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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner,

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Speaker 2: and we begin today with the geopolitics of the Mideast.

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Speaker 2: We are being told that senior US officials are preparing

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Speaker 2: for the possibility of a strike on Iran in the

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Speaker 2: coming days. Now, this situation, important to say, is still

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Speaker 2: evolving and it could change. Some of our sources pointed

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Speaker 2: to the potential plans for a strike on the weekend.

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Speaker 2: Joining me now is Mark Cranfield. He is Bloomberg Markets

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Speaker 2: Live strategist and he joins from Singapore. Mark, thank you

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Speaker 2: so much for making time to chat with me. I

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Speaker 2: think we can agree these are indeed delicate times. There's

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Speaker 2: the geopolitical situation between Israel and the Iran and the

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Speaker 2: uncertainty of potential US involvement. The story on tariffs meantime

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Speaker 2: is very much still alive. And then we've got the

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Speaker 2: macro picture, which may be a little cloudy right now.

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Speaker 2: But can we play off the FED decision in the

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Speaker 2: last session here in the States, And I'm curious to

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Speaker 2: get your take on how you see it impacting market

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Speaker 2: psychology right now in the Asia Pacific.

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Speaker 3: The FED would be pretty happy with the result of

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Speaker 3: what happened yesterday. They had an extremely difficult balancing act

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Speaker 3: to do, as you say, in the context of all

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Speaker 3: those things happening in the world, how do you create

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Speaker 3: policy and guidance for people in the United States and

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Speaker 3: to some extent globally, because everybody watches what the FED

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Speaker 3: has to say, And they managed to do it without

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Speaker 3: disrupting markets at all. By the end of the day,

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Speaker 3: equity markets, bond markets, currencies are pretty much where they

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Speaker 3: started the day. So from that point of view, patter

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Speaker 3: on the back for the FED. But it's certainly their

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Speaker 3: task is extra difficult because they clearly hinted at the

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Speaker 3: fact that the United States is going to have a

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Speaker 3: statulation every problem. They've lowered economic forecasts in their summary

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Speaker 3: of economic projections, and at the same time they've upsized

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Speaker 3: the project for inflation, particularly through the PCE window. So

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Speaker 3: they're telling you that the in stackulation which is beginning

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Speaker 3: to appear, is probably going to get worse in the

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Speaker 3: United States. And yet they're working essentially one arm tied

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Speaker 3: behind their back, because all investors can see that the

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Speaker 3: difficulty for the FED is that should inflation pick up

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Speaker 3: and become sticky in the sense that it stays for

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Speaker 3: a bit longer. Is the FED going to really raise

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Speaker 3: interest rates? Well, in the current environment and with your

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Speaker 3: own power as a chairman, I think most investors would

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Speaker 3: come to conclusion the FED is not going to typen policy.

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Speaker 3: It's very much skewed the other way. Should the employment

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Speaker 3: situation deteriorate and the America risk going somewhere towards the recession,

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Speaker 3: of course they would act quickly and lower interest rates.

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Speaker 3: The last thing they did was to lower interest rates,

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Speaker 3: so they obviously have a slight bias towards doing that.

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Speaker 3: But the real problem for them is what happens if

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Speaker 3: inflation starts to get higher.

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Speaker 2: When you evaluate some of the risk that the markets

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Speaker 2: are dealing with right now, and you look at the

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Speaker 2: potential for haven buying, particularly in US treasuries or for

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Speaker 2: that matter, in the US dollar, talk to me a

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Speaker 2: little bit about the flow of funds that you have

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Speaker 2: been seeing and how the dollar may be impacted right now.

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Speaker 3: We can take the dollar first, and I don't think

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Speaker 3: there's much doubt that the US is losing its haven appeal.

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Speaker 3: You can see that against major currencies it's had a

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Speaker 3: pretty rough year this year, it's underperformed pretty badly. And

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Speaker 3: then it's not just a one sided thing, because obviously

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Speaker 3: there needs to be an appeal on the others. If

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Speaker 3: you've got in currency trading, it's always one against something else.

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Speaker 3: So it's all fine to say that the US dollar

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Speaker 3: doesn't look as attractive as it did, but you need alternatives,

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Speaker 3: and the alternatives are starting to look a bit better.

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Speaker 3: So you take the Euro, which is the second biggest

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Speaker 3: currency on the planet. Europe's getting exacted together, partly because

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Speaker 3: it has to. It's under pressure to improve its defenses

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Speaker 3: because of the situation in Russia and Ukraine and United

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Speaker 3: States moving away from NATO, so they'reppy to spend more

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Speaker 3: on the defense. That's creating a bigger poll of funds

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Speaker 3: for the Euro. Investors can see that they're getting more

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Speaker 3: comfortable that there's deep liquidity in the European market, so

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Speaker 3: more money is starting to flow towards Europe. Then you've

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Speaker 3: got China, which as just yesterday we had the Central

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Speaker 3: Bank governor giving extended details about what they're doing to

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Speaker 3: improve the dynamics in China for foreign investors, and that

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Speaker 3: all revolves around stability and strength in the currency. They've

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Speaker 3: made it very clear that China is right behind the Yuwan.

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Speaker 3: They're not going to let it deteriorate. They're going to

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Speaker 3: keep it stronger and stable. And that supports all other

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Speaker 3: security aspects. It supports equities, it supports bonds, it supports

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Speaker 3: all kinds of investment flows to China, and they're encouraging

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Speaker 3: foreigners to send their money there. So you're beginning to

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Speaker 3: have serious contenders to the US dot. It doesn't mean

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Speaker 3: to say that the US dollar loses its status overnight,

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Speaker 3: but you can see why money can now more happily

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Speaker 3: move to other parts of the world because there are

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Speaker 3: currencies which are standing up and being counted and saying, hey,

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Speaker 3: we're a real alternative to the US dollar if you're

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Speaker 3: uncertain about the outlook there. Treasuries is a much more

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Speaker 3: complex picture, of course, because the Federal Reserve can twist

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Speaker 3: the needle, they can lower interest rates quickly when they

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Speaker 3: need to. But at the same time you do have

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Speaker 3: these spreads between treasury yields and other countries, and that's

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Speaker 3: where things will begin to show. If people start to

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Speaker 3: lose faith in treasuries, you'll see where spreads will widen

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Speaker 3: against Germany, against Japan, against other parts of the world.

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Speaker 3: That's more like it's in the absolute direction of what

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Speaker 3: treasuries may be doing, but certainly their share of the

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Speaker 3: market holdings of fixed income investments could well go down

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Speaker 3: in relation to other countries.

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Speaker 2: It's very interesting because we heard today from the US

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Speaker 2: Treasury with respect to foreign holdings of US bonds and notes,

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Speaker 2: and we learned that foreign holdings were actually up in

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Speaker 2: the month of April to the second highest level on record.

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Speaker 2: I found that a little surprising. So foreigners right now

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Speaker 2: are holding a little bit more than nine trillion dollars

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Speaker 2: in US government securities. Japan still the largest, Britain interestingly

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Speaker 2: has increased its holdings. China's holdings were down a little bit.

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Speaker 2: But when you look at the risk talking earlier about

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Speaker 2: Haven's status, how much concern is there over the US

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Speaker 2: fiscal situation right now, particularly the budget deficit, And I'm

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Speaker 2: wondering whether that outlook for budget deficits going forward has

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Speaker 2: become an important driver of the buying that we have

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Speaker 2: seen on the part of foreigners in US treasuries.

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Speaker 3: Absolutely, investors clearly are a bit concerned that should the

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Speaker 3: tax and spending be all go through in United States

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Speaker 3: as it's currently planned, it's going to worsen what's already

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Speaker 3: quite a bad fiscal deficit situation in United States. It's

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Speaker 3: not going to get any easier. And then if you

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Speaker 3: look at the way the data you're just talking about

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Speaker 3: the holdings of UK number of people from the UK

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Speaker 3: entities which are holding treasures. When that is going up,

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Speaker 3: that is a warning signal because that tends to be

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Speaker 3: hedge funds. That is not UK government or anybody UK

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Speaker 3: sovereign well fund they don't even have one, but so

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Speaker 3: it's not that kind of money. It's not secure money

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Speaker 3: which is going to this is much more flaky short

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Speaker 3: term money. So when the UK shows up as a

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Speaker 3: bigger holder of treasure is that's not a good sign.

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Speaker 3: That just means that short term holders who can quickly

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Speaker 3: come in and out, and they're often doing it as

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Speaker 3: spreads anywhere against other things, so they're not really secure

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Speaker 3: holders of treasures. These are the people who can change

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Speaker 3: on a dime. They'll be in and out in a

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Speaker 3: matter of minutes. So that's actually a warning signal that

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Speaker 3: the holders are less stable of US treasurers than they

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Speaker 3: were earlier in the year. So all of these things,

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Speaker 3: and of course we're on watch for the potential that

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Speaker 3: we've had one sovereign downgrade already this year of the

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Speaker 3: United States. These things tend to come in waves, and

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Speaker 3: once the ball starts rolling in that direction, you could

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Speaker 3: see more. Next stage will probably be to put the

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Speaker 3: sovereign rating on an other outlook for potential vision lower.

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Speaker 3: Investors are watching that very close. It could come before

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Speaker 3: the end of the year. So all of these things

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Speaker 3: are stacking up against the US Treasury. It's not looking

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Speaker 3: as secure as it was.

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Speaker 2: I don't think it's a surprise at all that China

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Speaker 2: reduced its holdings of US government securities. Talk to me

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Speaker 2: a little bit about what's happening right now, insofar as

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Speaker 2: you understand the progress that may be happening, or may

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Speaker 2: not be happening, for that matter, when it comes to

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Speaker 2: the trade issue between Washington and Beijing.

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Speaker 3: It looks from outsider in Asia, we probably see it

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Speaker 3: a bit more slanted from the from the Chinese side,

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Speaker 3: and it looks like they're playing the long game. It

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Speaker 3: looks like the Chinese authorities are fairly happy with the

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Speaker 3: way that they're stimulating their own economy. They're starting to

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Speaker 3: rebuild things extremely well there. It's on a much better footing.

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Speaker 3: Their markets are stable, currencies strong, They have some strong cards,

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Speaker 3: as President Trump would say, particularly when it comes to

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Speaker 3: some of the minerals they hold. So they look as

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Speaker 3: though they're ready to take their time to get a

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Speaker 3: trade deal. Dot really works from their point of view.

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Speaker 3: They don't look as though they're going to panic and

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Speaker 3: sign anything quickly at all. They want to do thorough

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Speaker 3: negotiating and if it takes time, it causes a bit

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Speaker 3: of pain. They're willing to play the long game in

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Speaker 3: that respect. That might be in contrast to how the

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Speaker 3: US authorities see it. So don't expect China to suddenly say, oh, yeah,

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Speaker 3: we're happy we've got a deal straight away until they're

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Speaker 3: really sure that it's something that is fair and favors

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Speaker 3: them as much as it favors the United States.

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Speaker 2: I mentioned a moment ago the conflict between Israel and Iran.

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Speaker 2: How is this being digested right now in the Asia Pacific.

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Speaker 3: It's all eyes on the oil on prices, as you

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Speaker 3: can expect, everybody's watching that minute by minute to see

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Speaker 3: what it means for changes in oil so far, we

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Speaker 3: haven't got close to the one hundred dollars threshold. That's

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Speaker 3: probably where people really start to get excited about the

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Speaker 3: oil market. If it goes about one hundred, that starts

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Speaker 3: to impact other asset classes lot more. And now we've

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Speaker 3: reached about eighty dollars roughly on on Brent, which is

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Speaker 3: not this high by recent standards, but it's not really

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Speaker 3: out of the realms of what we've been seeing in

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Speaker 3: the movements over the past year or so, so not extraordinary.

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Speaker 3: It certainly was a quick movi in oil, but not

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Speaker 3: yet one that really destabilizes financial markets on a brigger basis.

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Speaker 3: So that's probably why you're seeing contained moves in currencies

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Speaker 3: and bonds and equities as well. Get above one hundred dollars,

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Speaker 3: things start to change quite rapidly.

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Speaker 2: You were talking a moment ago about the potential for

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Speaker 2: hedge funds to become involved in trading of US bonds,

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Speaker 2: particularly in the UK. Talk to me a little bit

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Speaker 2: about what hedge funds do when they're trading oil and

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Speaker 2: how that may be manifesting it right now, particularly given

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Speaker 2: the environment that we're in right now.

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Speaker 3: We can already see in the options market in some

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Speaker 3: very substantial changes in the demand in the options market.

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Speaker 3: In fact, by some measures, what's going on in the

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Speaker 3: current state of the option is actually more extreme than

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Speaker 3: when Russia invaded Ukraine a few years ago. So that

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Speaker 3: just shows you how suddenly people are positioning very quickly

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Speaker 3: into that space. They will be trading spreads between contracts,

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Speaker 3: so Oil's futures trading is very deep liquid market. People

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Speaker 3: would trade the curve, whether it's steepens or flattens. They'll

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Speaker 3: also be trading on the outright volatility in the market,

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Speaker 3: which they do through the options market. So that turnover

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Speaker 3: in that market has exploded in the past couple of weeks,

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Speaker 3: and that's all geared towards the expectation that oil could

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Speaker 3: spike higher again from here. So at the same time,

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Speaker 3: the flip side of that, of course, is if things

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Speaker 3: come down quickly, you could see oil retrace it very quickly,

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Speaker 3: so we could go easily go back towards the mid sixties.

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Speaker 3: In terms of price. If that premium some people gold

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Speaker 3: Men Sacks are they saying that the premium is around

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Speaker 3: ten dollars for the world premium priced into oil at

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Speaker 3: the moment, I think Bloomberg they kind of miss save

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Speaker 3: between five and ten, so something around that figure needs

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Speaker 3: to be shaved off the oil price if you can.

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Speaker 3: The situation calming down quickly so you could see quite

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Speaker 3: a fast replacement. But for the moment, of course, people

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Speaker 3: are not going to do that just yet because there's

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Speaker 3: still a lot more to play out in that area.

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Speaker 3: But they just shows you how quickly oil can reverse.

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Speaker 3: Should Iran and Israel no longer be a major focus

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Speaker 3: for the oil market, Mark.

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Speaker 2: Will leave it there. It's always a pleasure. Thank you

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Speaker 2: so much for making time to chat with me. Mark

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Speaker 2: Ranfield is a Bloomberg Markets Live strategist joining from Singapore.

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Speaker 2: Here on the Daybreak Asia podcast. Welcome back to the

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Speaker 2: Daybreak Asia Podcast. I'm Doug Chrisner. So Fed officials left

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Speaker 2: their key policy rate unchanged in the last session, in

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Speaker 2: a move that was pretty much widely expected. They continued

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Speaker 2: at the same time to pencil in two rate cuts

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Speaker 2: in twenty twenty five. The Fed also lowered its estimate

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Speaker 2: for economic growth this year, while raising its forecast for

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Speaker 2: both on employment and inflation. So this combination of weaker

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Speaker 2: growth and stickier inflation suggests a more difficult economic backdrop.

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Speaker 2: We got reaction from University of Michigan professor Betsy Stevenson.

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Speaker 2: She spoke earlier with Bloomberg's Heidie Stroud Watson April Hong.

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Speaker 2: First question, just how difficult is the Fed's position.

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Speaker 4: You can see what they're thinking exactly by looking at

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Speaker 4: their projections, So you know, it is true that their

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Speaker 4: forecasts for the US economy are getting worse over time.

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Speaker 4: You know, in December they thought that the US economy

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Speaker 4: would grow two point one percent this year. They revised

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Speaker 4: that down to one point seven percent in March, and

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Speaker 4: they revise that down again here in June to one

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Speaker 4: point four. So it's like every you know, day, it

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Speaker 4: gets a little bit there's a little bit more of

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Speaker 4: a sense that, Okay, we're not going to have a

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Speaker 4: strong year this year. And that was kind of ironic

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Speaker 4: to listen to him say, like, there's less uncertainty, but

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Speaker 4: that doesn't mean things are good.

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Speaker 5: We actually feel more.

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Speaker 4: Certainty that we're going to have tariffs that stick, that

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Speaker 4: are higher than any kind of tariffs the United States

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Speaker 4: has had in fifty or sixty years, So we're probably

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Speaker 4: going to end up with some kind of effective tariff

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Speaker 4: that is probably you know, five to ten times higher

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Speaker 4: than what we had before Trump came into office. So

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Speaker 4: I think our uncertainty is coming down, but it's because

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Speaker 4: we're resigned to the fact that we're going to have

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Speaker 4: higher tariffs and we're going to have lower growth.

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Speaker 5: So if you look.

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Speaker 4: At that range of forecasts, you did see their uncertainty

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Speaker 4: come down, but it was actually because the people who

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Speaker 4: were most optimistic have now sort of joined the rest

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Speaker 4: of the pack and thinking that it's.

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Speaker 5: Going to be slower growth.

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Speaker 4: So you might say, then, why shouldn't they be cutting

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Speaker 4: rates right now? Well, that's because that certainty about we're

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Speaker 4: going to end up with higher tariffs and they're going

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Speaker 4: to stick means that we do have inflation in front

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Speaker 4: of us, and he's got to make sure that we

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Speaker 4: we don't let that inflation take off. And here's another

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Speaker 4: thing to consider, which is as inflation expectations have risen, effectively,

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Speaker 4: they are cutting the real rate because keeping rates the

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Speaker 4: same when people are expecting higher inflation is a rise

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Speaker 4: at nominal rates and a cut in that real rate,

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Speaker 4: So the market's cutting rates for them.

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Speaker 1: Yeah, that's a really key point.

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Speaker 5: Bets.

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Speaker 1: Yeah, I have to sort of you know not chuckle.

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Speaker 5: Obviously if there's a.

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Speaker 1: Lot of negativity out there, but you know, you make

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Speaker 1: the point of is certainty when it comes to a

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Speaker 1: more negative outlook really a good thing. But we've obviously

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Speaker 1: seen the worries for the markets over energy markets and

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Speaker 1: energy costs. Is it too early at this point to

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Speaker 1: be able to look at the inflationary upside pressure from

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Speaker 1: a potential change in those energy market dynamics.

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Speaker 5: Well, I got on this.

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Speaker 4: Pal was quite reassuring and reminded us that you know,

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Speaker 4: if you go back to the nineteen seventies, a big

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Speaker 4: oil price shock was terrible for the United States, but

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Speaker 4: you know, the United States doesn't rely on on foreign

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Speaker 4: oil as much. In fact, the US had achieved energy

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Speaker 4: and dependence. Now, of course the market means that you know,

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Speaker 4: prices should go up because we can sell anywhere in

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Speaker 4: the world. We're not forced to sell to ourselves. So

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Speaker 4: you know, and the whole you obviously care about more

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Speaker 4: than the United States, The whole the whole world is

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Speaker 4: going to suffer, you know, if with this geopolitical tension.

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Speaker 4: So I think there are real global worries about that.

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Speaker 5: But I think what.

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Speaker 4: Pal said is those are not huge inflationary worries for

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Speaker 4: the FED right now.

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Speaker 6: What about domestically, Betsy, When it comes to what you're

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Speaker 6: seeing among the American public worries about consumer confidence job security.

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Speaker 4: Well, I mean, we do see that consumer confidence has down,

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Speaker 4: CEO confidences down. People do have concerns about job security,

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Speaker 4: and they're not just about tariffs. So we have Amazon

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Speaker 4: coming out today and saying, you know, we're gonna need

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Speaker 4: fewer people because we're going to outsource our jobs to AI,

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Speaker 4: and so it's no longer going to be about, you know,

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Speaker 4: competing with workers in foreign countries. It's going to be

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Speaker 4: competing with artificial intelligence. So I think there is a

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Speaker 4: lot of anxiety. And in fact, I would say this

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Speaker 4: anxiety has been brewing for quite a long time and

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Speaker 4: is one of the explanations for the tariffs that we

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Speaker 4: have today, is that Americans have real anxiety about where

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Speaker 4: the economy is going. I don't think the choice as

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Speaker 4: President Trump is making has reassured them. In fact, I

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Speaker 4: think that it's made it worse. But I do think

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Speaker 4: it would be a mistake to think that that's the

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Speaker 4: only thing weighing on American consumers and on American businesses.

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Speaker 6: What else is on consumer confidence and businesses, and you know,

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Speaker 6: to what extent are you seeing perhaps full American industries

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Speaker 6: as well the cost pass through, given how the DOLLA

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Speaker 6: has also been depreciating.

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Speaker 4: Right, So, I mean this big set of questions, and

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Speaker 4: I think consumers and businesses are in different places. So

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Speaker 4: from consumers, I think that they think there's just a

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Speaker 4: lot of uncertainty around what is going to happen in

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Speaker 4: the workplace, right, are they going to have jobs? What

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Speaker 4: we're seeing is a very weird labor market right now

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Speaker 4: where unemployment is low, but it's not a good time

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Speaker 4: to be unemployed.

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Speaker 5: It's not a good time to try to change jobs.

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Speaker 4: And that creates a little bit of anxiety and consumers.

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Speaker 5: You know, if you start to.

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Speaker 4: Fear that you could lose your job or that you

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Speaker 4: could see your wages stagnate, you might start to pull

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Speaker 4: back on your spending. And as you pull back on

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Speaker 4: your spending, that makes out a self fulfilling prophecy. On

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Speaker 4: the business side, I mean, they're trying to make decisions

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Speaker 4: in a world that is highly uncertain. And that's about tariffs,

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Speaker 4: It's about the geopolitical risk, and it's also about political risk. Right,

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Speaker 4: we have a government right now that is very, very interventionist.

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Speaker 4: I think a lot of American companies thought that the great.

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Speaker 5: Thing about President Trump was he was.

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Speaker 4: Going to let them just do their thing and that

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Speaker 4: they were going to not have to deal with a

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Speaker 4: really heavy regulatory environment.

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Speaker 5: But what they've learned is that it is still a

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Speaker 5: pretty heavy environment.

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Speaker 4: It's just on a different set of issues and preferences

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Speaker 4: coming out of government. So I think that uncertainty means

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Speaker 4: everybody's moving a little bit slower, and when you slow

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Speaker 4: the pace of movement, you slow economic growth.

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Speaker 5: See.

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Speaker 1: I think when he spoke with Boombo back in April,

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Speaker 1: there was still this sort of discussion over whether it

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Speaker 1: was a bigger growth risk or a bigger inflation risk,

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Speaker 1: and whether we could kind.

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Speaker 5: Of see through the risk.

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Speaker 1: Do you think now that there's a real risk of

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Speaker 1: stagflation for the US economy.

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Speaker 4: I mean, certainly every forecast has moved in the stagflationary direction.

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Speaker 5: And I think if you think.

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Speaker 4: About what can cause stagflation like we had stagflation in

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Speaker 4: the seventies, stagflation really needs to come from some kind

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Speaker 4: of supply shock that causes economic growth to shrink in

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Speaker 4: a way that's sort of mismatched with where consumers are at.

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Speaker 5: So consumers want to keep buying stuff, so.

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Speaker 4: Prices are going up, but we're producing less. And that

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Speaker 4: mismatch in the seventies that was caused by all the

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Speaker 4: oil price shocks. What's happening in right now in the globe,

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Speaker 4: and it's the same thing that caused the inflation in

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Speaker 4: twenty twenty one twenty twenty two.

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Speaker 5: Coming out of the pandemic is supply chain problems.

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Speaker 4: So we're not able to move goods around the world,

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Speaker 4: We're not able to count on trade, and that's shrinking

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Speaker 4: are what we can could possibly produce, but that's not

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Speaker 4: shrinking our desires, and so that is where we get

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Speaker 4: that stagflationary pres you know pressure, And I think we've

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Speaker 4: just got to wait and see sort of how that

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Speaker 4: ends up playing out. You know, what's going to happen

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Speaker 4: geo politically in all the domains, tariffs, war, et cetera.

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Speaker 6: That disconnect there. Great to get your insights, Betsy, Thank

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Speaker 6: you so much. Betsy Stevenson, Professor of Public Policy and

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Speaker 6: Economics at the University of Michigan.

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Speaker 2: Thanks for listening to today's episode of The Bloomberg Daybreak.

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Speaker 2: Asia edition podcast. Each weekday, we look at the story

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Speaker 2: shaping markets, finance, and geopolitics in the Asia Pacific. You

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Speaker 2: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,

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Speaker 2: or anywhere else you listen. Join us again tomorrow for

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Speaker 2: insight on the market moves from Hong Kong to Singapore

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Speaker 2: and Australia. I'm Doug Prisoner and this is Bloomberg