Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.
Speaker 2: Here in the States, producer prices unexpectedly fell in August
Speaker 2: month on month for the first time in four months. Meantime,
Speaker 2: in China, the latest reading on factory gate inflation shows
Speaker 2: persistent deflationary pressures, while Chinese consumer inflation slipped to a
Speaker 2: six month low. And in a moment, we'll bring you
Speaker 2: an exclusive conversation with Sergio Ormonti, the CEO of UBS.
Speaker 2: But we begin here in the States, where treasury yields
Speaker 2: dropped right across the curve and much of the equity
Speaker 2: market extended record highs. Joining me now is Eric Fine.
Speaker 2: He is portfolio manager also head of Active em Debt
Speaker 2: at Vanek. He joins us from here in New York City. Eric,
Speaker 2: thank you so much for making time. Give me your
Speaker 2: sense of how you feel about the inflationary story right now.
Speaker 2: I know there are a couple of threads here, and
Speaker 2: as a part of that, the tariff story obviously, but
Speaker 2: give me your overall sense of where we are directionally
Speaker 2: in terms of inflation.
Speaker 1: I think we don't know yet. And one of the
Speaker 1: big concerns is that paraffs are still working their way
Speaker 1: through the system at the same point that the FED
Speaker 1: is arguably getting more of its certainly in the last week.
Speaker 1: That's what the market is pricing. We have about seventy
Speaker 1: basis points of cuts priced into your end roughly today.
Speaker 1: So the inflation story is very uncertain, but the market
Speaker 1: is somewhat trying to see through it, and so you
Speaker 1: could see a scenario in a few quarters where stagslation
Speaker 1: resumes as a concern for the US. Now, inflation in
Speaker 1: China's a very different story. Well, it's deflation, as you noted,
Speaker 1: and that is very bullish for the Chinese currency. That's
Speaker 1: an important thing to keep in mind. Bearished for the
Speaker 1: dollar a relative to China, and that's a key dynamic.
Speaker 1: That means that even though inflation may be an important
Speaker 1: issue for the develop markets like the US, it is
Speaker 1: almost the opposite for ems and EM currencies. That's why
Speaker 1: they've done so well this year. They've had very high
Speaker 1: real rates and they're just waiting for the FED to cut.
Speaker 1: So if the FED cuts, they do well. Fed doesn't cut,
Speaker 1: we know they've already done well. It's a sort of
Speaker 1: simplistic way of putting it. Tariffs s fit into this
Speaker 1: in an important way. Most important, I hope your listeners
Speaker 1: know that negotiators are not going to reveal whether there's
Speaker 1: a currency chapter in the discussions. Namely, you know what
Speaker 1: they're talking about in terms of currency. But I hope
Speaker 1: it's also obvious that if a country devalues right after
Speaker 1: a trade agreement, they're three steps backward. And further note that,
Speaker 1: so you know your currency can't be devalued to but
Speaker 1: super super simple after a tariff negotiation and look at
Speaker 1: your balance of payments accounts. Most of these countries, especially
Speaker 1: Nasan and em have high positive net international investment positions
Speaker 1: with the US. They own more of US if I'm
Speaker 1: speaking as the US, than we of them. That means
Speaker 1: they're up to their nexts in dollars. And what do
Speaker 1: you do if you're up to your next in dollars
Speaker 1: and you know dollars are going to go down? You
Speaker 1: reshore those dollars to your shores or to other non
Speaker 1: non US shores. There are many other variables, but I
Speaker 1: think inflation tariffs are definitely feeding into an uncertain narrative.
Speaker 1: But I wanted to emphasize that the dollar down means
Speaker 1: a lot of other currencies up, and that gives them
Speaker 1: a lot of flexibility, and it certainly underlies and supports
Speaker 1: their currencies.
Speaker 2: So the dollar story is definitely correlated with the expectations
Speaker 2: for FED policy easing and maybe as many as three
Speaker 2: rate cuts this year. Certainly that's the takeaway after this
Speaker 2: PPI number. Earlier in the week, obviously, we had the
Speaker 2: downward revision in employment growth over the last twelve months
Speaker 2: from the end of March. I think nine hundred thousand
Speaker 2: roughly overstated. So the market now seems to be of
Speaker 2: the opinion that we're going to get some aggressive FED
Speaker 2: easing given labor market weakness and perhaps contained inflation. Do
Speaker 2: you think the market's thinking is a little misguided here
Speaker 2: and is the Fed in particular in a very very
Speaker 2: difficult situation.
Speaker 1: I think in terms of the real thing many our
Speaker 1: listeners might care about, which is what could the ten
Speaker 1: year or thirty year yield? Do? I think it could
Speaker 1: rally a lot, but that's mostly due to positioning for
Speaker 1: a couple quarters. Now, the steepening trade that you know,
Speaker 1: long ends long end rates higher, front ends lower relative
Speaker 1: to each other has been consensus trade and if that's unwinding,
Speaker 1: and I said, my concerns come in a couple quarters,
Speaker 1: So if that's unwinding, that could go for a good
Speaker 1: period of time. PPI today certainly gives a green light today,
Speaker 1: we'll have to wait CPI for the final green light. Also,
Speaker 1: the inflation downtrend is going to be very much affected
Speaker 1: by the Oeer calculation that the FED uses owner's equivalent
Speaker 1: rent and that's you know, somewhat sticky in terms of
Speaker 1: its direction, namely weaker, and so a rally in rates,
Speaker 1: maybe even another fifty basis points is entirely possible, but
Speaker 1: I think it's going to be mainly due to positioning
Speaker 1: this consensus deep innerview that's been on because on your
Speaker 1: issue of you know, inflation's already sort of been pushed
Speaker 1: aside as a risk and employment growth there's great uncertainty still,
Speaker 1: certainly in terms of sequencing. I already mentioned that terriff
Speaker 1: implications may still becoming. What if the Fed's already cut
Speaker 1: by then and employment growth is extremely complicated because there's
Speaker 1: there's a new methodology or new you know, a new
Speaker 1: huh head of the Data Provision Agency, which if you're
Speaker 1: sitting in Singapore, right, you don't really care, you don't
Speaker 1: have a domestic political opinion. But that's not a not
Speaker 1: something normally you want to see in a country you
Speaker 1: invest in. Maybe you know, I'm not getting into whether
Speaker 1: it's warranted or not, but there's great uncertainty over the
Speaker 1: employment situation itself because of migration. There's great uncertainty on
Speaker 1: how much self deportation is happening, and so that's going
Speaker 1: to take, you know, a couple of quarters to work
Speaker 1: itself out, which is why I defer to the technicals.
Speaker 1: Everyone is positioned in a steepener. So the pain trade
Speaker 1: is that that unwindes and that's a rates rally. But
Speaker 1: I want to emphasize it's not because of UH that
Speaker 1: in a few quarters that'll seem warranted.
Speaker 2: On that I think is still very uncertainly am i'ment ago.
Speaker 2: You mentioned stagflation. Talk to me a little bit about
Speaker 2: the risk that you see right now of a stagflationary
Speaker 2: type environment.
Speaker 1: I think it should be standard. It should be your
Speaker 1: central case for the highly indebted developed markets where most
Speaker 1: investors unfortunately have their bond exposure. The only real solutions
Speaker 1: available to high indebtedness are default or inflation. I don't
Speaker 1: think default is really a scenario. Forms of it might be,
Speaker 1: but which leaves you with inflation. Now, the inflation dynamic
Speaker 1: when it unfolds. And I say this as someone who's
Speaker 1: been doing looking at countries for thirty years and a
Speaker 1: lot of them have defaulted and they recovered. And you know,
Speaker 1: I'm speaking from that experience. But it's saying that inflation
Speaker 1: solves the problem is essentially a way of saying that
Speaker 1: the dynamic moves completely to the political and social level.
Speaker 1: Just look at the US election. The last US election
Speaker 1: was very much about inflation. Was it too fiscally stimulated?
Speaker 1: Was the Trump campaign's argument. Or and look at the
Speaker 1: New York campaign, the New York City campaign on the left,
Speaker 1: you're getting arguments that are very focused on cost of living.
Speaker 3: Right.
Speaker 1: So inflation is front and center in politics. And the way,
Speaker 1: unfortunately it works, its way it works its way out
Speaker 1: is over many years in which consumers and investors need
Speaker 1: to figure out what is the nominal and what is
Speaker 1: the real That becomes the most important variable. So I'm
Speaker 1: sorry I don't have a like a simple black and white,
Speaker 1: you know, headline answer, but stagflation I think should be
Speaker 1: central case, especially if the dollar continues to weaken, and
Speaker 1: especially if the FED is actually or viewed as I'm
Speaker 1: having its independence undermined, and in an extreme scenario of
Speaker 1: YCC scenarios are contemplated, you know, that would underline the
Speaker 1: whole phenomenon. But the interesting thing and the point you
Speaker 1: know I mentioned, you know on your initial question, well,
Speaker 1: is that there are winners from this dollar down means
Speaker 1: something up. And it's not just gold, it's c and
Speaker 1: why for example, a C and Y is going to
Speaker 1: be extremely stable, it's going to be like watching paint dry.
Speaker 1: But other emerging markets with high real interest rates and
Speaker 1: cheap currencies that export commodities, that have decades of proof
Speaker 1: on their orthodoxy on inflation, we already know how the
Speaker 1: market will react to that. Even you know, even so
Speaker 1: far this year they've all rallied, not all, but you know,
Speaker 1: basically and UH and so if the FED cuts, it's
Speaker 1: going to be a big support for those currencies. And
Speaker 1: I think that's the better way, the better expression of
Speaker 1: this view. It's it's been. The better way to invest
Speaker 1: in bonds in general is through the more orthodox fiscal
Speaker 1: UH and monetary policies that characterize many of the emergent
Speaker 1: so called emerging markets.
Speaker 2: All right, Eric, good stuff, Thank you so much. We'll
Speaker 2: leave you there with Eric Fine, portfolio manager also head
Speaker 2: of Active em Debt at Venneck here in New York
Speaker 2: City on the Daybreak Asia podcast. Welcome back to the
Speaker 2: Debreak Asia podcast. I'm Doug Chrisner and has promised some
Speaker 2: of our exclusive conversation with the CEO of UBS, Sergio Ermati.
Speaker 2: He says the impact of global tariffs on the American economy,
Speaker 2: as well as FED policy both remain unclear. You know,
Speaker 2: it was last month when Bloomberg reported the Swiss Economy
Speaker 2: Minister sought input from UBS as the Swiss government scrambled
Speaker 2: to get and improved US trade deal. Now the Trump
Speaker 2: administration has imposed levies of thirty nine percent on Swiss
Speaker 2: exports to the US. That is the highest tariff rate
Speaker 2: for any developed nation. Ermadi is in Hong Kong for
Speaker 2: the annual UBS Disruptive Technology Summit. It begins later today.
Speaker 2: Here he is speaking exclusively with Bloomberg's David in Glace
Speaker 2: in our Hong Kong bureaus.
Speaker 4: Good morning, and it's very nice to see you in
Speaker 4: the region.
Speaker 1: What are you looking forward to this.
Speaker 4: Entire event about disruptive technologies? How is the bank looking
Speaker 4: to get involved here?
Speaker 3: Now?
Speaker 5: It was great to be back in Hong Kong with
Speaker 5: all the executive board and the Board of Directors for
Speaker 5: a full week of sessions, and now we are also
Speaker 5: hosting our eleventh event here on disruptive technology and gathering
Speaker 5: one thousand clients and really at the pivotal moment for
Speaker 5: the sector.
Speaker 3: I think that we always.
Speaker 5: Saw a lot of innovations, particularly coming out of age,
Speaker 5: but now the acceleration is huge around AI, around robotics,
Speaker 5: and so we're looking forward to engage with clients.
Speaker 4: Right And I think you and I were just talking
Speaker 4: before we started here that you know, people tend to
Speaker 4: overestimate in the short term how quickly things can but
Speaker 4: I think in this case things are rather moving fairly
Speaker 4: quickly as far as this technology. Because how is your
Speaker 4: team looking at opportunities for the bank here, internal or external?
Speaker 5: Yeah, is fair to say that also this time, probably
Speaker 5: there is an exaggeration of the estimation, but is going
Speaker 5: faster than what we saw in the past. But I'm
Speaker 5: pretty convinced that we are still underestimating the impact that
Speaker 5: we have over the long term. I think that for
Speaker 5: us is all about really preparing for the future. The
Speaker 5: biggest focus we have right now is how to make
Speaker 5: our processes more efficient on the backhand, but also how
Speaker 5: can we help our client advisors serving their clients in
Speaker 5: a more effective and efficient way. Our analyst to be
Speaker 5: more responsive to market changes. And you know, one point
Speaker 5: is very important. Technology will help humans being better and
Speaker 5: in banking we will continue to see the emotional part,
Speaker 5: the eq part of the equation playing also a very
Speaker 5: important role.
Speaker 4: The bank has been around through many cycles. I want
Speaker 4: to get your sense of this current macro environment. I mean,
Speaker 4: we went into this year with some expectations around how
Speaker 4: the macro environment would change, and then we had this
Speaker 4: flurry of tarists and this back and forth and now
Speaker 4: questions around how much the FED can in fact lower
Speaker 4: interest rates.
Speaker 1: What's your sense of the.
Speaker 4: Global economy and where do you think we will be
Speaker 4: in six months time?
Speaker 3: Are we going to be better offerers off? Well?
Speaker 5: Look, you know the issues that I don't think we
Speaker 5: have seen really the true impact of tariffs playing out
Speaker 5: in the economies. Of course, when you look at Asia
Speaker 5: and China and particularly it's fairly robust, you know, five percent,
Speaker 5: you know, comfortably about five percent GDP is quite quite
Speaker 5: a strong.
Speaker 3: Momentum.
Speaker 5: And of course also China may be impacted by high tariffs,
Speaker 5: but on the current assumptions around forty percent consumer Also
Speaker 5: that the waiting of tariffs in.
Speaker 3: For exporter has changed.
Speaker 5: You know, in twenty seventeen was probably around twenty percent
Speaker 5: of the exports we're going to the US.
Speaker 3: Now we are closer to fourteen percent.
Speaker 5: Of course, when you look at machinery, autos and technology
Speaker 5: there is between forty and eighty percent. But you know,
Speaker 5: what's going on, for example in this region, diversification.
Speaker 3: It's a very important topic.
Speaker 5: So you see Asian becoming much more, you know, developing
Speaker 5: more into a diversified play. The same is going on
Speaker 5: for you know, in Europe. The true issue on tariffs
Speaker 5: will be seen on.
Speaker 3: Consumers. In the US.
Speaker 5: We will need to see exactly if there is an
Speaker 5: inflationary aspect of tariffs and.
Speaker 4: Is that still unclear at this point?
Speaker 5: I think it's unclear because you know, a lot of
Speaker 5: in anticipation of tarists, lots of people have been exporting
Speaker 5: and anticipating and you know, the exports or imports from
Speaker 5: the rest of the world in the US, so the
Speaker 5: kind of targists we see right now which is seven
Speaker 5: eight times higher than what we add at the beginning
Speaker 5: of the years. I mean, if you look at Europe
Speaker 5: at fifteen percent and you know it's seven times higher
Speaker 5: than what it was. The dollar also depreciating ten percent
Speaker 5: as a big effect on the economy, so it's going
Speaker 5: to be challenging for Europe. In the US, we still
Speaker 5: believe that growth will be there, but the inflation questions
Speaker 5: and how it plays out into the central bank policy
Speaker 5: remains open.
Speaker 4: Well, when you speak to your big corporate clients, do
Speaker 4: you get a sense that people are more conservative still
Speaker 4: in terms of their assumptions, their cap expending, and just
Speaker 4: their broad expectations of how things will play out.
Speaker 5: Well, I think that there is still a level of uncertainty.
Speaker 5: Although if you look at the war, it seems to
Speaker 5: be divided into two pms, the more traditional let's call
Speaker 5: it economy and the one that is AI technology driven.
Speaker 5: There there is a clear boom and h and prospect
Speaker 5: for growth. We see it here in Hong Kong with
Speaker 5: the booming IPO market. You know this is something that
Speaker 5: we saw in the best times. But in general there
Speaker 5: is a constructive momentum. But the jury is out because
Speaker 5: the complexity is not only the economics, is also the
Speaker 5: very complex geopolitical environment is you know, is keeping all
Speaker 5: of us very focused on making sure that we are
Speaker 5: not becoming complacent.
Speaker 4: Well, speaking of this booming IPO market, it's something we
Speaker 4: haven't seen in years. That's put a diary at least
Speaker 4: our team as well, feels extremely busy.
Speaker 3: Every day.
Speaker 4: There seems to be a deal of fundraising, a stock
Speaker 4: rights offering, what have you almost on a daily basis.
Speaker 4: Are you satisfied with how your deals teams has come
Speaker 4: up to the task of this this booming in activity world.
Speaker 5: Absolutely, I mean it's extraordinary to see. I mean, if
Speaker 5: this is tenfold, seven seven, eight times higher volumes that
Speaker 5: we had at this point in time last year, I'm
Speaker 5: very happy. You know, we are one of the leaders
Speaker 5: with more than ten percent market share, you know, and
Speaker 5: you know, very happy to see that momentum. But it's
Speaker 5: quite impressive to see how the mood has changed compared
Speaker 5: to a year ago. And so it's which which shows
Speaker 5: the flexibility and the agility of the economy in this
Speaker 5: region to respond and react to market changes and the
Speaker 5: driving force of innovation that stays behind it.
Speaker 4: Right, and there's this renewed, let's put it, a healthy
Speaker 4: competition coming from some of your Chinese peers in the industry.
Speaker 4: Do you get a sense that the competition now is
Speaker 4: a bit it's a bit more fierce and how are
Speaker 4: you prepared to respond to all? How is UBS prepared
Speaker 4: to respond?
Speaker 1: It?
Speaker 4: Is this this new regime?
Speaker 5: Well, I don't remember in my career times which competition
Speaker 5: was in fierce And look, you know, I think that
Speaker 5: it is good to see that. Also Chinese securities firms
Speaker 5: and banks are broadening up their capabilities. We see us
Speaker 5: as a complimentary player in that sense. So we are
Speaker 5: helping international investors that wants to invest in China and
Speaker 5: in Asia and also the other way around.
Speaker 3: And this is very complimentary with the rest of the
Speaker 3: industry and the competitive landscape.
Speaker 2: That is UBS CEO Sergio or Madi speaking with Bloomberg's
Speaker 2: David and Glaze here on the Daybreak Asia podcast. Thanks
Speaker 2: for listening to today's episode of the Bloomberg Daybreak Asia
Speaker 2: Edition podcast. Each weekday, we look at the story shaping
Speaker 2: markets finance and geopolitics in the Asia Pacific. You can
Speaker 2: find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,
Speaker 2: or anywhere else you listen. Join us again and tomorrow
Speaker 2: for insight on the market moves from Hong Kong to
Speaker 2: Singapore and Australia. I'm Doug Prisoner and this is Bloomberg