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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.

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Speaker 2: So we know that Donald Trump has been pressuring the

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Speaker 2: Fed to cut its policy rate, and in a moment

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Speaker 2: we'll look at the outlook for US rates with Clayton Trick.

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Speaker 2: He is head of portfolio management at angel Oak Capital.

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Speaker 2: But we begin in Japan, where Prime Minister Shigiri Ishiba

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Speaker 2: says he is intending to stay on despite his ruling

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Speaker 2: coalition suffering and historic setback over the weekend in the

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Speaker 2: Upper House election, the ruling Liberal Democratic Party and its

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Speaker 2: longtime ally the Kometo Party, failed to retain a majority

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Speaker 2: in the Upper House. Bloomberg Asia Economy editor Yuko Takeo

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Speaker 2: says this outcome may complicate ongoing trade talks with.

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Speaker 3: The US Panist face across the board Tarisel twenty five

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Speaker 3: per cent from what was the first borring a deal

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Speaker 3: of the US. So far, there as being nothing concrete

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Speaker 3: to sure after Japan's chief trade negotiat A Akasawa, has

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Speaker 3: been to the US seven times already, so now the

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Speaker 3: ruling coalition will have to continue negotiations from a weakerd

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Speaker 3: domestic position with the deadline for higher tariffs coming up.

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Speaker 2: That is Bloomberg's Uco Takeo in Tokyo for a closer look. Now,

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Speaker 2: I'm joined by Shintaro taka Yuchi, portfolio manager at Matthews Asia. Shintaro,

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Speaker 2: thank you so much for making time to chat with me.

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Speaker 2: Let me just begin by getting your reaction to the

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Speaker 2: outcome of the election in Japan over the weekend.

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Speaker 1: Yes, so over the weekend, LDP KOME lost this majority

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Speaker 1: on the Upper House election, which is basically another loss

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Speaker 1: because they lost another election last autumn, so both houses

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Speaker 1: they have lost the majority, and going forward it would

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Speaker 1: be tougher operation of including the US SAFF negotiations and

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Speaker 1: also internal domestic policies for as they will need to

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Speaker 1: negotiate well to multiple parties going forward. In terms of

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Speaker 1: the initial market reactions, obviously the equity markets is closed

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Speaker 1: on Monday, but the currency has basically being flat or

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Speaker 1: stayed basically the same. This is because over the past

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Speaker 1: few weeks there has been a lot of media reports

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Speaker 1: that the LEDP COME coalition is going to lose the majority,

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Speaker 1: but given that the final outcome has only been the

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Speaker 1: lost of majority, but only by a couple of seats.

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Speaker 1: It's basically saying that it is in line with market

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Speaker 1: expectation ahead of the election itself.

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Speaker 2: So can we expect a lot more in the way

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Speaker 2: of government spending as the result of this.

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Speaker 1: Yes, of course Japanese government that to GDP is at

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Speaker 1: a elevated level. But many of the opposing parties who

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Speaker 1: have called for many tax cuts and basically have their

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Speaker 1: voices heard and increase their seats by quite a margin.

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Speaker 1: So these are all negotiations going forward. But in terms

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Speaker 1: of the directions, I think these kind of budgets will

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Speaker 1: need to be a little bit more, a bit more expanded.

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Speaker 2: It's kind of interesting because inflation in Japan for a

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Speaker 2: while now has been well above the boj's two percent target.

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Speaker 2: Where do you think the BOJ kind of fits into

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Speaker 2: this story? Now? With the upheaval that we're talking about

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Speaker 2: in the diet of the Japanese Parliament, where does this

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Speaker 2: leave the governor UITA and BOJ policy.

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Speaker 1: So current market consensus is about fifty to fifty and

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Speaker 1: whether the BOG will raise rates by another twenty five

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Speaker 1: basis points within this calendar year and maybe another twenty

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Speaker 1: five basis points on next spring the BOJ. We think

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Speaker 1: that is focused more on the wage growth. The real

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Speaker 1: wage growth happening. Negotiation of how much the wage growth

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Speaker 1: will be seen from japan corporates and its employee is

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Speaker 1: the data that BOG is looking very carefully on.

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Speaker 2: So we know that recently the equity market in Japan,

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Speaker 2: up until this year, had been doing very well. I

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Speaker 2: mean we've seen a struggle recently. Are there still opportunities

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Speaker 2: in the Japanese equity space in your view?

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Speaker 1: Yes, we think so. Despite the very anemic GDP growth

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Speaker 1: for Japan as a country for multiple decades. It is

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Speaker 1: important to note that Japanese equity markets is investing in

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Speaker 1: Japanese corporate profits and half of the profits actually come

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Speaker 1: from growth in overseas, so there has been a steady

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Speaker 1: earnings growth over more than a decade for Japanese corporates.

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Speaker 1: And on top of this, especially over the past few years,

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Speaker 1: you have seen many meaningful improvements in the corporate and

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Speaker 1: also leading to higher payouts, buybacks and dividends. And currently

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Speaker 1: Japanese markets are still training at a substantial discount to

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Speaker 1: European and US markets, primarily due to lower return on equities.

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Speaker 1: But finally, the Japanese corporates are making actions to improve

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Speaker 1: that on that front.

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Speaker 2: Shantaro, I'm curious as to how much of your optimism

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Speaker 2: is tied to a successful outcome in trade negotiations with

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Speaker 2: the US. And if that is your point of view,

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Speaker 2: can you give me a sense of what you expect

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Speaker 2: the effective tariff rate with the US to be?

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Speaker 1: So in terms of the tariffs, I have to admit

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Speaker 1: that negotiation, but when US and Japan around tariffs have

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Speaker 1: been taking longer time than we had anticipated. You know,

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Speaker 1: exports sector, especially automobiles, has been a victim of an

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Speaker 1: uncertainty and impact of tariffs. And you know the amount

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Speaker 1: of the percentage of the tariff itself. When we look

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Speaker 1: at how Japan puts terrify on it's US imports, there's

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Speaker 1: barely any except for a couple of agricultural and products.

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Speaker 1: So I don't have like a set number of what

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Speaker 1: is the optimal tiff rates. But as an investor, as

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Speaker 1: a long term, long only investor, what we look for

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Speaker 1: is to look for companies that actually weather through the

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Speaker 1: storm and will actually come out stronger after this.

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Speaker 2: So are there industries you mentioned the autos I'm thinking of,

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Speaker 2: so of steel. When I'm thinking about trade with the

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Speaker 2: United States, are there industries that you're focused on primarily?

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Speaker 1: So currently over the near term, we look for subsectors

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Speaker 1: and areas that are not impacted by the tariffs, namely

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Speaker 1: in like domestic industries within Japan that actually benefits from

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Speaker 1: labor shortages such as constructions, basically commanding a higher margin

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Speaker 1: as a result of that. Also in software and IP

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Speaker 1: such as games in other areas, those have relatively limited

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Speaker 1: impact to the US and tariff negotiations, so that we

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Speaker 1: are focusing on right now. However, we're not alone thinking

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Speaker 1: the same same thing, so we are also looking for

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Speaker 1: these kind of impacted sectors being underweight by the widest

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Speaker 1: margin in a couple of decades. So we're focusing and

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Speaker 1: taking a lot look in these outcomes of the negotiations,

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Speaker 1: but we're not setting any calendars of when this will dissolve,

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Speaker 1: and it's taking a little bit longer than we had anticipated.

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Speaker 2: So let's move away from Tokyo and Washington and the

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Speaker 2: tension that may exist on that front. And I'm curious

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Speaker 2: about Japan's relationships with some of the other trading partners

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Speaker 2: it has in the Asia Pacific principally China. Is this

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Speaker 2: something that you're also taking into consideration that maybe that

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Speaker 2: relationship becomes a little bit more meaningful From the Japanese side, I.

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Speaker 1: Think overall, I wouldn't say I would not say that

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Speaker 1: the globalization trend has reversed, but we think that the

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Speaker 1: trend of globalization has at least slowed down, meaning to

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Speaker 1: a lot of capital expenditure being more diversified globally, and

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Speaker 1: our view is that that actually benefits many Japanese companies

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Speaker 1: that make critical components and services in the capital of expenditure,

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Speaker 1: especially in the manufacturing sector. So because of these tensions,

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Speaker 1: you can no longer consolidate every single manufacturing in a

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Speaker 1: single country. Rather you have to make things in the

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Speaker 1: United States, you make things in China, you make things

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Speaker 1: in elsewhere, which means that there will be a duplication

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Speaker 1: of capital expenditure across the globe, and we look for

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Speaker 1: opportunities that benefit from that trend.

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Speaker 2: So Shintaro just to put a button on it. When

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Speaker 2: you look at the dynamics between Japan and China, strengthening

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Speaker 2: that trading relationship, that would be something that you would

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Speaker 2: look for in terms of trying to find opportunity right correct. Okay, Shintaro,

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Speaker 2: thank you so much. Shintaro Takayuchi, portfolio manager at Matthews Asia,

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Speaker 2: joining us here on the Daybreak Asia podcast. Welcome back

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Speaker 2: to the Daybreak Asia Podcast. I'm Doug Chrisner. So we

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Speaker 2: know the impact of the trade war on growth and

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Speaker 2: inflation differs across economies globally. Now Here in the US,

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Speaker 2: the potential for tariffs to be inflationary is keeping the

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Speaker 2: FED in this weight and see mode. Policymakers are now

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Speaker 2: in a blackout period ahead of the Fed's July thirtieth

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Speaker 2: rate decision. Now in the US, last Friday, Governor Chris

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Speaker 2: Waller reiterated his case for a rate cut, and Waller

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Speaker 2: hinted that he would dissent if his FED colleagues voted

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Speaker 2: to hold rate steady this month. For a closer look

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Speaker 2: now at the rate outlook, I'm joined by Clayton Trick.

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Speaker 2: He is head of portfolio management and public Strategies at

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Speaker 2: Angel Oak Capital. Clayton is on the line from Atlanta, Georgia. Clayton,

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Speaker 2: thank you so much for making time to chat with me.

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Speaker 2: Is there a case to be made for cutting the

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Speaker 2: policy rate as soon as this month.

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Speaker 4: Doug, good to be with you again. Yeah, we do

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Speaker 4: think so this meeting is obviously definitely on the early end.

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Speaker 4: But if you do look across developed economies, thinking about

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Speaker 4: where the current FED funds rate is in the United

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Speaker 4: States versus inflation, you know, it's definitely on the higher end,

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Speaker 4: i e. The real policy rate is one of the

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Speaker 4: highest levels. So there is an impetus to cutting rates

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Speaker 4: potentially at this meeting. We think the likelihood is extremely low,

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Speaker 4: given the Fed doesn't like to surprise the market, and

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Speaker 4: the probability is, you know, almost zero percent for this meeting.

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Speaker 4: But that being said, you know, we do think that

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Speaker 4: you know, rates could definitely be lower. That was our expectation,

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Speaker 4: you know, a few months ago going into the year,

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Speaker 4: and in our mid you're outlooking, we do expect that

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Speaker 4: the Fed funds rate you know, most likely be moving

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Speaker 4: lower in the next couple of months.

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Speaker 2: I'm wondering about the tariff story, because Bloomberg Economics is

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Speaker 2: estimating that the average US tariff rate will have risen

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Speaker 2: to above thirteen percent. It was a little more than

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Speaker 2: two percent back in January. Isn't there a risk that

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Speaker 2: tariffs really create much higher inflation, and that argues for

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Speaker 2: at least keeping rates on hold for the foreseeable future.

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Speaker 4: We do think that you could see, you know, some

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Speaker 4: bumps in the road here on inflation. You know, that

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Speaker 4: being said, kind of the overall tail risk that you

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Speaker 4: would get a significant rise and sustained inflation and core

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Speaker 4: inflation over the next three to nine months, we think

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Speaker 4: is a much lower risk today than it was just

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Speaker 4: a few months ago. So overall we think we could

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Speaker 4: see some bumps. You know, the last time we saw

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Speaker 4: higher tariffs, you know, that was a one time pass through.

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Speaker 4: If you look at what's driving inflation, you know, over

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Speaker 4: the intermediate term, housing prices, rent prices continued to move lower.

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Speaker 4: Actually in some places you're seeing falling home prices. That's

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Speaker 4: thirty percent of PCE and thirty percent of poor CPI

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Speaker 4: is shelter. And with those headwinds there in the economy

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Speaker 4: looking to lose momentum, we do think overall, core inflation

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Speaker 4: should not be surprising that much higher overall and gives

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Speaker 4: the FED the ability to kind of look through to

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Speaker 4: the longer term and potentially move rates lower even if

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Speaker 4: there's some bumps in the road. Modestly with inflation.

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Speaker 2: So let's look at the tariff story from the other

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Speaker 2: side of the equation that it begins to hurt growth.

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Speaker 2: Obviously that would argue for lower rates. But do you

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Speaker 2: think the growth story is going to suffer a little

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Speaker 2: bit as the consequence of tariffs.

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Speaker 1: Yeah, we do.

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Speaker 4: We think growth is definitely continued to slow. The economy

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Speaker 4: has been losing momentum. We put this in our outlook

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Speaker 4: illustrating the GDP growth the last few years has continue

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Speaker 4: to decelerate. You know, you look at the labor market.

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Speaker 4: We've also seen a fall on average payrolls. So last

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Speaker 4: year in twenty twenty four, we had average payrolls over

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Speaker 4: one hundred and fifty thousand per mons month. You now

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Speaker 4: you're about one hundred and thirty thousand with last month's beat.

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Speaker 4: So you know, all eyes will be on the labor

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Speaker 4: market overall. But with the economy losing momentum here and

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Speaker 4: tariffs most likely will end up being higher, even if

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Speaker 4: they're not as high as the initial fears at the

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Speaker 4: Liberation day, that is negative for growth, and so that

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Speaker 4: sets up well for what I think Waller's kind of

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Speaker 4: pointing to.

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Speaker 2: So in the week ahead, we're going to get two

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Speaker 2: reports on the housing market. Sales have previously owned homes

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Speaker 2: is one. I think that data arrives Wednesday Thursday. New

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Speaker 2: home sales. How are you understanding the housing market right

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Speaker 2: now and what the rates environment is doing, particularly the

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Speaker 2: mortgage market, the impact it's having on the real estate sector.

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Speaker 4: It seems like consumers are continued to be surprised that

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Speaker 4: mortgage rates are staying this elevated. Right You're still seeing

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Speaker 4: thirty year mortgage rates, you know, between six and a

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Speaker 4: half to seven percent at a time, and home prices

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Speaker 4: are still very elevated. So overall affordability is quite overall

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Speaker 4: and within the kind of in the micro level for housing,

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Speaker 4: we've had such low inventory that only a little bit

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Speaker 4: of demand has been able to clear these levels. But

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Speaker 4: we have really seen a significant rise in supply. We

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Speaker 4: saw supply rise over the last eighteen months almost every

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Speaker 4: single month, and we actually see today as kind of

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Speaker 4: more of a buyer's market, given there's so much more

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Speaker 4: sellers in the overall housing market than buyers right now,

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Speaker 4: and so home prices should continue to be softer. We

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Speaker 4: don't see new home sales or existing home sales really

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Speaker 4: surprising to the upside right now. We actually think that

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Speaker 4: the housing finance markets are in great shape. But as

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Speaker 4: far as think about our home prices are going, most

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Speaker 4: likely they're going to be flat or potentially negative next year.

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Speaker 2: On the margin, I'd like to get your take on

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Speaker 2: the MUNI market, particularly in the wake of the passage

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Speaker 2: of the Big Beautiful build. This could end up putting

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Speaker 2: a lot more stress on revenues for state governments, and

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Speaker 2: I'm wondering whether or not you have to be a

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Speaker 2: little bit more cautious when you begin to identify opportunities

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Speaker 2: in the MUNI market going forward.

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Speaker 4: You know, overall, we do think that the short term

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Speaker 4: kind of changes for communities and for revenue, and as

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Speaker 4: you mentioned the Big Beautiful bill, you know, that's really

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Speaker 4: just kind of setting up buying opportunities in the short term.

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Speaker 4: Over the long term, we've seen a lot of budgets,

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Speaker 4: you know, kind of being fixed in a lot of

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Speaker 4: the asset liability mismatch and mismanagement, and pensions have improved

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Speaker 4: so significantly with stocks up so much, so we actually

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Speaker 4: view anything kind of short term ball in munis is

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Speaker 4: actually a pretty strong buying opportunity.

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Speaker 1: We saw that earlier this year and if.

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Speaker 4: We see that again in the second half, we think

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Speaker 4: that could continue to be of another buying opportunity as well.

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Speaker 2: So broadly speaking, when you look at the fixed income space, Clayton,

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Speaker 2: where do you want to be positioned on the curve

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Speaker 2: right now?

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Speaker 4: Yeah, so we see really attractive opportunities in the short

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Speaker 4: intermediate term on the long end of the O curve.

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Speaker 4: You know, while the average ten years real rate is

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Speaker 4: around two hundred basis points, and that only averaged about

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Speaker 4: eighty basis points the last twenty years, it does look

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Speaker 4: really really attractive. That being said, with the unsustainable level

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Speaker 4: of the fiscal side of the picture, we think there

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Speaker 4: could be a lot of all in tenure yields in

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Speaker 4: twenty and thirty year yields, And so we see much

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Speaker 4: better opportunity in short and intermediate term fixed rate bonds.

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Speaker 4: You know, the easy money's kind of been made when

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Speaker 4: it comes to investment great corporates and highal corporates, but

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Speaker 4: fixed straight bonds within mortgage backed securities, asset back bonds

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Speaker 4: and selective areas of corporates actually look really really strong

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Speaker 4: right now. We saw that for the first half of

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Speaker 4: the year, returns have been right in line with their expectations,

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Speaker 4: and the vall has been so low for those that

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Speaker 4: portion of the market versus if you look at the

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Speaker 4: steering deviation of the S and P it was around

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Speaker 4: thirty the first half of the year. So great returns

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Speaker 4: and fixed incomes so far with you that most likely

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Speaker 4: will continue for the second half of the year.

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Speaker 2: Clayton will leave it there. Thank you so much. Clayton

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Speaker 2: Trick there. He is head of portfolio management and public

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Speaker 2: Strategies at Angel Oak Capital. On the line from Atlanta

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Speaker 2: here on the Daybreak Asia podcast. Thanks for listening to

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Speaker 2: today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,

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Speaker 2: we look at the story shaping markets, finance, and geopolitics

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Speaker 2: in the Asia Pacific. You can find us on Apple, Spotify,

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Speaker 2: the Bloomberg Podcast YouTube channel, or anywhere else you listen.

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Speaker 2: Join us again tomorrow for insight on the market moves

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Speaker 2: from Hong Kong to Singapore and Australia. I'm Doug Chrisner,

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Speaker 2: and this is Bloomberg