WEBVTT - China Activity Preview; Fed Rate Cut Momentum Builds 0:00:02.520 --> 0:00:07.040 Bloomberg Audio Studios, Podcasts, radio News. 0:00:10.360 --> 0:00:13.680 Welcome to the Bloomberg Daybreak Asia Podcast. I'm Doug Chrisner. 0:00:14.160 --> 0:00:17.000 Markets in Asia are gearing up to follow an update 0:00:17.040 --> 0:00:20.159 for Wall Street. US markets rallied on the bet for 0:00:20.239 --> 0:00:23.200 an imminent rate cut by way of the FED. Equities 0:00:23.239 --> 0:00:25.440 at all time highs in the States and yields were 0:00:25.480 --> 0:00:29.600 down across the Treasury curve. Meantime, Treasury Secretary Scott Bessont 0:00:29.640 --> 0:00:31.880 is calling on the FED to cut the policy rate 0:00:31.920 --> 0:00:36.159 by fifty basis points after this week's report on consumer prices. 0:00:36.440 --> 0:00:40.280 Speaking earlier to Bloomberg Surveillance, Besson said that could be 0:00:40.400 --> 0:00:43.080 the beginning of a new rate cutting cycle. 0:00:43.360 --> 0:00:47.879 The rates are too constrictive if you look at any model. 0:00:48.000 --> 0:00:48.640 That the. 0:00:50.760 --> 0:00:53.160 We should probably be one hundred and fifty one hundred 0:00:53.159 --> 0:00:57.400 and seventy five basis points lower. So I think the 0:00:57.440 --> 0:00:59.080 committee needs to step back. 0:00:59.280 --> 0:01:02.639 That is Treasury Secretary Scott Besson speaking earlier to Bloomberg. 0:01:02.680 --> 0:01:05.000 In a moment or two, we'll get some reaction from 0:01:05.080 --> 0:01:08.959 Ross Mayfield, investment strategist at Baird. But we begin this 0:01:09.080 --> 0:01:12.240 morning in Hong Kong. Joining me now is Helen Ju, 0:01:12.440 --> 0:01:16.679 managing partner and CIO at NF Trinity. Helen joins us 0:01:16.680 --> 0:01:19.000 from our studios in Hong Kong. It's always a pleasure 0:01:19.000 --> 0:01:21.400 to visit with you, Helen. Can we begin by talking 0:01:21.440 --> 0:01:24.720 about the Chinese economy and the big reveal that we'll 0:01:24.760 --> 0:01:27.280 get at the end of the week monthly activity data 0:01:27.360 --> 0:01:30.720 for July, and I want to focus first on industrial 0:01:30.800 --> 0:01:34.800 production and retail sales, two big components here. Give me 0:01:34.800 --> 0:01:36.720 a sense of what you're expecting to see. 0:01:37.240 --> 0:01:40.320 Well, I think the overall economy has been lackluster for 0:01:40.400 --> 0:01:42.959 quite some time, and so we don't expect to see 0:01:42.959 --> 0:01:46.760 any major pickup in either of those two items. Industrial 0:01:46.800 --> 0:01:50.320 production in particular, I would say obviously a lot of 0:01:50.320 --> 0:01:53.520 that relies on global pmis and orderers as well as 0:01:53.560 --> 0:01:57.800 the trade expectations, and even pmis outside of China have 0:01:57.960 --> 0:02:00.680 been pretty lackluster for a couple of years already, So 0:02:01.320 --> 0:02:04.559 to start off with the export demand is not great, 0:02:04.600 --> 0:02:07.360 and then at on top of that the fact that 0:02:07.400 --> 0:02:11.320 you've got trade uncertainty. There may have been some frontloading 0:02:11.600 --> 0:02:13.320 of activity in the first half of the year or 0:02:13.360 --> 0:02:16.240 beginning of the year before the tariffs were supposed to 0:02:16.280 --> 0:02:18.919 kick off, But I think as we go into the 0:02:18.960 --> 0:02:20.919 second part of the year, it's going to be hard 0:02:20.960 --> 0:02:25.200 to see major impetus for significant v shape recovery in 0:02:25.240 --> 0:02:25.760 that regard. 0:02:25.960 --> 0:02:29.079 So if the export economy has been a little sluggish, 0:02:29.280 --> 0:02:32.560 where would things be if this tariff truce did not 0:02:32.720 --> 0:02:35.520 exist and domestic demand being as weak as it is 0:02:35.560 --> 0:02:37.720 on the mainline, what would the overall economy look like? 0:02:38.960 --> 0:02:41.760 Look, I think the Chinese government are trying very hard 0:02:41.800 --> 0:02:46.000 to boost the domestic consumption and domestic demand. So that 0:02:46.160 --> 0:02:49.640 comes partly from some of the supportive policies we've seen 0:02:50.360 --> 0:02:54.400 on you know, let's say fixed asset investment, infrastructure stuff 0:02:54.440 --> 0:02:57.079 that's government related. Spending has actually picked up to try 0:02:57.080 --> 0:03:00.079 to buffer the slow down in the external demain and 0:03:00.400 --> 0:03:04.160 manufacturing industries and property sector. We see that the government 0:03:04.160 --> 0:03:08.000 has passed a number of consumption related supports, although consumption 0:03:08.120 --> 0:03:10.760 is very difficult to get a meaningful change in behavior 0:03:10.760 --> 0:03:13.480 in the short term, especially if you're feeling not so 0:03:13.560 --> 0:03:17.440 great about your wealth effects from your property price you know, stagnating. 0:03:17.760 --> 0:03:19.760 But that said, you know, the a share market has 0:03:19.800 --> 0:03:23.240 been stronger recently and has performed relatively well, so that 0:03:23.320 --> 0:03:25.920 helps the buffer it to some extent. So you know, 0:03:25.960 --> 0:03:30.000 I would say the domestic side is a little bit 0:03:30.040 --> 0:03:34.280 more visible and more stable versus the external demand, where 0:03:34.960 --> 0:03:38.320 things were starting to look a little bit choppy even before. 0:03:38.120 --> 0:03:40.360 The trade war. So you mentioned the property market. Where 0:03:40.360 --> 0:03:42.960 are we in this process of healing and getting rid 0:03:42.960 --> 0:03:45.840 of some of the bad debt that is kind of 0:03:45.880 --> 0:03:48.080 tied to the problems with the property market. 0:03:48.440 --> 0:03:51.880 We're actually pretty far along in that regard, So probably 0:03:52.480 --> 0:03:55.440 the vast majority of companies that had the significant leverage 0:03:55.480 --> 0:03:59.200 and concerns about their ability to deliver what they've sold. 0:03:59.520 --> 0:04:01.800 I think that's pretty much, you know, eighty percent ninety 0:04:01.840 --> 0:04:04.880 percent cleaned up at this point. But the concern is that, 0:04:05.720 --> 0:04:09.920 you know, China's market on housing used to be eighty 0:04:09.960 --> 0:04:12.480 percent new homes and twenty percent existing sales, and then 0:04:12.560 --> 0:04:17.680 that shifted meaningfully more towards existing secondhand homes. When people's 0:04:17.680 --> 0:04:22.000 expectation about price appreciation forever ended, they started to put 0:04:22.000 --> 0:04:24.880 their existing homes up for sale. So now the volume 0:04:24.920 --> 0:04:28.159 of sales is very skewed or much more skewed versus 0:04:28.160 --> 0:04:31.760 before to existing homes rather than new, which basically means 0:04:31.760 --> 0:04:33.960 that all the fixed asset investment activity on the new 0:04:34.040 --> 0:04:37.080 homes has meaningfully slowed down for the last couple of years, right, 0:04:37.440 --> 0:04:39.320 and then that's with the increase in supply of the 0:04:39.360 --> 0:04:43.640 secondary market. Then it's actually pressured overall prices in the 0:04:43.640 --> 0:04:45.480 market as well, And that's actually the more important thing 0:04:45.520 --> 0:04:47.080 to look at for consumer confidence. 0:04:47.240 --> 0:04:49.000 So maybe we can talk about one of the bright 0:04:49.040 --> 0:04:53.839 spots high tech, particularly the artificial intelligence trade. Big news 0:04:53.880 --> 0:04:57.040 in the last week was that President Trump struck a deal, 0:04:57.160 --> 0:05:01.080 an unusual deal with US chip makers and video and AMD, 0:05:01.240 --> 0:05:03.599 and they're going to be allowed to sell some of 0:05:03.640 --> 0:05:07.080 their less advanced AI chips into the Chinese markets if 0:05:07.120 --> 0:05:09.920 these companies pay fifteen percent of the revenue from those 0:05:10.000 --> 0:05:12.039 Chinese sales to the US government. 0:05:12.160 --> 0:05:12.520 Kind of a. 0:05:12.520 --> 0:05:15.760 Creative bit of enterprise here. What is this going to 0:05:15.800 --> 0:05:17.119 mean for China do you think? 0:05:17.839 --> 0:05:20.480 I think the fifteen percent will be partly absorbed by 0:05:20.600 --> 0:05:23.880 the chip makers and partly absorbed, probably by the customer. 0:05:24.880 --> 0:05:28.000 I think that China is very keen to develop its 0:05:28.040 --> 0:05:32.640 AI landscape, but that Chinese manufacturers themselves are certainly short 0:05:32.680 --> 0:05:36.560 of the capacity to produce in the order of magnitude 0:05:36.600 --> 0:05:39.520 that they actually need. Therefore, I believe that the Chinese 0:05:39.560 --> 0:05:43.080 side are very eager for continued GPU exports at China, 0:05:44.000 --> 0:05:48.160 and that this H twenty deal that's been inked by 0:05:48.279 --> 0:05:51.560 Jensen and President Trump will be very much welcomed by 0:05:51.640 --> 0:05:53.640 the Chinese. Of course, in the recent days, there's been 0:05:53.680 --> 0:05:56.240 a little bit of newsflow regarding whether China is discouraging 0:05:56.279 --> 0:05:58.359 the use of this, but I actually think that the 0:05:58.400 --> 0:06:02.919 discouragement is probably only towards very sensitive customers, including military 0:06:02.960 --> 0:06:06.800 and other type of specific usage. But for the broader 0:06:06.839 --> 0:06:09.600 AI landscape as a whole, I do believe that there 0:06:09.640 --> 0:06:13.520 is going to be sizeable imports that the Chinese government 0:06:13.560 --> 0:06:16.760 wants to bring in in order to continue to grow 0:06:16.800 --> 0:06:18.200 its AI ecosystem. 0:06:18.360 --> 0:06:21.840 To what extent is this deal opening up less advanced 0:06:21.880 --> 0:06:24.880 AI chips to the Chinese market going to be critical 0:06:25.000 --> 0:06:27.320 if the US and China were to kind of find 0:06:27.360 --> 0:06:28.599 a way out of this trade war. 0:06:29.320 --> 0:06:32.600 Oh, I think it's a huge ask, a huge important 0:06:32.680 --> 0:06:35.640 ask by the Chinese, and the negotiation it's probably way 0:06:35.680 --> 0:06:38.520 more important versus whether the tariffs on other stuff is 0:06:38.560 --> 0:06:41.640 five percent or ten percent higher or lower. I think 0:06:41.680 --> 0:06:45.360 that's been part of the critical negotiation all along. And 0:06:46.000 --> 0:06:48.440 keep in mind that H twent t is not a 0:06:48.560 --> 0:06:52.200 new incremental supply to China. It was supplied to China 0:06:52.360 --> 0:06:57.040 for quite some time and just recently suspended earlier because 0:06:57.080 --> 0:06:59.279 of the trade war. So now it's just a resumption 0:06:59.800 --> 0:07:03.640 of the export supplied to China. It's not necessarily, you know, 0:07:04.160 --> 0:07:06.000 all new incremental supply to China. 0:07:06.480 --> 0:07:09.960 So we're dealing a lot with predictions on FED policy here. 0:07:10.040 --> 0:07:12.760 Maybe we get a twenty five basis point rate cut 0:07:13.040 --> 0:07:16.040 at the September meeting, although the Treasury Secretary was saying 0:07:16.440 --> 0:07:19.160 after the CPI printed, maybe the FED could go as 0:07:19.240 --> 0:07:22.520 much as fifty basis points. Where are you in terms 0:07:22.560 --> 0:07:25.920 of factoring in US monetary policy into your thinking about 0:07:25.960 --> 0:07:27.680 putting money to work well? 0:07:27.760 --> 0:07:32.280 US monetary policy is obviously the most important policy decision 0:07:32.280 --> 0:07:34.480 in the world that one has to watch for ASA classes. 0:07:34.960 --> 0:07:38.320 I think Scott Bessen's rationale was that because the NFP 0:07:38.680 --> 0:07:42.480 was revised down so dramatically for the prior two months, 0:07:42.640 --> 0:07:44.920 you know, the reported numbers were one hundred something thousand, 0:07:45.000 --> 0:07:48.320 but the post revision numbers were like ten percent of 0:07:48.360 --> 0:07:51.480 the original reported numbers. So his point was, were the 0:07:51.640 --> 0:07:54.160 accurate numbers reported in the last couple of months. The 0:07:54.160 --> 0:07:56.440 FED may have already cut once and therefore, should it 0:07:56.520 --> 0:07:58.480 just catch up by cutting twice in September. 0:07:59.640 --> 0:08:02.440 My view is that they're probably. 0:08:02.160 --> 0:08:05.080 Just going to do twenty five basis points, because unless, 0:08:05.120 --> 0:08:09.400 of course, the beginning of September NFP number four August 0:08:09.520 --> 0:08:13.000 ends up being absolutely disastrous, in which case they might 0:08:13.040 --> 0:08:15.280 want to accelerate to fifty basis points. But if not, 0:08:15.400 --> 0:08:17.880 I think it's twenty five basis points. We're looking at 0:08:17.960 --> 0:08:21.040 consensus expectations of five to six cuts before the end 0:08:21.080 --> 0:08:23.680 of next year. Whether that's spaced out as three this 0:08:23.840 --> 0:08:27.080 year or two this year, it's not necessarily that important. 0:08:27.400 --> 0:08:29.880 But you know, the consensus terminal rate now is around 0:08:29.920 --> 0:08:33.240 three percent at the end of the cut cycle. We 0:08:33.320 --> 0:08:35.400 think actually, if anything, it could be a little bit 0:08:35.440 --> 0:08:37.320 lower than that and back to like the two handle. 0:08:37.640 --> 0:08:40.680 So is that already reflected in the dollar right now 0:08:40.760 --> 0:08:43.160 in terms of its value, let's say, against the end 0:08:43.280 --> 0:08:44.240 and the offshore you on. 0:08:44.840 --> 0:08:48.880 I think it's partially reflected, but probably not entirely reflected, 0:08:48.920 --> 0:08:51.440 because if you look at the upcoming data, I don't 0:08:51.440 --> 0:08:53.640 think that the CPI really matters that much. I think 0:08:53.720 --> 0:08:56.000 what the government cares about, what the Fed cares about, 0:08:56.000 --> 0:08:58.560 what the markets care about is really employment numbers, right, 0:08:58.559 --> 0:09:02.679 because employment numbers determine everything. So it's the NFP, it's 0:09:02.679 --> 0:09:06.560 the unemployment rate. If those numbers are good in the 0:09:06.600 --> 0:09:08.760 next month, people will have a sigh of relief. But 0:09:08.840 --> 0:09:10.800 I don't think that it means that rates are going 0:09:10.840 --> 0:09:13.480 to rally dramatically or the dollar is going to dramatically strengthen. 0:09:13.600 --> 0:09:16.280 But if those numbers are bad yet again for the 0:09:16.320 --> 0:09:18.800 third fourth month, then I think the market is going 0:09:18.880 --> 0:09:21.840 to really get stressed out and you'll see that the 0:09:21.880 --> 0:09:24.800 long end is going to come down, and actually the 0:09:24.840 --> 0:09:27.840 pressure on the dollar will be bigger and bigger. So 0:09:28.200 --> 0:09:29.920 and by the way, and the Trump government wants the 0:09:29.920 --> 0:09:31.880 dollar to be weaker anyway, so all of that is 0:09:31.920 --> 0:09:35.559 online for a weaker dollar and better performance outside of 0:09:35.600 --> 0:09:36.000 the US. 0:09:36.360 --> 0:09:38.920 So as we're talking the Japanese equity market, is it 0:09:39.000 --> 0:09:42.640 record highs and on Friday will get the preliminary estimate 0:09:42.720 --> 0:09:46.400 on second quarter GDP for Japan. How are you viewing 0:09:46.520 --> 0:09:50.440 the Japanese economy right now, and maybe more broadly, what 0:09:50.600 --> 0:09:53.800 is being reflected in Japanese stocks at the moment. 0:09:54.520 --> 0:09:58.199 The economy is doing okay from a headline perspective, but 0:09:58.280 --> 0:10:01.000 nothing spectacular and actually, if you look at the economic 0:10:01.040 --> 0:10:04.760 surprise Index, which is how it's come in versus expectations, 0:10:05.240 --> 0:10:08.560 it's actually been a little bit losing momentum recently versus 0:10:08.600 --> 0:10:12.400 what had become slightly higher expectations. And I always say 0:10:12.400 --> 0:10:15.319 the post COVID kind of tourism and consumption wave when 0:10:15.360 --> 0:10:17.480 the dollar, when the dollar was super strong and the 0:10:17.600 --> 0:10:19.960 end was like super weak, that has kind of started 0:10:20.000 --> 0:10:22.320 to wear off a little bit this year. Recently we 0:10:22.360 --> 0:10:24.240 have a little bit of a boost from the World Expo, 0:10:24.360 --> 0:10:27.760 which definitely drew some activity in the second quarter of 0:10:27.800 --> 0:10:29.920 the year, But going into the rest of the year, 0:10:30.840 --> 0:10:33.840 we think probably just in line with expectations. We're not 0:10:33.880 --> 0:10:36.800 seeing any major upside surprises from Japan in particular. 0:10:37.000 --> 0:10:39.040 Helen will leave it there. It's always a pleasure. Thank 0:10:39.080 --> 0:10:42.719 you so very much. Helenge you managing partner and CIO 0:10:42.800 --> 0:10:45.839 atf Trenditdy joining us from a Home Kong studio here 0:10:45.880 --> 0:10:55.240 on the Daybreak Asia podcast. Welcome back to the Daybreak 0:10:55.240 --> 0:10:58.880 Asia Podcast. I'm deg Krisner. Two weeks ago, market saw 0:10:58.920 --> 0:11:02.040 the chance of a rate cut in September at less 0:11:02.080 --> 0:11:05.319 than fifty percent. Well, now a quarter point cut is 0:11:05.360 --> 0:11:08.000 fully priced in and some are even betting on a 0:11:08.160 --> 0:11:12.520 larger reduction. Speaking earlier to Bloomberg, Treasury Secretary Scott Bessen 0:11:12.960 --> 0:11:16.200 hinted at a series of radcuts beginning with a fifty 0:11:16.240 --> 0:11:20.079 basis point move at the Fed's next meeting next month. 0:11:20.400 --> 0:11:23.079 Joining me now for a closer look is Ross Mayfield 0:11:23.440 --> 0:11:27.240 is investment strategist at Baird Ross. Always a pleasure, Thanks 0:11:27.240 --> 0:11:29.839 for making time. This is kind of an unusual situation. 0:11:30.280 --> 0:11:33.599 I can't recall the last time a Treasury secretary is 0:11:33.679 --> 0:11:37.520 kind of leaned in to the conversation on FED rate cuts. 0:11:37.559 --> 0:11:38.880 Is that a little concerning to you? 0:11:40.120 --> 0:11:43.520 I think the whole thing is a little concerning. Obviously, 0:11:43.520 --> 0:11:50.240 they've kind of backed away from intentions or directly firing Pal, 0:11:50.400 --> 0:11:55.440 at least for now, but the public pressure definitely kind 0:11:55.440 --> 0:11:59.839 of just gives an air of questioning whether that independence 0:11:59.880 --> 0:12:02.920 is still going to be there now again, you know, 0:12:03.320 --> 0:12:06.000 the Treasury secretary doing it might be new, but it 0:12:06.160 --> 0:12:08.480 won't be the first time that we've had a president 0:12:08.640 --> 0:12:12.120 over the years want breatcats want you know, a hotter 0:12:12.200 --> 0:12:17.000 economy heading into a midterm election year. But it certainly 0:12:17.520 --> 0:12:21.400 makes the job harder on share Pal and puts the 0:12:21.440 --> 0:12:24.959 Central Bank in a pretty tough position here, especially with 0:12:25.520 --> 0:12:26.720 tariffs kind of ramping up. 0:12:27.040 --> 0:12:29.720 So Besen said that the Fed may have already cut 0:12:29.760 --> 0:12:32.000 interest rates, or they would have done so at the 0:12:32.080 --> 0:12:35.240 last meeting if they had been aware of the revised 0:12:35.360 --> 0:12:38.800 jobs data kind of indicating the weakness in the labor market. 0:12:38.800 --> 0:12:41.400 How do you understand the labor market right now? Are 0:12:41.520 --> 0:12:45.679 things kind of increasing in dynamism, perhaps as a result 0:12:45.760 --> 0:12:49.320 of the tariff story and maybe even the artificial intelligence story. 0:12:50.240 --> 0:12:51.880 Yeah, I mean the way I see the job marketing 0:12:51.960 --> 0:12:58.040 right now is cooling, weakening, but not recessionary. Nothing to 0:12:58.600 --> 0:13:01.000 outrrite panic over. I mean, we're still adding jobs a 0:13:01.000 --> 0:13:04.720 month on month despite that big revision downwhard. You know, 0:13:04.760 --> 0:13:08.160 we still have those weekly initial claims numbers, you know, 0:13:08.240 --> 0:13:11.920 hovering at cycle lows. And those cycle lows also happened 0:13:11.960 --> 0:13:13.960 to be you know, fifty year lows for the data set. 0:13:14.040 --> 0:13:17.559 So we still have, you know, a labor market where 0:13:17.559 --> 0:13:22.000 people really aren't getting fired and people in the workforce 0:13:22.040 --> 0:13:24.199 are working. We have you know, prime age employment to 0:13:24.280 --> 0:13:28.800 population still at near cycle has. So it's a labor 0:13:28.840 --> 0:13:33.080 market that is not growing. There's not a lot that's 0:13:33.160 --> 0:13:36.920 kind of boosting job growth, especially outside of healthcare. But 0:13:36.960 --> 0:13:39.120 it's not a labor market that's that's in a ton 0:13:39.160 --> 0:13:41.319 of trouble in my view. Now, all that said, I 0:13:41.360 --> 0:13:43.400 do think the Fed would have cut if they had 0:13:43.400 --> 0:13:46.440 had that non farm perils number. So I don't think 0:13:46.480 --> 0:13:51.199 that Treasury Secretary Vessett is out of line for calling 0:13:51.200 --> 0:13:53.240 for a fifty basis point rate kid in September. I 0:13:53.280 --> 0:13:56.840 think it kind of mirrors closely this time last year, 0:13:56.880 --> 0:13:58.720 where the Fed went ahead and did a fifty basis 0:13:58.720 --> 0:14:00.720 point ket to start things off because they felt a 0:14:00.720 --> 0:14:03.880 bit behind the curve. So I think that's a reasonable 0:14:04.000 --> 0:14:06.560 place to be. You know, the market is more expecting 0:14:06.559 --> 0:14:09.760 one cut. We'll get another CPI report before then, so 0:14:09.800 --> 0:14:12.920 that'll be obviously critical. But I don't think fifty bases 0:14:12.920 --> 0:14:14.559 whence should be off the table. I think that should 0:14:14.559 --> 0:14:16.840 be a live decision for the Fed in September. 0:14:16.960 --> 0:14:18.920 So we had record highs today for the S and 0:14:18.960 --> 0:14:22.440 P five hundred NASDAK composite, all time highs here. How 0:14:22.440 --> 0:14:24.480 are you feeling about the equity trade? 0:14:25.080 --> 0:14:26.080 Yeah? Really strong. 0:14:26.200 --> 0:14:28.880 I mean I would I be surprised if the market 0:14:28.880 --> 0:14:32.200 consolidated a bit here in August or September or October. 0:14:32.240 --> 0:14:34.960 I mean these are seasonally week months. We've been on 0:14:35.000 --> 0:14:38.240 such a strong run. No, I wouldn't, But everything else 0:14:38.280 --> 0:14:41.000 about the setup I love. You know, we're talking raycats, 0:14:41.000 --> 0:14:45.840 which is obviously risk on. The fundamental story is incredibly strong. 0:14:45.880 --> 0:14:48.120 Despite all the headwinds that we talk about all day, 0:14:48.960 --> 0:14:53.360 this earning season has just been incredibly resilient, and guidance 0:14:53.400 --> 0:14:56.080 is actually pretty good as well. You know, you look 0:14:56.280 --> 0:14:58.320 underneath the hood of the equity market and you see 0:14:58.320 --> 0:15:02.000 things like today the S and P five hundred equal 0:15:02.000 --> 0:15:04.080 weight discretionary made in all time high. I mean, that's 0:15:04.160 --> 0:15:09.760 full of sub sectors, sub industries like autos and luxury 0:15:09.800 --> 0:15:13.880 retail and home builders. The home builders on fire. So 0:15:13.920 --> 0:15:16.480 it's not just a big tech story, although that you know, 0:15:16.480 --> 0:15:18.680 sucks up a lot of air in the room, the 0:15:18.720 --> 0:15:22.160 AI trade. But things look pretty healthy. And you know, 0:15:22.200 --> 0:15:24.400 if you even wanted to look outside of the US, 0:15:24.720 --> 0:15:27.560 this rally has a global tilt to it. Japan looks great, 0:15:27.960 --> 0:15:30.240 Europe has had a nice year, is consolidating a bit. 0:15:30.280 --> 0:15:32.600 But there's a lot to like about this equity market. 0:15:32.680 --> 0:15:35.160 So even if things need to take a breather and 0:15:35.280 --> 0:15:37.120 continue to let the fundamentals catch. 0:15:36.960 --> 0:15:39.120 Up to price, I would view it as very much 0:15:39.200 --> 0:15:39.840 biable here. 0:15:39.960 --> 0:15:42.160 So one of the things we learned this week the 0:15:42.280 --> 0:15:45.920 cost of tariff exposed goods really didn't rise as much 0:15:46.040 --> 0:15:48.600 as feared. In July. Tomorrow we're going to get the 0:15:48.720 --> 0:15:53.240 wholesale inflation report, the PPI data. Some companies have been 0:15:53.280 --> 0:15:56.520 holding off on increasing prices. Maybe there's a little bit 0:15:56.520 --> 0:16:01.040 of fear that consumers would then pull back on. How 0:16:01.080 --> 0:16:04.400 are you feeling about corporate margins right now as companies 0:16:04.520 --> 0:16:07.400 try to deal with the effect of tariffs. 0:16:08.040 --> 0:16:11.480 Yeah, I mean it's been a pretty incredible story. You've 0:16:11.520 --> 0:16:14.560 got next twelve month profit margins have actually hooked higher 0:16:14.560 --> 0:16:18.320 this earning season despite what we know is coming down the. 0:16:18.280 --> 0:16:20.760 Pipe as far as tariffs. 0:16:21.240 --> 0:16:25.240 So you know, ultimately it's it's I think it's going 0:16:25.320 --> 0:16:27.640 to be divided up in three ways. I think suppliers 0:16:27.680 --> 0:16:29.880 are going to eat some of the costs. I think 0:16:29.920 --> 0:16:31.760 that margins are going to get hit in some of 0:16:31.760 --> 0:16:35.600 these goods important countries. And I think ultimately consumers you know, 0:16:35.640 --> 0:16:39.760 in those sectors will will pay a higher price. Whether 0:16:39.840 --> 0:16:41.960 they balk at that, you know, I don't know. Obviously, 0:16:41.960 --> 0:16:44.680 the consumer is doing okay, but is in a weaker 0:16:44.720 --> 0:16:47.880 position today than they were in say twenty twenty two, 0:16:48.440 --> 0:16:51.320 when the inflation story and the corporate profit you know, 0:16:51.400 --> 0:16:55.200 greed inflation story was really ramping up. So I think 0:16:55.920 --> 0:16:58.280 companies will do everything they've can. I think they've probably 0:16:58.960 --> 0:17:01.160 tried to you know, run these tariffs as best as 0:17:01.160 --> 0:17:05.560 possible during the pause here. Obviously, the China pause helps 0:17:05.600 --> 0:17:07.840 a lot. A lot of the you know, imported goods 0:17:07.840 --> 0:17:10.439 from China will have another ninety days, so you might 0:17:10.480 --> 0:17:13.439 see a lot more you know, inventory stocking, so that 0:17:14.359 --> 0:17:17.639 companies can hold off on making that hard decision. But 0:17:17.760 --> 0:17:19.879 ultimately it's a boring answer, but I think it's going 0:17:19.920 --> 0:17:22.560 to be spread out amongst the three players here. I mean, 0:17:22.760 --> 0:17:25.800 a tariff as attacked and somebody pays it, so it'll 0:17:25.800 --> 0:17:29.439 probably end up being a combination of supplier, importer, and 0:17:29.600 --> 0:17:31.400 ultimately end consumer in those sectors. 0:17:31.560 --> 0:17:34.320 We had a big move today among small cap stocks. 0:17:34.320 --> 0:17:36.760 I think the Russell was up about two percent. How 0:17:36.760 --> 0:17:39.600 are you feeling about that end of the market, the 0:17:39.640 --> 0:17:40.600 small cap space. 0:17:42.240 --> 0:17:44.280 I'm not inclined to chase a small cap rally here. 0:17:44.320 --> 0:17:47.280 Obviously, you know, rate cat hype is going to be 0:17:47.320 --> 0:17:48.200 good for small caps. 0:17:48.200 --> 0:17:50.000 They have a lot more debt, a lot more variable 0:17:50.040 --> 0:17:51.000 rate debt in the books. 0:17:52.440 --> 0:17:56.080 But regardless of what the FED does in September, regardless 0:17:56.080 --> 0:17:58.320 of what the FED does in twenty twenty six, I 0:17:58.359 --> 0:18:01.639 think that because of the more structure inflation dynamics, because 0:18:01.680 --> 0:18:02.800 of the debt. 0:18:02.640 --> 0:18:05.399 And deficit, because of some issues. 0:18:05.040 --> 0:18:06.920 That are more structural in nature, I think that we're 0:18:06.960 --> 0:18:09.960 in a higher, for longer great environment, especially compared to 0:18:09.960 --> 0:18:12.439 the twenty tens. And I think that is just a 0:18:12.480 --> 0:18:17.520 really difficult operating environment for small caps. And then you 0:18:18.280 --> 0:18:20.879 think about what is driving the market today in this 0:18:21.000 --> 0:18:25.000 AI trade, and you know, it's not something that small 0:18:25.000 --> 0:18:27.000 caps can just tap into right away. They don't have 0:18:27.080 --> 0:18:29.960 the capital, they don't have the capacity. And then when 0:18:29.960 --> 0:18:33.159 these large caps and megacaps need something new, they go 0:18:33.240 --> 0:18:35.360 out and you know, they gobble up a smaller name 0:18:35.400 --> 0:18:37.359 that has what they need. So I think it's a 0:18:37.400 --> 0:18:40.960 really tough environment for small caps. I'm not inclined to 0:18:41.119 --> 0:18:43.440 chase the rally here, and if we have a nice 0:18:43.480 --> 0:18:46.920 small cap pop on some ray kind enthusiasm, I'm okay 0:18:47.000 --> 0:18:49.520 missing out on that and kind of hiding out in 0:18:49.720 --> 0:18:53.840 high quality large caps but you know, staying invested, staying 0:18:53.880 --> 0:18:55.760 risk on with kind of a cyclical tilt, but just 0:18:56.280 --> 0:18:57.880 not going to chase that small cap move. 0:18:58.080 --> 0:19:01.080 So we had yields down today across to curve the 0:19:01.119 --> 0:19:03.520 two and the ten, each by about five basis points. 0:19:03.520 --> 0:19:06.640 And with those lower yields, some dollar weakness crept in 0:19:07.000 --> 0:19:09.760 Bloomberg dollar spot was down about two tens to one percent. 0:19:10.560 --> 0:19:13.600 Is dollar weakness going to be the narrative going forward? 0:19:13.640 --> 0:19:16.760 You seem to be questioning the degree to which rates 0:19:16.760 --> 0:19:19.199 can move lower, But I'm wondering what all of this 0:19:19.359 --> 0:19:23.240 means for the dollar and then by extension, offshore markets. 0:19:23.760 --> 0:19:27.480 Yeah, I mean, we have anecdotally a lot of clients 0:19:27.520 --> 0:19:30.040 asking about the dollar for the first time in a while. 0:19:30.640 --> 0:19:32.920 I think the weakness is generally a good thing. We 0:19:32.960 --> 0:19:37.200 have a lot of multinationals here that will really benefit 0:19:37.240 --> 0:19:40.320 from a week dollar, especially as they try to digest, 0:19:40.480 --> 0:19:44.040 you know, other new input costs. Getting a break on 0:19:44.760 --> 0:19:48.480 currency exchange for foreign profits will be huge for international markets. 0:19:48.480 --> 0:19:51.439 I mean, you're seeing the result. Obviously these markets are 0:19:51.480 --> 0:19:54.480 doing well in local terms, but in dollar terms, the 0:19:55.240 --> 0:19:59.280 all world xus is lap in the field, and a 0:19:59.320 --> 0:20:02.800 big part of that is dollar weakness, so I don't 0:20:02.840 --> 0:20:06.119 know that it can continue into perpetuity. You know, interest 0:20:06.200 --> 0:20:09.359 rate differentials would still suggest, you know, the US has 0:20:09.760 --> 0:20:12.440 higher rates than a lot of our kind of contemporaries 0:20:13.119 --> 0:20:16.119 in developed markets. So I don't think the dollar is 0:20:16.160 --> 0:20:19.520 in free fall. I don't think that the quote unquote 0:20:19.520 --> 0:20:21.080 sell America trade is. 0:20:21.040 --> 0:20:22.199 All that real, you know. 0:20:22.400 --> 0:20:25.080 I do think there's maybe a little bit of diversification 0:20:25.160 --> 0:20:27.840 going on, but international investors still want to own the 0:20:28.119 --> 0:20:30.560 best companies, the safest assets, and they'll still reside in 0:20:30.560 --> 0:20:33.159 the US for now. So I think the dollar weakness 0:20:33.160 --> 0:20:34.919 has been a positive, but I don't think it's going 0:20:34.960 --> 0:20:38.040 to extend into perpetuity, and I don't think that it's 0:20:38.040 --> 0:20:39.640 something for investors to worry about too much. 0:20:39.840 --> 0:20:41.960 Ross will leave it there. It's always a pleasure. Thanks 0:20:42.000 --> 0:20:45.040 so very much. Ross Mayfield there. He is investment strategist 0:20:45.119 --> 0:20:50.560 at Baird Joining here on the Daybreak Asia podcast. Thanks 0:20:50.600 --> 0:20:54.240 for listening to today's episode of the Bloomberg Daybreak Asia 0:20:54.400 --> 0:20:58.840 Edition podcast. Each weekday, we look at the story shaping markets, finance, 0:20:59.200 --> 0:21:02.280