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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug. Prisoner. Markets

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Speaker 2: in the Asia Pacific are finding some support from a

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Speaker 2: key data point for China released over the weekend. Industrial

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Speaker 2: profits climbed in August by twenty point four percent compared

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Speaker 2: to last year. Now, this suggests that those national campaigns

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Speaker 2: to tackle things like over capacity and excessive competition are

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Speaker 2: beginning to bear fruit. In a moment, we'll hear from

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Speaker 2: Sean Fenner, head of Business and Industry Economics at Westpac.

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Speaker 2: But we begin here in the States, where the government

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Speaker 2: is facing a funding deadline of October first. Now, tomorrow,

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Speaker 2: top congressional leaders will be at the White House meeting

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Speaker 2: with President Trump. They'll discuss a short term spending bill.

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Speaker 2: This is necessary in order to avert a government shutdown,

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Speaker 2: and if a shutdown were to occur, that would likely

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Speaker 2: delay the release of the September jobs report. It's due Friday.

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Speaker 2: Bloomberg Economics is expecting non farm payroll growth of fifty

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Speaker 2: four thousand. The unemployment rate is seen holding steady at

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Speaker 2: four point three percent. For more, let's bring in James Abat.

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Speaker 2: He is managing director also the head of Fundamental Strategies

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Speaker 2: at Horizon Investments. James is on the line from here

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Speaker 2: in New York City. James, it's always a pleasure. Thank

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Speaker 2: you so very much. We can talk about the labor

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Speaker 2: market in a moment. You and I were speaking just

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Speaker 2: a moment ago about the change in leadership for the

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Speaker 2: equity market. I'd like to hear more on that. Talk

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Speaker 2: to me about what you're seeing right now in equities,

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Speaker 2: you know, in a.

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Speaker 3: Market that's richly priced and speculation rampid. I think it's

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Speaker 3: always good to go back to basics and remain discipline.

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Speaker 3: If you're sitting here trying to make sense of logic

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Speaker 3: and friendship. You read Aristotle. I think for me, when

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Speaker 3: you're sitting here trying to make sense of what's happening

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Speaker 3: in the market, it's always helpful to go back to

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Speaker 3: the long term legendary chief market strategies for Merrill Lynch,

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Speaker 3: Bob Farrell and his market rules. And you know, one

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Speaker 3: of the key things that File emphasized was investment styles.

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Speaker 3: You know, essentially you had growth, you have value or

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Speaker 3: cyclical stocks, you had small cap stocks and defensive stocks,

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Speaker 3: and markets tend to rotate between styles depend upon the

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Speaker 3: stage of economic or the market cycle. I think the

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Speaker 3: uniqueness of this cycle is that we have a confluence

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Speaker 3: of growth and defenses. If you look at most high

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Speaker 3: growth funds or defensively oriented funds, they own the same things.

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Speaker 3: Right now, they both look like Nasdaq one hundred portfolios

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Speaker 3: basically because you know, healthcare staples have been disappointed. They're

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Speaker 3: absent in many of the low volatility portfolios and defensive portfolios. So,

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Speaker 3: you know, File always talked about the style distortions and

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Speaker 3: they tend to overshoot, and I think we're at a

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Speaker 3: point potentially that we're seeing excesses and exhaustion. The Magnificent

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Speaker 3: Seven have become the de facto new defensive stocks and

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Speaker 3: safe havens as well as the high growth leadership. So

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Speaker 3: all this, you know, leadership is emerging, you know, in

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Speaker 3: terms of potential for change, because we're at a point

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Speaker 3: in time where you look at kind of the economic cycle,

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Speaker 3: we're at a stage where growth is actually firming, inflation

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Speaker 3: is stable, if not coming down. All that modes exceptionally

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Speaker 3: well or a very positive economic backdrop in the United

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Speaker 3: States for twenty twenty six. And from that perspective, we

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Speaker 3: think we can see, you know, a significant change in

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Speaker 3: leadership in the stock market. But because we have this

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Speaker 3: you know, so called style distortion, you know, it's the

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Speaker 3: potential for volatility and I would say very violent kind

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Speaker 3: of market action because everybody's on one side of the

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Speaker 3: boat to really lead to you know, some outside gains

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Speaker 3: when you see, you know, that genuine inflection in terms

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Speaker 3: of economic activity and economic growth. At the exact same time,

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Speaker 3: they were finally starting to see chinks in the armor

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Speaker 3: of the return on an investment. The AI trade and

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Speaker 3: a lot of the shenanigans with regard to vendor financing

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Speaker 3: transactions that were reminiscent of you know, lucent Nortel, Alcatel,

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Speaker 3: and Cisco back in nineteen ninety nine and two thousand,

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Speaker 3: happening again with Nvidia, core Weave, and a bunch of

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Speaker 3: other companies that are kind of paying to play in

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Speaker 3: this type of environment.

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Speaker 2: So I'm glad you brought up the AI trade because

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Speaker 2: it was last week that hedge fund manager David Einhorn

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Speaker 2: said the amount of spending on AI infrastructure may destroy

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Speaker 2: vast amounts of capital. He said, the numbers being thrown

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Speaker 2: around today are so extreme that eventual returns are highly uncertain.

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Speaker 2: I mean, this kind of dovetails with what you're talking

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Speaker 2: about here, but do you have a sense of the

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Speaker 2: vulnerability and the potential downside should markets begin to question

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Speaker 2: this thesis a little bit?

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Speaker 3: And this is a great point because you know, I

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Speaker 3: very much agree with what he said. I've probably been

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Speaker 3: a little bit earlier in saying it than he has

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Speaker 3: been because one of the things that we pointed out

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Speaker 3: in the most recent earnings results or alphabet was that

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Speaker 3: for the very first time in a number of orders,

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Speaker 3: we saw return on capital and return on assets actually

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Speaker 3: trend or inflect lower, meaning that despite you know, pretty

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Speaker 3: healthy sales gains, we started to see act efficiency diminish

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Speaker 3: quite greatly, leading to a negative inflection in return on capital,

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Speaker 3: which for a growth stock that's that usually spells a

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Speaker 3: very difficult environment and the de rating I think the

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Speaker 3: real case to see, you know, how damaging this could be.

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Speaker 3: And I think if you just look at some of

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Speaker 3: the numbers. I mean, there's been a bunch of studies

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Speaker 3: that have come out, whether it's Morgan Stanley or Bane

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Speaker 3: or even some of the other consulting firms that the

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Speaker 3: volume of revenue to justify the spend that needs to

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Speaker 3: be made by many of these companies is just is gargantuan.

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Speaker 3: And you know the fact that chat GBT is making

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Speaker 3: promises or capital expenditure promises that are vast above or

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Speaker 3: multiples of what their potential revenue could be over those

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Speaker 3: years highlights the cash flow shortage that they're going to have.

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Speaker 3: And we'll see where that goes. But for now, you know,

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Speaker 3: people are willing to look the other way, and you know,

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Speaker 3: these hyper scalers alone are expected to spend you know,

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Speaker 3: four hundred billion dollars in capital investment next year. I

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Speaker 3: think what you have to wait and see, though, is

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Speaker 3: when you see a company announce that it's increasing its

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Speaker 3: capital investment on AI and the stock price has a

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Speaker 3: negative reaction. We haven't seen that yet. When that happens,

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Speaker 3: that's when the light bulb overhere, every cfo's head is

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Speaker 3: going to go off and rethink what they're doing in

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Speaker 3: terms of capital expenditure in the AI space.

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Speaker 2: So beyond AI, I think a lot of what the

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Speaker 2: market has been hoping for is aggressive easing. Maybe we

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Speaker 2: get two more rate cuts this year. I guess critical

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Speaker 2: to that story is going to be the non farm

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Speaker 2: payrolls day that we get on Friday. But you made

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Speaker 2: the point a moment ago that inflation is trending lower.

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Speaker 2: Is there the risk though, that maybe it becomes a

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Speaker 2: little sticky here and the long end of the curve

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Speaker 2: may be a little vulnerable.

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Speaker 3: That's a potential. Yes, Clearly, what we're seeing is an

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Speaker 3: economy that's firm. It's not stalling, which is basically what

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Speaker 3: the consensus has been. Let's remember we basically have been

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Speaker 3: in a recession or a stall type procession, not a

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Speaker 3: kind of V shaped downdraft, but a stall type procession

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Speaker 3: four years. So we're really coming out of that, and

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Speaker 3: the tax bill has a lot of stimuli that's embedded

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Speaker 3: in it. They will allow us to actually grow out

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Speaker 3: of basically this environment that we've been in. However, when

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Speaker 3: you look at the inflation, and I'm not a Phillips

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Speaker 3: curve guy, I'm not convinced that inflation and growth are

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Speaker 3: a trade off versus one another. So from that standpoint,

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Speaker 3: I think, barring the barring the dollar actually continuing to fall,

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Speaker 3: which I don't not sure it will, I think it

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Speaker 3: will steady here, I think looking at an environment where, yes,

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Speaker 3: will inflation stay above the two percent target. I think

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Speaker 3: that's probably the case, but I don't foresee inflation moving higher,

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Speaker 3: so that I think is a positive. So I think

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Speaker 3: on the long end of the curve, you're probably going

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Speaker 3: to make the coupon, maybe not fur the capital appreciation,

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Speaker 3: but if you do get the fifty base point cut,

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Speaker 3: that steeper yield curve is going to be panacea to

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Speaker 3: a lot of the regional banks who are going to

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Speaker 3: benefit from an increase in an interest margin be able

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Speaker 3: to improve their lending capabilities. So all this is very positive,

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Speaker 3: and I think if we look out to twenty twenty six,

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Speaker 3: I think people are going to be surprised how robust

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Speaker 3: the economy actually is. And again, all that's going to

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Speaker 3: lead to Again, I think a rethink within the market,

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Speaker 3: maybe get rid of the style distortion that we've had

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Speaker 3: in the market as well as be a very positive thing.

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Speaker 3: But remember the stock market doesn't always equal to the

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Speaker 3: economy from that perspective, so it might be an environment

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Speaker 3: where because we're so top heavy in the stock market

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Speaker 3: that the indices don't move very much, but there's a

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Speaker 3: lot of money to be made in other areas of

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Speaker 3: the market, and people who are fearful of both the

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Speaker 3: dollar falling further and the back end coming up signific

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Speaker 3: only higher might be disappointed if they are leveraging those straits.

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Speaker 2: James, I want to get your take on how politics

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Speaker 2: could end up impacting the markets, whether we're talking about

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Speaker 2: a government shutdown or fed independence. Obviously we have this

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Speaker 2: funding deadline of October first, a meeting tomorrow at the

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Speaker 2: White House. Maybe things are resolved in such a way

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Speaker 2: to avoid a government shutdown, but assume for the moment

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Speaker 2: that one does occur and it's protracted. Talk to me

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Speaker 2: a little bit about the way in which politics has

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Speaker 2: the potential to influence a lot of the price action,

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Speaker 2: whether we're talking about the equity side or in the

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Speaker 2: bond market.

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Speaker 3: Yeah, I think that is if you think about what

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Speaker 3: could derail kind of the positive scenario that have just

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Speaker 3: laid out. It's politics, and probably more so geopolitics. Now

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Speaker 3: clearly what we're talking about in terms of a government shutdown,

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Speaker 3: and I actually think that the chance of a government

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Speaker 3: shutdown out is probably greater than it's in the past.

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Speaker 3: Usually you can dismiss that it's just mere theater between

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Speaker 3: the two parties, but I think both sides have kind

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Speaker 3: of dug in their heels here. So having some type

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Speaker 3: of shutdown for a week, a month, two months, whatever,

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Speaker 3: I think is positive. But remember, you know, the DOSEE

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Speaker 3: cuts and other things have already led to a large curtailment,

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Speaker 3: at least in terms of the growth of the government.

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Speaker 3: So I don't think it's going to have the same

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Speaker 3: impact in terms of employment that we've seen in the past,

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Speaker 3: particularly when you think about what's occurred over the Obama

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Speaker 3: and Obama administrations where government has grown significantly. But I

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Speaker 3: think one point that I do want to raise is

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Speaker 3: that you know, people do forget. And this again goes

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Speaker 3: back to the divorce between the economy and the stock market.

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Speaker 3: But you go way back to like two thousand and two.

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Speaker 3: You know, the economy had turned up, you know, and

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Speaker 3: was doing reasonably well, but the stock market had one

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Speaker 3: of its worst years ever, you know, even small caps.

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Speaker 3: So geopolitical is at that point in time, obviously the

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Speaker 3: tension in the run up to the war with Iraq

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Speaker 3: and the derating a tech stock. So people I think

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Speaker 3: sometimes remember sometimes the economy can do reasonably well while

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Speaker 3: the stock market does not do so well, and frankly

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Speaker 3: vice versa.

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Speaker 2: I'm curious to get your take on the labor market,

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Speaker 2: because if there is a government shutdown, the president has

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Speaker 2: threatened to begin laying off government employees. We mentioned earlier

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Speaker 2: that we have non farm payrolls day to do Friday

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Speaker 2: on Tuesday, it's the job opening data from the government.

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Speaker 2: Give me your sense of how you understand the labor

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Speaker 2: market right now.

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Speaker 3: Yeah, I think essentially it's been at a point in

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Speaker 3: time where you know, people have been warning that we're

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Speaker 3: on the verge of a hard landing. But you know,

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Speaker 3: typically to get into a hard landing from stall speed,

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Speaker 3: which I would argue we're kind of coming out of

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Speaker 3: to a certain degree, you need a shock. And when

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Speaker 3: I look at essentially what the government shutdown could be

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Speaker 3: in terms of a magnitude of a shock to demand,

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Speaker 3: I don't foresee that to be enough of demand shock

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Speaker 3: to actually reverse the course that growth is actually starting

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Speaker 3: to firm up ahead, and you know, leading indices from

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Speaker 3: what we look at, you know, aren't indicating any type

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Speaker 3: of you know, picture that indicates recession and inflation spire,

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Speaker 3: We're in stagflation ahead.

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Speaker 2: All right, James, We'll leave it there. It's always a pleasure.

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Speaker 2: Thank you. So very much. James Abat is Managing director

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Speaker 2: also the head of Fundamental Strategies at Horizon Investments. Joining

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Speaker 2: us here on the Daybreak Asia podcast. Welcome back to

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Speaker 2: the Daybreak Asia Podcast. I'm Doug Chrisner. Markets in the

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Speaker 2: Asia Pacific are somewhat mixed after China reported strong industrial

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Speaker 2: profits over the weekend. For more, we heard from Sean Fenner,

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Speaker 2: head of Business and Industry Economics at Westpac. Shawn spoke

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Speaker 2: with Bloomberg's Avril Hong on the Asia trade.

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Speaker 4: Give us your thoughts on the data over the weekend

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Speaker 4: out of China industrial profits maybe a buck some expectations

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Speaker 4: of a decline. How much to you do you think

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Speaker 4: is meaningful signs that the government's efforts to tackle over

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Speaker 4: capacity are seeing effect.

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Speaker 1: Hi, I think it's probably a little bit too early

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Speaker 1: to say that the policy that they've undertaken is actually

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Speaker 1: having a true effect.

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Speaker 5: The reason I say this is that it's quite volatile from.

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Speaker 1: Month to month, and as the stats off as themselves said,

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Speaker 1: it is actually partly that big jump that we saw

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Speaker 1: was due to base effects. Coupled with that, we also

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Speaker 1: had sort of some bring forward in tariff, So it's

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Speaker 1: something that it's positive, it's moving in the right direction,

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Speaker 1: but we've got to see about some longevity whether or

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Speaker 1: not it's going to persist.

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Speaker 4: All right. We are also keeping tabs on the situation

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Speaker 4: in the US. I mean, the problem now is that

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Speaker 4: even the data that for example, bond market is going

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Speaker 4: to be focusing on that that could be disrupt How

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Speaker 4: do you assess the US economy when you know the

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Speaker 4: data that's incoming that's crucial for markets might not come

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Speaker 4: in as expected.

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Speaker 1: Yeah, I mean, I think that's a real thing about

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Speaker 1: this sort of shutdown. Obviously it has implications both in

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Speaker 1: terms of growth the short term impact. You know, every

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Speaker 1: week sort of a rule of thumb takes off about

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Speaker 1: point one off that quarter, you can get some bounce back.

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Speaker 5: But I mean it's the data.

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Speaker 1: So particularly, you know, we're in this situation where we're

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Speaker 1: wanting to be sort of analyzing, know how is how

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Speaker 1: a tarift's actually feeding through into inflation and of course

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Speaker 1: the labor market. We sell back in twenty thirteen, you

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Speaker 1: know it sixteen days for a total shutdown, and that

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Speaker 1: sort of delays both in terms of the non farm

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Speaker 1: payrolls and inflation data going forward. So it's not just

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Speaker 1: whether or not we'll get Friday's data for the non

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Speaker 1: farm payrolls, but could we actually even you know, not

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Speaker 1: actually receive the inflation figures as well.

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Speaker 4: That means said we did get PC numbers pretty much

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Speaker 4: in line much. Do you think this economistif the focus

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Speaker 4: to look at, you know, the path of inflation and

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Speaker 4: how that informs what.

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Speaker 5: The Federal Reserve is going to do?

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Speaker 2: Yeah?

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Speaker 1: Yeah, So, I mean I think, you know, the data

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Speaker 1: we've been seeing, I mean it's a bit of a

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Speaker 1: conundrum really because I mean we've got on one side,

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Speaker 1: I mean, we had it's backward looking, but you know,

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Speaker 1: we have had strong GDP upward revisions.

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Speaker 5: You know, monthly household spending.

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Speaker 1: Is also running at a fairly solid rate, although that

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Speaker 1: was with the dragon sort of set the saving straight.

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Speaker 1: So households are pulling back, you know, are drawing on

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Speaker 1: their savings. How much more can they do that? Ahead

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Speaker 1: if we've got inflation rising as we know expect, you know,

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Speaker 1: they're purchasing power is going to decline with tariffs combined

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Speaker 1: that where you've got that softening in the labor market,

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Speaker 1: you know, you're not getting those new jobs, and it

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Speaker 1: does sort of suggest that, you know, the head winds

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Speaker 1: for the consumers going ahead is rising.

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Speaker 4: It's interesting because that backdrop that you just highlighted could

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Speaker 4: also apply to Australia. I mean, hotter than next directed

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Speaker 4: inflation and then potential weakness in the limber market. How

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Speaker 4: are we expecting the RBA to evolve when it comes

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Speaker 4: to it's signaling to the markets.

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Speaker 5: Yeah, so, I mean, firstly, I mean, I think if

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Speaker 5: anything that's.

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Speaker 1: Sort of a little hotter sort of partial inflation reinforces

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Speaker 1: our sort of long held view that September was going

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Speaker 1: to be the RBA remaining on hold, it's probably going

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Speaker 1: to be unanimous. I think really people will be sort

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Speaker 1: of looking for exactly as you said that signing. I

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Speaker 1: suppose a couple of things i'd sort of add to that.

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Speaker 1: First of all, this is a partial indicator. The RBA

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Speaker 1: has signaled that they you know, while they will take

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Speaker 1: note of this, it's not they want to see a

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Speaker 1: full quarter. And with that, we also expect that there's

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Speaker 1: probably going to be some payback in September. So while

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Speaker 1: September quarter as a whole may be a little bit

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Speaker 1: hotter than the RBA's forecast, you know, as we move

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Speaker 1: into the December, we're actually expecting that to come down

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Speaker 1: a little bit.

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Speaker 5: And going forward, you.

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Speaker 1: Know, we still see inflationary pressures as being such that

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Speaker 1: the RBA doesn't need to keep rates at sort of

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Speaker 1: this sort of slightly tight at three point six and

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Speaker 1: further rate cuts her ahead.

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Speaker 4: Sean, what about the tariff risk, because last Friday was

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Speaker 4: a reminder, given the headlines that came through from Trump

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Speaker 4: of this very risk. We saw, you know, the impact

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Speaker 4: on the Indian markets for example, and this is also

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Speaker 4: an economy that has quite squarely been in the crosshairs

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Speaker 4: of the US president. Now were these threats of pharmaceutical tariffs?

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Speaker 4: How at risk is the Indian economy? And to what

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Speaker 4: extent can perhaps want dubbish monetary policy from the IBI,

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Speaker 4: which also meets this week.

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Speaker 1: I've set some of that, yes, So, I mean India

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Speaker 1: has definitely been in the crosshairs with that fifty percent tariff,

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Speaker 1: and now you know also with visas where you know

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Speaker 1: they're sort of heavily involved for US, and now the pharmaceuticals.

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Speaker 1: I suppose there's a couple of things. First of all,

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Speaker 1: this is a post so we're still waiting for a

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Speaker 1: little bit of details there and also whether or not

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Speaker 1: you know at the moment, there's some carve outs if.

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Speaker 5: You like, in pure Trump fashion, So carve outs.

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Speaker 1: For those that are actually you know, breaking ground or

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Speaker 1: have construction underway, and also those that are you know, if.

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Speaker 5: It's a generic good.

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Speaker 1: And for India that matters because most of their pharmaceutical.

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Speaker 5: Goods to the US are generic.

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Speaker 1: That said, you know, clearly this is a headwind, particularly

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Speaker 1: the longer that these tarrats are fifty percent remain for

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Speaker 1: the Indian economy.

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Speaker 5: But there's some offsets as well. So they've also had

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Speaker 5: the GST cut.

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Speaker 1: And that you know, will provide some boostful for consumers.

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Speaker 1: I think for the RBI, we're looking for them to

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Speaker 1: keep rates on hold. It's probably going to be a

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Speaker 1: tight sort of a live call if you like, because

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Speaker 1: inflation is low. But we're looking for them to remain

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Speaker 1: not hold this week. But we do see that they

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Speaker 1: do have the space. If we do see that these

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Speaker 1: tariffs remain in place at fifty percent and consumption, particularly

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Speaker 1: after Devali, maybe if that fell off that they may

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Speaker 1: they will actually provide some more support.

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Speaker 4: Sean, great to chat. Thanks for setting us up for

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Speaker 4: this week. Sean Van, ahead of Business and Industry Economics

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Speaker 4: at westpac.

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Speaker 2: Thanks for listening to today's episode of the Bloomberg Daybreak

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Speaker 2: Asia Edition podcast. Each weekday, we look at the story

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Speaker 2: shaping markets, finance, and geopolitics in the Asia Pacific. You

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Speaker 2: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,

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Speaker 2: or anywhere else you listen. Join us again tomorrow for

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Speaker 2: insight on the market moves from Hong Kong to Singapore

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Speaker 2: and Australia. I'm Doug Prisner, and this is Bloomberg