1 00:00:00,120 --> 00:00:03,040 Speaker 1: Let's get to our guest, Mohammed Appabai, Global Markets, head 2 00:00:03,080 --> 00:00:07,920 Speaker 1: of Asia Trading Strategy at City Group. So there's this 3 00:00:08,039 --> 00:00:10,840 Speaker 1: view out there, Mohammed, and I think this may resonate 4 00:00:11,000 --> 00:00:13,680 Speaker 1: just having a quick glance at your notes may resonate 5 00:00:13,760 --> 00:00:16,239 Speaker 1: with what you're thinking. There's a view out there that 6 00:00:16,320 --> 00:00:19,320 Speaker 1: the CPI is lagging and that there are plenty of 7 00:00:19,320 --> 00:00:24,800 Speaker 1: indicators that inflation is heading lower, and there's a market 8 00:00:24,840 --> 00:00:27,880 Speaker 1: indicators that might even suggest that the Fed is being 9 00:00:27,960 --> 00:00:31,760 Speaker 1: clueless here with talk of one d basis point rate hikes. 10 00:00:31,880 --> 00:00:35,520 Speaker 1: Your thoughts, yes, good morning, Um. I think the thing 11 00:00:35,840 --> 00:00:39,199 Speaker 1: that is happening is that the FED is having to 12 00:00:39,240 --> 00:00:41,839 Speaker 1: play a public relations game, so they've got the real 13 00:00:41,880 --> 00:00:44,839 Speaker 1: economy to deal with on the one side, and the 14 00:00:44,880 --> 00:00:48,240 Speaker 1: real economy is really showing or there are some indications 15 00:00:49,000 --> 00:00:52,200 Speaker 1: that the recession actually began in the second week of June. 16 00:00:52,640 --> 00:00:54,440 Speaker 1: After the second week of June, what we've seen is 17 00:00:54,920 --> 00:00:59,720 Speaker 1: rollover in commodity prices, oil prices break even, inflation, bondy 18 00:00:59,760 --> 00:01:04,240 Speaker 1: yell also rolled over. And but what the Fed has 19 00:01:04,240 --> 00:01:09,399 Speaker 1: got to do is signal to the population that it's 20 00:01:09,440 --> 00:01:13,240 Speaker 1: going to be very tough on um inflation. And it's 21 00:01:13,280 --> 00:01:18,160 Speaker 1: going to get these price rises back under control. So 22 00:01:18,319 --> 00:01:21,120 Speaker 1: my views are basically what the FED is doing maybe 23 00:01:21,440 --> 00:01:26,800 Speaker 1: a mistake already, um it certainly in terms of the economy, 24 00:01:26,880 --> 00:01:29,399 Speaker 1: but I think there's this sort of public relations game 25 00:01:29,440 --> 00:01:32,440 Speaker 1: that they're playing and that may continue until the Sep. 26 00:01:32,480 --> 00:01:37,040 Speaker 1: Twenty two meeting. Another mistake, perhaps the fig gavernor Chris 27 00:01:37,040 --> 00:01:40,800 Speaker 1: Waller a wand of risks of overdoing it if rates 28 00:01:40,800 --> 00:01:43,840 Speaker 1: go to a hundred basis points increase at the next meeting. 29 00:01:44,080 --> 00:01:46,080 Speaker 1: But what's worse. I mean, we had a mistake from 30 00:01:46,160 --> 00:01:50,680 Speaker 1: underdoing it is overdoing it even worse. Well, overdoing it 31 00:01:51,600 --> 00:01:57,280 Speaker 1: could result in a recession. It could also result in 32 00:01:57,640 --> 00:02:00,480 Speaker 1: disinflation as well. I mean, if you look at uh, 33 00:02:00,480 --> 00:02:05,280 Speaker 1: you know, the inflation print in June was nine one 34 00:02:05,360 --> 00:02:07,800 Speaker 1: year break even inflation rates are back at three point 35 00:02:07,840 --> 00:02:11,360 Speaker 1: five seven percent this morning. So if you think of 36 00:02:11,400 --> 00:02:13,640 Speaker 1: that as the average over the next twelve months, and 37 00:02:13,680 --> 00:02:16,040 Speaker 1: the next print, let's say, is around the nine percent 38 00:02:16,160 --> 00:02:21,520 Speaker 1: level again, um, towards the other end of the next 39 00:02:21,520 --> 00:02:24,960 Speaker 1: twelve months, you could have some fairly low prints on 40 00:02:25,040 --> 00:02:27,200 Speaker 1: inflation as well. And the other thing we're watching is 41 00:02:28,040 --> 00:02:31,920 Speaker 1: oil prices, so clearly oil had a bit of volatile 42 00:02:32,360 --> 00:02:36,400 Speaker 1: night last night. We've been highlighting this ninety dollar level, 43 00:02:36,440 --> 00:02:40,920 Speaker 1: which is where oil was when the conflict in the 44 00:02:41,000 --> 00:02:44,720 Speaker 1: Ukraine started. And of course this is happening on a 45 00:02:44,840 --> 00:02:47,840 Speaker 1: day when President Biden is in Saudi Arabia as well 46 00:02:47,840 --> 00:02:52,000 Speaker 1: as a critical day for that. And Mohammad, when we 47 00:02:52,120 --> 00:02:54,960 Speaker 1: left after you were mentioning the oil price, I guess 48 00:02:55,000 --> 00:02:56,880 Speaker 1: the best thing we can say about it right now 49 00:02:56,960 --> 00:02:59,880 Speaker 1: is at least it's not over barrel anymore, but it's 50 00:03:00,000 --> 00:03:03,280 Speaker 1: still very high by historical standards, a key inflation driver. 51 00:03:04,280 --> 00:03:06,919 Speaker 1: Saudi Arabia can only pump so much. Is there any 52 00:03:06,960 --> 00:03:11,399 Speaker 1: meaningful relief coming well? The Americans certainly seem to think 53 00:03:11,400 --> 00:03:13,920 Speaker 1: that the Saudis have got more refining capacity, or the 54 00:03:14,000 --> 00:03:17,120 Speaker 1: Saudis and the OPEC have got more refining capacity. I 55 00:03:17,160 --> 00:03:19,440 Speaker 1: think one is important to look at here when we're 56 00:03:19,440 --> 00:03:23,240 Speaker 1: looking further down, is this key ninety eight level that 57 00:03:23,280 --> 00:03:25,720 Speaker 1: we have been talking about is going to be very important. 58 00:03:25,760 --> 00:03:27,720 Speaker 1: I think if you break the load that then all 59 00:03:27,720 --> 00:03:30,320 Speaker 1: the speculative longs that have been built up since February 60 00:03:30,320 --> 00:03:33,280 Speaker 1: twenty four will capitulate and we could be down to 61 00:03:33,480 --> 00:03:35,520 Speaker 1: the mid eighties. Very quickly, and then when we start 62 00:03:35,600 --> 00:03:39,000 Speaker 1: looking at here on the change in oil prices, it 63 00:03:39,040 --> 00:03:43,400 Speaker 1: will actually be a drag on inflation rather than a 64 00:03:43,480 --> 00:03:47,880 Speaker 1: boost to inflation. So again, the oil price is absolutely 65 00:03:47,880 --> 00:03:52,240 Speaker 1: critical to what is going to be happening in the 66 00:03:52,280 --> 00:03:56,320 Speaker 1: inflationary outlook. It's one thing for a consumers to be 67 00:03:56,400 --> 00:03:58,520 Speaker 1: paying more at the pump, but then they're paying a 68 00:03:58,520 --> 00:04:02,080 Speaker 1: lot more for food with a lot of other prices elevated. 69 00:04:02,480 --> 00:04:04,440 Speaker 1: You might think that for a while they would be 70 00:04:04,520 --> 00:04:07,840 Speaker 1: fine UH and the companies would be fine because they 71 00:04:07,920 --> 00:04:11,119 Speaker 1: might have pricing power and people have jobs, so they're 72 00:04:11,160 --> 00:04:14,080 Speaker 1: paying those higher prices. But at some point something gives, 73 00:04:14,640 --> 00:04:17,159 Speaker 1: and I'm wondering whether or not companies are going to 74 00:04:17,200 --> 00:04:20,440 Speaker 1: find it more difficult to continue to raise prices. They've 75 00:04:20,480 --> 00:04:23,160 Speaker 1: done that, and from here it gets much more difficult 76 00:04:23,200 --> 00:04:27,560 Speaker 1: for them. I completely agree. I think that the demand 77 00:04:28,000 --> 00:04:32,200 Speaker 1: destruction is already starting to be felt. We're starting to 78 00:04:32,240 --> 00:04:35,039 Speaker 1: see it from the few companies that have reported so 79 00:04:35,160 --> 00:04:38,480 Speaker 1: far in UH in the US that there is an 80 00:04:38,520 --> 00:04:42,120 Speaker 1: impact on on demand. I hear that there is already 81 00:04:42,279 --> 00:04:48,080 Speaker 1: some um discounting going on, especially at the lower end 82 00:04:48,600 --> 00:04:51,960 Speaker 1: of the consumer bracket. Although a colleague of mine told 83 00:04:51,960 --> 00:04:53,480 Speaker 1: me that she didn't think that there was going to 84 00:04:53,560 --> 00:04:57,560 Speaker 1: be any more sales at Chanel ever again before about that. 85 00:04:58,360 --> 00:05:00,520 Speaker 1: But I think the thing is this, if you look 86 00:05:00,520 --> 00:05:03,559 Speaker 1: at the US inflation basket, there is a very high 87 00:05:03,560 --> 00:05:06,600 Speaker 1: correlation of oil, even with things that you wouldn't think 88 00:05:06,760 --> 00:05:10,840 Speaker 1: are correlated, So for example goods and services and food 89 00:05:10,960 --> 00:05:17,159 Speaker 1: and commodities and obviously energy, there's something like of the 90 00:05:17,279 --> 00:05:21,279 Speaker 1: U s inflation can actually be explained by what is 91 00:05:21,320 --> 00:05:24,760 Speaker 1: going on with oil. Now. Of course, what is happening 92 00:05:24,800 --> 00:05:26,560 Speaker 1: is that the SAID is not only raising interest rates, 93 00:05:26,560 --> 00:05:28,960 Speaker 1: they're also going to be doubling the amount of QT 94 00:05:29,680 --> 00:05:34,320 Speaker 1: that they're going to be doing from UM September onwards, 95 00:05:34,360 --> 00:05:36,640 Speaker 1: and that's going to be having a very negative impact 96 00:05:36,720 --> 00:05:40,040 Speaker 1: on the SMP. We think the SMPS heading somewhere around 97 00:05:40,040 --> 00:05:43,760 Speaker 1: the thirty two eight team level to about down from 98 00:05:43,800 --> 00:05:46,200 Speaker 1: where we are right now. I just want to talk 99 00:05:46,240 --> 00:05:49,400 Speaker 1: about the inflation picture elsewhere in Asia, and let's take 100 00:05:49,400 --> 00:05:52,960 Speaker 1: a look at Japan, for example, a major oil importer. 101 00:05:53,480 --> 00:05:56,279 Speaker 1: What's the state of the inflation player there, and the 102 00:05:56,320 --> 00:06:00,680 Speaker 1: bog of course, seems committed to continuing with this bombuying program. 103 00:06:00,920 --> 00:06:03,480 Speaker 1: It's quite interesting because we sent out a piecefterday, are 104 00:06:03,600 --> 00:06:06,880 Speaker 1: questioning whether the FED was about to make a policy mistake. 105 00:06:06,920 --> 00:06:10,039 Speaker 1: And it's very interesting because the other dynamic that is 106 00:06:10,040 --> 00:06:12,440 Speaker 1: going on here is of course the stronger dollar. If 107 00:06:12,480 --> 00:06:14,479 Speaker 1: you take out the strengthen the dollar, the U S 108 00:06:14,520 --> 00:06:18,080 Speaker 1: inflation number would probably be in double digits right now. Um, 109 00:06:18,200 --> 00:06:21,080 Speaker 1: And what is happening is that the US in some 110 00:06:21,120 --> 00:06:27,920 Speaker 1: ways is transferring that inflation to Europe and Japan. Now 111 00:06:28,040 --> 00:06:30,680 Speaker 1: Europe seems to be in all sorts of difficulties at 112 00:06:30,680 --> 00:06:34,400 Speaker 1: the moment. Obviously we've got the Italian situation, that bond fragmentation, 113 00:06:34,440 --> 00:06:37,760 Speaker 1: other issues going on there. In Japan, the Bank of 114 00:06:37,839 --> 00:06:40,720 Speaker 1: Japan is very clear that this inflation is transient. So 115 00:06:41,080 --> 00:06:43,640 Speaker 1: if ironically it seems like the Bank of Japan is 116 00:06:43,680 --> 00:06:46,360 Speaker 1: actually in the right position here by not giving up 117 00:06:46,360 --> 00:06:49,039 Speaker 1: on the yield cove control, we believe the Japanese economy 118 00:06:49,080 --> 00:06:53,680 Speaker 1: is already in recession, so right now where the policy is, 119 00:06:53,720 --> 00:06:56,400 Speaker 1: you know, the week again is going to help their exports. 120 00:06:56,400 --> 00:07:00,120 Speaker 1: It will, it will cushion this recession that is going on, 121 00:07:00,760 --> 00:07:05,080 Speaker 1: and this headline inflation is going to be transient in Japan, 122 00:07:05,160 --> 00:07:08,520 Speaker 1: we believe, especially before oil comes lower, and the core 123 00:07:08,640 --> 00:07:10,560 Speaker 1: is still at no point eight percent, so it's still 124 00:07:10,640 --> 00:07:14,240 Speaker 1: well below the b OJ's target. Alright, Mohammed abam High, 125 00:07:14,280 --> 00:07:16,040 Speaker 1: we'll have to leave it there. Thanks for joining us. 126 00:07:16,080 --> 00:07:19,480 Speaker 1: Mohammed is the Global Markets head of Asia's trading strategy 127 00:07:19,560 --> 00:07:20,280 Speaker 1: at City Group.