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Speaker 1: Joining us now for some discussion of all this is
Speaker 1: Greg Reed, DOCO, who is ey chief economist, to take
Speaker 1: a closer look, so you can look at this two ways.
Speaker 1: I mean, it's no matter what, it's a dilemma for investors,
Speaker 1: Greg and economists. You've got about ten months of falling
Speaker 1: inflation versus about two months now of stickiness, if not
Speaker 1: outright games. So what's the more actionable takeaway for you?
Speaker 3: Well, I think generally speaking, we're still on this disinflationary trend.
Speaker 3: It is true that the last couple of months have
Speaker 3: been a little bit bumpy in terms of the momentum
Speaker 3: on a month to month basis, But whether you look
Speaker 3: at CPI data, the consumer price index or PPI data
Speaker 3: the producer price index, you're still seeing the underlying fundamentals
Speaker 3: of a disinflationary trajectory. It will be bumpy. There will
Speaker 3: be some upward movement in terms of energy prices like
Speaker 3: we just saw over the course of February. But overall,
Speaker 3: when you look at pricing sensitivity, when you look at
Speaker 3: pricing power, when you look at wage growth, those are
Speaker 3: all pointing towards further disinflation in the months to come.
Speaker 2: I think the market still has to recalibrate expectations where
Speaker 2: that it wouldn't be inflation, that is, wouldn't remain as
Speaker 2: sticky as it seems to be on either the retail
Speaker 2: or the wholesale level. And if you look at what
Speaker 2: the swaps market is indicating right now, Gregory, maybe a
Speaker 2: reduction in the degree of policy easing this year. Maybe
Speaker 2: we don't get seventy five basis points in total rate cuts,
Speaker 2: maybe it's close to the fifty and maybe the first
Speaker 2: cut is not until July. Does that square with your
Speaker 2: thinking that's a possibility.
Speaker 3: I think the market has repriced the expectations for a
Speaker 3: FED rate cut. You may recall that just six weeks
Speaker 3: ago before the January meeting FMC meeting, we had markets
Speaker 3: anticipating six rate cuts, almost seven with an onset in March,
Speaker 3: that got pushed back quite a bit, and now we're
Speaker 3: down to three rate cuts that are expected by investors
Speaker 3: starting in July. So that is a big shift in
Speaker 3: terms of market pricing. What I would caution is that
Speaker 3: the January data, and to some extent the February data,
Speaker 3: has been quite noisy. We've seen significant revisions in the
Speaker 3: employment numbers, for instance. We know that there was a
Speaker 3: lot of noisiness in the CPI data with January resets,
Speaker 3: with some seasonal factors, with some methodology issues in terms
Speaker 3: of the owner's equivalent rent component. I'm getting into the
Speaker 3: weeds here, but just to say that you have to
Speaker 3: really look for the signal in the data, and the
Speaker 3: signal is still pointing towards a disinflationary trend. So I
Speaker 3: think the Fed will likely consider easing monetary policy in
Speaker 3: June with about one hundred bases points of rate cuts,
Speaker 3: because both inflation and the employment mandate will be more
Speaker 3: in line with what they're expecting.
Speaker 1: Interesting, you won't like my next question, I don't think,
Speaker 1: But well, I mean, obviously a little bit higher inflation
Speaker 1: with a little bit stronger growth, I mean we can
Speaker 1: probably handle that. It just kind of pushes out the
Speaker 1: eventual coming down of inflation and probably growth coming down. However,
Speaker 1: there are some signs that growth is stalling at a
Speaker 1: time when you've got higher prices, and so that inevitably
Speaker 1: brings stagflation into the picture. I'm not sure whether or
Speaker 1: not you're in that camp, and it's probably too soon
Speaker 1: to talk about it, but is it at least a
Speaker 1: growing risk.
Speaker 3: It is definitely one of the key risks for the
Speaker 3: US economy. That risk of stagflation, where you have limited growth,
Speaker 3: if not contraction in economic activity and higher inflation, is
Speaker 3: definitely a risk. But I would point to the fact
Speaker 3: that while twenty twenty three was a lot or a
Speaker 3: lot of the story in twenty twenty three was about
Speaker 3: a strong economy where the supply side of the economy
Speaker 3: was rebounding strongly and allowing inflation to cool. We're probably
Speaker 3: going to be more in a normal environment in twenty
Speaker 3: twenty four, where slower final demand growth is going to
Speaker 3: put downward pressure on prices. I was talking earlier about
Speaker 3: pricing sensitivity. We're starting to see it. We saw retail
Speaker 3: sales were weaker than expected. Consumers are exercising more scrutiny
Speaker 3: in a higher price environment. That is a sign of
Speaker 3: disinflationary momentum to come, and I would anticipate that as
Speaker 3: the economy slows, as employment slows, income is also going
Speaker 3: to slow. That's going to force consumers to be more scrutinized,
Speaker 3: scrutinizing of how much they spend, and that will put
Speaker 3: further downward pressure on inflation. It's not going to be
Speaker 3: a retrenchment, but it will likely be a slowdown in
Speaker 3: employment and a slowdown in inflation that leads to fed
Speaker 3: the ease monetary policy gradually.
Speaker 2: I'd like to get your take on the American manufacturing
Speaker 2: economy tomorrow. We got a couple of key data points,
Speaker 2: US industrial production and the regional Empire manufacturing data. What
Speaker 2: is your feeling about American manufacturing overall?
Speaker 3: It's been quite interesting to see the resilience in US
Speaker 3: manufacturing despite global weakness. We know that in China, we
Speaker 3: know that in Germany, the industrial side of these economies
Speaker 3: has been a key drag on economic momentum. In the
Speaker 3: US force manufacturing is less significant, representing about thirteen to
Speaker 3: fourteen percent of the overall economy, but importantly we've seen
Speaker 3: this desire to rebuild manufacturing capacity be a strong driver
Speaker 3: of overall economic activity on the manufacturing side, or nowhere
Speaker 3: near any type of boom on the manufacturing front. If
Speaker 3: you look at the annual page of growth, it's very
Speaker 3: close to zero. But nonetheless that comes despite a global
Speaker 3: backdrop that is quite concerning. As we see this global
Speaker 3: backdrop on the manufacturing front starting to stabilize and probably
Speaker 3: finding a bottom that is going to be supportive of
Speaker 3: braddle upward momentum in the US, and we'll probably move
Speaker 3: back above that zero percent line.
Speaker 1: We talked a little bit about international, so let's talk
Speaker 1: to Japan. We've got the largest union group in Japan
Speaker 1: coming out with the wages requests and data today, so
Speaker 1: that's going to be a very big thing. It'll be
Speaker 1: this afternoon, and then we'll have the BOJ on Tuesday.
Speaker 1: Are we getting close enough do you think? Of course,
Speaker 1: depending on what we see in the wages, are we
Speaker 1: getting close enough to start thinking that the BOJ will
Speaker 1: act next Tuesday?
Speaker 3: Yeah, I think we're getting pretty close to the point
Speaker 3: at which the BOJ not only exits the negative interest
Speaker 3: rate world, but also let's go of its healed curve
Speaker 3: control policy. Both of the are or have been tied
Speaker 3: to an environment where Japan has been struggling with deflation.
Speaker 3: This is not a new story. This has been an
Speaker 3: ongoing story, but it had been exacerbated prior to the
Speaker 3: COVID crisis. Now we're seeing more of an inflationary environment
Speaker 3: in Japan. Inflation touch four percent. It has now come
Speaker 3: down a little bit, but wage growth have accelerated. They're
Speaker 3: likely in the wage negotiations going to be around five percent.
Speaker 3: That is forcing the BOJ to consider adopting a slightly
Speaker 3: more hawkish tone and more hawkish policy. And I think
Speaker 3: those types of developments on the wage front are likely
Speaker 3: to lead the BOJ to both exit its negative interest
Speaker 3: rate environment and let go of its yield control, either
Speaker 3: at this meeting in a week or in April.
Speaker 2: Gregory, last question, I can give you thirty seconds, but
Speaker 2: I'd like to get your view on the Chinese economy.
Speaker 2: We've been talking about slow growth and deflation. What's your
Speaker 2: view on China right now?
Speaker 3: In thirty seconds. I think we have a structural slowdown
Speaker 3: of the Chinese economy that will unlikely be the global
Speaker 3: engine of growth as it has been over the past decade.
Speaker 3: But from a cyclical perspective, perhaps we are finding a
Speaker 3: floor in terms of economic activity and there might be
Speaker 3: a little bit more momentum as we navigate through the
Speaker 3: rest of the year.
Speaker 1: All Right, Gregory, thanks very much for being with us.
Speaker 1: At least we did not ask you the dreaded question
Speaker 1: about the stock market, so you won one there from us.
Speaker 1: Thanks for joining us, Gregory dot o Ey, chief economist,
Speaker 1: looking more closely at economic performance really all around the world. Well,
Speaker 1: joining us now for some discussion of markets in our
Speaker 1: studios here in Hong Kong. Is Villain Sells gloio at
Speaker 1: HSBC Global Private Banking and Wealth. Villain, thanks very much
Speaker 1: for coming into our studios here. I know you're normally
Speaker 1: based in London. Let's talk a little bit about the
Speaker 1: investment climate in the United States after that hot PPI reading.
Speaker 1: We've had both hot CPI and PPI now for a
Speaker 1: couple of months, and it presents investors and economists, I
Speaker 1: suppose with a little bit of a dilemma. The long
Speaker 1: trend is disinflation, but the short trend is stickiness, which
Speaker 1: is more important.
Speaker 4: The long trend is more important, so we put our
Speaker 4: cash to work. We have zero percent cash in our
Speaker 4: model portfolios. Currently we have overweights in both bonds and
Speaker 4: in the equity market. In the bond market is basically
Speaker 4: to lock in those attractive bond y'lt. So we would
Speaker 4: use any sort of volatility from those short term ups
Speaker 4: and downs, you know, to step in into the bond
Speaker 4: market and to lock that in in the equity market.
Speaker 4: I think it's interesting to see that you see margin expansion,
Speaker 4: earnings expansion, and actually the equity markets are somewhat less
Speaker 4: concerned because of them than the bond market about those
Speaker 4: inflation figures.
Speaker 2: How do you look at liquidity right now globally? Are
Speaker 2: we looking at excessive levels of liquidity?
Speaker 4: There is a lot of liquidity. You had a headline
Speaker 4: this morning on the Terminal and talking about you know,
Speaker 4: record and money market holdings. You know, so there's certainly
Speaker 4: still a lot of money that can be put to work,
Speaker 4: and we do think it will go into both bonds
Speaker 4: and equities and actually also into alternatives where we see
Speaker 4: opportunities as well. That means to me that you know,
Speaker 4: concerns that or comments that is investor positioning is stretched
Speaker 4: or sentiment to stretched, I think those are probably you know,
Speaker 4: incorrect because indeed, you know that money can still be
Speaker 4: put to work.
Speaker 1: Villain. There are some people worried about the possibility of
Speaker 1: stagflation down the road, But then you can also look
Speaker 1: at the growth and commodities here. Of late, we've seen
Speaker 1: a little break in trend. It's been a long downward trend.
Speaker 1: Now is trending up a little, and I'm wondering whether
Speaker 1: or not we can draw any conclusions from that along
Speaker 1: with you know, the little bit stickier inflation suggests that
Speaker 1: growth is sticky too, and maybe we go into an
Speaker 1: upticking growth globally. Do you see it that way or no?
Speaker 4: Exactly. You can't be negative on both. I would I
Speaker 4: would actually be, you know, relatively encouraged by both. But
Speaker 4: I could accept the argument that in the shorter time
Speaker 4: we will see some inflation volatility on the growth side.
Speaker 4: Though I am an optimist, I do think that, you know,
Speaker 4: a US recession is very unlikely. Even Europe, I think,
Speaker 4: has seen the lowest, you know, quarter of growth, slowest
Speaker 4: quarter of growth, and we will see a very very
Speaker 4: mild acceleration from there. And then in China we have
Speaker 4: all of that stimulus which is probably putting a bottom
Speaker 4: under you know, economic growth, So you know, we are
Speaker 4: cyclically exposed in in the US and that's where where
Speaker 4: our overweight is as well. So on the stackflations, it's
Speaker 4: certainly not a stack part.
Speaker 2: What about the enthusiasm surrounding artificial intelligence, I know it's
Speaker 2: been a key I were of so many different threads
Speaker 2: of the equity market here in the US. I mean
Speaker 2: you can look at a company like in Nvidia as
Speaker 2: being emblematic of that euphoria. Is this something that you
Speaker 2: think is peaked or does that still have the potential
Speaker 2: to extend gains?
Speaker 4: So we have an we are basically looking mostly at
Speaker 4: how is that AI now going to translate into the
Speaker 4: rest of the economy and not just in a handful
Speaker 4: of stocks. And you know, the encouraging part there is
Speaker 4: that any any business owner that I talked to, and
Speaker 4: obviously we have a lot of business owners amongst our clients,
Speaker 4: they're all telling me they're using AI. For some of
Speaker 4: them it is still marginal, but for some of them
Speaker 4: it is really now quite substantial. So that is going
Speaker 4: to you know, percolate through the rest of the economy
Speaker 4: in terms of efficiency gains and so on. Robotics is
Speaker 4: a specific you know topic where obviously it is already
Speaker 4: leading to you know, lots of innovation. I would say
Speaker 4: healthcare innovation is also supported you know by AI. And
Speaker 4: then obviously a lot of you know, the in the
Speaker 4: electric vehicle or the vehicle industry more generally as well.
Speaker 4: You know, a lot of that is going into there,
Speaker 4: so you can have indirect place which are obviously quite
Speaker 4: quite a lot cheaper than the direct place. At this
Speaker 4: point in time.
Speaker 1: I want to go back to China for just a moment.
Speaker 1: HSBC obviously was so much business in Hong Kong and
Speaker 1: such a long presence out here Shanghai and Hong Kong,
Speaker 1: and you know, built into your name, so we're looking
Speaker 1: for expertise. Don't disappoint. The economic activity looks mixed at
Speaker 1: the start of the year. We've got this five percent target,
Speaker 1: We've still got a major drag from property. When we're
Speaker 1: weigh it all up, how are we moving through this
Speaker 1: year in China?
Speaker 4: So the consensus forecast ten hours as well are relatively
Speaker 4: flat in terms of economic growth over if you look
Speaker 4: at different quarters. This is a central momentum in a
Speaker 4: certain way that's already you know, I think that will
Speaker 4: already help in terms of market sentiment. You know that
Speaker 4: we're not decelerating from here, and I think that similus
Speaker 4: is really critical. You know, the only thing that we're
Speaker 4: not seeing at this point in time is a sharp
Speaker 4: acceleration of that activity, either on the economic side or
Speaker 4: on the earnings, and I think that is what you know,
Speaker 4: investors are looking for. That being said, we have a
Speaker 4: neutral and not an underweight at this point in time
Speaker 4: because we do believe that number one, valuations are very low.
Speaker 4: Number two foreign investors in particular are very underweight and
Speaker 4: in my view, would be very unlikely to be able
Speaker 4: to further sell, but are waiting for that acceleration to
Speaker 4: step in. There are also some sectors which are doing well,
Speaker 4: right so electric vehicles are doing well. There is obviously
Speaker 4: activity as well.
Speaker 1: View ideas straighting down now is so much.
Speaker 4: Competition, but they but they are gain they have a
Speaker 4: lot of market share gains, right so you know, hence
Speaker 4: the European auto manufacturers, you know, being quite worried about
Speaker 4: this to.
Speaker 1: Say the least.
Speaker 2: Yeah, well that's a great point. I mean, geopolitics, how
Speaker 2: is it influencing market behavior right now? Whether you're looking
Speaker 2: at something is you know, simple as let's say, US
Speaker 2: export controls on advanced technology to China. You mentioned the
Speaker 2: evs manufactured in China, trying to find a market in Europe.
Speaker 2: Is geopolitics kind of foremost in your mind when you
Speaker 2: evaluate opportunity?
Speaker 4: It is a It is a discussion point with clients.
Speaker 4: The difficulty always is number one to forecast it and
Speaker 4: number two to forecast the timing. You know, also what people,
Speaker 4: you know, the presidential candidates for example, we're not necessarily
Speaker 4: sure they would indeed implement what they are saying, so
Speaker 4: you know, very hard to invest on that basis, and
Speaker 4: I don't think it would be you know, very wise
Speaker 4: to second guess. But so the US itself has an
Speaker 4: you know, economic and earnings engine which is very strong,
Speaker 4: and therefore that's a big overweight for US. The other
Speaker 4: bit within Asia, the way that we deal with geopolitics
Speaker 4: there is we diversify our exposure. So whilst we are
Speaker 4: neutral on China, we have overweights in India, Indonesia, South
Speaker 4: Korea and Japan, so four countries where we see opportunities,
Speaker 4: and that allows you to be somewhat less exposed to this.
Speaker 1: So it sounds like you're fairly optimistic out of time now,
Speaker 1: but I suppose one interesting possibility might be you mentioned
Speaker 1: the foreign buyers back to a certain degree with Chinese equities.
Speaker 1: If you had foreign buyers at the same time as
Speaker 1: you had the national team buying, then maybe you would
Speaker 1: have something more to talk about. Villain. Thank you for
Speaker 1: joining us film selves from HSBC. We are joined by
Speaker 1: Taro Kimura Bloomberg Japan economists with us in our Tokyo studios.
Speaker 1: Tara Kumura, Thanks very much for joining us. You know,
Speaker 1: are we likely to see an adjudgment made by the
Speaker 1: bo J as a result of what these numbers will
Speaker 1: likely say?
Speaker 5: Hi, thanks for having me. I think it's likely to
Speaker 5: It's it's a high probability, I will say, although it's
Speaker 5: not my baseline, but the march is moved the next week.
Speaker 5: Moves by the BOJ is plausible in a sense that
Speaker 5: like the media reports are saying that the BOJ board
Speaker 5: is moulleling based on what we see on the trade
Speaker 5: unions agreed pay raises, and I think the race growth
Speaker 5: was what was long being missing piece for the BOJ
Speaker 5: that renders them to continue easy monetary policy. They stimulated
Speaker 5: the economy, but waste growth was very wobily, but finally
Speaker 5: pushed up by recent inflation. It's became a wake up
Speaker 5: call for the labor unions to restart requesting strong pay rises,
Speaker 5: which they hadn't done for many years. And that's making
Speaker 5: a kind of upbeat note in the spring waste negotiations.
Speaker 5: And that's if we see a positive number, the strong
Speaker 5: number in a grid rage rasis that pushes the WOH
Speaker 5: to move.
Speaker 2: So there I understand it. I'm maybe going to oversimplify
Speaker 2: three basic threads to the policy right now. There's the
Speaker 2: purchases of the ETFs, there's yield curve control, and there's
Speaker 2: the negative policy rate. If you had to kind of
Speaker 2: predict a sequencing of changes in each one of those,
Speaker 2: what would it look like. Do you begin to dial
Speaker 2: back on your ETF purchases initially? Do you change the
Speaker 2: policy from a negative ten basis points to let's say
Speaker 2: zero percent? Is that the next step and then the
Speaker 2: last step is yield curve control or I'm curious what
Speaker 2: would the sequencing look like?
Speaker 5: In my view? Whenever the bo J's move is gonna be,
Speaker 5: I think the BOJ will and all of this stuff
Speaker 5: at this u uh simultaneously, meaning and negative rates rates
Speaker 5: and also and youth curve control and stop purchasing ETFs
Speaker 5: because it's a package that was introduced by previous governor Krouda,
Speaker 5: and I think where the new governor Kazu Weda was
Speaker 5: seeking a timing to pivot from those policy packages. That
Speaker 5: doesn't mean that like the Bank of Japan suddenly become
Speaker 5: aggressive and stop purchasing JGB at all. UH. Probably they
Speaker 5: will end the youth curve control UH the package itself,
Speaker 5: but I think they will keep continue some measures UH
Speaker 5: to purchase Japanese government bonds so that the long term
Speaker 5: meals UH wasn't suddenly right Sharply.
Speaker 1: Do you think they we'll see capital abroad come back
Speaker 1: to Japan or do you think things will stay pretty
Speaker 1: much the same.
Speaker 5: I think it depends on how the BOH will communicate
Speaker 5: on the policy after ending negative interest rates. So in
Speaker 5: my view, if the Bank of Japan moves next week,
Speaker 5: that means from an economists point of view, still the
Speaker 5: prices are globally and information they get whether there is
Speaker 5: actually secured two percent inflation steadily, it's still kind of
Speaker 5: not enough. That means that speaks to me that the
Speaker 5: Bank of Japan Policy Board is tilting towards normalization instead
Speaker 5: of purely pursuing steady two percent inflation because recent readings
Speaker 5: by about consumption or CPI is actually weak. So that
Speaker 5: speaks to me, if they move next week, it means
Speaker 5: they move in haste, and that means their will to
Speaker 5: normalize policy is strong. So that will end up probably
Speaker 5: not just ending negative interest rate policy, and probably they
Speaker 5: will move to gradual rate hikes once or twice this year.
Speaker 5: That means the weight will raise in Japan, and probably
Speaker 5: we will see some unwind of Yan carry trade, and yes,
Speaker 5: the investment to Japan may come back.
Speaker 2: Maybe we can move away from the theoretical for the
Speaker 2: moment and get into the practical. And you can, as
Speaker 2: a as a resident of the Japanese capital, describe for
Speaker 2: us what the actual effect of inflation is right now,
Speaker 2: and the average consumer in Japan, how is it showing up?
Speaker 2: What is it like living there when inflation is now
Speaker 2: after three decades beginning to occur.
Speaker 5: Right So basically like me growing up in Japan, I
Speaker 5: learned the concept of inflation in college from macroeconomics textbook,
Speaker 5: and before that I was even aware. I wasn't even
Speaker 5: aware that the price of a certain thing could change
Speaker 5: without its intrinsic value moving. So I think it's like
Speaker 5: for one generation people didn't see inflation, and finally they
Speaker 5: tangibly recognized, oh, that's the inflation. And probably that's making
Speaker 5: a difference in the waste negotiation process and also in
Speaker 5: the deflation. It's optimal for Japanese people to put your
Speaker 5: cash in the bank's deposit, but faced with inflation, including me,
Speaker 5: they probably the individuals have to reconsider about their asset
Speaker 5: management strategies. So Japan is kind of known as people
Speaker 5: are reluctant to invest in stocks because it used to
Speaker 5: be something that just declines. But now things are changing
Speaker 5: and probably the household investments towards asset or other stocks
Speaker 5: or other assets may become some factors that strengthen picking
Speaker 5: up of the acid prices in Japan.
Speaker 1: Tara, thanks very much for joining us. Taro Kumura, Bloomberg
Speaker 1: Japan economists so refreshing. An economists too. Used to be
Speaker 1: at the Bank of Japan now with Bloomberg who had
Speaker 1: a great little anecdote there that he had to learn
Speaker 1: about inflation from the textbooks. Unbelievable and it's so cool.
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