Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug Chrisner. This
Speaker 2: is going to be the first opportunity for markets in
Speaker 2: Asia to react to a downgrade of the US credit
Speaker 2: rating by Moody's. It was last Friday, after the New
Speaker 2: York close that moody stripped the US government of its
Speaker 2: top credit rating, cutting it to double A one from
Speaker 2: triple A. Bloomberg's Michael McKee says this may not mean
Speaker 2: a lot for US markets.
Speaker 3: But there could be some portfolio rebalancing based on this.
Speaker 3: But most contracts say usment reference US government debt rather
Speaker 3: than specific ratings for it, so that could prevent forest selling. However,
Speaker 3: it does mean likely higher interest rates. We'll have to
Speaker 3: keep an eye on the yield curve, and that raises
Speaker 3: the costs that the US government is going to have
Speaker 3: to pay to service.
Speaker 2: Its Yes, that is Bloomberg's Michael McKee. Now Moody cited
Speaker 2: the failure of successive administrations to deal with rising US
Speaker 2: debt and deficits. The firm also cited interest payment ratios
Speaker 2: at significantly higher levels than similarly rated sovereigns. I guess
Speaker 2: you could say the move was hardly surprising since both
Speaker 2: S and P Global and Fitch have already taken similar steps.
Speaker 2: Joining me now for a closer look at this and
Speaker 2: other stories in the marketplace is Larry Tantarelli. He is
Speaker 2: the chief technical strategist at blue Chip Daily Trend Report. Larry,
Speaker 2: thank you for making time to chat with me about this.
Speaker 2: Give me your reaction to the Moody's downgrade.
Speaker 4: Doug, thank you for having me on. So I believe
Speaker 4: the Moody's downgrade is going to turn out to be
Speaker 4: a non event. As you said, two other rating agencies
Speaker 4: have already downgraded the US over the years. And as
Speaker 4: we look at the market reaction right now, the S
Speaker 4: and P futures are down about six tens of percent.
Speaker 4: Ten year treasure heels with me moved up about five
Speaker 4: basis points. So we may see some short term volatility,
Speaker 4: but I don't think that this is going to be
Speaker 4: a major event whatsoever.
Speaker 2: But the timing comes as Congress debates even more unfunded
Speaker 2: tax cuts. Do you think this in any way influences
Speaker 2: the conversation in Washington?
Speaker 4: It might to a degree, because I do think it
Speaker 4: puts upward pressure on bond yields, So to a degree,
Speaker 4: it might because it is still a major news event,
Speaker 4: so to a degree, yes.
Speaker 2: Well, you mentioned the upward pressure on bond yields, which
Speaker 2: reminds me of the situation a while back with Silicon
Speaker 2: Valley Bank. Do we have to be concerned if we
Speaker 2: get a backup in yields to a meaningful degree about
Speaker 2: the way in which some of the regional banks or
Speaker 2: other financial institutions are exposed to US treasuries.
Speaker 4: We need to see tang year yields break out over
Speaker 4: four point eight zero. Right now, they're trading at about
Speaker 4: four point four eight, and I don't know that this
Speaker 4: is enough of an event to push yields to that
Speaker 4: breakout level. So it's always a possibility, but I would
Speaker 4: say it's a very remote possibility that we get a
Speaker 4: major breakout in yields from this.
Speaker 2: Let's talk a little bit about what's been going on
Speaker 2: with the global economy as the Trump administration works to
Speaker 2: rearrange or re engineer global trade. How do you understand
Speaker 2: the tariff story at the moment? Are we closer to
Speaker 2: a resolution? Do you suspect or does this have the
Speaker 2: potential to drag on for a while and do a
Speaker 2: substantial amount of harm to the global economy.
Speaker 4: My expectation is somewhere in the middle. So my expectation
Speaker 4: is that this will not be a quick fix. It
Speaker 4: could drag on as far as the process for a
Speaker 4: few months or longer. Scott Bessnt recently said that he
Speaker 4: thought it would take two to three years to get
Speaker 4: a full China trade deal, so the process could take
Speaker 4: a little more time. But I think what the markets
Speaker 4: are really focused on right now is the news cycle,
Speaker 4: and about six weeks ago, the markets had really priced
Speaker 4: in worst case scenario and a global economic slowdown. Over
Speaker 4: the past few weeks because of positive news headlines that
Speaker 4: have come out, I think a lot of pressure has
Speaker 4: been taken off global economic expectations, and I think the
Speaker 4: markets are adjusting right now to the expected tariffs.
Speaker 2: We talked about the possibility that this Moody's downgrade will
Speaker 2: negatively impact US equities. You cited the S and P
Speaker 2: E many futures contract a moment ago, But if you
Speaker 2: look at what happened Friday, equities capped there as second
Speaker 2: best week of the year. Fair amount of optimism maybe
Speaker 2: about the trade deal, and I was struck by the
Speaker 2: fact that the markets seem to overlook not only the
Speaker 2: slump in consumer sentiment, but a real spike in inflation expectations.
Speaker 2: I think we're at the highest level right now in
Speaker 2: about forty years. What is the risk do you think
Speaker 2: for the US equity market in the next three to
Speaker 2: six months.
Speaker 4: The two biggest risks that we face. Number one would
Speaker 4: be if there was any major walk back in the
Speaker 4: progress that we've made with China and the trade negotiations.
Speaker 4: That would be number one. The second biggest risk if
Speaker 4: for some reason the economy started to slow down drastically,
Speaker 4: if the jobs market started to weaken, which it has not.
Speaker 4: The labor market's held up very well. I think the
Speaker 4: disconnect with inflation is inflation expectations are based on consumer sentiment,
Speaker 4: but if we look at the actual data that's coming in,
Speaker 4: CPI has come in below forecast for the past three months.
Speaker 4: PPI came in negative last week, So the consumer expectations
Speaker 4: may be bearish, but the actual data that's coming in
Speaker 4: has been trending lower.
Speaker 2: But you could make the case that we have yet
Speaker 2: to see the tariffs really bite. I think Walmart last
Speaker 2: week said it was going to raise prices the President
Speaker 2: kind of pushed back against that notion. Is there the
Speaker 2: risk that these tariffs will in fact produce higher inflation
Speaker 2: that the market is right now maybe underestimating a little bit.
Speaker 4: Yes, there definitely is. The tariff effect is going to
Speaker 4: have a lagging process as far as when the tariff
Speaker 4: kicks it, when the tariffs kick in. So although we
Speaker 4: haven't really seen higher inflation yet, this is going to
Speaker 4: be a process, not an event. So we do have
Speaker 4: to stay cautious over the next few weeks or over
Speaker 4: the next few months that inflation doesn't break out higher.
Speaker 2: So when it comes to the Fed, what is your thinking.
Speaker 2: Do they take a very very cautious stance here? And
Speaker 2: if the market right now is expecting maybe two to
Speaker 2: twenty five bases point rate cuts, that's about right. Maybe
Speaker 2: the risk is that we get fewer than that.
Speaker 4: Yes, I believe that the Fed is on hold at
Speaker 4: least until September. The Fed Fund's futures market is pricing
Speaker 4: in the first rate cut in September. But I believe
Speaker 4: the Fed can be very patient right here. They don't
Speaker 4: have to be in a hurry to cut rates whatsoever.
Speaker 4: The economy is holding up well, the labor market is
Speaker 4: very strong, and inflation is still above the long term forecast,
Speaker 4: so I believe that the FED is going to be
Speaker 4: very patient. I believe they're going to want to see
Speaker 4: no negative effects from the tariffs, so I believe they're
Speaker 4: on hold for the time being.
Speaker 2: I'm curious as to how you're viewing opportunities offshore right now.
Speaker 2: Are there places to put money to work?
Speaker 4: Definitely?
Speaker 1: So.
Speaker 4: China has turned up recently. Taiwan. The Taiwan market is
Speaker 4: back over the two hundred day moving average, and they're
Speaker 4: heavily tied to semiconductors. Semiconductors had a very strong week
Speaker 4: last week. Taiwan semi was very strong. India has turned
Speaker 4: up recently over the past few weeks, that's back over
Speaker 4: the forty week moving average, and Korea has been acting
Speaker 4: very well. So I'm seeing opportunities in China, India, Korea,
Speaker 4: and Taiwan.
Speaker 2: I'm curious, Larry about the measures of conviction that you
Speaker 2: use in your work. What are they?
Speaker 4: What I look at is price trends and weekly price moves.
Speaker 4: So what I'm seeing in the S and P five
Speaker 4: hundred and the Nasdaq one hundred very very strong conviction
Speaker 4: moves what we saw last week is the S and
Speaker 4: P five hundred and Nasdaq one hundred both closed over
Speaker 4: the forty week moving average for the first time in
Speaker 4: quite a few weeks. They did it with a very
Speaker 4: strong move. Both indices were up by over five percent.
Speaker 4: The forty week moving average is rising, the ten week
Speaker 4: moving average is rising. So when I look at these
Speaker 4: weekly chart trends, these are very strong moves that we're seeing.
Speaker 2: Larry, we'll leave it there. Thank you so much for
Speaker 2: joining us. Great insights from Tantarelli. He is the chief
Speaker 2: technical strategist at blue Chip Daily Trend Report. Joining us
Speaker 2: here on the Daybreak Asia podcast. Welcome back to the
Speaker 2: Daybreak Asia Podcast. I'm Doug Krisner. We're seeing currency market
Speaker 2: reaction to the downgrade of the US credit rating by Moody's.
Speaker 2: Both the Japanese yenn and the Swiss frank have strengthened.
Speaker 2: The dollar mean time is weaker earlier. Treasury Secretary Scott
Speaker 2: Besson downplayed concerns over the US government's debt and the
Speaker 2: inflationary impact of the tariffs on Sunday. He said the
Speaker 2: Trump administration is determined to lower federal spending and grow
Speaker 2: the American economy now. Besson's remarks come ahead of the
Speaker 2: G seven finance ministers meeting this week in Canada. That's
Speaker 2: where US Japan trade talks are expected. For more, we
Speaker 2: heard from Tobias Harris. He is the founder and principal
Speaker 2: at Japan Foresight. He spoke earlier with Bloomberg sivon men
Speaker 2: and April Home.
Speaker 5: We talked about what's at stake here, but it seems
Speaker 5: like the narrative has shifted on how Japan can approach
Speaker 5: these talks in this third round. What is your expectations
Speaker 5: on whether Japan can actually secure a long term trade
Speaker 5: deal with the US.
Speaker 1: You really have this fundamental question of what is the
Speaker 1: US willing to put on the table, because I think
Speaker 1: Japan has been very clear that it doesn't want a
Speaker 1: one sided deal. It wants automobile tariffs, wh wants steel tariffs,
Speaker 1: WO wants aluminum tariffs to be on the table up
Speaker 1: for consideration, and I think the messaging from the Prime
Speaker 1: Minister and other members of his government has been is
Speaker 1: that this is pretty much a non negotiable position. And
Speaker 1: so frankly, until we see movement from the US on
Speaker 1: those tariffs, it's going to be really hard to get
Speaker 1: a deal done because I think is of Us put
Speaker 1: himself in a position where you can't really climb back
Speaker 1: on that.
Speaker 5: Yeah, you mentioned about the auto tariffs. I mean that
Speaker 5: twenty five percent tariff on japan auto imports is still there.
Speaker 5: What do you think Isshab was thinking? Do you think
Speaker 5: his administration is willing to sacrifice the domestic agricultural industry
Speaker 5: to win back those terror reductions when it comes to autos?
Speaker 6: You know, I think it just depends on the overall
Speaker 6: deal that's on the table.
Speaker 1: And in fact, I think, you know, we've now seen
Speaker 1: some reporting hinting that the Issuba government might be open
Speaker 1: to lower auto tariffs, but not completely removing the new
Speaker 1: tariffs that we're introduced.
Speaker 6: But the overall package.
Speaker 1: I mean, for now, we have not really heard what
Speaker 1: the Trump renstration is really willing to put.
Speaker 6: On the table.
Speaker 1: And frankly, I don't know if we if we've heard
Speaker 1: that the Trump renstration is even happy with some of
Speaker 1: the potential agricultural concessions that we've that have been discussed
Speaker 1: as possible.
Speaker 6: From the Japanese government. I mean, the overall picture.
Speaker 1: The idea, you know, what exactly are they looking to
Speaker 1: get out of Japan in this, you know, is the goal,
Speaker 1: you know, getting rid.
Speaker 6: Of Japan's biolateral.
Speaker 1: Trade surplus with the United States or is it market
Speaker 1: access for US goods, whether or not that results in
Speaker 1: eliminating that trade and balance with Japan.
Speaker 6: And until we get to that point, I think it's.
Speaker 1: Really hard to say what exactly does it an agreement
Speaker 1: between these countries look.
Speaker 7: Like Tomorrow's what about? Sort of like the domestic audience
Speaker 7: at this point, because there is also an Upper House
Speaker 7: election coming up. Does that in a way play into
Speaker 7: trade talks?
Speaker 1: I think it absolutely does, and I think it you know,
Speaker 1: it certainly has affected Issuba's sense of timing that, you know,
Speaker 1: not wanting to have a certainly he doesn't want a
Speaker 1: bad deal at all, but a bad deal right before
Speaker 1: the election I think is going.
Speaker 6: To be bad news.
Speaker 1: I think, you know, a deal that saves Japan's automakers,
Speaker 1: that limits the impact on agricultural producers, I think, you know,
Speaker 1: that would be a great deal for him to announce
Speaker 1: right before the Upper House campaign. And I think you know,
Speaker 1: he's looking, you know, to have some achievement that he
Speaker 1: can take to voters. But if that deal does not
Speaker 1: look like it's materializing. You know, it's much more likely frankly,
Speaker 1: that talks will drag on past the Upper House elections
Speaker 1: that you know, Japan is better off waiting to get
Speaker 1: a better deal than to have something inadequate to put
Speaker 1: before the voters in July.
Speaker 6: So, you know, it really.
Speaker 1: Depends on what ultimately is on the table. But clearly,
Speaker 1: you know the fact that issue doesn't want to be
Speaker 1: going to the electorate having to face accusations that he's
Speaker 1: thrown Japanese agricultural producers under the bus. That's not something
Speaker 1: the LDP wants to have to run on in the
Speaker 1: Upper House election. So you know, it really depends on
Speaker 1: the substance. You know, it's not there's not a one
Speaker 1: size fits all agreements here as far as the LDP
Speaker 1: is concerned.
Speaker 7: What about the best currency? I mean, how is that
Speaker 7: figuring it to negotiations?
Speaker 1: You think, I'm skeptical that currency has that much of
Speaker 1: a role to play. It's been coming up, it's been
Speaker 1: floating around, It's been mentioned as you know, possible.
Speaker 6: I don't think, you know, at the end of the day,
Speaker 6: I don't think a deal.
Speaker 1: I don't even know what a currency deal really looks
Speaker 1: like considering that Japan has not been has not been
Speaker 1: devaluing its currency. If anything, when they've intervened, it's been
Speaker 1: to strengthened its currency. I don't think the Japanese government
Speaker 1: is really in a position to put monetary policy on
Speaker 1: the table.
Speaker 6: I think going to resist that.
Speaker 1: And you know, when it comes down to it, they're
Speaker 1: also not going to agree to some sort of specific
Speaker 1: numerical target for dollar again either. So ultimately, I don't
Speaker 1: I don't know what exactly a currency deal looks like.
Speaker 1: I don't know what Japan is willing to bargain in
Speaker 1: favor of a currency deal, and so ultimately, I mean,
Speaker 1: I think, you know, they'll have these discussions, but when
Speaker 1: it comes down to getting some sort of trade deal done,
Speaker 1: I don't think currency is really going to be an
Speaker 1: important plank of that.
Speaker 5: Yeah, Tobias, you talk about the relationship between the US
Speaker 5: and Japan. You know, Japan is very dependent on the
Speaker 5: US when it comes to security. There's a sixty three
Speaker 5: billion dollar trade surplus with the US. I got to wonder, though,
Speaker 5: how much leverage then, does Japan have going into these talks.
Speaker 1: I think we're seeing that, you know, it's trying to
Speaker 1: find sources of leverage. But ultimately, you know, and some
Speaker 1: of it is the structure of bilateral trade. I mean,
Speaker 1: it's not that there's an easy fix, you know, to
Speaker 1: make you know, either Japanese buy more American stuff or
Speaker 1: you know, to get Americans to buy less, other than
Speaker 1: leaving the tariffs in place, right, I mean, if the
Speaker 1: US is really serious about reducing or eliminating the trade
Speaker 1: deficit with Japan, I mean, ultimately the best thing is
Speaker 1: going to be leaving the tariffs in place and encouraging
Speaker 1: Americans to buy fewer things from Japan.
Speaker 6: That's a little uncomfortable for Japan in general, though.
Speaker 1: I mean, I think, you know, what has been interesting
Speaker 1: over the last several months watching the Japanese public's response
Speaker 1: to you know, the Liberation Day tariffs and the auto
Speaker 1: tariffs and so on. I think there's a feeling of
Speaker 1: frustration and betrayal, and I think it's in some way
Speaker 1: stiff in the Japanese government's fine. I think there's a
Speaker 1: feeling that, you know, in the past, perhaps the expectation was,
Speaker 1: you know, the government has to do whatever it takes
Speaker 1: to make the US happy, to keep the US engaged
Speaker 1: and committed to Japan. But I think there's a feeling that,
Speaker 1: you know, there were certain promises made during the first
Speaker 1: US Japan FTA talks with Trump in twenty nineteen, and
Speaker 1: there's a feeling that those promises were broken. There's a
Speaker 1: feeling that without really having a clear sense of what
Speaker 1: the US actually wants, there's a sense of, you know,
Speaker 1: the US being unfair and being arbitrary, and so therefore,
Speaker 1: I think there's an expectation that, you know, if you
Speaker 1: should just you know, play caated, you know, do whatever
Speaker 1: trip to playk Trump, that that actually could backfi your
Speaker 1: domestically in a way that I think would not necessarily
Speaker 1: have been the case in the past.
Speaker 6: And so this is something of you uncharted waters.
Speaker 1: You know, we don't really the way that domestic politics
Speaker 1: are playing out in this situation.
Speaker 6: It's a little different than what we've seen with you
Speaker 6: as in the past.
Speaker 7: Tobias, thanks so much, great to get your analysis. Tobias Harris,
Speaker 7: founder and principal at Japan Foresight.
Speaker 2: Thanks for listening to today's episode of the Bloomberg Daybreak
Speaker 2: Asia Edition podcast. Each weekday, we look at the story
Speaker 2: shaping markets, finance, and geopolitics in the Asia Pacific. You
Speaker 2: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,
Speaker 2: or anywhere else you listen. Join us again tomorrow for
Speaker 2: insight on the market moves from Hong Kong to Singapore
Speaker 2: and Australia. I'm Doug Prisoner and this is Bloomberg