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Speaker 2: Well, we had the pmis come out in China over
Speaker 2: the weekend, not particularly strong. We had the manufacturing PMI
Speaker 2: with a reading of forty nine point five that matched
Speaker 2: the survey estimate and also match the previous month. Joining
Speaker 2: us now for some discussion is Shazan Kazi, COO and
Speaker 2: Managing director at China Beige Book. Chazan, thanks very much
Speaker 2: for coming on the program with us. Bloomberg Economics says
Speaker 2: that the GDP target is in doubt of five percent.
Speaker 2: They say that without stronger stimulus delivery, there's a real
Speaker 2: risk here that GDP will undersh you your thoughts on
Speaker 2: where China is heading.
Speaker 3: Yeah, look, I think if you want to talk about
Speaker 3: the GDP, uh, you know, I agree that we may
Speaker 3: not get to five percent this year despite what the
Speaker 3: you know what the party claimed up front, but I
Speaker 3: think pulling back, let's talk about where the economy is.
Speaker 3: It kicked off on a pretty solid state in the
Speaker 3: first quarter, and where you're getting to now is that
Speaker 3: the pace of improvement has faded, There's no question about it.
Speaker 3: But we are nowhere near I think a level where
Speaker 3: Beijing starts to feel the pressure to unleash stimulus and
Speaker 3: large enough quantities, which is exactly which is what the
Speaker 3: markets are hoping for right now.
Speaker 1: So considering hope we've are looking forward to the third
Speaker 1: Plan in the month of July, is anything going to
Speaker 1: come from this meeting that's meaningful?
Speaker 3: Markets, I think are going to walk away feeling disappointed
Speaker 3: because if I'm the party, you know what am I
Speaker 3: looking at? I'm looking at a property sector where housing
Speaker 3: is beginning to act show possible green shoots. I'm looking
Speaker 3: at a manufacturing sector that's decelerating but still looking pretty
Speaker 3: good year over year. Sure, the consumer side of the
Speaker 3: economy is a bit spotty and not ideal, But does
Speaker 3: this mean that I need to really ramp up a
Speaker 3: fiscal spending and and you know, announce a bigger deficit
Speaker 3: for the year. I don't think so so announcement might
Speaker 3: be meaningful. Markets I don't think will treat anything as
Speaker 3: meaningful short of something that's very splashy. I just don't
Speaker 3: think they get it.
Speaker 2: Well, if you're a policymaker, you had been hoping that
Speaker 2: exports and manufacturing would would help bring the economy along,
Speaker 2: knowing that the consumer side was a little bit weak,
Speaker 2: and so that's not really happening. So I think what
Speaker 2: is being suggested by some is that they need to
Speaker 2: do something. Maybe it comes out of the third Plan,
Speaker 2: or maybe the PBOC just sort of increases the oomph
Speaker 2: of the home buying scheme, which you know, could could
Speaker 2: do the trick.
Speaker 4: It's just not big enough at the moment.
Speaker 3: And look, you know when when they get into the plan,
Speaker 3: and one of the things I think they may also
Speaker 3: talk about is claim some victory finally housing, you know,
Speaker 3: turning in some somewhat better news by comparison. By the way,
Speaker 3: I should point out, commercial property is starting to suffer
Speaker 3: a little bit, and so increasingly when we think about
Speaker 3: the Chinese property market and what needs to be done
Speaker 3: in terms of a rescue plan, investors might go from
Speaker 3: worrying solely about housing to worrying still about housing a
Speaker 3: little bit, but increasingly getting caught up with what's happening
Speaker 3: to commercial real estate in China.
Speaker 1: So we know the story on deflation, to what extent
Speaker 1: will the PBOC, to Brian's point, kind of lean in
Speaker 1: and do something that is maybe a little controversial, something
Speaker 1: very similar to quantitative easy.
Speaker 3: We're increasingly thinking, you know, hearing about the fact that
Speaker 3: you know, the PBOC wants to get involved in bond
Speaker 3: buying and that sort of thing. So there's there's there's
Speaker 3: a likelihood that we get some more information and announcements
Speaker 3: to that end, and that can help. But but let
Speaker 3: me point something out. Liquidity in the system has not
Speaker 3: been a challenge in China, and that is not a
Speaker 3: challenge today. If anything, I would argue, looking at the data,
Speaker 3: there's plenty of liquidity out there, and banks are willing
Speaker 3: to lend, and banks are cutting back on rates, banks
Speaker 3: are cutting back on rejections the way they used to
Speaker 3: reject loans a couple of years ago. Companies are just
Speaker 3: not going out there and borrowing. So what exactly is
Speaker 3: the problem and what exactly is the solution? We have
Speaker 3: to always think about that thing.
Speaker 2: Will carefully how important is corporate borrowing, which has ticked
Speaker 2: down a little bit in China.
Speaker 3: The main takeaway I think is Beijing is having a
Speaker 3: really really hard time stimulating the economy through monetary policy easing.
Speaker 3: It simply isn't working on in any kind of sustained fashion.
Speaker 3: You do get a month here or there with the
Speaker 3: five boring ramps up, because companies are still not expanding investment,
Speaker 3: and even though they're hiring a little bit more, they're
Speaker 3: not hiring and large enough quantities investing in large enough
Speaker 3: quantities to go out there and borrow continuously, And so
Speaker 3: stimulus through policiesing on the monetary side is just now
Speaker 3: working out.
Speaker 1: What about geopolitics, I mean the thread of maybe more
Speaker 1: severe tariffs on Chinese goods coming to the United States.
Speaker 1: That's one angle we were talking about. What's going on
Speaker 1: with the EV market, not just in the US but
Speaker 1: in Europe as well. What about the trade relations and
Speaker 1: geopolitics and how might that affect the economy going forward.
Speaker 3: Yeah, there's been a massive amount of redirection of trade
Speaker 3: away from directly with the US, even the EU a
Speaker 3: little bit in our latest data, and then through Southeast
Speaker 3: Asia and so forth. This is I think threat number
Speaker 3: one for the Chinese economy as they look at twenty
Speaker 3: twenty five, there's a trade war part two coming. There's
Speaker 3: just no question about it. I think at this point,
Speaker 3: if there's a Trump presidency, it's going to be pretty extreme.
Speaker 3: And so they are going to have to continuously figure
Speaker 3: out how to sort of almost jump on the decoupling
Speaker 3: bandwagon used to that bilateral trade deficit and be able
Speaker 3: to continuously meet customer demand out here by doing it
Speaker 3: through third party countries. And that of course is going
Speaker 3: to ultimately weigh on Chinese factories. I think it's going
Speaker 3: to take a tickets hit to their bottom lines.
Speaker 2: Shazzad, just in ten seconds, what's the bright spot at
Speaker 2: the moment?
Speaker 4: Ten seconds?
Speaker 3: Look, I think the bright spot is that parts of
Speaker 3: the services economy are holding on. I've said this before.
Speaker 3: Property is actually looking like the rescue plan my family
Speaker 3: finally be having an effect overall solid growth year over year.
Speaker 2: Okay, all right, well thanks for leaving us on at
Speaker 2: least a positive note. Shazad Kanzi there COO, managing director at.
Speaker 4: The China Page Book.
Speaker 2: Joining us now on my program, we will Addams, chief
Speaker 2: economists at Comerica Bank to take a closer look at
Speaker 2: the US economy and some of the data that we'll
Speaker 2: be having coming out this week. And before we get
Speaker 2: to that, Bill, I just wanted to get your comments
Speaker 2: on the stress test and the banks. We had kind
Speaker 2: of a lackluster day in the broader mark is, but
Speaker 2: the banks did very well. JP Morgan was up one
Speaker 2: point six percent, City Group rallied three percent.
Speaker 4: Bank of America higher.
Speaker 2: I know the market is not really your specialty, but
Speaker 2: it's it's good if the banks are doing well, is.
Speaker 5: It not, Brian, thank you for having me back. I
Speaker 5: think it's a sign of the broader health of the
Speaker 5: US economy. The financial system is well capitalized, and it's
Speaker 5: the economy is growing solidly, and when the economy does well,
Speaker 5: the banking system does well.
Speaker 4: So that's I have to say.
Speaker 5: I'm pleasantly surprised that you're even having me on when
Speaker 5: the economy is sort of, you know, bubbling along slow
Speaker 5: and steady, and it's kind of shifted a bit to
Speaker 5: the backdrop relative to twenty twenty three.
Speaker 1: But Bill, are all things kind of functioning at equal
Speaker 1: levels here? Is there not a little bit of weakness?
Speaker 1: I'm going to bring out. Commercial real estate is one area,
Speaker 1: and maybe there are pockets of the residential housing market
Speaker 1: that are starting to falter.
Speaker 5: Sure, interest rate sensitive sectors of the economy are definitely
Speaker 5: under pressure right now. I think commercial real estate is
Speaker 5: a prime example of that, as well as some parts
Speaker 5: of residential Also manufacturing. Of the manufacturing survey out this
Speaker 5: week is probably going to show some continued softness in
Speaker 5: that industry because that's a capital intensive, credit intensive industry,
Speaker 5: and the fed's high rate policy is having its intended
Speaker 5: effect there.
Speaker 4: Bill.
Speaker 2: You know, people don't like to get too comfortable with
Speaker 2: the sort of steady economy notion because they know that
Speaker 2: things can turn quickly, or at least they fear that
Speaker 2: things can turn quickly. Your take on the economy, I
Speaker 2: guess is that it's taking along okay.
Speaker 4: There are always challenges.
Speaker 2: If you had to single out some of the biggest
Speaker 2: challenges right now, what would they be.
Speaker 5: So we've already talked about cr which is an obvious one. Also,
Speaker 5: the risk of a FED policy error holding rates too
Speaker 5: high for too long. It's a possibility. On top of that,
Speaker 5: I'm looking at the startup hurricane season in the United
Speaker 5: States and in you know, the Western hemisphere. It does
Speaker 5: seem like we're having an earlier than normal start to
Speaker 5: that higher ocean temperatures. So I think the risk of uh,
Speaker 5: you know, severe hurricane hitting some part of the United
Speaker 5: States and causing property damage, especially like in a metro
Speaker 5: area that where we've seen home insurance premiums rise a
Speaker 5: lot and an increase in under insurance or uninsurance, I
Speaker 5: think we could have macroeconomic effects of that that that
Speaker 5: could be pretty painful for the US economy.
Speaker 1: Heyil, so tick, let's pivot to the PCE. But what
Speaker 1: did you make of that reading? Underlying inflation is starting
Speaker 1: to cool now, I mean, is enough to allow the
Speaker 1: rate the Fed rather to move more quickly than let's
Speaker 1: say November.
Speaker 5: It's a step in the right direction. I think a
Speaker 5: September rate cut is still on the table, and that
Speaker 5: is in fact our base case for the FED for
Speaker 5: this year, one cut in September, a second one in December.
Speaker 5: The Fed wants to see more normalization of inflation, which
Speaker 5: I think with the economy operating now with a decent
Speaker 5: margin of slack and a more balanced relationship between supply
Speaker 5: and demand and the labor market, it looks like inflation
Speaker 5: should moderate further and that those rate heights are possible.
Speaker 5: So the PCE report basically validating that we are in
Speaker 5: this two steps forward, one step back process back towards
Speaker 5: more normal inflation.
Speaker 2: So in the data that we got late last week,
Speaker 2: including personal incomes and spending, personal incomes up and higher
Speaker 2: than expected, and spending was pretty steady. But I wonder
Speaker 2: whether or not, you know, if, because you had such
Speaker 2: a robust stock market in the first half of the year,
Speaker 2: if that cools down in the second half, whether you
Speaker 2: might see well off people spending a little bit less.
Speaker 2: I don't really track the breakdown there as closely as
Speaker 2: you do, but tell us what you expect in terms of,
Speaker 2: you know, spending in the second half.
Speaker 4: Of the year.
Speaker 5: The affluent consumer in the United States and wealthy consumers
Speaker 5: are doing quite well. Household net worth was up about
Speaker 5: nine percent year over year in the first quarter, which
Speaker 5: is the last the most timely data we have right
Speaker 5: now on all assets all liabilities of the household sector,
Speaker 5: and that is enough to continue to power spending. Consider
Speaker 5: that the US is an aging society, A lot of
Speaker 5: consumers are retirees, and so they're much more sensitive to
Speaker 5: asset markets and financial markets than they are to earned incomes,
Speaker 5: and I think that's going to keep the US economy
Speaker 5: growing in the second half of the year.
Speaker 1: Let's talk about the employment reports. Do at the end
Speaker 1: of the week. Obviously it's a market holiday on Thursday
Speaker 1: here in the States when we come back from July fourth,
Speaker 1: and we're going to jump right into it with non
Speaker 1: farm payrolls for June. Are you expecting a little bit
Speaker 1: of moderation.
Speaker 5: I'm expecting a hair more softness on the household survey,
Speaker 5: So I do think the unemployment rate more likely than not,
Speaker 5: would rise to four point one percent from four percent
Speaker 5: in May. I think the payrolls will probably still see
Speaker 5: a solid report. So we've really had a lot of
Speaker 5: split personality type jobs reports in the last couple of months,
Speaker 5: with the unemployment rate rising, a mid solid payrolls growth,
Speaker 5: and I think we'll still see that mixed message in
Speaker 5: this latest report, but most likely we'll also see wage
Speaker 5: growth moderating.
Speaker 2: Speaking of mixed messages, it seems it's very very difficult
Speaker 2: to get one take on things. For instance, we just
Speaker 2: got some date out of Japan. You had some slight
Speaker 2: positivity there with the large manufacturer Tongkon thirteen.
Speaker 4: The estimate eleven.
Speaker 2: But first quarter and this is ancient information admittedly, but
Speaker 2: first quarter GDP was revised down pretty sharply to minus
Speaker 2: two point nine percent. How do you read Japan at
Speaker 2: the moment?
Speaker 5: I think of Japan as a slow growing economy, advanced
Speaker 5: economy that's being affected by the lagged effects of high
Speaker 5: interest rates around the world and the headwinds to manufacturing
Speaker 5: from that. Nice to see the latest survey in more
Speaker 5: positive territory. I think there's the upside case for Japanese
Speaker 5: manufacturing for global manufacturing this year is that we've been
Speaker 5: in a period of inventories de stocking in the goods
Speaker 5: sector around the world, and maybe we're going to come
Speaker 5: to the end of that soon and we'll see a
Speaker 5: little bit stronger demand for inventories and business to business
Speaker 5: sales because of that.
Speaker 1: So the swaps market bill right now is projecting maybe
Speaker 1: we get too rate cuts between now and the end
Speaker 1: of the year. Certainly twenty five basis points at least
Speaker 1: has been fully priced in by November, maybe December as
Speaker 1: a toss up. I don't know, how are you seeing
Speaker 1: the path for rate cuts between now and the end
Speaker 1: of twenty four.
Speaker 5: Market pricing is reasonable. I think that there's a stronger
Speaker 5: likelihood of a second rate cut by the end of
Speaker 5: this year, and that's because I think we have seen
Speaker 5: a more substantial slowdown in the economy than, for example,
Speaker 5: you'll get by looking at GDP now still has real
Speaker 5: GDP in the second quarter above two percent. I think
Speaker 5: probably we'll see a second quarter GDP print of a
Speaker 5: bit shy of two percent. So with that, you know,
Speaker 5: businesses don't have the same pricing power that they did
Speaker 5: when the economy was going gangbusters in the second half
Speaker 5: of last year, and I think that's going to lead
Speaker 5: to more discounting announcements and help to slow inflation.
Speaker 2: All right, Bill, thanks very much for joining us. Spill Adams,
Speaker 2: chief economist ATQ America Bank to talk about markets, who
Speaker 2: are joined by Meredith Whitney, founder and CEO at Meredith
Speaker 2: Whitney Advisory Group. Meredith, thank you for joining us here.
Speaker 2: So we had some favorable economic data out on Friday
Speaker 2: with spending and income and the PCEE, yet it was
Speaker 2: not a risk on session, particularly for markets.
Speaker 4: How are you reading the room at the moment?
Speaker 6: I think it's well.
Speaker 7: First of all, you know, a lot of the outperformance
Speaker 7: in the market, as you have well covered, is very concentrated.
Speaker 7: So you know, today I was looking at doing a
Speaker 7: second quarter audit of the baskets that I look at,
Speaker 7: and you've got great names that have underperformed and.
Speaker 6: For no fundamental reason.
Speaker 7: So I think that, you know, you can have good
Speaker 7: numbers come out or bad numbers come out. I wouldn't
Speaker 7: say that the consumer spend numbers are you know, barn
Speaker 7: you know barn Burner. They're they're relatively softer than they
Speaker 7: were a year ago, and that's largely because you know,
Speaker 7: we're seeing that the effects of cumulative inflation, specifically for homeowners,
Speaker 7: and that's sixty five percent of US households. So I
Speaker 7: think you're you're seeing you know some you know, most
Speaker 7: consumers pull back and the smaller portion of consumers caring
Speaker 7: the economy.
Speaker 1: Does the market have it right? If we're predicting two
Speaker 1: ratecouts between now and the end of the year. Is
Speaker 1: that the way you see things?
Speaker 6: I don't.
Speaker 7: So I came into the year being very skeptical. I
Speaker 7: thought the biggest risk of the market was the fact
Speaker 7: that the FED would not cut rates by h six times,
Speaker 7: and I still think that you have so much fiscal
Speaker 7: spending that's powering the economy that I think you're going
Speaker 7: to it's going to be tough. I think you're probably
Speaker 7: we may get one, but I don't think we're going
Speaker 7: to get two.
Speaker 2: So one interesting aspect of the data was that you
Speaker 2: had personal income a little higher than was expected and
Speaker 2: personal spending a little lower. Now, you know, the consumer
Speaker 2: is seventy percent of the economy, so we don't really
Speaker 2: want that number low. But in a time when you're
Speaker 2: trying to fight inflation, is sort of matched up as
Speaker 2: a pretty decent result. But you think that it's a
Speaker 2: little too heavily weighted with well off people, Is that right?
Speaker 6: Well, I think you have.
Speaker 7: So you have well off people, but then you also
Speaker 7: have what I call the avocado toast generation, and it's
Speaker 7: the younger millennials and Gen Z and they're not burdened
Speaker 7: by owning a home. Now you could say it's tough
Speaker 7: for them to get to the housing market, but owning
Speaker 7: a home has become increasingly expensive, and I think it's
Speaker 7: actually going to drive a lot of homeowners to be
Speaker 7: forced to sell.
Speaker 6: Because you had homeowners.
Speaker 7: Insurance on average up in the teams each year, and
Speaker 7: certainly for the past three years it's up over ten percent,
Speaker 7: over eleven percent. This is nationally, it's been much higher
Speaker 7: in many of the states. Property taxes over the past
Speaker 7: three years are up over twenty six percent. Obviously varies
Speaker 7: state to state, but these are things that you just
Speaker 7: can't get around. So the average cost of housing for
Speaker 7: most people have gone up much faster than inflation, and
Speaker 7: that's what you see that is really the sticking point
Speaker 7: with consumer spend. So older. The vast majority of homeowners
Speaker 7: are over fifty, and in fact very they're well under
Speaker 7: ten percent of homes are owned by people under forty,
Speaker 7: So you see younger people really driving the leisure spend
Speaker 7: and the experiential spend. And the fastest category of growth
Speaker 7: within leisure spend is actually online gaming and sports bedding.
Speaker 7: So the underlying trends or what's moving the economy are
Speaker 7: probably not good long term, but it's keeping spending flowing.
Speaker 7: And the very high end that has been the biggest
Speaker 7: beneficiary of low interest rates for the longest time are
Speaker 7: also still spending and not.
Speaker 6: Having a problem.
Speaker 1: I'm wondering of.
Speaker 6: Americans that are really coming up against it.
Speaker 1: I'm wondering how those avocado toasters will influence the election
Speaker 1: in November. What is your sense in where things stand
Speaker 1: politically right now in the States, and how might that
Speaker 1: affect the market going forward.
Speaker 6: Well, it's very interesting.
Speaker 7: When I was in Asia with you in March, you
Speaker 7: asked me such like the best question, which was what's
Speaker 7: your biggest takeaway from your meetings with investors? And I
Speaker 7: said that the every investor that I spoke to was
Speaker 7: preparing for Trump to win, and you know, obviously having
Speaker 7: no idea about how really shocking and sad the debates
Speaker 7: were Thursday night. I think that I don't think that
Speaker 7: the youth is engaged with Biden.
Speaker 6: I don't think that the youth.
Speaker 7: May be engaged with voting and may set this election out.
Speaker 7: You've got to get and that's the scariest thing for
Speaker 7: me about this election, that a smaller percentage of Americans
Speaker 7: can determine can determine who becomes our stay as president
Speaker 7: or becomes president.
Speaker 4: So I think we got you.
Speaker 2: I was just gonna say, we got some time to
Speaker 2: get to that. I wanted to squeeze in a question
Speaker 2: about the banking sector because you're you're a wizard of that.
Speaker 2: So away from the avocado toast express to the stress
Speaker 2: test express. The stress test was tough. I mean, these
Speaker 2: banks did very well in passing. It is the banking
Speaker 2: community now in really good shape.
Speaker 7: It depends on which banks you're looking at. So the
Speaker 7: banks that you know, the over the banks that are
Speaker 7: over two hundred and fifty billion in assets, the original
Speaker 7: systemically important financial institutions, they're great, right, So they've de risked,
Speaker 7: they're sitting on a lot of capital. They've been in
Speaker 7: for you know, most banks, well at least JP Morgan
Speaker 7: and Bank of America, when those banks have been cus
Speaker 7: you know, really right sizing their businesses for the past
Speaker 7: fifteen years. And I think Wells Fargo is has been
Speaker 7: in the penalty the regulatory penalty box and is doing
Speaker 7: a lot of the right things to get itself back
Speaker 7: on track. And City has a you know, restructuring plan,
Speaker 7: and you know, godspeed to them. But the smaller banks,
Speaker 7: I think are are still in a precarious position and
Speaker 7: really need to consolidate.
Speaker 6: So these are the banks under one hundred billion.
Speaker 7: And you know what's been frustrating for me is that
Speaker 7: that would be the best thing for the system. And
Speaker 7: those are the banks that are have have you know,
Speaker 7: commercial lending exposure, and are in precarious positions and don't
Speaker 7: have economies of scale and need to spend a ton
Speaker 7: on cybersecurity and technology, and they really need UH to consolidate.
Speaker 6: I think the d o JS.
Speaker 7: And UH and the fd I SEE have been against consolidation.
Speaker 6: Maybe the fd I see UH it gets better.
Speaker 7: Elizabeth Warren has been against consolidation. We really need this
Speaker 7: for the better.
Speaker 1: Men of the Meredith very quickly. It's an interesting point.
Speaker 1: Is that going to be more peer to peer kind
Speaker 1: of lateral consolidation or cannibalization where some of the bigger
Speaker 1: players come in and kind of digest the smaller ones
Speaker 1: very quickly.
Speaker 7: Well, well, look, the big banks have been effectively acquiring
Speaker 7: the smaller banks businesses just by stealing market share. When
Speaker 7: depositors get scared, they go to the big bank. So
Speaker 7: it's been happening, but you need to have it happen
Speaker 7: on a more institutionally sponsored basis through smart consolidation of
Speaker 7: the smaller players.
Speaker 2: Meredith, thanks so much for joining us here on a
Speaker 2: Sunday early Monday morning in Asia. We appreciated Meredith Whitney,
Speaker 2: founder and CEO at Meredith Whitney Advisory Group.
Speaker 1: This has been the Bloomberg Daybreak Asia podcast, bringing you
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