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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg

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Speaker 1: Daybreak Asia podcast. I'm Doug Krisner. You can join Brian

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Speaker 1: Curtis and myself for the stories, making news and moving

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Speaker 1: markets in the APAC region. You can subscribe to the

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Speaker 1: show anywhere you get your podcast and always on Bloomberg Radio,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business app.

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Speaker 2: Well.

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Speaker 3: Joining us now in our studios in Hong Kong for

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Speaker 3: a discussion about inflation and deflation is Way Yao, head

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Speaker 3: of Research and Chief Economists for the Asia Pacific Associate

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Speaker 3: General cib Well. Y'all, thanks very much for being with us.

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Speaker 3: Let's talk a little bit about the data we'll get

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Speaker 3: this morning. In about twenty minutes or so seventeen to

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Speaker 3: twenty minutes, we'll get the PPI numbers and the CPI

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Speaker 3: numbers for the month of March. Still expecting a negative

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Speaker 3: number on PPI minus two point eight percent is the

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Speaker 3: survey estimate CPI, though I should show an increase of

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Speaker 3: zero point four percent, and that would be the second

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Speaker 3: consecutive month of being in positive territory. Can we take

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Speaker 3: that as a wee bit of good news?

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Speaker 4: Well, maybe it's just a wee bit of good news,

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Speaker 4: But I think structurally things haven't really changed much. If

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Speaker 4: you look at the economic situation in China, it continued

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Speaker 4: to be a challenge of not enough do miss the

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Speaker 4: demand and a lot of supply so and a policy

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Speaker 4: on the policy front, there is not much significant to

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Speaker 4: address this issue.

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Speaker 1: So when you're dealing with deflation, particularly at the factory

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Speaker 1: gate level the wholesale level, what's the remedy here? I mean,

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Speaker 1: is there a way to kind of give maybe a

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Speaker 1: little bit of guidance to policymakers in China on a

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Speaker 1: way that they could arrest this situation.

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Speaker 4: Well, there's a lot of focus about China's over capacity issue.

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Speaker 4: I agree, you know, China does have so much supply. However,

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Speaker 4: I would think the problem liesing more of a lack

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Speaker 4: of domestic demand in the sense that you know, China,

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Speaker 4: because of the housing crash, is losing a big engine

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Speaker 4: of domestic demound and the policy is very much tutored

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Speaker 4: towards supply. So I think it's a matter of balancing

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Speaker 4: the policy more towards demand rather than supply.

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Speaker 3: So we're trying to get Chinese consumers spending again and

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Speaker 3: a moment ago you said you kind of referred to

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Speaker 3: Chinese policy making as substandard.

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Speaker 2: Almost.

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Speaker 4: Well, it's unbalanced, I would say, because it's pretty clear

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Speaker 4: what they want to achieve for good reason, because you know,

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Speaker 4: I think the the idea here of the top leadership

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Speaker 4: is to boost the productivity growth by you know, moving

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Speaker 4: China up the value chain. However, you know, it's it

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Speaker 4: may not be entirely the remedy here, given that we

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Speaker 4: are in a deflation or environ and if China continue

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Speaker 4: on supporting supply, it's going to cause trade engions, which

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Speaker 4: we're already seen.

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Speaker 1: Yeah, that's a little confounding. I mean, you talked about

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Speaker 1: the overcapacity issue, and then when you listen to what

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Speaker 1: the government is saying that industrial policy will be the

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Speaker 1: way of reviving economic activity, it doesn't really make sense,

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Speaker 1: does it.

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Speaker 4: Well, it's just that they have a long term view

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Speaker 4: that where this is where China should be, and it

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Speaker 4: seems that there's not much willingness to adjust to the

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Speaker 4: reality that you know, they have this deflation problem at hand,

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Speaker 4: or maybe they don't worry about this as much as

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Speaker 4: we do. I think, you know what, it's just going

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Speaker 4: to take more convincing to make them at least change calls.

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Speaker 4: Right now, the export momentum seem to be picking up,

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Speaker 4: so it doesn't seem to be the time yet.

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Speaker 3: Yeah, if you look long term, okay, you're thinking industrialization,

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Speaker 3: building up tech, the chest is stuck out. But then

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Speaker 3: short term you're thinking, hey, we got to get this

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Speaker 3: economy moving again. How do you stimulate consumers to get

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Speaker 3: the spending.

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Speaker 4: Well, the one thing they talked about which got us

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Speaker 4: a little bit excited is subsidizing you know, the replacement

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Speaker 4: or upgrade of home appliances. However, we haven't heard much

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Speaker 4: follow up at least. You know, what we really need

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Speaker 4: to see is government actually providing tangible amount of fiscal

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Speaker 4: support to households, either on the consumption side or income side.

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Speaker 4: Another pass to the long term sustainable growth of consumptions,

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Speaker 4: obviously to beef of the social security system, but that

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Speaker 4: again is a slow moving process.

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Speaker 1: When you look at the tension between the US and

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Speaker 1: China right now, particularly in areas of high technology, I

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Speaker 1: mean the barriers that have been established export controls limiting

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Speaker 1: China's access to some of the most sophisticated high tech technology.

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Speaker 1: Are you sensing that this is having a meaningful impact

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Speaker 1: on the economy or is it something we only talk

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Speaker 1: about kind of marginally.

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Speaker 4: It is not too obvious yet, but I suppose you know,

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Speaker 4: this does indeed the limits put some limits on China's

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Speaker 4: development in terms of you know, AI all right, you know?

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Speaker 4: And I think one consequence, one clear consequence from all

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Speaker 4: these US policy is actually making China, making the Chinese

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Speaker 4: policy makers even want to double down on the supply

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Speaker 4: strategy more so, you see, this is the response to

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Speaker 4: Chinese leadership is coming up towards the US. Maybe we

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Speaker 4: could think of if the US were to relax, be

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Speaker 4: more relaxed about China, and China would be more willing

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Speaker 4: to rebalance. Who knows.

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Speaker 3: We're seeing more efforts to try to stimulate the housing market.

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Speaker 3: We have a leading newspaper this morning, the Economic Observer

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Speaker 3: in China, saying that many Chinese cities now are cutting

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Speaker 3: or they're doing some targeted easing. Here fifteen cities have

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Speaker 3: removed the lower limit for mortgage rates on first first

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Speaker 3: time home purchases, and some four cities have relaxed housing

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Speaker 3: provident fund. Can they do more?

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Speaker 4: Well, they can do more, certainly, But I guess I

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Speaker 4: guess you know, one short term problem for them is

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Speaker 4: they really need to address the issue that developers do

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Speaker 4: not have the trust of households to finish project uh

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Speaker 4: and and if this problem can be addressed, that I

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Speaker 4: believe some of the demands could come back. Because you

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Speaker 4: look at the sales of finished apartments, they're pretty decent.

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Speaker 4: It's the other part, which the unfinished part, you know,

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Speaker 4: it's really really distressed. But ultimately you you know it's

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Speaker 4: it's it's a market force, right. The price is probably

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Speaker 4: may need to forb more for the households to be

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Speaker 4: more willing to come back, because if you look at

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Speaker 4: the affordability of the housing prices in the big cities

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Speaker 4: in China, it's very hard to say they're cheap enough.

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Speaker 1: Next week we get the monthly activity data. Is there

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Speaker 1: something that you're looking for that could represent a big surprise,

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Speaker 1: something maybe that the market is not prepared for, or

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Speaker 1: do you think market participants have a pretty good understanding

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Speaker 1: of what's happening on the mainland insofar as the economy

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Speaker 1: is concerned.

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Speaker 4: So data wise, I think the expectation or kind of

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Speaker 4: the consensus here is, you know, cyclically, things are not

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Speaker 4: getting worse. At least there is a bit of improvement

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Speaker 4: on the supply side, industrial side, slow progress on the

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Speaker 4: consumption if anything. The positive surprise, if any, will be

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Speaker 4: you know, the consumption data, the retail sales. But the

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Speaker 4: downside risks is if the supplies I also lose momentum.

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Speaker 4: But it doesn't seem to be the case yet.

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Speaker 3: So if we look at the Chinese economy way out

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Speaker 3: and think about external inputs versus internal you know, domestic consumption,

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Speaker 3: which will perform the best over the next six months

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Speaker 3: and which really holds the key to getting the economy

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Speaker 3: really roaring again.

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Speaker 4: So our expectation is that the extern turnal demount will improve.

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Speaker 4: As we can see cross Asia, you know, the trade

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Speaker 4: momentum is really picking up, so that were help China too.

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Speaker 4: Domestic our assumption is you know, consumption income. It continues

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Speaker 4: its very gradual pace of recovery. Housing may only find

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Speaker 4: a button by the end of this year if the

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Speaker 4: policy keeps at it.

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Speaker 1: What about the labor market, particularly where the younger people.

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Speaker 4: Are concerned, Well, so that's going to be a derivative

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Speaker 4: of all these forces. Essentially, you know, we don't have

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Speaker 4: big positive force to improve the labor market very fast

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Speaker 4: because jobs are not generated by the manufacturing sector, you know,

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Speaker 4: in terms of the majority of the jobs, it has

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Speaker 4: to be the service sector doing better. But the service

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Speaker 4: sector is you know, has challenges. Yeah, and things don't

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Speaker 4: change fast.

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Speaker 3: We just had the PBOC keep the fix steady to

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Speaker 3: support that you want after this big jump in the

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Speaker 3: dollar just twenty seconds or so, do you like the

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Speaker 3: way the PBOC is managing the currency?

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Speaker 4: The PBOC is uh, you know, I would say it

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Speaker 4: seems that the thinking here is they don't want too

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Speaker 4: weak currency. They sort of throw a little bit test

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Speaker 4: to the market once in a while to see, you know,

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Speaker 4: if they weaken to fix what happens. And it seems

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Speaker 4: that what happened was not what they liked. So it

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Speaker 4: doesn't seem there would be willingness to devalue the currency

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Speaker 4: to generate inflation.

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Speaker 3: All right, way, y'all's with us, head of Research and

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Speaker 3: Chief Economists for the Asia Pacific Associated General. Joining us

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Speaker 3: now in our studios in Hong Kong is Stephanie holtz Gen,

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Speaker 3: the Asia Pacific CIO at Deutsche Bank for further discussion

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Speaker 3: about markets. So I think the contrast is very interesting

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Speaker 3: very compelling something to talk about. A very hot inflation

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Speaker 3: reading Stephanie in the United States, a very cool inflation

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Speaker 3: reading in China, yet both countries are very much right

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Speaker 3: smack dab in the middle of global supply. How do

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Speaker 3: we make sense of that?

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Speaker 2: Well, it's been a dynamic that is around with us

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Speaker 2: for a while, and I think the explanation goes way

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Speaker 2: back to the way the reopening after COVID has been handled.

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Speaker 2: So I'm not sure I'm adding much news here, but

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Speaker 2: I think the unfortunate part is that the macroeconomic data

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Speaker 2: in China keeps on being uneven. So we had a

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Speaker 2: set of fairly optimistic data when we saw the pm

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Speaker 2: I swing back into expansionary territory just slightly so, and

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Speaker 2: then you know, other readings are still coming in below expectations.

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Speaker 2: So it's something that needs to be taken into account.

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Speaker 2: As one says as the investment opportunity, we look at

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Speaker 2: it as a second half of the year opportunity. In China.

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Speaker 2: We had a tactical trade on and I think we

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Speaker 2: need to be careful and stay on the sidelines for

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Speaker 2: the time being because we don't have the whole mix

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Speaker 2: of macroeconomics, sentiment and the following flow all showing in

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Speaker 2: the right direction.

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Speaker 1: So many of the guests that we have on this

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Speaker 1: program when they talk about the problem at its core

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Speaker 1: is just the absence of positive sentiment, and when you

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Speaker 1: don't have consumer engagement in an economy and you don't

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Speaker 1: have domestic demand, I mean there are ramifications for that, right.

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Speaker 1: Is there a policy prescription that you can think of

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Speaker 1: that might improve the behavior of the consumer in China.

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Speaker 2: I think there's been a lot of policy efforts to

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Speaker 2: support the consumer sentiment. So we have seen a lot

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Speaker 2: of physical stimulus quite targeted as well in terms of

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Speaker 2: stimulating the consumer to not just save, not just to

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Speaker 2: repay loans, but go and invest and purchase in the economy.

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Speaker 2: But it's still underwhelming, as we've seen recently in the

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Speaker 2: retail sales data as well. But in terms of the

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Speaker 2: market opportunity, of course it's twofold. There's an international investor

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Speaker 2: sentiment that I think is still needs more to be convinced,

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Speaker 2: and I I took that stance, and again I mentioned

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Speaker 2: that technical trading opportunity that we saw and then moved

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Speaker 2: to the sidelines. About one and a half weeks ago

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Speaker 2: when we saw the government weakening the currency with the

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Speaker 2: less positive fixing, which I actually interpreted as a sign

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Speaker 2: of confidence from a Chinese perspective. But the market, it was,

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Speaker 2: the market not at all exactly sold off right away.

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Speaker 3: I remember that comment so clearly. It was a couple

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Speaker 3: of weeks ago, and you were in Singapore, and the

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Speaker 3: reason we have you back now is you're here in

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Speaker 3: Hong Kong and it's great to get you into our studios.

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Speaker 3: I remember you're not that positive on China, but that

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Speaker 3: you were pretty positive on Japan and India. Let's start

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Speaker 3: off with Japan significant weakness in the end this morning

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Speaker 3: and threats from policymakers. Are you still really confident in

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Speaker 3: the upside possibilities in Japan?

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Speaker 2: So the Japan investment opportunity, whether that is the structural

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Speaker 2: angle to it, because of the government, you know, of

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Speaker 2: the reforms around the Tokyo Stock Exchange that will improve governance,

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Speaker 2: as well as the cycle girl elements that drive the

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Speaker 2: market higher, which is the weekend that you just mentioned.

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Speaker 2: These are still remaining intact. Of course, we have to

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Speaker 2: be absolutely ary about the Ministry of Finance ability to

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Speaker 2: change the course of the currency. But I also remain

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Speaker 2: of the opinion that it's a double edged sword for

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Speaker 2: the Japanese authorities to really intervene. And I think this

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Speaker 2: is also why we are seeing this being on a

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Speaker 2: verbal tune, and that is also why the market is

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Speaker 2: not really taking its clue and going meaningful of the

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Speaker 2: other way. So I think what they are doing is

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Speaker 2: they will be verbally intervening to slow down the depreciation,

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Speaker 2: but it will be very difficult to change the course

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Speaker 2: because it's benefiting in export let economy, it's benefiting the

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Speaker 2: investment opportunity in an overall slowing growth environment. So I

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Speaker 2: think it's prudent to have this run for a little

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Speaker 2: bit more.

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Speaker 1: So I think we can agree, yeah, that a weekend

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Speaker 1: would be positive for the exporting companies. But Prime Minister

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Speaker 1: case as in the US today, and one of the

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Speaker 1: things that was unveiled at the White House in a

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Speaker 1: joint press conference with President Biden was this investment this

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Speaker 1: program for to drive innovation in terms of artificial intelligence.

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Speaker 1: And when I think of AI as it relates to Japan,

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Speaker 1: that's really not an export story, is it is that

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Speaker 1: an opportunity for you to want to put money to

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Speaker 1: work in AI related companies in Japan.

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Speaker 2: Well, we're looking at this in the context also of

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Speaker 2: the alliances that Japan has been forging around the semiconductor space,

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Speaker 2: you know, and you know, just enlarged this into more

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Speaker 2: the it and now you're talking about AI conversation. I

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Speaker 2: think that's as an important, you know, alliance that's been

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Speaker 2: fostered and definitely is an investment pocket in a sector

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Speaker 2: that needs to be looked at. It is it is

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Speaker 2: not benefiting of the weekend necessarily, but you know another

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Speaker 2: sector is, for instance, it's tourism. You know, everyone still

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Speaker 2: in Hong Kong, everywhere I go in Asia has a

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Speaker 2: top destination in Japan because of the weekend as well.

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Speaker 2: So there are many different elements to why the yen

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Speaker 2: weakness can run.

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Speaker 3: Yeah, and I know that you're still positive on megacap

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Speaker 3: tech in the United States, so we don't have time

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Speaker 3: to get into that now. But even with these sort

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Speaker 3: of sticky levels of inflation that we're seeing. Stephanie, thanks

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Speaker 3: so much for joining us in our studios. We talk

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Speaker 3: again soon. Stephanie Holtz, jen apac cio at Deutsche Bank. Well,

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Speaker 3: joining us now for some discussion of the same as Lindsay,

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Speaker 3: Pigg's chief economist at Stifel. So, Lindsay, it does seem

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Speaker 3: sort of a slam dunk. I would imagine that June

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Speaker 3: is off the table. However, there will be a considerable

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Speaker 3: amount of data that we get between now and then.

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Speaker 3: How are you looking at rates here over the next

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Speaker 3: month or two, Well, I.

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Speaker 5: Think given the baseline for the economy, growth accelerating beyond expectations,

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Speaker 5: a still very spendy consumer, a labor market slightly less

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Speaker 5: tight than it was, but still very tight, this is

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Speaker 5: further justification for the FED to remain on the sidelines

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Speaker 5: at the current policy level. And so our base case remains,

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Speaker 5: as it has since the turn of the calendar year,

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Speaker 5: that the Fed will wait until the second half of

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Speaker 5: the year before initiating rate cuts. Now, with inflation reversing

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Speaker 5: course as of late, I do think it's going to

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Speaker 5: be difficult for the FED to justify anything beyond one

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Speaker 5: or two rate reductions, And even so, after initiating that pathway,

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Speaker 5: if we failed to see meaningful improvement, we could see

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Speaker 5: a second round pause after that. So the FED moving

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Speaker 5: back to the sidelines after just twenty five or fifty

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Speaker 5: basis points of cuts.

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Speaker 1: You have to remember too, last Friday's employment did it

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Speaker 1: was very very strong. We were one hundred thousand above

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Speaker 1: forecast in terms of non farm payroll growth. I think

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Speaker 1: initially we went into the data with a number of

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Speaker 1: around two hundred k. We came out three hundred k.

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Speaker 1: Is there a risk in your view that we could

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Speaker 1: see enough or hike.

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Speaker 6: There is, but that scenario has to be very specific.

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Speaker 5: I would need to see inflation reverse core in a

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Speaker 5: meaningful way and in a persistent manner. So we would

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Speaker 5: need to see a continued upward trajectory really forcing the

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Speaker 5: Fed into a corner in order to re engage in

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Speaker 5: order to continue with hikes. Right now, with the inflation

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Speaker 5: level just taking slightly higher, I don't think that's enough

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Speaker 5: to scare the Fed into further rate hikes, but again,

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Speaker 5: it does justify further position on the sideline.

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Speaker 3: You know, slightly higher inflation is not good news to

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Speaker 3: low income people, and it's not good news for the

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Speaker 3: housing market or for small companies that have floating rate loans,

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Speaker 3: but it may not have a huge effect on company earnings.

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Speaker 3: And if we don't see that, then we'll probably see

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Speaker 3: you know, labor staying relatively strong with companies, and so ultimately,

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Speaker 3: I mean, is this a good news story or bad

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Speaker 3: news story for the economy.

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Speaker 6: Well, it really depends.

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Speaker 5: But my biggest concern is right now that the US

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Speaker 5: economy appears to be resilient. That being said, momentum is

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Speaker 5: clearly waning. Consumers are still spending, businesses are still investing,

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Speaker 5: but they're doing so at a noticeably reduced pace. So

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Speaker 5: activity has already gone from five percent in the third

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Speaker 5: quarter to three percent at year end, likely a two

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Speaker 5: is ish percent pace in twenty twenty four. But where

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Speaker 5: do we go from here if growth continues to slow

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Speaker 5: to a non accelerating pace or at least fall below

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Speaker 5: the bare minimum that we should expect for a developed economy.

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Speaker 5: But the Fed is still sitting on the sidelines, twiddling

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Speaker 5: their thumbs, allowing inflation to remain above target. Well, now

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Speaker 5: they've backed this, you know areas I don't think you

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Speaker 5: can say.

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Speaker 3: You can't really say twiddling their thumbs, because you know,

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Speaker 3: we have to say they were very aggressive in getting

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Speaker 3: the FED funds rate up to five and a half percent.

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Speaker 3: That's well above where inflation is now, and it's well

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Speaker 3: above the noise. So it's not like they're sitting on

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Speaker 3: their hands, really, it's just that they're holding at very

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Speaker 3: high levels.

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Speaker 5: Well, I would argue that they had a hyper focus

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Speaker 5: on achieving a soft landing, and with that focus, I

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Speaker 5: think they fail to raise rates to a sufficiently restrictive level. Well,

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Speaker 5: look at cycles. Historically, the FED typically has to raise

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Speaker 5: rates above the peak level of inflation. This time they

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Speaker 5: arguably stop short at five percent, and so I am

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Speaker 5: concerned that the FED has not done enough to tame inflation.

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Speaker 1: One of the things that we've been talking about is

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Speaker 1: possible risk in the financial system is the result of

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Speaker 1: rates remaining elevated for the foreseeable future. One of the

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Speaker 1: reasons maybe that some of the regional banks were a

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Speaker 1: hard hit today given the spike and yield. Are you

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Speaker 1: confident that we have really seen the worst of the stress.

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Speaker 1: Maybe that's related to some areas of the commercial real

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Speaker 1: estate market.

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Speaker 5: No, I'm certainly not, and I would say that's one

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Speaker 5: of the biggest risks for the economy over the next

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Speaker 5: twelve to twenty five or months, with trillions and commercial

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Speaker 5: loans coming due that are going to reset at significantly

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Speaker 5: higher rates, and so that's going to require a significant

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Speaker 5: amount of capital to write size those loans. Now, that's

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Speaker 5: not to say that can't happen or that commercial real

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Speaker 5: estate is essentially the next shoe to drop, But there

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Speaker 5: is a contagion effect when we talk about this paper,

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Speaker 5: the majority of which is being held on the balance

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Speaker 5: sheet of financial institutions that have less than two hundred

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Speaker 5: and fifty billion in assets, so that there is still

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Speaker 5: concern about further weakness in the banking sector, although the

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Speaker 5: latest commentary from the FED does suggest that we're still

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Speaker 5: at very stable conditions as of late.

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Speaker 3: You know, one of the things that Jamie Diamond mentioned

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Speaker 3: in is islong letter to shareholders was that we may

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Speaker 3: see a structurally higher level of inflation for a considerable

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Speaker 3: period because of some new factors. One might be the

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Speaker 3: geopolitical concerns the wars that are underway, but also the

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Speaker 3: reindustrialization of the American economy and some other factors as well.

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Speaker 3: You know, are you thinking that longer term? You know,

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Speaker 3: we're going to be facing this problem, you know, for

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Speaker 3: a while.

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Speaker 6: I do think it's going to be a long standing problem.

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Speaker 5: That's not to say that the FED is going to

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Speaker 5: give up on achieving that two percent goal. Share Poal

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Speaker 5: was very clear at last month's press conference that two

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Speaker 5: percent is the Fed's target. It's always been the target,

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Speaker 5: and it does remain the target. That being said, longer term,

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Speaker 5: the Fed may be willing to reevaluate that two percent target,

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Speaker 5: and if it does prove to be a very onerous achievement,

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Speaker 5: they may be willing to adjust that upwards. But right

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Speaker 5: now they cannot adjust that mid cycle without potentially losing

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Speaker 5: control over inflation expectations, which of course feed back into

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Speaker 5: the direct inflation calculation.

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Speaker 1: So we talk a lot about the fiscal story as

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Speaker 1: well on this program, and with yields being elevated to

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Speaker 1: the extent they are today, how much will that hinder

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Speaker 1: the government's effort when we're talking about debt service that's

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Speaker 1: going to be increased, I mean, and that's really maybe

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Speaker 1: going to tie the hands of the government and trying

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Speaker 1: to do more in certain areas of the economy.

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Speaker 5: Well, as we know, debt but gets more debt, and

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Speaker 5: with thirty four trillion at current levels, we would expect

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Speaker 5: the treasury to have to massively increase issuance up and

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Speaker 5: down the curve at presumably higher rates to entice investors

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Speaker 5: into the market to buy said debt.

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Speaker 6: But I'm not necessarily.

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Speaker 5: Convinced that that's a negative in terms of controlling further

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Speaker 5: expansion of the government's balance sheet, because if we do

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Speaker 5: see further expenditures politics aside, social benefit, aside from the

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Speaker 5: Fed's perspective, that could further potential inflationary implications.

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Speaker 3: Well, given that fiscal largess that was deemed as pretty

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Speaker 3: necessary because of the pandemic and other factors like the

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Speaker 3: Ukraine War, also the reindustrialization of the American economy to

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Speaker 3: create more jobs for people at home, could you see

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Speaker 3: accepting slightly higher levels of inflation for a period of time,

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Speaker 3: not forever, but for a few years.

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Speaker 6: Well, we've already been in a few years of above

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Speaker 6: target inflation, so I think at this point the American

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Speaker 6: public is going to have a difficult time digesting further inflation.

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Speaker 3: Yeah, could be enough is enough anyway, Lindsay, thank you

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Speaker 3: very much for being with us. Lindsay pigs of their

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Speaker 3: chief economist, dis Stiefel with us live here on the program,

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Speaker 3: taking questions one after the other.

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Speaker 5: Two