Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Welcome to the Daybreak Asia podcast. I'm Dan Schwartzman. Doug
Speaker 2: Risner has a day off. Oil is extending gains. That
Speaker 2: is after Ron says an agreement with Omon establishing a
Speaker 2: shipping route through the Strait of Hormuz was quote very close,
Speaker 2: but remain short of a final deal. However, Iron has
Speaker 2: ruled out direct talks with the US for now, sit
Speaker 2: in US violations of a short lived interim peace agreement. Meantime,
Speaker 2: in the States, on Friday, employers unexpectedly cut jobs in
Speaker 2: July and hirings in the prior two months was revised lower.
Speaker 2: This suggests the labor market is weaker than previously thought.
Speaker 2: The report may prompt the Federal Reserve to delay interest
Speaker 2: rate increases as officials weigh inflation against risks to employment.
Speaker 2: For more on the Federate outlook, Bloomberg's Heidi Stroud Watts
Speaker 2: spoke to Jasmine Douon, senior investment strategist at RBC Wealth
Speaker 2: Management Asia.
Speaker 3: What's the up top of mind for you at the moment.
Speaker 1: There is quite a bit of conversation as to whether
Speaker 1: these FED expectations have really shifted going into the end
Speaker 1: of the year.
Speaker 4: Well, we think right now, what's causing the rates the
Speaker 4: use volatility is really the FAT communications strategy. In the past,
Speaker 4: the FAT communicates to the market very clearly, but now
Speaker 4: under the new fectuer, he wants the market to figure
Speaker 4: out things themselves. And in this past Fat meeting, investors
Speaker 4: expected the FAT to act, but they didn't act, so
Speaker 4: that kind of caused some confusions to the market as well.
Speaker 4: And this talked tough but without action approach, we'll only
Speaker 4: act in the short term.
Speaker 3: And we think that central.
Speaker 4: Banks needs credibility, and credibility comes from backing words with actions,
Speaker 4: So we think WASH will take the opportunity of Jackson
Speaker 4: Holle to clarify his approach, and until we hear from him,
Speaker 4: we expect yous to remain elevated and volatility to persist.
Speaker 4: And we think the FAT is likely to have the
Speaker 4: rates on hold until end of the next year. But
Speaker 4: biggeries comes from inflation if it picks up again in
Speaker 4: the fall or oil price goes up again, and that
Speaker 4: will push the FAT into action.
Speaker 1: In the meantime, you remain overweight US equity. It has
Speaker 1: a recent relatility when it comes to questions over AI
Speaker 1: spend change that at all, what are you focusing on?
Speaker 4: Well, for us, we remain constructive on the AI story
Speaker 4: on the text sector as long as the earnings can deliver,
Speaker 4: and we think if earnings can continue to hold, there
Speaker 4: is a room for the market to continue to go higher.
Speaker 4: But we do acknowledge that the AI narrative is getting
Speaker 4: more compacts right now. So first of all, the AI
Speaker 4: is powering the whole data center build out and broader
Speaker 4: economic growth. But most of the company are still saying
Speaker 4: they see potential for earnings to grow using AI, but
Speaker 4: there is no actual provement of their productivity or their
Speaker 4: earnings profitability improvement. So we see this gap between the
Speaker 4: hype and result widening. And also we see an inflection
Speaker 4: point for the Hyperscaler's capex. For this year, the growth
Speaker 4: is expected to be seventy percent year on year and
Speaker 4: for next year the growth will be thirty percent. It
Speaker 4: is still a very big number, but the growth rate
Speaker 4: is slowing down and for equity investors they look at
Speaker 4: the growth rate instead.
Speaker 3: Of the absolute level.
Speaker 4: And therefore we think we are reaching an inflection point.
Speaker 4: And now with the cheap AI models coming to the market,
Speaker 4: that could also extend ouri timeline for the hyper scalers.
Speaker 4: So we are constructed on the tech sector, but we
Speaker 4: are aware the narrative is getting more more and more complex.
Speaker 1: Part of the challenge, of course, well, the real challenge
Speaker 1: is coming from China. So do you have any interest
Speaker 1: in any of the II names or even the pixel
Speaker 1: shovels names from the Chinese market.
Speaker 4: We do see that it's very interesting we are hearing
Speaker 4: this latest news for the cheap AI models coming into
Speaker 4: the market and getting more and more and more competitive
Speaker 4: to their US peers, and that could provide some opportunities
Speaker 4: because the AI peers, the China peers did look more
Speaker 4: attractive in terms of valuation and their growth are looking
Speaker 4: also attractive. And therefore we think at this moment of time,
Speaker 4: the AI China AI space to present some opportunity. But
Speaker 4: what's more important to watch is the upcoming second quarter
Speaker 4: earning season. So for some of the big tech companies,
Speaker 4: their revenue may continue to grow or remain stable, but
Speaker 4: for their bottom line beca of the increased investment in AI,
Speaker 4: their profitability may be affected. So it really depends on
Speaker 4: how the company management is going to explain this and how.
Speaker 3: Investors will look at this.
Speaker 4: Increased investment in AI, so maybe they are happy that
Speaker 4: there is an increasing investment, there are future profitability growth,
Speaker 4: but some investors may also be concerned about the short
Speaker 4: term earnings being affected. So it's really important for us
Speaker 4: to look at the upcoming second quarter earning season with.
Speaker 1: No resolution inside of the moment between the US and Iran.
Speaker 1: Do you see opportunities in the energy sector.
Speaker 4: Yes, we do so right now for the US and
Speaker 4: Iran situation. For US, we remain skeptical that real peace
Speaker 4: or stable oil market will come back anytime soon. And
Speaker 4: we think for both US and Iran they are just pausing,
Speaker 4: not peacing. And if we look at the nuclear stand
Speaker 4: of that started the war five months ago, it hasn't
Speaker 4: been resolved, and we think both sides will have incentive
Speaker 4: to fight again. And also for the shipping market, with
Speaker 4: the ongoing threads of tolls and drones and missiles, a
Speaker 4: large portion of the ship market will.
Speaker 3: Remain on the side lines.
Speaker 4: And now the US strategic strategic petroleum reserve is at
Speaker 4: this lowest level since nineteen eighty three. It's just slightly
Speaker 4: about three hundred million barrel and that means the buffer
Speaker 4: is really think and the wood is hard to sustain
Speaker 4: another supply shock, and therefore we think for investors it's
Speaker 4: really good to have some energy stocks in your portfolio
Speaker 4: to diversify the risk as we expect this supply constraint
Speaker 4: to remain.
Speaker 2: That was Jasmin Duon, senior investment strategist at RBC Wealth
Speaker 2: Management Asia, speaking of Bloomberg TV host Heidi Shroud Watts,
Speaker 2: and we're bringing their conversation to you here on the
Speaker 2: Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast.
Speaker 2: I'm Dan Schwartzman. Doug Risner has a day off Asian
Speaker 2: stocks rose on Monday after soft US job's data sent
Speaker 2: Wall Street gages higher on Friday, where the S and
Speaker 2: P five hundred index closing at a record high. Meantime,
Speaker 2: in the week ahead, traders will be looking at upcoming
Speaker 2: reports on consumer prices that are likely to decide the
Speaker 2: Fed's course of action. For more, we had the chance
Speaker 2: to speak to Leana Jane, international economist at Westpac. She
Speaker 2: spoke to Bloomberg's Heidie shroud Watts.
Speaker 1: All your takes away, because clearly that has caused a
Speaker 1: rethink when it comes to where the FED can go
Speaker 1: from here.
Speaker 5: Yeah, certainly, Look, the job's numbers really confirmed what we
Speaker 5: had been talking about for quite some time that the
Speaker 5: headline numbers were really masking a week economy under the surface.
Speaker 5: So we saw a decline non farm pay rolls. But
Speaker 5: I think the one thing to focus on is the
Speaker 5: unemployment rate in the participation rate. We've seen the participation
Speaker 5: rate fall for the most part since twenty twenty three,
Speaker 5: and that's meant that that's really flattered the unemployment rate
Speaker 5: to be lower. But if we hold the participation rate
Speaker 5: at where it was roughly and around twenty twenty three,
Speaker 5: which again is lower than where it was prior to
Speaker 5: the pandemic, we would have an unemployment rate closer to
Speaker 5: five percent, and that certainly speaks to a labor market
Speaker 5: and economy that has a bit of slack in it.
Speaker 5: So overall, we do think we took that read to
Speaker 5: be a confirmation of what we think that the underlying
Speaker 5: labor market is actually quite weak, and we do expect
Speaker 5: that the FED will remain on hold for the foreseeble
Speaker 5: future due to that.
Speaker 1: So it makes this week's inflation read it ever more interesting.
Speaker 1: Are you surprised that we haven't perhaps seen as much
Speaker 1: pass through from the Middle East oil crisis for the US.
Speaker 5: I think it has been a little bit surprising, but
Speaker 5: this pass through has.
Speaker 3: Still definitely been there.
Speaker 5: I mean, if you see the last couple inflation prints,
Speaker 5: they have been on the stronger side, even though we
Speaker 5: have seen a bit of easing in the services side,
Speaker 5: and that strength in inflation is probably what's going to
Speaker 5: keep the FED on hold and not necessarily cutting rates.
Speaker 5: As for the CPI data we're getting this week, we
Speaker 5: do anticipate it's going to show the impacts of that
Speaker 5: re escalation intentions, but we don't anticipate that a lot
Speaker 5: of the discretionary categories, things like recreational services, are.
Speaker 3: Going to see much renewed strength.
Speaker 5: So while we do see the headline number, there is
Speaker 5: a bit of risk that it comes in a bit
Speaker 5: stronger than what markets are expecting. We don't think the
Speaker 5: underlying will point to renewed inflationary pressures.
Speaker 1: But the RBA this week, the consensus, at least hero Bleinbergers,
Speaker 1: is for a hawkish hold. The stubbornness of the inflation readings, well,
Speaker 1: I guess the slowness of how the disinflation effort is
Speaker 1: coming through. Is that balance with factors like the fact
Speaker 1: that we're seeing a really big slowdown in the property market.
Speaker 5: Yeah. Sure, So I'll start with inflation first. So you're
Speaker 5: right in that we've seen inflation be quite persistent. But
Speaker 5: I think it's worth noting that inflation, while it has
Speaker 5: been persistent, it hasn't reflected a strong transmission of the higher.
Speaker 3: Costs a lot of businesses are facing. And in contrast to.
Speaker 5: The US, I think that's a very good news story
Speaker 5: for the RBA, and that's something that has led us
Speaker 5: for led us to change our call to for the
Speaker 5: RBA to remain on hold for this year and into
Speaker 5: the first part of the next year as well. And
Speaker 5: so well we can say, well, inflation's been quite persistent.
Speaker 5: I think I like to see that number is a
Speaker 5: good thing because it hasn't actually passed through a lot
Speaker 5: of the costs. In terms of the housing market, we
Speaker 5: are expecting a sharper slow down than we were previously.
Speaker 5: The combination of higher rates as well as this tax
Speaker 5: changes we saw this year have led to a much
Speaker 5: sharper contraction in house prices, particularly in capital cities like
Speaker 5: Melbourne and Sydney, and so for overall, we do explic
Speaker 5: decline in house prices for twenty twenty six in Australia,
Speaker 5: but a lot of that's going to be driven by
Speaker 5: the capital cities like Melbourne and Sydney.
Speaker 1: Have you started to see that feed through when it
Speaker 1: comes to consumption or sentiment data?
Speaker 5: Yeah, Sadly, sentiment has been incredibly weak and consumption well,
Speaker 5: the most recent househill indicator suggests that it's been pretty strong.
Speaker 3: The underlying pace has been quite weak.
Speaker 5: We look at internal data here at Westpac, we look
Speaker 5: at customer data that reflects both as spending and saving side,
Speaker 5: and we saw that spending actually did slow down. It
Speaker 5: was boosted by a lot of airline refunds, so people
Speaker 5: getting refunds from not being able to travel, and we
Speaker 5: think that may have contributed to some of the strength
Speaker 5: that we saw in overall spending, but the underlying pace
Speaker 5: has been quite weak.
Speaker 3: If we kind of look at spending on an ex
Speaker 3: transport basis in terms.
Speaker 5: Of the saving start, I think that's where the really
Speaker 5: interesting part comes in, because we saw that a lot
Speaker 5: of consumers have quite healthy buffers, particularly ones with mortgages,
Speaker 5: and those buffers were nearly as strong as what we
Speaker 5: saw in twenty twenty two prior to the rate hikes,
Speaker 5: So consumers are in a pretty good position, but their
Speaker 5: lack of confidence in the economy is really what's leading
Speaker 5: them to slow down and hold back on excessive spending.
Speaker 1: Confidence Is that still an issue for China? We see
Speaker 1: that sort of demand driven reflation really starting to weaken
Speaker 1: in the latest inflation readings.
Speaker 3: Yeah, certainly.
Speaker 5: I think for China that confidence story is quite important,
Speaker 5: and why Chinese consumers is like so much confidence, it's
Speaker 5: not hard to see. I mean, the main source of
Speaker 5: wealth was housing, and the housing downturn the last couple
Speaker 5: of years hasn't been great for that. On the flip side,
Speaker 5: the labor market hasn't been particularly strong. During previous expansions,
Speaker 5: particularly industrial expansions, where we saw big growth in exports
Speaker 5: and industrial production. That usually translated into labor market growth
Speaker 5: as well, because you know, you have to hire more
Speaker 5: workers to make more products. But this time round, because
Speaker 5: a lot of the growth is coming from the high
Speaker 5: tech manufacturing sector that doesn't require as much labor, it's
Speaker 5: more capital intensive, we've seen a slowdown in how in
Speaker 5: hiring and that's really dampened consumers.
Speaker 3: So for China, the main issue is making sure.
Speaker 5: Consumers don't lose their confidence completely and that for that
Speaker 5: not to turn into a structural factor of the Chinese economy.
Speaker 3: So the K shaped recovery continues.
Speaker 1: Do you expect more fiscal stimulus or do you think
Speaker 1: at this point it's something that China is comfortable with.
Speaker 5: Yeah, recent meetings suggests that maybe fiscal stimulus in the
Speaker 5: way we saw in twenty twenty five probably won't be
Speaker 5: a thing. I don't expect a lot of cash handouts
Speaker 5: to come through twenty twenty six. That said, it doesn't
Speaker 5: mean that Chinese consumers don't need to be.
Speaker 3: Aided fiscal support. What that fiscal support.
Speaker 5: Really should be doing is helping bolster confidence. One way
Speaker 5: of doing that is helping support the equity market and
Speaker 5: encouraging consumers to invest into the equity market because that
Speaker 5: allows them to that allows them to give sharing on
Speaker 5: all lot of the gains in the tech sector rather
Speaker 5: than miss out.
Speaker 2: That was Eleana Jaane, international economist at Westpac, speaking of
Speaker 2: Bloomberg's Heidi Shroud Watts, and we're bringing their conversation to
Speaker 2: you here on the Daybreak Asia podcast.
Speaker 6: Thanks for listening to today's episode of the Bloomberg Daybreak
Speaker 6: Asia Edition podcast. Each weekday, we look at the story
Speaker 6: shaping markets, finance, and geopolitics in the Asia Pacific. You
Speaker 6: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,
Speaker 6: or anywhere else you listen. Join us again tomorrow for
Speaker 6: insight on the market moves from Hong Kong to Singapore
Speaker 6: and Australia. I'm Doug Prisner, and this is Bloomberg. Hmm.