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Speaker 1: Daybreak Asia podcast. I'm Doug Prisner. You can join Brian
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Speaker 2: Joining us now for some insights is Dan Wong, chief
Speaker 2: economist at Hangsang Bank. To take a closer look here,
Speaker 2: I think we can talk about the ultralong bond sales
Speaker 2: that China's announced and also this move potential move to
Speaker 2: have the province's buy up unsold homes. In just a moment,
Speaker 2: I just wanted to get your first reaction to the
Speaker 2: slightly weaker than expected inflation data in the United States
Speaker 2: and what it might mean for the dollar and for Asia.
Speaker 3: So this week performance in the inflation in the US
Speaker 3: actually will be relatively good news for China because it
Speaker 3: means maybe the Federal Reserve would decide to cut interested
Speaker 3: earlier than people had hoped. But right now China is
Speaker 3: quite constrained in its monitor policy, and largely due to
Speaker 3: a concern and a weaker currency. If we cannot have
Speaker 3: more of the monitory injection into the domestic economy, then
Speaker 3: the economy will have much much bigger trouble when it
Speaker 3: comes to true recovery.
Speaker 1: Is that the secret to seeing a little bit of
Speaker 1: or let me put it in another way, less deflation
Speaker 1: in China looser policy.
Speaker 3: Well exactly because so far what we have seen in
Speaker 3: China is the three contractions in housing, in fiscal policy,
Speaker 3: and in monitor policy. And it doesn't matter how many
Speaker 3: ultra long term government bond that central government issues, as
Speaker 3: long as that the commercial banks in China cannot really
Speaker 3: land out much at a lower cost, then I won't
Speaker 3: have a true recovery. Especially for the private seccess the
Speaker 3: true borrowing cost for them is still high given the
Speaker 3: deflationary pressure.
Speaker 2: Yeah, one of the big developments yesterday was Bloomberg source
Speaker 2: story talking about how advice would be given to the
Speaker 2: provinces to buy up some of these unsold homes. I'm
Speaker 2: not sure about the technical requirements there and where this
Speaker 2: money comes from, but this is one thing that might
Speaker 2: lead to some sort of relief to the property sector.
Speaker 2: Your thoughts on what you see there.
Speaker 3: I was not surprised by that news. We've been hearing
Speaker 3: this kind of rumor from time to time in the
Speaker 3: past three years, actually, But the critical problem is still
Speaker 3: where can the local governments get the money to buy
Speaker 3: up those properties, especially most of those properties are built
Speaker 3: in the wrong location. If they are somehow built around
Speaker 3: the first two cities or in some good districts in
Speaker 3: Beijing or Shanghai, then it's not a problem because the
Speaker 3: resale value or the rental value will be relatively high.
Speaker 3: So for the local government they might have the intention,
Speaker 3: but actually we have to see a lot more issuance
Speaker 3: of those long term central government bonds for that to happen.
Speaker 4: Dan.
Speaker 1: Tomorrow, we're going to get the monthly activity data, and
Speaker 1: I'm curious to get your read on what we may learn.
Speaker 1: I mean, everything that we've been discussing is kind of known.
Speaker 1: The persistent weakness and property maybe a big question mark
Speaker 1: over the health of the Chinese consumer lending that has
Speaker 1: really not been very very loose at all. As a
Speaker 1: matter of fact, just over the weekend we had the
Speaker 1: latest credit data. What are we going to learn about
Speaker 1: industrial production? What are we going to learn about retail sales?
Speaker 1: That may give the market a little bit more confidence
Speaker 1: right now that there is some kind of something lasting
Speaker 1: that may be on the way here for the Chinese
Speaker 1: economy rather than just the rotation that we've been describing
Speaker 1: in the equity market.
Speaker 3: The industrial sector remained to be the only bright spot
Speaker 3: in Chinese economy given strong policy support, and for investors
Speaker 3: it's a good news because people will know exactly where
Speaker 3: the money is flowing. It is flowing out of the
Speaker 3: traditional sectors of the commercial housing sexis and into the
Speaker 3: manufacturing sector towards the higher end. And for the retail data,
Speaker 3: I don't have much confidence. Although the latest the data
Speaker 3: might appear to be okay because we do have more
Speaker 3: holidays than last year and that has encouraged more spending
Speaker 3: and tourism or transportation, but overall, the average spending per
Speaker 3: person is still lower than twenty nineteen, and without a
Speaker 3: strong program to support the low income families in China,
Speaker 3: I just said, don't see how the retail market could
Speaker 3: have a true revival.
Speaker 2: Yeah, consumer activity has and weak, and you know, China
Speaker 2: has been relying on strong industrial outlook or output, but
Speaker 2: that is the part that's getting in hotter water with
Speaker 2: the United States and Europe, so it seems like at
Speaker 2: the moment the country is still heading down a road
Speaker 2: that may prove difficult in the short to medium term.
Speaker 3: Oh absolutely, and the more closely we look at Chinese economy,
Speaker 3: the more concerns we might have for its long term performance.
Speaker 3: It is true that the fundamentals in the manufacturing seccess
Speaker 3: supply chains are quite strong, and China is trying everything
Speaker 3: it could to guarantee strengthening the high tech sacset, but
Speaker 3: the success for that strategy would depend on the rest
Speaker 3: of the world, especially the good will, in my opinion,
Speaker 3: from Europe. As long as that market is still open
Speaker 3: to China, then we will have a market that can
Speaker 3: be a sustainable driver for domestic investment and export sector
Speaker 3: in particular. But if somehow there are way more tariffs
Speaker 3: or sanctions from Europe or the US in the future,
Speaker 3: then we'll see a stronger momentum for capital to flow
Speaker 3: out of China, and that down the road will cause
Speaker 3: more problems. Because we know that Japan has a larger
Speaker 3: economy overseas than it's domestic economy, but China is so
Speaker 3: much bigger and there's such a large population that needs jobs,
Speaker 3: so we do need more money to stay in China
Speaker 3: to create jobs.
Speaker 1: That's pretty consistent with the latest note from Bloomberg Economics
Speaker 1: on the longer term risk of additional tariffs if this
Speaker 1: trade war heats up. Imagine a new administration in the
Speaker 1: United States coming to power in the early part of
Speaker 1: twenty twenty five and the severity of even tougher sanctions.
Speaker 1: So is there a policy prescription. Is there something that
Speaker 1: Beijing can do to address that can concerns, whether it's
Speaker 1: over capacity or just the lack of not playing on
Speaker 1: a level playing field, that can turn this situation around
Speaker 1: and maybe take some of the sting out of what
Speaker 1: you described as being a distinct possibility.
Speaker 3: I think China has the tools to get rid of
Speaker 3: some of the overcapacity, but it doesn't have the political
Speaker 3: willingness to do so. It's largely consistent with the deterioration
Speaker 3: of China US relations, and somehow China is in the
Speaker 3: strong belief that they have to have more indigenous innovation capacity,
Speaker 3: and by doing that, we cannot rely on foreign countries,
Speaker 3: especially we cannot rely on the technology from the US.
Speaker 3: But then that means this economy has to allocate even
Speaker 3: more resources to the high tech sector, and a lot
Speaker 3: of the money has been wasted in the past twenty years,
Speaker 3: and see a lot more can be wasted in this
Speaker 3: process because you know, the latest technology in AI, machine
Speaker 3: learning or quantum computing, it can't be done single handedly
Speaker 3: by one country.
Speaker 2: So Dan, is this a policy mistake by Beijing the
Speaker 2: direction that it is carved out at the moment.
Speaker 3: I don't think it's a mistake, but it is an
Speaker 3: over emphasis on how much the supply side can bring
Speaker 3: to a country like China has this long ambition to
Speaker 3: be rich and powerful, and in the past decades it
Speaker 3: has been successful, and it was quite successful to cultivate
Speaker 3: its own green economy as well, so it wants to
Speaker 3: rely on that model.
Speaker 2: All right, Dan, thanks very much for being with us.
Speaker 2: Dan Wong, chief economist at Hangsang Bank looking at the
Speaker 2: Chinese economy and in fact global conditions. We are joined
Speaker 2: by our old friend Stefan Hofirm, Managing director and chief
Speaker 2: investment strategist at LGT Private Banking Asia, someone who used
Speaker 2: to be on the program a lot then was transferred
Speaker 2: back to Switzerland and the time didn't really suit, so
Speaker 2: it's been a while. Stefan, thanks very much for coming
Speaker 2: very much you. So, you know, I haven't talked to
Speaker 2: you in a while. I don't know whether you're tilting
Speaker 2: bearish or tilting bullish. But let me throw a scenario
Speaker 2: at you and you can tell me I'm all wet,
Speaker 2: or you can say yeah, I like it. So we
Speaker 2: had a little bit of a fake scare in the
Speaker 2: first quarter on inflation, and now we're sort of moving
Speaker 2: away from that with this latest print. I'm speculating that,
Speaker 2: but that's that's a position, and now we're about ready
Speaker 2: to have a fake scare in in in a growth
Speaker 2: that growth is going to fall off and that we're
Speaker 2: heading into an uncomfortable position. In the first three months
Speaker 2: of the year, it was time to buy even with
Speaker 2: hot inflation. Is it now still a time to buy,
Speaker 2: even with fears of slow and growth.
Speaker 5: Well, it's quite fascinating because we're still in an environment
Speaker 5: where we've come off the fastest rate interest rate increase
Speaker 5: in US history, and yet here we are in May,
Speaker 5: and frankly, you know, consumption, you know, irrespective of the
Speaker 5: of the retail print yesterday, is basically very very solid
Speaker 5: in terms of the levels. So this this much anticipated
Speaker 5: textbook or you know, you know, type of slowdown in
Speaker 5: you simply has not happened. Unemployment is still below the
Speaker 5: natural rate, and we have this, you know, great disinflation,
Speaker 5: but overall the economy is still, i think objectively speaking,
Speaker 5: quite hot.
Speaker 1: Have you seen in the history books a case like
Speaker 1: this where you can have elevated interest rates and stills
Speaker 1: so much robustness and growth that does this seem odd
Speaker 1: to you?
Speaker 5: It's very odd. Dog, it doesn't happen. It frankly does
Speaker 5: not happen. And this is sort of something that you know,
Speaker 5: maybe five ten from our academia will sort of really,
Speaker 5: you know, figure out why it's happened. Maybe we have
Speaker 5: still some leftover you know, COVID handout money that is
Speaker 5: still sort of circulating there, keeping things elevated. We also know, however,
Speaker 5: that credit card to the United States has skyrocketed, so
Speaker 5: some of this growth is fueled on a private borrowing
Speaker 5: and that of course also will reach a limit at
Speaker 5: some point. But all that said, yes, you apter, you're right,
Speaker 5: this is brand new, never happened before, and by now
Speaker 5: we really should be in a recession that it hasn't happened.
Speaker 2: But is it really? I mean, interest rates traditionally over
Speaker 2: a long period of time, we're quite off and up
Speaker 2: around four to five percent. It's really only in the
Speaker 2: last twenty years, is it not that we've gotten used
Speaker 2: to such strong disinflation almost deflationary conditions that you know,
Speaker 2: we see this as unusual when perhaps it's not.
Speaker 5: That's true, But it's all about the rate of change,
Speaker 5: so and not just the level. And really, if you
Speaker 5: look at the path of what the Fed has done
Speaker 5: in a very compressed period of time, they rapidly increased
Speaker 5: interest rates and really textbook argues that something needs to break,
Speaker 5: and certainly inflation has to break, and it kind of did.
Speaker 5: But also the labor market and the fact that you've
Speaker 5: got below the natural rate of unemployment in the United
Speaker 5: States highly unusual, never happened before.
Speaker 1: The other thing that's confounding is that the yield curve
Speaker 1: remains inverted. I can't remember a time that you've had
Speaker 1: growth like that with an inverted yield curve.
Speaker 5: Yeah, and no one is really sort of focusing on
Speaker 5: that anymore. And really what it's all about, you know, thankfully,
Speaker 5: is at least on the equity side, it's earning. So
Speaker 5: earnings growth the United States is exceptionally high, and on
Speaker 5: that topic, it's Japan. Japan is the runaway winner in
Speaker 5: terms of corporate profitability, So we have an investment backdrop
Speaker 5: that is certainly supported by companies pretty much across the board.
Speaker 5: Europe being the weak is what overall doing really quite well.
Speaker 2: So the two year is tied to FED funds rate policy.
Speaker 2: If we get say fifty to seventy five basis points
Speaker 2: in cuts, there goes the inversion, right And won't that
Speaker 2: tell you then that you know, we enter a period
Speaker 2: when it's something you really don't have to worry about this,
Speaker 2: you know, this forever lasting inverted deal.
Speaker 5: Care Yes, but I mean, I think seventy five business
Speaker 5: points right now is you know unlikely. We're also, of course,
Speaker 5: in the election cycle, and historically the view has been
Speaker 5: that the closer you get to the elections, the least
Speaker 5: you know you should be doing less in terms of
Speaker 5: the federal reserve. So maybe September some people are saying
Speaker 5: July we're at LGT. We're saying this is be one
Speaker 5: cut in September.
Speaker 1: So how are you viewing US China relations, particularly in
Speaker 1: light of the new tariffs that were unveiled yesterday by
Speaker 1: the Biden administration.
Speaker 5: Well, you know, if you're a believer in globalization and
Speaker 5: free trade and efficient markets and all that kind of thing,
Speaker 5: then then it's troubling.
Speaker 3: You know.
Speaker 5: I'm based here with with you know Brian in Hong Kong,
Speaker 5: and Hong Kong and Singapore as well have zero import tariffs.
Speaker 5: So that's the kind of environment that you know economy.
Speaker 5: You know, businesses generally can prosper. The more that you
Speaker 5: increase tariffs, the more distortions there are, is not a
Speaker 5: good thing longer term for global growth. But at the
Speaker 5: same time, we do know that both Republican and Democrat
Speaker 5: voters tend to like to see being you know, tough
Speaker 5: on China.
Speaker 2: Is Europe in the process of kind of finding a
Speaker 2: rock pro chemong with China, or is it ready to
Speaker 2: stiffen policy.
Speaker 5: So if you take the case of say Germany, Germany
Speaker 5: is very very exposed to Chinese demand given the kind
Speaker 5: of exports that they have, so capital, goods, chemicals and
Speaker 5: so on and so forth. So it's a really a
Speaker 5: dollar and cents type issue. The United States has a
Speaker 5: much much larger domestic demand driven economy, less sensitive to that,
Speaker 5: but the Europeans will really feel it if you know,
Speaker 5: if China doesn't reaccelerate further from here, and that's been
Speaker 5: a major drag for them over the past say two
Speaker 5: years already, so it's all about Europe being sensitive to
Speaker 5: try them all.
Speaker 2: Right, Stefan, thanks very much for joining us here on
Speaker 2: the program Live Stuff On Hofer Managing Director, Chief Investment
Speaker 2: Strategists at LGT Private Banking Asia. We are joined on
Speaker 2: the program by Jose Todes, a senior economist at Interactive Brookers. Jose,
Speaker 2: I wonder whether the attention now is sort of focus
Speaker 2: in markets and for people like you as an economist,
Speaker 2: focus a little bit more on growth now and perhaps
Speaker 2: a little away from inflation. That's not to say that
Speaker 2: the fight against inflation is over, but growth now is
Speaker 2: also sort of in the in the crosshairs at least
Speaker 2: in the short term.
Speaker 4: Your thoughts, good evening. I'm not ready to call it
Speaker 4: quits on the consumer just yet. In the last two
Speaker 4: and a half years, we've seen in certain months the
Speaker 4: consumers going somewhat of a stop and go kind of
Speaker 4: path where they're spending will decline sharply one month, only
Speaker 4: to recover even more strongly the next month. So against
Speaker 4: that backdrop. However, there are some significant headwinds, some of
Speaker 4: the same ones that we've been hearing for the last
Speaker 4: two years, and a lot of economists, including myself, we've
Speaker 4: been confounded because we thought that all this monetary policy
Speaker 4: tightening rates is high. We thought that would be in recession.
Speaker 4: And it's the consumer that's rebounded whenever we thought we
Speaker 4: were so close to that slowdown to what do.
Speaker 1: You attribute that? I mean, why it has The American
Speaker 1: consumer still remained very resilient in the face of higher rates.
Speaker 4: Well, corporate balance sheets are quite robust, job jobs are plentiful,
Speaker 4: you know, Labor vacancies are still at around eight and
Speaker 4: a half million, well above pre pandemic levels. For the
Speaker 4: high end consumer, they've benefited significantly from buoyant capital markets
Speaker 4: and elevated real estate prices that reach all time highs
Speaker 4: essentially every month, similar to what we're seeing inequities with
Speaker 4: the S and P five hundred closing above fifty three
Speaker 4: hundred today. That's really supported the high end consumer. The
Speaker 4: middle and low end consumer had a lot of savings
Speaker 4: back when fiscal stimulus was quite plentiful, but now they're
Speaker 4: sort of starting to see some more significant weakness, particularly
Speaker 4: with personal savings, as well as on the earnings calls,
Speaker 4: we're hearing about discretionary items starting to be paired back
Speaker 4: in favor of necessities.
Speaker 2: Yeah, it's tempting to say that this is retail sales
Speaker 2: of goods today the latest data, and that services is
Speaker 2: a much bigger part of it. But we're reminded that
Speaker 2: City Group's Economic Surprises index is at the lowest since
Speaker 2: January of last year. So this is really looking at
Speaker 2: a series of weaker than estimated data points, not just
Speaker 2: retail sales, but jobs, services, manufacturing. It is, it is
Speaker 2: out there, you know. Is it a welcome slowing of
Speaker 2: the economy or is it unwelcome?
Speaker 4: I think right now it's quite welcome because it's helping
Speaker 4: on inflation, albeit very modestly, and we're in that point
Speaker 4: of the cycle here where the private sector isn't hiring strongly.
Speaker 4: When we look at the jobs reports, whether it's ADP
Speaker 4: or BLS, we see that they have a non cyclical
Speaker 4: tilt a lot of the jobs being created or in
Speaker 4: healthcare and education and government, and that's been the case
Speaker 4: for a long time. But when we look at numbers
Speaker 4: like initial unemployment claims, and continuing unemployment claims. And let
Speaker 4: me hold my breath, because those numbers are coming out
Speaker 4: tomorrow at a thirty am Easter time. And we did
Speaker 4: see a sharp increase, albeit to two hundred and thirty thousand,
Speaker 4: not that concerning of a level in itself, but if
Speaker 4: we start seeing it picking up towards two fifty two
Speaker 4: seventy three hundred, now we're talking about an unemployment rate
Speaker 4: ticking up to four point three or four point four percent.
Speaker 4: That's the bearish path. The neutral to bullish path is
Speaker 4: that we never actually get there. Companies have good balance sheets.
Speaker 4: They spent post pandemic period right sizing and preparing for
Speaker 4: a recession that many pundits thought was including myself, thought
Speaker 4: was right around the corner. So they're in a good spot.
Speaker 4: And there's the potential that this expansion goes longer because
Speaker 4: of that factor. And finally, on this point, monetary policy
Speaker 4: tightening hasn't been enough to counter the excessive loosening that
Speaker 4: occurred in twenty twenty and twenty twenty one. Both from
Speaker 4: Congress as well as the said, you know, right now
Speaker 4: we're one point six trillion off of the FED balance
Speaker 4: sheet peak. But we added almost five trillion due to
Speaker 4: the pandemic. You know, we still have a lot of
Speaker 4: liquidity universe repo bank reserves a quice point, and financial
Speaker 4: conditions are the loosest sty've been in since late twenty
Speaker 4: twenty one. Whether you look at Chicago, Fed, Bloomberg, or Goldman.
Speaker 1: Sachs Hose, the swaps market is now pricing in nearly
Speaker 1: two separate twenty five basis point FED rate cuts before
Speaker 1: the end of this year. Do you think that's reasonable?
Speaker 4: I think so. I think we're going to see some
Speaker 4: slowing into September that's going to allow the FED to
Speaker 4: cut there, and then I think that we'll probably get
Speaker 4: one in December. But right now I'm in between one
Speaker 4: and two. I'm really at one and a half inflation.
Speaker 4: You know, central banks flat around the world are implicitly
Speaker 4: accepting inflation higher than target because they're not willing to
Speaker 4: endure the sacrifices necessary to really get down to two percent.
Speaker 4: You know, we're at three point four percent uh and
Speaker 4: you know, judging by the two percent standard, that would
Speaker 4: require a month over month increase in the very short
Speaker 4: term of sixteen zero point six dips month over month
Speaker 4: to get to two percent at the end of the year.
Speaker 6: And a fun exercise, yeah yeah, yeah, And a fun
Speaker 6: exercise last point here, A fun exercise is count every
Speaker 6: single month, every and every kind of inflation.
Speaker 4: You want CPI headline, core, CPI headline, PC core PC.
Speaker 4: You know you're not there, You're not even.
Speaker 2: We want we get the point, We get the point, Jose.
Speaker 2: But but you know the Fed is actually employing time
Speaker 2: here rather than you know, sharper activity in the short term.
Speaker 2: It sounds like you are all for sharper activity in
Speaker 2: the short term. You'd like to see them high rates here.
Speaker 4: It seems like I would like them to keep the
Speaker 4: hike on the table because messaging has become so an
Speaker 4: important aspect of monetary policy these days. So if you
Speaker 4: keep leading the market on we're cutting, we're cutting. You know,
Speaker 4: back in December that was a pivotal pivot in monetary
Speaker 4: policy this cycle, Chair palpoint to rate cuts right around
Speaker 4: the corner, right, and the uncertainty of monetary policy itself
Speaker 4: titans financial conditions. And right now we don't really have
Speaker 4: that kind of uncertainty because look at today the market
Speaker 4: rallied and to my earlier point, which you know, I
Speaker 4: explained a little too much. Sorry about that, but you
Speaker 4: know we inflation today came in around thirty one thirty
Speaker 4: two BIPs.
Speaker 1: Yeah, you know, it's kind of interesting because there was
Speaker 1: there has been a little criticism of the fact that
Speaker 1: maybe there's been a little too much messaging from the Fed,
Speaker 1: and you know, we get a lot more volatility as
Speaker 1: the result of that. Jose, thank you so much for
Speaker 1: being with us. Jose Torres is a senior economist at
Speaker 1: Interactive Brokers.
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