Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Welcome to the Daybreak
Speaker 1: Asia podcast. I'm Doug Christner, and today we begin with
Speaker 1: the FED. On Wednesday, members of the FOMC voted unanimously
Speaker 1: to leave interest rates unchanged. Now that move was widely expected.
Speaker 1: The raid on FED funds held steady in a range
Speaker 1: of three and a half to three and three quarters percent.
Speaker 1: Now officials also signaled their next move maybe to raise
Speaker 1: interest rates, not cut them, given the outlook for higher inflation.
Speaker 1: Here is FED Share Kevin Walsh at his first post
Speaker 1: meeting news conference.
Speaker 2: Persistently high prices our burden for the American people, but
Speaker 2: the recent past need not be prologed. I am pleased
Speaker 2: to report that members of the FOMC are unambiguous and unanimous.
Speaker 2: This committee will deliver price stability.
Speaker 1: Fed Share Kevin Worsh. There for a closer look, I'm
Speaker 1: joined by Jeffrey Roche. He is the chief economist at
Speaker 1: LPL Financial. Jeffrey, thank you so much for being with us.
Speaker 1: It seems to me this tone was maybe a little
Speaker 1: more hawkish that the market was expecting. So can you
Speaker 1: put that in context? Given the fact that this was
Speaker 1: Worsh's first meeting. I'm wondering whether he was trying to
Speaker 1: buy a little bit of credibility perhaps with the bond market.
Speaker 1: Is that possible, Well, I.
Speaker 3: Think, you know, there was a lot of pressure on Worsh.
Speaker 3: There was a lot of chatter that he was going
Speaker 3: to be a puppet to the president. Obviously he was
Speaker 3: picked by the President and confirmed then by the Senate,
Speaker 3: but it was all in the context of being a
Speaker 3: dovish leader the FED. I think Worsh did the right
Speaker 3: thing today that he came out with a big bark.
Speaker 3: Maybe the bark's going to be worse than the bite.
Speaker 3: I'm not sure. Time will tell, but he was terse
Speaker 3: kurt straight to the point. I think he did what
Speaker 3: had to be done. That the bigger concern is runaway inflation.
Speaker 3: It's not necessarily something where we're thinking about the brinks
Speaker 3: of recession. So I think he balanced it quite well.
Speaker 1: There have been a lot of questions, perhaps some concerns
Speaker 1: even about the degree to which the FED is going
Speaker 1: to alter its communication style with markets, and Warsh said
Speaker 1: today that the FED has dropped forward guidance. Is that
Speaker 1: a problem in your opinion.
Speaker 3: Well, it's a little bit of a misnomer because we
Speaker 3: certainly got plenty of forward guidance from the Summary of
Speaker 3: economic projections. So what was a little bit surprising, and
Speaker 3: this certainly was making a statement, was the very short
Speaker 3: statement released earlier thirty minutes before the chair started his
Speaker 3: press conference, roughly one hundred and thirty words or so.
Speaker 3: The previous statement was roughly triple that. So he certainly
Speaker 3: is going straight to the point. But I don't know
Speaker 3: what's going to happen with the summary acond of projections.
Speaker 3: He did hint at saying that he was not participating
Speaker 3: in the forecast this time around, but there were plenty
Speaker 3: of committee members that did participate with those dot plots,
Speaker 3: So in some ways, the markets did get plenty of
Speaker 3: forward guidance. We did get an updated dot plot. We
Speaker 3: did get more information that several of these governors and
Speaker 3: district presidents are more so inclined now to indeed hike
Speaker 3: hence the uptick and expectations from futures markets. So we're
Speaker 3: still a little bit in the dark because we don't
Speaker 3: know how much change worsh will enact after these task
Speaker 3: forces come with their recommendations.
Speaker 1: Well, I'm glad you bring up that fact. Because as
Speaker 1: a part of his opening remarks, worsh did announce the
Speaker 1: creation of multiple task forces I think five areas, and
Speaker 1: the aim here is to change the way that the
Speaker 1: FED operates. If you were advising the FED, I hate
Speaker 1: to put you in a tough position, but I'm going
Speaker 1: to anyway, how could the FED improve the way that
Speaker 1: it operates? Are there things that are a little antiquated
Speaker 1: right now that need to be addressed to improve the
Speaker 1: functioning not only of the regulatory regime, but the transmission
Speaker 1: mechanism and the way in which kind of markets respond
Speaker 1: to what the FED is trying to achieve.
Speaker 3: Well, I would say unambiguously, I was pretty excited to
Speaker 3: hear that one of the five task forces will be
Speaker 3: about data collection and the updating on data. I think
Speaker 3: that is a very fair point for the chair to
Speaker 3: call that out on the press conference, that there are
Speaker 3: things either the methodology or the survey calculations. There are
Speaker 3: a number of ways that we legitimately could update and
Speaker 3: bring into the current times and fix some of the
Speaker 3: antiquated data that we rely on as private sector economists,
Speaker 3: no doubt public sector FED officials as well, so very
Speaker 3: happy with some of these task force setups could be
Speaker 3: on net markets for investors on net This could actually
Speaker 3: be a very good thing. Now. The hard part, of course,
Speaker 3: is in the interim, waiting and somewhat being a little
Speaker 3: bit in the fog as we sit here today.
Speaker 1: Most definitely, particularly where the effects of the war with
Speaker 1: Iran are concerned and higher energy prices. But money markets
Speaker 1: right now, you talked about the market response in terms
Speaker 1: of futures, money markets are fully pricing in a quarter
Speaker 1: point FED hike by October, maybe another one by March.
Speaker 1: I think that's been fully priced in as well. Does
Speaker 1: the market seem right now to be a little too
Speaker 1: optimistic about the degree to which the Fed might titan.
Speaker 3: Well, I don't think the market has it right. We've
Speaker 3: seen this before, where market futures markets respond to the
Speaker 3: press conference, whether it's warsh Er, whether it's Powell or
Speaker 3: Bernaki or yelling green Span. Even so, I think markets
Speaker 3: are a little bit ahead of themselves. And the reason
Speaker 3: why I say that is because we know from the
Speaker 3: statement from the chair's own mouth during the press conference
Speaker 3: that a lot of these inflationary pressures are supply driven,
Speaker 3: and we know that those things can reverse quite quickly.
Speaker 3: And when that does, you'll have a very very different
Speaker 3: inflation dynamic.
Speaker 1: What is your sense of the inflation problem right now?
Speaker 1: I don't want to use the term transitory. I'm sure
Speaker 1: it was thrown around a lot today by commentators looking
Speaker 1: at the Fed's decision. Do you think this is a
Speaker 1: temporary thing that we are going to experience as a
Speaker 1: result of the war with Iran or are we at
Speaker 1: risk for higher prices to remain embedded in the economy
Speaker 1: for the foreseeable future.
Speaker 3: Well, I do think that there is some time stamp
Speaker 3: on the energy related inflation we're seeing clearly connected to
Speaker 3: the Middle East crisis. One thing that I don't know,
Speaker 3: and I'm a little bit nervous about, is the embedded
Speaker 3: inflation pressures from households that have a lot of cash.
Speaker 3: There are plenty of households. When you look at household
Speaker 3: net worth relative to disposable personal income that is at
Speaker 3: a very very high ratio. And so from the demand
Speaker 3: side of the equation, we still see a lot of
Speaker 3: households spending on a number of durable goods, certainly non durables.
Speaker 3: Starting to see a little bit of slow down in
Speaker 3: terms of travel plans and services, in that regard, but
Speaker 3: there is a strong demand for several sectors in the
Speaker 3: economy that are demand driven that will stick around a
Speaker 3: lot longer than the components that are supply driven.
Speaker 1: The President has made trade policy a cornerstone of his
Speaker 1: administration's economic plan, and one of the things that we
Speaker 1: saw today as a result of the price action in
Speaker 1: the bond market a much much stronger dollar. I think
Speaker 1: the Bloomberg Dollar Spot index was up about seven tens
Speaker 1: to one percent today. If the dollar does remain at
Speaker 1: these levels, is that problematic for US trade?
Speaker 3: Well, certainly, we've seen a pretty strong and solid relationship
Speaker 3: between dollar performance and import prices, So in some ways
Speaker 3: the biggest risk to strong dollars probably emerging markets, not
Speaker 3: necessarily domestically inside the United States. I think what this
Speaker 3: tells me, though, is whenever there's this move toward dollar assets,
Speaker 3: when there's periods of uncertainty, in some ways, it embeds
Speaker 3: in my mind the view that the dollar is still
Speaker 3: this safe haven asset. In some ways, you can argue
Speaker 3: from that that you still have a little bit of
Speaker 3: benefit and the exorbitant privilege, as it were, for US
Speaker 3: markets because of.
Speaker 1: That, all right, Jeffrey we'll leave it there. Good stuff,
Speaker 1: Thank you so very much. Jeffrey Roachi is the chief
Speaker 1: economist at LPL Financial. Joining us here on the Daybreak
Speaker 1: Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm
Speaker 1: Doug Chrisner. Equity markets across the APAC region are reacting
Speaker 1: to the FED signaling it may need to raise interest
Speaker 1: rates further to contain inflation. Now, US money markets have
Speaker 1: fully priced in a quarter pl point FED hike by
Speaker 1: October and another hike by March of next year. However,
Speaker 1: Home and Lee, the senior macro strategist at Lombard Oda,
Speaker 1: says the FED will hold great steady until the end
Speaker 1: of the year. Homan spoke about his outlook with Bloomberg
Speaker 1: TV host April Home.
Speaker 4: So you think no change till the end of the year.
Speaker 5: Well, that's still our base case, even though this meeting
Speaker 5: proved to be a little more hawkish than what we expected.
Speaker 5: So there is a bit of a growing challenge to
Speaker 5: our scenario. At the end of the day, label market
Speaker 5: has been fairly solid, and that capital markets have been
Speaker 5: quite buoyant in terms of the activities and sentiment, and
Speaker 5: inflation still remains about targets, so it makes sense why
Speaker 5: they're removing the dubbish language from the statement and the communication.
Speaker 5: But you know, the backdrop before the meeting was that
Speaker 5: of disruptions in the strait of homos and energy market
Speaker 5: instability that's now fading from the view. So it's in
Speaker 5: entirely puzzle that a few months from now the assessment
Speaker 5: of some of these median dots suggesting great hike could
Speaker 5: actually change. So for these reasons, we still think it
Speaker 5: makes sense for the fact to be a little more
Speaker 5: patient and look through this core inflation spike that could
Speaker 5: prove temporary and simply stand on the sidelines until the
Speaker 5: end of the year. But we have the acknowledge given
Speaker 5: the message, especially the repeated emphasis and price stability from
Speaker 5: a chairman Wash, a chair Wash and his initiative to
Speaker 5: maybe change the communication framework, maybe there's a degree of
Speaker 5: caution that's required as we go forward.
Speaker 4: So what we're seeing in markets today, specifically on the
Speaker 4: bond market reaction, do you think that's appropriate? Should we
Speaker 4: be expecting more volatility there?
Speaker 5: We think our assessment is that the current bond market
Speaker 5: pricing is a little bit excessive at the global level
Speaker 5: level and also potentially for the US treasury market. And
Speaker 5: if you have a hockey central bank that increases the
Speaker 5: chance of price stability in the medium term, there's actually
Speaker 5: not a bad news for bond market in the medium term.
Speaker 5: So we think the current rate pricing in the bond
Speaker 5: market more or less reflect what's achievable from many of
Speaker 5: these major central banks. Actually, some bond marketers are so
Speaker 5: slightly excessive pricing for that. So there we already see
Speaker 5: some opportunities. We're not uh uh, you know, keen on
Speaker 5: increasing the duration risks significantly, but we do see opportunities
Speaker 5: in places like Europe and Asia, Australia for instance, where
Speaker 5: you know, the rate hikes recently could actually provide a
Speaker 5: better trajectory for bond market participants in the future.
Speaker 4: In Japan, do we just do you clear that?
Speaker 5: Well, Japan is a slightly trickier story to be frank
Speaker 5: So Boja delivered that rate hike and we currently assume
Speaker 5: for the base case semi annual rate hikes, so the
Speaker 5: next move will likely occur in December. But you know,
Speaker 5: the intervention from the Finance ministry and the bank. You know,
Speaker 5: of course, great high by the Bank of Japana guidance
Speaker 5: for additional hike have not delivered the stability for the
Speaker 5: end yet, so that's a bit of concern. And we
Speaker 5: also have to wait for the fiscal policy signals from
Speaker 5: the cabinet regarding their medium term strategy. So these developments
Speaker 5: need to be digestif by the market participants before we
Speaker 5: can be more aggressive. So when it comes to Japanese
Speaker 5: yel curve, we're slightly more neutral as opposed to European
Speaker 5: and Australian curves.
Speaker 4: A wonderful equity though as long as yen remains roughly stable,
Speaker 4: it's a positive enough backdrop to a lot further gains.
Speaker 4: I mean, you look at how things are firing in
Speaker 4: the early goings today, it looks like, you know, investors
Speaker 4: are still banking on that memory up cycle chip surge.
Speaker 5: Well, first of all, if you look at the fundamentals
Speaker 5: of the Japanese economy, it's still pretty solid despite the
Speaker 5: shocks that it has gone through due to the situation
Speaker 5: in the Strait of Homus. As you said, it's an
Speaker 5: economy that's prime to respond very positively the global capac cycle,
Speaker 5: and this is a cycle that will get additional support
Speaker 5: from the regulation of the risk in the strait of
Speaker 5: Homus because countries around the world they'll try to boost
Speaker 5: their infrastructure even further in reaction to this, and Japan
Speaker 5: is perfectly positioned for that. And of course there are
Speaker 5: AI plays, the pixel shovels place, you know, nan memory
Speaker 5: and the ceramic capacitors. All these producers are still in Japan,
Speaker 5: so they also benefit. So that's the fundamental picture in
Speaker 5: our view, which I suppose.
Speaker 4: To help career as well as the same.
Speaker 5: Fundamentals exactly exactly, so when it comes to the central
Speaker 5: bank policy in Asia Pacific region, we're in a pretty
Speaker 5: interesting place in my view. So for Japan, for the corporates,
Speaker 5: the stable yen around this level still promises potential further
Speaker 5: upgrading earnings growth for the Japanese companies, But for the
Speaker 5: other Asia Pacific companies, especially in North Asia, there's an
Speaker 5: additional tailwind now from the regulational risk in Homus, and
Speaker 5: that's the reason why we still remain constructive for this
Speaker 5: segment of Asia Pacific region for career.
Speaker 4: Also even as an em you know, even if we
Speaker 4: see a bit of hikes, they can still sort of
Speaker 4: overcome that given how we're seeing these tail winds from
Speaker 4: their memory up cycle, So we.
Speaker 5: Still subscribe to the view that memory remains a key
Speaker 5: bottleneck in the overall AI development. So that's still positive
Speaker 5: for the country. And we continue to see volent is
Speaker 5: upgrade in the earnings outlook for Korea, not just this
Speaker 5: year but also next year, so that's positive. Now regarding
Speaker 5: the external developments, clearly the resolution risk and homos because
Speaker 5: Korea is a heavy net import or energy from elsewhere,
Speaker 5: it's going to be a certainly a tailwind. And finally,
Speaker 5: when it comes to monitoring policy, we do expect now
Speaker 5: some raid hikes down the road, but for the corporate
Speaker 5: we think that's a manageable event because we don't think
Speaker 5: that the OKAY will be very aggressively hawkish on monitoring policy.
Speaker 4: I have to ask you on China though, because we
Speaker 4: got some signals from the PBOC yesterday, do you think
Speaker 4: this is a central bank that's kind of moving towards
Speaker 4: what a DM regime would look like, something more like
Speaker 4: what is major peers are doing.
Speaker 5: So this is part of the medium transition that we
Speaker 5: have seen for quite some time now, you know, moving
Speaker 5: from the deposit rate to the market based rate a
Speaker 5: few years ago, and then changing the framework again in
Speaker 5: twenty twenty four, so it's actually a continuation of a
Speaker 5: trend from our perspective, So the PBOC is quite keen.
Speaker 5: It seems to move to a market price, a price
Speaker 5: based in a monetary policy regime. And now they're moving
Speaker 5: the benchmark from seven day to one day, just like
Speaker 5: the other developed market peers. However, they still seem pretty
Speaker 5: keen on keeping the control and capital accounts and targeting currency.
Speaker 5: Those are the fundamental constraints and moving fully to a
Speaker 5: price based monetary policy. And for that reason, despite these efforts,
Speaker 5: we think the near time implications are quite limited for
Speaker 5: the Chinese market.
Speaker 1: That was Home and League senior macro strategist at Lombard
Speaker 1: Odia speaking with Bloomberg TV host Avril Hong, bringing you
Speaker 1: their conversation here on the Daybreak Asia Podcast. Thanks for
Speaker 1: listening to today's episode of the Bloomberg Daybreak Asia Edition podcast.
Speaker 1: Each weekday, we look at the story shaping markets, finance,
Speaker 1: and geopolitics in the Asia Pacific. You can find us
Speaker 1: on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere
Speaker 1: else you listen. Join us again tomorrow for insight on
Speaker 1: the market moves from Hong Kong to Singapore and Australia.
Speaker 1: I'm Doug Chrisner, and this is Bloomberg