Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Welcome to the Daybreak Asia podcast. I'm Krisner. There's no
Speaker 2: trading today in Japan. Markets are closed for National Foundation
Speaker 2: Day and as a result, there will be no trading
Speaker 2: in US treasuries until the London session. In the Japanese
Speaker 2: equity market on Tuesday, we had the Nike closing at
Speaker 2: a record high. Shares in Soft Bank led the way
Speaker 2: with a gain of ten percent ahead of its earnings. Stateside,
Speaker 2: we did have the report on retail sales and the
Speaker 2: reading was unexpectedly flat for the month of December. Economists
Speaker 2: had expected an increase by four tenths of one percent,
Speaker 2: so the shortfall means the estimate on fourth quarter GDP
Speaker 2: will be reduced. It also reinforces the case that perhaps
Speaker 2: the Fed can be a little more aggressive in cutting
Speaker 2: interest rates this year. For a closer look at markets,
Speaker 2: I'm joined by Bloomberg Strategy just David Finnerty. David joins
Speaker 2: from our studios in Singapore. Thank you for being here
Speaker 2: and I want to play to one of your strengths
Speaker 2: and talk about the currency market. The Bloomberg Dollar Spot
Speaker 2: Index has been down now for three straight sessions, during
Speaker 2: New York trading, and in that time it's lost around
Speaker 2: one percent. Is the story on the weaker dollar really
Speaker 2: driving the narrative when you look at overall price action.
Speaker 3: In FX markets, Yes, I think it's basically dollar versus yeah,
Speaker 3: the rest of the world basically in terms of currencies.
Speaker 3: The general sentiment talking to a little traders and contacts
Speaker 3: that I have is that people generally would like to
Speaker 3: sell the dollar. They need the excuse to do that.
Speaker 3: They're getting some but you get these pullbacks because the
Speaker 3: US data comes out a bit mixed. You saw US
Speaker 3: retail sales over night was weak, but you go back
Speaker 3: to the IM data at the beginning of the month
Speaker 3: that was strong. So obviously everyone's looking at what the
Speaker 3: payroll data is today, particularly unemployment rate is that is
Speaker 3: tends to be what the Fed focuses on. If you
Speaker 3: did see an uptick in that, then I think the
Speaker 3: market go yes, finally we got another green knight to
Speaker 3: sell the dollar and buy other currencies, and they're tending
Speaker 3: to buy. If they're shorting the dollar, they're tending to
Speaker 3: go for the Euro or the Aussie dollar tend to
Speaker 3: be the two popular ones at the moment. But everything
Speaker 3: generally does well, but those tend to be the too
Speaker 3: popular trade.
Speaker 2: So, as I mentioned, we did have that record high
Speaker 2: for the Japanese equity market on Tuesday. A lot of
Speaker 2: this bullishness seems to be directly correlated to the so
Speaker 2: called taki ichi trade expectations here that we're going to
Speaker 2: see a lot more in a way of fiscal spending,
Speaker 2: perhaps a cut in the sales tax on certain food items.
Speaker 2: You would think with talk around fiscal stimulus that the
Speaker 2: Japanese currency would weaken, but that doesn't seem to have
Speaker 2: been the case. So if you look at the yen strength, David,
Speaker 2: does that really revolve around the dollar weakness story?
Speaker 3: Yeah, well, I would still remember dolly in still trading
Speaker 3: one fifty four, so historically still at the weaker end
Speaker 3: of its range, shall we say, with like one sixty
Speaker 3: basically being the bottom of it. Some of it really
Speaker 3: have won, it's just this end of intervention fears that
Speaker 3: you have. Some of it is a weeker dollar. But
Speaker 3: you know when it was up around one fifty seven
Speaker 3: just the start of the week, you know the market
Speaker 3: was the Finance Miniso in Japan came out and did say,
Speaker 3: look you now we are watching currency markets. Was again
Speaker 3: was we don't want that one sided spectation against the end.
Speaker 3: So that's a strength and the end pushed dolly and lower.
Speaker 3: But even as you said, some of it Nan has
Speaker 3: been the dollar side. What's interesting is talking to some
Speaker 3: traders yesterday when dolly en was around one fifty five
Speaker 3: ahead of the US retail sales data, I was like,
Speaker 3: you know what sort of the positioning on this? Where
Speaker 3: are we? And they go, look, realistically, the long dollar
Speaker 3: en longs have been sort of been squaring up. It
Speaker 3: hasn't shifted to a dollar in short position yet. They said,
Speaker 3: this is some of that, but not a lot. I
Speaker 3: think everyone really is looking this payroll but to get
Speaker 3: out the way to give Glay the greater clarity in
Speaker 3: terms of whether dollar headed and therefore sy Dollien will
Speaker 3: go with that.
Speaker 2: The other story here that's kind of remarkable to me
Speaker 2: is the strength that we've been seeing in the Chinese currency,
Speaker 2: both offshore and onshore. Is that again really about dollar weakness.
Speaker 3: I think that's a bit of two things. I mean, obviously,
Speaker 3: the PBOC with the fixed scenes has continually sort of
Speaker 3: indicated that it's quite happy for it to slowly appreciate,
Speaker 3: and I emphasize the slowly appreciate. The Federal Reserve came
Speaker 3: out recently. Also, the Treasury did in its semi annual
Speaker 3: country report and did say, okay, they think the EU
Speaker 3: one was well undervalued. So obviously they're giving signs to China,
Speaker 3: let your currency appreciate. China seems to be willing to
Speaker 3: let it appreciate to some degree. I mean, we have
Speaker 3: six nineties, you know, a lot of people saying that
Speaker 3: maybe six eighty six seventy versus dollar per year end.
Speaker 3: That certainly the path at the moment of least resistance. Again,
Speaker 3: things can always change with geopolitics, which could disrupt the carts.
Speaker 3: But the moment, the trend higher PBOC doesn't seem to
Speaker 3: be fighting that. So the market, which is long yan
Speaker 3: so short dotty one, is quite happy with this, quite
Speaker 3: high at the moment.
Speaker 2: So you mentioned that week reading on retail sales. It
Speaker 2: caused money markets to price slightly higher odds for three
Speaker 2: Fed rate cuts this year. Two have already fully been
Speaker 2: priced in, And I'm wondering whether or not you're comfortable
Speaker 2: with the idea that we could see as many as
Speaker 2: three or is that maybe a little bit too much enthusiasm.
Speaker 3: I think, look at the moment, the market loves rate cuts,
Speaker 3: so you give it a chance to price inerrate cut
Speaker 3: will happily do it. So I think realistically, you're not
Speaker 3: going to get the rate cut before Kevin Wah, the
Speaker 3: new governor, takes over, So then you're looking for basically
Speaker 3: second half of the year. I think, you know, so
Speaker 3: there's a lot of data that can still come out
Speaker 3: ahead of that, So is too feasible? You go, definitely,
Speaker 3: you're not going to write off three, but I wouldn
Speaker 3: at the moment say more than three. But you know,
Speaker 3: the market's going two to three. Giving the amount of
Speaker 3: data it could still come out which could move that probability,
Speaker 3: You go, well, you know, it's sort of fair. You know,
Speaker 3: I don't think we're going extreme yet, but we're in
Speaker 3: that two to three camp and I think we'll stay there.
Speaker 3: I think the market's be very reluctant to go under two.
Speaker 3: We need some really really strong day to do that.
Speaker 3: But I think if we're going above three, then you
Speaker 3: really need some really weak data, particularly the employment unemployment rate,
Speaker 3: to optic.
Speaker 2: Yeah, we'll get that US jobs data on Wednesday, today's
Speaker 2: FED speaks seemed to me to be a little hawkish.
Speaker 2: We heard from the head of the Cleveland FED, Beth Hammock,
Speaker 2: and she was saying that interest rates could be on
Speaker 2: hold for an extended period while the FED evaluates incoming data.
Speaker 2: And the head of the Dallas FED, Laurie Logan, was
Speaker 2: saying it would take material weakness in the labor market
Speaker 2: for her to support more RAID cuts. I'm curious to
Speaker 2: get your take on this messaging. Obviously, we're going to
Speaker 2: get a new FED chairman soon, and perhaps a tilt
Speaker 2: in the FED bias will change to becoming a little
Speaker 2: more dubbish when Kevin Warsh is seated, if in fact
Speaker 2: that does happen and he is confirmed by the Senate.
Speaker 3: Yeah, if I'm honest, I don't. I think what all
Speaker 3: that rhetoric illustrates how split the Federal Reserve is, and
Speaker 3: I don't think that will change unless the hawks we saved,
Speaker 3: unless they only become dubbish, and if they got data to
Speaker 3: back that up. So at the moment, I mean that
Speaker 3: UFED chair Powe's dealing with the split, and I think Kevin,
Speaker 3: what should be no different. I mean, all you're doing
Speaker 3: is you're changing one person. Yes, that person has a
Speaker 3: strong influence over the policymakers, but at the end of
Speaker 3: the they make their own decisions. You look at a
Speaker 3: dot plot, it's always been very split, so there are
Speaker 3: sort of two camps, and I think that will remain
Speaker 3: cleinly for foreseeable future. I said, for those hawks become doves,
Speaker 3: I think they'll go, not that they won't, but they go.
Speaker 3: I needed more evidence than they're presently seeing, is what
Speaker 3: they're saying, and I think it's fair at the moment.
Speaker 2: Okay, David, we'll leave it their good stuff as always,
Speaker 2: Thank you so much. David finnerity Bloomberg's strategist, joining from
Speaker 2: Singapore here on the Daybreak Asia podcast. Welcome back to
Speaker 2: the Daybreak Asia Podcast. I'm Doug Krisner. We moved to
Speaker 2: China next and the latest readings on inflation. Consumer prices
Speaker 2: were up last month less than expected. We had CPI
Speaker 2: rising at an annual rate of two tenths of one percent. However,
Speaker 2: producer prices dropped at an annual rate of one point
Speaker 2: four percent. We got reaction from Robin Sching. Robin is
Speaker 2: the chief Chine economist at Morgan Stanley he spoke with
Speaker 2: Bloomberg TV host David Engliss and minman Low.
Speaker 4: There is no signs of decisive reflation. If you look
Speaker 4: at the CPI over the last three four months, they
Speaker 4: edged up largely due to go the price and the vegetables.
Speaker 4: If you stripe that out, Yeah, anything in the course
Speaker 4: of its remained the very week due to y in
Speaker 4: sufficient domestic demand. PPI improved a little bit, but I
Speaker 4: think it's just mechanical. If you look at the PPI
Speaker 4: is due to commodity price. It's all contributed by global factors.
Speaker 4: It's not a demand let turn in China because we
Speaker 4: see no path through from this upstream commodity price to
Speaker 4: downstream or consumer goods. So there is no decisive reflation
Speaker 4: yet in China.
Speaker 5: I'm wondering when you talk about PPI. Actually, if you
Speaker 5: pull out and look at the longer term, it's steadily
Speaker 5: been improving since maybe middle of last year, and some
Speaker 5: economist think we could see positive PPI somewhere maybe middle
Speaker 5: of this year. Do you think that's possible.
Speaker 4: Well, if you think about the big picture, China need
Speaker 4: to refleate. They need to do three steps. Step one,
Speaker 4: don't add a new capacity in these oversupplied sectors. They
Speaker 4: started to do that anti evolution step two cutting access capacity,
Speaker 4: they haven't done much. There is very limited progress on
Speaker 4: that front due to job concerns or debt concerns. Finally,
Speaker 4: post consumption, particularly boosting it in a sustainable way, not
Speaker 4: just to catch for clong subsidy, but try to provide
Speaker 4: a better upgraded social safety net to unlock consumption. That
Speaker 4: part is also quite weak, right. So that's why I
Speaker 4: don't see sustained reflation here. And the PPI improvement you
Speaker 4: mentioned that I mentioned it is mechanical because global factors
Speaker 4: like dollar debate or global AI data center demand, that's
Speaker 4: helping the upstream price going up, but we don't see
Speaker 4: it's passing through to any of the downstream or consumer
Speaker 4: price in China that showed is largely important due to
Speaker 4: external factors. It's not a China net reflation.
Speaker 6: So the lack of okay, let's just call it the
Speaker 6: demand pull inflationary pressures, that's really what matters, right, and
Speaker 6: that's really what keeps things sustainable. That's the backdrop I'll
Speaker 6: bring into other stories. Recently, there's the conversations from VAT
Speaker 6: and the stronger currency. Both of those things are counter
Speaker 6: inflation if well the other one actually, if you add inflation,
Speaker 6: it's not perhaps the best time.
Speaker 2: To do that.
Speaker 6: Where do you think those two stories fit into the
Speaker 6: inflation picture.
Speaker 4: Well, the VAT debate is an interesting story. Your colleagues
Speaker 4: did a great coverage on that that day when they
Speaker 4: moved on the telecom VIAT, you know, from six per
Speaker 4: century to nine percent. A lot of investors were concerned
Speaker 4: this could become a broad based at hikes, not just
Speaker 4: the left pocket the right pocket in a sooe dominated
Speaker 4: the telecom business, but also maybe reaching out going after
Speaker 4: private firms in Internet platforms, e commerce, gaming on at hikes.
Speaker 4: We don't think they will do that because it's counterproductive,
Speaker 4: it's bad for reflation, is hurting confidence, and it's inconsistent
Speaker 4: with the macro consistency review work. But investors are concerned
Speaker 4: due to legitimate reasons. We think in the upcoming National
Speaker 4: People of Congress in March, they may set the physical
Speaker 4: deficit ratio at the same level of last year. So
Speaker 4: if the economy is in definition, you actually need more
Speaker 4: proactive fiscal powers expanding fiscal deficit. B it the headline
Speaker 4: deficit or the broad augmented deficit if you keep it
Speaker 4: stable because government revenue is going to underperform during deflation.
Speaker 4: Revenue as a percentage of GDP may decline and the
Speaker 4: deficit keep stable. That means suspending power to support the economy,
Speaker 4: support consumption or being limited. Right, So investors have a point.
Speaker 4: Maybe the government need to collect more revenue by hiking
Speaker 4: some tax rates, but that's counterproductive during deflation. So that's
Speaker 4: why I think if they keep a modest stable deficity
Speaker 4: ratio is probably not decisive reflation efforts. But I do
Speaker 4: think if first half growth on the delivered, they may
Speaker 4: you a top up in this physical package by second
Speaker 4: half of this year in the order of maybe zero
Speaker 4: point five percentage of GDP, you know, less than one
Speaker 4: trallmain be targeting consumption or housing support.
Speaker 5: To your point about fiscal policies, right, I think so
Speaker 5: far all the signs this year showed that the government
Speaker 5: is pulling back significantly in terms of consumption subsidies. Last
Speaker 5: year is three hundred billion uion this year is sixty
Speaker 5: over a billion UI in and you mentioned the social
Speaker 5: safety net as well. What do you think is holding
Speaker 5: the government back from decisively pumping in more.
Speaker 4: Fiscal policies here, I think old habits die hard.
Speaker 5: Right.
Speaker 4: They try to be restrained on how much debt they
Speaker 4: want to raise, how much deficit they want to expand,
Speaker 4: partially due to the concerns if you do too much
Speaker 4: debt expansion it's bad for the future, but also how
Speaker 4: you spend the debt. China was used to the supply
Speaker 4: centric business model, spending it on instructor capects or manufacturing upgrade.
Speaker 4: But we know in some areas it's already oversupplied instructure
Speaker 4: or industrial capacity. So they have to shift the pattern
Speaker 4: of the spending mix from investing in physical goods to
Speaker 4: investing in human capital like social welfare. But these are
Speaker 4: all multi year journey of reform. I don't expect it.
Speaker 4: They can do a big band reform this year. It
Speaker 4: may be the start of the next five year plan
Speaker 4: emphasizing the upgrading of a social safety net, but it
Speaker 4: will take some time. So to your question, physical policy
Speaker 4: is still restraint because they are still a lot of
Speaker 4: old habits, and old habits die hard.
Speaker 6: Some of the old let's call it old habits. To
Speaker 6: barrier the concept you just raised, there is an exercise
Speaker 6: in setting GDP and growth targets right, and we've heard
Speaker 6: from many provinces recently over their individual targets for twenty
Speaker 6: twenty six. How do those targets form you over what
Speaker 6: the aggregate economic growth target is going to be at
Speaker 6: the NPC and what they'll tell us.
Speaker 4: Then, Yeah, we closely monitor how the local MPC from
Speaker 4: each province or cities are tracking on gp target. Most
Speaker 4: of them trimmed the target, so on average they lowered
Speaker 4: the target of last years five point five percent to
Speaker 4: twenty six five percent around five percent, so that probably
Speaker 4: should national target will also be around five percent. I
Speaker 4: don't think it's a downgrade, it's more like becoming more
Speaker 4: practical if they can tolerate slightly slower growth instead of
Speaker 4: doing all in for CAPAX to reach that five percent
Speaker 4: or above growth target. These tolerance of slightly slower growth
Speaker 4: is actually good for quality rebalancing efforts because if they
Speaker 4: need to shift the spending from supply side to consumer welfare,
Speaker 4: that will take time and the new term that may
Speaker 4: mean you have to tolerate a lower GDP target because
Speaker 4: it's always easier to anchor growth with instructure capacks, while
Speaker 4: it may take longer harder to change people's behavior on consumption,
Speaker 4: So I do take it. You know, ten out of
Speaker 4: these top fifteen provinces lower the GDP target. That's probably
Speaker 4: a good sign they are becoming more practical.
Speaker 5: We have seen with the dollar slide, right, the UN
Speaker 5: has been pushing towards six point nine, and there has
Speaker 5: been expectation that this momentum would continue throughout the year.
Speaker 5: But at the same time this would worsen't deflation, right,
Speaker 5: So how much do you think the PBOC would allow
Speaker 5: the UN to continue strengthening.
Speaker 4: If you ask ten economists on the forecast of mean
Speaker 4: ME today, I think ten out of ten will be bullished.
Speaker 4: I am not one of them. The reason is Chinese
Speaker 4: in deflation and a stronger currency in a sustainable session
Speaker 4: is counterproductive for reflation. It could make the PPI deflation
Speaker 4: even worse, squeezing profit margins for firms, so it's against
Speaker 4: the reflation goal. Of course. Now people are looking at
Speaker 4: your term the mean B has been strengthening. That's not
Speaker 4: a German B story. That's largely a dollar story. Just
Speaker 4: to look at your screen, dollar index is continue to
Speaker 4: weakening and that's a dollar beta story. It's not a
Speaker 4: German B alpha story. In fact, the PBOC probably prefer
Speaker 4: by you know, maintaining the German b against its basket
Speaker 4: at a stable level. The safety's basket will largely parked
Speaker 4: at that around one hundred nine. Uh, that's the stability
Speaker 4: they are looking for. When dollar is strengthening, the mean
Speaker 4: be will weakened against the dollar. When dollar is weakening,
Speaker 4: just like now, Dollarman b will strengthen. But it's not
Speaker 4: a Reman b alpha story because they know that when
Speaker 4: they have domestic definition problem, if you have a sustainable
Speaker 4: briefly an appreciation of the currency is actually making PPI
Speaker 4: deflation worth making profit margins of corporate worth. So I
Speaker 4: don't think they are looking for a stronger sustainable appreciation
Speaker 4: of the rep.
Speaker 6: Do you think that's going to be the story of
Speaker 6: twenty twenty six? That the economy is not bad enough
Speaker 6: to merit short term stimulus, stick to the structural story,
Speaker 6: but not good enough that it's not going to fuel
Speaker 6: this earnings rally, that most equity strategists are now trying
Speaker 6: to sustain rebound in the equity market well aly lost economy.
Speaker 4: I think the theme for twenty six will be similar
Speaker 4: to twenty five. Oka micropositive macro challenging, so it's a
Speaker 4: slow burn in China. Cigradio long term reflation process. Macro
Speaker 4: is still challenging, particularly these macro sensitive effectors housing consumption.
Speaker 4: But micro you can see a lot of positives on tech, AI,
Speaker 4: supply chain, bow tech, advestor manufacturing. So this is definitely
Speaker 4: the area investors I met have been re engaging with China.
Speaker 4: It's more on these micro positives, but on macro people
Speaker 4: are still Cassius.
Speaker 2: That was Robin Shing. He is the chief China economist
Speaker 2: at Morgan Stanley, speaking there to Bloomberg's David Igliss and
Speaker 2: minman Low, bringing you their conversation here on the Daybreak
Speaker 2: Asia Podcast. Thanks for listening to today's episode of the
Speaker 2: Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at
Speaker 2: the story shaping markets, finance, and geopolitics in the Asia Pacific.
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