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Speaker 1: This is Bloomberg Daybreak Asia for this Thursday, March ninth

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Speaker 1: in Hong Kong, Wednesday March eighth in New York and

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Speaker 1: coming up today. Fetcher J. Powell says no decision has

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Speaker 1: been made on the size of this month's rate hike.

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Speaker 1: The Netherlands prepares more restrictions on shipmaking gear to China,

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Speaker 1: and Apple shakes up as sales operation to focus more

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Speaker 1: on growth in India. President She calls for the need

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Speaker 1: for its tech industry to boost China's military. US intelligence

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Speaker 1: report says China is aid in Russia during its war effort.

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Speaker 1: Australia touts new submarines. I'm at Baxter with Global News.

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Speaker 1: That's all straight ahead on Bloomberg Daybreak Asia, the business

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Speaker 1: news you need to start your day in just one

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Speaker 1: fifteen minute podcast available on Apples, Spotify, the Bloomberg Business

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Speaker 1: app and everywhere you get your podcasts. Good morning, I'm

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Speaker 1: Deck Prisoner and I'm Brian Curtis. Here the stories we're

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Speaker 1: following today. Ben Chair J. Powell, softening his tone a

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Speaker 1: little during a second day of congressional testimony, He said

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Speaker 1: the FED hadn't made any decision on what it will

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Speaker 1: do at its next meeting in March. Larger point, though,

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Speaker 1: is that we're not on a preset path and that

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Speaker 1: we will be guided by the incoming data any evolving outlook.

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Speaker 1: No decision has been made on this, but if the

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Speaker 1: totality of the data were to indicate that faster tightening

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Speaker 1: is warranted, we'd be prepared to increase the pace of

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Speaker 1: rate hikes. PAL signed upcoming payroll and inflation reports as

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Speaker 1: potentially key data. In the meantime, Traders up their bets

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Speaker 1: on Wednesday that the FED wood hike interest rates by

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Speaker 1: half a point at its next meeting. They also saw

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Speaker 1: the FED taking rates to a peak of near five

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Speaker 1: point seven percent this year, and that he's up from

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Speaker 1: five point five percent on Monday. Well, TikTok is making

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Speaker 1: a push to convince governments in Europe that the company

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Speaker 1: does protect user data. We have that story from Bloomberg's

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Speaker 1: ofvon Men. TikTok is planning to build three European data

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Speaker 1: center is to store information in the region locally. It'll

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Speaker 1: be done with help from an independent third party that

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Speaker 1: will oversee data access controls. TikTok's European data is currently

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Speaker 1: stored in Singapore and the US. The new data centers

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Speaker 1: will take about three years to build and will cost

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Speaker 1: one point three billion dollars annually to maintain. TikTok's latest

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Speaker 1: move follows an order from the European Commission to ask

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Speaker 1: its own staff to delete the app. Germany and Canada

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Speaker 1: follows suit, and the Netherlands is said to be considering

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Speaker 1: similar steps. In Hong Kong, I'm Ivan Mah Bloomberg Daybreak Asia,

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Speaker 1: the Netherlands is preparing more restrictions on chip making gear

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Speaker 1: to China. More from Bloomberg's David and Glaze. A new

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Speaker 1: proposal will reign in exports a so called immersion DUV

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Speaker 1: lithography products that, in addition to restrictions that already exist

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Speaker 1: for the most cutting edge lithography machines now, this means

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Speaker 1: that Dutch tech firm ASML will be barred from selling

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Speaker 1: some additional technology to Chinese companies. Even so, ASML said

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Speaker 1: in a separate statement that the measures would not have

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Speaker 1: a material effect on its outlook for twenty twenty three.

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Speaker 1: The plan comes as the US ramps up restrictions and

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Speaker 1: China's access to semiconductor technology, and the US is counting

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Speaker 1: on the Netherlands to help stop China from further developing

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Speaker 1: its chip industry and its military in Hong Kong. I'm

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Speaker 1: David Inglis bloombrig Debrick Asia. We go to Apple next.

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Speaker 1: We are told the company is reshuffling management of its

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Speaker 1: international businesses with a name of putting a larger focus

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Speaker 1: on India. That story from Bloomberg's Charlie Pellet. It is

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Speaker 1: a sign of the nation's growing importance. The shift will

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Speaker 1: mark the first time that India becomes its own sales

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Speaker 1: region at Apple, which has seen demands surge in the country.

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Speaker 1: One of the sources says it will give the Asian

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Speaker 1: nation increased prominence inside the tech giant. Apple is making

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Speaker 1: the change after its vice president in charge of India,

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Speaker 1: the Middle East, Mediterranean, East, Europe and Africa recently retired.

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Speaker 1: In New York, Charlie Pellet Bloomberg Daybreak Asia. We did

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Speaker 1: have Apple gaining about eight tenths of a percent in

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Speaker 1: this latest session, probably not really as a result of

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Speaker 1: that story and also asml Interestingly, when it traded last

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Speaker 1: in Europe, it traded up about one point four percent.

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Speaker 1: The Adanni family is said to have paid off all

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Speaker 1: borrowings backed by Adanni Group shares investors at a meeting

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Speaker 1: in London quoted a Donnie executives for this update. In addition,

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Speaker 1: sources say that the group repaid a five hundred million

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Speaker 1: dollar bridge loan to banks that was due today. The

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Speaker 1: London meeting was part of a global road show that

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Speaker 1: included earlier stops in Hong Kong, Singapore, and Dubai. The

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Speaker 1: Adonni Group has been trying to reassure investors after a

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Speaker 1: scathing short seller report, and the road show may be working.

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Speaker 1: US investment firm GQG Partners said it would likely increase

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Speaker 1: its stakes in Adanni firms over time. Adanni's roadshow will

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Speaker 1: continue this week in the United States. Meetings will be

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Speaker 1: held over four days in New York and Los Angeles. So, Doug,

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Speaker 1: the bear case is pretty easily made. It's about all

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Speaker 1: you hear at the moment. The bull case that's much

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Speaker 1: more difficult, But it would become a little easier if

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Speaker 1: the upcoming data, the economic data was somewhat muted. Yeah,

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Speaker 1: that'll begin Friday with the employment report here in the US,

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Speaker 1: and then you look to next week with the inflation

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Speaker 1: data that we're going to get on a Wednesday, that's

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Speaker 1: the consumer price index. It's going to probably indicate to

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Speaker 1: that inflation remains stubbornly high. But in terms of trend line,

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Speaker 1: I think that we are beginning to see a little

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Speaker 1: bit of a continuation of a softening at least in

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Speaker 1: the rate of inflation here in the US. But to

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Speaker 1: your point, Brian, as long as the FED is going

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Speaker 1: to continue to lean into this fight aggressively, and if

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Speaker 1: the market has it right and there is an additional

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Speaker 1: one hundred basis points of tightening over the next four meetings,

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Speaker 1: then you're also right. The equity market has a bit

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Speaker 1: of a headwind to face. Yeah, it's a little bit

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Speaker 1: of head scratcher. Then you get comments like we heard

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Speaker 1: from Caterpillar that they see demand pretty strong and they

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Speaker 1: don't see a recession in the United States. And if

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Speaker 1: you look at Caterpillar and also John Deer, the stocks

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Speaker 1: typical industrial names have traded up of thirty five to

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Speaker 1: forty percent since September, although of late they've been moving

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Speaker 1: a little bit more sideways. But there's a lot of

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Speaker 1: conflicting signals in the marketplace. Yeah, when it comes to

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Speaker 1: cat how much of this is construction, how much of

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Speaker 1: it is mining. Right, we talk a lot about the

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Speaker 1: transition to cleaner energy that's going to boost consumption of metals.

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Speaker 1: The mining cycle is going to be a very very

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Speaker 1: critical component for Caterpillar to look at it as the

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Speaker 1: need for more natural resources becomes greater. I think that

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Speaker 1: a company like cat it's probably going to be a

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Speaker 1: big beneficiary. Yeah, so bullcase versus bearcase, inflation versus recession.

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Speaker 1: Will put these questions to James aboute coming up in

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Speaker 1: a few moments from Center Asset Management. Now it's time

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Speaker 1: for Global News. China's president Hijinping is calling for its

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Speaker 1: technology advancements to help boost its military might and backs

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Speaker 1: to it with Global News in San Francisco in the

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Speaker 1: nine sixty news from it Yeah that's right, Brian. She

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Speaker 1: clearly says China needs to accelerate its bois for high

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Speaker 1: tech independence to achieve advantage over its international rivals. Bloomberg.

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Speaker 1: Stephen angel In Honkong says she is telling military delegates

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Speaker 1: at the NPC that ties with technology and defense will

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Speaker 1: build its military standing in the world. Just about every

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Speaker 1: leader has talked about this pressure that China is under

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Speaker 1: and the need for a whole nation approach to become

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Speaker 1: or reach technology independent, thereby strengthening the military. Meanwhile, the

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Speaker 1: US is saying China will deepen its ties with Russia

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Speaker 1: despite global pressure. The Director of National Intelligence Abril Haines

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Speaker 1: releasing report and appearing before a Senate intelligence today saying,

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Speaker 1: despite global backlash, China will maintain its diplomatic defense he

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Speaker 1: can technology cooperation with Russia. This in an effort to

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Speaker 1: challenge the US. Haynes says China needs the relationship with

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Speaker 1: Russia desperately. The IC assesses that China's long term economic

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Speaker 1: growth will continue to decelerate because China's era of rapid

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Speaker 1: catch up growth is ending. In Structural issues such as debt, demographics, inequality,

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Speaker 1: overreliance on investment, and suppressed consumption remain and at the hearing,

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Speaker 1: Senator Marc o'rubio drilled down with FBI Director Christopher Ray

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Speaker 1: on China and TikTok, but they use it to drive

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Speaker 1: narratives like to divide Americans against each other. For example,

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Speaker 1: let's say China wants to invade Taiwan to make sure

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Speaker 1: that the Americans are seeing videos arguing why Taiwan belongs

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Speaker 1: to China and why the US should not intervene yes,

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Speaker 1: and I would make the point on that last one,

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Speaker 1: in particular, that we're not sure that we would see

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Speaker 1: many of the outward signs of it happening if it

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Speaker 1: was happening. And Ray confirmed to his knowledge of TikTok

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Speaker 1: also had access to privacy of the American public. The

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Speaker 1: committee also sought more information about the origins of COVID. Again,

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Speaker 1: Abril Haines, there's a broad consensus in the intelligence community

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Speaker 1: that the outbreak is not the result of a bioweapon

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Speaker 1: or genetic engineering. What there isn't a consensus on is

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Speaker 1: whether or not it's a lably or natural exposure to

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Speaker 1: an infected animal, Haines says a leading intelligence as it

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Speaker 1: did emanate from China. Though, a treasure trove of stories

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Speaker 1: coming out of the depositions and the dominion voting System's

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Speaker 1: defamation lawsuit against Fox News. Court documents, for example, focusing

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Speaker 1: on Tucker Carlson have him passionately writing about Donald Trump quote,

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Speaker 1: I hate him passionately this while he's loyally supporting him

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Speaker 1: on the air, going on to say, I truly can't

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Speaker 1: wait reference to talking about with him too for it

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Speaker 1: to end. Now, these statements draw a dark contrast to

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Speaker 1: what he and other host were saying on the air

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Speaker 1: on Fox and White House Folks when Karine Jean Pierre

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Speaker 1: put an exclamation point on it. Today, you agree with

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Speaker 1: the Fox Nation's own attorneys and executives who have repeatedly

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Speaker 1: stressed in multiple courts of law that Tucker Coulson is

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Speaker 1: not credible when it comes to this issue, in particular,

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Speaker 1: Global News powered by more than twenty seven hundred journalists

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Speaker 1: and analysts and over one hundred twenty countries. In San Francisco,

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Speaker 1: I'm at Baxter and this is Bloomberg. This is Bloomberg

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Speaker 1: day Break Asia. I'm Brian Curtis, along with Rashad Salama,

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Speaker 1: Doug Krisner, and Ed Baxter as well. Our guest on

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Speaker 1: the show this morning is James Abatte, Managing director and

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Speaker 1: Chief investment Officer at Center Asset Management. James, Doug and

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Speaker 1: I were just talking about inflation versus recession, you know,

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Speaker 1: which is the greater fear at the moment, and how

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Speaker 1: difficult it is to really make the bulk case here

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Speaker 1: other than perhaps for individual stories. Always interested in your take,

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Speaker 1: How how are you looking at markets these days? Well,

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Speaker 1: I think when you're looking at top down indicators as

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Speaker 1: the yoke curve being inverted on their own every maturity,

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Speaker 1: pm i's other leading indicators and contraction, housing, construction weakness,

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Speaker 1: and job losses. You see daily in technology and finance.

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Speaker 1: It screams economy wide recession. However, you know, as a

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Speaker 1: stock an, it's doing bottom up research across all sectors

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Speaker 1: of the market. You know, what we're seeing is that

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Speaker 1: it's possible that you know, barring a significant demand shock,

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Speaker 1: we might end up with what I consider a rolling

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Speaker 1: recession that lasts much longer than the average recession, but

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Speaker 1: it's quite shallow as it goes from industry to industry.

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Speaker 1: I mean, for example, today today's release of the Federal

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Speaker 1: Reserves Page book I highlighted that supply chain disruptions continue

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Speaker 1: to ease. Consumer spending has generally held steady. Traveling tourism

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Speaker 1: was a bright spot actually and verily strong, while manufacturing

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Speaker 1: was quite stable. But when you look at loan demand,

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Speaker 1: client credit standard of tightening, delinquency rates edged up, the

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Speaker 1: interest rates move higher, you know, from US I think

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Speaker 1: the most significant complicating factor to all of this analysis

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Speaker 1: is the strength of the labor market. I mean, now

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Speaker 1: the side of tech and finance companies are highly reluctant

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Speaker 1: to let go of trained workers and remain understaff due

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Speaker 1: to the lingering effects of the pandemic crisis. So we

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Speaker 1: might just be able to avoid a recession here. So James, ultimately,

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Speaker 1: you know, is the FED actually getting it right? You know,

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Speaker 1: let's think about it. Assuming the FED races its target

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Speaker 1: rate by fifty basis points at the March meeting coming up,

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Speaker 1: and we get to a five to five and a

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Speaker 1: quarter or target range. You know, let's just point out

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Speaker 1: that that may seem high, and in fact that's the

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Speaker 1: most significant in terms of the slope in terms of

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Speaker 1: rate races that we've seen, you know, in a generation.

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Speaker 1: But when core CPI inflation still stands at five point

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Speaker 1: six percent, rates are still negative in real terms. I mean,

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Speaker 1: more importantly, if you look at interest rates that are

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Speaker 1: broadly used in the economy as well as valuation, most

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Speaker 1: notably the ten year US treasure yield, which is now

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Speaker 1: at four percent, it's still a negative two percent rate

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Speaker 1: in terms of real terms. So let's talk of restrictive

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Speaker 1: monetary policy stance is simply not true. I mean, until

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Speaker 1: real yields, you know, go from negative to positive. I

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Speaker 1: think that's where the FED is going to end up.

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Speaker 1: So you know, when you think about you know, looking

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Speaker 1: at even inflation, you know for falls and coming months,

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Speaker 1: when you look at forward looking measures like tips shields,

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Speaker 1: they're still well below where we were for before the

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Speaker 1: global financial crisis, are around one hundred and fifty basis

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Speaker 1: points right now. So I've changed my thought process in

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Speaker 1: terms of the FED. I think the FED is and

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Speaker 1: this is from interpretation of Powell's comments over the last

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Speaker 1: year or so, is that they're going to stop and

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Speaker 1: hold rates when the ten year tip rate gets to

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Speaker 1: around two percent, which is essentially the real yield, meaning

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Speaker 1: either inflation expectations fall down or nominal rates move higher,

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Speaker 1: because you still got about one hundred basis points to

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Speaker 1: go to basically get to that point where real yields

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Speaker 1: on a forward looking basis or at that two two

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Speaker 1: and a half percent level, which is where they existed

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Speaker 1: prior to the global financial crisis. So it's going back

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Speaker 1: to the old normal. So is there an issue, do

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Speaker 1: you think in terms of messaging? I think so, because

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Speaker 1: what's happening now is that there's an entire generation of

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Speaker 1: investors who basically know nothing other than the FED put

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Speaker 1: and easy monetary policy, and in essence, as you rightly

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Speaker 1: point out, we're kind of getting back to the future,

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Speaker 1: which is, you know, really the way things existed in

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Speaker 1: terms of a normal rate. I think if you do

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Speaker 1: want to look at, you know, a variable that does matter,

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Speaker 1: it's credit spreads, and right now BAA spreads are still

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Speaker 1: near historic lows, only around you know, two percent. I mean,

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Speaker 1: unless you get to three percent levels, you're not even

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Speaker 1: close to considering recessionary levels. And when you look at

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Speaker 1: even high yield indices, um, they're no, we're near close

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Speaker 1: to the levels that we saw during the two thousand

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Speaker 1: and two recession, or you know, even very elevated levels

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Speaker 1: during two thousand and eight. But James, if you're right

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Speaker 1: and we get this sort of long rolling recession, wouldn't

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Speaker 1: that do the trick? Wouldn't that get at inflation? In fact,

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Speaker 1: it's actually not a bad scenario because it means that,

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Speaker 1: you know, because people don't want to fire or companies

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Speaker 1: don't want to fire their workers, they will stay employed,

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Speaker 1: they will keep getting paychecks, and they will spend and

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Speaker 1: even if growth slows down, it just buys you some

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Speaker 1: time for ultimately higher interest rates to bring inflation down

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Speaker 1: and nobody gets that hurt. Yeah, that's that's kind of

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Speaker 1: like what the market has told us, right, because the

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Speaker 1: SMP five hundreds at the same level today as it

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Speaker 1: was last May, so you know, the earnings collapse is

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Speaker 1: not yet evident, whether it's because the FED has not

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Speaker 1: constricted the economy to the same degree, but it is

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Speaker 1: maxtional frustration for US investors, right because sideways versus this

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Speaker 1: trap door draw down like we had in the fall

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Speaker 1: two thousand and eight or some er two thousand and two,

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Speaker 1: you know, has not yet materialized. So I think we

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Speaker 1: continue to kind of have this grinding, sideways type of

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Speaker 1: environment unless we see an earnings recession, end doors, some

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Speaker 1: type of event that causes major risk aversion. Do you

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Speaker 1: hold your nose a little in buy? I think what

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Speaker 1: you want to do, And this is a good opportunity

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Speaker 1: because what we have seen is correlations within the SMP

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Speaker 1: five hundred fall to levels that we haven't seen in

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Speaker 1: quite a while, and particularly when you look at intrastsector correlations,

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Speaker 1: they're at very little levels, and healthcare, materials, consumers states

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Speaker 1: so to the extent where people have gravitated towards technology

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Speaker 1: and communication services earlier this year. We've taken the opportunity

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Speaker 1: to go back into those sectors, particularly staples and healthcare,

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Speaker 1: to amplify positions that we think can give kind of

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Speaker 1: an idiosyncratic opportunity and away from kind of broad market risk. Again.

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Speaker 1: You know, you look at the the ADP employment report

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Speaker 1: here is well again, this is strong too, and you

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Speaker 1: know in Jolts also that was a bit of a

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Speaker 1: surprise to the upsite, So you know, this goes really

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Speaker 1: further your narrative. Ultimately, Yeah, that's right, And clearly the

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Speaker 1: number on Friday with a change in non farm payrolls,

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Speaker 1: which is estimated to be two hundred twenty five thousand,

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Speaker 1: is critically important in terms of what the Fed's decision

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Speaker 1: is going to be at its upcoming March meetings, as

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Speaker 1: well as the CPI numbers that we're expecting next week.

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Speaker 1: So I think, you know, the one worry that I

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Speaker 1: do have, and this is a real important issue, is first,

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Speaker 1: never underestimate how well run US companies are. You know,

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Speaker 1: that's said labor costs and rising input costs from deglobalization

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Speaker 1: are significant unknowns, and I think the major point that

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Speaker 1: I wanted to point out with regard to kind of

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Speaker 1: all the restructuring efforts and cost cutting that we're seeing

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Speaker 1: today unlike what happened back in two thousand and nine.

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Speaker 1: And one of the reasons back then why we were

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Speaker 1: kind of shouting from the rooftops to buy stocks was

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Speaker 1: that people were underestimating the operating leverage to earnings of sales.

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Speaker 1: Growth turned positive out of the recession, but margins were depressed.

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Speaker 1: You know. In fact, you know, margins back then for

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Speaker 1: the SMP five hundred expanded over thirty percent in two

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Speaker 1: thousand and ten after declining you know, twelve percent in

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Speaker 1: two thousand and seven and thirty percent two thousand and eight,

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Speaker 1: which led to a huge forty percent increase in EPs

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Speaker 1: in two thousand and ten that drove the market higher. Today,

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Speaker 1: you know, very important distinguishing issue is that margins have

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Speaker 1: contracted by about ten percent from the record highs, but

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Speaker 1: they're two standard deviations from trend right now. So in

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Speaker 1: other words, you know, the cost cutting we're seeing today

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Speaker 1: is just simply slowing down the rate of decline and

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Speaker 1: earnings and not setting the foundation for huge increase that

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Speaker 1: can drive earnings higher even in a temperate sales growth environment.

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Speaker 1: This is Bloomberg Daybreak Asia, your morning brief on the

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