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

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Speaker 2: Welcome to the Daybreak Asia podcast. I'm Krisner. There's no

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Speaker 2: trading today in Japan. Markets are closed for National Foundation

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Speaker 2: Day and as a result, there will be no trading

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Speaker 2: in US treasuries until the London session. In the Japanese

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Speaker 2: equity market on Tuesday, we had the Nike closing at

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Speaker 2: a record high. Shares in Soft Bank led the way

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Speaker 2: with a gain of ten percent ahead of its earnings. Stateside,

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Speaker 2: we did have the report on retail sales and the

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Speaker 2: reading was unexpectedly flat for the month of December. Economists

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Speaker 2: had expected an increase by four tenths of one percent,

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Speaker 2: so the shortfall means the estimate on fourth quarter GDP

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Speaker 2: will be reduced. It also reinforces the case that perhaps

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Speaker 2: the Fed can be a little more aggressive in cutting

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Speaker 2: interest rates this year. For a closer look at markets,

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Speaker 2: I'm joined by Bloomberg Strategy just David Finnerty. David joins

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Speaker 2: from our studios in Singapore. Thank you for being here

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Speaker 2: and I want to play to one of your strengths

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Speaker 2: and talk about the currency market. The Bloomberg Dollar Spot

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Speaker 2: Index has been down now for three straight sessions, during

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Speaker 2: New York trading, and in that time it's lost around

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Speaker 2: one percent. Is the story on the weaker dollar really

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Speaker 2: driving the narrative when you look at overall price action.

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Speaker 3: In FX markets, Yes, I think it's basically dollar versus yeah,

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Speaker 3: the rest of the world basically in terms of currencies.

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Speaker 3: The general sentiment talking to a little traders and contacts

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Speaker 3: that I have is that people generally would like to

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Speaker 3: sell the dollar. They need the excuse to do that.

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Speaker 3: They're getting some but you get these pullbacks because the

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Speaker 3: US data comes out a bit mixed. You saw US

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Speaker 3: retail sales over night was weak, but you go back

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Speaker 3: to the IM data at the beginning of the month

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Speaker 3: that was strong. So obviously everyone's looking at what the

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Speaker 3: payroll data is today, particularly unemployment rate is that is

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Speaker 3: tends to be what the Fed focuses on. If you

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Speaker 3: did see an uptick in that, then I think the

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Speaker 3: market go yes, finally we got another green knight to

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Speaker 3: sell the dollar and buy other currencies, and they're tending

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Speaker 3: to buy. If they're shorting the dollar, they're tending to

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Speaker 3: go for the Euro or the Aussie dollar tend to

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Speaker 3: be the two popular ones at the moment. But everything

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Speaker 3: generally does well, but those tend to be the too

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Speaker 3: popular trade.

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Speaker 2: So, as I mentioned, we did have that record high

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Speaker 2: for the Japanese equity market on Tuesday. A lot of

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Speaker 2: this bullishness seems to be directly correlated to the so

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Speaker 2: called taki ichi trade expectations here that we're going to

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Speaker 2: see a lot more in a way of fiscal spending,

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Speaker 2: perhaps a cut in the sales tax on certain food items.

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Speaker 2: You would think with talk around fiscal stimulus that the

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Speaker 2: Japanese currency would weaken, but that doesn't seem to have

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Speaker 2: been the case. So if you look at the yen strength, David,

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Speaker 2: does that really revolve around the dollar weakness story?

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Speaker 3: Yeah, well, I would still remember dolly in still trading

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Speaker 3: one fifty four, so historically still at the weaker end

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Speaker 3: of its range, shall we say, with like one sixty

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Speaker 3: basically being the bottom of it. Some of it really

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Speaker 3: have won, it's just this end of intervention fears that

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Speaker 3: you have. Some of it is a weeker dollar. But

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Speaker 3: you know when it was up around one fifty seven

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Speaker 3: just the start of the week, you know the market

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Speaker 3: was the Finance Miniso in Japan came out and did say,

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Speaker 3: look you now we are watching currency markets. Was again

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Speaker 3: was we don't want that one sided spectation against the end.

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Speaker 3: So that's a strength and the end pushed dolly and lower.

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Speaker 3: But even as you said, some of it Nan has

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Speaker 3: been the dollar side. What's interesting is talking to some

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Speaker 3: traders yesterday when dolly en was around one fifty five

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Speaker 3: ahead of the US retail sales data, I was like,

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Speaker 3: you know what sort of the positioning on this? Where

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Speaker 3: are we? And they go, look, realistically, the long dollar

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Speaker 3: en longs have been sort of been squaring up. It

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Speaker 3: hasn't shifted to a dollar in short position yet. They said,

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Speaker 3: this is some of that, but not a lot. I

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Speaker 3: think everyone really is looking this payroll but to get

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Speaker 3: out the way to give Glay the greater clarity in

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Speaker 3: terms of whether dollar headed and therefore sy Dollien will

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Speaker 3: go with that.

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Speaker 2: The other story here that's kind of remarkable to me

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Speaker 2: is the strength that we've been seeing in the Chinese currency,

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Speaker 2: both offshore and onshore. Is that again really about dollar weakness.

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Speaker 3: I think that's a bit of two things. I mean, obviously,

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Speaker 3: the PBOC with the fixed scenes has continually sort of

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Speaker 3: indicated that it's quite happy for it to slowly appreciate,

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Speaker 3: and I emphasize the slowly appreciate. The Federal Reserve came

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Speaker 3: out recently. Also, the Treasury did in its semi annual

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Speaker 3: country report and did say, okay, they think the EU

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Speaker 3: one was well undervalued. So obviously they're giving signs to China,

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Speaker 3: let your currency appreciate. China seems to be willing to

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Speaker 3: let it appreciate to some degree. I mean, we have

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Speaker 3: six nineties, you know, a lot of people saying that

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Speaker 3: maybe six eighty six seventy versus dollar per year end.

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Speaker 3: That certainly the path at the moment of least resistance. Again,

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Speaker 3: things can always change with geopolitics, which could disrupt the carts.

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Speaker 3: But the moment, the trend higher PBOC doesn't seem to

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Speaker 3: be fighting that. So the market, which is long yan

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Speaker 3: so short dotty one, is quite happy with this, quite

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Speaker 3: high at the moment.

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Speaker 2: So you mentioned that week reading on retail sales. It

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Speaker 2: caused money markets to price slightly higher odds for three

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Speaker 2: Fed rate cuts this year. Two have already fully been

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Speaker 2: priced in, And I'm wondering whether or not you're comfortable

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Speaker 2: with the idea that we could see as many as

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Speaker 2: three or is that maybe a little bit too much enthusiasm.

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Speaker 3: I think, look at the moment, the market loves rate cuts,

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Speaker 3: so you give it a chance to price inerrate cut

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Speaker 3: will happily do it. So I think realistically, you're not

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Speaker 3: going to get the rate cut before Kevin Wah, the

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Speaker 3: new governor, takes over, So then you're looking for basically

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Speaker 3: second half of the year. I think, you know, so

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Speaker 3: there's a lot of data that can still come out

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Speaker 3: ahead of that, So is too feasible? You go, definitely,

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Speaker 3: you're not going to write off three, but I wouldn

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Speaker 3: at the moment say more than three. But you know,

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Speaker 3: the market's going two to three. Giving the amount of

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Speaker 3: data it could still come out which could move that probability,

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Speaker 3: You go, well, you know, it's sort of fair. You know,

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Speaker 3: I don't think we're going extreme yet, but we're in

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Speaker 3: that two to three camp and I think we'll stay there.

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Speaker 3: I think the market's be very reluctant to go under two.

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Speaker 3: We need some really really strong day to do that.

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Speaker 3: But I think if we're going above three, then you

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Speaker 3: really need some really weak data, particularly the employment unemployment rate,

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Speaker 3: to optic.

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Speaker 2: Yeah, we'll get that US jobs data on Wednesday, today's

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Speaker 2: FED speaks seemed to me to be a little hawkish.

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Speaker 2: We heard from the head of the Cleveland FED, Beth Hammock,

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Speaker 2: and she was saying that interest rates could be on

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Speaker 2: hold for an extended period while the FED evaluates incoming data.

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Speaker 2: And the head of the Dallas FED, Laurie Logan, was

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Speaker 2: saying it would take material weakness in the labor market

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Speaker 2: for her to support more RAID cuts. I'm curious to

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Speaker 2: get your take on this messaging. Obviously, we're going to

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Speaker 2: get a new FED chairman soon, and perhaps a tilt

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Speaker 2: in the FED bias will change to becoming a little

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Speaker 2: more dubbish when Kevin Warsh is seated, if in fact

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Speaker 2: that does happen and he is confirmed by the Senate.

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Speaker 3: Yeah, if I'm honest, I don't. I think what all

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Speaker 3: that rhetoric illustrates how split the Federal Reserve is, and

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Speaker 3: I don't think that will change unless the hawks we saved,

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Speaker 3: unless they only become dubbish, and if they got data to

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Speaker 3: back that up. So at the moment, I mean that

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Speaker 3: UFED chair Powe's dealing with the split, and I think Kevin,

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Speaker 3: what should be no different. I mean, all you're doing

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Speaker 3: is you're changing one person. Yes, that person has a

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Speaker 3: strong influence over the policymakers, but at the end of

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Speaker 3: the they make their own decisions. You look at a

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Speaker 3: dot plot, it's always been very split, so there are

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Speaker 3: sort of two camps, and I think that will remain

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Speaker 3: cleinly for foreseeable future. I said, for those hawks become doves,

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Speaker 3: I think they'll go, not that they won't, but they go.

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Speaker 3: I needed more evidence than they're presently seeing, is what

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Speaker 3: they're saying, and I think it's fair at the moment.

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Speaker 2: Okay, David, we'll leave it their good stuff as always,

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Speaker 2: Thank you so much. David finnerity Bloomberg's strategist, joining from

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

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Speaker 2: the Daybreak Asia Podcast. I'm Doug Krisner. We moved to

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Speaker 2: China next and the latest readings on inflation. Consumer prices

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Speaker 2: were up last month less than expected. We had CPI

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Speaker 2: rising at an annual rate of two tenths of one percent. However,

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Speaker 2: producer prices dropped at an annual rate of one point

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Speaker 2: four percent. We got reaction from Robin Sching. Robin is

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Speaker 2: the chief Chine economist at Morgan Stanley he spoke with

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Speaker 2: Bloomberg TV host David Engliss and minman Low.

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Speaker 4: There is no signs of decisive reflation. If you look

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Speaker 4: at the CPI over the last three four months, they

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Speaker 4: edged up largely due to go the price and the vegetables.

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Speaker 4: If you stripe that out, Yeah, anything in the course

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Speaker 4: of its remained the very week due to y in

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Speaker 4: sufficient domestic demand. PPI improved a little bit, but I

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Speaker 4: think it's just mechanical. If you look at the PPI

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Speaker 4: is due to commodity price. It's all contributed by global factors.

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Speaker 4: It's not a demand let turn in China because we

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Speaker 4: see no path through from this upstream commodity price to

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Speaker 4: downstream or consumer goods. So there is no decisive reflation

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Speaker 4: yet in China.

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Speaker 5: I'm wondering when you talk about PPI. Actually, if you

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Speaker 5: pull out and look at the longer term, it's steadily

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Speaker 5: been improving since maybe middle of last year, and some

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Speaker 5: economist think we could see positive PPI somewhere maybe middle

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Speaker 5: of this year. Do you think that's possible.

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Speaker 4: Well, if you think about the big picture, China need

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Speaker 4: to refleate. They need to do three steps. Step one,

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Speaker 4: don't add a new capacity in these oversupplied sectors. They

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Speaker 4: started to do that anti evolution step two cutting access capacity,

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Speaker 4: they haven't done much. There is very limited progress on

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Speaker 4: that front due to job concerns or debt concerns. Finally,

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Speaker 4: post consumption, particularly boosting it in a sustainable way, not

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Speaker 4: just to catch for clong subsidy, but try to provide

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Speaker 4: a better upgraded social safety net to unlock consumption. That

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Speaker 4: part is also quite weak, right. So that's why I

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Speaker 4: don't see sustained reflation here. And the PPI improvement you

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Speaker 4: mentioned that I mentioned it is mechanical because global factors

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Speaker 4: like dollar debate or global AI data center demand, that's

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Speaker 4: helping the upstream price going up, but we don't see

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Speaker 4: it's passing through to any of the downstream or consumer

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Speaker 4: price in China that showed is largely important due to

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Speaker 4: external factors. It's not a China net reflation.

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Speaker 6: So the lack of okay, let's just call it the

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Speaker 6: demand pull inflationary pressures, that's really what matters, right, and

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Speaker 6: that's really what keeps things sustainable. That's the backdrop I'll

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Speaker 6: bring into other stories. Recently, there's the conversations from VAT

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Speaker 6: and the stronger currency. Both of those things are counter

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Speaker 6: inflation if well the other one actually, if you add inflation,

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Speaker 6: it's not perhaps the best time.

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Speaker 2: To do that.

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Speaker 6: Where do you think those two stories fit into the

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Speaker 6: inflation picture.

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Speaker 4: Well, the VAT debate is an interesting story. Your colleagues

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Speaker 4: did a great coverage on that that day when they

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Speaker 4: moved on the telecom VIAT, you know, from six per

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Speaker 4: century to nine percent. A lot of investors were concerned

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Speaker 4: this could become a broad based at hikes, not just

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Speaker 4: the left pocket the right pocket in a sooe dominated

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Speaker 4: the telecom business, but also maybe reaching out going after

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Speaker 4: private firms in Internet platforms, e commerce, gaming on at hikes.

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Speaker 4: We don't think they will do that because it's counterproductive,

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Speaker 4: it's bad for reflation, is hurting confidence, and it's inconsistent

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Speaker 4: with the macro consistency review work. But investors are concerned

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Speaker 4: due to legitimate reasons. We think in the upcoming National

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Speaker 4: People of Congress in March, they may set the physical

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Speaker 4: deficit ratio at the same level of last year. So

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Speaker 4: if the economy is in definition, you actually need more

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Speaker 4: proactive fiscal powers expanding fiscal deficit. B it the headline

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Speaker 4: deficit or the broad augmented deficit if you keep it

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Speaker 4: stable because government revenue is going to underperform during deflation.

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Speaker 4: Revenue as a percentage of GDP may decline and the

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Speaker 4: deficit keep stable. That means suspending power to support the economy,

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Speaker 4: support consumption or being limited. Right, So investors have a point.

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Speaker 4: Maybe the government need to collect more revenue by hiking

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Speaker 4: some tax rates, but that's counterproductive during deflation. So that's

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Speaker 4: why I think if they keep a modest stable deficity

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Speaker 4: ratio is probably not decisive reflation efforts. But I do

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Speaker 4: think if first half growth on the delivered, they may

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Speaker 4: you a top up in this physical package by second

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Speaker 4: half of this year in the order of maybe zero

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Speaker 4: point five percentage of GDP, you know, less than one

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Speaker 4: trallmain be targeting consumption or housing support.

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Speaker 5: To your point about fiscal policies, right, I think so

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Speaker 5: far all the signs this year showed that the government

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Speaker 5: is pulling back significantly in terms of consumption subsidies. Last

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Speaker 5: year is three hundred billion uion this year is sixty

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Speaker 5: over a billion UI in and you mentioned the social

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Speaker 5: safety net as well. What do you think is holding

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Speaker 5: the government back from decisively pumping in more.

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Speaker 4: Fiscal policies here, I think old habits die hard.

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Speaker 5: Right.

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Speaker 4: They try to be restrained on how much debt they

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Speaker 4: want to raise, how much deficit they want to expand,

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Speaker 4: partially due to the concerns if you do too much

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Speaker 4: debt expansion it's bad for the future, but also how

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Speaker 4: you spend the debt. China was used to the supply

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Speaker 4: centric business model, spending it on instructor capects or manufacturing upgrade.

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Speaker 4: But we know in some areas it's already oversupplied instructure

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Speaker 4: or industrial capacity. So they have to shift the pattern

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Speaker 4: of the spending mix from investing in physical goods to

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Speaker 4: investing in human capital like social welfare. But these are

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Speaker 4: all multi year journey of reform. I don't expect it.

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Speaker 4: They can do a big band reform this year. It

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Speaker 4: may be the start of the next five year plan

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Speaker 4: emphasizing the upgrading of a social safety net, but it

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Speaker 4: will take some time. So to your question, physical policy

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Speaker 4: is still restraint because they are still a lot of

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Speaker 4: old habits, and old habits die hard.

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Speaker 6: Some of the old let's call it old habits. To

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Speaker 6: barrier the concept you just raised, there is an exercise

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Speaker 6: in setting GDP and growth targets right, and we've heard

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Speaker 6: from many provinces recently over their individual targets for twenty

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Speaker 6: twenty six. How do those targets form you over what

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Speaker 6: the aggregate economic growth target is going to be at

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Speaker 6: the NPC and what they'll tell us.

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Speaker 4: Then, Yeah, we closely monitor how the local MPC from

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Speaker 4: each province or cities are tracking on gp target. Most

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Speaker 4: of them trimmed the target, so on average they lowered

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Speaker 4: the target of last years five point five percent to

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Speaker 4: twenty six five percent around five percent, so that probably

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Speaker 4: should national target will also be around five percent. I

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Speaker 4: don't think it's a downgrade, it's more like becoming more

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Speaker 4: practical if they can tolerate slightly slower growth instead of

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Speaker 4: doing all in for CAPAX to reach that five percent

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Speaker 4: or above growth target. These tolerance of slightly slower growth

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Speaker 4: is actually good for quality rebalancing efforts because if they

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Speaker 4: need to shift the spending from supply side to consumer welfare,

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Speaker 4: that will take time and the new term that may

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Speaker 4: mean you have to tolerate a lower GDP target because

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Speaker 4: it's always easier to anchor growth with instructure capacks, while

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Speaker 4: it may take longer harder to change people's behavior on consumption,

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Speaker 4: So I do take it. You know, ten out of

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Speaker 4: these top fifteen provinces lower the GDP target. That's probably

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Speaker 4: a good sign they are becoming more practical.

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Speaker 5: We have seen with the dollar slide, right, the UN

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Speaker 5: has been pushing towards six point nine, and there has

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Speaker 5: been expectation that this momentum would continue throughout the year.

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Speaker 5: But at the same time this would worsen't deflation, right,

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Speaker 5: So how much do you think the PBOC would allow

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Speaker 5: the UN to continue strengthening.

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Speaker 4: If you ask ten economists on the forecast of mean

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Speaker 4: ME today, I think ten out of ten will be bullished.

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Speaker 4: I am not one of them. The reason is Chinese

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Speaker 4: in deflation and a stronger currency in a sustainable session

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Speaker 4: is counterproductive for reflation. It could make the PPI deflation

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Speaker 4: even worse, squeezing profit margins for firms, so it's against

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Speaker 4: the reflation goal. Of course. Now people are looking at

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Speaker 4: your term the mean B has been strengthening. That's not

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Speaker 4: a German B story. That's largely a dollar story. Just

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Speaker 4: to look at your screen, dollar index is continue to

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Speaker 4: weakening and that's a dollar beta story. It's not a

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Speaker 4: German B alpha story. In fact, the PBOC probably prefer

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Speaker 4: by you know, maintaining the German b against its basket

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Speaker 4: at a stable level. The safety's basket will largely parked

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Speaker 4: at that around one hundred nine. Uh, that's the stability

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Speaker 4: they are looking for. When dollar is strengthening, the mean

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Speaker 4: be will weakened against the dollar. When dollar is weakening,

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Speaker 4: just like now, Dollarman b will strengthen. But it's not

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Speaker 4: a Reman b alpha story because they know that when

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Speaker 4: they have domestic definition problem, if you have a sustainable

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Speaker 4: briefly an appreciation of the currency is actually making PPI

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Speaker 4: deflation worth making profit margins of corporate worth. So I

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Speaker 4: don't think they are looking for a stronger sustainable appreciation

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Speaker 4: of the rep.

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Speaker 6: Do you think that's going to be the story of

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Speaker 6: twenty twenty six? That the economy is not bad enough

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Speaker 6: to merit short term stimulus, stick to the structural story,

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Speaker 6: but not good enough that it's not going to fuel

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Speaker 6: this earnings rally, that most equity strategists are now trying

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Speaker 6: to sustain rebound in the equity market well aly lost economy.

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Speaker 4: I think the theme for twenty six will be similar

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Speaker 4: to twenty five. Oka micropositive macro challenging, so it's a

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Speaker 4: slow burn in China. Cigradio long term reflation process. Macro

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Speaker 4: is still challenging, particularly these macro sensitive effectors housing consumption.

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Speaker 4: But micro you can see a lot of positives on tech, AI,

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Speaker 4: supply chain, bow tech, advestor manufacturing. So this is definitely

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Speaker 4: the area investors I met have been re engaging with China.

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Speaker 4: It's more on these micro positives, but on macro people

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Speaker 4: are still Cassius.

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Speaker 2: That was Robin Shing. He is the chief China economist

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Speaker 2: at Morgan Stanley, speaking there to Bloomberg's David Igliss and

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Speaker 2: minman Low, bringing you their conversation here on the Daybreak

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Speaker 2: Asia Podcast. Thanks for listening to today's episode of the

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Speaker 2: Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at

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

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

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Speaker 2: YouTube channel, or anywhere else you listen. Join us again

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Speaker 2: tomorrow for insight on the market moves from Hong Kong

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

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Speaker 2: Bloomberg