WEBVTT - Markets Brace for Fed's July Decision; US-China Talks to Continue

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Chrisner.

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<v Speaker 2>Talks between the US and China will continue as the

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<v Speaker 2>two sides work to extend a tear off truce. It's

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<v Speaker 2>set to expire August twelfth. Speaking after meetings in Stockholm earlier,

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<v Speaker 2>US Treasury Secretary Scott Besson confirmed that President Trump will

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<v Speaker 2>ultimately make the final decision.

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<v Speaker 3>I noticed as the earlier question said that the Chinese

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<v Speaker 3>Deputy minister did say that we had agreed on a pause.

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<v Speaker 3>We have nothing is agreed until we speak with President Trump.

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<v Speaker 2>We'll have more on the tariff story in a moment

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<v Speaker 2>when we hear from Paul Donovan. He is the chief

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<v Speaker 2>economist at UBS Global Wealth Management. But we begin here

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<v Speaker 2>in the States, where the equity market drifted lower ahead

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<v Speaker 2>of tomorrow's decision from the Fed. Join me now is

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<v Speaker 2>Mark Heppenstall. He is president and the CIO at Pen

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<v Speaker 2>Mutual Asset Management. Mark is on the line from just

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<v Speaker 2>outside Philadelphia. Thank you so much for making time to

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<v Speaker 2>chat with me. Is it too much to say that

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<v Speaker 2>the Fed is not going to cut rights this month?

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<v Speaker 2>Even though President Trump has been arguing for that for

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<v Speaker 2>a while now.

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<v Speaker 4>Hey Doug, Well, first off, great to be with you again.

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<v Speaker 4>Thanks for having me on the program. So I think,

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<v Speaker 4>you know, if a rate cut were happening tomorrow, then

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<v Speaker 4>I think that it would have already been spread through

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<v Speaker 4>the rumor mail coming out of the Federal Reserve. That

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<v Speaker 4>just seems to be the way they operate. They have

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<v Speaker 4>never really surprised markets under Powell's leadership, so I think

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<v Speaker 4>it's likely to be more of a discussion around September.

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<v Speaker 4>I do think it is interesting that, you know, we've

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<v Speaker 4>had certain members of the FOMC lobbying for a rate

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<v Speaker 4>cut this month. But I will say, in some ways,

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<v Speaker 4>I'm not so sure this isn't being orchestrated by Chair

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<v Speaker 4>Pow sort of this dissension, because it's going to be

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<v Speaker 4>a lot easier for when the time comes to cut

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<v Speaker 4>interest rates to say that he's listening to fellow FMC

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<v Speaker 4>members as opposed to being caving in to some of

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<v Speaker 4>the pressure from President Trump.

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<v Speaker 2>The price action today was a little interesting. It seemed

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<v Speaker 2>as though money was shifting out of the equity market

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<v Speaker 2>and into the bond market a bit, yields lower across

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<v Speaker 2>the curve, and I'm wondering whether or not there may

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<v Speaker 2>have been a little bit of short covering going on

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<v Speaker 2>at the bond market in front of the Fed's decision.

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<v Speaker 2>What do you think, Well, I.

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<v Speaker 4>Do think that is part of it. Yeah, I mean

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<v Speaker 4>the seven year auction came in, you know, stronger than

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<v Speaker 4>a lot of folks were expecting. So you know, the

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<v Speaker 4>market was starting to rally in the bond market to

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<v Speaker 4>start the day, and then when the seven year auction

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<v Speaker 4>came out strong, we really started to see people grab

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<v Speaker 4>for bond. So I do think in some ways people

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<v Speaker 4>are likely to be neutral tomorrow because again, even though

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

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<v Speaker 4>I do think there could be a lot of volatility

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<v Speaker 4>around the press conference. And as you mentioned earlier, we

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<v Speaker 4>have a lot of important earnings this week. We have GDP,

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<v Speaker 4>we have the employment report. So again it isn't surprising

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<v Speaker 4>to me that people would want to square positions in

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<v Speaker 4>light of all of the news that's happening.

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<v Speaker 2>How are you making sense of the day's economic news.

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<v Speaker 2>We had word that consumer confidence was up in the

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

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<v Speaker 2>hovering at a level right now that implies a stable

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<v Speaker 2>labor market. How are you viewing the macro these days?

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<v Speaker 4>Well, I guess if you had to pick one word,

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

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<v Speaker 4>moderation in some of the strong growth numbers that we

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<v Speaker 4>witnessed last year. You know, the first quarter negative print

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<v Speaker 4>on GDP I think was somewhat of an anomaly driven

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<v Speaker 4>by trade imbalances. So again, this GDP report will give

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

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<v Speaker 4>because it was you know, the consumer was weak in

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<v Speaker 4>the first quarter. So it'll be interesting to see what

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<v Speaker 4>type of a rebound we see here in the GDP

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

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<v Speaker 4>and with you know, the unemployment rate pretty much close

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<v Speaker 4>to indicating full employment picture at this point, I think

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<v Speaker 4>it's you know, again, consumer spending is likely to not

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<v Speaker 4>fall off a cliff, and so I would go back

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<v Speaker 4>to that word stable.

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<v Speaker 2>Okay, So we also get the Fed's preferred measure of

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<v Speaker 2>inflation this week, core PCE. How are you feeling about

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<v Speaker 2>inflation in spite of the fact that people have been

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<v Speaker 2>saying for a while now that with these tariffs and

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<v Speaker 2>some of these new trade deals, inflation is likely to

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<v Speaker 2>tick up. The market doesn't seem to be too concerned

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<v Speaker 2>about that right now.

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<v Speaker 4>No, it is interesting, and I will say we're seeing

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<v Speaker 4>a lot of mixed signals. If you look at the

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<v Speaker 4>ten year break even inflation on you know, looking at

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

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<v Speaker 4>So certainly that's not sort of a runaway high type

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

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<v Speaker 4>and it has been trending higher more recently, so that's

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<v Speaker 4>something to be watchful for. Oil prices have been well behaved.

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<v Speaker 4>You mentioned they are up strongly day, but you know,

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<v Speaker 4>I do think with oil being well behaved and a

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<v Speaker 4>lot of these you know, sort of severe terror shifting

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<v Speaker 4>into sort of moderate trade deals with still some you know,

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

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<v Speaker 4>this point to really cause the spike in inflation that

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<v Speaker 4>a lot of analysts were expecting after Liberation Day.

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<v Speaker 2>Are you still finding opportunity in the bond market these days,

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<v Speaker 2>even though yields have come in pretty substantially as of late.

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

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<v Speaker 2>where on the curve are you finding it?

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<v Speaker 4>You know, I will say we've seen you know, I

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<v Speaker 4>would say a normalization of the yield curve, and I

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<v Speaker 4>will say for fixed income managers, having some one of

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<v Speaker 4>a positive slope to the yeld curve that allows the

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<v Speaker 4>passive of time to basically improve the performance for fixed

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<v Speaker 4>income assets, I think is a benefit. So we you know,

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<v Speaker 4>we're still forecasting a moderate steepening of the yield curves,

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<v Speaker 4>so sort of in that five to ten years zip code,

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<v Speaker 4>I will say, corporate credit spreads are you know, basically

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<v Speaker 4>very close to the post financial crisis tights today. That's

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<v Speaker 4>both an investment great and high yield. So we're finding

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<v Speaker 4>better opportunities in securitize credit, including residential mortgage backed securities.

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<v Speaker 2>What are you most concerned about right now?

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<v Speaker 4>Well, I do think the debt and deficits, which is

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<v Speaker 4>you know, one of the reasons that we've seen the

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<v Speaker 4>steepening of the yield curve, and you know, we've seen

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<v Speaker 4>the thirty year treasury tests the five percent level so

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<v Speaker 4>many times recently. I do worry that it could be

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<v Speaker 4>ready to break through the next time that we test

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<v Speaker 4>the five percent level. So again I think it's going

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<v Speaker 4>to be pressure at the long end of the yield curve.

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<v Speaker 4>And basically, you know, you discount financial assets at risk

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<v Speaker 4>free rates across the yield curve, and so to the

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<v Speaker 4>extent that should long term interest rates rise, that should

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<v Speaker 4>be a headwind for other financial assets. So again that's

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

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<v Speaker 4>the sort of the breakdown is of the debt issuance. Tomorrow,

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<v Speaker 4>I think the Treasury is going to announce how much

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<v Speaker 4>short versus long term debt they're going to be issuing.

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<v Speaker 2>Are you tempted to look offshore for fixed income opportunities?

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<v Speaker 4>Well, I will say our focus is primarily in US

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<v Speaker 4>fixed income markets. So you know, we have a little

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<v Speaker 4>bit of form bond exposure, a little bit of emerging

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<v Speaker 4>market exposure. But again I will say the opportunity set

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<v Speaker 4>for US fixed income in light of you know, close

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<v Speaker 4>to a four and a half percent tenure treasure yield

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<v Speaker 4>is so much better than it was four or five

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

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<v Speaker 4>which we think are attractive for a lot of spread assets.

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<v Speaker 2>Okay, so for talking the US, how much exposure do

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<v Speaker 2>you have right now to the muni market.

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<v Speaker 4>Well, we do tax wimmunis, and I will say, you know,

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<v Speaker 4>we've had as much as let's say, ten to fifteen

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<v Speaker 4>percent of our portfolio and tax communis. However, tax community

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<v Speaker 4>issuance has really fallen off a cliff, and that's partly

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<v Speaker 4>because the exempt market has been so strong. So again

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<v Speaker 4>that's been an area where we're seeing a declining percentage

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<v Speaker 4>within the portfolio. But you know, there still are sort

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

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<v Speaker 4>But again, as sort of a broad asset class, it's

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<v Speaker 4>a little bit tough to find opportunities there.

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

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<v Speaker 2>Mark Heppenstall, Presidency IO at Pen Mutual Asset Management. Joining

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<v Speaker 2>from just outside Philadelphia here on the Daybreak Asia podcast.

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<v Speaker 2>Welcome back to the Daybreak Asia Podcast. I'm dig Chrisner.

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<v Speaker 2>So the earning season moves into high gear in the

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<v Speaker 2>States tomorrow when we'll get the numbers from Meta, Microsoft

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<v Speaker 2>and Qualcom after the closing bell. But it seems as

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<v Speaker 2>though neither earnings nor even the Fed's decision are enough

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<v Speaker 2>to take the market's attention away from tariffs and issues

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<v Speaker 2>on trade. On Tuesday, the IMF said the global economy

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<v Speaker 2>will keep weakening and it remains vulnerable to trade shocks,

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<v Speaker 2>and that's despite the fact that we're seeing some signs

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<v Speaker 2>of resilience when it comes to those US tariffs. We

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<v Speaker 2>got reaction from Paul Donovan. He is the chief economist

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<v Speaker 2>at UBS Global Wealth Management. Paul spoke with Bloomberg TV

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<v Speaker 2>host Sherry On and Heidi Stroud Watts on the Asia trade.

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<v Speaker 5>Has the brasilience in the data surprised you or is

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<v Speaker 5>it just a result of sort of front loading before

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<v Speaker 5>it all hits in the coming months.

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<v Speaker 6>It's not a surprise.

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<v Speaker 7>The impatience of people to see the tariffs and the numbers,

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<v Speaker 7>I think is actually a little surprising.

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<v Speaker 6>It takes time. So there's two things here.

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<v Speaker 7>Firstly, any goods that were already on board ship heading

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<v Speaker 7>off to the United States on the ninth of April,

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<v Speaker 7>they're not subject to tariff. So that means some of

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<v Speaker 7>the stuff that's being unloaded from Asia in late May

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<v Speaker 7>and June that's still not subject to tariff. And then

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<v Speaker 7>when you get from the port to the shopping basket

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

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<v Speaker 7>so you're not expecting to see the full effects of

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<v Speaker 7>these tariffs showing up. The consumer isn't paying the tax

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<v Speaker 7>until June the very earliest, and frankly, with the April

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<v Speaker 7>that's probably not going to be fully visible until September.

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<v Speaker 7>And with the August taxes that Trump's putting on consumers,

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<v Speaker 7>they're not going to be paid until probably January of

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<v Speaker 7>next year. So it's a staggered effect. But in the

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<v Speaker 7>details of the data, we are seeing this start to

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<v Speaker 7>come through.

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<v Speaker 5>And it sounds like it could be sort of a

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<v Speaker 5>holiday season hit that we're seeing as well. But what

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<v Speaker 5>about the stickiness and the longevity of tariffs? Is that

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<v Speaker 5>something been the longer term concerns you more well.

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<v Speaker 7>So this is the great unknown. It's the unknown for economists,

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<v Speaker 7>it's the unknown for the FED. It's not the first

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<v Speaker 7>round effects. The first round effects are nice and simple

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<v Speaker 7>to calculate. Basically, this is going to add about one

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<v Speaker 7>and a half percentage points to US inflation. That's effectively

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<v Speaker 7>the sales tax that the tariffs are likely to represent.

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<v Speaker 7>The question is the second round effects do we see

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<v Speaker 7>us manufacturers raising their prices because they're facing less price

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<v Speaker 7>competition from foreign competitors.

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<v Speaker 6>Do we see US.

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<v Speaker 7>Retailers going into profit led in flom and using this

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<v Speaker 7>tariff story as a as a convenient cover to sneak

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<v Speaker 7>in a bit more profit margin and a bit higher prices.

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<v Speaker 7>And the more you get those second round effects, the

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<v Speaker 7>longer the negative impact of the trade taxes is going

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<v Speaker 7>to weigh on the US consumer.

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<v Speaker 1>Does it mean that it makes sense for the Federal

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<v Speaker 1>Reserve to be cutting rates now in order to pre

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<v Speaker 1>empt that impact?

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<v Speaker 6>Well, this is a great problem. You know.

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<v Speaker 7>I'm not somebody who has a great deal of support

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<v Speaker 7>for for Chair Pale, I have to say, but nevertheless,

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<v Speaker 7>I do have quite a bit of sympathy for him

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<v Speaker 7>at the moment because he's in a really difficult position

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<v Speaker 7>that we don't know how big the second round effects

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<v Speaker 7>are going to be in total. We don't even know

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<v Speaker 7>actually how big the directive effects of the tariffs are

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<v Speaker 7>going to be, because firstly, we don't know what all

0:11:46.640 --> 0:11:48.520
<v Speaker 7>of the trade taxes are going to be, and secondly,

0:11:48.559 --> 0:11:50.760
<v Speaker 7>we don't know if they're going to survive the court reviews,

0:11:50.840 --> 0:11:53.160
<v Speaker 7>and you know, there may will be some dialing back

0:11:53.200 --> 0:11:56.920
<v Speaker 7>of these taxes as the courts reject them. So it's

0:11:56.960 --> 0:11:59.880
<v Speaker 7>a lot of uncertainty there, and the wait and see

0:11:59.880 --> 0:12:03.000
<v Speaker 7>approach is basically I think saying, well, look, if the

0:12:03.040 --> 0:12:05.360
<v Speaker 7>economy is going to slow down, and it almost certainly

0:12:05.400 --> 0:12:08.000
<v Speaker 7>is going to weaken significantly as we go into the

0:12:08.040 --> 0:12:12.880
<v Speaker 7>second half, really should we be cutting rates now or

0:12:12.880 --> 0:12:16.200
<v Speaker 7>should we wait to see how bad the damage is

0:12:16.240 --> 0:12:16.640
<v Speaker 7>going to be?

0:12:16.679 --> 0:12:17.959
<v Speaker 6>And that's the great uncertainty.

0:12:18.000 --> 0:12:20.560
<v Speaker 7>So the FED is in weight and see mode, I

0:12:20.640 --> 0:12:24.160
<v Speaker 7>think justifiably at the moment, I think they'll cut probably

0:12:24.240 --> 0:12:26.600
<v Speaker 7>one percent over the course of the next twelve months.

0:12:26.880 --> 0:12:30.200
<v Speaker 7>But when they start that process that's quite uncertain. Do

0:12:30.280 --> 0:12:32.760
<v Speaker 7>they cut in September or do they kick it into

0:12:32.760 --> 0:12:35.920
<v Speaker 7>the fourth quarter? That's uncertain because the data is uncertain,

0:12:35.960 --> 0:12:39.600
<v Speaker 7>The tariffs are uncertain, you know. Uncertainty is the hallmark

0:12:39.640 --> 0:12:41.400
<v Speaker 7>of the current administration in the States.

0:12:42.360 --> 0:12:45.040
<v Speaker 1>And the job data is one that we're really watching

0:12:45.080 --> 0:12:47.800
<v Speaker 1>closely that the FED is referring to when it comes

0:12:47.800 --> 0:12:50.599
<v Speaker 1>to also economic fragility. Right, what are you seeing in

0:12:50.640 --> 0:12:51.440
<v Speaker 1>the labor market?

0:12:52.640 --> 0:12:56.000
<v Speaker 7>So fragile is exactly the right word I think there,

0:12:56.000 --> 0:13:00.600
<v Speaker 7>because what's going on is the labor market is clearly

0:13:00.880 --> 0:13:05.440
<v Speaker 7>experiencing some stress because in this climate of uncertainty, companies

0:13:05.559 --> 0:13:07.040
<v Speaker 7>are refusing to hire.

0:13:07.440 --> 0:13:09.080
<v Speaker 6>They're not firing workers.

0:13:09.080 --> 0:13:11.240
<v Speaker 7>If you've got a job, your job is probably safe,

0:13:11.280 --> 0:13:13.920
<v Speaker 7>but they're not keen to go out and take on

0:13:13.960 --> 0:13:14.920
<v Speaker 7>new labor because you know.

0:13:14.880 --> 0:13:17.160
<v Speaker 6>Who knows what the next twelve months is going to bring.

0:13:17.480 --> 0:13:20.680
<v Speaker 7>And so as a result, we're not seeing, you know,

0:13:20.800 --> 0:13:23.800
<v Speaker 7>job vacancies be particularly strong. We're not seeing that recruitment.

0:13:24.080 --> 0:13:29.200
<v Speaker 7>Now that's negative, but it's not disastrous. It's negative because

0:13:29.200 --> 0:13:33.359
<v Speaker 7>obviously the labor market is weakening. If you're somebody leaving university,

0:13:33.400 --> 0:13:37.040
<v Speaker 7>you're going to struggle to find work. On the other hand,

0:13:37.679 --> 0:13:40.040
<v Speaker 7>twenty one year olds aren't that important as consumers.

0:13:40.480 --> 0:13:40.640
<v Speaker 6>You know.

0:13:40.800 --> 0:13:44.240
<v Speaker 7>It's the middle aged people like me who are actually

0:13:44.320 --> 0:13:48.040
<v Speaker 7>the bigger consumers overall. So you know, it's what I'm doing,

0:13:48.200 --> 0:13:49.960
<v Speaker 7>you know, not what my twenty one year old niece

0:13:50.040 --> 0:13:54.880
<v Speaker 7>is doing that is actually going to matter to economic performance. Well, no,

0:13:55.080 --> 0:13:57.680
<v Speaker 7>fortunately we haven't gone down that route. But the TikTok

0:13:57.720 --> 0:13:59.840
<v Speaker 7>shop does get more of her income than it should.

0:14:00.000 --> 0:14:02.439
<v Speaker 7>But yeah, that's the pattern that we're going to be

0:14:02.480 --> 0:14:04.480
<v Speaker 7>looking for. So the FED is going to be very

0:14:04.559 --> 0:14:07.960
<v Speaker 7>very focused on the labor market. Unfortunately, the labor market

0:14:08.040 --> 0:14:11.000
<v Speaker 7>data is not very good quality, and that's where one

0:14:11.040 --> 0:14:13.720
<v Speaker 7>of the risks of policy era comes in, not because

0:14:13.760 --> 0:14:18.040
<v Speaker 7>Powell is more incompetent than normal, but because the data

0:14:18.480 --> 0:14:21.240
<v Speaker 7>gives a misleading signal and is corrected in revision.

0:14:21.440 --> 0:14:22.600
<v Speaker 6>That's where the real risk lies.

0:14:22.600 --> 0:14:26.240
<v Speaker 5>I think, speaking of Labuobos, how are you viewing US

0:14:26.360 --> 0:14:28.000
<v Speaker 5>China at the moment? I mean, is this sort of

0:14:28.560 --> 0:14:30.480
<v Speaker 5>the instinct is to kick the gun down the road

0:14:30.480 --> 0:14:33.280
<v Speaker 5>for another ninety days because this is obviously the hardest

0:14:33.280 --> 0:14:35.920
<v Speaker 5>decision of the hardest tariff negotiation to have.

0:14:36.600 --> 0:14:38.360
<v Speaker 7>I think that is very much the case, and so

0:14:38.440 --> 0:14:41.960
<v Speaker 7>I think there will be an inclination to extend and

0:14:43.200 --> 0:14:45.440
<v Speaker 7>to try and push this further out. And one of

0:14:45.480 --> 0:14:49.080
<v Speaker 7>the things about the China trade, of course, is that

0:14:49.120 --> 0:14:51.440
<v Speaker 7>the China trade is likely to be quite.

0:14:51.320 --> 0:14:53.920
<v Speaker 6>Visible to US consumers.

0:14:53.960 --> 0:14:58.240
<v Speaker 7>They're going to notice when the trade tax comes in

0:14:58.320 --> 0:15:01.360
<v Speaker 7>on China's products because these are things that they do

0:15:01.440 --> 0:15:04.480
<v Speaker 7>buy a bit more frequently, or they're obsessing about. They're

0:15:04.520 --> 0:15:08.480
<v Speaker 7>smaller items. It's not steel so much. Steel is not

0:15:08.560 --> 0:15:10.160
<v Speaker 7>something you don't go out and buy any good of

0:15:10.160 --> 0:15:12.760
<v Speaker 7>steel on a Saturday morning, do you. But you might

0:15:12.800 --> 0:15:14.320
<v Speaker 7>go out and think, oh I need a new toast store,

0:15:14.360 --> 0:15:16.280
<v Speaker 7>I need a new cattle, or I need a labuba.

0:15:16.400 --> 0:15:18.640
<v Speaker 7>Nobody needs a labooboo. But you know that sort of thing.

0:15:19.080 --> 0:15:21.920
<v Speaker 7>You're going out to spend on a frequent basis, you

0:15:22.080 --> 0:15:23.720
<v Speaker 7>notice the price increases a bit more.

0:15:23.720 --> 0:15:23.920
<v Speaker 6>There.

0:15:24.400 --> 0:15:28.000
<v Speaker 2>That's Paul Donovan, chief economist at UBS Global Wealth Management,

0:15:28.240 --> 0:15:31.920
<v Speaker 2>speaking with Bloomberg's Sherry On and Heidi Stroud Watts right

0:15:31.960 --> 0:15:37.400
<v Speaker 2>here on the Daybreak Asia Podcast. Thanks for listening to

0:15:37.400 --> 0:15:42.360
<v Speaker 2>today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,

0:15:42.400 --> 0:15:46.320
<v Speaker 2>we look at the story shaping markets, finance, and geopolitics

0:15:46.320 --> 0:15:49.600
<v Speaker 2>in the Asia Pacific. You can find us on Apple, Spotify,

0:15:49.720 --> 0:15:53.240
<v Speaker 2>the Bloomberg Podcast YouTube channel, or anywhere else you listen.

0:15:53.640 --> 0:15:56.560
<v Speaker 2>Join us again tomorrow for insight on the market moves

0:15:56.600 --> 0:16:01.160
<v Speaker 2>from Hong Kong to Singapore and Australia. I'm Doug Prisoner

0:16:01.280 --> 0:16:02.720
<v Speaker 2>and this is Bloomberg