Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Lisa A.
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Speaker 3: Joining us now Jeff you Seney, market strategist at bm
Speaker 3: Y Mellon to kick off the program with us.
Speaker 2: Jeff, great to have you with us, Sir.
Speaker 3: Your reaction, I guess, first of all, to what we
Speaker 3: saw from the BOJ what is the new line in
Speaker 3: the sand for a Japanese ten year government bond yield?
Speaker 4: Well, if you look at that slide that the BOJ announced,
Speaker 4: you know there's this hazy part between a point five
Speaker 4: point and a one percent, right, So I think that's
Speaker 4: a boj to telling you there is no actual line
Speaker 4: in the sand. The strategic ambiguity, I guess you know,
Speaker 4: there's some components of that, but taking a step back,
Speaker 4: you know, if it's tidying and financial gage and in
Speaker 4: financial conditions that you're trying to achieve, then generating volatility
Speaker 4: and FX markets which Governor Rada talked about, and in
Speaker 4: fixed income markets.
Speaker 2: Then job done.
Speaker 4: Every BOJ meeting is probably going to be live upp
Speaker 4: ahead and that marks a change compared to the previous decade.
Speaker 3: So Jeff, you actually believe that maybe this opens the
Speaker 3: door to taking a step towards raising interest rates next year.
Speaker 4: I think everything is on the table. So Governor Raider
Speaker 4: himself admitted April the outlook and perhaps a bit too
Speaker 4: much on the benign side, and there's a sementy basis
Speaker 4: point increase and this year's inflation outlook hence a tweak.
Speaker 4: Now you cannot phrase or you cannot really characterize such
Speaker 4: a tweak in response to a higher inflation print or
Speaker 4: inflation forecast as an easing step, right, So I think
Speaker 4: the market can see that. But again it's about the
Speaker 4: next step that we know. The trajectory is towards tightening
Speaker 4: and comprehensive conditions. The phrase that they're using and markets
Speaker 4: yen next three markets and in particular jgb's global fixed
Speaker 4: income will need to react accordingly.
Speaker 1: Has the reaction in global markets we did see a
Speaker 1: sell off in sovereign developed market bonds. We also saw
Speaker 1: sell off and risk assets. Is that indicative of what
Speaker 1: could potentially happen that it will be orderly but it
Speaker 1: will be disruptive or do we not have any sense
Speaker 1: at all of what the response will be to true
Speaker 1: yield curve control abandonment given that we've just heard whispers
Speaker 1: and unclear guidance all of the above.
Speaker 4: Really, but what we do know is you know those
Speaker 4: and figures out you mentioned earlier, So US ten years,
Speaker 4: and you're moving much more than what the JGB has done.
Speaker 4: One basis point in the US in bunds is not
Speaker 4: equivalent to one basis point in JGB ten years.
Speaker 2: Let's make that clear.
Speaker 4: So the more that it's going to move, then if
Speaker 4: you assume the process is going to be linear, then
Speaker 4: the stronger the reaction is going to be. Having said that,
Speaker 4: Japanese investors they've been retreating from Europe for some time now,
Speaker 4: they've been retreating from the US on a relative basis.
Speaker 4: China has been retreating as well. So looking for new purchasers,
Speaker 4: you know, for the Europe, for the Eurozone bond market,
Speaker 4: and for the US treasury market. I think that has
Speaker 4: been going on for some time now, So in that
Speaker 4: context shouldn't generate too much volatility of Japan steps back
Speaker 4: a bit more.
Speaker 1: Okay. So in other words, even if we do get
Speaker 1: full normalization, you could see it happen in an orderly
Speaker 1: fashion that won't necessarily present a tail risk or some
Speaker 1: sort of headwind to sovereign binds globally.
Speaker 4: I think as long as the normalization itself from Japan
Speaker 4: from Tokyo is going to be more orderly than the
Speaker 4: answer is yes. If it's going to be sudden, stepwise changes,
Speaker 4: large discrete changes of twenty five to fifty basis points
Speaker 4: something like that, then it's a different story. So it
Speaker 4: takes two to tango.
Speaker 3: We have to go beyond wrapping up the last twenty
Speaker 3: four hours. We've got to wrap up the last twelve months.
Speaker 3: For the last decade, we've had two anchors around the
Speaker 3: neck of the global bond market, the ECB the BOJ
Speaker 3: byan government bond yields. Seeing what's been happening in Germany
Speaker 3: for a long long time, Jeff, those anchors, those anchors
Speaker 3: are away slowly being lifted over in Japan. So I
Speaker 3: need to think about a new flaw in a global
Speaker 3: bond market when it comes to yields.
Speaker 2: Yeah, how are you thinking about that?
Speaker 3: Now?
Speaker 4: Well, two things there. Firstly, you said the word yourself.
Speaker 4: It's going to be slowly lifted, right, So they'll make
Speaker 4: sure that it's not going to be volatile process, you know,
Speaker 4: as excess reserves that aspect of the central banks balance
Speaker 4: sheet and continues them to come off. They'll be monitoring
Speaker 4: that very very quickly. But the second part of it
Speaker 4: is going to be data. And here I think the
Speaker 4: emphasis is more on the ECB or anything. Imagine previous environments.
Speaker 4: If we are general manufacturing pmis, you're on the thirty
Speaker 4: handle DCB, we'd be talking about easing, right. So now
Speaker 4: that's where the direction of travel is. So I think
Speaker 4: we have to think about, you know, who's going to
Speaker 4: stop this ban sheet online process. I think that will
Speaker 4: help to serve them as an offset. But overall, at
Speaker 4: this point look in all the central banks. I think
Speaker 4: that markets can absorb this for now.
Speaker 1: Well, but Jeff, just to push us a little further
Speaker 1: as we look here, question whether we're seeing the end
Speaker 1: of the rate hiking cycles for both the FED and
Speaker 1: the ECB, which some people believe is the case. We're
Speaker 1: talking about the potential abandonment of yield curve control. Where
Speaker 1: are we going to head if yields do come down?
Speaker 1: What is to John's point, the floor that we hit
Speaker 1: that seems like the new normal at a time when
Speaker 1: some of the more unconventional policies are no longer in effect.
Speaker 4: Well, if you really want a normal number, my rule
Speaker 4: of thumb is always whereas potential growth on a nominal basis.
Speaker 4: So in the US, is it on the four handle,
Speaker 4: five handle? In the Eurozone, if growth isn't close to
Speaker 4: flat your inflation target term two percent? Is it on
Speaker 4: the two in the two to three range? Japan probably
Speaker 4: slightly lower. So that's where longer term, the Wiselian rate,
Speaker 4: you know, so to speak, that really starts to come in.
Speaker 4: But to get there, we need to get inflation back
Speaker 4: to target first, and I think that is the risk
Speaker 4: that means a lot more unwinding, more QT first. Before
Speaker 4: we can even start that discussion.
Speaker 3: Let's get to favorite trade in FX right now, Jeff,
Speaker 3: Which one?
Speaker 4: So you want to own a pack funders against the
Speaker 4: dollar right now? So what I mean by that your
Speaker 4: Korean ones, your tai one, dollars even women be in
Speaker 4: the short term in this respect right because now that
Speaker 4: Japan has moved the yen can strengthen a bit. Then
Speaker 4: that gives more room for Asian central banks to tighten things,
Speaker 4: or at least a shift towards a more assertive stance.
Speaker 4: Because you have China Japan put together, the youngerman be
Speaker 4: forty percent and your trade weighted basket. You can't afford
Speaker 4: to let your currency strengthen. Now they are allowing a
Speaker 4: bit more tolerance for strength, so can you. And given
Speaker 4: in our iflow data, our custodial positioning data, these currencies
Speaker 4: are quite underheld right now.
Speaker 2: Good risk of water to stop buying them back, Jeff.
Speaker 2: Just to be clear, that's apak versus the US dollar.
Speaker 4: Yes, and euros and versus g ten as well.
Speaker 2: Okay, Jeff Wander for the catch up.
Speaker 3: As always, buddy, Jeff, you there if bin Y Mellon
Speaker 3: wrapping up the Central Bank and trilogy.
Speaker 2: This week, we have.
Speaker 1: With us someone who has been at the FED who
Speaker 1: might tell us about happy hour after getting good economic
Speaker 1: reas Jonathan Pingle, chief US economist at UBS, who is
Speaker 1: not at happy hour currently sitting at his office. I'm
Speaker 1: curious from your vantage point, Jonathan, how much conviction you
Speaker 1: can have in this soft landing narrative when we keep
Speaker 1: getting data print after data print showing you know, this inflation,
Speaker 1: robust growth, this feeling that maybe we will just immaculately
Speaker 1: get price stability.
Speaker 5: Yeah, I mean this, you know, this is certainly good news,
Speaker 5: but we're still actually a long way from price stability.
Speaker 5: And I think, you know, looking at today's employment cost
Speaker 5: index data, as you know, some sort of Mike was saying,
Speaker 5: as well as the core PC deflator, you know, the
Speaker 5: year over a year change following to four point one
Speaker 5: percent puts the FED actually within striking distance two tens
Speaker 5: if there's sort of full year projection for later this year.
Speaker 5: But even at four percent of the fed's three to
Speaker 5: nine in Q four, you're still a ways away from
Speaker 5: what you would call price stability. So everything looks looks
Speaker 5: great now, I mean, looking at you know, Mike was
Speaker 5: mentioning real spending coming in a little stronger. You know,
Speaker 5: we'd actually sort of expected the four tenths increase, and
Speaker 5: he's right. I mean, we ended up revising up our
Speaker 5: Q three consumption estimates after retail sales as a result,
Speaker 5: so this is all good news and the economy has
Speaker 5: certainly proved resilient, but they do have this problem that
Speaker 5: they know we're making progress on inflation it looks like,
Speaker 5: but we're not actually at two yet, and there's actually
Speaker 5: a pretty big gap between now and how we're going
Speaker 5: to get there and a lot of uncertainty. But you know,
Speaker 5: at the moment, Lisa, yeah, the data looks good.
Speaker 1: What's the bigger risk right now that we're wrong about
Speaker 1: inflation just steadily coming down and we see a reignition
Speaker 1: of some of the price increase is or that the
Speaker 1: economy slows down more dramatically, and that the strength that
Speaker 1: we've seen recently perhaps is an indicative of the longer
Speaker 1: term trend.
Speaker 5: Well, I am pretty worried that this economy is going
Speaker 5: to slow meaningfully in the coming quarters. You know, there
Speaker 5: are a lot of positives right now, but they're also headwinds.
Speaker 5: And I still kind of agree with share Powell that
Speaker 5: there's still follow through from the monetary policy tightening. I
Speaker 5: think there's you know, there's still excess savings that's percolating
Speaker 5: through and supporting you know, and some of these forces
Speaker 5: could diminish. We also have things like student loan repayments
Speaker 5: coming up. I mean, there's a number of headwinds and
Speaker 5: challenges that we're still going to have to face as
Speaker 5: an economy. But I think you've you've nailed the sort
Speaker 5: of risks on the head right because you know, everybody,
Speaker 5: of course would like to have a soft landing and
Speaker 5: not have job loss and have this this this continue.
Speaker 5: But the initial conditions are a little tough. And by
Speaker 5: initial conditions, I mean, you know, we're starting with a
Speaker 5: low unemployment rate, you know, even with the e c
Speaker 5: I at one percent. I mean, I think that's going
Speaker 5: to be great news at the FED. Take a little
Speaker 5: bit of the wind out of the you know, sales
Speaker 5: of the more work to do component of the committee,
Speaker 5: but that's still you know, a little over it's you know,
Speaker 5: four percent annualized, and that kind of needs it to
Speaker 5: get it down closer to three and a half. So
Speaker 5: you get a low and employment rate, nominal wage inflation
Speaker 5: that's still a little brisk. If the economy stays strong,
Speaker 5: you know, there is the risk that the FED might
Speaker 5: have to hike more and do more work to get
Speaker 5: the slowing that they need in the economy.
Speaker 1: A lot of people Jonathan, have been talking about how
Speaker 1: it's been easier to get a disinflationary trend just simply
Speaker 1: on the year of your comparison numbers, at least over
Speaker 1: the past few months. What changes what areas of the
Speaker 1: inflation overview are you looking at?
Speaker 3: Is it housing?
Speaker 1: Is it car prices? Is it something else that could
Speaker 1: fuel some sort of strengthening in the inflation reads?
Speaker 5: Well, I mean it's all of that. I mean, I
Speaker 5: don't think the details of the inflation data in my
Speaker 5: career have ever been as looked at as they are
Speaker 5: today because of how crucial it's.
Speaker 6: Been for monetary policy.
Speaker 5: But when we think about, you know, sort of what's
Speaker 5: unfolding in the various chunks of the basket, I mean,
Speaker 5: I think, you know, you know, there's people have talked about,
Speaker 5: you know, supercre and sort of these measures. I mean,
Speaker 5: I don't want to put a label on it. But
Speaker 5: when we look at some of the services components that
Speaker 5: are most linked to waged inflation, many of them also
Speaker 5: have relatively persistent components. You know, I think we can
Speaker 5: get comfortable with the goods disinflation and we can see
Speaker 5: it and I think, you know, we're watching sort of
Speaker 5: you know oere and rents slow and the CPI data,
Speaker 5: but you know, these other services, you know, are really
Speaker 5: sort of what what what I think is worth watching
Speaker 5: for where the improvement could come or you know, what
Speaker 5: might re accelerate because of the low unemployment rate. That's
Speaker 5: one of the reasons I think, you know, Chair Powell
Speaker 5: and his press conference, you know when went ahead and
Speaker 5: mentioned the e c I a sort of one important
Speaker 5: data point they would get between the July and September
Speaker 5: FOMC meetings.
Speaker 1: And if you're just joining us now, we did see
Speaker 1: the e c I, the Employment cost Index come in
Speaker 1: at one percent for the second quarter. The expectation had
Speaker 1: been one point one percent. It was down from one
Speaker 1: point two percent. Personal spending coming in stronger than expected
Speaker 1: at zero point five percent, personal income coming in softer,
Speaker 1: so people making less and spending more. Michael McKee, you've
Speaker 1: been digging under the numbers.
Speaker 3: What do you see?
Speaker 7: Yeah, Le's look un to the hood. A couple of
Speaker 7: things that Jonathan was talking about. The ECI for wages
Speaker 7: goes down to a one percent gain from a one
Speaker 7: point two percent gain in the first quarter, and that
Speaker 7: would be considered reasonably good news. But when you look
Speaker 7: under the personal income figures, wages went up six tenths
Speaker 7: of eight percent in the month of June, and that
Speaker 7: is up from half percent. It is actually the highest
Speaker 7: increase since January. So we have two sort of contrasting
Speaker 7: views of what wage pressures are doing at the moment.
Speaker 7: And John mentioned, as we do every time we get
Speaker 7: an inflation figure, the supercore, which is J. Powell's favorite thing,
Speaker 7: core services x housing comes in at a two tenths
Speaker 7: gain to point two two if you want to round
Speaker 7: it out to three figures, and that puts it at
Speaker 7: a four point four point one percent increase for the year,
Speaker 7: which is going to be your lowest since basically last August.
Speaker 7: So things moving in the supercore direction take out housing
Speaker 7: out of the equation, and services for the PCE like
Speaker 7: the CPI are down, but the wage numbers still healthy,
Speaker 7: and that suggests consumers can still keep spending. The question
Speaker 7: is will the fancy that as inflationary?
Speaker 1: Jonathan, As we talk about these numbers four point one
Speaker 1: percent down significantly from what it had been from four
Speaker 1: point six percent the previous reading, what's it enough? Are
Speaker 1: we heading back toward two percent or to the conversation
Speaker 1: we had with Richard Clarita. Are we looking at a
Speaker 1: two and a half or something somewhat above the target
Speaker 1: that the FED is just going to live with?
Speaker 5: Well, I mean, so this is a this is probably
Speaker 5: I mean, this is a question they're going to have
Speaker 5: to answer at some point I think next year. At
Speaker 5: the moment, you know, obviously the four point one is
Speaker 5: not enough. I do think it's pretty relevant though, for
Speaker 5: sort of the meeting by meeting decisions they're going to
Speaker 5: make going forward. I mean this, I mean, at four
Speaker 5: point one percent, they're only zero point two percent points
Speaker 5: away from their full year core inflation projection already in
Speaker 5: the June data, so they're clearly making some progress. The
Speaker 5: other thing they're making progress on is real rates. You know,
Speaker 5: this is going to widen the gap between the funds
Speaker 5: rate after the rate hike on Wednesday, to a level
Speaker 5: you know that hasn't been around since two thousand and seven,
Speaker 5: So they are. So they're they're making progress in terms
Speaker 5: of restrictiveness, not just because of the rate hikes now,
Speaker 5: but also because they're making progress on inflation now. A
Speaker 5: year from now, you know, let's say inflation is moving
Speaker 5: down to two and a half percent. They're going to
Speaker 5: have to make a decision about how hard they push
Speaker 5: to get it back down to two point oh. I mean,
Speaker 5: I do think that monetary policy makers would like to
Speaker 5: actually get it back to two point zher for their
Speaker 5: credibility to show that they can do it. Are they
Speaker 5: going to really work very hard to run it at
Speaker 5: you know, one point eight so that they can show
Speaker 5: that they're on both sides. I don't know that that's
Speaker 5: worth really costing a lot of people their jobs, but
Speaker 5: I do think they're gonna leave, you know, if they're
Speaker 5: struggling to get back to their target. I think they
Speaker 5: probably would leave restrictive policy in place for a while.
Speaker 1: Jonathan Peingle of UBS, thank you so much for taking
Speaker 1: the time.
Speaker 3: Jane Fully of Rabberbanks saying this that the BOJ tweeked
Speaker 3: YCC in quote a very cautious way. As expected, the
Speaker 3: BOJ raise this twenty twenty three inflation forecast, but there
Speaker 3: was no upward revision to course CPI in twenty four
Speaker 3: or twenty five. Therein lies the reason for continued caution
Speaker 3: from the Bank of Japan. If further progress is made
Speaker 3: in reviving domestically driven inflation. The BOJ will act again,
Speaker 3: but they are clearly in no rush. So Jane, we've
Speaker 3: got to start with that question. Lisa has asked it
Speaker 3: a few times and Danny Berger asked it again this morning,
Speaker 3: and Jane, thanks for being with us. Is this the
Speaker 3: starting gun on timing or just sending up policy to
Speaker 3: keep things a little bit more sustainable and easier for longer.
Speaker 8: You know, the starting gun really reminds me of that
Speaker 8: the tortoise and the hair, and I think the Bankerjapan
Speaker 8: really is the tortoise in this race. It is going
Speaker 8: to be in no rush. And this is you know,
Speaker 8: backing away from your curve control because it can be
Speaker 8: a nuisance sort of policy. It can push policymakers into corners.
Speaker 8: And we have this in December when when the Bank
Speaker 8: of Japan you know, made an adjustment to the range
Speaker 8: for the ten year yield and said it was an adjustment. Now,
Speaker 8: clearly we can see those distortions. You know, you have
Speaker 8: the possibility where you have maybe five year years seven
Speaker 8: year eels rising above the ten year old. That's not
Speaker 8: what they want to signal, so they had to raise
Speaker 8: the parameters. And really, I think there's something about what's
Speaker 8: happened today, which is the same you know, they want
Speaker 8: to take themselves away from being pushed into a corner
Speaker 8: by market conditions and hence the loosening. But on the
Speaker 8: other hand, you know, if you read through a lot
Speaker 8: of the rhetoric from some of the Bank of Japan
Speaker 8: policy makers, some of them are clearly seeing these signs
Speaker 8: that inflation conditions are just beginning to normalize. And I
Speaker 8: would say, perhaps, you know, the real piece of juicy
Speaker 8: news from Japan, you know this week, is that the
Speaker 8: government it looks likely to be recommending another hike in
Speaker 8: the minimum wages. That would be a four percent hike.
Speaker 8: There was already, you know, a really big rise this year.
Speaker 8: So if that four percent goes through, that is your
Speaker 8: wheels and motion of domestically generated inflation. That's what they
Speaker 8: want to see. That's the sort of news that we
Speaker 8: really ought to be reacting to.
Speaker 3: So Jane, that long term forecast for inflation that comes
Speaker 3: from the Bank of Japan. Should I view that as
Speaker 3: an honest view on where they think inflation will be
Speaker 3: or just a signal to the market for where they
Speaker 3: want the market to believe policy will be.
Speaker 8: Well, the government came out with a pretty similar forecast
Speaker 8: for cour CPI. I think it was one point five
Speaker 8: percent for the next fiscal year, stripping out in some
Speaker 8: of the base effects because there have been some energy
Speaker 8: related subsidies, for instance. So again in the government of
Speaker 8: the Bank of Japan, lots of economists are on the
Speaker 8: same page here. They think inflation next year will be
Speaker 8: lower than this year, and that is why they've got
Speaker 8: to be cautious, because they've got to remember a lot
Speaker 8: of the inflation that we are seeing. You know, people
Speaker 8: are saying, oh, you know, Bank of Japan or Japanese
Speaker 8: inflation on the headline is firmer than in the US.
Speaker 8: Maybe they should be tidy, but that is really misleading
Speaker 8: because a lot of the inflation in that particular print
Speaker 8: is imported prices. Now, imported prices are not domestically driven.
Speaker 8: That's what they want to see. It's the opposite really
Speaker 8: to Europe, to the Bank of England, to the US.
Speaker 8: They want to see this wage price spiral getting themselves
Speaker 8: up to sustained inflation around about two percent. We're on
Speaker 8: that road, but they're not quite there yet.
Speaker 1: Is it a coincidence, Jane that the Bank of Japan's
Speaker 1: tweak I should say comes after a real shift from
Speaker 1: both the FED and the ECB moving away from forward
Speaker 1: guidance and away from committing to further rate hikes.
Speaker 8: Well, you know, I think the movie Been Away from
Speaker 8: Forward Guidance sort of reflects the fact that the committees
Speaker 8: within those central banks and perhaps there's bigger gaps between
Speaker 8: the doves and the hawks, because if everyone was on
Speaker 8: the same page, it's obviously easy to give forward guidance,
Speaker 8: but when you have this more diverse range of opinions,
Speaker 8: you can't really do that. And I think that's probably
Speaker 8: true of the Bank of Japan as well. I think
Speaker 8: there is a range of opinions within the Bank of
Speaker 8: Japan if you read through some of their rhetoric, some
Speaker 8: of those policy makers are perhaps more ready to act
Speaker 8: on policy than others. But you know, a caution has
Speaker 8: always prevailed through the Bank of Japan because of its history,
Speaker 8: because of its history with deflation and disinflation, and I
Speaker 8: think that is still here, and I think that's very
Speaker 8: evidence in the commentary this morning from the Bank of
Speaker 8: Japan governor.
Speaker 1: It hasn't just been the Bank of Japan that's been
Speaker 1: causing some waves this week. There seems to be a
Speaker 1: feeling that both the FED and the ECB may be
Speaker 1: done with raid hikes, which calls into question whether the
Speaker 1: ECB actually will end up hiking further than the FED
Speaker 1: this year, which was the consensus heading into twenty twenty three.
Speaker 1: What's your view on this. Do we have to rethink
Speaker 1: this that maybe both are at their peak and their
Speaker 1: rate hiking cycle over in Europe isn't going to be
Speaker 1: as long as many people thought it might be.
Speaker 8: Yeah, you know, we're coming down on the view that
Speaker 8: they may pause in September, that there may not be
Speaker 8: any more moves from from the ECB. You know, some
Speaker 8: of the commentary from some of the officials from the
Speaker 8: UCP in the last couple of weeks, you know, it
Speaker 8: has been mixed, but there have been some comments indicating
Speaker 8: that perhaps core inflation could be pattering, because obviously that's
Speaker 8: the focus for Europe, you know, this this core inflation,
Speaker 8: this stickiness there. But if we look at some of
Speaker 8: the economic data, for instance, He's pmis that we had
Speaker 8: for Europe at the start of the week, they were
Speaker 8: really quite worrying. If we still you know that the
Speaker 8: credit service from the UCB too this week, well that
Speaker 8: showed that that the higher interest rates are clearly impacting.
Speaker 8: So there are you know, recession is hanging above Europe.
Speaker 8: Germany of course already in recession. Recession risks are really
Speaker 8: very real and that may give the UCB course for
Speaker 8: constraints in set timber and pause policy. So we are
Speaker 8: data dependent. We have to make up our minds on
Speaker 8: that according to the data. But there is certainly a
Speaker 8: risk that the market is going into the possibility of
Speaker 8: a pause in September whilst.
Speaker 2: It's long the euro.
Speaker 8: And that's really important because I think positioning here is
Speaker 8: going to be adjusted, and I think the market has
Speaker 8: has got very long the euro and anticipated with a
Speaker 8: very high hawkish ECB, and that might have been overdone.
Speaker 3: All favorite trades. Let's wrap up Jane downside on the Euro.
Speaker 2: What is it?
Speaker 8: Well, you know, we've had, you know, for a while now,
Speaker 8: a three month forcus for your a dollar at one
Speaker 8: o eight, you know, a few weeks ago. I think
Speaker 8: people you know, wouldn't have agreed with that. I think
Speaker 8: now maybe people are coming round to that. The market
Speaker 8: is very long the euro, and I think it's increasingly
Speaker 8: difficult to see that situation being justified.
Speaker 3: Jane, thank you for getting on board with the program
Speaker 3: this morning following that breaking news from the Bank of
Speaker 3: Japan appreciated. Jane Foley of Rubber Bank, responding to the
Speaker 3: latest headlines out of the BOJ Stave Chevron joined us
Speaker 3: now had a multi asset solutions at Federated Hermes. Steve
Speaker 3: wanted for to catch up with you. You mentioned the pain
Speaker 3: trade in this equity market may well be a higher
Speaker 3: equity market just walk us through as Steve.
Speaker 9: Yeah, I mean, it's been the thesis that we started
Speaker 9: with in January when we went back overweight, which was
Speaker 9: that look even if for session risks do materialize at
Speaker 9: some point, and that's still an open question, it's not
Speaker 9: today and tomorrow doesn't look good, John. I mean, you
Speaker 9: look out if you're still in a position of tight
Speaker 9: labor markets, inflation that's sticky, a FED that at best
Speaker 9: is maybe pausing, may still be in the hike cycle.
Speaker 9: We'll see what September and November bring, but it's certainly
Speaker 9: not anywhere near a place where they're cutting. Historically, that's
Speaker 9: not an environment where you have big equity sell offs.
Speaker 9: If you look FED pauses are really good for equity markets.
Speaker 9: Fifteen percent returns on average twenty percent max rallies drawdowns
Speaker 9: that are relatively small. And so I think that you're
Speaker 9: in this scenario. And I heard you mention in the
Speaker 9: prior segment this idea of a you know, a kind
Speaker 9: of summer window. I don't think it's a summer window.
Speaker 9: I think this goes higher for longer. And I'm talking
Speaker 9: about equity markets right now. So we see upside through
Speaker 9: the old highs even if storm clouds do eventually you know, materialize,
Speaker 9: but we don't think it's it's soon.
Speaker 3: So, Steve, upside where because people are willing or at
Speaker 3: least want to shift away from the tech winners. They
Speaker 3: want to think about maybe the things that are left behind, sick,
Speaker 3: the coos, banks, energy take you pick, Steve, how are
Speaker 3: you thinking about that?
Speaker 9: Yeah? So again, if you look at both fed pauses
Speaker 9: and then even once you get into FED cuts, cyclicals
Speaker 9: tend to do better than you're kind of defensive growth names. Also,
Speaker 9: at twenty seven times multiple for the Russell one thousand value,
Speaker 9: that's hard for us to kind of just hold our
Speaker 9: nose and buy. But we're buying is everything else pretty much,
Speaker 9: So we've been overweight value, particularly cyclicals and the defensive
Speaker 9: dividend payers a little bit as a hedge. And then
Speaker 9: our newest buying has been in small cap growth. The
Speaker 9: idea is that it edited itsel off the year before.
Speaker 9: Those names are still down twenty percent on a two
Speaker 9: year basis, and while valuations look high on an absolute
Speaker 9: basis relative to where they were two years ago, we
Speaker 9: think they're attractive. So if there's any disruption to the
Speaker 9: kind of big tech in growth names, it's going to
Speaker 9: be those smaller companies we think that emerge and we
Speaker 9: just think that offers a much better kind of upside scenario.
Speaker 9: So it's really cyclicals, yes, a little bit of those
Speaker 9: defensive divid eendpires, but then also the small cap growth
Speaker 9: where we think there's some better opportunities.
Speaker 1: I want to point to something that Torstenslock wrote that
Speaker 1: John was talking about earlier of Apollo, where he wrote
Speaker 1: for markets to continue to trade higher, the soft landing
Speaker 1: must be a soft landing, not a reacceleration. And he's speaking,
Speaker 1: of course about inflation. How much does your bullish call
Speaker 1: hinge on inflation not reaccelerating and continuing to go down?
Speaker 9: Yeah, so you know in the list of things that
Speaker 9: you need to watch. I'd put that in there. You know,
Speaker 9: you've gotten the housing market at home prices have shown
Speaker 9: some signs of reacceleration. I know, we've all seen some
Speaker 9: of the labor deals that have come through. We're watching wages.
Speaker 1: You know.
Speaker 9: Our expectation is that you will see some reacceleration in
Speaker 9: at least a headline number in the back half of
Speaker 9: the year. That's just math lee So I mean your
Speaker 9: your toughest comps or your easiest comps coming on how
Speaker 9: you want to think about it. We're really in the
Speaker 9: first half of last year. As you get to the
Speaker 9: back half, just the base effect should take you up.
Speaker 9: So we still have a three point nine percent core
Speaker 9: CPI forecaster this year. If it was materially higher than that,
Speaker 9: and we're talking about a FED, then that is forced
Speaker 9: into you know, much more aggressive policy action. Again that
Speaker 9: could have some disruption. But if you look, there has
Speaker 9: never been a market in the last forty years an
Speaker 9: SMP five hundred that was negative during the hike site.
Speaker 9: There was never a more except for one that was
Speaker 9: negative during the pause cycle. And so it really is
Speaker 9: once that economic data has deteriorated and you're in a
Speaker 9: cut cycle that you start to worry about those big downsides.
Speaker 9: But it's hard to see us in that scenario in
Speaker 9: twenty three. And that's the story that if you're a
Speaker 9: soft landing person or you or you're someone who sees
Speaker 9: a kind of new bullish trend to your being overweight
Speaker 9: equities obviously makes sense. Even if you're someone that's cautious,
Speaker 9: though the historical track record suggests that for some time,
Speaker 9: and not a very short period of time, you probably
Speaker 9: still have upside risk. You know, at least through the
Speaker 9: old highs.
Speaker 1: When do you know it's gone steve the upside risk
Speaker 1: or the upside potential for some of the risk assets.
Speaker 9: Yeah, I think what you watch and what we're watching
Speaker 9: are going to be spreads. You know, spreads are one.
Speaker 9: When you start to see spreads move up, I think
Speaker 9: you need to see a little bit more deterioration in
Speaker 9: initial little job as claims.
Speaker 6: You know, you've got at least.
Speaker 9: Get to that three hundred thousand level before you can
Speaker 9: start to really think about a material acceleration force. You know,
Speaker 9: the unemployment rate would need to kind of creep up
Speaker 9: on the back of that. The ye'll curve not just
Speaker 9: being inverted, but starting to re steep. It would be
Speaker 9: a sign, you know, if you start seeing that you'll
Speaker 9: curve get back towards zero. Historically, that's a sign that
Speaker 9: that's starting to happen. Bond yields that are falling, you
Speaker 9: get the theme here. Those are all the things that
Speaker 9: I think the most verished folks thought would be happening already.
Speaker 9: And granted, even though we saw a first half rally,
Speaker 9: I might have expected to see more progress in that
Speaker 9: direction so far this year, but it hasn't happened, and
Speaker 9: so until it does, you've got to stick with the
Speaker 9: regime that you're in.
Speaker 3: Stick with it, Steve, That's the message. Thank you, sir,
Speaker 3: Steve Chevron, a federated Hermes on this sweet spot in
Speaker 3: the market that he thinks can last a whole lot
Speaker 3: longer than many others do.
Speaker 2: I've got favorite guests.
Speaker 3: Here's one now, Jake Piloski, principal and founder of TPW Advisory.
Speaker 3: Jay's going to catch up buddy, as always. Can we
Speaker 3: start in Japan? Just briefly the latest change from the
Speaker 3: boj I know it's an equity market, Jay, you've been
Speaker 3: looking at more closely.
Speaker 2: Did you like what you heard this morning.
Speaker 10: Yes, I think Japan has had success. That's something that
Speaker 10: they've been fighting for forty years John right, which is
Speaker 10: to get rid of deflation, and they've done that. They
Speaker 10: now have inflation, and so we like Japan as an
Speaker 10: equity market. It's set up beautifully. The currency is super
Speaker 10: cheap on OECD purchasing power parity basis fifty percent undervalued
Speaker 10: stocks are super cheap. Right, you have stocks that sell
Speaker 10: for less than cash. I think twenty percent of top
Speaker 10: X sells for less than the cash that's on the
Speaker 10: balance sheet.
Speaker 6: We like Japan a lot.
Speaker 10: We think the boj is exiting yield curve control. That's
Speaker 10: going to set off not only a potential allocation out
Speaker 10: of foreign assets, which is what japan institutions have been
Speaker 10: doing for years back into domestic assets, but also within
Speaker 10: the domestic acid allocation where the famous Missus Wantanabi, the
Speaker 10: retail investor, has been doing nothing but buying bonds. Now
Speaker 10: bonds in Japan are going into the same bear market
Speaker 10: that US bonds and European bonds have been in for
Speaker 10: the last year and a half or so, and so
Speaker 10: that means an allocation shift to equities and so Japan
Speaker 10: is we think one of the most attractive markets in
Speaker 10: the world at this present moment looking out on a
Speaker 10: six or twelve month basis.
Speaker 3: Jay, just to build on that, Yesterday evening, I was
Speaker 3: going through some decks, some slides from Apollo's Tossed and
Speaker 3: slock on Japanese banks and looking at net interest margins.
Speaker 3: It was shocking to see just how narrow themse net
Speaker 3: interest margins are at a Japanese bank compared to say
Speaker 3: a wels Fago, which is sort of multiple of that. Jay,
Speaker 3: would you play it through the Japanese banks and how
Speaker 3: much of a move have we already seen anticipating what
Speaker 3: we got this morning.
Speaker 10: Yeah, the banks have moved first obviously because this rates
Speaker 10: go up, that issue that you spoke of gets helped out,
Speaker 10: as we've seen with US banks, right, you know, we've
Speaker 10: been in this extreme low rate environment.
Speaker 6: And one of our.
Speaker 10: Key conclusions Lisa was talking about strategic ambiguity brought me
Speaker 10: back to my National security days studying for.
Speaker 6: A master down in DC.
Speaker 10: But they're looking to do something different, and the opportunity
Speaker 10: is to grow the economy and to have inflation come back,
Speaker 10: and that helps the margins that helps earnings. And just
Speaker 10: as we look at in the US right high nominal growth. John,
Speaker 10: you remember we've been talking about this for ages, high
Speaker 10: nominal growth. The same thing applies in Japan, which is
Speaker 10: why you're going to have good earnings, You're going to
Speaker 10: have good bank results. And again you're not paying anything
Speaker 10: for it less than cash. Percent of the market sells
Speaker 10: for less than the cash on the balance sheet. It's
Speaker 10: a value player's dream, it's a growth player's dream. The
Speaker 10: currency is going to appreciate, rates are going up, bonds
Speaker 10: are going to sell off, people are going to buy stocks. Really,
Speaker 10: I think it's a fantastic setup.
Speaker 1: To be clear, it was Jeff you who coined strategic ambiguity.
Speaker 1: I was just parroting a perfect explanation of central banks
Speaker 1: this week. You say a value player's dream over in Japan.
Speaker 1: What about in Europe, which you have been overweight, Is
Speaker 1: there's still a value player's dream in an area that
Speaker 1: has disappointed in a way that the US has not.
Speaker 10: Yeah, I mean Europe has more of a challenge on
Speaker 10: the economic front. Lisa, I think that's pretty clear. But
Speaker 10: I think again the sentiment. Look, one of the things
Speaker 10: that we've been talking about is this tremendous gap between
Speaker 10: data and surveys, you know, sentiment and the data continues
Speaker 10: to come in pretty good, and the surveys and the
Speaker 10: sentiment continues to be, for the most part, you know,
Speaker 10: pretty lousy, and data is winning out. And the same
Speaker 10: applies in Europe. You know, we talked about banks, right,
Speaker 10: John knows this and Lisa we've talked about it over time.
Speaker 10: We've been a buyer and an owner of European financials
Speaker 10: for the last several years, and they continue to hit
Speaker 10: new highs, just hit new highs in the last couple
Speaker 10: of weeks. So we think this situation in Europe is
Speaker 10: better than it's being portrayed. But to be clear, we
Speaker 10: were bullish Europe last year. We've been bullish Japan in
Speaker 10: Asia this year. We've talked about rotation. We wrote a
Speaker 10: piece called Rotation two months ago. That's been what's going
Speaker 10: on in the markets. We have a rolling rotation. So
Speaker 10: now looking forward, we're all about what's next.
Speaker 6: Right.
Speaker 10: We want to look forward because markets are moving very
Speaker 10: very fast, and so to us, what's next is we
Speaker 10: have clear skies, we have a manufacturing recovery. I think
Speaker 10: that's what's going to be the surprise in the second
Speaker 10: half of the year. Manufacturing is going to pick up
Speaker 10: as we restock the inventory drawdowns that have taken place.
Speaker 10: You're just talking about that on the oil side. One
Speaker 10: reason why we're bullish energy is exactly that thesis. And
Speaker 10: so we think the big opportunity right now for the
Speaker 10: next six to twelve eighteen months is an emerging market
Speaker 10: equities and commodities, both of which are at fifteen to
Speaker 10: twenty year lows relative to the US equity market as
Speaker 10: an example, So lots of upside in those two segments.
Speaker 2: Do you need stimulus out of China to make that work?
Speaker 6: Chack, No, We think China is again.
Speaker 10: China is another, you know, the poster child for a
Speaker 10: negative sentiment.
Speaker 6: Just ridiculous about how negative people are about an.
Speaker 10: Economy that's a massive, second biggest economy the world, is
Speaker 10: growing at five percent, double the United States. It's growing
Speaker 10: at five percent, John with you know, pretty much an
Speaker 10: assurance and they're making ship right. They're welcoming back the
Speaker 10: tech companies because they need them.
Speaker 6: So the whole issue around China tech is over.
Speaker 10: And one of the things we've talked about in the
Speaker 10: last couple of weeks, take some profits in US big
Speaker 10: tech reallocate back into China tech things like k Web, etc.
Speaker 10: We think emerging markets are going to lead the next
Speaker 10: cycle in central banks, which is rape cutting. Right We're
Speaker 10: at the end of the rate hiking cycle in the
Speaker 10: West and the US and Europe, maybe just beginning in Japan,
Speaker 10: fair enough, but emerging markets are going to lead the
Speaker 10: rate cutting cycle, and we think markets like Brazil are
Speaker 10: very attractive. We like China, We like Brazil in particular.
Speaker 10: Within emerging markets right now, we like Japan. And then
Speaker 10: within the commodity space, we like energy, we like industrials,
Speaker 10: we like precious metals. Commodities we think are really the
Speaker 10: next thing, and they're breaking out again.
Speaker 6: Within the last two weeks. WTI has broken.
Speaker 10: Out, Goldman Sachs Commodity index has broken out, and that's
Speaker 10: telling you that we're not going to have a recession.
Speaker 10: So bonds priced out recession first by getting rid of
Speaker 10: the rate cut for next year, oh sorry for this year.
Speaker 10: Second half of this year. Ben stocks with the move
Speaker 10: into cyclicals and now commodities are pricing out recessions. So
Speaker 10: you're not going to have a breakout in commodities in
Speaker 10: a recession, right, those two things don't go together.
Speaker 3: Jay, this would have been easy. If we just started
Speaker 3: the interview by saying, what done you like? This would
Speaker 3: have lasted thirty seconds. Jay, it's going to hear from you.
Speaker 3: We've got to let you go dot welcome back.
Speaker 2: Let me tell you, Yeah, I don't like you. We
Speaker 2: get luck dwork.
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