Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is the.
Speaker 2: Bloomberg Daybreak Asia podcast. I'm Doug Krisner. You can join
Speaker 2: Brian Curtis and myself for the stories, making news and
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Speaker 3: Paul Dobson joins us Bloomberg Executive Editor for Asia Markets.
Speaker 1: Paul. The Bank of Japan meeting tomorrow.
Speaker 3: Ninety percent of BOJ watchers apparently see the risk of
Speaker 3: authorities ending the negative interest rate campaign. But we did
Speaker 3: hear from the NIKE that perhaps they would stay steady
Speaker 3: on the bond buying program. And we don't know exactly
Speaker 3: what might happen with the purchase of ETFs, but it
Speaker 3: seems like we're almost set up now for a little
Speaker 3: bit of disappointment, even though the BOJ is finally going
Speaker 3: to act.
Speaker 1: How do you see things? What are you hearing from investors? Yeah?
Speaker 4: Well, and I think that there would be the perfect
Speaker 4: scenario for the BOJ in for awad or if in
Speaker 4: the end it's so well telegraphed that there's no surprise
Speaker 4: in the market belly ripples at all once we finally
Speaker 4: get there. You know, I think that there's a lot
Speaker 4: of certainty now that the door is wide open for
Speaker 4: them to act this week or send an extremely clear
Speaker 4: signal that they're going to be doing some big changes
Speaker 4: pretty soon. It feels like the equities market is relatively
Speaker 4: confident it can continue to hold its ground even without
Speaker 4: the backstop of BOJ purchases of ETFs. What market will
Speaker 4: be more interesting If the BOJ does stay, they're preventing
Speaker 4: too heavy a sell off as well than that, we
Speaker 4: you know, we'll limit the volatility of the en perhaps
Speaker 4: as well, I suppose if you're talking about disappointment. Disappointment
Speaker 4: maybe for people who were bullish on the end thought
Speaker 4: this would be the thing that would cause a recovery.
Speaker 1: You know.
Speaker 4: On the flip side of that, you've got the super
Speaker 4: strong dollar and the super strong US economy. So if
Speaker 4: you're looking at it from that sort of perspective, it
Speaker 4: is quite difficult at the moment for the end to
Speaker 4: gain a great deal of ground.
Speaker 2: Do you think that it was the wage information that
Speaker 2: we had Friday from the largest umbrella group of trade
Speaker 2: unions in Japan that kind of was created the tipping
Speaker 2: point here, or do you think that there was just
Speaker 2: a preponderance of data that was, you know, even before
Speaker 2: that wage data came, that was kind of indicating that
Speaker 2: it was time for the BOJ to move.
Speaker 4: Yeah, the Bank of Japan was pretty explicit that it
Speaker 4: wanted to see that second year of positive wage growth.
Speaker 4: And so really the I think the numbers that we
Speaker 4: had on Friday with a clincher for that, right, they
Speaker 4: were better than last year. They were better than perhaps
Speaker 4: some of the expectations that had been there as well,
Speaker 4: and so that really drives home the idea that inflation
Speaker 4: is starting to seep itself into the mindset of the
Speaker 4: Japanese population, that they're ready for a cycle of inflation
Speaker 4: and can therefore tolerate slightly higher interest rates as well.
Speaker 4: So it's a green light for the BOJ. They will
Speaker 4: be super encouraged and super happy with that. Now they've
Speaker 4: just got to, you know, manage those expectations very carefully,
Speaker 4: because it's taken so long for us to get here.
Speaker 4: Once they get off the grounds, you know, can they
Speaker 4: continue to raise interest rates with confidence? So they're going
Speaker 4: to have to be very careful. How far can they
Speaker 4: get it? Probably they would like to be able to
Speaker 4: put in a couple of hikes so that you know,
Speaker 4: there's room to cut again if the economy or the
Speaker 4: inflation ouder does start to sour again.
Speaker 3: Well, speaking about setting expectations, we'll have John Powell speaking again,
Speaker 3: and a lot of investors will be interesting to see
Speaker 3: how the Fed adjusts its policy with the with the
Speaker 3: dot plots and such, interest rate swaps now looking at
Speaker 3: fewer than three quarter point cuts this year. At one
Speaker 3: point we thought there would be six, and so there's
Speaker 3: been a little bit of turbulence on that front. What
Speaker 3: do you think Powell will say this week? What will
Speaker 3: his tone be?
Speaker 4: I could have just be so careful to get this
Speaker 4: at the moment. I think that we have a really
Speaker 4: good quote in one of our stories about the bond
Speaker 4: market saying the Fed is desperate to start cutting interest rates,
Speaker 4: but the data just isn't allowing it to do so
Speaker 4: at the moment, you know, and.
Speaker 1: You can't.
Speaker 4: Continue arguing forever the you know, the time for cutting
Speaker 4: is nigh when you're seeing these very strong inflation numbers still,
Speaker 4: So I guess power will will want to project the
Speaker 4: idea that the economy is doing well, but that at
Speaker 4: some point, with our policy being restrictive in the Fed's view,
Speaker 4: then there will be room to start cutting again. And
Speaker 4: you know, hopefully from his perspective, inflation does start to call.
Speaker 4: But on the other hand, you know, it's hard to
Speaker 4: see is policy really restrictive at these rates. You know,
Speaker 4: it doesn't seem to be slowing slowing the economy particularly,
Speaker 4: doesn't seem to be calling inflation all that much either.
Speaker 4: So at some point they're going to be louder questions
Speaker 4: about whether, you know, the FED needs to either keep
Speaker 4: rates higher for longer or even consider moving them moving
Speaker 4: them up further again.
Speaker 2: Paul, in the time we have left, we can talk
Speaker 2: a little bit about China because we've got the monthly
Speaker 2: activity data coming around the corner here. Particularly interesting will
Speaker 2: be retail sales and industrial output. Do you have a
Speaker 2: sense of what the data may show.
Speaker 4: My perspective on China at the moment is just look
Speaker 4: at the yields on the longer maturity bonds. You know,
Speaker 4: they're really pricing now a lower for longer environment, a
Speaker 4: slow down in the economy. That deflationary mindset sort of
Speaker 4: really proving hard to shift, So not sure about what
Speaker 4: the individual data will show. Maybe they'll brighten a little bit.
Speaker 4: We had some better exports and stuff like that, but
Speaker 4: the longer term outlook is not you know, a V
Speaker 4: shape rebound or anything like that. At the moment is
Speaker 4: there's still plenty of reasons to be pretty pessimistic about it.
Speaker 3: So China stays down, the US stays up. That could
Speaker 3: be quite roiling over the next little period. Just a
Speaker 3: quick question, I mean, is it possible that we see
Speaker 3: inflation stay entrenched mainly becase because people keep their jobs
Speaker 3: and that that is pretty well entrenched now in the US.
Speaker 4: Yeah, that's definitely. That's definitely a major factor of it. Yeah,
Speaker 4: unemployment is is still super low as well. Wage growth
Speaker 4: is fine as well, So on ongoes that cycle. I mean,
Speaker 4: it just looks great at the moment.
Speaker 3: Yeah, absolutely, And you know, you know talking about waiting
Speaker 3: on godoh well, waiting on the lag defect.
Speaker 1: Where is that lag defect? We're not seeing it at
Speaker 1: the moment.
Speaker 3: Paul Dobson is with US Bloomberg, Executive editor for Asian Markets.
Speaker 1: This is Bloomberg.
Speaker 3: Our guest is Jeanette Garrity, managing director and chief economist
Speaker 3: at Robertson Stevens with us to take a closer look
Speaker 3: at markets. Well, we can talk about We had a
Speaker 3: guest on earlier saying that the equity risk premium was
Speaker 3: way too low at the moment and there's just too
Speaker 3: much optimism in equity markets. Of course, it has been
Speaker 3: a successful strategy over the past four or five months
Speaker 3: and investors have stuck with it, but that doesn't mean
Speaker 3: it will continue in the future. So Jennett, I know
Speaker 3: you're an economist and you probably don't focus as much
Speaker 3: on equity markets as you do on the.
Speaker 1: Broader macro picture. But does he have a point?
Speaker 5: Yeah, he does have a point in this sense. I think, look,
Speaker 5: and I'm optimistic for reasons. We can discuss in a
Speaker 5: little bit about, you know, why equities are a sensible play.
Speaker 5: I think it has a lot to do with where
Speaker 5: I see the economic cycle right now. But there is
Speaker 5: a lot of optimism in the sense that people not
Speaker 5: thinking that something can still go wrong. That's the kind
Speaker 5: of optimism that makes me uncomfortable. There is an offlock
Speaker 5: going on in this economy. There's still still stuff to
Speaker 5: play out from the Fed policies of the last year
Speaker 5: year and a half. Interest rates are still relatively high,
Speaker 5: not the full effect of that has not yet been felt,
Speaker 5: and consumers are always, you know, a question, are they
Speaker 5: going to surprise you? They could surprise us in the
Speaker 5: next couple of months. So I'm optimistic over the long term.
Speaker 5: But I think this general sense, like, hey, we've got
Speaker 5: a soft landing, there are no problems off to the races.
Speaker 5: I think we need to be more considered about that.
Speaker 2: So, Jeannette, where is commercial real estate on your list
Speaker 2: of potential problems?
Speaker 5: Commercial real estate is always on a list of potential problems,
Speaker 5: you know, And what do we really mean. It's a
Speaker 5: huge market. There are so many different facets of it.
Speaker 5: There are so many different geographies too to address. I'll
Speaker 5: tell you where this really comes home to roost is
Speaker 5: really not so much just in the commercial real estate side,
Speaker 5: but on the regional banks and financial system at large.
Speaker 5: There's no indication that this is not a manageable issue,
Speaker 5: but the fact that there's still properties that are under
Speaker 5: stress because of interest rates and possibly difficult in getting
Speaker 5: difficulties in getting refinanced, and that means stress for bankers,
Speaker 5: stress for bankers is not a happy situation. Stressful bankers
Speaker 5: are sometimes then not happy in giving loans to other people. So,
Speaker 5: you know, I think there's still more of that to come.
Speaker 5: The blessing has been the refinancing cycle, and commercial real
Speaker 5: estate is a very long one, meaning there's a lot
Speaker 5: of different properties coming up for refinancing at different times,
Speaker 5: and so it stretches out the problem, but it also
Speaker 5: makes it more manageable.
Speaker 3: Yeah, the question of whether or not it's manageable is
Speaker 3: big because you have Jay Powell and also Janet Yellen
Speaker 3: both coming out and saying, look, there will be issues,
Speaker 3: but there will be individual issues to those regional banks.
Speaker 3: It's not a systemic issue. Now most of us, you know,
Speaker 3: take the word of leaders like J Powell and Janet Yellen.
Speaker 3: But a lot of this, you know, has been kind
Speaker 3: of baked on or baked into the idea that we'd
Speaker 3: get we'd get lower interest rates later this year, it
Speaker 3: would be a little easier to refinance. But now that's changing.
Speaker 3: So do we have to change our view and our
Speaker 3: confidence in the leaders?
Speaker 5: Well, no, I think the messaging delivered by Janet Yellen
Speaker 5: and J Powell is the correct one. You can think
Speaker 5: back to times like after the Great Financial Crisis of
Speaker 5: eight and nine, and there were expectations at that time
Speaker 5: the career social real estate would be the next problem,
Speaker 5: and it really didn't unfold that way. And you know,
Speaker 5: reserve requirements are much more aggressively managed right now. The
Speaker 5: solvency of the system has been much more aggressively managed
Speaker 5: since that time. So I think that all comes together
Speaker 5: to say, yes, you know, I think there is not
Speaker 5: I do not think that there's anything indicating that there's
Speaker 5: a systemic problem at all, but it can those losses
Speaker 5: can provide a chill, you know, when they hit, particularly
Speaker 5: it for regional banks. It can change the overall appetite
Speaker 5: for risk in a way that you don't anticipate and
Speaker 5: be a negative, not a catastrophic negative at all, but
Speaker 5: it can just certainly be a negative for various quarters
Speaker 5: of various regions or various needs at the time. I
Speaker 5: think it's plainly addressable by the way. I do think
Speaker 5: that interest rates will fall later in the year and
Speaker 5: that will be of considerable assystem.
Speaker 2: So domestic politics one of the risks as well. I
Speaker 2: would imagine Janeta, I can give you sixty seconds and
Speaker 2: let me just highlight a headline from a story on
Speaker 2: the Bloomberg terminal. Biden pitch on improving economy falls flat
Speaker 2: at the grocery store.
Speaker 5: Listen, my mother used to tell me, you know so
Speaker 5: much about inflation, and then she would quote me the
Speaker 5: price of ahead of lettuce. The price of ahead of
Speaker 5: lettuce does not determine the overall level of inflation, but
Speaker 5: there are price pressures there. I think it's interesting to
Speaker 5: see how this is playing through the households, US households
Speaker 5: and the consumer sector. But at the end of the day,
Speaker 5: if the employment growth days strong and there are all
Speaker 5: sorts of surveys that indicate people are very optimistic about
Speaker 5: the near, medium, and longer term outlook for employment, and
Speaker 5: that stays in place, particularly with some of the wage
Speaker 5: increases that we've seen, I think will be very It'll
Speaker 5: be okay.
Speaker 1: Jennette, Thank you so much.
Speaker 3: Jeanette Garretty, Managing director and chief Economist at Robertson Stevens.
Speaker 3: James Abonte joins us Managing director and chief investment Officer
Speaker 3: at Center Asset Management. James, last week was a big week.
Speaker 3: We had a huge spike in tenure yields and seems
Speaker 3: like the bond market now is finally coming around to
Speaker 3: the Fed's projected path on rates, interest rate swaps now
Speaker 3: reflecting a fewer than three quarter point cuts this year,
Speaker 3: and that's a long ways away from the six that
Speaker 3: we're expecting anyway. So I'm wondering how you are embracing
Speaker 3: this change and how you see the path forward.
Speaker 6: Well, I think the FED seems handcuffed by this persist
Speaker 6: sense of inflation. The talk of a June or even
Speaker 6: a July cut is increasing an uncertainty. And you know
Speaker 6: how that relates to, you know, other asset classes. Is
Speaker 6: that when you look now at the relationship between stocks
Speaker 6: and bonds, which can be expressed by a forecasted equity
Speaker 6: risk premium, and again to explain to people, or risk
Speaker 6: premium is just the attractiveness of stocks versus risk free treasuries.
Speaker 6: It's at the lowest level that we've seen, even that
Speaker 6: below that preceded the global financial crisis, as low as
Speaker 6: it was back in early two thousand. And you know,
Speaker 6: even in a more rudimentary kind of valuation metric, the
Speaker 6: pe on the SMP five hundred, the equal weight to
Speaker 6: SMP is about twenty four times, so the market itself.
Speaker 6: In terms of how the ramifications of this play out
Speaker 6: to other ACID classes is that it implies either a
Speaker 6: very significant drop in interest rates or a significant acceleration
Speaker 6: in earnings. And I don't think the up and earning
Speaker 6: an interest rates is going to happen anytime soon.
Speaker 2: So what do you make Let's look at Nvidia. I mean,
Speaker 2: you highlight in your note some of the Magnificent seven
Speaker 2: that you've been watching, but let's talk about in video.
Speaker 2: Over the last ten weeks, this stock is up nearly
Speaker 2: eighty five percent. I think we've been up for ten
Speaker 2: straight weeks if you look at it on a weekly basis.
Speaker 2: The company will beginning on Monday, launch a developers conference.
Speaker 2: I think it's going to take a lot of very
Speaker 2: upbeat news in order to drive this stock even further,
Speaker 2: wouldn't you agree?
Speaker 6: I agreed to one hundred percent and Vidia. You know,
Speaker 6: we could sit here and talk about how much it's
Speaker 6: gone up, but the reality is when you look at
Speaker 6: where we are in terms of in Vidia and some
Speaker 6: of the other Magnificent seven stocks. I mean, it may
Speaker 6: sound ironic, but investors are seeking safety, and usually investors
Speaker 6: seek safety until it's obvious that the whole market's at risk.
Speaker 6: You know, whether it's the nifty to fifty and the seventies,
Speaker 6: a boot chips like Coca Cola and g in the
Speaker 6: ninety seven to ninety eight environment, Cisco, Intel, Yahoo back
Speaker 6: in two thousand. But if you look at video in particular,
Speaker 6: you know markets fall earnings. And when you look at
Speaker 6: the aggregate magnificent seven in video being the biggest contributor,
Speaker 6: they accounted for approximately one hundred percent of sm P
Speaker 6: five hundred operating earnings growth, which meant that the rest
Speaker 6: of the market actually had negative earnings growth in the
Speaker 6: first quarter of twenty twenty four. So if you think
Speaker 6: that you know markets fall earnings, the reality is earnings
Speaker 6: are going to fall economic growth, and this is where
Speaker 6: there's a big disconnect because I think if you look
Speaker 6: at top down indicators, a lot of strategists looking at
Speaker 6: PMIS and leading economic indicators feel that there's a bottoming
Speaker 6: in early signs of some kind of pivoting higher on
Speaker 6: the horizon. But when you look at kind of the
Speaker 6: negative view, you were at a critical juncture because the
Speaker 6: top down information doesn't reconcile what the bottom up, meaning
Speaker 6: that there's very little sales growth margins are rolling over
Speaker 6: from elevated levels, Asset efficiency is moving lower, which means
Speaker 6: returns on equities are one moving lower. So I think
Speaker 6: people are going to seek safety and names like Nvidia
Speaker 6: until essentially in Vidia starts to show cracks like other
Speaker 6: high flyers have in the past. But it's very difficult
Speaker 6: to sit here and feel that there's further upside in
Speaker 6: the stock at this point in time.
Speaker 3: Yeah, investors were somewhat distracted by the earnings. I mean,
Speaker 3: perhaps your take is accurate that they were a little
Speaker 3: too bullish on that, but that distraction is now gone
Speaker 3: because the earning season is basically over. Do you think
Speaker 3: that now it gets a little rougher here in the
Speaker 3: stock market because people will focus more on the FED
Speaker 3: and rates and inflation being sticky.
Speaker 6: Agreed to one hundred percent. You know, I'm quite negative
Speaker 6: at this point in time. I think we have an
Speaker 6: environment where we go sideways at best, with the potential
Speaker 6: that year's you know, significant to move down in markets.
Speaker 6: And as I talked about with regard to everything price
Speaker 6: for perfection with regard to equities, you can make the
Speaker 6: same argument with regard to corporate it. So I think
Speaker 6: speculation is rampant, right, cryptocurrencies, ETFs, zero day options, I
Speaker 6: mean global, It's a global phenomenon, right India, right, we
Speaker 6: see derivters trading in India up one hundred and fifty percent,
Speaker 6: and in fact, Indian derivdives are eighty percent of global
Speaker 6: option contracts at this point in time. So I think
Speaker 6: when you look at you know, just like the now
Speaker 6: thirty six thousand book in late nineteen ninety nine argued
Speaker 6: that stocks are no riskier than bonds and the equity
Speaker 6: risk premium should be zero. There's a lot of academic
Speaker 6: papers that are being widely discussed that argue for one
Speaker 6: hundred percent equity allocation right now. Very interesting, you know.
Speaker 6: In fact, they say that you should lever it up
Speaker 6: your equity exposure for a young person like a home.
Speaker 6: You know, very very very top of the market when
Speaker 6: you think about the antidotal information. But again, the fundamentals
Speaker 6: are all pointing to not a broadening out of the
Speaker 6: overall economy and the overall stock market earnings picture, but
Speaker 6: in essence, a environment where we have not had an
Speaker 6: acceleration in economic growth, a lot of policy uncertainty, margins
Speaker 6: acid efficiency all turning negative from recent highs. None of
Speaker 6: that boats well for a stock market outlook.
Speaker 2: So Brian was mentioning a moment ago the fact that
Speaker 2: the market has now pretty much aligned itself with the
Speaker 2: FEDS thinking in terms of the forecast for interest rate
Speaker 2: cuts this year. I think the Fed was predicting in
Speaker 2: twenty four three separate twenty five basis point rate cuts.
Speaker 2: But from what I'm hearing you say, Jim, it seems
Speaker 2: like there's a risk that we could even get more
Speaker 2: rate cuts.
Speaker 6: Yes, exactly, in response to a deterior rating environment. And
Speaker 6: I think if you look at the information from the economy,
Speaker 6: I mean, there's a lot of information that's anecdotally IRA
Speaker 6: hardship withdrawals are spiking, higher capacity utilization is deterior rating,
Speaker 6: which is a very bad thing for capital spending. Even
Speaker 6: more so when you look at the labor front, which
Speaker 6: has really been the point of strength. There's been incredible
Speaker 6: discrepancy between the house survey and the payroll survey. In fact,
Speaker 6: we've never had such a large difference. In fact, the
Speaker 6: difference between the household and the payroll survey was, you know,
Speaker 6: one point one million in December and eight hundred thousand
Speaker 6: in January. That has only been a sign that there's
Speaker 6: been a significant aberration, and typically this divergence indicates a
Speaker 6: weakening job market, which is really what people have been
Speaker 6: holding their hat on in terms of the economy.
Speaker 3: Remaining point, let's talk a little bit about the Bank
Speaker 3: of Japan because tomorrow is going to be a big day.
Speaker 3: What we've been saying, the latest is, at least from
Speaker 3: the NIKE, is that they will they will finish off
Speaker 3: with negative interest rates, but to keep the YCC program
Speaker 3: in place in order to tamp down the volatility a
Speaker 3: little bit. Is that where you're expecting and what might
Speaker 3: the consequences be.
Speaker 6: Well, when you look at the other developed market areas, right,
Speaker 6: I mean, the EU and the US all have positive
Speaker 6: real rates and Japan is definitely the outlier, and we've
Speaker 6: seen that with where the end is traded. I'm not
Speaker 6: so convinced yet that the Japan is ready to ready
Speaker 6: to abandon its negative interst rate policy. In fact, I
Speaker 6: think one of the biggest surprises that you could see
Speaker 6: going forward is a significant spike of the end through
Speaker 6: the one to fifty level, in fact, back to levels
Speaker 6: that may have been consistent with the environment back in
Speaker 6: the late nineteen nineties. So I think that we could
Speaker 6: see a very significant shock at some point as a
Speaker 6: black Swan event occur because of such a consensus at
Speaker 6: this point in time that Japan is going to basically
Speaker 6: get itself out of this negative interest rate policy stabilize
Speaker 6: the end. I might think that the black swan event
Speaker 6: is actually a currency event that occurs in Japan where
Speaker 6: the end goes way way through one to fifty and
Speaker 6: weaken significantly very quickly.
Speaker 2: Jim, So what you're been saying kind of in total here,
Speaker 2: if we are looking at rate cuts maybe more than
Speaker 2: three and a end that could weaken to one fifty,
Speaker 2: it's too soon to call for peak dollar.
Speaker 6: Right, exactly right, as long as we have an environment
Speaker 6: where the FED recognizes that it needs inbound investment. I
Speaker 6: don't believe the FED is going to be in a
Speaker 6: position to move us back into negative indust rates because
Speaker 6: of the fiscal deficits which you need to be financed,
Speaker 6: as well as the inbound investment requirements to keep it
Speaker 6: doll relatively stay more strong.
Speaker 3: All right, James, thanks very much for joining us, James Debonte.
Speaker 3: They're managing director, Chief Investment Officer, Center Asset Management.
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