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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug Prisner. Crude

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Speaker 2: oil prices are trading higher at this hour. This is

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Speaker 2: after the US military launched an additional round of strikes

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Speaker 2: against Iran, while at the same time resuming a naval

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Speaker 2: blockade of Iranian ports and coast elsewhere. Today, we had

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Speaker 2: FED share Kevin Warsh telling House lawmakers the FED has

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Speaker 2: no tolerance for high inflation, and he at the same

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Speaker 2: time downplayed that CPI report for the month of June,

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Speaker 2: saying the inflation mission is not yet accomplished. If you're

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Speaker 2: wondering about the inflation story overall, CPI cooled last month

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Speaker 2: for the first time in six years. This is the

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Speaker 2: headline reading up at an annual rate of three and

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Speaker 2: a half percent, But that's down from what we had

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Speaker 2: in May of four point two percent, and that is

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Speaker 2: obviously a reflection of lower fuel prices, especially gas. So

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Speaker 2: the CPI print helped relieve a bit of anxiety over

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Speaker 2: whether the FED would be inclined to raise rates in

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Speaker 2: the near term. Stocks moving higher, especially the chip makers.

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Speaker 2: We had the Philadelphia Semiconductor Index up today by two

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Speaker 2: and a half percent for a look at some of

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Speaker 2: this price section. I'm joined by Paisley Nardini of Simplify

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Speaker 2: Asset Management. Paisley, thank you so much. How do you

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Speaker 2: understand the risks right now in markets? And let's just

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Speaker 2: talk beyond equities, maybe we can move into the fixed

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Speaker 2: income space as well.

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Speaker 3: Yeah, well, today's inflation print.

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Speaker 1: I'm kind of surprised to hear some of the comments today,

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Speaker 1: as you mentioned Warsh making a comment that.

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Speaker 3: This doesn't mean we're out of the woods. I mean,

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Speaker 3: this is a huge.

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Speaker 1: Tailwind I think for his objective, which is this dual mandate,

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Speaker 1: and this really helps give him a more balanced approach

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Speaker 1: to what he needs to accomplish in the next couple months.

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Speaker 3: I think it removes a key.

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Speaker 1: Point of stress, and the markets have priced that in

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Speaker 1: as you mentioned, with just rate hike expectations, declining rates

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Speaker 1: rallying a bit as well. So as it relates to

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Speaker 1: fixed income, we've really seen of the last you know,

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Speaker 1: probably a couple of years at this point, but definitely

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Speaker 1: over the last year or so, with heightened inflation expectations,

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Speaker 1: especially earlier this year, with oil investors kind of throwing

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Speaker 1: in the towel around the fixed income, the traditional core

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Speaker 1: bond trade, and that's where.

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Speaker 3: I think a bit of a risk lies.

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Speaker 1: We've seen a little bit repricing today, but not nearly

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Speaker 1: to levels that would warrant kind of piling in on

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Speaker 1: the interest rate risk or duration trade. But if we

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Speaker 1: start to see at least we get more validation that

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Speaker 1: you may was maybe peak for current inflation behind us

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Speaker 1: and any cracks within the employment data that are coming

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Speaker 1: out in the next couple of days, that could definitely

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Speaker 1: continue to pressure yields lower. And I think markets broadly

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Speaker 1: over the last couple of years have been trading more

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Speaker 1: on technicals than fundamentals. So if we start to see

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Speaker 1: a bit of a inertia or momentum and investors piling

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Speaker 1: back into duration, I think that could be a catalyst

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Speaker 1: as well.

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Speaker 3: So that's something I think a lot of investors.

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Speaker 1: Maybe aren't paying as much attention to, and core bonds

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Speaker 1: just where we are on the cycle, Like I said,

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Speaker 1: maybe aren't front and center just given all the exciting

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Speaker 1: semiconductor technology opportunities for portfolios.

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Speaker 3: But it's not time to completely throw in the towel

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Speaker 3: on bonds.

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Speaker 2: I would say in the month of June, gasoline prices

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Speaker 2: were down nearly ten percent, something greater than nine percent.

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Speaker 2: We have seen obviously a lot of turbulence in the

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Speaker 2: oil markets. It's not clear yet where this is going

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Speaker 2: to go, but if we can say maybe fairly that

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Speaker 2: we're not going to retest the highs that we had

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Speaker 2: at the near the onset of the war with Iran.

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Speaker 2: You mentioned the chip story in there, and I'm wondering

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Speaker 2: whether or not maybe what's been happening in the semiconductor space,

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Speaker 2: particularly as it relates to memory, will kind of replace

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Speaker 2: energy as being the driving factor behind this persistently. Maybe

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Speaker 2: not higher inflation, but certainly sticky inflation.

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Speaker 4: Yeah.

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Speaker 1: I think this also kind of ties back to some

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Speaker 1: of the comments with Warsh coming into.

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Speaker 3: The HELM is that his views or that inflation is or.

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Speaker 1: Sees me the technology and AI is deflationary over time.

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Speaker 3: I think many of us can agree with that.

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Speaker 1: Perhaps with that time horizon is where I think a

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Speaker 1: lot of people may deviate, myself included. I do think

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Speaker 1: inflation is absolutely ex sees me technology is inflationary in

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Speaker 1: the near term, and we are seeing the implications of

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Speaker 1: that on the markets today. We've seen that obviously trickle

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Speaker 1: through and just the input costs, which is why we've

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Speaker 1: seen this kind of shift from more of the hyperscalers

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Speaker 1: to more of the chip makers over the last couple months.

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Speaker 1: That volatility and that shifting of the guard I would

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Speaker 1: say of who's leading the race for AI from a

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Speaker 1: return perspective, especially within technology, is I think what's leaving

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Speaker 1: a lot of investors confused. How do you play the

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Speaker 1: technology trade? How do you take advance of this really

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Speaker 1: once in a lifetime generational type innovation and technology that's

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Speaker 1: driving productivity, that's allowing us to increase our bottom lines

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Speaker 1: for a lot of these companies at their profit margins,

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Speaker 1: how do you play that trade? And just given the

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Speaker 1: last couple months, the noise and the volatility across sectors

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Speaker 1: and individual names, is why I think looking at more

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Speaker 1: of a balanced or prudent approach to this and say,

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Speaker 1: like an equal weight approach of technology can be advantageous.

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Speaker 1: So yes, inflationary definitely in the short term. And then

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Speaker 1: also the demand story, right where are we overbuilding? Are

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Speaker 1: we over promising? And that really kind of bleeds into

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Speaker 1: the fundamentals. A lot of these earnings reports that are

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Speaker 1: coming out really priced for perfection at the stock level,

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Speaker 1: and so in order to maintain these loftier valuations. I'm

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Speaker 1: not saying these companies are overvalue. The fundamentals thus far

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Speaker 1: have been strong. But to maintain these type of price levels,

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Speaker 1: you really need to over deliver, and you can only

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Speaker 1: do that for so long. It's not sustainable quarter after

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Speaker 1: quarter to deliver these kind of record beating type reports

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Speaker 1: and leading guidance higher. So I think that's where the

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Speaker 1: markets are a bit on shaky ground and why really

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Speaker 1: here at Simplify, we are always focused on how do

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Speaker 1: you diversify some of those risks, So, whether it's an

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Speaker 1: equal weighted approach, whether it's introducing additional sources of risk

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Speaker 1: to the portfolio liquid alts, I mean, with the inflationary

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Speaker 1: concerns that still exist even with today's cooling print for inflation,

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Speaker 1: having hard assets and commodities in a portfolio can be

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Speaker 1: a really convenient trade.

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Speaker 3: I guess at the stage of the cycle.

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Speaker 2: What about being exposed to markets offshore right now, particularly

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Speaker 2: in Asia, is that something that you would be inclined

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Speaker 2: to maybe play around with or is there a risk

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Speaker 2: there that you just aren't willing to take on.

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Speaker 1: Yeah, the way I look at the kind of the

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Speaker 1: non US trade anyway, for US investors is kind of twofold.

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Speaker 3: The bigger lever driver of returns.

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Speaker 1: Is obviously currencies, and so with the strength that we've

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Speaker 1: seen over the last couple months in the US dollar,

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Speaker 1: that continues to place pressure on non US equity assets.

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Speaker 1: So until when we see reversal from that perspective, which

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Speaker 1: could happen if we start to see again inflation cooling,

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Speaker 1: further cracks and employment the Fed starts to even talk

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Speaker 1: about easing back on the table, that could pressure the

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Speaker 1: dollar lower, which could help put a bit on international assets.

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Speaker 1: I would say the more near term way to think

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Speaker 1: about opportunities abroad is just thinking about more of like

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Speaker 1: the sector play, right, So there's certain really innovative companies

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Speaker 1: that exist and we've seen obviously volatility and exceptional returns

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Speaker 1: this year, and more of like South Korean equities, which

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Speaker 1: is a really concentrated play on a specific part of

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Speaker 1: the market, which is those chip makers. So opportunities I

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Speaker 1: would say across sectors for diversification beyond US names, but

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Speaker 1: really as it relates to technology in the AI trade,

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Speaker 1: especially with companies like Skhinex coming to market in an

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Speaker 1: ADR format in the US market in the last week here.

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Speaker 1: These are all really interrelated at the at the margin.

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Speaker 1: So are you really getting diversification when these companies are

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Speaker 1: global in nature and all kind of tied or tethered

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Speaker 1: to the same AI type trade.

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Speaker 2: So we're just getting the earning season underway. There have

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Speaker 2: been some positive results so far from a few of

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Speaker 2: the big banks. I'm thinking of JP, Morgan, Chase, goldmunt

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Speaker 2: Sacks today in particular, with a nine percent moved to

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Speaker 2: the upside. How do you think we're going too fair

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Speaker 2: in Q two in terms of overall performance?

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Speaker 1: Well, I think one of the key tailwinds to some

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Speaker 1: of these bank and trading related financials is the volatility

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Speaker 1: that we're talking about that we've seen in markets. This

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Speaker 1: volatility is exactly what drives trading revenues for these banks,

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Speaker 1: and so Goldman, as you mentioned, up nine percent today

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Speaker 1: on earnings. Provided we continue to see opportunities to trade

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Speaker 1: and make money within this more volatile market, I think

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Speaker 1: these companies will continue to see a bid. The other

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Speaker 1: theme that or I would say tailwind in the financial

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Speaker 1: sector broadly related to banks, is just thinking about the

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Speaker 1: slope of the curve. Typically banks do better when there's

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Speaker 1: a steeper yield curve. The money they make on lending

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Speaker 1: becomes more attractive versus what they're paying on their reserves

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Speaker 1: at the bank level. And so if we do start

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Speaker 1: to see the front end, as we did a little

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Speaker 1: bit today, start to reprice lower from a yield perspective,

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Speaker 1: that really steepens the curve, and so that provides a

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Speaker 1: more kind fortuitous backdrop for some of these financial and

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Speaker 1: bank related companies to continue beyond just the strength that

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Speaker 1: we've seen from a profitability perspective from trading revenue over

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Speaker 1: the last quarter or two. So I do think that

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Speaker 1: that's a sector that could continue to perform quite well.

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Speaker 1: And another way to think about, how do you diversify

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Speaker 1: given what we've seen from a macro risk perspective, by

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Speaker 1: trying to kind of remove yourself directly from the AI trade.

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Speaker 2: So you mentioned the rally that we had in the

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Speaker 2: short end of the treasury curve, yields coming down quite

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Speaker 2: a bit. I think the two year came in around

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Speaker 2: eight or nine basis points. And I'm curious how you're

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Speaker 2: feeling about FED policy right now between let's say now

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Speaker 2: in the end of the year, do we avoid a

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Speaker 2: quarter point right hike. Do you think is it going

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Speaker 2: to be kind of steady as she goes for a

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Speaker 2: while longer?

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Speaker 1: The markets have had a fun year, I would say

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Speaker 1: repricing rate expectations. It's been up, it's been down, it's

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Speaker 1: been up, and it's been back down again. What we

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Speaker 1: really try to focus on is kind of looking through

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Speaker 1: the noise. We all know that, you know, a rise

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Speaker 1: in oil prices will be you know, transitory from an

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Speaker 1: inflationary perspective. So I think the question of the last

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Speaker 1: quarter has been is it more than just oil? And

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Speaker 1: obviously oil was the key reason why we saw inflation

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Speaker 1: start to decline. With today's print, there are some small

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Speaker 1: pockets within inflation readings broadly that still show signs of

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Speaker 1: pressure to the upside. But I think for the most part,

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Speaker 1: we came into really the second quarter with inflation moving

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Speaker 1: in the right direction, and now it's kind of regaining

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Speaker 1: on that that path lower. So I do think that

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Speaker 1: as it relates to the it's still the hikes that

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Speaker 1: are still priced in for this year.

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Speaker 3: I have a feeling those will be taken off the table.

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Speaker 1: I think we might be closer to where we started

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Speaker 1: the year when we end this year, which is having

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Speaker 1: cuts back on the table. With that being said, because

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Speaker 1: we are kind of a global economy at this point,

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Speaker 1: with central bank hikes and other parts of the world

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Speaker 1: developed nations Japan, Europe, et cetera, that does place some

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Speaker 1: pressure on more you know, not to say the FED

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Speaker 1: is trying to be coordinated, but we we tend to

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Speaker 1: see these.

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Speaker 3: Themes in these trends persist cross border.

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Speaker 1: So I do wonder if when we get through the

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Speaker 1: summer of the ECB and the Bank of Japan, we'll

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Speaker 1: start to move back in line. But if I had

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Speaker 1: to flip a coin, I think the next six months

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Speaker 1: we'll see rates expectations moving lower than higher.

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Speaker 2: Okay, Paisley, thank you so very much. We'll leave it there,

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Speaker 2: Paisley Nardini of Simplify Asset Management joining us here on

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Speaker 2: the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast.

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Speaker 2: I'm Doug Krisner. China's monthly activity data is expected to

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Speaker 2: show weakness as of midyear. We got some insight from

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Speaker 2: Pichian Lu, Asia economist from Fidelity International. Here. She is

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Speaker 2: speaking with Bloomberg's April Home.

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Speaker 5: So Peton we're expecting a bit of a slowing What

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Speaker 5: does that mean for the back half of the year.

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Speaker 4: Thanks for having me today, Avery, Yes, we're going to

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Speaker 4: se see China's qq GDP alongside the reactivity data today

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Speaker 4: and we do expect a slow down as we have

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Speaker 4: observed in data from April and May. Part of that

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Speaker 4: was hit by the Iran conflict and its subsequent shortages

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Speaker 4: of various input but as well, the domestic demand seems

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Speaker 4: to be softened a little bit on the back of

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Speaker 4: somewhat conservative fiscal stunts in the second quarter. So all

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Speaker 4: in all, I think we're probably going to expect some

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Speaker 4: softness in data. And the key really is where does

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Speaker 4: that trigger the reaction function from the policymakers.

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Speaker 5: Do you think there will be a reaction function. I

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Speaker 5: think a lot of economists or China observers have said,

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Speaker 5: you know, keep your expectations on stimulus low.

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Speaker 4: Yeah, I think there's a view on that, and you

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Speaker 4: do lean into that view of broad based stimulus because overall,

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Speaker 4: if you look at China's growth, even though we're expecting

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Speaker 4: slow down to somewhat a four point five percent anchor,

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Speaker 4: but remember we have lowered the GDP and growth expectations

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Speaker 4: for this year.

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Speaker 6: To pave way for a higher quality growth.

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Speaker 4: And looking at the shape of Chinese growth, it's currently

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Speaker 4: running under two speed. We know K shape growth is everywhere,

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Speaker 4: but K in China looks slightly different. It is a

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Speaker 4: representation of the characteristics of China's transition. We do see

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Speaker 4: the high speed growth in xpot sector yesterday, as well

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Speaker 4: as the tech manufacturing sector that's been running on a

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Speaker 4: higher speed, and that perhaps stops or kind of makes

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Speaker 4: the policymaker hesitant to roll out any form of broad stimulus.

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Speaker 4: But that doesn't mean China doesn't need help, because we

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Speaker 4: do have another side of the k or the lower

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Speaker 4: gear of the economy, which is under transition. And we

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Speaker 4: did see some slowdown, especially within the retail sales, which

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Speaker 4: we are expecting some weak number today again, which is

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Speaker 4: mainly driven by the slowdown of goods consumption as stimulus

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Speaker 4: has been subsided earlier this year. So with that in

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Speaker 4: mind and if there are slow down resurface again in

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Speaker 4: the retail sector, we do see more efforts coming in

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Speaker 4: to inject some sort of targeted stimulus to support the

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Speaker 4: weaker side of the economy.

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Speaker 5: There also seems to be some rumblings about the Consumption

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Speaker 5: Support Plan.

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Speaker 4: How much weight are you putting on something like that, Yeah, exactly.

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Speaker 4: We did hear some follow ups from five year plan.

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Speaker 4: In terms of implementation, the key headline number suggests that

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Speaker 4: we're probably going to see about three point seven percent

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Speaker 4: of nomenal retail sales growth planned in for the next

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Speaker 4: few years, and that's not ambitious in my view. I

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Speaker 4: think he's still along the side of accepting a slower

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Speaker 4: growth trajectory while making the structure of the economy in

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Speaker 4: a better shape. So in terms of consumption more particularly

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Speaker 4: in that policy statement, I think we should pay more

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Speaker 4: attention to the skilled towards the services consumption altogether. So

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Speaker 4: it used to be the case where goods consumption are

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Speaker 4: taking the heavy weight, and it appears to be more

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Speaker 4: cyclical coming in and out with policy stimulus. But now

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Speaker 4: we are probably seeing that transition more towards an institutionalized

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Speaker 4: framework to allow consumption and domestic consumption at large to

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Speaker 4: be the backbone of the economy to support the products

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Speaker 4: or the yield dividends from tech and innovation driven growth.

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Speaker 5: We've been talking a lot about what some people are

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Speaker 5: calling the bottom half of the key what about the

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Speaker 5: AI driven part. I mean, we had the trade numbers yesterday,

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Speaker 5: do you get a sense that even that could be

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Speaker 5: vulnerable to the global capex cycle and to what AI

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Speaker 5: related investments look like in the next.

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Speaker 6: Couple of years.

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Speaker 4: There are definitely some cyclical elements of that, But I

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Speaker 4: would like to dissect yesterday's trade data into three broader

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Speaker 4: perspective to look at China's external outperformance in a broader view.

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Speaker 6: Firstly, the AI part.

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Speaker 4: We did see exponential growth in AIS, both in pots

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Speaker 4: and expots, and that just reflects how deeply entrenched that

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Speaker 4: AI phenomenon has been affecting China, and China is also

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Speaker 4: deeply integrated in that supply chain. Given as cyclical elements

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Speaker 4: of that, you know, coming to next quarters, if there's

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Speaker 4: any risks so that, I'm sure China will be affected

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Speaker 4: as well, but that is not the big picture. We

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Speaker 4: also saw another aspects of China's outperformance, which mainly comes

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Speaker 4: from I would say the competitiveness of its supply chain

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Speaker 4: with regard to green tech and transportation. So if we

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Speaker 4: saw evxpots, which is also continuously outperforming, and that to

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Speaker 4: me reflects more of the upgrading of China's manufacturing supply chain,

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Speaker 4: and that demand for energy resilience energy security is also

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Speaker 4: a decent support from a structural perspective to China screen

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Speaker 4: tech expots.

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Speaker 5: Some of these Sorry you had another point was that

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Speaker 5: Kara just go.

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Speaker 4: The third point really is the easing of the US

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Speaker 4: China trade tensions that people have always overlooked because if

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Speaker 4: we look at China's exports by country, lowe end product

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Speaker 4: consumer goods to US has been recovered somewhat after the

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Speaker 4: piece still with the trade truths with US, some of.

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Speaker 5: The sectors that you talked about that are underpinning the

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Speaker 5: trade numbers, they're also facing over supply. The over capacity

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Speaker 5: is that a headwind or has that already been sort

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Speaker 5: of accounted for?

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Speaker 4: That's always going to be a head wings as we

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Speaker 4: think that with a lot more trade frictions with the

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Speaker 4: DM economies because of the rising export similarity the rising

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Speaker 4: competitiveness of China. So we're not really optimistic per se

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Speaker 4: about upcoming relationship between China and Europe, China, Japan, or

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Speaker 4: just broadly with the competitive industrial pack. But I think

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Speaker 4: that having been said, China's exports of EV is probably

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Speaker 4: going to continue to push through to a wider amount

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Speaker 4: markets and I think the demand is there, of course

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Speaker 4: with some frictions from the DM, but the third market competition,

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Speaker 4: China is probably going to still.

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Speaker 6: Sail through with some resilience going forward.

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Speaker 5: Talking about sailing the latest flare up in the street,

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Speaker 5: how bad does it look for China, because it was

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Speaker 5: also interesting how resilient it was even during the worst

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Speaker 5: of times in the conflict.

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Speaker 4: Yeah, here comes the massy part of the resolution. In

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Speaker 4: our base case, we always think that the streets of

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Speaker 4: hormone situation is going to be a massy resolution. It's

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Speaker 4: never a straight line. And now we see some flare

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Speaker 4: ups and we are worried about that as well. Earlier

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Speaker 4: this year we did see China showing some resilience, which

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Speaker 4: is basically a combination of some demand destruction, softer demand,

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Speaker 4: especially in a refinery sector as well as it's buffers

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Speaker 4: and the inventory that has built up. But inventory is

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Speaker 4: not infinite. We do think that the risk is accumulating

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Speaker 4: as we move forward with more closures and more disruptions.

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Speaker 4: So all we can see is that China is now

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Speaker 4: running on about first. But the clock is taken for

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Speaker 4: China as well. So if the disruption is going to

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Speaker 4: last longer. We do think that China will continue to

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Speaker 4: draw down reserves at the point of time while remain

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Speaker 4: a sensitive margin buyer of crude oil and enter the

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Speaker 4: market wherever price seems to be appropriate for them.

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Speaker 6: It's not just a crude storry.

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Speaker 4: I would also like to fleg that there are also

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Speaker 4: LNG aspects of that and other key strategic inputs such

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Speaker 4: as helium or keep products for manufacturing sectors. So we

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Speaker 4: do think that China will start to remain a little

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Speaker 4: bit cautious as well as the disruption happens, But it's

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Speaker 4: overall managing on kind of sitting through and managing with

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Speaker 4: precautions is our base case.

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Speaker 2: That's pitch On Lou Asia, economist at Fidelity International, speaking

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Speaker 2: with Bloomberg TV host April Hong, bringing you their conversation

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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