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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 Chrisner.

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Speaker 2: Talks between the US and China will continue as the

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Speaker 2: two sides work to extend a tear off truce. It's

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Speaker 2: set to expire August twelfth. Speaking after meetings in Stockholm earlier,

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Speaker 2: US Treasury Secretary Scott Besson confirmed that President Trump will

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Speaker 2: ultimately make the final decision.

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Speaker 3: I noticed as the earlier question said that the Chinese

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Speaker 3: Deputy minister did say that we had agreed on a pause.

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Speaker 3: We have nothing is agreed until we speak with President Trump.

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Speaker 2: We'll have more on the tariff story in a moment

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Speaker 2: when we hear from Paul Donovan. He is the chief

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Speaker 2: economist at UBS Global Wealth Management. But we begin here

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Speaker 2: in the States, where the equity market drifted lower ahead

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Speaker 2: of tomorrow's decision from the Fed. Join me now is

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Speaker 2: Mark Heppenstall. He is president and the CIO at Pen

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Speaker 2: Mutual Asset Management. Mark is on the line from just

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Speaker 2: outside Philadelphia. Thank you so much for making time to

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Speaker 2: chat with me. Is it too much to say that

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Speaker 2: the Fed is not going to cut rights this month?

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Speaker 2: Even though President Trump has been arguing for that for

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Speaker 2: a while now.

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Speaker 4: Hey Doug, Well, first off, great to be with you again.

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Speaker 4: Thanks for having me on the program. So I think,

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Speaker 4: you know, if a rate cut were happening tomorrow, then

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Speaker 4: I think that it would have already been spread through

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Speaker 4: the rumor mail coming out of the Federal Reserve. That

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Speaker 4: just seems to be the way they operate. They have

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Speaker 4: never really surprised markets under Powell's leadership, so I think

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Speaker 4: it's likely to be more of a discussion around September.

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Speaker 4: I do think it is interesting that, you know, we've

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Speaker 4: had certain members of the FOMC lobbying for a rate

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Speaker 4: cut this month. But I will say, in some ways,

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Speaker 4: I'm not so sure this isn't being orchestrated by Chair

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Speaker 4: Pow sort of this dissension, because it's going to be

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Speaker 4: a lot easier for when the time comes to cut

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Speaker 4: interest rates to say that he's listening to fellow FMC

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Speaker 4: members as opposed to being caving in to some of

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Speaker 4: the pressure from President Trump.

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Speaker 2: The price action today was a little interesting. It seemed

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Speaker 2: as though money was shifting out of the equity market

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Speaker 2: and into the bond market a bit, yields lower across

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Speaker 2: the curve, and I'm wondering whether or not there may

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Speaker 2: have been a little bit of short covering going on

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Speaker 2: at the bond market in front of the Fed's decision.

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Speaker 2: What do you think, Well, I.

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Speaker 4: Do think that is part of it. Yeah, I mean

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Speaker 4: the seven year auction came in, you know, stronger than

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Speaker 4: a lot of folks were expecting. So you know, the

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Speaker 4: market was starting to rally in the bond market to

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Speaker 4: start the day, and then when the seven year auction

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Speaker 4: came out strong, we really started to see people grab

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Speaker 4: for bond. So I do think in some ways people

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Speaker 4: are likely to be neutral tomorrow because again, even though

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Speaker 4: I don't think we're going to get at a rate move,

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Speaker 4: I do think there could be a lot of volatility

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Speaker 4: around the press conference. And as you mentioned earlier, we

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Speaker 4: have a lot of important earnings this week. We have GDP,

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Speaker 4: we have the employment report. So again it isn't surprising

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Speaker 4: to me that people would want to square positions in

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Speaker 4: light of all of the news that's happening.

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Speaker 2: How are you making sense of the day's economic news.

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Speaker 2: We had word that consumer confidence was up in the

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Speaker 2: month of July. Job openings were down, yes, although they're

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Speaker 2: hovering at a level right now that implies a stable

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Speaker 2: labor market. How are you viewing the macro these days?

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Speaker 4: Well, I guess if you had to pick one word,

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Speaker 4: it probably would be stable. You know, we've seen a

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Speaker 4: moderation in some of the strong growth numbers that we

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Speaker 4: witnessed last year. You know, the first quarter negative print

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Speaker 4: on GDP I think was somewhat of an anomaly driven

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Speaker 4: by trade imbalances. So again, this GDP report will give

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Speaker 4: us a much better sense of what's happening with the consumer,

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Speaker 4: because it was you know, the consumer was weak in

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Speaker 4: the first quarter. So it'll be interesting to see what

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Speaker 4: type of a rebound we see here in the GDP

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Speaker 4: report tomorrow. But again with labor market, it's relatively strong,

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Speaker 4: and with you know, the unemployment rate pretty much close

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Speaker 4: to indicating full employment picture at this point, I think

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Speaker 4: it's you know, again, consumer spending is likely to not

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Speaker 4: fall off a cliff, and so I would go back

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Speaker 4: to that word stable.

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Speaker 2: Okay, So we also get the Fed's preferred measure of

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Speaker 2: inflation this week, core PCE. How are you feeling about

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Speaker 2: inflation in spite of the fact that people have been

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Speaker 2: saying for a while now that with these tariffs and

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Speaker 2: some of these new trade deals, inflation is likely to

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Speaker 2: tick up. The market doesn't seem to be too concerned

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Speaker 2: about that right now.

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Speaker 4: No, it is interesting, and I will say we're seeing

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Speaker 4: a lot of mixed signals. If you look at the

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Speaker 4: ten year break even inflation on you know, looking at

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Speaker 4: tips versus anomenal bonds, it's implying two point four percent.

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Speaker 4: So certainly that's not sort of a runaway high type

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Speaker 4: of number, but it is above the Fed's two percent target,

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Speaker 4: and it has been trending higher more recently, so that's

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Speaker 4: something to be watchful for. Oil prices have been well behaved.

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Speaker 4: You mentioned they are up strongly day, but you know,

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Speaker 4: I do think with oil being well behaved and a

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Speaker 4: lot of these you know, sort of severe terror shifting

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Speaker 4: into sort of moderate trade deals with still some you know,

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Speaker 4: high tariffs, but again, I don't think it's enough at

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Speaker 4: this point to really cause the spike in inflation that

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Speaker 4: a lot of analysts were expecting after Liberation Day.

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Speaker 2: Are you still finding opportunity in the bond market these days,

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Speaker 2: even though yields have come in pretty substantially as of late.

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Speaker 2: And I'm wondering if that's the case. If there is opportunity,

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Speaker 2: where on the curve are you finding it?

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Speaker 4: You know, I will say we've seen you know, I

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Speaker 4: would say a normalization of the yield curve, and I

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Speaker 4: will say for fixed income managers, having some one of

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Speaker 4: a positive slope to the yeld curve that allows the

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Speaker 4: passive of time to basically improve the performance for fixed

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Speaker 4: income assets, I think is a benefit. So we you know,

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Speaker 4: we're still forecasting a moderate steepening of the yield curves,

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Speaker 4: so sort of in that five to ten years zip code,

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Speaker 4: I will say, corporate credit spreads are you know, basically

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Speaker 4: very close to the post financial crisis tights today. That's

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Speaker 4: both an investment great and high yield. So we're finding

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Speaker 4: better opportunities in securitize credit, including residential mortgage backed securities.

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Speaker 2: What are you most concerned about right now?

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Speaker 4: Well, I do think the debt and deficits, which is

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Speaker 4: you know, one of the reasons that we've seen the

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Speaker 4: steepening of the yield curve, and you know, we've seen

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Speaker 4: the thirty year treasury tests the five percent level so

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Speaker 4: many times recently. I do worry that it could be

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Speaker 4: ready to break through the next time that we test

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Speaker 4: the five percent level. So again I think it's going

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Speaker 4: to be pressure at the long end of the yield curve.

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Speaker 4: And basically, you know, you discount financial assets at risk

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Speaker 4: free rates across the yield curve, and so to the

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Speaker 4: extent that should long term interest rates rise, that should

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Speaker 4: be a headwind for other financial assets. So again that's

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Speaker 4: something we're watching for. It'll be interesting to see what

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Speaker 4: the sort of the breakdown is of the debt issuance. Tomorrow,

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Speaker 4: I think the Treasury is going to announce how much

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Speaker 4: short versus long term debt they're going to be issuing.

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Speaker 2: Are you tempted to look offshore for fixed income opportunities?

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Speaker 4: Well, I will say our focus is primarily in US

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Speaker 4: fixed income markets. So you know, we have a little

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Speaker 4: bit of form bond exposure, a little bit of emerging

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Speaker 4: market exposure. But again I will say the opportunity set

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Speaker 4: for US fixed income in light of you know, close

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Speaker 4: to a four and a half percent tenure treasure yield

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Speaker 4: is so much better than it was four or five

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Speaker 4: years ago. So again we're taking advantage of absolute yields,

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Speaker 4: which we think are attractive for a lot of spread assets.

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Speaker 2: Okay, so for talking the US, how much exposure do

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Speaker 2: you have right now to the muni market.

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Speaker 4: Well, we do tax wimmunis, and I will say, you know,

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Speaker 4: we've had as much as let's say, ten to fifteen

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Speaker 4: percent of our portfolio and tax communis. However, tax community

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Speaker 4: issuance has really fallen off a cliff, and that's partly

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Speaker 4: because the exempt market has been so strong. So again

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Speaker 4: that's been an area where we're seeing a declining percentage

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Speaker 4: within the portfolio. But you know, there still are sort

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Speaker 4: of diamonds and they're rough you can find in attractive opportunities.

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Speaker 4: But again, as sort of a broad asset class, it's

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Speaker 4: a little bit tough to find opportunities there.

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Speaker 2: Okay, Mark, we'll leave it there, Thank you so very much.

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Speaker 2: Mark Heppenstall, Presidency IO at Pen Mutual Asset Management. Joining

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Speaker 2: from just outside Philadelphia here on the Daybreak Asia podcast.

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Speaker 2: Welcome back to the Daybreak Asia Podcast. I'm dig Chrisner.

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Speaker 2: So the earning season moves into high gear in the

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Speaker 2: States tomorrow when we'll get the numbers from Meta, Microsoft

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Speaker 2: and Qualcom after the closing bell. But it seems as

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Speaker 2: though neither earnings nor even the Fed's decision are enough

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Speaker 2: to take the market's attention away from tariffs and issues

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Speaker 2: on trade. On Tuesday, the IMF said the global economy

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Speaker 2: will keep weakening and it remains vulnerable to trade shocks,

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Speaker 2: and that's despite the fact that we're seeing some signs

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Speaker 2: of resilience when it comes to those US tariffs. We

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Speaker 2: got reaction from Paul Donovan. He is the chief economist

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Speaker 2: at UBS Global Wealth Management. Paul spoke with Bloomberg TV

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Speaker 2: host Sherry On and Heidi Stroud Watts on the Asia trade.

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Speaker 5: Has the brasilience in the data surprised you or is

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Speaker 5: it just a result of sort of front loading before

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Speaker 5: it all hits in the coming months.

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Speaker 6: It's not a surprise.

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Speaker 7: The impatience of people to see the tariffs and the numbers,

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Speaker 7: I think is actually a little surprising.

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Speaker 6: It takes time. So there's two things here.

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Speaker 7: Firstly, any goods that were already on board ship heading

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Speaker 7: off to the United States on the ninth of April,

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Speaker 7: they're not subject to tariff. So that means some of

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Speaker 7: the stuff that's being unloaded from Asia in late May

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Speaker 7: and June that's still not subject to tariff. And then

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Speaker 7: when you get from the port to the shopping basket

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Speaker 7: of the consumer. You've got another three months on average,

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Speaker 7: so you're not expecting to see the full effects of

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Speaker 7: these tariffs showing up. The consumer isn't paying the tax

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Speaker 7: until June the very earliest, and frankly, with the April

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Speaker 7: that's probably not going to be fully visible until September.

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Speaker 7: And with the August taxes that Trump's putting on consumers,

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Speaker 7: they're not going to be paid until probably January of

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Speaker 7: next year. So it's a staggered effect. But in the

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Speaker 7: details of the data, we are seeing this start to

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Speaker 7: come through.

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Speaker 5: And it sounds like it could be sort of a

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Speaker 5: holiday season hit that we're seeing as well. But what

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Speaker 5: about the stickiness and the longevity of tariffs? Is that

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Speaker 5: something been the longer term concerns you more well.

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Speaker 7: So this is the great unknown. It's the unknown for economists,

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Speaker 7: it's the unknown for the FED. It's not the first

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Speaker 7: round effects. The first round effects are nice and simple

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Speaker 7: to calculate. Basically, this is going to add about one

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Speaker 7: and a half percentage points to US inflation. That's effectively

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Speaker 7: the sales tax that the tariffs are likely to represent.

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Speaker 7: The question is the second round effects do we see

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Speaker 7: us manufacturers raising their prices because they're facing less price

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Speaker 7: competition from foreign competitors.

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Speaker 6: Do we see US.

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Speaker 7: Retailers going into profit led in flom and using this

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Speaker 7: tariff story as a as a convenient cover to sneak

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Speaker 7: in a bit more profit margin and a bit higher prices.

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Speaker 7: And the more you get those second round effects, the

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Speaker 7: longer the negative impact of the trade taxes is going

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Speaker 7: to weigh on the US consumer.

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Speaker 1: Does it mean that it makes sense for the Federal

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Speaker 1: Reserve to be cutting rates now in order to pre

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Speaker 1: empt that impact?

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Speaker 6: Well, this is a great problem. You know.

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Speaker 7: I'm not somebody who has a great deal of support

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Speaker 7: for for Chair Pale, I have to say, but nevertheless,

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Speaker 7: I do have quite a bit of sympathy for him

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Speaker 7: at the moment because he's in a really difficult position

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Speaker 7: that we don't know how big the second round effects

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Speaker 7: are going to be in total. We don't even know

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Speaker 7: actually how big the directive effects of the tariffs are

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Speaker 7: going to be, because firstly, we don't know what all

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Speaker 7: of the trade taxes are going to be, and secondly,

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Speaker 7: we don't know if they're going to survive the court reviews,

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Speaker 7: and you know, there may will be some dialing back

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Speaker 7: of these taxes as the courts reject them. So it's

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Speaker 7: a lot of uncertainty there, and the wait and see

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Speaker 7: approach is basically I think saying, well, look, if the

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Speaker 7: economy is going to slow down, and it almost certainly

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Speaker 7: is going to weaken significantly as we go into the

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Speaker 7: second half, really should we be cutting rates now or

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Speaker 7: should we wait to see how bad the damage is

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Speaker 7: going to be?

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Speaker 6: And that's the great uncertainty.

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Speaker 7: So the FED is in weight and see mode, I

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Speaker 7: think justifiably at the moment, I think they'll cut probably

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Speaker 7: one percent over the course of the next twelve months.

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Speaker 7: But when they start that process that's quite uncertain. Do

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Speaker 7: they cut in September or do they kick it into

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Speaker 7: the fourth quarter? That's uncertain because the data is uncertain,

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Speaker 7: The tariffs are uncertain, you know. Uncertainty is the hallmark

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Speaker 7: of the current administration in the States.

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Speaker 1: And the job data is one that we're really watching

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Speaker 1: closely that the FED is referring to when it comes

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Speaker 1: to also economic fragility. Right, what are you seeing in

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Speaker 1: the labor market?

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Speaker 7: So fragile is exactly the right word I think there,

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Speaker 7: because what's going on is the labor market is clearly

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Speaker 7: experiencing some stress because in this climate of uncertainty, companies

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Speaker 7: are refusing to hire.

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Speaker 6: They're not firing workers.

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Speaker 7: If you've got a job, your job is probably safe,

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Speaker 7: but they're not keen to go out and take on

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Speaker 7: new labor because you know.

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Speaker 6: Who knows what the next twelve months is going to bring.

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Speaker 7: And so as a result, we're not seeing, you know,

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Speaker 7: job vacancies be particularly strong. We're not seeing that recruitment.

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Speaker 7: Now that's negative, but it's not disastrous. It's negative because

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Speaker 7: obviously the labor market is weakening. If you're somebody leaving university,

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Speaker 7: you're going to struggle to find work. On the other hand,

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Speaker 7: twenty one year olds aren't that important as consumers.

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Speaker 6: You know.

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Speaker 7: It's the middle aged people like me who are actually

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Speaker 7: the bigger consumers overall. So you know, it's what I'm doing,

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Speaker 7: you know, not what my twenty one year old niece

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Speaker 7: is doing that is actually going to matter to economic performance. Well, no,

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Speaker 7: fortunately we haven't gone down that route. But the TikTok

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Speaker 7: shop does get more of her income than it should.

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Speaker 7: But yeah, that's the pattern that we're going to be

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Speaker 7: looking for. So the FED is going to be very

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Speaker 7: very focused on the labor market. Unfortunately, the labor market

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Speaker 7: data is not very good quality, and that's where one

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Speaker 7: of the risks of policy era comes in, not because

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Speaker 7: Powell is more incompetent than normal, but because the data

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Speaker 7: gives a misleading signal and is corrected in revision.

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Speaker 6: That's where the real risk lies.

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Speaker 5: I think, speaking of Labuobos, how are you viewing US

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Speaker 5: China at the moment? I mean, is this sort of

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Speaker 5: the instinct is to kick the gun down the road

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Speaker 5: for another ninety days because this is obviously the hardest

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Speaker 5: decision of the hardest tariff negotiation to have.

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Speaker 7: I think that is very much the case, and so

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Speaker 7: I think there will be an inclination to extend and

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Speaker 7: to try and push this further out. And one of

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Speaker 7: the things about the China trade, of course, is that

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Speaker 7: the China trade is likely to be quite.

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Speaker 6: Visible to US consumers.

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Speaker 7: They're going to notice when the trade tax comes in

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Speaker 7: on China's products because these are things that they do

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Speaker 7: buy a bit more frequently, or they're obsessing about. They're

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Speaker 7: smaller items. It's not steel so much. Steel is not

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Speaker 7: something you don't go out and buy any good of

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Speaker 7: steel on a Saturday morning, do you. But you might

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Speaker 7: go out and think, oh I need a new toast store,

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Speaker 7: I need a new cattle, or I need a labuba.

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Speaker 7: Nobody needs a labooboo. But you know that sort of thing.

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Speaker 7: You're going out to spend on a frequent basis, you

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Speaker 7: notice the price increases a bit more.

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Speaker 6: There.

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Speaker 2: That's Paul Donovan, chief economist at UBS Global Wealth Management,

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Speaker 2: speaking with Bloomberg's Sherry On and Heidi Stroud Watts right

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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 Prisoner

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Speaker 2: and this is Bloomberg