WEBVTT - China Inflation Outlook, US CPI Data 0:00:02.480 --> 0:00:10.480 Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg 0:00:10.520 --> 0:00:13.720 Daybreak Asia podcast. I'm Doug Krisner. You can join Brian 0:00:13.800 --> 0:00:16.640 Curtis and myself for the stories, making news and moving 0:00:16.680 --> 0:00:19.560 markets in the APAC region. You can subscribe to the 0:00:19.600 --> 0:00:23.080 show anywhere you get your podcast and always on Bloomberg Radio, 0:00:23.320 --> 0:00:26.120 the Bloomberg Terminal, and the Bloomberg Business app. 0:00:26.400 --> 0:00:26.520 Well. 0:00:26.600 --> 0:00:29.080 Joining us now in our studios in Hong Kong for 0:00:29.160 --> 0:00:33.839 a discussion about inflation and deflation is Way Yao, head 0:00:33.880 --> 0:00:37.120 of Research and Chief Economists for the Asia Pacific Associate 0:00:37.320 --> 0:00:41.479 General cib Well. Y'all, thanks very much for being with us. 0:00:41.720 --> 0:00:43.559 Let's talk a little bit about the data we'll get 0:00:43.600 --> 0:00:46.559 this morning. In about twenty minutes or so seventeen to 0:00:46.640 --> 0:00:49.559 twenty minutes, we'll get the PPI numbers and the CPI 0:00:49.680 --> 0:00:53.960 numbers for the month of March. Still expecting a negative 0:00:54.040 --> 0:00:56.520 number on PPI minus two point eight percent is the 0:00:56.560 --> 0:01:00.760 survey estimate CPI, though I should show an increase of 0:01:01.200 --> 0:01:03.640 zero point four percent, and that would be the second 0:01:03.680 --> 0:01:07.520 consecutive month of being in positive territory. Can we take 0:01:07.560 --> 0:01:09.399 that as a wee bit of good news? 0:01:09.880 --> 0:01:12.240 Well, maybe it's just a wee bit of good news, 0:01:12.319 --> 0:01:16.000 But I think structurally things haven't really changed much. If 0:01:16.040 --> 0:01:19.480 you look at the economic situation in China, it continued 0:01:19.520 --> 0:01:22.560 to be a challenge of not enough do miss the 0:01:22.600 --> 0:01:26.800 demand and a lot of supply so and a policy 0:01:26.840 --> 0:01:30.679 on the policy front, there is not much significant to 0:01:30.800 --> 0:01:31.800 address this issue. 0:01:32.040 --> 0:01:37.000 So when you're dealing with deflation, particularly at the factory 0:01:37.040 --> 0:01:40.920 gate level the wholesale level, what's the remedy here? I mean, 0:01:41.040 --> 0:01:44.240 is there a way to kind of give maybe a 0:01:44.280 --> 0:01:47.080 little bit of guidance to policymakers in China on a 0:01:47.120 --> 0:01:49.800 way that they could arrest this situation. 0:01:50.880 --> 0:01:55.000 Well, there's a lot of focus about China's over capacity issue. 0:01:56.360 --> 0:02:01.040 I agree, you know, China does have so much supply. However, 0:02:01.600 --> 0:02:05.080 I would think the problem liesing more of a lack 0:02:05.160 --> 0:02:09.120 of domestic demand in the sense that you know, China, 0:02:09.440 --> 0:02:12.480 because of the housing crash, is losing a big engine 0:02:12.480 --> 0:02:17.919 of domestic demound and the policy is very much tutored 0:02:17.919 --> 0:02:21.520 towards supply. So I think it's a matter of balancing 0:02:21.520 --> 0:02:24.120 the policy more towards demand rather than supply. 0:02:24.800 --> 0:02:28.200 So we're trying to get Chinese consumers spending again and 0:02:28.240 --> 0:02:30.639 a moment ago you said you kind of referred to 0:02:30.760 --> 0:02:33.720 Chinese policy making as substandard. 0:02:33.720 --> 0:02:34.600 Almost. 0:02:35.280 --> 0:02:39.360 Well, it's unbalanced, I would say, because it's pretty clear 0:02:39.400 --> 0:02:42.560 what they want to achieve for good reason, because you know, 0:02:42.639 --> 0:02:46.120 I think the the idea here of the top leadership 0:02:46.200 --> 0:02:50.919 is to boost the productivity growth by you know, moving 0:02:51.040 --> 0:02:54.560 China up the value chain. However, you know, it's it 0:02:54.639 --> 0:02:58.640 may not be entirely the remedy here, given that we 0:02:58.680 --> 0:03:01.480 are in a deflation or environ and if China continue 0:03:01.639 --> 0:03:04.880 on supporting supply, it's going to cause trade engions, which 0:03:04.919 --> 0:03:05.640 we're already seen. 0:03:05.760 --> 0:03:07.920 Yeah, that's a little confounding. I mean, you talked about 0:03:07.960 --> 0:03:10.720 the overcapacity issue, and then when you listen to what 0:03:10.800 --> 0:03:14.360 the government is saying that industrial policy will be the 0:03:14.560 --> 0:03:18.040 way of reviving economic activity, it doesn't really make sense, 0:03:18.080 --> 0:03:18.400 does it. 0:03:19.360 --> 0:03:21.799 Well, it's just that they have a long term view 0:03:21.880 --> 0:03:25.400 that where this is where China should be, and it 0:03:25.440 --> 0:03:28.000 seems that there's not much willingness to adjust to the 0:03:28.040 --> 0:03:31.120 reality that you know, they have this deflation problem at hand, 0:03:31.160 --> 0:03:33.519 or maybe they don't worry about this as much as 0:03:33.520 --> 0:03:35.600 we do. I think, you know what, it's just going 0:03:35.680 --> 0:03:40.560 to take more convincing to make them at least change calls. 0:03:40.640 --> 0:03:43.400 Right now, the export momentum seem to be picking up, 0:03:43.440 --> 0:03:45.400 so it doesn't seem to be the time yet. 0:03:46.360 --> 0:03:50.680 Yeah, if you look long term, okay, you're thinking industrialization, 0:03:51.000 --> 0:03:54.080 building up tech, the chest is stuck out. But then 0:03:54.160 --> 0:03:56.200 short term you're thinking, hey, we got to get this 0:03:56.320 --> 0:03:59.840 economy moving again. How do you stimulate consumers to get 0:03:59.840 --> 0:04:00.600 the spending. 0:04:01.400 --> 0:04:04.640 Well, the one thing they talked about which got us 0:04:04.680 --> 0:04:08.600 a little bit excited is subsidizing you know, the replacement 0:04:08.720 --> 0:04:13.080 or upgrade of home appliances. However, we haven't heard much 0:04:13.280 --> 0:04:15.400 follow up at least. You know, what we really need 0:04:15.440 --> 0:04:19.520 to see is government actually providing tangible amount of fiscal 0:04:19.560 --> 0:04:23.000 support to households, either on the consumption side or income side. 0:04:23.160 --> 0:04:26.760 Another pass to the long term sustainable growth of consumptions, 0:04:27.000 --> 0:04:29.880 obviously to beef of the social security system, but that 0:04:29.960 --> 0:04:32.000 again is a slow moving process. 0:04:32.720 --> 0:04:35.240 When you look at the tension between the US and 0:04:35.320 --> 0:04:38.400 China right now, particularly in areas of high technology, I 0:04:38.400 --> 0:04:42.480 mean the barriers that have been established export controls limiting 0:04:42.640 --> 0:04:47.560 China's access to some of the most sophisticated high tech technology. 0:04:47.600 --> 0:04:50.520 Are you sensing that this is having a meaningful impact 0:04:50.600 --> 0:04:52.680 on the economy or is it something we only talk 0:04:52.720 --> 0:04:54.600 about kind of marginally. 0:04:55.960 --> 0:04:59.919 It is not too obvious yet, but I suppose you know, 0:05:00.080 --> 0:05:04.560 this does indeed the limits put some limits on China's 0:05:04.880 --> 0:05:08.800 development in terms of you know, AI all right, you know? 0:05:08.880 --> 0:05:12.440 And I think one consequence, one clear consequence from all 0:05:12.480 --> 0:05:17.320 these US policy is actually making China, making the Chinese 0:05:17.360 --> 0:05:20.800 policy makers even want to double down on the supply 0:05:20.880 --> 0:05:24.280 strategy more so, you see, this is the response to 0:05:24.400 --> 0:05:28.960 Chinese leadership is coming up towards the US. Maybe we 0:05:29.000 --> 0:05:31.080 could think of if the US were to relax, be 0:05:31.200 --> 0:05:33.719 more relaxed about China, and China would be more willing 0:05:33.760 --> 0:05:35.080 to rebalance. Who knows. 0:05:36.120 --> 0:05:39.880 We're seeing more efforts to try to stimulate the housing market. 0:05:40.200 --> 0:05:42.919 We have a leading newspaper this morning, the Economic Observer 0:05:43.000 --> 0:05:47.280 in China, saying that many Chinese cities now are cutting 0:05:47.839 --> 0:05:51.440 or they're doing some targeted easing. Here fifteen cities have 0:05:51.839 --> 0:05:54.800 removed the lower limit for mortgage rates on first first 0:05:54.839 --> 0:05:58.960 time home purchases, and some four cities have relaxed housing 0:05:59.040 --> 0:06:01.320 provident fund. Can they do more? 0:06:02.360 --> 0:06:06.880 Well, they can do more, certainly, But I guess I 0:06:06.880 --> 0:06:09.680 guess you know, one short term problem for them is 0:06:09.720 --> 0:06:14.120 they really need to address the issue that developers do 0:06:14.200 --> 0:06:17.280 not have the trust of households to finish project uh 0:06:17.560 --> 0:06:20.120 and and if this problem can be addressed, that I 0:06:20.120 --> 0:06:22.760 believe some of the demands could come back. Because you 0:06:22.800 --> 0:06:27.360 look at the sales of finished apartments, they're pretty decent. 0:06:27.800 --> 0:06:30.440 It's the other part, which the unfinished part, you know, 0:06:30.560 --> 0:06:35.240 it's really really distressed. But ultimately you you know it's 0:06:35.560 --> 0:06:40.400 it's it's a market force, right. The price is probably 0:06:40.400 --> 0:06:42.279 may need to forb more for the households to be 0:06:42.320 --> 0:06:44.080 more willing to come back, because if you look at 0:06:44.080 --> 0:06:47.159 the affordability of the housing prices in the big cities 0:06:47.160 --> 0:06:49.800 in China, it's very hard to say they're cheap enough. 0:06:50.000 --> 0:06:52.840 Next week we get the monthly activity data. Is there 0:06:52.920 --> 0:06:57.159 something that you're looking for that could represent a big surprise, 0:06:57.240 --> 0:06:59.920 something maybe that the market is not prepared for, or 0:07:00.360 --> 0:07:03.280 do you think market participants have a pretty good understanding 0:07:03.320 --> 0:07:06.200 of what's happening on the mainland insofar as the economy 0:07:06.240 --> 0:07:06.760 is concerned. 0:07:07.680 --> 0:07:13.080 So data wise, I think the expectation or kind of 0:07:13.080 --> 0:07:15.400 the consensus here is, you know, cyclically, things are not 0:07:15.480 --> 0:07:17.640 getting worse. At least there is a bit of improvement 0:07:17.680 --> 0:07:20.800 on the supply side, industrial side, slow progress on the 0:07:20.880 --> 0:07:25.560 consumption if anything. The positive surprise, if any, will be 0:07:25.680 --> 0:07:28.400 you know, the consumption data, the retail sales. But the 0:07:28.440 --> 0:07:32.240 downside risks is if the supplies I also lose momentum. 0:07:32.440 --> 0:07:34.240 But it doesn't seem to be the case yet. 0:07:34.600 --> 0:07:36.960 So if we look at the Chinese economy way out 0:07:36.960 --> 0:07:42.600 and think about external inputs versus internal you know, domestic consumption, 0:07:43.280 --> 0:07:45.760 which will perform the best over the next six months 0:07:45.800 --> 0:07:49.160 and which really holds the key to getting the economy 0:07:49.200 --> 0:07:50.160 really roaring again. 0:07:51.240 --> 0:07:54.440 So our expectation is that the extern turnal demount will improve. 0:07:54.520 --> 0:07:56.840 As we can see cross Asia, you know, the trade 0:07:56.880 --> 0:08:01.160 momentum is really picking up, so that were help China too. 0:08:01.360 --> 0:08:06.760 Domestic our assumption is you know, consumption income. It continues 0:08:06.800 --> 0:08:11.160 its very gradual pace of recovery. Housing may only find 0:08:11.160 --> 0:08:14.240 a button by the end of this year if the 0:08:14.280 --> 0:08:15.360 policy keeps at it. 0:08:15.960 --> 0:08:19.880 What about the labor market, particularly where the younger people. 0:08:19.640 --> 0:08:23.160 Are concerned, Well, so that's going to be a derivative 0:08:23.240 --> 0:08:26.960 of all these forces. Essentially, you know, we don't have 0:08:27.160 --> 0:08:32.200 big positive force to improve the labor market very fast 0:08:32.360 --> 0:08:37.120 because jobs are not generated by the manufacturing sector, you know, 0:08:37.200 --> 0:08:39.360 in terms of the majority of the jobs, it has 0:08:39.400 --> 0:08:41.920 to be the service sector doing better. But the service 0:08:41.960 --> 0:08:46.200 sector is you know, has challenges. Yeah, and things don't 0:08:46.240 --> 0:08:46.800 change fast. 0:08:47.040 --> 0:08:49.839 We just had the PBOC keep the fix steady to 0:08:50.000 --> 0:08:52.360 support that you want after this big jump in the 0:08:52.440 --> 0:08:54.600 dollar just twenty seconds or so, do you like the 0:08:54.600 --> 0:08:56.400 way the PBOC is managing the currency? 0:08:58.160 --> 0:09:02.320 The PBOC is uh, you know, I would say it 0:09:02.320 --> 0:09:04.719 seems that the thinking here is they don't want too 0:09:04.800 --> 0:09:09.040 weak currency. They sort of throw a little bit test 0:09:09.080 --> 0:09:11.040 to the market once in a while to see, you know, 0:09:11.120 --> 0:09:13.920 if they weaken to fix what happens. And it seems 0:09:13.960 --> 0:09:17.360 that what happened was not what they liked. So it 0:09:17.400 --> 0:09:20.120 doesn't seem there would be willingness to devalue the currency 0:09:20.160 --> 0:09:21.199 to generate inflation. 0:09:21.559 --> 0:09:23.520 All right, way, y'all's with us, head of Research and 0:09:23.600 --> 0:09:33.679 Chief Economists for the Asia Pacific Associated General. Joining us 0:09:33.720 --> 0:09:36.640 now in our studios in Hong Kong is Stephanie holtz Gen, 0:09:37.240 --> 0:09:40.920 the Asia Pacific CIO at Deutsche Bank for further discussion 0:09:41.160 --> 0:09:45.600 about markets. So I think the contrast is very interesting 0:09:45.760 --> 0:09:49.200 very compelling something to talk about. A very hot inflation 0:09:49.320 --> 0:09:52.880 reading Stephanie in the United States, a very cool inflation 0:09:53.000 --> 0:09:57.240 reading in China, yet both countries are very much right 0:09:57.320 --> 0:10:01.000 smack dab in the middle of global supply. How do 0:10:01.040 --> 0:10:01.880 we make sense of that? 0:10:04.840 --> 0:10:07.800 Well, it's been a dynamic that is around with us 0:10:07.840 --> 0:10:10.800 for a while, and I think the explanation goes way 0:10:10.840 --> 0:10:13.959 back to the way the reopening after COVID has been handled. 0:10:14.000 --> 0:10:17.280 So I'm not sure I'm adding much news here, but 0:10:17.600 --> 0:10:21.640 I think the unfortunate part is that the macroeconomic data 0:10:21.640 --> 0:10:25.480 in China keeps on being uneven. So we had a 0:10:25.520 --> 0:10:29.200 set of fairly optimistic data when we saw the pm 0:10:29.280 --> 0:10:34.280 I swing back into expansionary territory just slightly so, and 0:10:34.320 --> 0:10:37.959 then you know, other readings are still coming in below expectations. 0:10:38.440 --> 0:10:41.439 So it's something that needs to be taken into account. 0:10:41.480 --> 0:10:44.360 As one says as the investment opportunity, we look at 0:10:44.360 --> 0:10:47.439 it as a second half of the year opportunity. In China. 0:10:47.480 --> 0:10:49.720 We had a tactical trade on and I think we 0:10:49.800 --> 0:10:53.040 need to be careful and stay on the sidelines for 0:10:53.080 --> 0:10:55.800 the time being because we don't have the whole mix 0:10:55.840 --> 0:11:01.160 of macroeconomics, sentiment and the following flow all showing in 0:11:01.200 --> 0:11:01.880 the right direction. 0:11:02.280 --> 0:11:03.760 So many of the guests that we have on this 0:11:03.840 --> 0:11:06.720 program when they talk about the problem at its core 0:11:06.880 --> 0:11:11.600 is just the absence of positive sentiment, and when you 0:11:11.640 --> 0:11:15.000 don't have consumer engagement in an economy and you don't 0:11:15.000 --> 0:11:18.240 have domestic demand, I mean there are ramifications for that, right. 0:11:18.760 --> 0:11:21.440 Is there a policy prescription that you can think of 0:11:21.559 --> 0:11:25.040 that might improve the behavior of the consumer in China. 0:11:26.040 --> 0:11:29.920 I think there's been a lot of policy efforts to 0:11:29.960 --> 0:11:33.520 support the consumer sentiment. So we have seen a lot 0:11:33.520 --> 0:11:36.560 of physical stimulus quite targeted as well in terms of 0:11:36.600 --> 0:11:39.400 stimulating the consumer to not just save, not just to 0:11:39.440 --> 0:11:44.280 repay loans, but go and invest and purchase in the economy. 0:11:44.280 --> 0:11:47.319 But it's still underwhelming, as we've seen recently in the 0:11:47.360 --> 0:11:51.120 retail sales data as well. But in terms of the 0:11:51.160 --> 0:11:55.000 market opportunity, of course it's twofold. There's an international investor 0:11:55.080 --> 0:11:59.040 sentiment that I think is still needs more to be convinced, 0:11:59.040 --> 0:12:02.200 and I I took that stance, and again I mentioned 0:12:02.200 --> 0:12:05.480 that technical trading opportunity that we saw and then moved 0:12:05.520 --> 0:12:07.360 to the sidelines. About one and a half weeks ago 0:12:07.760 --> 0:12:10.839 when we saw the government weakening the currency with the 0:12:12.480 --> 0:12:15.920 less positive fixing, which I actually interpreted as a sign 0:12:16.000 --> 0:12:19.280 of confidence from a Chinese perspective. But the market, it was, 0:12:19.280 --> 0:12:22.000 the market not at all exactly sold off right away. 0:12:22.080 --> 0:12:24.120 I remember that comment so clearly. It was a couple 0:12:24.160 --> 0:12:26.000 of weeks ago, and you were in Singapore, and the 0:12:26.000 --> 0:12:28.000 reason we have you back now is you're here in 0:12:28.040 --> 0:12:30.360 Hong Kong and it's great to get you into our studios. 0:12:30.679 --> 0:12:33.880 I remember you're not that positive on China, but that 0:12:33.960 --> 0:12:37.160 you were pretty positive on Japan and India. Let's start 0:12:37.160 --> 0:12:40.920 off with Japan significant weakness in the end this morning 0:12:40.960 --> 0:12:45.679 and threats from policymakers. Are you still really confident in 0:12:45.800 --> 0:12:47.880 the upside possibilities in Japan? 0:12:48.320 --> 0:12:51.839 So the Japan investment opportunity, whether that is the structural 0:12:51.880 --> 0:12:53.960 angle to it, because of the government, you know, of 0:12:54.000 --> 0:12:58.120 the reforms around the Tokyo Stock Exchange that will improve governance, 0:12:58.320 --> 0:13:01.000 as well as the cycle girl elements that drive the 0:13:01.040 --> 0:13:04.080 market higher, which is the weekend that you just mentioned. 0:13:04.120 --> 0:13:06.920 These are still remaining intact. Of course, we have to 0:13:06.960 --> 0:13:11.840 be absolutely ary about the Ministry of Finance ability to 0:13:12.160 --> 0:13:15.200 change the course of the currency. But I also remain 0:13:15.240 --> 0:13:18.720 of the opinion that it's a double edged sword for 0:13:18.880 --> 0:13:23.040 the Japanese authorities to really intervene. And I think this 0:13:23.160 --> 0:13:25.240 is also why we are seeing this being on a 0:13:25.320 --> 0:13:29.120 verbal tune, and that is also why the market is 0:13:29.160 --> 0:13:32.920 not really taking its clue and going meaningful of the 0:13:32.960 --> 0:13:35.160 other way. So I think what they are doing is 0:13:35.920 --> 0:13:40.800 they will be verbally intervening to slow down the depreciation, 0:13:41.200 --> 0:13:43.600 but it will be very difficult to change the course 0:13:43.600 --> 0:13:47.600 because it's benefiting in export let economy, it's benefiting the 0:13:47.640 --> 0:13:51.320 investment opportunity in an overall slowing growth environment. So I 0:13:51.360 --> 0:13:53.800 think it's prudent to have this run for a little 0:13:53.840 --> 0:13:54.240 bit more. 0:13:54.320 --> 0:13:56.400 So I think we can agree, yeah, that a weekend 0:13:56.400 --> 0:13:59.600 would be positive for the exporting companies. But Prime Minister 0:13:59.720 --> 0:14:01.520 case as in the US today, and one of the 0:14:01.520 --> 0:14:03.959 things that was unveiled at the White House in a 0:14:04.040 --> 0:14:08.160 joint press conference with President Biden was this investment this 0:14:08.320 --> 0:14:12.920 program for to drive innovation in terms of artificial intelligence. 0:14:12.960 --> 0:14:15.320 And when I think of AI as it relates to Japan, 0:14:15.720 --> 0:14:18.720 that's really not an export story, is it is that 0:14:18.800 --> 0:14:20.920 an opportunity for you to want to put money to 0:14:21.000 --> 0:14:23.320 work in AI related companies in Japan. 0:14:24.120 --> 0:14:26.720 Well, we're looking at this in the context also of 0:14:26.840 --> 0:14:30.360 the alliances that Japan has been forging around the semiconductor space, 0:14:30.840 --> 0:14:33.840 you know, and you know, just enlarged this into more 0:14:33.880 --> 0:14:37.920 the it and now you're talking about AI conversation. I 0:14:37.920 --> 0:14:41.400 think that's as an important, you know, alliance that's been 0:14:41.440 --> 0:14:44.560 fostered and definitely is an investment pocket in a sector 0:14:44.600 --> 0:14:46.840 that needs to be looked at. It is it is 0:14:46.880 --> 0:14:50.720 not benefiting of the weekend necessarily, but you know another 0:14:50.760 --> 0:14:53.920 sector is, for instance, it's tourism. You know, everyone still 0:14:53.920 --> 0:14:56.560 in Hong Kong, everywhere I go in Asia has a 0:14:56.760 --> 0:15:00.120 top destination in Japan because of the weekend as well. 0:15:00.120 --> 0:15:02.440 So there are many different elements to why the yen 0:15:02.520 --> 0:15:03.400 weakness can run. 0:15:03.520 --> 0:15:06.240 Yeah, and I know that you're still positive on megacap 0:15:06.280 --> 0:15:08.160 tech in the United States, so we don't have time 0:15:08.200 --> 0:15:12.680 to get into that now. But even with these sort 0:15:12.720 --> 0:15:15.760 of sticky levels of inflation that we're seeing. Stephanie, thanks 0:15:15.800 --> 0:15:17.640 so much for joining us in our studios. We talk 0:15:17.720 --> 0:15:29.480 again soon. Stephanie Holtz, jen apac cio at Deutsche Bank. Well, 0:15:29.560 --> 0:15:32.200 joining us now for some discussion of the same as Lindsay, 0:15:32.280 --> 0:15:36.800 Pigg's chief economist at Stifel. So, Lindsay, it does seem 0:15:36.880 --> 0:15:40.440 sort of a slam dunk. I would imagine that June 0:15:40.480 --> 0:15:43.200 is off the table. However, there will be a considerable 0:15:43.200 --> 0:15:45.880 amount of data that we get between now and then. 0:15:45.880 --> 0:15:48.080 How are you looking at rates here over the next 0:15:48.320 --> 0:15:50.600 month or two, Well, I. 0:15:50.520 --> 0:15:55.000 Think given the baseline for the economy, growth accelerating beyond expectations, 0:15:55.240 --> 0:15:59.320 a still very spendy consumer, a labor market slightly less 0:15:59.360 --> 0:16:01.960 tight than it was, but still very tight, this is 0:16:02.080 --> 0:16:05.720 further justification for the FED to remain on the sidelines 0:16:05.720 --> 0:16:09.360 at the current policy level. And so our base case remains, 0:16:09.560 --> 0:16:11.520 as it has since the turn of the calendar year, 0:16:11.560 --> 0:16:14.120 that the Fed will wait until the second half of 0:16:14.160 --> 0:16:18.880 the year before initiating rate cuts. Now, with inflation reversing 0:16:18.960 --> 0:16:21.720 course as of late, I do think it's going to 0:16:21.760 --> 0:16:24.960 be difficult for the FED to justify anything beyond one 0:16:25.240 --> 0:16:30.040 or two rate reductions, And even so, after initiating that pathway, 0:16:30.440 --> 0:16:34.520 if we failed to see meaningful improvement, we could see 0:16:34.520 --> 0:16:37.440 a second round pause after that. So the FED moving 0:16:37.520 --> 0:16:40.080 back to the sidelines after just twenty five or fifty 0:16:40.080 --> 0:16:41.200 basis points of cuts. 0:16:41.840 --> 0:16:44.280 You have to remember too, last Friday's employment did it 0:16:44.360 --> 0:16:46.680 was very very strong. We were one hundred thousand above 0:16:46.720 --> 0:16:50.000 forecast in terms of non farm payroll growth. I think 0:16:50.240 --> 0:16:52.760 initially we went into the data with a number of 0:16:52.840 --> 0:16:56.720 around two hundred k. We came out three hundred k. 0:16:56.960 --> 0:16:59.520 Is there a risk in your view that we could 0:16:59.520 --> 0:17:00.480 see enough or hike. 0:17:02.520 --> 0:17:05.520 There is, but that scenario has to be very specific. 0:17:05.560 --> 0:17:08.679 I would need to see inflation reverse core in a 0:17:08.760 --> 0:17:12.240 meaningful way and in a persistent manner. So we would 0:17:12.240 --> 0:17:15.920 need to see a continued upward trajectory really forcing the 0:17:15.960 --> 0:17:19.480 Fed into a corner in order to re engage in 0:17:19.560 --> 0:17:23.000 order to continue with hikes. Right now, with the inflation 0:17:23.200 --> 0:17:27.000 level just taking slightly higher, I don't think that's enough 0:17:27.080 --> 0:17:29.600 to scare the Fed into further rate hikes, but again, 0:17:29.640 --> 0:17:32.720 it does justify further position on the sideline. 0:17:34.119 --> 0:17:37.280 You know, slightly higher inflation is not good news to 0:17:37.680 --> 0:17:40.119 low income people, and it's not good news for the 0:17:40.160 --> 0:17:44.880 housing market or for small companies that have floating rate loans, 0:17:45.520 --> 0:17:49.040 but it may not have a huge effect on company earnings. 0:17:49.400 --> 0:17:52.000 And if we don't see that, then we'll probably see 0:17:53.040 --> 0:17:57.879 you know, labor staying relatively strong with companies, and so ultimately, 0:17:58.000 --> 0:18:00.160 I mean, is this a good news story or bad 0:18:00.200 --> 0:18:03.560 news story for the economy. 0:18:04.160 --> 0:18:05.920 Well, it really depends. 0:18:05.960 --> 0:18:09.160 But my biggest concern is right now that the US 0:18:09.200 --> 0:18:13.080 economy appears to be resilient. That being said, momentum is 0:18:13.160 --> 0:18:17.399 clearly waning. Consumers are still spending, businesses are still investing, 0:18:17.520 --> 0:18:20.600 but they're doing so at a noticeably reduced pace. So 0:18:20.720 --> 0:18:23.440 activity has already gone from five percent in the third 0:18:23.520 --> 0:18:26.680 quarter to three percent at year end, likely a two 0:18:26.840 --> 0:18:29.440 is ish percent pace in twenty twenty four. But where 0:18:29.440 --> 0:18:32.719 do we go from here if growth continues to slow 0:18:32.840 --> 0:18:35.399 to a non accelerating pace or at least fall below 0:18:35.440 --> 0:18:38.240 the bare minimum that we should expect for a developed economy. 0:18:38.640 --> 0:18:41.440 But the Fed is still sitting on the sidelines, twiddling 0:18:41.480 --> 0:18:45.320 their thumbs, allowing inflation to remain above target. Well, now 0:18:45.520 --> 0:18:48.359 they've backed this, you know areas I don't think you 0:18:48.400 --> 0:18:49.440 can say. 0:18:49.600 --> 0:18:52.159 You can't really say twiddling their thumbs, because you know, 0:18:52.160 --> 0:18:54.280 we have to say they were very aggressive in getting 0:18:54.280 --> 0:18:56.320 the FED funds rate up to five and a half percent. 0:18:56.600 --> 0:18:59.240 That's well above where inflation is now, and it's well 0:18:59.280 --> 0:19:01.639 above the noise. So it's not like they're sitting on 0:19:01.680 --> 0:19:04.640 their hands, really, it's just that they're holding at very 0:19:04.720 --> 0:19:05.360 high levels. 0:19:06.080 --> 0:19:09.200 Well, I would argue that they had a hyper focus 0:19:09.200 --> 0:19:12.560 on achieving a soft landing, and with that focus, I 0:19:12.600 --> 0:19:15.919 think they fail to raise rates to a sufficiently restrictive level. Well, 0:19:16.119 --> 0:19:20.200 look at cycles. Historically, the FED typically has to raise 0:19:20.280 --> 0:19:23.280 rates above the peak level of inflation. This time they 0:19:23.600 --> 0:19:26.720 arguably stop short at five percent, and so I am 0:19:26.880 --> 0:19:30.400 concerned that the FED has not done enough to tame inflation. 0:19:31.280 --> 0:19:34.040 One of the things that we've been talking about is 0:19:34.400 --> 0:19:37.040 possible risk in the financial system is the result of 0:19:37.359 --> 0:19:40.560 rates remaining elevated for the foreseeable future. One of the 0:19:40.560 --> 0:19:42.800 reasons maybe that some of the regional banks were a 0:19:42.800 --> 0:19:45.679 hard hit today given the spike and yield. Are you 0:19:45.880 --> 0:19:49.440 confident that we have really seen the worst of the stress. 0:19:49.960 --> 0:19:52.960 Maybe that's related to some areas of the commercial real 0:19:53.040 --> 0:19:53.719 estate market. 0:19:54.920 --> 0:19:56.840 No, I'm certainly not, and I would say that's one 0:19:56.880 --> 0:19:59.200 of the biggest risks for the economy over the next 0:19:59.240 --> 0:20:01.960 twelve to twenty five or months, with trillions and commercial 0:20:01.960 --> 0:20:05.119 loans coming due that are going to reset at significantly 0:20:05.200 --> 0:20:08.400 higher rates, and so that's going to require a significant 0:20:08.400 --> 0:20:11.040 amount of capital to write size those loans. Now, that's 0:20:11.080 --> 0:20:13.360 not to say that can't happen or that commercial real 0:20:13.440 --> 0:20:17.240 estate is essentially the next shoe to drop, But there 0:20:17.359 --> 0:20:19.919 is a contagion effect when we talk about this paper, 0:20:20.000 --> 0:20:22.359 the majority of which is being held on the balance 0:20:22.400 --> 0:20:25.520 sheet of financial institutions that have less than two hundred 0:20:25.520 --> 0:20:28.960 and fifty billion in assets, so that there is still 0:20:29.000 --> 0:20:32.920 concern about further weakness in the banking sector, although the 0:20:33.000 --> 0:20:36.240 latest commentary from the FED does suggest that we're still 0:20:36.240 --> 0:20:38.240 at very stable conditions as of late. 0:20:39.560 --> 0:20:41.679 You know, one of the things that Jamie Diamond mentioned 0:20:41.720 --> 0:20:45.440 in is islong letter to shareholders was that we may 0:20:45.480 --> 0:20:49.359 see a structurally higher level of inflation for a considerable 0:20:49.359 --> 0:20:53.560 period because of some new factors. One might be the 0:20:53.600 --> 0:20:57.680 geopolitical concerns the wars that are underway, but also the 0:20:57.680 --> 0:21:03.600 reindustrialization of the American economy and some other factors as well. 0:21:04.520 --> 0:21:06.760 You know, are you thinking that longer term? You know, 0:21:06.800 --> 0:21:09.760 we're going to be facing this problem, you know, for 0:21:09.800 --> 0:21:10.200 a while. 0:21:11.880 --> 0:21:14.160 I do think it's going to be a long standing problem. 0:21:14.240 --> 0:21:15.960 That's not to say that the FED is going to 0:21:15.960 --> 0:21:19.120 give up on achieving that two percent goal. Share Poal 0:21:19.280 --> 0:21:21.640 was very clear at last month's press conference that two 0:21:21.640 --> 0:21:24.520 percent is the Fed's target. It's always been the target, 0:21:24.520 --> 0:21:29.520 and it does remain the target. That being said, longer term, 0:21:29.640 --> 0:21:33.440 the Fed may be willing to reevaluate that two percent target, 0:21:33.600 --> 0:21:38.399 and if it does prove to be a very onerous achievement, 0:21:38.760 --> 0:21:41.320 they may be willing to adjust that upwards. But right 0:21:41.359 --> 0:21:46.520 now they cannot adjust that mid cycle without potentially losing 0:21:46.560 --> 0:21:50.000 control over inflation expectations, which of course feed back into 0:21:50.040 --> 0:21:51.520 the direct inflation calculation. 0:21:51.760 --> 0:21:54.239 So we talk a lot about the fiscal story as 0:21:54.240 --> 0:21:57.600 well on this program, and with yields being elevated to 0:21:57.640 --> 0:22:01.520 the extent they are today, how much will that hinder 0:22:01.640 --> 0:22:05.560 the government's effort when we're talking about debt service that's 0:22:05.600 --> 0:22:08.360 going to be increased, I mean, and that's really maybe 0:22:08.440 --> 0:22:10.520 going to tie the hands of the government and trying 0:22:10.520 --> 0:22:12.920