puts terrify on it's US imports, there's
barely any except for a couple of agricultural and products.
So I don't have like a set number of what
is the optimal tiff rates. But as an investor, as
a long term, long only investor, what we look for
is to look for companies that actually weather through the
(06:21):
storm and will actually come out stronger after this.
Speaker 2 (06:24):
So are there industries you mentioned the autos I'm thinking of,
so of steel. When I'm thinking about trade with the
United States, are there industries that you're focused on primarily?
Speaker 1 (06:35):
So currently over the near term, we look for subsectors
and areas that are not impacted by the tariffs, namely
in like domestic industries within Japan that actually benefits from
labor shortages such as constructions, basically commanding a higher margin
as a result of that. Also in software and IP
(06:58):
such as games in other areas, those have relatively limited
impact to the US and tariff negotiations, so that we
are focusing on right now. However, we're not alone thinking
the same same thing, so we are also looking for
these kind of impacted sectors being underweight by the widest
(07:22):
margin in a couple of decades. So we're focusing and
taking a lot look in these outcomes of the negotiations,
but we're not setting any calendars of when this will dissolve,
and it's taking a little bit longer than we had anticipated.
Speaker 2 (07:38):
So let's move away from Tokyo and Washington and the
tension that may exist on that front. And I'm curious
about Japan's relationships with some of the other trading partners
it has in the Asia Pacific principally China. Is this
something that you're also taking into consideration that maybe that
relationship becomes a little bit more meaningful From the Japanese side, I.
Speaker 1 (08:01):
Think overall, I wouldn't say I would not say that
the globalization trend has reversed, but we think that the
trend of globalization has at least slowed down, meaning to
a lot of capital expenditure being more diversified globally, and
(08:22):
our view is that that actually benefits many Japanese companies
that make critical components and services in the capital of expenditure,
especially in the manufacturing sector. So because of these tensions,
you can no longer consolidate every single manufacturing in a
single country. Rather you have to make things in the
(08:44):
United States, you make things in China, you make things
in elsewhere, which means that there will be a duplication
of capital expenditure across the globe, and we look for
opportunities that benefit from that trend.
Speaker 2 (08:55):
So Shintaro just to put a button on it. When
you look at the dynamics between Japan and China, strengthening
that trading relationship, that would be something that you would
look for in terms of trying to find opportunity right correct. Okay, Shintaro,
thank you so much. Shintaro Takayuchi, portfolio manager at Matthews Asia,
joining us here on the Daybreak Asia podcast. Welcome back
(09:24):
to the Daybreak Asia Podcast. I'm Doug Chrisner. So we
know the impact of the trade war on growth and
inflation differs across economies globally. Now Here in the US,
the potential for tariffs to be inflationary is keeping the
FED in this weight and see mode. Policymakers are now
in a blackout period ahead of the Fed's July thirtieth
(09:45):
rate decision. Now in the US, last Friday, Governor Chris
Waller reiterated his case for a rate cut, and Waller
hinted that he would dissent if his FED colleagues voted
to hold rate steady this month. For a closer look
now at the rate outlook, I'm joined by Clayton Trick.
He is head of portfolio management and public Strategies at
Angel Oak Capital. Clayton is on the line from Atlanta, Georgia. Clayton,
(10:08):
thank you so much for making time to chat with me.
Is there a case to be made for cutting the
policy rate as soon as this month.
Speaker 4 (10:16):
Doug, good to be with you again. Yeah, we do
think so this meeting is obviously definitely on the early end.
But if you do look across developed economies, thinking about
where the current FED funds rate is in the United
States versus inflation, you know, it's definitely on the higher end,
i e. The real policy rate is one of the
highest levels. So there is an impetus to cutting rates
(10:38):
potentially at this meeting. We think the likelihood is extremely low,
given the Fed doesn't like to surprise the market, and
the probability is, you know, almost zero percent for this meeting.
But that being said, you know, we do think that
you know, rates could definitely be lower. That was our expectation,
you know, a few months ago going into the year,
and in our mid you're outlooking, we do expect that
the Fed funds rate you know, most likely be moving
(11:00):
lower in the next couple of months.
Speaker 2 (11:02):
I'm wondering about the tariff story, because Bloomberg Economics is
estimating that the average US tariff rate will have risen
to above thirteen percent. It was a little more than
two percent back in January. Isn't there a risk that
tariffs really create much higher inflation, and that argues for
at least keeping rates on hold for the foreseeable future.
Speaker 4 (11:24):
We do think that you could see, you know, some
bumps in the road here on inflation. You know, that
being said, kind of the overall tail risk that you
would get a significant rise and sustained inflation and core
inflation over the next three to nine months, we think
is a much lower risk today than it was just
a few months ago. So overall we think we could
(11:46):
see some bumps. You know, the last time we saw
higher tariffs, you know, that was a one time pass through.
If you look at what's driving inflation, you know, over
the intermediate term, housing prices, rent prices continued to move lower.
Actually in some places you're seeing falling home prices. That's
thirty percent of PCE and thirty percent of poor CPI
(12:08):
is shelter. And with those headwinds there in the economy
looking to lose momentum, we do think overall, core inflation
should not be surprising that much higher overall and gives
the FED the ability to kind of look through to
the longer term and potentially move rates lower even if
there's some bumps in the road. Modestly with inflation.
Speaker 2 (12:27):
So let's look at the tariff story from the other
side of the equation that it begins to hurt growth.
Obviously that would argue for lower rates. But do you
think the growth story is going to suffer a little
bit as the consequence of tariffs.
Speaker 1 (12:39):
Yeah, we do.
Speaker 4 (12:40):
We think growth is definitely continued to slow. The economy
has been losing momentum. We put this in our outlook
illustrating the GDP growth the last few years has continue
to decelerate. You know, you look at the labor market.
We've also seen a fall on average payrolls. So last
year in twenty twenty four, we had average payrolls over
one hundred and fifty thousand per mons month. You now
(13:01):
you're about one hundred and thirty thousand with last month's beat.
So you know, all eyes will be on the labor
market overall. But with the economy losing momentum here and
tariffs most likely will end up being higher, even if
they're not as high as the initial fears at the
Liberation day, that is negative for growth, and so that
sets up well for what I think Waller's kind of
(13:21):
pointing to.
Speaker 2 (13:22):
So in the week ahead, we're going to get two
reports on the housing market. Sales have previously owned homes
is one. I think that data arrives Wednesday Thursday. New
home sales. How are you understanding the housing market right
now and what the rates environment is doing, particularly the
mortgage market, the impact it's having on the real estate sector.
Speaker 4 (13:43):
It seems like consumers are continued to be surprised that
mortgage rates are staying this elevated. Right You're still seeing
thirty year mortgage rates, you know, between six and a
half to seven percent at a time, and home prices
are still very elevated. So overall affordability is quite overall
and within the kind of in the micro level for housing,
(14:05):
we've had such low inventory that only a little bit
of demand has been able to clear these levels. But
we have really seen a significant rise in supply. We
saw supply rise over the last eighteen months almost every
single month, and we actually see today as kind of
more of a buyer's market, given there's so much more
sellers in the overall housing market than buyers right now,
(14:27):
and so home prices should continue to be softer. We
don't see new home sales or existing home sales really
surprising to the upside right now. We actually think that
the housing finance markets are in great shape. But as
far as think about our home prices are going, most
likely they're going to be flat or potentially negative next year.
Speaker 2 (14:46):
On the margin, I'd like to get your take on
the MUNI market, particularly in the wake of the passage
of the Big Beautiful build. This could end up putting
a lot more stress on revenues for state governments, and
I'm wondering whether or not you have to be a
little bit more cautious when you begin to identify opportunities
in the MUNI market going forward.
Speaker 4 (15:06):
You know, overall, we do think that the short term
kind of changes for communities and for revenue, and as
you mentioned the Big Beautiful bill, you know, that's really
just kind of setting up buying opportunities in the short term.
Over the long term, we've seen a lot of budgets,
you know, kind of being fixed in a lot of
the asset liability mismatch and mismanagement, and pensions have improved
(15:29):
so significantly with stocks up so much, so we actually
view anything kind of short term ball in munis is
actually a pretty strong buying opportunity.
Speaker 1 (15:38):
We saw that earlier this year and if.
Speaker 4 (15:39):
We see that again in the second half, we think
that could continue to be of another buying opportunity as well.
Speaker 2 (15:43):
So broadly speaking, when you look at the fixed income space, Clayton,
where do you want to be positioned on the curve
right now?
Speaker 4 (15:50):
Yeah, so we see really attractive opportunities in the short
intermediate term on the long end of the O curve.
You know, while the average ten years real rate is
around two hundred basis points, and that only averaged about
eighty basis points the last twenty years, it does look
really really attractive. That being said, with the unsustainable level
(16:11):
of the fiscal side of the picture, we think there
could be a lot of all in tenure yields in
twenty and thirty year yields, And so we see much
better opportunity in short and intermediate term fixed rate bonds.
You know, the easy money's kind of been made when
it comes to investment great corporates and highal corporates, but
fixed straight bonds within mortgage backed securities, asset back bonds
(16:31):
and selective areas of corporates actually look really really strong
right now. We saw that for the first half of
the year, returns have been right in line with their expectations,
and the vall has been so low for those that
portion of the market versus if you look at the
steering deviation of the S and P it was around
thirty the first half of the year. So great returns
and fixed incomes so far with you that most likely
will continue for the second half of the year.
Speaker 2 (16:52):
Clayton will leave it there. Thank you so much. Clayton
Trick there. He is head of portfolio management and public
Strategies at Angel Oak Capital. On the line from Atlanta
here on the Daybreak Asia podcast. Thanks for listening to
today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,
(17:12):
we look at the story shaping markets, finance, and geopolitics
in the Asia Pacific. You can find us on Apple, Spotify,
the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Join us again tomorrow for insight on the market moves
from Hong Kong to Singapore and Australia. I'm Doug Chrisner,
and this is Bloomberg
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