WEBVTT - Oil Advances as Iran Deal Eludes, Eco Week Ahead 0:00:00.040 --> 0:00:07.000 Bloomberg Audio Studios, Podcasts, radio News. 0:00:10.640 --> 0:00:13.960 Welcome to the Daybreak Asia podcast. I'm Dan Schwartzman. Doug 0:00:14.080 --> 0:00:17.000 Risner has a day off. Oil is extending gains. That 0:00:17.160 --> 0:00:19.680 is after Ron says an agreement with Omon establishing a 0:00:19.720 --> 0:00:22.520 shipping route through the Strait of Hormuz was quote very close, 0:00:22.760 --> 0:00:25.560 but remain short of a final deal. However, Iron has 0:00:25.600 --> 0:00:27.880 ruled out direct talks with the US for now, sit 0:00:27.920 --> 0:00:31.520 in US violations of a short lived interim peace agreement. Meantime, 0:00:31.600 --> 0:00:34.880 in the States, on Friday, employers unexpectedly cut jobs in 0:00:34.960 --> 0:00:38.080 July and hirings in the prior two months was revised lower. 0:00:38.360 --> 0:00:41.280 This suggests the labor market is weaker than previously thought. 0:00:41.600 --> 0:00:44.160 The report may prompt the Federal Reserve to delay interest 0:00:44.200 --> 0:00:48.080 rate increases as officials weigh inflation against risks to employment. 0:00:48.520 --> 0:00:51.400 For more on the Federate outlook, Bloomberg's Heidi Stroud Watts 0:00:51.479 --> 0:00:55.240 spoke to Jasmine Douon, senior investment strategist at RBC Wealth 0:00:55.280 --> 0:00:56.120 Management Asia. 0:00:56.480 --> 0:00:58.640 What's the up top of mind for you at the moment. 0:00:58.760 --> 0:01:01.120 There is quite a bit of conversation as to whether 0:01:01.160 --> 0:01:04.200 these FED expectations have really shifted going into the end 0:01:04.200 --> 0:01:04.640 of the year. 0:01:08.840 --> 0:01:13.520 Well, we think right now, what's causing the rates the 0:01:13.720 --> 0:01:18.520 use volatility is really the FAT communications strategy. In the past, 0:01:18.720 --> 0:01:21.959 the FAT communicates to the market very clearly, but now 0:01:22.120 --> 0:01:25.000 under the new fectuer, he wants the market to figure 0:01:25.000 --> 0:01:31.360 out things themselves. And in this past Fat meeting, investors 0:01:31.480 --> 0:01:34.200 expected the FAT to act, but they didn't act, so 0:01:34.240 --> 0:01:37.119 that kind of caused some confusions to the market as well. 0:01:37.440 --> 0:01:41.840 And this talked tough but without action approach, we'll only 0:01:41.880 --> 0:01:42.959 act in the short term. 0:01:43.160 --> 0:01:44.640 And we think that central. 0:01:44.360 --> 0:01:49.960 Banks needs credibility, and credibility comes from backing words with actions, 0:01:50.240 --> 0:01:53.440 So we think WASH will take the opportunity of Jackson 0:01:53.480 --> 0:01:57.480 Holle to clarify his approach, and until we hear from him, 0:01:57.680 --> 0:02:02.000 we expect yous to remain elevated and volatility to persist. 0:02:02.680 --> 0:02:05.440 And we think the FAT is likely to have the 0:02:05.520 --> 0:02:08.200 rates on hold until end of the next year. But 0:02:08.280 --> 0:02:12.520 biggeries comes from inflation if it picks up again in 0:02:12.600 --> 0:02:15.480 the fall or oil price goes up again, and that 0:02:15.560 --> 0:02:17.120 will push the FAT into action. 0:02:20.360 --> 0:02:23.079 In the meantime, you remain overweight US equity. It has 0:02:23.080 --> 0:02:26.360 a recent relatility when it comes to questions over AI 0:02:26.440 --> 0:02:29.480 spend change that at all, what are you focusing on? 0:02:32.320 --> 0:02:35.760 Well, for us, we remain constructive on the AI story 0:02:36.160 --> 0:02:39.880 on the text sector as long as the earnings can deliver, 0:02:40.320 --> 0:02:43.560 and we think if earnings can continue to hold, there 0:02:43.600 --> 0:02:46.600 is a room for the market to continue to go higher. 0:02:46.880 --> 0:02:50.400 But we do acknowledge that the AI narrative is getting 0:02:50.440 --> 0:02:55.600 more compacts right now. So first of all, the AI 0:02:55.840 --> 0:02:58.880 is powering the whole data center build out and broader 0:02:59.200 --> 0:03:02.920 economic growth. But most of the company are still saying 0:03:03.160 --> 0:03:07.960 they see potential for earnings to grow using AI, but 0:03:08.240 --> 0:03:12.720 there is no actual provement of their productivity or their 0:03:12.800 --> 0:03:17.480 earnings profitability improvement. So we see this gap between the 0:03:17.600 --> 0:03:23.680 hype and result widening. And also we see an inflection 0:03:23.840 --> 0:03:27.760 point for the Hyperscaler's capex. For this year, the growth 0:03:27.880 --> 0:03:30.960 is expected to be seventy percent year on year and 0:03:31.000 --> 0:03:33.840 for next year the growth will be thirty percent. It 0:03:33.919 --> 0:03:36.560 is still a very big number, but the growth rate 0:03:36.640 --> 0:03:40.080 is slowing down and for equity investors they look at 0:03:40.120 --> 0:03:41.680 the growth rate instead. 0:03:41.360 --> 0:03:43.480 Of the absolute level. 0:03:43.840 --> 0:03:47.240 And therefore we think we are reaching an inflection point. 0:03:47.440 --> 0:03:50.400 And now with the cheap AI models coming to the market, 0:03:50.640 --> 0:03:54.600 that could also extend ouri timeline for the hyper scalers. 0:03:54.720 --> 0:03:58.720 So we are constructed on the tech sector, but we 0:03:58.760 --> 0:04:02.320 are aware the narrative is getting more more and more complex. 0:04:04.120 --> 0:04:06.160 Part of the challenge, of course, well, the real challenge 0:04:06.200 --> 0:04:08.840 is coming from China. So do you have any interest 0:04:09.000 --> 0:04:12.480 in any of the II names or even the pixel 0:04:12.520 --> 0:04:14.480 shovels names from the Chinese market. 0:04:17.800 --> 0:04:20.520 We do see that it's very interesting we are hearing 0:04:20.600 --> 0:04:23.839 this latest news for the cheap AI models coming into 0:04:23.880 --> 0:04:27.760 the market and getting more and more and more competitive 0:04:28.040 --> 0:04:31.599 to their US peers, and that could provide some opportunities 0:04:31.760 --> 0:04:35.880 because the AI peers, the China peers did look more 0:04:35.920 --> 0:04:40.000 attractive in terms of valuation and their growth are looking 0:04:40.160 --> 0:04:43.920 also attractive. And therefore we think at this moment of time, 0:04:44.120 --> 0:04:47.960 the AI China AI space to present some opportunity. But 0:04:48.120 --> 0:04:51.640 what's more important to watch is the upcoming second quarter 0:04:51.760 --> 0:04:55.000 earning season. So for some of the big tech companies, 0:04:55.279 --> 0:04:58.720 their revenue may continue to grow or remain stable, but 0:04:58.760 --> 0:05:02.440 for their bottom line beca of the increased investment in AI, 0:05:02.800 --> 0:05:06.800 their profitability may be affected. So it really depends on 0:05:07.080 --> 0:05:11.039 how the company management is going to explain this and how. 0:05:10.960 --> 0:05:12.560 Investors will look at this. 0:05:14.240 --> 0:05:17.920 Increased investment in AI, so maybe they are happy that 0:05:18.320 --> 0:05:22.279 there is an increasing investment, there are future profitability growth, 0:05:22.520 --> 0:05:25.760 but some investors may also be concerned about the short 0:05:25.839 --> 0:05:31.160 term earnings being affected. So it's really important for us 0:05:31.200 --> 0:05:35.320 to look at the upcoming second quarter earning season with. 0:05:35.400 --> 0:05:38.480 No resolution inside of the moment between the US and Iran. 0:05:38.880 --> 0:05:41.720 Do you see opportunities in the energy sector. 0:05:43.880 --> 0:05:46.800 Yes, we do so right now for the US and 0:05:46.960 --> 0:05:51.560 Iran situation. For US, we remain skeptical that real peace 0:05:51.760 --> 0:05:55.080 or stable oil market will come back anytime soon. And 0:05:55.160 --> 0:05:58.320 we think for both US and Iran they are just pausing, 0:05:58.520 --> 0:06:02.520 not peacing. And if we look at the nuclear stand 0:06:02.640 --> 0:06:05.680 of that started the war five months ago, it hasn't 0:06:05.720 --> 0:06:09.760 been resolved, and we think both sides will have incentive 0:06:09.880 --> 0:06:13.479 to fight again. And also for the shipping market, with 0:06:13.640 --> 0:06:18.159 the ongoing threads of tolls and drones and missiles, a 0:06:18.279 --> 0:06:20.640 large portion of the ship market will. 0:06:20.440 --> 0:06:21.760 Remain on the side lines. 0:06:22.160 --> 0:06:27.120 And now the US strategic strategic petroleum reserve is at 0:06:27.120 --> 0:06:31.640 this lowest level since nineteen eighty three. It's just slightly 0:06:31.680 --> 0:06:36.440 about three hundred million barrel and that means the buffer 0:06:36.640 --> 0:06:39.640 is really think and the wood is hard to sustain 0:06:39.680 --> 0:06:45.240 another supply shock, and therefore we think for investors it's 0:06:45.320 --> 0:06:48.560 really good to have some energy stocks in your portfolio 0:06:48.600 --> 0:06:52.960 to diversify the risk as we expect this supply constraint 0:06:53.120 --> 0:06:53.799 to remain. 0:06:54.240 --> 0:06:57.880 That was Jasmin Duon, senior investment strategist at RBC Wealth 0:06:57.920 --> 0:07:01.520 Management Asia, speaking of Bloomberg TV host Heidi Shroud Watts, 0:07:01.680 --> 0:07:03.599 and we're bringing their conversation to you here on the 0:07:03.640 --> 0:07:14.840 Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. 0:07:15.000 --> 0:07:18.200 I'm Dan Schwartzman. Doug Risner has a day off Asian 0:07:18.240 --> 0:07:21.200 stocks rose on Monday after soft US job's data sent 0:07:21.280 --> 0:07:23.720 Wall Street gages higher on Friday, where the S and 0:07:23.760 --> 0:07:26.880 P five hundred index closing at a record high. Meantime, 0:07:26.920 --> 0:07:29.200 in the week ahead, traders will be looking at upcoming 0:07:29.200 --> 0:07:32.200 reports on consumer prices that are likely to decide the 0:07:32.200 --> 0:07:35.000 Fed's course of action. For more, we had the chance 0:07:35.000 --> 0:07:38.320 to speak to Leana Jane, international economist at Westpac. She 0:07:38.360 --> 0:07:40.360 spoke to Bloomberg's Heidie shroud Watts. 0:07:40.640 --> 0:07:44.000 All your takes away, because clearly that has caused a 0:07:44.040 --> 0:07:45.800 rethink when it comes to where the FED can go 0:07:45.880 --> 0:07:46.280 from here. 0:07:46.600 --> 0:07:49.920 Yeah, certainly, Look, the job's numbers really confirmed what we 0:07:50.080 --> 0:07:53.320 had been talking about for quite some time that the 0:07:53.400 --> 0:07:57.880 headline numbers were really masking a week economy under the surface. 0:07:58.000 --> 0:08:01.600 So we saw a decline non farm pay rolls. But 0:08:01.760 --> 0:08:03.560 I think the one thing to focus on is the 0:08:03.640 --> 0:08:07.240 unemployment rate in the participation rate. We've seen the participation 0:08:07.400 --> 0:08:11.120 rate fall for the most part since twenty twenty three, 0:08:11.880 --> 0:08:15.840 and that's meant that that's really flattered the unemployment rate 0:08:15.880 --> 0:08:18.600 to be lower. But if we hold the participation rate 0:08:18.720 --> 0:08:21.760 at where it was roughly and around twenty twenty three, 0:08:22.120 --> 0:08:24.040 which again is lower than where it was prior to 0:08:24.080 --> 0:08:27.280 the pandemic, we would have an unemployment rate closer to 0:08:27.560 --> 0:08:31.920 five percent, and that certainly speaks to a labor market 0:08:31.920 --> 0:08:34.200 and economy that has a bit of slack in it. 0:08:34.640 --> 0:08:37.320 So overall, we do think we took that read to 0:08:37.400 --> 0:08:39.800 be a confirmation of what we think that the underlying 0:08:39.880 --> 0:08:43.080 labor market is actually quite weak, and we do expect 0:08:43.160 --> 0:08:45.319 that the FED will remain on hold for the foreseeble 0:08:45.360 --> 0:08:46.959 future due to that. 0:08:47.240 --> 0:08:50.160 So it makes this week's inflation read it ever more interesting. 0:08:50.760 --> 0:08:52.960 Are you surprised that we haven't perhaps seen as much 0:08:53.000 --> 0:08:57.720 pass through from the Middle East oil crisis for the US. 0:08:57.880 --> 0:09:00.200 I think it has been a little bit surprising, but 0:09:00.240 --> 0:09:01.320 this pass through has. 0:09:01.160 --> 0:09:02.440 Still definitely been there. 0:09:02.480 --> 0:09:05.120 I mean, if you see the last couple inflation prints, 0:09:05.400 --> 0:09:07.400 they have been on the stronger side, even though we 0:09:07.440 --> 0:09:10.559 have seen a bit of easing in the services side, 0:09:10.640 --> 0:09:14.200 and that strength in inflation is probably what's going to 0:09:14.280 --> 0:09:17.520 keep the FED on hold and not necessarily cutting rates. 0:09:18.040 --> 0:09:22.000 As for the CPI data we're getting this week, we 0:09:22.040 --> 0:09:24.960 do anticipate it's going to show the impacts of that 0:09:25.600 --> 0:09:30.720 re escalation intentions, but we don't anticipate that a lot 0:09:30.760 --> 0:09:34.920 of the discretionary categories, things like recreational services, are. 0:09:34.760 --> 0:09:36.400 Going to see much renewed strength. 0:09:36.520 --> 0:09:38.760 So while we do see the headline number, there is 0:09:38.760 --> 0:09:40.120 a bit of risk that it comes in a bit 0:09:40.160 --> 0:09:42.840 stronger than what markets are expecting. We don't think the 0:09:42.920 --> 0:09:45.920 underlying will point to renewed inflationary pressures. 0:09:46.240 --> 0:09:50.040 But the RBA this week, the consensus, at least hero Bleinbergers, 0:09:50.120 --> 0:09:54.760 is for a hawkish hold. The stubbornness of the inflation readings, well, 0:09:54.800 --> 0:09:58.240 I guess the slowness of how the disinflation effort is 0:09:58.640 --> 0:10:02.960 coming through. Is that balance with factors like the fact 0:10:03.000 --> 0:10:05.880 that we're seeing a really big slowdown in the property market. 0:10:06.440 --> 0:10:10.080 Yeah. Sure, So I'll start with inflation first. So you're 0:10:10.160 --> 0:10:13.400 right in that we've seen inflation be quite persistent. But 0:10:14.160 --> 0:10:17.839 I think it's worth noting that inflation, while it has 0:10:17.880 --> 0:10:21.720 been persistent, it hasn't reflected a strong transmission of the higher. 0:10:21.520 --> 0:10:25.000 Costs a lot of businesses are facing. And in contrast to. 0:10:25.000 --> 0:10:26.920 The US, I think that's a very good news story 0:10:26.960 --> 0:10:30.520 for the RBA, and that's something that has led us 0:10:30.520 --> 0:10:33.720 for led us to change our call to for the 0:10:33.800 --> 0:10:37.200 RBA to remain on hold for this year and into 0:10:37.559 --> 0:10:40.120 the first part of the next year as well. And 0:10:40.200 --> 0:10:43.240 so well we can say, well, inflation's been quite persistent. 0:10:43.480 --> 0:10:45.760 I think I like to see that number is a 0:10:45.800 --> 0:10:48.280 good thing because it hasn't actually passed through a lot 0:10:48.280 --> 0:10:50.840 of the costs. In terms of the housing market, we 0:10:50.880 --> 0:10:53.839 are expecting a sharper slow down than we were previously. 0:10:54.720 --> 0:10:58.280 The combination of higher rates as well as this tax 0:10:58.840 --> 0:11:01.280 changes we saw this year have led to a much 0:11:01.320 --> 0:11:04.680 sharper contraction in house prices, particularly in capital cities like 0:11:05.080 --> 0:11:08.880 Melbourne and Sydney, and so for overall, we do explic 0:11:09.240 --> 0:11:12.839 decline in house prices for twenty twenty six in Australia, 0:11:12.880 --> 0:11:14.400 but a lot of that's going to be driven by 0:11:14.440 --> 0:11:16.240 the capital cities like Melbourne and Sydney. 0:11:16.920 --> 0:11:18.600 Have you started to see that feed through when it 0:11:18.600 --> 0:11:21.079 comes to consumption or sentiment data? 0:11:21.440 --> 0:11:25.600 Yeah, Sadly, sentiment has been incredibly weak and consumption well, 0:11:25.640 --> 0:11:28.800 the most recent househill indicator suggests that it's been pretty strong. 0:11:29.120 --> 0:11:31.280 The underlying pace has been quite weak. 0:11:32.080 --> 0:11:34.559 We look at internal data here at Westpac, we look 0:11:34.559 --> 0:11:37.760 at customer data that reflects both as spending and saving side, 0:11:37.800 --> 0:11:40.840 and we saw that spending actually did slow down. It 0:11:41.000 --> 0:11:44.199 was boosted by a lot of airline refunds, so people 0:11:44.240 --> 0:11:46.840 getting refunds from not being able to travel, and we 0:11:46.880 --> 0:11:49.200 think that may have contributed to some of the strength 0:11:49.240 --> 0:11:52.600 that we saw in overall spending, but the underlying pace 0:11:52.720 --> 0:11:53.840 has been quite weak. 0:11:53.880 --> 0:11:56.199 If we kind of look at spending on an ex 0:11:56.280 --> 0:11:58.880 transport basis in terms. 0:11:58.679 --> 0:12:01.200 Of the saving start, I think that's where the really 0:12:01.200 --> 0:12:04.120 interesting part comes in, because we saw that a lot 0:12:04.160 --> 0:12:08.479 of consumers have quite healthy buffers, particularly ones with mortgages, 0:12:09.080 --> 0:12:11.800 and those buffers were nearly as strong as what we 0:12:11.880 --> 0:12:14.680 saw in twenty twenty two prior to the rate hikes, 0:12:14.960 --> 0:12:17.440 So consumers are in a pretty good position, but their 0:12:17.559 --> 0:12:20.679 lack of confidence in the economy is really what's leading 0:12:20.720 --> 0:12:24.280 them to slow down and hold back on excessive spending. 0:12:25.400 --> 0:12:27.880 Confidence Is that still an issue for China? We see 0:12:27.920 --> 0:12:31.120 that sort of demand driven reflation really starting to weaken 0:12:31.160 --> 0:12:32.640 in the latest inflation readings. 0:12:32.960 --> 0:12:33.600 Yeah, certainly. 0:12:33.600 --> 0:12:36.960 I think for China that confidence story is quite important, 0:12:37.480 --> 0:12:42.000 and why Chinese consumers is like so much confidence, it's 0:12:42.040 --> 0:12:44.480 not hard to see. I mean, the main source of 0:12:44.520 --> 0:12:47.160 wealth was housing, and the housing downturn the last couple 0:12:47.160 --> 0:12:50.120 of years hasn't been great for that. On the flip side, 0:12:51.120 --> 0:12:56.200 the labor market hasn't been particularly strong. During previous expansions, 0:12:57.160 --> 0:13:02.840 particularly industrial expansions, where we saw big growth in exports 0:13:02.880 --> 0:13:08.000 and industrial production. That usually translated into labor market growth 0:13:08.000 --> 0:13:10.040 as well, because you know, you have to hire more 0:13:10.040 --> 0:13:12.959 workers to make more products. But this time round, because 0:13:12.960 --> 0:13:14.800 a lot of the growth is coming from the high 0:13:14.960 --> 0:13:17.959 tech manufacturing sector that doesn't require as much labor, it's 0:13:18.000 --> 0:13:22.720 more capital intensive, we've seen a slowdown in how in 0:13:23.120 --> 0:13:25.600 hiring and that's really dampened consumers. 0:13:26.040 --> 0:13:28.760 So for China, the main issue is making sure. 0:13:28.640 --> 0:13:32.199 Consumers don't lose their confidence completely and that for that 0:13:32.320 --> 0:13:35.000 not to turn into a structural factor of the Chinese economy. 0:13:35.480 --> 0:13:37.479 So the K shaped recovery continues. 0:13:37.600 --> 0:13:40.719 Do you expect more fiscal stimulus or do you think 0:13:40.760 --> 0:13:43.680 at this point it's something that China is comfortable with. 0:13:44.040 --> 0:13:47.320 Yeah, recent meetings suggests that maybe fiscal stimulus in the 0:13:47.360 --> 0:13:50.840 way we saw in twenty twenty five probably won't be 0:13:50.880 --> 0:13:53.080 a thing. I don't expect a lot of cash handouts 0:13:53.080 --> 0:13:56.840 to come through twenty twenty six. That said, it doesn't 0:13:56.880 --> 0:13:59.720 mean that Chinese consumers don't need to be. 0:13:59.559 --> 0:14:03.320 Aided fiscal support. What that fiscal support. 0:14:03.000 --> 0:14:06.480 Really should be doing is helping bolster confidence. One way 0:14:06.520 --> 0:14:08.960 of doing that is helping support the equity market and 0:14:09.080 --> 0:14:13.600 encouraging consumers to invest into the equity market because that 0:14:13.840 --> 0:14:19.960 allows them to that allows them to give sharing on 0:14:20.120 --> 0:14:22.360 all lot of the gains in the tech sector rather 0:14:22.440 --> 0:14:23.120 than miss out. 0:14:23.240 --> 0:14:26.680 That was Eleana Jaane, international economist at Westpac, speaking of 0:14:26.680 --> 0:14:30.080 Bloomberg's Heidi Shroud Watts, and we're bringing their conversation to 0:14:30.120 --> 0:14:32.119 you here on the Daybreak Asia podcast. 0:14:34.800 --> 0:14:38.160 Thanks for listening to today's episode of the Bloomberg Daybreak 0:14:38.320 --> 0:14:41.680 Asia Edition podcast. Each weekday, we look at the story 0:14:41.760 --> 0:14:46.120 shaping markets, finance, and geopolitics in the Asia Pacific. You 0:14:46.160 --> 0:14:50.240 can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, 0:14:50.360 --> 0:14:53.400 or anywhere else you listen. Join us again tomorrow for 0:14:53.520 --> 0:14:57.000 insight on the market moves from Hong Kong to Singapore 0:14:57.400 --> 0:15:08.680 and Australia. I'm Doug Prisner, and this is Bloomberg. Hmm.