Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Daybreak Aisia podcast. I'm Doug Prisner.
Speaker 2: You can join Brian Curtis and myself for the stories,
Speaker 2: making news and moving markets in the APAC region. You
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Speaker 2: and always on Bloomberg Radio, the Bloomberg Terminal, and the
Speaker 2: Bloomberg Business app. This is Daybreak Asia. I'm Doug Prisoner
Speaker 2: in New York, joined by my colleague Avril Hong in Singapore,
Speaker 2: and our guest is Cheryl Smith. She's economist and portfolio
Speaker 2: manager at Trillium Asset Management. Cheryl joins us from Boston, Massachusetts.
Speaker 2: Thanks for making time to chat with us. I'm sure
Speaker 2: you've had a very very interesting week with a lot
Speaker 2: of the volatility that we have been seeing in markets.
Speaker 2: Late in the day yesterday was struck by the fact
Speaker 2: that JP Morgan put out a note indicating that, according
Speaker 2: to its calculations, the unwinding of this yen carry trade,
Speaker 2: which really created an enormous amount of this week's volatility,
Speaker 2: has been essentially removed, has been unwound seventy five percent.
Speaker 2: Does that make you feel a little bit more comfortable
Speaker 2: at this point, Cheryl.
Speaker 3: It feels more comfortable than knowing that there's a huge
Speaker 3: amount still to be unwound. But it is the sense
Speaker 3: that when you have a market instability, you begin to
Speaker 3: discover the trades that you didn't exactly know were there.
Speaker 3: So we I think it was something people knew that
Speaker 3: there was a carry trade going on. People knew that
Speaker 3: it made sense because the stability between of the difference
Speaker 3: between US interest rates and Japanese interest rates had been
Speaker 3: established for quite a long time, and the exchange rates
Speaker 3: were relatively stable. What we did not know until we
Speaker 3: saw the unwind coming was really how large that trade was,
Speaker 3: how many trades in place, and however they were so,
Speaker 3: how susceptible the traders were to any unexpected change in
Speaker 3: either the interest rate spread or in the differential four
Speaker 3: or excuse me, the direction of the exchange rate. So
Speaker 3: the speed at which that happened was quite alarming. If
Speaker 3: we say, you should say so, I think you know,
Speaker 3: twenty five percent left to go is certainly better than
Speaker 3: looking and saying, oh my gosh, there's three times more to.
Speaker 4: Go, Cheryl.
Speaker 5: When we look at where the yen is seated now,
Speaker 5: it's around the one four seven level. It's nowhere near
Speaker 5: the one four one we saw intraday earlier in the week,
Speaker 5: which also tells us that the FED is a driver
Speaker 5: in a way of what we see on the pay
Speaker 5: Given what we got out of the US initial jobless
Speaker 5: claims declining by the most in nearly a year, what
Speaker 5: are you expecting out of September?
Speaker 3: I think that we'll I still expect to see the
Speaker 3: labor market deteriorate and somewhat because while the initial claims
Speaker 3: fell by the most in quite some time, continuing claims
Speaker 3: were steady and are forty percent above where they were
Speaker 3: at their low, So we really have a substantial backlog.
Speaker 3: That continuing claims I think is a little bit more
Speaker 3: of an indicator because it includes people that have been
Speaker 3: out of work for a longer period of time. And
Speaker 3: what we're seeing is that people are finding it harder
Speaker 3: to get jobs. Maybe not so much coming in losing
Speaker 3: jobs immediately, but that longer duration of unemployment still counts
Speaker 3: and still burns up a rising unemployment rate.
Speaker 5: What is your sense of whether you know they're going
Speaker 5: to try and completely put the genie back in the bottle?
Speaker 5: Are we still talking about two percent on the inflation target.
Speaker 3: They certainly have been very very steadfast that that is
Speaker 3: where they are trying to go. And a large part
Speaker 3: of inflation is expectational. People try to put that in
Speaker 3: their labor contracts, people put it in their expectations of
Speaker 3: how are they doing? And we had an established two
Speaker 3: percent or lower inflation rate for a good ten years,
Speaker 3: and they're really the FED, I think, is trying very
Speaker 3: very hard to get that back into people's heads, to
Speaker 3: get that back into people's minds and therefore into people's behavior.
Speaker 3: So they need to keep in their mind they need
Speaker 3: to keep aiming for that two percent target, and I
Speaker 3: think that they will continue to do it. I don't
Speaker 3: think that they think that this amount of increase in
Speaker 3: unemployment that we've seen so far is out of line.
Speaker 3: I don't think that the FED thinks that it is
Speaker 3: behind ball.
Speaker 2: It seems like you disagree somewhat. And if that's the case,
Speaker 2: are you expecting a recession?
Speaker 3: We are expecting a recession. We are not expecting a
Speaker 3: super deep reception recession, but we are expecting a recession.
Speaker 3: They tend to be cumulative. So when you see this
Speaker 3: increase in continuing claims those people run out of resources
Speaker 3: or their resources are strained, they spend less. That spending
Speaker 3: less really doesn't do it on its own. But as
Speaker 3: consumers spend less, businesses start cutting their discretionary spending, they
Speaker 3: cut the investment and that is what really can cause
Speaker 3: a recession to gather hold and start really rolling. So
Speaker 3: we've seen in this earning season, we saw a lot
Speaker 3: of discussion, particularly about AI. You know, how much investment
Speaker 3: we're firms going to make an AI and were they
Speaker 3: ever going to see a payoff? Those are the kinds
Speaker 3: of questions. When shareholders start asking those questions, business people
Speaker 3: start looking at their investment plans and you know, can
Speaker 3: I take a little out here, can I take a
Speaker 3: little out there. They may still commit to large scale
Speaker 3: commitments like investing in AI, but where else are they
Speaker 3: going to cut? So as we see those questions about
Speaker 3: returns on investment coming up, businesses get happy to sort
Speaker 3: of pull the trigger and cut investment plans, and that's
Speaker 3: what starts to snowball. So that's really my concern, Cheryl.
Speaker 5: I take your point about, you know, things slowing down,
Speaker 5: especially when it comes to earnings and you know, AI spending.
Speaker 5: It really needs to show that it's a revenue generator.
Speaker 5: But in terms of the recession risks, given how big
Speaker 5: the reaction the concern in the market was earlier this week,
Speaker 5: it seems more like an overreaction to me, at least,
Speaker 5: what is your sense of weather, It was just a
Speaker 5: case of, you know, perhaps bad timing, given how it
Speaker 5: coincided with tech earnings and the rotation, and then we
Speaker 5: also had concerns about tensions in the Middle East.
Speaker 3: I think this initial rapid drop and certainly what we
Speaker 3: saw in Japan was I won't call it an overreaction,
Speaker 3: but I'll call it an immediate marketing to market, if
Speaker 3: you will, an immediate change in expectations. And I would
Speaker 3: add into the factors that you mentioned that we really
Speaker 3: did see the market certainly perceived a regime change by
Speaker 3: the Bank of Japan. Bank of Japan apparently is saying
Speaker 3: we still thought that that was an accommodating policy. We
Speaker 3: didn't think raising the rates to twenty five basis points
Speaker 3: was that big a deal. The market certainly perceived it,
Speaker 3: and as I mentioned, you know, sort of the unwind
Speaker 3: of that carry trade being a precipitating factor. So I
Speaker 3: don't think we'll see the quite kind of that immediate volatility.
Speaker 3: Markets going down twelve percent in a day is scary
Speaker 3: to anybody. But what I think we will see is
Speaker 3: a continuation in the slowing of economic growth that we
Speaker 3: had been seeing. The second quarter us GDP was much
Speaker 3: higher than expectations, but if we look at, you know,
Speaker 3: the year before, it's half of what the year before was.
Speaker 3: So we are seeing that slowing. It's going to sort
Speaker 3: of continue to slow.
Speaker 2: Cheryl, always a pleasure. Thank you for making time to
Speaker 2: chat with us here on Daybreak Asia. She is Cheryl Smith,
Speaker 2: economist and portfolio manager at Trillium Asset Management. Mary Niicola
Speaker 2: she is m Live macro Strategist. She's in Singapore, and
Speaker 2: so Mary and I are going to chat a little
Speaker 2: bit now about what's happening in markets. Can we start
Speaker 2: with this inflation data for China? Does it shock you
Speaker 2: that we I don't even know how many months it's
Speaker 2: been since kind of factory gate prices have been in deflation.
Speaker 2: This is problematic, isn't it.
Speaker 1: Absolutely. I think we've seen that there's just a broad
Speaker 1: weakness in the domestic economy, whether you're seeing it from
Speaker 1: consumer price andes or from the producer price index. Both
Speaker 1: are suggesting that domestic demand is very, very lackluster, and
Speaker 1: of course adding to that is the weak export data
Speaker 1: that we saw, and exports were one of the big
Speaker 1: drivers of growth for China for some time, and now
Speaker 1: that that's losing steam as well, it's hard to see
Speaker 1: the China really making that five percent growth target.
Speaker 2: You know, I know it's a very sensitive topic around
Speaker 2: the notion of overcapacity, but isn't that part of the
Speaker 2: problem where there is so much capacity that some of
Speaker 2: these producers have no choice to move inventory but to
Speaker 2: lower prices. Isn't that part of the problem.
Speaker 1: Well, it's also a problem of domestic demand, So it's
Speaker 1: the fact that people aren't responding to these lower prices.
Speaker 1: It's a matter of there is a weakness in domestic demand,
Speaker 1: so they're forced to export as well, which is why
Speaker 1: we've seen a massive uptick in exports and things like
Speaker 1: electric vehicles and other stuff. So it's a combination. It's
Speaker 1: really if you pin it back and draw it back
Speaker 1: to what is the underlying problem, it still comes back
Speaker 1: to the weakness and domestic demand, and that's largely because
Speaker 1: of what we're seeing in the property sector.
Speaker 2: So where does that leave the government, particularly the central bank?
Speaker 2: Is there anything that can happen on the policy side.
Speaker 2: I know that we've seen rate cuts and rate cuts.
Speaker 2: Nothing seems to work. I know a while ago we
Speaker 2: were talking about some form of quantitative easing, but PBOC
Speaker 2: seems a little resistant. What can policy makers do?
Speaker 3: Yeah?
Speaker 1: I think it still comes down to what will they
Speaker 1: do on the property sector. We have to remember that
Speaker 1: so many people have their money in property in China,
Speaker 1: and now that the property sector has been in a
Speaker 1: malaise for such a long time, there is still that
Speaker 1: there is concern about where to put your money and
Speaker 1: will this market ever come back? So it's still and
Speaker 1: we have to remember how much the market reacted to
Speaker 1: the possibility of cleaning up that excess supply, but of
Speaker 1: course it wasn't enough, and it wasn't It didn't do
Speaker 1: much to pick up sentiment because it wasn't a a
Speaker 1: big surprise or a big comprehensive plan.
Speaker 2: What do you see when you look at the Chinese
Speaker 2: bond market right now is one example. Is there anything
Speaker 2: that is informative about kind of investors sentiment when you
Speaker 2: look at Chinese bonds?
Speaker 1: Yeah, It's interesting because a while ago I had written
Speaker 1: something specifically talking about China bonds and the Japanification of
Speaker 1: China bonds in the sense of that yields are going
Speaker 1: to continue to go lower largely on the basis of
Speaker 1: longer term prospects of demographics, debt, deflation, and depressed confidence,
Speaker 1: and a lot of these factors haven't really changed, would
Speaker 1: suggests that yields should be still heading lower as a result.
Speaker 2: In terms of the currency, do you have a sense,
Speaker 2: I mean, we've been holding around these levels for it
Speaker 2: seems quite some time, and we talked about the export
Speaker 2: component being very important for contained or rather continued growth
Speaker 2: in China. Do you have a sense of whether or
Speaker 2: not authorities are worried about weakness in the currency.
Speaker 1: I think, well, we've seen a strength about a strengthen
Speaker 1: the currency with the unwind of carry trades over the
Speaker 1: last week, so China was one of the big funders
Speaker 1: that investors were using. So we've seen that unwind come
Speaker 1: through for C and Y. But at the same time
Speaker 1: and that actually the yield differential differential narrowing with the
Speaker 1: US does provide some opportunity for the PBOC to actually
Speaker 1: move ahead on interest rate cuts because if you recall,
Speaker 1: they had been focused on the weakness and the currency
Speaker 1: and we're afraid, we're reluctant to cut rates because of
Speaker 1: the fear of capital outflows because of an overshoot in
Speaker 1: the in currency weakness.
Speaker 2: Yeah, we can talk a little bit about the yen
Speaker 2: trade very briefly. That was pretty stunning. Do you have
Speaker 2: a sense, I mean, your sources, the people that you're
Speaker 2: talking to in the newsroom and their sources. Do we
Speaker 2: have a sense that most of this unwind has happened already?
Speaker 3: Yeah?
Speaker 1: The big the big story was from JP Morgan where
Speaker 1: their estimates show that seventy percent of the carry chain
Speaker 1: unwind has already happened. But potentially, you know, we're looking
Speaker 1: for yen at trading into a new range. Right, so
Speaker 1: the possibility of dollar yen going back to one sixty
Speaker 1: is very unlikely, especially with a relatively hawkish BOJ. So
Speaker 1: we could see yen stabilize around these levels, but with
Speaker 1: heightened volatility, you could still see a further unwind in
Speaker 1: the carry trade.
Speaker 2: Eva Lee she is Head of Greater China Equities at
Speaker 2: UBS Global Wealth Management, where she is in the Chief
Speaker 2: Investment Office pleasure to have you on the show today, Eva,
Speaker 2: thanks so much. So much has been happening in global markets.
Speaker 2: I want to get into the China story momentarily, but
Speaker 2: I'm curious as to what you're hearing from clients as
Speaker 2: a result of this enormous volatility that was running through
Speaker 2: global markets in the past week. What were they saying
Speaker 2: to you?
Speaker 4: Well, well, luckily, you know, most of my clients actually
Speaker 4: have been setting their money in the money market funds,
Speaker 4: you know, in deposits, so they're actually looking into whether
Speaker 4: when's the best timing to deploy this cash. Some of
Speaker 4: them actually have their holdings already in bonds and they're happy,
Speaker 4: you know, with the movements. If you look at the
Speaker 4: past two weeks, the investment great bonds has been doing well.
Speaker 4: So the biggest questions that I've been asked is whether
Speaker 4: the you know, the yen unwinding it's done. I think
Speaker 4: that's the key questions. And based on our data analysis,
Speaker 4: we find that you know that if you break it
Speaker 4: down in terms of the end positioning into three buckets
Speaker 4: and the more need term buckets than winding already done.
Speaker 4: And I think this is an important signal because I'm
Speaker 4: not saying that there is not lack there won't be
Speaker 4: any volatility.
Speaker 1: There will be.
Speaker 4: I mean, we look at how the US markets overnight
Speaker 4: and going forward, we still have a lot of data
Speaker 4: to sort of signal where the US economy is hading.
Speaker 4: But having said that, you know, some of the markets
Speaker 4: after the corrections, like the Big Tag, the Quality Company,
Speaker 4: some of the Japanese ones, they look really attractive in
Speaker 4: terms of valuations after the correction. Yeah, I think that's
Speaker 4: that makes some you know, sort of the equity market
Speaker 4: very interesting, at least in the near term.
Speaker 1: So even we've seen over the past week that there
Speaker 1: has been this view that China has in a safe haven.
Speaker 1: What do you think that is and also why? What
Speaker 1: do you think will be the real catalyst that brings
Speaker 1: foreign investors back, especially since we've seen a number of
Speaker 1: different policy responses but nothing has really compelled foreign investors
Speaker 1: back in. So what do you think it'll take.
Speaker 4: I think the market really, I mean totally with you.
Speaker 4: I mean, some of the training program on home appliance
Speaker 4: is like I'm like, hey, come on, I mean, the
Speaker 4: central government is pulling out real money to support the economy.
Speaker 4: It hasn't happened often The last time they did so
Speaker 4: was two thousand and nine, I think. But having said that,
Speaker 4: I think the market really needs real data or you know,
Speaker 4: sort of real earnings improvements to sort of pull the
Speaker 4: market in, pull the money back in. I think some
Speaker 4: I think that was select companies earnings with self surprise
Speaker 4: on up side, despite the very challenging micro they're still
Speaker 4: able to grow their earnings by teens and the share
Speaker 4: price up ten percent in one day. I think so
Speaker 4: market did respond, but they need real data. They do
Speaker 4: not no longer will listen to this dat's policy support. Yeah,
Speaker 4: I think that that's the main difference. And obviously people
Speaker 4: have been hiding. I won't describe China as a safe haven,
Speaker 4: but I will say there are pockets of sectors actually
Speaker 4: that give you yields, and they still treating a very
Speaker 4: attractive evaluation. I think that might be paid where people hiding.
Speaker 2: The export economy seems to be holding up remarkably well,
Speaker 2: even though taishin the last reading on the manufacturing PMI
Speaker 2: was a little soft. I understand that, but if you
Speaker 2: look at the overall economy, domestic demand is very sluggish,
Speaker 2: we get that exports are holding well. Here he is
Speaker 2: the kind of the sort of damocles that's just dangling
Speaker 2: over the market. And that's the tariff story. When you
Speaker 2: consider geopolitics and the US, I mean, are you braced
Speaker 2: for something in a new administration where we could be
Speaker 2: potentially looking at much hard sure tariffs on on Chinese exports.
Speaker 4: I think we all understand. I mean, the you know
Speaker 4: sort of the Republicans, you know Trump, it's more likely
Speaker 4: to be harsh on China particular and tariff side. We
Speaker 4: don't know too much about Harris at the moment, but
Speaker 4: looks like the Democratic Party would be more of a
Speaker 4: continuity of policy. They will continue on these restrictions are ivy,
Speaker 4: but they're not going to impose new additionals ones onto China.
Speaker 4: But I think you bring a very you brought a
Speaker 4: very good point. Yes, export growth was very strong, but
Speaker 4: we cannot deny that part of it with people are
Speaker 4: making orders ahead of this potential change in tariff. So
Speaker 4: further down the road, particularly moving in twenty twenty five,
Speaker 4: these sort of teens growth in export, it's unlikely to continue.
Speaker 4: Then it will fall back down to local consumptions, and
Speaker 4: as consumption was so weak at this stage, if in
Speaker 4: fact It tells you why the government really pull out
Speaker 4: their own money into support the economy domestic consumption, because
Speaker 4: they knew that if they do not drive this further
Speaker 4: or let it, you know, sort of life in kicking.
Speaker 4: You know that the expert growth, it's not going to
Speaker 4: be there forever, and then the economic situation will be
Speaker 4: very challenging. Moving into twenty twenty five.
Speaker 1: If you spoke about earnings, what are your expectations for
Speaker 1: this earning season and how do you see the tech
Speaker 1: companies playing out?
Speaker 4: Overall? Will be mixed back, Like we all know that
Speaker 4: the top line, particularly the consumption side, is very weak.
Speaker 4: I mean when we break it down into details. For
Speaker 4: those that announced results, they are saying asp down. So
Speaker 4: the only way is they able to manage volumes and
Speaker 4: cost control, then they are able to do some magic
Speaker 4: on the bottom line. So some not all the companies
Speaker 4: that manage to do that, right, So that that's one point.
Speaker 4: Second point on the internet side, leading in the nets
Speaker 4: companies likely to do continue to surprise you on the
Speaker 4: bottom line on the cost control. They did that in
Speaker 4: first quarter and I think that will continue in the
Speaker 4: second quarter and they will confirm you more of the
Speaker 4: buy back plan, which they have done in first quarter,
Speaker 4: so we actually see that this could be uh, you know,
Speaker 4: at least make some of these stocks look more interesting
Speaker 4: after around the results season.
Speaker 2: I'm imagining that you don't believe that we're going to
Speaker 2: get they hit the growth target this year. I think
Speaker 2: you're you're probably of the opinion that we're going to
Speaker 2: fail on that front, am I right?
Speaker 4: Okay? They said five percent? Okay, now the broad saying
Speaker 4: it's as long as you know close to five we
Speaker 4: are good. So I don't know how you define it.
Speaker 4: Do you have a guess target or not take a shot?
Speaker 4: I think four point six four four point seven, four
Speaker 4: point eight. I think that will be the rough rough target.
Speaker 4: They were rich, all.
Speaker 2: Right either It's always a place sure. Thanks for making
Speaker 2: time to chat with us.
Speaker 5: Eva Lee.
Speaker 2: She is head of Greater China Equities at UBS Global
Speaker 2: Wealth Management. She's a part of the Chief Investment Office
Speaker 2: in Hong Kong. This has been the Bloomberg Daybreak Asia podcast,
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